<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED AUGUST 31, 1997, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ______.
COMMISSION FILE NUMBER: 1-7806
FEDERAL EXPRESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 71-0427007
(State of incorporation) (I.R.S. Employer
Identification No.)
2005 Corporate Avenue
Memphis, Tennessee 38132
(Address of principal (Zip Code)
executive offices)
(901) 369-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding Shares at September 30, 1997
Common Stock, par value $.10 per share 115,054,898
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets
August 31, 1997 and May 31, 1997 . . . . . . . . . . . . . . . . . . . .3-4
Condensed Consolidated Statements of Income
Three Months Ended August 31, 1997 and 1996. . . . . . . . . . . . . . . .5
Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 1997 and 1996. . . . . . . . . . . . . . . .6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . 7-10
Review of Condensed Consolidated Financial Statements
by Independent Public Accountants. . . . . . . . . . . . . . . . . . . . 11
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . 12
Management's Discussion and Analysis of Results of Operations
and Financial Condition. . . . . . . . . . . . . . . . . . . . . . . .13-17
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . .18-19
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .E-1
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31,
1997 May 31,
(Unaudited) 1997
----------- ----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 209,782 $ 122,023
Receivables, less allowance for doubtful accounts
of $40,164,000 and $36,175,000 . . . . . . . . . . 1,771,116 1,512,939
Spare parts, supplies and fuel. . . . . . . . . . . . . 323,532 313,337
Deferred income taxes . . . . . . . . . . . . . . . . . 157,629 149,158
Prepaid expenses and other. . . . . . . . . . . . . . . 52,446 35,132
----------- ----------
Total current assets. . . . . . . . . . . . . 2,514,505 2,132,589
----------- ----------
Property and Equipment, at Cost (Note 6) . . . . . . . . . . 10,083,465 9,818,936
Less accumulated depreciation and amortization. . . . . 5,371,533 5,196,856
----------- ----------
Net property and equipment. . . . . . . . . . 4,711,932 4,622,080
----------- ----------
Other Assets:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . 361,603 365,327
Equipment deposits and other assets (Note 6). . . . . . 431,316 505,490
----------- ----------
Total other assets. . . . . . . . . . . . . . 792,919 870,817
----------- ----------
$ 8,019,356 $7,625,486
----------- ----------
----------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
August 31,
1997 May 31,
(Unaudited) 1997
----------- ----------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt (Note 3). . . . . . . $ 148,449 $ 126,666
Accounts payable. . . . . . . . . . . . . . . . . . . . 841,775 828,421
Accrued expenses (Note 2) . . . . . . . . . . . . . . . 1,150,212 1,007,696
----------- ----------
Total current liabilities . . . . . . . . . . 2,140,436 1,962,783
---------- ----------
Long-Term Debt, Less Current Portion (Note 3). . . . . . . . 1,438,233 1,397,954
---------- ----------
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . 170,229 159,165
---------- ----------
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . 1,167,120 1,143,070
---------- ----------
Commitments and Contingencies (Notes 6 and 7)
Common Stockholders' Investment (Note 5):
Common Stock, $.10 par value;
200,000,000 shares authorized; 115,044,048 and
114,906,753 shares issued. . . . . . . . . . . . . 11,504 11,491
Other . . . . . . . . . . . . . . . . . . . . . . . 3,091,834 2,951,023
---------- ----------
Total common stockholders' investment . . . . 3,103,338 2,962,514
---------- ----------
$8,019,356 $7,625,486
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
-----------------------
1997 1996
---------- ----------
(In thousands, except
per share amounts)
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $3,297,218 $2,692,312
---------- ----------
Operating Expenses:
Salaries and employee benefits . . . . . . . . . . . . 1,450,487 1,231,423
Rentals and landing fees . . . . . . . . . . . . . . . 274,468 253,368
Depreciation and amortization . . . . . . . . . . . . 202,421 190,209
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . 173,780 153,547
Maintenance and repairs. . . . . . . . . . . . . . . . 208,460 181,419
