-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SdEwp37NZAsHtfCIQ2IlP8o1UZQrroY2QY084ImKAFKJ/DG3RQuzD/gE6V3uKhI9 8kfKxVfwWaiFXfT926owzA== 0000003000-97-000003.txt : 19970512 0000003000-97-000003.hdr.sgml : 19970512 ACCESSION NUMBER: 0000003000-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRBORNE FREIGHT CORP /DE/ CENTRAL INDEX KEY: 0000003000 STANDARD INDUSTRIAL CLASSIFICATION: 4513 IRS NUMBER: 910837469 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06512 FILM NUMBER: 97565399 BUSINESS ADDRESS: STREET 1: P O BOX 662 CITY: SEATTLE STATE: WA ZIP: 98111 BUSINESS PHONE: 2062854600 10-K 1 FORM 10-K 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 For the fiscal year ended Commission file number December 31, 1996 1-6512
---------------------------------- AIRBORNE FREIGHT CORPORATION (Exact name of registrant as specified in its charter) Delaware 91-0837469 (State of Incorporation) (I.R.S. Employer Identification No.)
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: Name of each Exchange Title of each class on which Registered ------------------- ------------------- Common Stock, Par Value New York Stock Exchange $1.00 per share Pacific Stock Exchange 6 3/4% Convertible Subordinated New York Stock Exchange Debentures Due August 15, 2001 Rights to Purchase Series A New York Stock Exchange Participating Cumulative Pacific Stock Exchange Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.(X) As of February 24, 1997, 21,308,812 shares (net of 315,150 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 $600,367,932.(1) Documents Incorporated by Reference Portions of the 1996 Annual Report to Shareholders are incorporated by reference into Part I and Part II. Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders to be held April 22, 1997 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 24, 1997. 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 1996 FORM 10-K ANNUAL REPORT Table of Contents
Page ---- Part I Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Item 4a. Executive Officers of the Registrant 9 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8. Financial Statements and Supplementary Data 11 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 11 Part III Item 10. Directors and Executive Officers of the Registrant 12 Item 11. Executive Compensation 12 Item 12. Security Ownership of Certain Beneficial Owners and Management 12 Item 13. Certain Relationships and Related Transactions 12 Part IV Item 14. Exhibits, Financial Statement Schedules, and 13 Reports on Form 8-K
PART I ITEM 1. BUSINESS - - ------------------ a) General Development of Business ------------------------------- Airborne Freight Corporation (herein referred to as "Airborne Express" or the "Company", which reference shall include its subsidiaries and their assets and operations, unless the context clearly indicates otherwise) was incorporated in Delaware on May 10, 1968. The Company is an air express company and air freight forwarder that expedites shipments of all sizes to destinations throughout the United States and most foreign countries. The Company 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. In 1996, the Company commemorated its first 50 years of service. Founded in 1946 in San Francisco, Airborne Flower Association of California began as a transporter of fresh flowers from Hawaii and California to East Coast markets. As Airborne Flower grew and offered other expanded service options and capabilities, it changed its name in 1956 to Airborne Freight Corporation. In 1968, the Company was formed when its predecessor consolidated with Pacific Air Freight, a freight forwarder founded in Seattle in 1949, to transport perishables to Alaska. The Company retained the name Airborne Freight Corporation. The Company is proud of its 50 years of successes and looks forward to the future. b) Financial Information about Industry Segments --------------------------------------------- None c) Narrative Description of Business --------------------------------- Airborne Express provides door-to-door express delivery of small packages and documents throughout the United States and to and from most foreign countries. The Company also acts as an international and domestic freight forwarder for shipments of any size. The Company's strategy is to be the low cost provider of express services for high volume corporate customers. Domestic Operations - - ------------------- The Company's domestic operations, supported by approximately 280 facilities, primarily involve express door-to-door delivery of shipments weighing less than 100 pounds. Shipments consist primarily of business documents and other printed matter, electronic and computer parts, software, machine parts, health care items, films and videotapes, and other items for which speed and reliability of delivery are important. The Company's primary service is its overnight express product. This product, which comprised approximately 58% of the Company's domestic shipments during 1996, 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- Beginning in 1995 and continuing into 1996, the Company redefined its deferred service product through the creation of two distinct levels of service. The services, Next Afternoon Service (NAS) and Second Day Service (SDS) replaced Select Delivery Service, which had been the Company's deferred service product since 1990. NAS is available for shipments weighing five pounds or less and SDS is offered for shipments of all weights. Select Delivery Service provided next afternoon service for shipments weighing five pounds or less, with shipments weighing more than five pounds delivered on a second day basis. Deferred service shipments, which comprised approximately 42% of domestic shipments during 1996, 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's 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 inputs to the system, in part through the driver's use of hand-held scanners which read bar-codes on the shipping documents, with information necessary to determine the status and location of customer shipments 24 hours a day. FOCUS allows for direct customer access to shipment information through the use of their own computer systems. 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 13,300 radio-dispatched delivery vans and trucks, of which approximately 5,100 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 11,100 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. In 1995, the sort center was expanded and currently has the capacity to handle approximately 980,000 pieces during the primary 2-1/2 hour nightly sort operation. On average, approximately 835,000 pieces were sorted each weekday night at the sort center during the fourth quarter of 1996. In addition to the main sort facility at Wilmington, ten 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 receives shipments weighing five pounds or less from flights -2- arriving during the previous night sort operation. Shipments weighing more than five pounds are either trucked or flown to the day sort from the regional hub facilities. The operation of the Wilmington facility is critical to the Company's business. The inability to use the Wilmington airport, because of bad weather or other factors, would have a serious adverse effect on the Company's service. However, contingency plans, including landing at nearby airports and transporting packages to and from the sort center by truck, can be implemented to address, in part, temporary inaccessibility of the Wilmington airport. In the fourth quarter of 1996, approximately 54% and 19% of total shipment weight was handled through the night sort and day sort operations at Wilmington, respectively, with the remaining 27% being handled exclusively by the regional hubs. 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, NAS shipments and SDS shipments weighing five pounds or less 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. For the day sort operation, handling SDS shipments weighing over five pounds, generally 12 aircraft return to Wilmington from overnight service destinations on Tuesday through Thursday. These aircraft, and trucks from six regional hubs, arrive at Wilmington between 10:00 a.m. and 2:00 p.m., 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 14 Company aircraft and by trucks. Aircraft - - -------- The Company currently utilizes used aircraft manufactured in the late 1960s and early 1970s. Upon acquisition, the aircraft are modified by the Company. At the end of 1996, the Company's in-service fleet consisted of a total of 110 aircraft, including 35 McDonnell Douglas DC-8s (consisting of 13 series 61, 6 series 62 and 16 series 63), 66 DC-9s (consisting of 2 series 10, 43 series 30 and 21 series 40), and 9 YS-11 turboprop aircraft. The Company owns the majority of the aircraft it operates, but has completed sale-leaseback transactions with respect to six DC-8 and six DC-9 aircraft. In addition, approximately 65 smaller aircraft are chartered nightly to connect small cities with Company aircraft that then operate to and from Wilmington. -3- In December 1995, the Company announced an agreement to purchase 12 used Boeing 767-200's between the years 1997 and 2000 and its plans to pursue the acquisition of 10 to 15 additional used 767-200's between the years 2000 and 2004. This newer generation of aircraft should increase operating efficiency and allow the Company to meet anticipated demand for additional lift capacity. There are no plans to retire any aircraft as a result of these acquisitions, although retirement is an option if shipment growth does not require the added capacity. At year end 1996, the nightly lift capacity of the system was about 3.8 million pounds versus approximately 3.5 million pounds and 3.1 million pounds at the end of 1995 and 1994, respectively. During 1996, the Company's utilization of available lift capacity approximated 74%. 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 a comparable Stage 2 aircraft. In 1990, Congress passed the Airport Noise and Capacity Act of 1990 (the "Noise Act"). Among other things, the Noise Act generally requires turbojet aircraft weighing in excess of 75,000 pounds and operating in the United States (the type of DC-8 and DC-9 aircraft operated by the Company) to comply with Stage 3 noise emission standards on or before December 31, 1999. The Company's YS-11 turboprop aircraft are not subject to these requirements. In accordance with the Noise Act, the FAA has issued regulations establishing interim compliance deadlines. These rules required air carriers to reduce the base level of Stage 2 aircraft they operate 50% by December 31, 1996; and 75% by December 31, 1998. As of December 31, 1996, the Company has complied with interim compliance deadline and expects to meet or exceed the December 31, 1998 interim compliance deadline. As of December 31, 1996, 61% of the Company's turbojet aircraft (25 DC-8 and 37 DC-9 aircraft) were Stage 3 aircraft, the balance being Stage 2 aircraft. In addition to FAA regulation, certain local airports also regulate noise compliance. See "Business - Regulation". The Company, in conjunction with several other companies, has developed noise suppression technology known as hush kits for its DC-9 series aircraft which have been certified to meet FAA Stage 3 requirements. The capital cost for Stage 3 hush kits is approximately $1.4 million for each DC-9 series aircraft. The Company has installed hush kits which satisfy Stage 3 compliance requirements on all of its DC-8-62 and DC-8-63 series aircraft and three of its DC-8-61 series aircraft. The capital cost to modify the Company's remaining DC-8-61 aircraft to meet Stage 3 noise standards is approximately $5.7 million per aircraft. International Operations - - ------------------------ The Company provides international express door-to-door delivery and a variety of freight services. These services are provided in most foreign countries on an inbound and outbound basis through a network of Airborne offices and independent agents. Most international deliveries are accomplished within 24 to 96 hours of pickup. The Company's domestic stations are staffed and equipped to handle international shipments to or from almost anywhere in the world. In addition to its extensive domestic network, the Company operates its own offices in the Far East, Australia, New Zealand, and -4- 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 ventures have been formed in Japan, Thailand, Malaysia, the Netherlands, and South Africa. Customers and Marketing - - ----------------------- The Company's primary domestic strategy focuses on express services for high volume corporate customers. Most high volume customers have entered into service agreements providing for specified rates or rate schedules for express deliveries. As of December 31, 1996, the Company serviced approximately 460,000 active customer shipping locations. The Company determines prices for any particular domestic express customer based on competitive factors, anticipated costs, shipment volume and weight, and other considerations. The Company believes that it generally offers prices that are competitive with, or lower than, prices quoted by its principal competitors for comparable services. Internationally, the Company's marketing strategy is to target the outbound express and freight shipments of U.S. corporate customers, and to sell the inbound service of the Company's distribution capabilities in the United States. Both in the international and domestic markets, the Company believes that its customers are most effectively reached by a direct sales force and, accordingly, does not currently engage in mass media advertising. Domestic sales representatives are responsible for selling both domestic and international express shipments. In addition, the International Division has its own dedicated direct sales organization for selling international freight service. The Company's sales force currently consists of approximately 300 domestic representatives and approximately 80 international specialists. The Company's sales efforts are supported by the Marketing and International Divisions, based at the Company headquarters. Senior management is also active in marketing the Company's services to major accounts. Value-added services continue to be important factors in attracting and retaining customers. Accordingly, the Company is automating more of its operations to make the service easier for customers to use and to provide them with valuable management information. The Company believes that it is generally competitive with other express carriers in terms of reliability, value-added services and convenience. -5- For many of its high volume customers, the Company offers a metering device, called LIBRA II, 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 and provides a daily shipping report. At year end 1996, the system was in use at approximately 9,300 domestic customer locations and 900 international customer locations. Use of LIBRA II not only benefits the customer directly, but also lowers the Company's operating costs, since LIBRA II shipment data is transferred into the Airborne FOCUS shipment tracking 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. In 1995, the Company unveiled "LIGHTSHIP TRACKER", a PC-based tracking software, which was the first in a series of software products designed to improve customer productivity and provide convenient access to the Company's various services. LIGHTSHIP TRACKER allows customers, working from their PCs, to view the status of and receive information regarding their shipments through access to the Airborne FOCUS system. In 1997, the Company will provide customers with additional flexibility and productivity opportunities through the introduction of its PC-based software program, "LIGHTSHIP SHIPPER". Through personal or office computers via modem connection to the Airborne FOCUS system, customers will be able to obtain estimated shipping rates and delivery times, fill out and print shipping labels, schedule pickups, as well as track the status of their shipments. The Company offers a number of special logistics programs to customers through Airborne Logistics Services ("ALS"), a division of ABX Air, Inc. ALS operates the Company's Stock Exchange and Hub Warehousing and other logistics programs. These programs provide customers the ability to maintain 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. In addition, the Company's Sky Courier business provides expedited next-plane-out service at premium prices. Sky Courier also offers a Regional Warehousing program where customer inventories are managed at any of over 60 locations around the United States and Canada. The Company has obtained ISO 9000 certification for its Chicago, Philadelphia and London stations and its Seattle Headquarters. ISO 9000 is a program developed by the International Standards Organization ("ISO"), based in Geneva, Switzerland. This organization provides a set of international standards on quality management and quality assurance presently recognized in over 90 countries. The certification is an asset in doing business worldwide and provides evidence of the Company's commitment to excellence and quality. -6- 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 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 express competitors include the U.S. Postal Service's Express Mail Service and several other transportation companies offering next morning or next-plane-out delivery service. The Company also competes to some extent with companies offering ground transportation services and with facsimile and other forms of electronic transmission. The Company believes it is important to maintain an active capital expansion program to increase capacity, improve service and increase productivity as its volume of shipments increases. However, the Company has significantly less capital resources than its two primary competitors. In the international markets, in addition to Federal Express and United Parcel Service, the Company competes with DHL, TNT and other air freight forwarders or carriers and most commercial airlines. Employees - - --------- As of December 31, 1996, the Company and its subsidiaries had approximately 12,700 full-time employees and 8,000 part-time and casual employees. Approximately 6,000 full-time employees (including the Company's 715 pilots) and 3,200 part-time and casual employees are employed under union contracts, primarily with locals of the International Brotherhood of Teamsters and Warehousemen. Labor Agreements - - ---------------- Most labor agreements covering the Company's ground personnel are for a four-year term expiring in 1998. The Company's pilots are covered by a contract which became amendable on July 31, 1995. The Company has not experienced any significant disruption from labor disputes in the past. However, negotiations with the pilots are in mediation, and the Company cannot predict whether the contract with the pilots will be amended without experiencing any work disruption. 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 are as follows: a) Wilmington Air Park, Inc., an Ohio corporation, is the owner of the Wilmington airport property (Airborne Air Park). b) Airborne FTZ, Inc., an Ohio corporation, is the holder of a foreign trade zone certificate at the Wilmington airport property and owns and manages the Company's expendable aircraft parts inventory. c) Aviation Fuel, Inc., an Ohio corporation, purchases and sells aviation and other fuels. -7- d) Advanced Logistics Services Corp., an Ohio corporation, provided customized warehousing, inventory management and shipping services, through late 1996. Logistics services are currently provided by Airborne Logistic Services, a division of ABX Air, Inc. e) Sound Suppression, Inc., an Ohio corporation with no current operating activities. 2. Awawego Delivery, Inc., a New York corporation, holds trucking rights in New York and Connecticut. 3. Airborne Forwarding Corporation, a Delaware corporation doing business as Sky Courier, provides expedited courier service. 4. 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, security procedures, and communications. The FAA issues operating certificates to carriers who possess the technical competence to conduct air carrier operations. In addition, the FAA issues certificates of airworthiness to each aircraft which meets the requirements for aircraft design and maintenance. The Company believes it holds all airworthiness and other FAA certificates required for the conduct of its business, although the FAA has the power to suspend or revoke such certificates for cause, including failure to comply with federal law. The federal government generally regulates aircraft engine noise at its source. However, local airport operators may, under certain circumstances, regulate airport operations based on aircraft noise considerations. The Noise Act provides that in the case of Stage 2 aircraft restrictions, the airport operator must notify air carriers of its intention to propose rules and satisfy the requirements of federal statutes before implementation of the rules or in the case of Stage 3 aircraft, the airport operator must obtain the carriers' or the governments' approval of the rule prior to its adoption. The Company believes the operation of its aircraft either complies with or is exempt from compliance with currently applicable local airport rules. However, if more stringent aircraft operating regulations were adopted on a widespread basis, the Company might be required to expend substantial sums, make schedule changes or take other actions. The Company's aircraft currently meet all known requirements for emission levels. However, under the Clean Air Act, individual states or the Federal Environmental Protection Agency (the "EPA") may adopt regulations requiring the reduction in emissions for one or more localities based on the measured air quality at such localities. The EPA has proposed regulations for portions of California calling for emission reductions through restricting the use of emission producing ground service equipment or aircraft auxiliary power units. There can be no assurance, that if such regulations are adopted in the future or changes in existing laws or regulations are promulgated, such laws or rules would not have a material adverse effect on the Company. -8- 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 42 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, 1996 is presented in Note J (Segment Information) of the Notes to Consolidated Financial Statements appearing in the 1996 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 280 domestic and 40 foreign stations, most of which are leased. The majority of the facilities are located at or near airports. The Company owns the airport at the Airborne Air Park, in Wilmington, Ohio. The airport currently consists of two runways, taxi-ways, aprons, buildings serving as aircraft and equipment maintenance facilities, sort facilities, storage facilities, a training center, and operations and administrative offices. The Company believes its existing facilities are adequate to meet current needs. Information regarding collateralization of certain property and lease commitments of the Company is set forth in Notes E and F of the Notes to Consolidated Financial Statements appearing in the 1996 Annual Report to Shareholders and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS - - --------------------------- None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - ------------------------------------------------------------- None -9- ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT - - ----------------------------------------------
Positions and Offices Presently Name Age Held and Business Experience - - ---- --- ---------------------------- Robert S. Cline 59 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 59 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 59 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 56 Executive Vice President, Marketing Division (1980 to date); Senior Vice President (1978 to 1980); Vice President (1973 to 1978) Raymond T. Van Bruwaene 58 Executive Vice President, Field Services Division (1980 to date); Senior Vice President (1978 to 1980); Vice President (1973 to 1978) John J. Cella 56 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 45 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); Director, Customer Support (1988 to 1990)
-10- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED - - --------------------------------------------------------------- STOCKHOLDERS MATTERS - - -------------------- The response to this Item is contained in the 1996 Annual Report to Shareholders and the information contained therein is incorporated by reference. On February 24, 1997 there were 1,298 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 1996 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 1996 Annual Report to Shareholders and the information contained therein is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - - ----------------------------------------------------- The response to this Item is contained in the 1996 Annual Report to Shareholders and the information contained therein is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - - ------------------------------------------------------------------------- FINANCIAL DISCLOSURE - - -------------------- None -11- 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 1997 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 1997 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 1997 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 - - -------------------------------------------------------- The response to this Item is contained in the Proxy Statement for the 1997 Annual Meeting of Shareholders under the caption "Executive Compensation" and the information contained therein is incorporated herein by reference. -12- 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 1996 Annual Report to Shareholders are incorporated by reference in Part II, Item 8: Consolidated Statements of Net Earnings Consolidated Balance Sheets Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report (a)2. Financial Statement Schedules ----------------------------- Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes thereto. (a)3. Exhibits - - --------------- A) The following exhibits are filed with this report: EXHIBIT NO. 3 Articles of Incorporation and By-laws - - ---------------------------------------------------- 3(a) The Restated Certificate of Incorporation of the Company, dated as of August 4, 1987 (incorporated herein by reference from Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1987). 3(b) The By-laws of the Company as amended to February 4, 1997. EXHIBIT NO. 4 Instruments Defining the Rights of Security Holders - - ------------------------------------------------------------------ Including Indentures - - -------------------- 4(a) Indenture dated as of August 15, 1991, between the Company and Bank of America National Trust and Savings Association, as Trustee, with respect to the Company's 6-3/4% Convertible Subordinated Debentures due August 15, 2001 (incorporated herein by reference from Exhibit 4(i) to Amendment No. 1 to the Company's Registration Statement on Form S-3 No. 33-42044 filed with the Securities and Exchange Commission on August 15, 1991). 4(b) First Supplemental Trust Indenture dated as of June 30, 1994 between the Company and LaSalle National Bank, as Successor Trustee, with respect to the Company's 6-3/4% Convertible Subordinated Debentures due August 15, 2001 (incorporated by reference from Exhibit 4(d) to the Company's Form 10-K for the year ended December 31, 1996). -13- 4(c) 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(d) 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). 4(e) 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. 4(f) 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(g) 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(h) Form of Right Certificate relating to the Rights Agreement (see 4(f) 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 herein 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 herein by reference from the Addendum to the Company's Proxy Statement for the 1994 Annual Meeting of Shareholders). 10(d) Airborne Freight Corporations Directors Stock Option Plan (incorporated herein by reference from the Addendum to the Company's Proxy Statement for the 1991 Annual Meeting of Shareholders). 10(e) Airborne Freight Corporation Director Stock Bonus Plan dated April 23, 1996 (incorporated by reference from Exhibit 10(a) to the Company's Form 10-Q for the quarter ended June 30, 1996). -14- 10(f) 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(g) 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(h) Airborne Express 1995-1999 Executive Incentive Compensation Plan, amended as of January 1, 1997. 10(i) Airborne Express 1997-1999 Executive Group Incentive Compensation Plan as of January 1, 1997. 10(j) 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). Identical agreements exist between the Company and the other six executive officers. 10(k) 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(l) $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, NBD Bank, N.A., as banks (incorporated herein by reference from Exhibit 10(k) to the Company's Form 10-K for the year ended December 31, 1993). 10(m) First Amendment to Revolving Loan Facility dated as of March 31, 1995 among the Company, as borrower, and Wachovia Bank of Georgia, N.A., as Agent, and Wachovia Bank of Georgia, N.A., ABN AMRO Bank N.V., United States National Bank of Oregon, Seattle-First National Bank, CIBC, Inc., National City Bank, Columbus, Bank of America National Trust and Savings Association, The Bank of New York, and NBD Bank, N.A., as banks (incorporated by reference from Exhibit 10(a) to the Company's Form 10-Q for the quarter ended March 31, 1995). 10(n) 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). -15- 10(o) 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. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 (incorporated herein by reference from Exhibit 10(n) to the Company's From 10-K for the year ended December 31, 1996.). EXHIBIT NO. 11 Statement Re Computation of Per Share Earnings - - ------------------------------------------------------------- 11 Statement re computation of earnings per share EXHIBIT NO. 12 Statements Re Computation of Ratios - - -------------------------------------------------- 12 Statement re computation of ratio of senior long-term debt and total long-term debt to total capitalization EXHIBIT NO. 13 Annual Report to Security Holders - - ------------------------------------------------ 13 Portions of the 1996 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, 1996. EXHIBIT NO. 23 Consents of Experts and Counsel - - ---------------------------------------------- 23 Independent Auditors' Consent and Report on Schedule 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 ------------------- A Form 8-K was filed February 12, 1997 which disclosed the following information: (1) Approval, by the Board of Directors, of a shareholder rights plan effective February 14, 1997. (2) Summary description of the shareholder rights plan. -16- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AIRBORNE FREIGHT CORPORATION By /s/ Robert S. Cline -------------------------- Robert S. Cline Chief Executive Officer By /s/ Robert G. Brazier -------------------------- Robert G. Brazier Chief Operating Officer By /s/ Roy C. Liljebeck -------------------------- Roy C. Liljebeck Chief Financial Officer By /s/ Lanny H. Michael -------------------------- Lanny H. Michael Treasurer and Controller Date: March 27, 1997 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/ Andrew V. Smith - - ----------------------------- ----------------------------- Robert G. Brazier (Director) Andrew V. Smith (Director) /s/ Robert S. Cline /s/ Mary Agnes Wilderotter - - ----------------------------- ----------------------------- Robert S. Cline (Director) Mary Agnes Wilderotter (Director) /s/ Harold M. Messmer, Jr. /s/ James H. Carey - - ----------------------------- ----------------------------- Harold M. Messmer, Jr.(Director) James H. Carey (Director) -17- AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions Balance at Charged to Balance at Beginning Costs and End Description of Period Expenses Deductions of Period -------- -------- -------- -------- -------- DEDUCTED FROM ASSETS TO WHICH THEY APPLY: 1. Allowance for doubtful accounts - Year Ended December 31, 1996 $7,750 $16,157 $15,562 $8,345 Year Ended December 31, 1995 $7,500 $13,309 $13,059 $7,750 Year Ended December 31, 1994 $6,925 $12,631 $12,056 $7,500
-18- EXHIBIT INDEX
Exhibit Page Number Description Number - - ------- ------------ ------- (a)3. Exhibits - - --------------- A) The following exhibits are filed with this report:
EXHIBIT NO. 3 Articles of Incorporation and By-laws - - ---------------------------------------------------- 3(a) The Restated Certificate of Incorporation of the -- Company, dated as of August 4, 1987 (incorporated herein by reference from Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1987). 3(b) The By-laws of the Company as amended to -- February 4, 1997.
EXHIBIT NO. 4 Instruments Defining the Rights of Security Holders - - ------------------------------------------------------------------ Including Indentures - - -------------------- 4(a) Indenture dated as of August 15, 1991, between -- the Company and Bank of America National Trust and Savings Association, as Trustee, with respect to the Company's 6-3/4% Convertible Subordinated Debentures due August 15, 2001 (incorporated herein by reference from Exhibit 4(i) to Amendment No. 1 to the Company's Registration Statement on Form S-3 No. 33-42044 filed with the Securities and Exchange Commission on August 15, 1991). 4(b) First Supplemental Trust Indenture dated as of -- June 30, 1994 between the Company and LaSalle National Bank, as Successor Trustee, with respect to the Company's 6-3/4% Convertible Subordinated Debentures due August 15, 2001 (incorporated by reference from Exhibit 4(d) to the Company's Form 10-K for the year ended December 31, 1996). 4(c) 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(d) 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). 4(e) 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. 4(f) 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(g) 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(h) Form of Right Certificate relating to the Rights -- Agreement (see 4(f) 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 herein 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 herein by reference from the Addendum to the Company's Proxy Statement for the 1994 Annual Meeting of Shareholders). 10(d) Airborne Freight Corporations Directors Stock -- Option Plan (incorporated herein by reference from the Addendum to the Company's Proxy Statement for the 1991 Annual Meeting of Shareholders). 10(e) 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). 10(f) 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(g) 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(h) Airborne Express 1995-1999 Executive Incentive -- Compensation Plan, amended as of January 1, 1997. 10(I) Airborne Express 1997-1999 Executive Group -- Incentive Compensation Plan as of January 1, 1997. 10(j) 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). Identical agreements exist between the Company and the other six executive officers. 10(k) 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(l) $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, NBD Bank, N.A., as banks (incorporated herein by reference from Exhibit 10(k) to the Company's Form 10-K for the year ended December 31, 1993). 10(m) First Amendment to Revolving Loan Facility dated -- as of March 31, 1995 among the Company, as borrower, and Wachovia Bank of Georgia, N.A., as Agent, and Wachovia Bank of Georgia, N.A., ABN AMRO Bank N.V., United States National Bank of Oregon, Seattle-First National Bank, CIBC, Inc., National City Bank, Columbus, Bank of America National Trust and Savings Association, The Bank of New York, and NBD Bank, N.A., as banks (incorporated by reference from Exhibit 10(a) to the Company's Form 10-Q for the quarter ended March 31, 1995). 10(n) 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(o) 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. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 (incorporated herein by reference from Exhibit 10(n) to the Company's From 10-K for the year ended December 31, 1996.).
EXHIBIT NO. 11 Statement Re Computation of Per Share Earnings - - -------------------------------------------------------------- 11 Statement re computation of earnings per share --
EXHIBIT NO. 12 Statements Re Computation of Ratios - - -------------------------------------------------- 12 Statement re computation of ratio of senior long- -- term debt and total long-term debt to total capitalization
EXHIBIT NO. 13 Annual Report to Security Holders - - ------------------------------------------------- 13 Portions of the 1996 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, 1996.
EXHIBIT NO. 23 Consents of Experts and Counsel - - ----------------------------------------------- 23 Independent Auditors' Consent and Report on -- Schedules
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 ------------------- A form 8-K was filed February 12, 1997 which disclosed the following information: (1) Approval, by the Board of Directors, of a -- shareholder rights plan effective February 14, 1997. (2) Summary description of the shareholder rights -- plan.