Other. . . . . . . . . . . . . . . . . . . . . . . . . 723,397 552,428
---------- ----------
3,033,013 2,562,394
---------- ----------
Operating Income . . . . . . . . . . . . . . . . . . . . . 264,205 129,918
---------- ----------
Other Income (Expense):
Interest, net. . . . . . . . . . . . . . . . . . . . . (25,828) (21,759)
Other, net . . . . . . . . . . . . . . . . . . . . . . 8,618 (420)
---------- ----------
(17,210) (22,179)
---------- ----------
Income Before Income Taxes . . . . . . . . . . . . . . . . 246,995 107,739
Income Tax Provision . . . . . . . . . . . . . . . . . . . 103,738 45,789
---------- ----------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 143,257 $ 61,950
---------- ----------
---------- ----------
Earnings per Share . . . . . . . . . . . . . . . . . . . . $ 1.22 $ .54
---------- ----------
---------- ----------
Common and Common Equivalent Shares (Note 5) . . . . . . . 117,343 114,934
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
-------------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities. . . . . . . . . . . . $ 206,782 $ 279,481
---------- ----------
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $300,000 and
$1,100,000. . . . . . . . . . . . . . . . . . . . . . . . . (365,957) (272,549)
Proceeds from disposition of property
and equipment:
Sale-leaseback transactions. . . . . . . . . . . . . . . 81,500 -
Reimbursements of A300 deposits. . . . . . . . . . . . . 85,169 42,026
Other dispositions . . . . . . . . . . . . . . . . . . . 8,046 879
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 14,513 16,401
---------- ----------
Net cash used in investing activities. . . . . . . . . . . . . . (176,729) (213,243)
---------- ----------
Financing Activities:
Proceeds from debt issuances . . . . . . . . . . . . . . . . . 267,105 -
Principal payments on debt . . . . . . . . . . . . . . . . . . (209,446) (7,678)
Proceeds from stock issuances. . . . . . . . . . . . . . . . . 3,591 3,196
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (3,544) (312)
---------- ----------
Net cash provided by (used in)
financing activities . . . . . . . . . . . . . . . . . . . . . 57,706 (4,794)
---------- ----------
Net increase in cash and cash equivalents. . . . . . . . . . . . 87,759 61,444
Cash and cash equivalents at beginning of period . . . . . . . . 122,023 93,419
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 209,782 $ 154,863
---------- ----------
---------- ----------
Cash payments for:
Interest (net of capitalized interest) . . . . . . . . . . . . $ 8,631 $ 6,951
---------- ----------
---------- ----------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,817 $ 21,125
---------- ----------
---------- ----------
Non-cash investing and financing activities:
Fair value of assets surrendered under
exchange agreements (with two airlines) . . . . . . . . . . $ 25,741 $ -
Fair value of assets acquired under
exchange agreements . . . . . . . . . . . . . . . . . . . . 31,413 -
---------- ----------
Liabilities incurred . . . . . . . . . . . . . . . . . . . . . $ (5,672) $ -
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information, the
instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X,
and should be read in conjunction with Federal Express Corporation's Annual
Report on Form 10-K for the year ended May 31, 1997. Accordingly, significant
accounting policies and other disclosures normally provided have been omitted
since such items are disclosed therein.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the consolidated financial position of Federal Express Corporation and
subsidiaries as of August 31, 1997, the consolidated results of their operations
for the three-month periods ended August 31, 1997 and 1996, and their
consolidated cash flows for the three-month periods ended August 31, 1997 and
1996. Operating results for the three-month period ended August 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending May 31, 1998.
The Company has entered into contracts which are designed to limit its
exposure to fluctuations in jet fuel prices. Under these contracts, the Company
makes (or receives) payments based on the difference between a specified lower
(or upper) limit and the market price of jet fuel, as determined by an index of
spot market prices representing various geographic regions. The difference is
recorded as an increase or decrease in fuel expense.
Certain prior period amounts have been reclassified to conform to the
current presentation.