EX-3 2 EXHIBIT 3(B) EXHIBIT 3(b) BY-LAWS OF AIRBORNE FREIGHT CORPORATION (A Delaware Corporation) (As Amended to 2/04/97) ARTICLE I --------- Offices ------- 1. Registered Office. The registered office of the corporation shall be located at such address as shall be designated by the Board of Directors within the City of Wilmington, Delaware. 2. Other Offices. The corporation may have other offices, within or outside the State of Delaware and within or outside the United States, at such place or places as the Board of Directors may appoint from time to time or the business of the corporation may require. ARTICLE II ---------- Shareholders' Meetings ---------------------- 1. All meetings of the shareholders shall be held at the principal office of the corporation or at such other place as shall be determined from time to time by the Board of Directors, and the place at which such meeting shall be held shall be stated in the notice and call of the meeting. 2. The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year on the fourth Tuesday in April, at the hour of 10 a.m., if not a legal holiday, or, if a legal holiday, then on the day following, at the same hour. If the annual meeting of the shareholders be not held as herein prescribed, the election of directors may be held at any meeting called pursuant to these By-laws and the laws of the State of Delaware. 3. At an annual meeting of shareholders, an item of business may be conducted, and a proposal may be considered and acted upon, only if such item or proposal is brought before the annual meeting (a) by, or at the direction of, the Board of Directors, or (b) by any shareholder of the corporation who is entitled to vote at the meeting and who complies with the procedures set forth in the remainder of this Section 3. This Section 3 shall not apply to matters of -1- procedure, which shall instead be subject to the authority of the presiding officer at the meeting. For an item of business or proposal to be brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the principal office of the corporation not less than ninety (90) days prior to the date scheduled for the annual meeting (regardless of any postponements, deferrals or adjournments of that meeting to a later date), or, if notice or public disclosure of the date scheduled for the annual meeting is not given or made at least one hundred (100) days prior thereto, not more than ten (10) days following the day on which notice of the date scheduled for the annual meeting is mailed or the day on which disclosure of that date is made, whichever is earlier. A shareholder's notice to the Secretary under this Section 3 shall set forth, as to each item of business or proposal the shareholder intends to bring before the annual meeting (i) a brief description of the item of business or proposal and the reasons for bringing it before the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the shareholder and of any other shareholders that the shareholder knows or anticipates will support the item of business or proposal, (iii) the number and class of shares of stock of the corporation that are beneficially owned on the date of such notice by the shareholder and by any such other shareholders, (iv) any financial interest of the shareholder or any such other shareholders in such item of business or proposal, (v) a statement as to whether such shareholder and any such other shareholders intend to solicit proxies in support of such proposals and (vi) in the case of nominations of directors, the existence and nature of any financial or other arrangements or understandings between such directors and such shareholder or such other shareholders pursuant to which such nominations are being made. The Board of Directors, or a designated committee thereof, may reject a shareholder's notice that is not timely given in accordance with the terms of this Section 3. If the Board of Directors, or a designated committee thereof, determines that the information provided in a shareholder's notice does not satisfy the requirements of this Section 3 in any material respect, the Secretary of the corporation shall notify the shareholder of the deficiency in the notice. The shareholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five (5) days from the date such deficiency notice is given to the shareholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the shareholder, together with information -2- previously provided, does not satisfy the requirements of this Section 3 in any material respect, then the Board of Directors or such committee may reject the shareholder's notice. Notwithstanding the procedures set forth above in this Section 3, if a shareholder desires to bring an item of business or proposal before an annual meeting (it being understood that, except as may be required by law, a shareholder shall not have the right to bring an item of business or proposal before a special meeting), and neither the Board of Directors nor any committee thereof has made a prior determination of whether the shareholder has complied with the procedures set forth in this Section 3 in connection with such item of business or proposal, then the chairman of the annual meeting shall determine and declare at the annual meeting whether the shareholder has so complied. If the chairman determines that the shareholder has so complied, then the chairman shall so state and ballots shall be provided for use at the meeting with respect to such item of business or proposal. If the chairman determines that the shareholder has not so complied, then, unless the chairman, in his sole and absolute discretion, determines to waive such compliance, the chairman shall state that the shareholder has not so complied and the item of business or proposal shall not be brought before the annual meeting. This Section 3 shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no item of business may be conducted, and no proposal may be considered and acted upon, unless there has been compliance with the procedures set forth in this Section 3 in connection therewith. 4. At the annual meeting of shareholders, the order of business shall be as follows unless otherwise determined by the presiding officer: (a) Calling the meeting to order; (b) Proof of notice of meeting and proxy report; (c) Reading of minutes of last annual meeting; (d) Reports of officers; (e) Reports of committees; (f) Confirmation of selection of independent accountants; -3- (g) Election of directors; and (h) Miscellaneous business. 5. Special meetings of the shareholders for any purpose other than those regulated by statute may be called at any time by the Board of Directors and shall be called by the Secretary at any time, upon written request of the Chief Executive Officer or of any two directors. 6. Notice of the time and place of the annual meeting or of any special meeting of shareholders shall be given by delivering or by mailing a written or printed notice of the same at least ten days, and not more than sixty days, prior to the meeting, with postage prepaid, to each shareholder of record entitled to vote at such meeting and addressed to the shareholder's last known post office address appearing on the books of the corporation. Notice of any shareholders' meeting may be waived in writing by any shareholder at any time. 7. Except as otherwise required by the Certificate of Incorporation or by law: (a) A quorum at any annual or special meeting of shareholders shall consist of shareholders representing, either in person or by proxy, a majority of the outstanding shares of the corporation entitled to vote at such meeting; (b) If a quorum be not present at a properly called shareholders' meeting, the meeting may be adjourned by those present, without new notice being given; provided, however, that any meeting at which directors are to be elected shall be adjourned only from day to day until such directors have been elected, and a quorum established at any time during such meeting, including adjournments thereof, shall constitute a quorum for the purpose of electing directors; (c) At any properly called meeting or adjourned meeting of shareholders at which a quorum as in this paragraph 7 is defined is present (i) in all matters, other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy and entitled to vote on the subject matter shall be the act of the shareholders, and (ii) directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors; and -4- (d) Every shareholder entitled to vote shall have the right to vote either in person or by proxy. ARTICLE III ----------- Stock ----- 1. Certificates representing shares of stock shall be issued in numerical order, and each shareholder shall be entitled to a certificate bearing signature or facsimile signature of the Chief Executive Officer, President or Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying to the number of shares owned. Certificates bearing facsimile signatures of any of the foregoing may be issued during a reasonable period following such person leaving office. 2. Transfers of shares shall be made only upon the transfer books of the corporation, kept at the office of the corporation or Registrar duly authorized by the Board of Directors; and before a new certificate is issued, the old certificates shall be surrendered for cancellation. 3. Registered shareholders only shall be entitled to be treated by the corporation as the holders in fact of the shares standing in their respective names, and the corporation shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Delaware. 4. In case of loss or destruction of any certificate representing shares of stock, another may be issued in its place upon proof of such loss or destruction and upon the giving of a satisfactory bond or indemnity to the corporation in such sum or in such manner as the Board of Directors may provide. 5. In order that the corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date which shall not be more than sixty nor less than ten days before the date of such meeting nor more than sixty days prior to any other action. -5- ARTICLE IV ---------- Board of Directors ------------------ 1. The management of the affairs, property and interests of the corporation shall be vested in the Board of Directors, consisting of no less than eight and no more than twelve persons, as determined from time to time by resolution of the Board of Directors. The directors shall be classified with respect to the time for which they shall severally hold office, by dividing them into three classes, to be known as classes "A", "B", and "C". The number of directors in each of the three classes shall be as determined from time to time by resolution of the Board of Directors. At each annual election, the successors to the class of directors whose terms shall expire in that year shall be elected to hold office for the term of three years so that the terms of office of one class of directors shall expire in each year. The terms of office of directors in Class A shall expire in 1989 and every three years thereafter; the terms of office of directors in Class B shall expire in 1990 and every three years thereafter; and the terms of office of directors in Class C shall expire in 1988, and every three years thereafter. Upon any increase in the size of the Board of Directors, the additional position(s) shall be filled by a vote of a majority of the directors then in office, who shall designate, in conformity with the terms of this Section 1, the class to which each additional director shall be assigned. Notwithstanding any other provision of these By-laws or of law, no amendment of these By-laws that would have the effect of increasing the number of directors of the corporation to a number larger than 12 shall be valid unless approved by vote of the shareholders of the corporation. 2. Nominations of candidates for election as directors at an annual meeting of shareholders may only be made (a) by, or at the direction of, the Board of Directors, or (b) by any shareholder of the corporation who is entitled to vote at the meeting and who complies with the procedures set forth in the remainder of this Section 2. If a shareholder proposes to nominate one or more candidates for election as directors at an annual meeting, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the principal office of the corporation not less than seventy (70) days prior to the date scheduled for the annual meeting (regardless of any postponements, deferrals or adjournments of that meeting to a later date), or, if notice or public disclosure of the date scheduled for the annual meeting is not given or made at least eighty (80) days prior thereto, -6- not more than ten (10) days following the day on which notice of the date scheduled for the annual meeting is mailed or the day on which disclosure of that date is made, whichever is earlier. A shareholder's notice to the Secretary under this Section 2 shall set forth, as to each person whom the shareholder proposes to nominate for election as a director (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person, (c) the number and class of shares of stock of the corporation that are beneficially owned on the date of such notice by such person, and (d) any other information relating to such person required to be disclosed in solicitations of proxies with respect to nominees for election as directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, including but not limited to information required to be disclosed by Schedule 14A of Regulation 14A, and any other information that the shareholder would be required to file with the Securities and Exchange Commission in connection with the shareholder's nomination of such person as a candidate for director or the shareholder's opposition to any candidate for director nominated by, or at the direction of, the Board of Directors. In addition to the above information, a shareholder's notice to the Secretary under this Section 2 shall (i) set forth (A) the name and address, as they appear on the corporation's books, of the shareholder and of any other shareholders that the shareholder knows or anticipates will support any candidate or candidates nominated by the shareholder, and (B) the number and class of shares of stock of the corporation that are beneficially owned on the date of such notice by the shareholder and by any such other shareholders, and (ii) be accompanied by a written statement, signed and acknowledged by each candidate nominated by the shareholder, that the candidate agrees to be so nominated and to serve as a director of the corporation if elected at the annual meeting. The Board of Directors, or a designated committee thereof, may reject any shareholder's nomination of one or more candidates for election as directors if the nomination is not made pursuant to a shareholder's notice timely given in accordance with the terms of this Section 2. If the Board of Directors, or a designated committee thereof, determines that the information provided in a shareholder's notice does not satisfy the requirements of this Section 2 in any material respect, the Secretary of the corporation shall notify the shareholder of the deficiency in the notice. The shareholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five (5) days from the date such deficiency notice is given to the shareholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the shareholder, together with information previously provided, does not satisfy the -7- requirements of this Section 2 in any material respect, then the Board of Directors or such committee may reject the shareholder's notice. Notwithstanding the procedures set forth above in this Section 2, if a shareholder proposes to nominate one or more candidates for election as directors at an annual meeting, and neither the Board of Directors nor any committee thereof has made a prior determination of whether the shareholder has complied with the procedures set forth in this Section 2 in connection with such nomination, then the chairman of the annual meeting shall determine and declare at the annual meeting whether the shareholder has so complied. If the chairman determines that the shareholder has so complied, then the chairman shall so state and ballots shall be provided for use at the meeting with respect to such nomination. If the chairman determines that the shareholder has not so complied, then, unless the chairman, in his sole and absolute discretion, determines to waive such compliance, the chairman shall state that the shareholder has not so complied and the defective nomination shall be disregard. 3. Notwithstanding the power and authority of the Board of Directors to amend these By-laws, including, without limitation, provisions relating to the number of directors, the number of directors may at any time be increased or decreased by a vote of the majority of the voting stock issued and outstanding, at any regular or special meeting of shareholders, if the notice of such meeting contains a statement of the proposed increase or decrease; and in case of any such increase, the Board of Directors or the shareholders, at any general or special meeting held before the Board of Directors takes action, shall have power to elect such additional directors, to hold office until the next annual meeting of the shareholders and until their successors are elected and qualified. 4. All vacancies in the Board of Directors, whether caused by resignation, death, or otherwise, may, except as otherwise provided in the Certificate of Incorporation, be filled by a majority of the remaining directors attending a stated or special meeting called for that purpose, even though less than a quorum be present, or by the shareholders at any regular or special meeting held prior to the filling of such vacancies by the Board of Directors as above provided. A director thus elected to fill any vacancy shall hold office for the unexpired term of the newly created position and until a successor is elected and qualified. 5. Regular meetings of the Board of Directors may be held without notice at the principal office of the corporation or at such other place or places as the Board of Directors may designate from time to time. The annual meeting of the Board shall be held without notice immediately following the adjournment of the annual meeting of shareholders. -8- 6. Special meetings of the Board of Directors may be called at any time by the Chairman or by any two directors, to be held at the principal office of the corporation or at such other place or places as the Board of Directors may designate from time to time. 7. The notice of all special meetings of the Board of Directors shall be given to each director by delivering, telegraphing, or mailing a written or printed notice of the same at least three days prior to the meeting and, if by mail, with postage prepaid, Sundays and holidays excluded; provided that if a meeting by telephone is to be held as permitted by statute, verbal or written notice thereof shall be given at least three hours prior to the scheduled time for such meeting. 8. The presence of one-half or more of the members of the whole Board of Directors shall be necessary at all meetings to constitute a quorum for the transaction of business, but less than a quorum may adjourn any meeting which may be held on a subsequent date without further notice, provided a quorum be present at such deferred meeting. 9. There may be an Executive Committee of the Board of Directors, which, if constituted, shall meet on call of the Chief Executive Officer or any two Committee members and shall be comprised of two salaried officer- members and two outside members, or as otherwise determined by the Board of Directors. The Executive Committee may act for the full Board between meetings and shall have such specific powers as delegated by the Board. Other standing or temporary committees may be appointed from its own number by the Board of Directors from time to time, and the Board of Directors may invest from time to time such Committee with powers as it may see fit, subject to such other conditions as may be prescribed by the Board. Each committee of the Board shall keep regular minutes of the transaction of its meetings and shall cause them to be recorded in books kept for that purpose in the office of the corporation and shall report the same to the Board of Directors at its next meeting. 10. By resolution of the Board of Directors, a fixed annual sum and attendance fee, together with expenses of attendance, if any, may be allowed the directors who are not salaried by the corporation for their services and for attendance at each regular or special meeting of such Board; provided, that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. -9- ARTICLE V --------- Officers -------- 1. The officers of the corporation may include a Chairman of the Board and Chief Executive Officer, a Vice Chairman of the Board, a President, one or more Vice Presidents, a Secretary, and a Treasurer and may include one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, a Comptroller, and one or more Assistant Comptrollers, all of whom shall hold office in the discretion of the Board of Directors. The Chairman of the Board and Chief Executive Officer shall be a director, and any of the other officers may be directors of the corporation. Any person may hold more than one office, if permitted by law. The officers of the corporation shall have the following duties, subject at all times to action of the Board of Directors: 2. Chairman of the Board: The Chairman of the Board shall be chairman of and preside at all meetings of the Board of Directors and all meetings of the shareholders of the corporation; shall determine the agenda for all such meetings; and may call special meetings of the Board of Directors at such times, at such places, and for such purposes as the Chairman shall determine. The Chairman of the Board shall also be the Chief Executive Officer and shall have general management and direction of the business and of other officers of the corporation, including all powers ordinarily incident thereto. Except where by law the signature of the President is required, the Chief Executive Officer shall possess the same power to sign all certificates, contracts, and other instruments of the corporation which may be authorized by the Board of Directors. The Board of Directors shall from time to time determine who shall exercise the functions of the Chief Executive Officer during the absence or disability of such officer. 3. Vice Chairman of the Board: The Vice Chairman of the Board, if one is appointed, shall exercise the functions of the Chairman during the absence or disability of the Chairman. 4. President: The President shall be the principal operating officer of the corporation and shall exercise the functions of the Chairman in the absence or disability of the Chairman and the Vice Chairman. 5. Vice Presidents: The Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, and Assistant Vice Presidents shall have such powers and discharge such duties as may be assigned from time to time by the Chief Executive Officer or the Board of Directors. -10- 6. The Secretary and/or Assistant Secretary shall issue notices for all meetings, except that notice for special meetings of directors called at the request of two directors as provided in Section 6 of Article IV of the By-laws may be issued by such directors; shall keep minutes of all meetings; shall have charge of the seal and the corporate books; and shall make such reports and perform such other duties as are incident to the office or are properly required by the Board of Directors. 7. The Treasurer and/or Assistant Treasurer shall have the custody of all moneys and securities of the corporation and shall keep regular books of account; shall disburse the funds of the corporation in payment of the just demands against the corporation or as may be ordered by the Board of Directors, taking proper vouchers for such disbursements; shall render to the Board of Directors from time to time as may be required an account of all transactions as may be assigned from time to time by Chief Executive Officer or the Board of Directors. 8. In the case of absence or inability to act of any officer of the corporation and of any person herein authorized to act in place thereof, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer or any director or other person whom it may select. 9. Vacancies in any office arising from any cause may be filled by the directors at any regular or special meeting. 10. The Board of Directors may appoint such other officers and agents as it shall deem necessary or expedient, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. 11. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. 12. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of the whole Board of Directors. 13. The Board of Directors may, by resolution, require any and all of the officers to give bonds to the corporation, with sufficient surety or sureties, conditioned for the faithful performance of the duties of their respective offices and to comply with such other conditions as may from time to time be required by the Board of Directors. -11- ARTICLE VI ---------- Dividends and Finance --------------------- 1. Dividends may be declared by the Board of Directors and paid out of the annual net profits of the corporation or out of its net assets in excess of its capital, subject to the conditions and limitations imposed by the Certificate of Incorporation of the corporation and the laws of the State of Delaware. 2. Before making any distribution of profits, there may be set aside out of the net profits of the corporation such sums as the directors from time to time in their absolute discretion deem expedient as a reserve fund to meet contingencies, or for equalizing dividends, or for maintaining any property of the corporation, or for any other purposes, and any profits of any year not distributed as dividends shall be deemed to have been thus set apart until otherwise disposed of by the Board of Directors. 3. The moneys of the corporation shall be deposited in the name of the corporation in such bank or banks or trust company or trust companies as the Board of Directors shall designate, and shall be drawn out only by instrument signed by persons designated by resolution by the Board of Directors. ARTICLE VII ----------- Notices ------- 1. Whenever the provisions of the statute or these By-laws require notice to be given to any director, officer, or shareholder, they shall not be construed to mean personal notice; such notice may be given in writing by depositing the same in a post office or letter box, in a postpaid, sealed wrapper, addressed to such director, officer, or shareholder at his or her address as the same appears on the books of the corporation, and the time when the same shall be mailed shall be deemed to be the time of the giving of such notice. Notice may also be given by telegraph, in which event proof of delivery shall be required. 2. A waiver of any notice in writing, signed by a shareholder, director, or officer, whether before or after the time stated in said waiver for holding a meeting, shall be deemed equivalent to a notice required to be given to any director, officer, or shareholder. -12- ARTICLE VIII ------------ Seal ---- The corporate seal of the corporation shall be in the form prescribed by the Board of Directors. ARTICLE IX ---------- Amendments ---------- These By-laws may be altered, amended, or repealed by the Board of Directors. The foregoing By-laws were duly adopted as the By-laws of Airborne Freight Corporation, a Delaware corporation, on the 10th day of July, 1968, by B.J. Consono, F.J. Obara, Jr., and A.D. Grier, being all of the incorporators, and subsequently amended from time to time, most recently on February 4, 1997. -13- EX-4 3 EXHIBIT 4(E) EXHIBIT 4(e) SECOND SUPPLEMENTAL INDENTURE RELATING TO THE COMPANY'S 8-7/8% NOTES DUE 2002 SECOND SUPPLEMENTAL INDENTURE, dated as of February 12, 1997, among AIRBORNE FREIGHT CORPORATION, a corporation duly orga nized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 3101 Western Avenue, Seattle, Washington 98111, ABX AIR, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called "ABX"), having its principal office at 145 Hunter Drive, Wilmington, Ohio 45177, AIRBORNE FORWARDING CORPORATION, a corporation duly organized under the laws of the State of Delaware (herein called "Airborne Forwarding"), having its principal office at 1851 Alexander Bell Dr., Reston, Virginia 22091, WILMINGTON AIR PARK, INC., a corporation duly organized and existing under the laws of the State of Ohio (herein called "Wilmington Air Park"), having its principal office at 145 Hunter Drive, Wilmington, Ohio 45177, AIRBORNE FTZ, INC., a corporation duly organized under the laws of the State of Ohio (herein called "Airborne FTZ"), having its principal office at 145 Hunter Drive, Wilmington, Ohio 45177, (ABX, Airborne Forwarding, Wilmington Air Park and Airborne FTZ, being herein collectively referred to as the "Guarantors" and each being individually referred to as a "Guarantor") and THE BANK OF NEW YORK, a New York banking corporation, as Trustee (herein called the "Trustee"), supplementing that certain Indenture, dated as of December 15, 1992 (the "Indenture"), among the Company, ABX, Airborne Forwarding and the Trustee. RECITALS OF THE COMPANY AND THE GUARANTORS The Company, ABX and Airborne Forwarding have heretofore executed and delivered to the Trustee the Indenture providing for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein and therein called the "Securities"), to be issued in one or more series as in the Indenture provided. Section 901 of the Indenture provides, among other things, that, without the consent of any Holders, the Company, when authorized by a Board Resolution of the Company, the Guarantors, when authorized by respective Board Resolutions of the Guarantors, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental thereto, in form satisfactory to the Trustee, to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under the Indenture, provided that such action shall not adversely affect the interests of the Holders of Securities of any series in any material respect. The Company and the Guarantors, pursuant to the foregoing authority, propose in and by this Second Supplemental Indenture to supplement the Indenture in certain respects with respect to the Securities denominated its "8-7/8% Notes Due December 15, 2002," the terms of which are described in the Pricing Agreement dated December 14, 1992 between the Company, ABX, Airborne Forwarding and Goldman Sachs & Co. (the "2002 Securities"), including the addition of Wilmington Air Park and Airborne FTZ as Guarantors. All things necessary to make this Second Supplemental Indenture a valid agreement of the Company and the Guarantors, and a valid supplement to the Indenture, in accordance with its terms, have been done. NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH: In consideration of the above matters and of the covenants contained herein, it is mutually agreed, for the equal and proportionate benefit of all Holders of the 2002 Securities, as follows: ARTICLE ONE Definitions and Other Provisions of General Application Section 101. Definitions. ----------- (a) For all purposes of this Second Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) capitalized terms used herein without definition shall have the meanings specified in the Indenture; (3) unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Second Supplemental Indenture; and (4) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Second Supplemental Indenture as a whole and not to any particular Article, Section or other subdivision. -2- (b) The Indenture is hereby amended with respect to the 2002 Securities by amending and restating in its entirety the definition of "Guarantors" set forth in Section 101 of the Indenture to read as follows: "Guarantors" means ABX Air, Inc., a corporation duly organized and existing under the laws of the State of Delaware, Airborne Forwarding Corporation, a corporation duly organized under the laws of the State of Delaware, Wilmington Air Park, Inc., a corporation duly organized and existing under the laws of the State of Ohio, and Airborne FTZ, Inc., a corporation duly organized under the laws of the State of Ohio, except in the case any of such Persons has been released from its Guarantees hereunder in accordance with Section 1404 hereof. ARTICLE TWO Obligation of Guarantors Section 201. Guarantee by Wilmington Air Park and Airborne FTZ. ------------------------------------ By execution and delivery hereof, Wilmington Air Park and Airborne FTZ each expressly agrees, with respect to the 2002 Securities, to become a Guarantor under the Indenture and to be bound by all terms and provisions therein made applicable thereby to Wilmington Air Park and Airborne FTZ, including without limitation those set forth in Article Fourteen of the Indenture providing for the joint and several and unconditional guarantees of the 2002 Securities by the Guarantors. ARTICLE THREE Miscellaneous Section 301. Miscellaneous ------------- (a) The Trustee accepts the trusts created by the Indenture as supplemented by this Second Supplemental Indenture, and agrees to perform the same upon the terms and conditions of the Indenture, as supplemented hereby. (b) The recitals contained herein shall be taken as statements of the Company or the Guarantors, as applicable, and the Trustee assumes no responsibility for their correctness. -3- (c) Each of the Company, the Guarantors and the Trustee acknowledges that all of its respective covenants and agreements set forth in the Indenture are in no way amended or modified except as provided in this Second Supplemental Indenture. (d) Each of Wilmington Air Park and Airborne FTZ makes, as of the date of execution of this Second Supplemental Indenture, all of the respective covenants and agreements set forth by the Guarantors in the Indenture as supplemented hereby. (e) All covenants and agreements in this Second Supplemental Indenture by the Company, the Guarantors or the Trustee shall bind its respective successors and assigns, whether so expressed or not. (f) Except as otherwise provided herein, the Indenture shall remain in full force and effect in accordance with its terms. (g) This Second Supplemental Indenture shall have effect only with respect to the 2002 Securities. (h) This Second Supplemental Indenture shall be deemed to be incorporated in, and made a part of, the Indenture; and the Indenture, as supplemented hereby, shall be read, taken and construed as one and the same instrument. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -4- IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed, all as of the day and year first above written. [SEAL] AIRBORNE FREIGHT CORPORATION By/s/Roy C. Liljebeck ------------------------------ Executive Vice President, CFO Attest: /s/David C. Anderson - - ------------------------------ Secretary [SEAL] ABX AIR, INC. By/s/Stephen E. DeForest ------------------------------ Secretary Attest: /s/Joseph C. Hete - - ------------------------------ Sr. Vice President, Chief Operating Officer [SEAL] AIRBORNE FORWARDING CORPORATION By/s/Roy C. Liljebeck ------------------------------ Secretary Attest: David C. Anderson - - ------------------------------ Secretary -5- [SEAL] WILMINGTON AIR PARK, INC. By/s/Stephen E. DeForest ------------------------------ Secretary/Treasurer Attest: /s/Joseph C. Hete - - ------------------------------ Vice President [SEAL] AIRBORNE FTZ, INC. By/s/Stephen E. DeForest ------------------------------ Secretary/Treasurer Attest: /s/Joseph C. Hete - - ------------------------------ Vice President [SEAL] THE BANK OF NEW YORK By/s/Vivian George's ------------------------------ Assistant Vice President Attest: /s/Paul Schmalzel - - ------------------------------ Assistant Treasurer -6- State of Washington ) ) ss.: King County ) On the 12th day of February, 1997, before me personally came Roy C. Liljebeck, to me known, who, being by me duly sworn, did depose and say that he is Executive Vice President, CFO of Airborne Freight Corporation, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/Janell Cote ------------------------------ Notary Public State of Washington ) ) ss.: King County ) On the 13th day of February, 1997, before me personally came Stephen E. DeForest to me known, who, being by me duly sworn, did depose and say that he is Secretary of ABX Air, Inc., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/Diane C. Kristine ------------------------------ Notary Public -7- State of Washington ) ) ss.: King County ) On the 12th day of February, 1997, before me personally came Roy C. Liljebeck, to me known, who, being by me duly sworn, did depose and say that he is Secretary of Airborne Forwarding Corporation, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/Janell Cote ------------------------------ Notary Public State of Washington ) ) ss.: County of King ) On the 13th day of February, 1997, before me personally came Stephen E. DeForest, to me known, who, being by me duly sworn, did depose and say that he is Secretary of Wilmington Air Park, Inc., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/Diane C. Kristine ------------------------------ Notary Public -8- State of Washington ) ) ss.: County of King ) On the 13th day of February, 1997, before me personally came Stephen E. DeForest, to me known, who, being by me duly sworn, did depose and say that he is Secretary of Airborne FTZ, Inc., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/Diane C. Kristine ------------------------------ Notary Public State of New York ) ) ss.: City of New York ) On the 18th day of February, 1997, before me personally came Vivian George's, to me known, who, being by me duly sworn, did depose and say that he is Assistant Vice President of The Bank of New York, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/William J. Cassels ------------------------------ Notary Public -9- EX-10 4 EXHIBIT 10(H) EXHIBIT 10(h) Airborne Express 1995-1999 Executive Incentive Compensation Plan (First Amendment, January 1, 1997) Airborne Freight Corporation D/B/A "Airborne Express" EXECUTIVE INCENTIVE COMPENSATION PLAN ------------------------------------- Effective January 1, 1995 - December 31, 1999 (First Amendment, January 1, 1997) 1. Purpose ------- The purpose of this Plan is to achieve Corporate goals by providing incentive compensation to eligible key executives who through industry, ability and exceptional service, contribute materially to the success of Airborne Express. 2. Definitions ----------- When used in the Plan, the following words and phrases shall have the following meanings: (a) Attainment - The actual results of effort to reach the Target for a Performance Measure, usually stated as a percentage of Target. (b) Beneficiary - The beneficiary or beneficiaries designated to receive the amount, if any, payable under the Plan upon the death of a Participant. (c) Board - The Board of Directors of Airborne Freight Corporation. (d) Compensation Committee - The Compensation Committee of the Board. (e) Maximum - The point above Target that represents the maximum payout level for a particular Performance Measure. (f) Net Profit - Pre-tax, pre-profit sharing net profit. (g) Participant - Any employee eligible to receive awards under section 4. (h) Performance Measure - A specific objective measure to assess success in achieving established goals. Permitted Performance Measures are listed in section 5. (i) Plan - The 1995-1999 Executive Incentive Compensation Plan, as amended. (j) Plan Year - Each calendar year for which Performance Measures and Targets are established for the Company. (k) Retirement - When an employee leaves active service and qualifies under the Company's regular or early retirement programs. (l) Revenue Growth - Percentage growth in sales revenue over the prior year. (m) Target - The point at which performance equals 100% of the stated objective. (n) Threshold - The point below Target at which incentive payout for each Performance Measure begins. -2- 3. Administration -------------- (a) The Compensation Committee will have the power to interpret the Plan and to make all determinations necessary or desirable for its administration. (b) The decision of the Compensation Committee on any question concerning the interpretation or administration of the Plan will be final and conclusive. Nothing in the Plan will be deemed to give any officer or employee, or legal representatives or assigns, any right to participate in the Plan except to such extent as the Compensation Committee may determine pursuant to the provisions of the Plan. 4. Eligibility ----------- (a) Positions eligible for the EICP are: ------------------------------------ Chairman of the Board Chief Executive Officer President Chief Operating Officer Executive Vice Presidents Chief Financial Officer President, ABX Air, Inc. Division Heads Except as otherwise provided below, Participants for a Plan Year must be employed for the entire Plan Year. (b) With approval of the Compensation Committee, prior to June 30 of each Plan Year, additional employees may be included in the Plan, with any award pro-rated as shall be determined by the Compensation Committee. (c) Participants who retire in good standing during the year will be eligible for a pro-rated award for the year in which they retire provided they are on the active payroll on June 30th or later of the Plan Year. (d) Participants who take a leave of absence will have their awards calculated based on actual Airborne salary earnings for the calendar year. Any disability insurance payments will not be included as earnings in calculating awards. Participants who are on a leave of absence for more than 90 days and who continue to receive full or partial salary continuance will have their awards adjusted. Any salary paid while on a leave of absence period over 90 days will not be included in the base used to calculate awards. 5. Performance Measures -------------------- Unless otherwise determined by the Committee, bonuses will be based on two Performance Measures -- Net Profit and Revenue Growth. In addition to or in lieu of one or both of the preceding Performance Measures, the Committee may select one or more of the following Performance Measures: earnings per share, shipment growth, increase in stock price, return on assets or return on equity. The Compensation Committee will set annual Targets for each Performance Measure within 90 days after the beginning of each Plan Year and such Targets may not be changed thereafter. The Targets may be ratified by the Board. Unless within 90 days after the beginning of each Plan Year the Committee selects Performance Measures in addition to or in lieu of one or both of Net Profit and Revenue Growth, bonuses will be allocated based on Attainment of Targets as follows: (a) Net Profit earnings is the major corporate Performance Measure and shall be the basis of 75% of the bonus allocation. (b) An 80% Threshold is set on targeted Net Profit. (c) A 150% Maximum is set on targeted Net Profit. -3- (d) Revenue Growth is the second major corporate Performance Measure and shall be the basis of 25% of the bonus allocation. (e) An 80% Threshold is set on targeted Revenue Growth. (f) A 150% Maximum is set on targeted Revenue Growth. 6. Qualifiers on Performance Measures ---------------------------------- (a) The bonus percentage is applied to the Participant's salary paid in the Plan (calendar) Year. (b) No bonus will be paid for Revenue Growth unless the Threshold Net Profit is achieved. (c) To receive any award under EICP, a Participant's individual performance must be evaluated as at least competent by the Compensation Committee. (d) The Committee has the discretion to reduce or eliminate any award. 7. Bonus Amounts ------------- Actual bonuses will be determined by multiplying the following percentages, or a pro-rated portion thereof, by the Participant's annual salary.