(2) ACCRUED EXPENSES
August 31,
1997 May 31,
(Unaudited) 1997
------------ ----------
(In thousands)
Compensated absences . . . . . . . . . . $ 239,123 $ 234,284
Insurance. . . . . . . . . . . . . . . . 221,925 207,059
Taxes other than income taxes. . . . . . 142,937 143,541
Salaries . . . . . . . . . . . . . . . . 133,928 101,694
Employee benefits. . . . . . . . . . . . 104,505 108,679
Federal income taxes . . . . . . . . . . 98,628 25,658
Aircraft overhaul. . . . . . . . . . . . 76,217 84,006
Interest . . . . . . . . . . . . . . . . 46,898 28,165
Other. . . . . . . . . . . . . . . . . . 86,051 74,610
---------- ----------
$1,150,212 $1,007,696
---------- ----------
---------- ----------
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<PAGE>
(3) LONG-TERM DEBT
August 31,
1997 May 31,
(Unaudited) 1997
------------ ----------
(In thousands)
Unsecured notes payable, interest rates of
6.25% to 10.57%, due through 2098 $1,171,977 $ 928,525
Unsecured sinking fund debentures, interest
rate of 9.63%, due through 2020 98,478 98,461
Commercial paper, effective interest
rate of 5.75% - 200,904
Capital lease obligations and tax exempt bonds,
due through 2017, interest rates of
5.35% to 8.30% 275,205 255,100
Less bond reserves 9,024 11,096
---------- ----------
266,181 244,004
Other debt, interest rates of 9.68% to 9.98% 50,046 52,726
---------- ----------
1,586,682 1,524,620
Less current portion 148,449 126,666
---------- ----------
$1,438,233 $1,397,954
---------- ----------
---------- ----------
The Company has a revolving credit agreement with domestic and foreign banks
that provides for a commitment of $1,000,000,000 through May 31, 2000, all of
which was available at August 31, 1997. Interest rates on borrowings under this
agreement are generally determined by maturities selected and prevailing market
conditions. Commercial paper borrowings are backed by unused commitments under
this revolving credit agreement and reduce the amount available under the
agreement. Commercial paper borrowings are classified as long-term based on the
Company's ability and intent to refinance such borrowings.
In July 1997, the Memphis-Shelby County Airport Authority ("MSCAA") issued
$20,105,000 of 5.35% Special Facilities Revenue Bonds. The proceeds of the
bonds in combination with other funds were used to refund outstanding MSCAA
1982A 8.3% bonds on September 2, 1997. The 1997 bonds have a maturity date of
July 1, 2012. The Company is obligated under an operating lease agreement with
MSCAA to pay rentals equal to the principal and interest on the bonds.
In July 1997, the Company issued $250,000,000 of 7.6% unsecured senior notes
due July 1, 2097, under its July 1996 shelf registration with the Securities and
Exchange Commission.
(4) PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors, at its
discretion, to issue up to 4,000,000 shares of Series Preferred Stock. The
stock is issuable in series which may vary as to certain rights and preferences
and has no par value. As of August 31, 1997, none of these shares had been
issued.
(5) COMMON STOCKHOLDERS' INVESTMENT
During the three-month period ended August 31, 1997, 197,295 shares of common
and treasury stock were issued under employee incentive plans at prices ranging
from $17.25 to $52.88 per share. During the same period, the Company acquired
60,000 shares of its common stock at a cost of $59.07 per share.
On September 29, 1997, the stockholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the authorized
common stock of the Company from 200,000,000 to 400,000,000 shares.
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<PAGE>
(6) COMMITMENTS
As of August 31, 1997, the Company's purchase commitments for the remainder
of 1998 and annually thereafter under various contracts are as follows (in
thousands):
Aircraft-
Aircraft Related(1) Other(2) Total
---------- ---------- ---------- ----------
1998 (remainder) $238,900 $252,800 $394,600 $886,300
1999 406,100 182,800 85,000 673,900
2000 369,500 392,400 13,500 775,400
2001 278,000 222,500 - 500,500
2002 38,000 114,700 - 152,700
(1) Primarily aircraft modifications, rotables and spare parts and
engines.
(2) Primarily vehicles, facilities, computers and other equipment.
The Company is committed to purchase 13 Airbus A300s, four Airbus A310s,
one DC10, seven MD11s and 50 Ayers ALM 200s to be delivered through 2002.
Deposits and progress payments of $53,676,000 have been made toward these
purchases. The Company may be required to purchase seven additional MD11s for
delivery beginning no later than 2000 under a put option agreement.
The Company has entered into agreements with two airlines to acquire 53
DC10 aircraft, spare parts, aircraft engines and other equipment, and
maintenance services in exchange for a combination of aircraft engine noise
reduction kits and cash. Delivery of these aircraft began in 1997 and will
continue through 2001. Additionally, these airlines may exercise put options
through December 31, 2003, requiring the Company to purchase up to 29 additional
DC10s along with additional aircraft engines and equipment.