Threshold Maximum Position (80% of Target) Target (150% of Target) --------- -------------- ------- --------------- CEO 30% 80% 160% COO 30% 70% 140% EVP's 25% 60% 120%
8. Allocations ----------- Unless otherwise determined under section 5, the EICP incentive payment percentages for Attainment of Performance Measures are: CEO --- (100% Corporate)
Percent of Attainment Profit(75%) Revenue(25%) Total ---------- ---------- ----------- ----- 80% 22.5% 7.5% 30.0% 100% 60.0% 20.0% 80.0% 150% 120.0% 40.0% 160.0%
COO --- (100% Corporate)
Percent of Attainment Profit(75%) Revenue(25%) Total ---------- ---------- ----------- ----- 80% 22.5% 7.5% 30.0% 100% 52.5% 17.5% 70.0% 150% 105.0% 35.0% 140.0%
-4- EVP'S ----- (100% Corporate)
Percent of Attainment Profit(75%) Revenue(25%) Total ---------- ---------- ----------- ----- 80% 18.75% 6.25% 25.0% 100% 45.0% 15.0% 60.0% 150% 90.0% 30.0% 120.0%
9. Example ------- An example incentive calculation for the CEO level is shown on page 7. 10. Form of Payment --------------- Awards shall be paid entirely in cash. Payments will be made as soon as practicable after audited performance results are known and approved by the Compensation Committee, which should be on or about March 1. Award checks are prepared by the Payroll Department and the amounts are subject to tax withholding and Capital Accumulation Plan (CAP) deductions. If a Participant dies before the end of the Plan Year an amount equal to a pro-rated portion thereof as of the date of death shall be paid in one lump cash sum to the Participant's Beneficiary. 11. Limitation on Allocation ------------------------ Notwithstanding any other provision of the Plan, in no circumstances will the total amount allocated as an award to a Participant for any Plan Year exceed $975,000. 12. Designation of Beneficiaries ---------------------------- Each Participant shall file with the Company a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon the Participant's death. A Participant may, from time to time, revoke or change his Beneficiary designation without the consent of any prior Beneficiary by filing a new designation. The last such designation received shall be controlling, provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Company prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. 13. Absence of Valid Designation ---------------------------- If no such Beneficiary designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant, or if such designation conflicts with the law, the Participant shall be deemed to have designated the Participant's estate as the Participant's Beneficiary and the Participant's estate shall receive the payment of the amount, if any, under the Plan upon the Participant's death. If the Compensation Committee is in doubt as to the right of any person to receive such amount, the Compensation Committee may direct retention of such amount, without liability for any interest thereon, until the rights thereto are determined or the Compensation Committee may pay such amount to any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and of Airborne Express therefore. 14. No Liability of Compensation Committee, Board Members or Officers ----------------------------------------------------------------- No members of the Compensation Committee, Board or Corporate officers shall be personally liable by reason of any contract or other instrument executed by them or on their behalf nor for any mistake or judgment made in good faith, and Airborne shall indemnify and hold harmless each member of the Board and each other officer, employee or director of Airborne Express to whom any duty or power relating to the administration or -5- interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Compensation Committee) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith. 15. Right to Amend, Suspend or Terminate Plan ----------------------------------------- The Board reserves the right at any time to amend, suspend or terminate the Plan in whole or in part and for any reasons and without the consent of any Participant or Beneficiary; provided that no such amendment shall adversely affect rights to receive any amount to which Participants or Beneficiaries have become entitled prior to such amendment. Unless otherwise provided herein, any amendment, modification, suspension or termination of any provisions of the Plan may be made retroactively. 16. No Rights to Continued Employment or Bonus ------------------------------------------ Nothing contained in the Plan shall give any employee the right to be retained in the employment of Airborne Express or affect the right of Airborne Express to dismiss any employee. The adoption of the Plan shall not constitute a contract between Airborne Express and any employee. No Participant shall receive any right to be granted an award hereunder nor shall any such award be considered as compensation under any employee benefit plan of Airborne Express except as otherwise determined by Airborne Express. 17. No Right, Title, or Interest in Assets -------------------------------------- The Participant shall have no right, title, or interest whatsoever in or to any investments which Airborne Express may make to aid in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a fiduciary relationship between Airborne Express and any Participant or any other person. To the extent that any person acquires a right to receive payments from Airborne Express under this Plan, such right shall be no greater than the right of an unsecured general creditor of Airborne Express. 18. Unfunded Plan: Governing Law ---------------------------- The Plan is intended to constitute an incentive compensation arrangement for a select group of management or highly compensated personnel and all rights thereunder shall be governed by and construed in accordance with the laws of the State of Washington. -6- EX-10 5 EXHIBIT 10(I) EXHIBIT 10(i) Airborne Express 1997-1999 Executive Group Incentive Compensation Plan Airborne Freight Corporation D/B/A "Airborne Express" EXECUTIVE GROUP INCENTIVE COMPENSATION PLAN ------------------------------------------- Effective January 1, 1997 - December 31, 1999 1. Purpose ------- The purpose of this Plan is to achieve Corporate goals by providing incentive compensation to eligible key executives who through industry, ability and exceptional service, contribute materially to the success of Airborne Express. 2. Definitions ----------- When used in the Plan, the following words and phrases shall have the following meanings: (a) Attainment - The actual results of effort to reach the Target for a Performance Measure, usually stated as a percentage of Target. (b) Beneficiary - The beneficiary or beneficiaries designated to receive the amount, if any, payable under the Plan upon the death of a Participant. (c) Board - The Board of Directors of Airborne Freight Corporation. (d) Compensation Committee - The Compensation Committee of the Board. (e) Maximum - The point above Target that represents the maximum payout level for a particular Performance Measure. (f) Net Profit - Pre-tax, pre-profit sharing net profit. (g) Participant - Any employee eligible to receive awards under section 4. (h) Performance Measure - A specific objective measure to assess success in achieving established goals. Permitted Performance Measures are listed in section 5. (i) Plan - The 1997-1999 Executive Group Incentive Compensation Plan. (j) Plan Year - Each calendar year for which Performance Measures and Targets are established for the Company. (k) Retirement - When an employee leaves active service and qualifies under the Company's regular or early retirement programs. (l) Revenue Growth - Percentage growth in sales revenue over the prior year. (m) Target - The point at which performance equals 100% of the stated objective. (n) Threshold - The point below Target at which incentive payout for each Performance Measure begins. -2- 3. Administration -------------- (a) The Compensation Committee will have the power to interpret the Plan and to make all determinations necessary or desirable for its administration. (b) The decision of the Compensation Committee on any question concerning the interpretation or administration of the Plan will be final and conclusive. Nothing in the Plan will be deemed to give any officer or employee, or legal representatives or assigns, any right to participate in the Plan except to such extent as the Compensation Committee may determine pursuant to the provisions of the Plan. 4. Eligibility ----------- (a) Positions eligible for the Executive Group Incentive Compensation Plan (EGICP) are: Executive Vice Presidents (EVPs) Chief Financial Officer (CFO) President, ABX Air, Inc. Except as otherwise provided below, participants for a Plan Year must be employed for the entire Plan Year. (b) With approval of the Compensation Committee, prior to June 30 of each Plan Year, additional employees may be included in the Plan, with any award pro-rated as shall be determined by the Compensation Committee. (c) Participants who retire in good standing during the year will be eligible for a pro-rated award for the year in which they retire provided they are on the active payroll on June 30th or later of the Plan Year. (d) Participants who take a leave of absence will have their awards calculated based on actual Airborne salary earnings for the calendar year. Any disability insurance payments will not be included as earnings in calculating awards. Participants who are on a leave of absence for more than 90 days and who continue to receive full or partial salary continuance will have their awards adjusted. Any salary paid while on a leave of absence period over 90 days will not be included in the base used to calculate awards. 5. Performance Measures -------------------- Unless otherwise determined by the Committee, bonuses for the Executive Group will be based on the following Performance Measures -- Net Profit, Revenue Growth, and additionally assigned management by objectives (MBOs) that specifically relate to the individual executive and his/her responsibilities. The Committee may select one or more of the following Performance Measures in lieu of one or both of the Net Profit and Revenue Growth Performance Measures: earnings per share growth, shipment growth, increase in stock price, return on assets or return on equity. The Compensation Committee will set annual Targets for each Performance Measure within 90 days after the beginning of each Plan Year and such Targets will not be changed thereafter. The Targets may be ratified by the Board. Unless within 90 days after the beginning of each Plan Year the Committee selects Performance Measures in addition to or in lieu of one or all three of Net Profit, Revenue Growth and MBOs, bonuses will be allocated based on Attainment of Targets as follows: A. Executive Vice Presidents and President, ABX Air, Inc. - Net Profit is the first major corporate Performance Measure and is the basis of 52.5% of the bonus allocation. 1) An 80% Threshold is set on targeted Net Profit. 2) A 150% Maximum is set on targeted Net Profit. -3- - Revenue Growth is the second major corporate Performance Measure and is the basis of 17.5% of the bonus allocation. 1) An 80% Threshold is set on targeted Revenue Growth. 2) A 150% Maximum is set on targeted Revenue Growth. - MBO is the third major performance measure and is the basis of 30% of the bonus allocation. 1) Quantitatively based, but judgmentally applied. 2) Meaningful - represents impact of position. 3) Reporting System - uses existing reporting systems. 4) Quantifiable results are subject to override by the Committee/CEO/COO. B. Chief Financial Officer The CFO position, though part of the Executive Group, will not have the 70% Corporate Results and 30% MBO ratio. The ratio will be 85% Corporate Results and 15% MBO. Consequently, bonuses for the CFO will be allocated on Attainment of Targets as follows: - Net profit is the first major corporate Performance Measure and is the basis of 63.75% of the bonus allocation. 1) An 80% Threshold is set on targeted Net Profit. 2) A 150% Maximum is set on targeted Net Profit. - Revenue Growth is the second major corporate Performance Measure and is the basis of 21.25% of the bonus allocation. 1) An 80% Threshold is set on targeted Revenue Growth. 2) A 150% Maximum is set on targeted Revenue Growth. - MBO is the third major Performance Measure and is the basis of 15% of the bonus allocation. 1) Quantitatively based, but judgmentally applied. 2) Meaningful - represents impact of position. 3) Reporting System - uses existing reporting systems. 4) Quantifiable results are subject to override by the Committee/CEO/COO. 6. Qualifiers on Performance Measures ---------------------------------- - The amount of bonus paid on MBO achievements will be at the discretion of the Committee/CEO/COO. - The bonus percentage is applied to the Participant's salary paid in the Plan (calendar) Year. - No bonus will be paid for Revenue Growth unless the Threshold for Net Profit is achieved. -4- - The bonus earned for corporate net profit and revenue may be withheld if MBO performance is unsatisfactory. - To receive any award under EGICP, a Participant's individual performance must be evaluated as at least competent by the Compensation Committee. - The Committee has the discretion to reduce or increase or eliminate any award earned under the MBO provision of the EGICP plan. 7. Bonus Amounts ------------- Actual bonuses will be determined by multiplying the following percentages, or a pro-rated portion thereof, by the Participant's annual salary.
Threshold Maximum Position (80% of Target) Target (150% of Target) -------- -------------- ------ --------------- EVPs, CFO and (1) 25% 60% 120% Pres, ABX Air, Inc.
(1) The Committee/CEO/COO have the authority to increase or decrease the quantifiable MBO attainment percents based on their judgment of MBO accomplishments. 8. Allocations ----------- Unless otherwise determined under section 5, the EGICP incentive payment percentages for Attainment of Performance Measures are: EVPs and President, ABX Air, Inc. (excl CFO) -------------------------------------------- (70% Corporate/30% MBO)
|----------- --Corporate-- ----------| Percent of Net Revenue Corp (1) Attainment Profit(52.5%) Growth(17.5%) Total(70%) MBO(30%) Total ---------- ------------ ------------ --------- ------- ----- 80% 13.125% 4.375% 17.5% - - 100% 31.5% 10.5% 42.0% 18.0% 60.0% 150% 63.0% 21.0% 84.0% - -
CFO --- (85% Corporate/15% MBO)
|------------ --Corporate-- ---------| Percent of Net Revenue Corp (1) Attainment Profit(63.75%) Growth(21.25%) Total(85%) MBO(15%) Total ---------- ------------ ------------ --------- ------- ----- 80% 15.94% 5.31% 21.25% - - 100% 38.25% 12.75% 51.0% 9.0% 60.0% 150% 76.5% 25.5% 102.0% - -
(1) The Committee/CEO/COO have the authority to increase or decrease the quantifiable MBO attainment percents based on their judgment of MBO accomplishments. -5- 9. Example ------- An example incentive calculation for the EVP level is shown on Pages 8-9. 10. Form of Payment --------------- Awards shall be paid entirely in cash. Payments will be made as soon as practicable after audited performance results are known and approved by the Compensation Committee, which should be on or about March 1. Award checks are prepared by the Payroll Department and the amounts are subject to tax withholding and Capital Accumulation Plan (CAP) deductions. If a Participant dies before the end of the Plan Year an amount equal to a pro-rated portion thereof as of the date of death shall be paid in one lump cash sum to the Participant's Beneficiary. 11. Limitation on Allocation ------------------------ Notwithstanding any other provision of the Plan, in no circumstances will the total amount allocated as an award to a Participant for any Plan Year exceed $975,000. 12. Designation of Beneficiaries ---------------------------- Each Participant shall file with the Company a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon the Participant's death. A Participant may, from time to time, revoke or change his Beneficiary designation without the consent of any prior Beneficiary by filing a new designation. The last such designation received shall be controlling, provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Company prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. 13. Absence of Valid Designation ---------------------------- If no such Beneficiary designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant, or if such designation conflicts with the law, the Participant shall be deemed to have designated the Participant's estate as the Participant's Beneficiary and the Participant's estate shall receive the payment of the amount, if any, under the Plan upon the Participant's death. If the Compensation Committee is in doubt as to the right of any person to receive such amount, the Compensation Committee may direct retention of such amount, without liability for any interest thereon, until the rights thereto are determined or the Compensation Committee may pay such amount to any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and of Airborne Express therefore. 14. No Liability of Compensation Committee, Board Members or Officers ----------------------------------------------------------------- No members of the Compensation Committee, Board or Corporate officers shall be personally liable by reason of any contract or other instrument executed by them or on their behalf nor for any mistake or judgment made in good faith, and Airborne shall indemnify and hold harmless each member of the Board and each other officer, employee or director of Airborne Express to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Compensation Committee) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith. 15. Right to Amend, Suspend or Terminate Plan ----------------------------------------- The Board reserves the right at any time to amend, suspend or terminate the Plan in whole or in part and for any reasons and without the consent of any Participant or Beneficiary; provided that no such amendment shall adversely affect rights to receive any amount to which Participants or Beneficiaries have become entitled prior to such amendment. Unless otherwise provided herein, any amendment, modification, suspension or termination of any provisions of the Plan may be made retroactively. -6- 16. No Rights to Continued Employment or Bonus ------------------------------------------ Nothing contained in the Plan shall give any employee the right to be retained in the employment of Airborne Express or affect the right of Airborne Express to dismiss any employee. The adoption of the Plan shall not constitute a contract between Airborne Express and any employee. No Participant shall receive any right to be granted an award hereunder nor shall any such award be considered as compensation under any employee benefit plan of Airborne Express except as otherwise determined by Airborne Express. 17. No Right, Title, or Interest in Assets -------------------------------------- The Participant shall have no right, title, or interest whatsoever in or to any investments which Airborne Express may make to aid in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a fiduciary relationship between Airborne Express and any Participant or any other person. To the extent that any person acquires a right to receive payments from Airborne Express under this Plan, such right shall be no greater than the right of an unsecured general creditor of Airborne Express. 18. Unfunded Plan: Governing Law ---------------------------- The Plan is intended to constitute an incentive compensation arrangement for a select group of management or highly compensated personnel and all rights thereunder shall be governed by and construed in accordance with the laws of the State of Washington. -7- EX-11 6 EXHIBIT 11 EXHIBIT 11 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31 ---------------------- 1996 1995 1994 ---- ---- ---- (In thousands except per share data) PRIMARY: Net Earnings Available $27,174 $23,544 $37,941 to Common Shareholders ======= ======= ======= Average Common Shares Outstanding 21,133 21,050 20,645 Effect of Dilutive Stock Options 149 154 356 ------- ------- ------- Total Average Shares Outstanding 21,282 21,204 21,001 ======= ======= ======= Primary Earnings Per Share $ 1.28 $ 1.11 $ 1.81 ======= ======= ======= FULLY DILUTED: Net Earnings Available $27,174 $23,544 $37,941 to Common Shareholders Redeemable Preferred -- -- 894 Stock Dividends Convertible Debentures -- -- 4,331 ------- ------- ------- Adjusted Net Earnings $27,174 $23,544 $43,166 ======= ======= ======= Average Common Shares Outstanding 21,133 21,050 20,645 Effect of Dilutive Stock Options 149 250 356 Effect of Conversion of -- -- 3,239 Subordinated Debentures Effect of Conversion of Redeemable -- -- 559 Preferred Stock Dividends ------- ------- ------- Total Average Shares Outstanding 21,282 21,300 24,799 ======= ======= ======= Fully Diluted Earnings Per Share $ 1.28 $ 1.11 $ 1.74 ======= ======= =======
EX-12 7 EXHIBIT 12 EXHIBIT 12 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES RATIO OF SENIOR LONG-TERM DEBT AND TOTAL LONG-TERM DEBT TO TOTAL CAPITALIZATION
DECEMBER 31, 1996 ----------------- (Dollars in thousands) SENIOR LONG-TERM DEBT: Revolving Credit Agreement $ 145,000 Money Market Lines of Credit 43,500 Senior Notes 200,000 Refunding Revenue Bonds 13,200 Other 8,093 -------- 409,793 Less Current Portion 353 -------- Senior Long-Term Debt $ 409,440 ======== TOTAL LONG-TERM DEBT: Senior Long-Term Debt $ 409,440 Convertible Subordinated Debentures 115,000 -------- Total Long-Term Debt $ 524,440 ======== TOTAL CAPITALIZATION: Long-Term Debt $ 524,440 Deferred Income Taxes 40,816 Redeemable Preferred Stock -- Shareholders Equity, Net 431,830 -------- Total Capitalization $ 997,086 ======== RATIO OF SENIOR LONG-TERM DEBT TO TOTAL CAPITALIZATION 41.1% ======== RATIO OF TOTAL LONG-TERM DEBT TO TOTAL CAPITALIZATION 52.6% ========
EX-13 8 EXHIBIT 13 1 EXHIBIT 13 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES COMMON STOCK & DIVIDEND INFORMATION 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 1996 and 1995:
Quarter High Low Dividend - - ------- ---- --- -------- 1996: Fourth $23.375 $19.500 $.075 Third 26.875 19.875 .075 Second 27.500 23.500 .075 First 28.375 25.000 .075 1995: Fourth $29.500 $22.250 $.075 Third 25.625 19.250 .075 Second 22.750 18.375 .075 First 24.250 18.750 .075
2 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands except per share data) OPERATING RESULTS: Revenues Domestic $2,108,670 $1,871,163 $1,660,003 $1,484,787 $1,259,792 International 375,636 368,188 310,756 235,194 224,524 ---------- ---------- ---------- ---------- ---------- Total 2,484,306 2,239,351 1,970,759 1,719,981 1,484,316 Operating Expenses 2,405,125 2,170,370 1,881,821 1,636,861 1,456,450 ---------- ---------- ---------- ---------- ---------- Earnings From Operations 79,181 68,981 88,938 83,120 27,866 Interest, Net 33,236 29,347 24,663 24,093 18,779 ---------- ---------- ---------- ---------- ---------- Earnings Before Income Taxes 45,945 39,634 64,275 59,027 9,087 Income Taxes 18,500 15,814 25,440 23,738 3,930 ---------- ---------- ---------- ---------- ---------- Net Earnings Before 27,445 23,820 38,835 35,289 5,157 Changes in Accounting Cumulative Effect of -- -- -- 3,828 -- Changes in Accounting ---------- ---------- ---------- ---------- ---------- Net Earnings 27,445 23,820 38,835 39,117 5,157 Preferred Stock Dividends 271 276 894 2,760 2,760 ---------- ---------- ---------- ---------- ---------- Net Earnings Available $ 27,174 $ 23,544 $ 37,941 $ 36,357 $ 2,397 to Common Shareholders ========== ========== ========== ========== ========== Net Earnings Per Common Share Primary $ 1.28 $ 1.11 $ 1.81 $ 1.66* $ 0.12 ========== ========== ========== ========== ========== Fully Diluted $ 1.28 $ 1.11 $ 1.74 $ 1.64* $ 0.12 ========== ========== ========== ========== ========== Dividends Per Common Share $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 0.30 ========== ========== ========== ========== ========== Average Primary 21,282 21,204 21,001 19,596 19,423 Shares Outstanding ========== ========== ========== ========== ========== FINANCIAL STRUCTURE: Working Capital $ 141,457 $ 91,599 $ 66,871 $ 56,521 $ 50,276 Property and Equipment 866,627 842,703 766,346 733,963 730,937 Total Assets 1,307,422 1,217,384 1,078,506 1,002,866 964,739 Long-Term Debt 409,440 364,621 279,422 269,250 303,335 Subordinated Debt 115,000 115,000 118,580 122,150 125,720 Redeemable Preferred Stock --- 3,948 5,000 40,000 40,000 Shareholders' Equity 431,830 406,315 387,398 318,824 285,639 NUMBER OF SHIPMENTS: Domestic 254,234 225,553 187,460 160,568 130,186 International 5,036 4,592 3,954 3,545 3,302 ---------- ---------- ---------- ---------- ---------- Total 259,270 230,145 191,414 164,113 133,488 ========== ========== ========== ========== ==========
* Exclusive of the cumulative effect of adopting accounting standards for income taxes and postretirement benefits. Primary and fully diluted earnings per share inclusive of the changes were $1.86 and $1.82, respectively. 3 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS: The Company's operating results for 1996 showed good improvement over 1995. The Company made certain strategy moves that began to have a positive impact in 1996, and that management believes will strengthen operating returns in future periods. The Company re-evaluated its pricing structure in relation to those offered by competitors and to the value being provided and in many cases raised prices. Further, it took a hard look at the customer base and eliminated certain business which could not be served in a profitable manner. These strategies reinforce the Company's focus of shifting towards margin improvement and away from volume growth. Net earnings available to common shareholders in 1996 increased to $27.2 million, or $1.28 per primary share, compared to $23.5 million, or $1.11 per share in 1995. The 1996 results include a non-recurring charge in the fourth quarter related to the loss of an aircraft of $3.7 million, or $2.2 million on an after-tax basis and $0.10 on a per share basis. Without this charge, earnings would have been $29.4 million, or $1.38 per share, an increase of 24.9% over 1995 net earnings. The following table is an overview of the Company's shipments, revenue and weight trends for the last three years:
1996 1995 1994 ---- ---- ---- Number of Shipments (in thousands): Domestic Overnight Letters 38,523 36,574 34,042 0-2 lbs. 57,313 50,097 44,302 3-99 lbs. 50,622 44,366 39,711 -------- -------- -------- Total 146,458 131,037 118,055 Deferred 0-2 lbs. 70,174 59,713 43,212 3-99 lbs. 37,304 34,486 25,841 -------- -------- -------- Total 107,478 94,199 69,053 100 lbs. And over 298 317 352 -------- -------- -------- Total Domestic 254,234 225,553 187,460 -------- -------- -------- International Express 4,500 4,035 3,473 Freight 536 557 481 -------- -------- -------- Total International 5,036 4,592 3,954 -------- -------- -------- Total Shipments 259,270 230,145 191,414 ======== ======== ======== Average Pounds Per Shipment: Domestic 4.5 4.6 4.8 International 54.6 62.9 64.1 Average Revenue Per Pound: Domestic $ 1.83 $ 1.80 $ 1.85 International $ 1.34 $ 1.28 $ 1.22 Average Revenue Per Shipment: Domestic $ 8.25 $ 8.24 $ 8.84 International $74.59 $80.18 $78.59
4 Total revenues increased 10.9% in 1996, 13.6% in 1995, and 14.6% in 1994. Shipment volume grew to 259 million units in 1996 increasing 12.7%, compared to a 20.2% increase in 1995 and 16.6% in 1994. Domestic revenue increased 12.7% in 1996 on shipment growth of 12.7%, compared to revenue growth of 12.7% and 11.8%, and shipment growth of 20.3% and 16.7% in 1995 and 1994, respectively. Domestic shipment growth in 1996 was impacted by the decision management made to shift its focus away from volume growth to focus on margin improvement. Accordingly, the Company experienced a milestone in 1996 relative to domestic revenue growth that has not occurred in several years. The percentage growth in domestic revenues was equal to the percentage growth in domestic shipments rather than lagging shipment growth. Furthermore, the average revenue per domestic shipment increased sequentially for each quarter of 1996 from $8.08 in the first quarter to $8.39 in the fourth quarter of 1996, with the average for the year of $8.25. Also, the average weight per domestic shipment for 1996 was 4.5 pounds and was relatively stable for each quarter of the year. Domestic shipment growth of the two primary service products, priority overnight service and deferred service, was more balanced in 1996 than prior periods. Domestic shipment growth of higher yielding priority overnight service was 11.8% in 1996 and 11.0% in 1995, while lower yielding deferred service grew 14.1% in the current year compared to 36.4% in 1995. These various factors all combined to produce a more stable domestic yield environment in 1996 compared to 1995 and 1994. Although still very competitive, the domestic pricing environment during 1996 has been relatively stable. International revenue increased 2.0% in 1996 on shipment growth of 9.7% compared to revenue growth of 18.5% and 32.1% and shipment growth of 16.1% and 11.5% in 1995 and 1994, respectively. International revenue per shipment decreased compared to last year as a result of the decrease in higher yielding freight shipments in 1996 compared to 1995. Consistent with the Company's domestic focus, the focus on international business has been more on margin improvement than on volumes. As a result, the international contribution to earnings from operations increased to $7.3 million in 1996 from $1.2 million in 1995. OPERATING EXPENSES are affected by shipment volume, productivity improvements, costs incurred to increase capacity and expand service, fuel price volatility and discretionary items such as the level of marketing expenditures. Operating expenses as a percentage of revenues were 96.8% in 1996 compared to 96.9% in 1995 and 95.5% in 1994. Measuring cost performance on a per shipment basis, total operating expenses per shipment declined in 1996 to $9.28, compared to $9.43 in 1995 and $9.83 in 1994. A strong focus on cost control, productivity improvements and quality improvement programs are primarily responsible for this favorable trend. The Company achieved a 1.9% improvement in productivity in 1996, as measured by shipments handled per paid employee hour, compared to 7.3% improvement in 1995 and 6.0% in 1994. With the Company's focus on improving margins and slower volume growth, productivity gains achieved on a per-shipment basis were not as strong as experienced in the prior two years. Higher productivity gains are more difficult to achieve in periods of slower shipment growth. Transportation purchased decreased as a percentage of revenues to 33.3% in 1996 compared to 35.2% in 1995 and 34.0% in 1994. This expense category consists primarily of commercial airline costs, contracted pick-up and delivery and trucking costs. The decrease in 1996 is primarily due to two factors. Commercial airline costs were lower as a percentage of total revenues due to the decline in international freight shipments. Also, the suspension of the Federal Aviation Excise Tax on January 1, 1996 resulted in the avoidance of costs in the first eight months of 1996 of $14.7 million compared to the corresponding period of 1995 when approximately $13.6 million of costs related to this tax were incurred. The Aviation Excise Tax was re-implemented effective on August 27, 1996. Station and ground expense as a percentage of revenues was 31.5% in 1996 compared to 31.0% in 1995 and 30.2% in 1994. Productivity gains in pick-up and delivery, customer service and hub operations have been instrumental in partially offsetting the effect of increased costs incurred to accommodate the growth in shipments and expand service while maintaining service integrity. However, productivity gains in 1996 were less than that achieved in the prior periods Flight operations and maintenance expense as a percentage of revenues was 15.6% in 1996 compared to 14.6% in 1995 and 14.2% in 1994. The average aviation fuel price in 1996 was $0.752 per gallon, compared to $0.615 per gallon in 1995, and $0.60 per gallon in 1994. The average price above includes the effect of a 4.3 cent per gallon excise tax on jet fuel that became effective October 1, 1995 which added approximately $1.7 million of additional cost to fourth quarter 1995 operating costs. Aviation fuel consumption increased 13.0% to 160.7 million gallons in 1996, a result of additional Company operated aircraft placed in service during the past year to accommodate the growth in business. The dramatic increase in per gallon fuel costs in 1996 over 1995 applied to the current year's consumption increased fuel related operating costs by $22.0 million in 1996, of which $7.2 million applied to the fourth quarter of 1996 alone. As a result of fuel hedging contracts, the Company was able to mitigate $3.0 million of the increase in 1996, including $2.5 million mitigated in the fourth quarter of 1996. 5 General and administrative expense as a percentage of revenues increased to 7.3% in 1996 compared to 7.0% in 1995 and 7.4% in 1994. Sales and marketing decreased to 2.4% of revenues in 1996 compared to 2.7% in 1995 and 1994. Productivity gains and controls on discretionary spending in these two expense categories have been instrumental in offsetting most of the effect of increased costs incurred to accommodate shipment growth and expand service as well as inflationary cost increases. General and administrative expense includes profit sharing expense of $3.5 million in 1996, compared to $3.0 million in 1995 and $4.8 million in 1994. Depreciation and amortization expense as a percentage of revenues were 6.6% in 1996 compared to 6.4% in 1995 and 7.0% in 1994. The total dollar amount of depreciation and amortization has continued to increase over the last three years as a result of capital expenditures incurred primarily to expand the airline operations. Operating expense in 1996 includes a non-recurring charge of $3.7 million related to the loss of a DC-8-63 aircraft. This aircraft was destroyed in an accident which occurred during a routine maintenance check flight in December 1996. There were no survivors among the six persons aboard. The cause of the accident continues to be investigated by the National Transportation Safety Board. Management is not aware of, nor at this time expects, any significant actions to arise from those investigations which would result in future operating restrictions on the use of the Company's fleet of aircraft. INTEREST EXPENSE increased in 1996 compared to 1995 as the result of moderately higher level of average outstanding borrowings and a lower level of capitalized interest. Interest capitalized in 1996 of $1.7 million, primarily related to the acquisition and modification of aircraft and the airport expansion, was approximately $2.0 million lower than the amount capitalized in 1995. INCOME TAXES for 1996 resulted in an effective tax rate of 40.3% compared to 39.9% in 1995 and 39.6% in 1994. The Company anticipates that the effective tax rate for 1997 will be comparable to 1996. Looking ahead, the Company's focus will continue to be on margin improvement rather than volume growth. As was the case this past year, the challenge will be to continue to adjust the Company's operations to respond to this changing mix of business and lower the 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 1997 and beyond. Further, continuing high fuel prices may have a negative impact on operations. The Company has implemented a revenue fuel surcharge of 2.0% beginning February 17, 1997; however, there is no assurance that this action will totally mitigate increased fuel costs going forward. The Company's pilots are covered by a collective bargaining agreement which became amendable on July 31, 1995. Negotiations relating to an amended contract are still ongoing. While the Company has not experienced any significant disruptions from labor disputes in the past, it cannot predict whether the contract with the pilots will be amended without experiencing any work disruptions. FINANCIAL CONDITION: CAPITAL EXPENDITURES and financing associated with those expenditures have been the primary factors affecting the financial condition of the Company over the last three years. Total capital expenditures net of dispositions were $172 million in 1996 compared to $214 million in 1995 and $168 million in 1994. A significant portion of these expenditures has been related to the acquisition and modification of aircraft and related flight equipment. Additionally, there were capital expenditures in 1996 of $21 million related to the DC-8-63 aircraft that was destroyed in an accident in December 1996. The Company realized insurance proceeds of $18 million in January 1997 for this property loss. The Company acquired six DC-9 aircraft in 1996. A total of 7 aircraft were placed into service during the year; made up of 5 DC-9's and 2 DC-8's, while 2 YS-11's were retired from service. At the end of 1996, the Company had 110 aircraft in service, consisting of 35 DC-8's, 66 DC-9's and 9 YS-11's. In addition, there was 1 aircraft in modification status and 2 aircraft that had not been modified. Other capital expenditures in 1996 included vehicles for expansion and replacement, facilities and package handling equipment related to servicing the increased shipment volume, leasehold improvements for new or expanded facilities and for computer equipment. Capital expenditures will continue to be a significant factor affecting financial condition in 1997. The Company anticipates 1997 capital expenditures of approximately $220 million. A significant portion of the 1997 capital investment is for the acquisition of 5 additional 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 sort facilities. A total of 5 aircraft are expected to be placed in service in 1997. In 1995, the Company announced a new aircraft program relative to a commitment to purchase 12 used Boeing 767-200's, 2 of which will be delivered in late 1997, with the remaining 10 aircraft delivered between the years 1998 and 2000. These acquisitions are not expected to significantly increase capital spending. Instead, this newer generation aircraft should increase operating efficiency while keeping capital requirements relatively unchanged. 6 LIQUIDITY AND CAPITAL RESOURCES: Liquidity for financing capital expenditures in 1996 came from two principal sources - internally generated cash provided by operations and proceeds from bank borrowings. Internally generated cash provided by operations approximated $207 million in 1996 compared to $170 million in 1995 and $183 million in 1994. Additional liquidity during the year was provided by the revolving bank credit agreement. The revolving bank credit agreement has traditionally been used as a major source of liquidity for periods of time between other financing transactions that provide liquidity. The Company amended its revolving bank credit agreement effective May 1, 1996, extending the effective date through May 31, 2001. Commitments are subject to a maximum level of Company indebtedness permitted by certain convenants in the agreement and other loan agreements. The Company also has available $65 million under 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. At December 31, 1996, a total of $188.5 million was owing under the revolving bank credit and money market agreements. This balance was $28 and $33 million higher than the average balances for the preceding month and the subsequent month, respectively, due to the slowdown in cash receipts availability experienced during the holiday periods in late December. Comparatively, at January 31, 1997, a total of $142 million was owing under these facilities. The Company's ratio of senior long-term debt to total capitalization was 41.1% and the ratio of total long-term debt to total capitalization was 52.6% at December 31, 1996, compared to 39.3% and 51.7%, respectively, at December 31, 1995. Anticipated cash flow from 1997 operations should provide the majority of the liquidity for projected 1997 capital expenditures. These debt-to-capitalization ratios are not expected to change significantly during 1997 from the 1996 year end level. In management's opinion, the available capacity under the bank credit agreements coupled with anticipated internally generated cash flow from 1997 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. 7 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET EARNINGS