During the quarter ended August 31, 1997, the Company acquired four Airbus
A300s under operating leases. These aircraft were included as purchase
commitments as of May 31, 1997. At the time of delivery, the Company sold its
rights to purchase these aircraft to third parties who reimbursed the Company
for its deposits on the aircraft and paid additional consideration. The Company
then entered into operating leases with each of the third parties who purchased
the aircraft from the manufacturer.
Lease commitments added since May 31, 1997 for the four Airbus A300s and
one MD11, purchased in 1997 then subsequently sold and leased back, are as
follows (in thousands):
1998 $ 14,900
1999 29,100
2000 29,100
2001 29,100
2002 29,100
Thereafter 608,600
(7) LEGAL PROCEEDINGS
Customers of the Company have filed four separate class-action lawsuits
against the Company generally alleging that the Company has breached its
contract with the plaintiffs in transporting packages shipped by them. These
lawsuits allege that the Company continued to collect a 6.25% federal excise tax
on the
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<PAGE>
transportation of property shipped by air after the tax expired on December 31,
1995, until it was reinstated in August of 1996. The plaintiffs seek
certification as a class action, damages, an injunction to enjoin the Company
from continuing to collect the excise tax referred to above, and an award of
attorneys' fees and costs. Three of those cases were consolidated in Minnesota
Federal District Court. That court stayed the consolidated cases in favor of a
case filed in Circuit Court of Greene County, Alabama. The complaint in the
Alabama case also alleges that the Company continued to collect the excise tax
on the transportation of property shipped by air after the tax expired again on
December 31, 1996.
A fifth case, filed in the Supreme Court of New York, New York County,
containing allegations and requests for relief substantially similar to the
other four cases was dismissed with prejudice on the Company's motion on
September 23, 1997. The court found that there was no breach of contract and
and that the other causes of action were preempted by Federal law. The
plaintiffs have the right to appeal. This case originally alleged that the
Company continued to collect the excise tax on the transportation of property
shipped by air after the tax expired on December 31, 1996. The New York
complaint was later amended to cover the first expiration period of the tax
(December 31, 1995 through August 27, 1996) covered in the original Alabama
complaint.
The air transportation excise tax expired on December 31, 1995, was
reenacted by Congress effective August 27, 1996, and expired again on
December 31, 1996. The excise tax was then reenacted by Congress effective
March 7, 1997. The expiration of the tax relieved the Company of its obligation
to pay the tax during the periods of expiration. The Taxpayer Relief Act of
1997, signed by President Clinton in August, extended the tax for 10 years
through September 30, 2007.
The Company intends to vigorously defend itself in these cases. No amount
has been reserved for these contingencies.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
aggregate liability, if any, with respect to these other actions will not
materially adversely affect the financial position or results of operations of
the Company.
(8) SUBSEQUENT EVENTS
On October 6, 1997, the Company announced it signed a definitive
agreement to acquire Caliber Systems, Inc. and its subsidiaries. The
transaction will be accounted for as a pooling of interests. A new holding
company, FDX Corporation, will be formed and will exchange 0.8 shares of its
common stock for each share of Caliber Systems, Inc. stock and one share of
its common stock for each share of Federal Express Corporation stock. The
transaction, which has been approved by the Boards of Directors of both
companies, is subject to the approval of shareholders of both companies, the
U.S. Government and other regulatory agencies, and is expected to be
completed in early calendar 1998.
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REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, has performed a review
of the condensed consolidated balance sheet of the Company as of August 31,
1997, and the related condensed consolidated statements of income for the
three-month periods ended August 31, 1997 and 1996 and the condensed
consolidated statements of cash flows for the three-month periods ended August
31, 1997 and 1996, included herein, as indicated in their report thereon
included on page 12.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Federal Express Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Federal Express Corporation and subsidiaries as of August 31, 1997 and the
related condensed consolidated statements of income for the three-month periods
ended August 31, 1997 and 1996 and the condensed consolidated statements of cash
flows for the three-month periods ended August 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Federal Express Corporation and
subsidiaries as of May 31, 1997 and the related consolidated statements of
income, changes in common stockholders' investment and cash flows for the year
then ended. In our report dated June 30, 1997, we expressed an unqualified
opinion on those financial statements, which are not presented herein. In our
opinion, the accompanying condensed consolidated balance sheet as of May 31,
1997 is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
Arthur Andersen LLP
Memphis, Tennessee,
October 6, 1997
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the three months ended August 31, 1997, the Company recorded net income
of $143 million ($1.22 per share) on revenues of $3.3 billion compared with net
income of $62 million ($.54 per share) on revenues of $2.7 billion for the same
period in the prior year. These improved results reflect the effects of several
non-recurring items, a rise in U.S. domestic revenue per package (yield) and
increased volume of U.S. domestic and international express packages.