Year Ended December 31 1996 1995 1994 - - ---------------------- ---- ---- ---- (In thousands except per share data) REVENUES: Domestic $2,108,670 $1,871,163 $1,660,003 International 375,636 368,188 310,756 ---------- ---------- ---------- 2,484,306 2,239,351 1,970,759 OPERATING EXPENSES: Transportation purchased 827,997 788,040 669,648 Station and ground operations 781,867 693,371 595,845 Flight operations and maintenance 386,961 327,838 279,457 General and administrative 181,353 156,501 145,698 Sales and marketing 59,565 60,258 53,473 Depreciation and amortization 163,645 144,362 137,700 Loss related to aircraft accident 3,737 -- -- ---------- ---------- ---------- 2,405,125 2,170,370 1,881,821 ---------- ---------- ---------- EARNINGS FROM OPERATIONS 79,181 68,981 88,938 INTEREST, NET 33,236 29,347 24,663 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 45,945 39,634 64,275 INCOME TAXES 18,500 15,814 25,440 ---------- ---------- ---------- NET EARNINGS 27,445 23,820 38,835 PREFERRED STOCK DIVIDENDS 271 276 894 ---------- ---------- ---------- NET EARNINGS AVAILABLE $ 27,174 $ 23,544 $ 37,941 TO COMMON SHAREHOLDERS ========== ========== ========== NET EARNINGS PER COMMON SHARE: Primary $ 1.28 $ 1.11 $ 1.81 ========== ========== ========== Fully diluted $ 1.28 $ 1.11 $ 1.74 ========== ========== ========== DIVIDENDS PER COMMON SHARE $ 0.30 $ 0.30 $ 0.30 ========== ========== ==========
See notes to consolidated financial statements. 8 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 1996 1995 - - ----------- ---- ---- (In thousands) ASSETS - - ------ CURRENT ASSETS: Cash $ 35,816 $ 17,906 Trade accounts receivable, less allowance of $8,345,000 and $7,750,000 287,515 259,408 Spare parts and fuel inventory 34,761 33,792 Deferred income tax assets 15,012 16,135 Prepaid expenses and other 42,118 24,887 ---------- ---------- TOTAL CURRENT ASSETS 415,222 352,128 PROPERTY AND EQUIPMENT, NET 866,627 842,703 EQUIPMENT DEPOSITS and OTHER ASSETS 25,573 22,553 ---------- ---------- TOTAL ASSETS $1,307,422 $1,217,384 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - - ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 139,036 $ 136,987 Salaries, wages and related taxes 63,835 49,106 Accrued expenses 68,759 66,679 Income taxes payable 1,782 1,967 Current portion of debt 353 5,790 ---------- ---------- TOTAL CURRENT LIABILITIES 273,765 260,529 LONG-TERM DEBT 409,440 364,621 SUBORDINATED DEBT 115,000 115,000 DEFERRED INCOME TAX LIABILITIES 40,816 38,242 OTHER LIABILITIES 36,571 28,729 REDEEMABLE PREFERRED STOCK -- 3,948 SHAREHOLDERS' EQUITY: Preferred stock, without par value - Authorized 5,200,000 shares, no shares issued Common stock, par value $1 per share - Authorized 60,000,000 shares Issued 21,621,596 and 21,397,865 21,622 21,398 Additional paid-in capital 190,405 185,947 Retained earnings 220,774 199,941 ---------- ---------- 432,801 407,286 Treasury stock, 315,150 shares, at cost (971) (971) ---------- ---------- 431,830 406,315 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,307,422 $1,217,384 ========== ==========
See notes to consolidated financial statements. 9 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 1996 1995 1994 - - ---------------------- ---- ---- ---- (In thousands) OPERATING ACTIVITIES: Net Earnings $ 27,445 $ 23,820 $ 38,835 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 151,538 133,931 127,835 Provision for aircraft engine overhauls 12,107 10,431 9,865 Deferred income taxes 3,697 4,163 4,888 Loss related to aircraft accident 3,737 -- -- Other 8,027 (2,351) 1,418 -------- -------- -------- CASH PROVIDED BY OPERATIONS 206,551 169,994 182,841 Change in: Receivables (28,107) (37,620) (31,001) Inventories and prepaid expenses (200) (9,907) (2,733) Accounts payable 2,049 19,793 22,866 Accrued expenses, salaries and taxes payable 16,118 14,499 6,185 NET CASH PROVIDED BY -------- -------- -------- OPERATING ACTIVITIES 196,411 156,759 178,158 INVESTING ACTIVITIES: Additions to property and equipment (173,157) (215,958) (170,453) Investment in aircraft destroyed in accident (21,232) -- -- Disposition of property and equipment 694 2,079 2,196 Expenditures for engine overhauls (15,000) (10,039) (6,839) Other (3,309) 378 (1,294) -------- -------- -------- NET CASH USED BY INVESTING ACTIVITIES (212,004) (223,540) (176,390) FINANCING ACTIVITIES: Proceeds (payments) on bank notes, net 45,200 (8,700) 47,000 Principal payments on debt (5,818) (18,434) (40,230) Proceeds from common stock issuance 734 638 2,839 Dividends paid (6,613) (6,596) (7,193) Proceeds from debt issuance -- 107,461 -- Redemption of redeemable preferred stock -- -- (1,000) -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 33,503 74,369 1,416 -------- -------- -------- NET INCREASE IN CASH 17,910 7,588 3,184 CASH AT BEGINNING OF YEAR 17,906 10,318 7,134 -------- -------- -------- CASH AT END OF YEAR $ 35,816 $ 17,906 $ 10,318 ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year - Interest, net of amount capitalized $33,234 $28,085 $24,788 Income taxes 16,674 10,457 23,795 Noncash financing activities - Conversion of redeemable preferred stock 3,948 1,052 34,000
See notes to consolidated financial statements. 10 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Years Ended December 31, 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNT POLICIES NATURE OF OPERATIONS The Company's revenues are derived from domestic and international transportation of shipments. The Company provides door-to-door express delivery of small packages and documents throughout the United States and to most foreign countries. The Company also acts as an international and domestic freight forwarder for shipments of any size. Most domestic shipments are transported on the Company's own airline and a fleet of ground transportation vehicles through its Company-owned airport and central sorting facilities, or one of ten 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, 1996, the Company had approximately 9,300 employees (45% of total employees), including approximately 715 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 became amendable on July 31, 1995. Most labor agreements covering the Company's ground personnel will expire in 1998. The Company has not experienced any significant disruptions from labor disputes in the past. The Company cannot predict whether the contract with the pilots will be amended without experiencing any work disruptions. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly own subsidiaries. Intercompany balances and transactions are eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions may have a material impact on the financial statements. The Company has used estimates in determining certain provisions and reserves including those for engine overhaul costs, useful lives for fixed assets, insurance claims, uncollectible trade accounts receivable, and tax liabilities. 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 $28,059,000 and $39,971,000 are included in accounts payable at December 31, 1996 and 1995, 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 gain or loss reflected in earnings from operations. 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:
Flight equipment 7 to 10 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
Flight equipment carries residual values ranging from 10% to 15% of asset cost. 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. 11 Major engine overhauls as well as ordinary engine maintenance and repairs for DC-8 aircraft are performed by a third-party service provider under a contract expiring in 2004. Service costs under the contract are based upon an hourly rate for engine usage and are charged to expense in the period utilization occurs. Major engine overhauls for YS-11 aircraft and expenditures for ordinary maintenance and repairs are charged to expense as incurred. CAPITALIZED INTEREST Interest incurred during the construction period of certain facilities and on aircraft purchase and modification costs are capitalized as an additional cost of the asset until the date the asset is placed in service. Capitalized interest was $1,728,000, $3,741,000, and $2,127,000 for 1996, 1995 and 1994, respectively. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are provided for temporary differences between the timing of reporting certain revenues and expenses for financial versus tax purposes. Deferred taxes are measured using provisions of currently enacted tax laws. Tax credits are accounted for as a reduction of income taxes in the year in which the credit originates. EARNINGS PER SHARE Primary earnings per common share are based upon the weighted average number of common shares outstanding during the period plus dilutive common equivalent shares applicable to the assumed exercise of outstanding stock options. The weighted average number of shares outstanding were 21,282,000, 21,204,000, and 21,001,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Fully diluted earnings per share includes the potential dilution for stock options and, when material, conversion of the 6.9% redeemable cumulative convertible preferred stock and conversion of the 6.75% convertible subordinated debentures. Net earnings are adjusted for the assumed elimination of preferred stock dividends and interest expense, net of income tax, on the debentures, as applicable. 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. FAIR VALUE INFORMATION The carrying amounts and related fair values of the Company's financial instruments are as follows (in thousands):
December 31 1996 1995 - - ----------- ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Long-term debt $409,440 $419,050 $364,621 $380,071 Subordinated debt 115,000 115,288 115,000 115,575 Redeemable preferred stock 3,948 4,500 Off-balance sheet derivatives: Fuel contracts -- 3,798 -- 488
Discussion regarding the fair value of the above financial instruments are disclosed in the respective notes to the consolidated financial statements. Carrying amounts for cash, trade accounts receivable, and current liabilities approximate fair value. RECLASSIFICATIONS Certain amounts for prior years have been reclassified in the consolidated financial statements to conform to the classification used in 1996. 12 NOTE B - PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
December 31 1996 1995 - - ----------- ---- ---- Flight equipment $1,125,019 $1,039,797 Land, buildings and leasehold improvements 215,795 198,606 Package handling and ground support equipment 124,689 128,911 Vehicles and other equipment 230,227 215,167 ---------- ---------- 1,695,730 1,582,481 Accumulated depreciation and amortization (829,103) (739,778) ---------- ---------- $ 866,627 $ 842,703 ========== ==========
NOTE C - ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
December 31 1996 1995 - - ----------- ---- ---- Insurance reserves $16,703 $16,239 Aircraft leases 12,576 14,003 Retirement plans 12,468 11,429 Unearned revenues 8,866 7,064 Property and other taxes 7,141 6,783 Interest 6,097 5,903 Other 4,908 5,258 ------- ------- $68,759 $66,679 ======= =======
NOTE D - INCOME TAXES Deferred income tax assets and liabilities consist of the following (in thousands):
December 31 1996 1995 - - ----------- ---- ---- Insurance reserves $ 5,753 $ 5,884 Employee benefits 3,317 3,968 Bad debts, sales reserves and other 5,942 6,283 -------- -------- Current deferred income tax assets 15,012 16,135 -------- -------- Depreciation and amortization 84,230 74,275 Alternative Minimum Tax credit (33,178) (28,348) Insurance reserves (8,187) (5,245) Aircraft engine overhaul accrual (7,112) (8,139) Capitalized interest 5,982 5,640 Pension and other (919) 59 -------- -------- Noncurrent net deferred income tax liabilities 40,816 38,242 -------- -------- Net deferred income tax liabilities $ 25,804 $ 22,107 ======== ========
13 Income taxes consist of the following (in thousands):
Year Ended December 31 1996 1995 1994 - - ---------------------- ---- ---- ---- Current: Federal $12,361 $10,297 $17,384 State 1,900 1,250 3,080 Foreign 542 104 88 ------- ------- ------- 14,803 11,651 20,552 Deferred: Depreciation and amortization 9,955 11,040 9,743 Alternative Minimum Tax credit (4,830) (5,571) (3,129) Insurance reserves (2,811) (522) 175 Aircraft engine overhaul accrual 1,027 307 (1,276) Employee benefits (867) (1,027) (1,001) Other 1,223 (64) 376 ------- ------- ------- 3,697 4,163 4,888 ------- ------- ------- $18,500 $15,814 $25,440 ======= ======= =======
The following table summarizes the major differences between the actual income tax provision and taxes computed at the Federal statutory rate (in thousands):
Year Ended December 31 1996 1995 1994 - - ---------------------- ---- ---- ---- Taxes computed at statutory $16,081 $13,872 $22,496 rate of 35% State and foreign income taxes, 1,288 855 2,073 net of Federal benefit Tax effect of nondeductible expense 1,185 1,146 874 Tax credits and other (54) (59) (3) ------- ------- ------- $18,500 $15,814 $25,440 ======= ======= =======
NOTE E - LONG-TERM AND SUBORDINATED DEBT Long-term and subordinated debt consist of the following:
December 31 1996 1995 - - ----------- ---- ---- (In thousands) LONG-TERM DEBT: Revolving credit notes payable to banks, $145,000 $115,000 effective rate of 5.7% on December 31, 1996 Money market lines of credit, 43,500 28,300 effective rate of 7.4% on December 31, 1996 Senior notes, 7.35%, due September, 2005 100,000 100,000 Senior notes, 8.875%, due December, 2002 100,000 100,000 Refunding revenue bonds, effective rate 13,200 13,200 of 4.2% on December 31, 1996, due June 2011 Other 8,093 10,331 -------- -------- 409,793 366,831 Less current portion 353 2,210 -------- -------- $409,440 $364,621 ======== ======== SUBORDINATED DEBT: Convertible subordinated debentures, $115,000 $115,000 6.75%, due August 2001 Senior subordinated notes, 10%, -- 3,580 repaid January, 1996 -------- -------- 115,000 118,580 Less current portion -- 3,580 -------- -------- $115,000 $115,000 ======== ========
14 The Company has a revolving bank credit agreement providing for a total commitment of $250,000,000. Interest rates for borrowings are generally determined by maturities selected and prevailing market conditions. The revolving credit agreement was extended during 1996 for a five-year period expiring May 31, 2001. The Company was in compliance with covenants of the revolving credit agreement during 1996, 1995, and 1994, including net worth restrictions which limit the payment of dividends ($126,101,300 of retained earnings was not restricted at December 31, 1996). The Company has available $65,000,000 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 5.8% for 1996. These credit lines are used in conjunction with the revolving credit agreement to facilitate settlement and accommodate short-term borrowing fluctuations. The Company has classified the borrowings outstanding under the money market lines of credit as long-term. These amounts will be refinanced under the revolving credit agreement. The Company's tax-exempt airport facilities refunding bonds carry no sinking fund requirements and bear interest at weekly adjustable rates. The average interest rate on these borrowings was 3.5% during 1996. 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 $32,164,000 at December 31, 1996. The Company's 6.75% convertible subordinated debentures require no sinking fund payments prior to maturity. The debentures may be redeemed at the option of the Company at a current redemption price of 103.5% declining ratably on an annual basis each August to par at maturity. The debentures are convertible into the Company's common stock at a conversion price of $35.50 per share, subject to adjustment in certain events. The Company has reserved 3,239,437 shares of common stock for such conversion. The scheduled annual principal payments on long-term and subordinated debt for the next five years is $353,000, $381,000, $410,000, $442,000, and $303,976,000 for 1997 through 2001, respectively. The fair value information shown in Note A reflects values for the Company's senior notes and convertible subordinated debentures based on quoted market prices for the same issues. The carrying value of the Company's remaining long-term financial debt instruments approximate fair value primarily because of the repricing frequency of the instruments. NOTE F - 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 1996, 1995, and 1994 was $105,331,000, $97,461,000, and $89,975,000, respectively. Rental commitments under long-term operating leases at December 31, 1996 total $445,695,000 and are payable as follows (in thousands):
Facilities Equipment ---------- --------- 1997 $ 57,491 $ 26,923 1998 56,510 24,010 1999 51,974 19,948 2000 45,077 6,383 2001 37,758 767 2002 and beyond 117,754 1,100
COMMITMENTS Under various agreements, the Company is committed to purchase 18 aircraft consisting of 12 Boeing 767, and 1 McDonnell Douglas DC-8, and 5 DC-9 aircraft to be acquired at various dates through 2000. The Company also has commitments to purchase 16 Stage III hush kits for its DC-9 aircraft at various dates through 1998. At December 31, 1996, cash deposits of $2,910,000 had been made toward these purchases. Additional deposits and payments for these acquisitions will approximate $69,742,000, $95,798,000, $75,700,000, and $34,700,000 for 1997 through 2000, respectively. 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 Company believes this index provides the best correlation to its jet fuel transactions. 15 The contracts have no cost basis and are accounted for as hedges of anticipated transactions. Settlements are made in cash and are recorded as either an increase or decrease to fuel expense. At December 31, 1996, the Company had contracts, some extending through August 1997, covering a monthly notional sum of between 4.8 million to 6.8 million gallons, which represents between 35% and 50% of prospective average monthly consumption of jet fuel. Settlement payments of $3,016,000 related to these contracts were received during 1996 with no payments being received in 1995. No settlement payments were made during 1996 or 1995. Based on current market prices, the fair market value of these contracts was approximately $3,798,000 and $488,000 at December 31, 1996 and 1995, 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, 1996. NOTE G - POSTRETIREMENT PLANS PENSIONS The Company has trusteed retirement plans for all employees not covered by multi-employer plans to which the Company contributes under terms of various collective bargaining agreements. The Company's retirement plans consist of defined contribution profit sharing and capital accumulation plans and defined benefit minimum monthly retirement income plans. The capital accumulation plans are funded by both voluntary employee salary deferrals of up to 16% of annual compensation and by employer matching contributions of 35% of employee salary deferrals up to 6% of annual compensation. The Company's matching contribution expense was $4,987,000, $3,823,000, and $3,635,000 for 1996, 1995, and 1994, respectively. Contributions to the profit sharing plans are made at the discretion of the Board of Directors. However, a basic formula has been followed for contributions of 7% of earnings before taxes up to a specific profit level plus 14% of earnings in excess of that level. The Company's profit sharing expense was $3,459,000, $2,984,000, and $4,838,000 for 1996, 1995, and 1994, respectively. The profit sharing plans hold 447,499 shares of the Company's common stock at December 31, 1996, representing 2.1% of outstanding shares. The profit sharing plans are intended to be a primary retirement benefit. The minimum monthly retirement income plans guarantee a minimum level of monthly pension income for those not accruing sufficient balances in the profit sharing plans. The Company's funding of the plans is equal to the amounts required by ERISA. Net minimum monthly plan pension expense included the following components (in thousands):
Year Ended December 31 1996 1995 1994 - - ---------------------- ---- ---- ---- Service cost benefits earned during the period $ 6,929 $4,664 $4,185 Interest cost on projected benefit obligation 4,166 3,017 2,149 Actual return on plan assets (5,211) (4,751) 69 Net amortization and deferral 4,213 4,036 (240) ------- ------ ------ Net pension expense $10,097 $6,966 $6,163 ======= ====== ======
The following is a summary of the minimum monthly plan funded status (in thousands):
December 31 1996 1995 - - ----------- ---- ---- Projected benefit obligation for service rendered to date $64,780 $53,344 Plan assets at fair market value, 42,640 28,193 primarily marketable securities ------- ------- Projected benefit obligation in excess of plan assets 22,140 25,151 Unrecognized prior service cost (438) (724) Unrecognized net losses from past experience (11,131) (14,477) different from that assumed Unrecognized net transition obligation (118) (148) ------- ------- Pension liability included in consolidated balance sheets $10,453 $ 9,802 ======= ======= Actuarial present value of accumulated benefit obligation, including vested benefits of $36,913 $28,880 $33,910,000 and $25,886,000, respectively ======= =======
16 The Company also has a non-qualified, unfunded supplemental retirement plan for certain key executives which provides defined retirement benefits that supplement those provided by the Company's other retirement plans. Pension expense for this plan was $1,825,000, $1,405,000, and $1,042,000 in 1996, 1995, and 1994, respectively. The plan's projected benefit obligation, accumulated benefit obligation and accrued pension liability was $6,500,000, $3,455,000, and $5,428,000 at December 31, 1996 and $4,962,000, $1,832,000 and $3,609,000 at December 31, 1995. Assumptions used in determining minimum monthly and supplemental retirement pension obligations were as follows:
1996 1995 1994 ---- ---- ---- Discount rate 7.5% 7.0% 8.0% Rate of compensation increase (pilots) 6.5% 5.5% 5.5% Rate of compensation increase (non pilots) 5.0% 5.0% 5.0% Long-term rate of return on assets 8.0% 8.0% 8.0%
The Company additionally contributes to multi-employer defined benefit pension plans for substantially all employees covered under collective bargaining agreements. Total expense of these plans was $28,773,000, $24,278,000, and $19,056,000 for 1996, 1995, and 1994, respectively. HEALTH CARE BENEFITS The Company provides postretirement health care benefits for employees and qualifying dependents who have met certain eligibility requirements and who are not covered by other plans to which the Company contributes, such as collectively bargained plans. The Company's plan is currently unfunded. The accumulated postretirement benefit obligation was $5,039,000 and $5,329,900 at December 31, 1996 and 1995, respectively, and $5,593,000 and $4,648,000 has been accrued in Other Liabilities in the Consolidated Balance Sheets. Postretirement benefit expense was $1,066,000, $861,000, and $865,000 for 1996, 1995, and 1994, respectively. The assumed health care cost trend rate used in measuring benefit costs was 9% for 1996, decreasing each successive year to a 5% annual growth rate in 2000, and thereafter. A 1% increase or decrease in the assumed health care cost trend rate for each year would not have a material effect on the accumulated postretirement benefit obligation or cost as of or for the year ended December 31, 1996. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 7% at December 31, 1996 and 1995, respectively. The Company also contributes to multi-employer defined benefit welfare plans for substantially all employees covered under collective bargaining agreements. Portions of the these contributions, which cannot be disaggregated, relate to postretirement benefits for plan participants. Total expense of these plans was $34,474,000, $28,968,000, and $22,955,000 for 1996, 1995, and 1994, respectively. NOTE H - PREFERRED STOCK In 1990, the Company issued a series of 6.9% redeemable cumulative convertible preferred stock with mandatory redemption of all outstanding shares required by December 2004. The preferred shares were convertible into the Company's common stock at a conversion price of $23.393 per share. In December 1996, the holders provided notice of their intent to convert the remaining 78,950 preferred shares with a par value of $3,948,000 into 168,747 of the Company's common shares. The conversion has been achieved, and is recorded in the consolidated financial statements as of December 31, 1996. The fair value information shown in Note A, as of December 31, 1995, was computed assuming the stock was converted, at the option of the holder, to the Company's common shares utilizing the closing market price of $26.63 per share. 17 NOTE I - SHAREHOLDERS' EQUITY Changes in shareholders' equity consist of the following (in thousands):
Additional Common Paid-In Retained Treasury Stock Capital Earnings Stock ------ ------- -------- ------- BALANCE at JANUARY 1, 1994 $19,689 $149,156 $150,950 $ (971) Net earnings available to common shareholders 37,941 Conversion of redeemable preferred stock 1,453 32,513 Common stock dividends paid (6,177) Exercise of stock options 144 2,700 ------- -------- -------- -------- BALANCE at DECEMBER 31, 1994 21,286 184,369 182,714 (971) Net earnings available to common shareholders 23,544 Conversion of redeemable preferred stock 45 1,007 Common stock dividends paid (6,317) Exercise of stock options 67 571 ------- -------- -------- ------- BALANCE at DECEMBER 31, 1995 21,398 185,947 199,941 (971) Net earnings available to common shareholders 27,174 Conversion of redeemable preferred stock 169 3,779 Common stock dividends paid (6,341) Exercise of stock options 55 679 ------- -------- -------- ------- BALANCE at DECEMBER 31, 1996 $21,622 $190,405 $220,774 $ (971) ======= ======== ======== =======
NOTE J - SEGMENT INFORMATION Substantially all of the Company's revenues are derived from domestic and international transportation and/or forwarding of air freight and express shipments. Domestic is defined as any shipment with an origin and destination within the U.S., Puerto Rico or Canada. A substantial portion of international revenue originates in the U.S. ($273,586,000 in 1996, $279,164,000 in 1995, and $234,607,000 in 1994). The determination of operating income of domestic and international operations requires that certain costs incurred in the U.S. be allocated to international operations.
Year Ended December 31 1996 1995 1994 - - ---------------------- ---- ---- ---- (In thousands) Revenues: Domestic $2,108,670 $1,871,163 $1,660,003 International 375,636 368,188 310,756 ---------- ---------- ---------- $2,484,306 $2,239,351 $1,970,759 ========== ========== ========== Earnings from Operations: Domestic $ 71,809 $ 67,765 $ 86,298 International 7,372 1,216 2,640 Interest, net (33,236) (29,347) (24,663) ---------- ---------- ---------- Earnings Before Income Taxes $ 45,945 $ 39,634 $ 64,275 ========== ========== ========== Identifiable Assets: Domestic $1,229,011 $1,148,056 $1,027,115 International 78,411 69,328 51,391 ---------- ---------- ---------- $1,307,422 $1,217,384 $1,078,506 ========== ========== ==========
18 NOTE K - STOCK OPTIONS The Company has three fixed option plans which reserve shares of the Company's common stock for issuance to officers, directors and key employees. Options granted under these shareholder approved plans are issued at the fair market value of the Company's stock on the date of grant and become exercisable over a period of six months to three years, expiring ten years from the date of grant. A total of 3,050,000 shares may be granted under these plans of which 1,675,439 is available for future grants at December 31, 1996. A summary of the Company's stock option activity and related information is as follows:
Year Ended December 31 1996 1995 1994 - - ---------------------- ---- ---- ---- Outstanding at beginning of year 1,134,680 1,041,821 1,070,261 Granted 218,460 193,285 134,820 Exercised (63,659) (81,966) (150,000) Canceled (11,888) (18,460) (13,260) --------- --------- --------- Outstanding at end of year 1,277,593 1,134,680 1,041,821 ========= ========= ========= Exercisable at end of year 828,372 740,000 655,853 ========= ========= =========
Weighted average option price information is as follows:
Year Ended December 31 1996 1995 1994 - - ---------------------- ---- ---- ---- Outstanding at beginning of year $22.11 $21.09 $18.31 Granted 26.00 23.13 37.68 Exercised 12.62 10.51 15.69 Canceled 26.68 28.17 25.43 Outstanding at end of year 23.21 22.11 21.09 Exercisable at end of year 21.45 19.23 16.71
Information related to the number of options outstanding, weighted average price per share and remaining life of significant option groups outstanding at December 31, 1996 is as follows:
Outstanding Exercisable ---------------------------- ---------------------------- Life in Life in Price Range Number Price Years Number Price Years ----------- ------ ----- -------- ------ ----- -------- $6.63-$18.50 293,812 $13.55 2.3 293,812 $13.55 2.3 $22.13-$28.50 856,901 24.37 6.8 468,099 24.12 5.3 $36.13-$37.75 126,880 37.67 7.1 66,461 37.60 7.1
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans and accordingly no compensation expense has been recognized in the Consolidated Statements of Net Earnings. Had compensation expense been measured under the fair value provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", the Company's Net Earnings Available to Common Shareholders and Earnings Per Share for 1996 and 1995 would have been reduced to the following pro forma amounts. In accordance with SFAS No. 123, pro forma information does not include compensation expense attributed to 1996 and 1995 from options granted prior to 1995. 19
Year Ended December 31 1996 1995 - - ---------------------- ---- ---- Net Income Available to Common Shareholders (in thousands): As reported $27,174 $23,544 Pro forma 26,086 23,020 Net Earnings Per Common Share (Primary): As reported $1.28 $1.11 Pro forma 1.23 1.09
The weighted average fair value for options granted in 1996 and 1995, computed utilizing the Black-Scholes option-pricing model, was $9.34 and $8.33, respectively. Significant assumptions used in the estimation of fair value and compensation expense are as follows:
Year Ended December 31 1996 1995 - - ---------------------- ---- ---- Weighted expected life (years) 6.6 6.1 Weighted risk free interest rate 5.3% 7.4% Weighted volatility 36.9% 38.4% Dividend yield 1.2% 1.3%
NOTE L - 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):
Balance Sheet Information: December 31, 1996 1995 - - ------------ ---- ---- Current assets $ 63,345 $ 46,157 Property and equipment, net 739,470 726,378 Other noncurrent assets 11,469 12,053 Current liabilities 97,071 82,439 Long-term debt 20,940 13,200 Other noncurrent liabilities 87,284 75,210 Intercompany payable 426,878 458,854
Earnings Statement Information: Year Ended December 31, 1996 1995 1994 - - ----------------------- ---- ---- ---- Revenues - intercompany $767,972 $668,592 $591,501 Revenues - third-party 72,702 55,674 32,872 Operating expenses 778,392 662,632 572,629 Earnings from operations 62,282 61,634 51,744 Net earnings 27,229 28,704 23,404
20 ABX is a certificated air carrier which owns and operates the domestic express cargo services for which the Company is the sole customer. ABX also offers air charter services on a limited basis to third-party customers. FTZ owns certain aircraft parts inventory which it sells primarily to ABX, with limited sales to third-party customers. FTZ is also the holder of a foreign trade zone certificate at Wilmington airport property. WAP is the owner of the Wilmington airport property which includes the Company's main sort facility, aircraft maintenance facilities, runways and related airport facilities and airline administrative and training facilities. ABX is the only occupant and customer of WAP. AFC, d.b.a. Sky Courier, provides expedited courier services and regional logistics warehousing primarily to third-party customers. Investment balances and revenues between Guarantors have been eliminated for purposes of presenting the above summarized financial information. Intercompany revenues and net earnings recorded by ABX, FTZ, and WAP are controlled by the Company and are based on various discretionary factors. Intercompany payable amounts represent net amounts due the Company by its Guarantors. The Company provides the Guarantors with a majority of the cash necessary to fund operating and capital expenditure requirements. Federal income taxes allocated to the Guarantors have been computed assuming the subsidiaries filed separate returns. NOTE M - LOSS RELATED TO AIRCRAFT ACCIDENT On December 22, 1996, the Company suffered the loss of a DC-8-63 aircraft during a routine maintenance check flight. There were no survivors among the six persons aboard. Costs associated with the accident are estimated at $3,737,000 and include certain amounts for self insured retention of workers' compensation, loss on the retirement of the aircraft (net of insurance recoveries), and other costs specific to the accident. Aircraft property insurance recoveries of $18,000,000 were received in January 1997 and have been classified with Prepaid Expenses and Other in the Consolidated Balance Sheet at December 31, 1996. The cause of the accident continues to be investigated by the National Transportation Safety Board. Management is not aware of, nor at this time expecting, any significant actions from these investigations which would result in future operating restrictions on its aircraft fleet. Additionally, management is not aware of any threatened litigation, claims, or other actions specific to the accident which could have a material adverse effect on the Company's financial condition or results of operations as of and for the year ended December 31, 1996. NOTE N - QUARTERLY RESULTS (Unaudited) The following is a summary of quarterly results of operations (in thousands except per share data):
1st 2nd 3rd 4th 1996 Quarter Quarter Quarter Quarter - - ---- ------- ------- ------- ------- Revenues $597,909 $622,398 $612,027 $651,972 Earnings from Operations 10,720 25,815 16,424 26,222 Net Earnings Available to Common Shareholders 1,246 10,621 4,642 10,665 Net Earnings per Common Share Primary $ .06 $ .50 $ .22 $ .50 Fully Diluted .06 .48 .22 .48 1995 - - ---- Revenues $529,916 $545,940 $560,565 $602,930 Earnings from Operations 10,029 10,976 20,221 27,755 Net Earnings Available to Common Shareholders 1,809 2,194 7,633 11,908 Net Earnings per Common Share Primary $ .09 $ .10 $ .36 $ .56 Fully Diluted .09 .10 .36 .53
21 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, 1996 and 1995, and the related consolidated statements of net earnings and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. - - ------------------------- DELOITTE & TOUCHE LLP February 14, 1997 Seattle, Washington EX-23 9 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE Board of Directors Airborne Freight Corporation Seattle, Washington We consent to the incorporation by reference in Registration Statement Nos. 33-3713, 2-67161, 33-39720, 33-51651 and 33-58905 on Form S-8 of our reports dated February 14, 1997, on the consolidated financial statements of Airborne Freight Corporation and subsidiaries appearing in the Company's 1996 Annual Report to Shareholders and incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1996. Our audit of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedule listed in the accompanying Index at Item 14(a)2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly in all material respects the information therein set forth. /s/Deloitte & Touche LLP - - ------------------------ DELOITTE & TOUCHE LLP Seattle, Washington March 24, 1997 EX-27 10 EXHIBIT 27
5 1,000 12-MOS DEC-31-1996 JAN-1-1996 DEC-31-1996 35,816 0 295,860 8,345 34,761 415,222 1,695,730 829,103 1,307,422 273,765 524,440 0 0 21,622 410,208 1,307,422 0 2,484,306 0 2,405,125 0 0 33,236 45,945 18,500 0 0 0 0 27,445 1.28 1.28
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