The most significant non-recurring item impacting the results of
operations was the Teamsters strike against United Parcel Service ("UPS").
During the 12 operating days of the strike, the Company delivered
approximately 800,000 additional U.S. domestic express packages per day. It
is difficult to estimate with precision the impact of this additional volume.
However, the Company estimates that as much as 15% of this volume has been
retained thus far. The Company analytically calculated that the volume not
retained contributed approximately $150 million in U.S. domestic revenues.
This additional revenue, net of applicable variable compensation, income
taxes and variable costs, but not allocated fixed costs, resulted in an
estimated additional $.25 to $.30 per share to the quarter's earnings.
Also, the Company realized a net gain of $17 million from the insurance
settlement and the release from certain related liabilities on a leased MD11
aircraft destroyed in an accident in July. This gain was almost equally
divided between operating and non-operating income. An unrelated expense,
which partially offset this gain, was an addition of $9 million to an
operating reserve for the disposition of leased B747 aircraft. These
aircraft, which are currently subleased, must undergo certain maintenance and
repairs before the aircraft are transferred to a new lessee. The net effect
of the MD11 gain and the B747 reserve on domestic and international operating
income was immaterial. The combined effect of these aircraft-related items
contributed approximately $.03 per share for the quarter, net of applicable
variable compensation and income taxes.
Revenues
The following table shows a comparison of revenues (in millions):
Three Months Ended
August 31,
----------------------- Percent
1997 1996 Change
-------- -------- --------
U.S. domestic express. . . . . . . $ 2,335 $ 1,908 +22%
International Priority (IP). . . . 655 541 +21
International Express Freight
(IXF) and Airport-to-
Airport (ATA) . . . . . . . . . . 151 137 +10
Charter, Logistics services
and other . . . . . . . . . . . . 156 106 +47
-------- --------
$ 3,297 $ 2,692 +22
-------- --------
-------- --------
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<PAGE>
The following table shows a comparison of selected express and airfreight
(IXF/ATA) statistics (in thousands, except dollar amounts):
Three Months Ended
August 31,
------------------ Percent
1997 1996 Change
-------- -------- --------
U.S. domestic express:
Average daily packages . . . . . . . . . 2,692 2,297 +17%
Revenue per package . . . . . . . . . . $13.55 $12.98 + 4
IP:
Average daily packages . . . . . . . . . 246 209 +18
Revenue per package . . . . . . . . . . $41.56 $40.37 + 3
IXF/ATA:
Average daily pounds . . . . . . . . . . 2,652 2,340 +13
Revenue per pound. . . . . . . . . . . . $ .89 $ .92 - 3
The current quarter's increase in the Company's U.S. domestic package
volume was augmented by additional volume resulting from the UPS strike. At the
same time, yield increased 4% largely from the effects of the strike-related
volume, much of which was near list price and above-average weight per package.
Average weight per package also increased due to the roll-out of FedEx Express
Saver, a three-day, deferred service. Continuing yield-management initiatives,
including pursuing price increases on low-yielding accounts and discontinuing
unprofitable accounts, also positively impacted yields. Management expects to
retain a portion of the strike-related volume causing U.S. domestic package
volumes to grow at rates similar to those experienced in the past two years.
Management believes that U.S. domestic yields should remain stable year over
year during the remainder of 1998 due to continued effects of yield-management
actions and the introduction of distance-based pricing. Actual results may vary
depending on the impact of competitive pricing changes, including distance-based
pricing, customer responses to yield management initiatives and changing
customer demand patterns.
In the quarter ended August 31, 1996, the expiration of the air
transportation excise tax added $28 million and 1% to U.S. domestic revenues
and yields, respectively. The excise tax expired on December 31, 1995, was
reenacted by Congress effective August 27, 1996, and expired again on
December 31, 1996. The Company was not obligated to pay the tax during the
periods in which it was expired. The excise tax was reenacted by Congress
effective March 7, 1997, and in August 1997, it was extended for 10 years
through September 30, 2007.
The Company's IP revenues and volumes continued to experience strong growth
during the quarter. Yields also increased during the quarter compared to the
same period of the prior year. Management expects these revenue and volume
trends to continue through the remainder of 1998, with yields remaining
relatively constant. Actual IP results will depend on the impact of
international economic conditions, actions by the Company's competitors, and
regulatory conditions for international aviation rights.
The Company's airfreight volume increased year-over-year, while yield
experienced a year-over-year decline. IXF volumes (a space-confirmed,
time-definite service) increased 30% for the quarter, but yields declined 6% for
the same period. ATA volumes (a lower-priced, space-available service)
decreased 10% for the quarter, with yields lower by 5% for the same period.
Management expects airfreight yields to continue to decline, year-over-year,
through the balance of the fiscal year. Actual results, however, will depend on
the impact of international economic conditions, actions by the Company's
competitors and regulatory conditions for international aviation rights.
- 14 -
<PAGE>
Operating Expenses
Salaries and employee benefits increased 18% for the quarter as a result of
volume-related growth and increased provisions under the Company's
performance-based, incentive compensation plans. Also included in the current
quarter's expense is a $25 million special appreciation bonus for U.S.
operations employees for their extra efforts during the UPS strike.
Rentals and landing fees increased 8% for the quarter. This increase is
primarily due to additional leased aircraft in the Company's fleet. As of
August 31, 1997, the Company had 82 wide-bodied aircraft under operating
lease compared with 76 as of August 31, 1996. The current quarter's expense
is net of approximately half of a $17 million net gain resulting from the
destruction of an MD11 aircraft in an accident in July. Management expects
year-over-year increases in lease expense to continue as the Company enters
into additional aircraft rental agreements during 1998 and thereafter. The
Company expects to be able to convert its A300 purchase commitments into
direct operating leases. (See Note 6 of Notes to Condensed Consolidated
Financial Statements.)
Fuel expense increased 13% for the quarter primarily due to an increase in
gallons consumed (13%). The first quarter's increase in fuel expense includes
payments made under contracts which limit the Company's exposure to fluctuations
in jet fuel prices.
Effective August 1, 1997, the Company lifted its temporary 2% fuel
surcharge that had been in place on U.S. domestic shipments except FedEx SameDay
service and including Puerto Rico and all U.S. export IP shipments, except those
to the People's Republic of China and Hong Kong. This surcharge was implemented
on February 3, 1997 to mitigate the impact of rising jet fuel prices.
Maintenance and repairs expense increased 15% for the quarter. The
increase is due primarily to higher year-over-year engine maintenance on A310
and DC10 aircraft and the majority of the additional reserve for the disposition
of B747 aircraft, as discussed above. Management believes that maintenance and
repairs expense will continue a long-term trend of year-over-year increases for
the foreseeable future due to the Company's increasing fleet size, aging fleet
and variety of aircraft types.
Other operating expenses increased 31% for the quarter primarily due to
expenses related to volume growth and expenses necessitated by the additional
strike volume, including the transportation of packages by third parties,
temporary manpower, uniforms and supplies and programming services. The cost of
sales of engine noise reduction kits also increased year over year.
Operating Income
The Company's consolidated operating income increased 103% for the quarter
ended August 31, 1997 from the prior year.
U.S. domestic operating income was $241 million for the quarter, compared
with $126 million for the prior year. Volume growth (17%) and yield
improvements (4%), partially offset by an increase in cost per package (1%),
resulted in a rise in operating income. As noted above, U.S. domestic operating
results were significantly impacted by the UPS strike. Also included in U.S.
domestic operating income was an incremental $22 million from the sales of
aircraft engine noise reduction kits compared to last year's first quarter.
U.S. domestic margin for the quarter was 9.9%, compared to 6.5% for the same
period in the prior year.
- 15 -
<PAGE>
The Company's international operating income was $23 million for the
quarter, compared with $4 million for the prior year. The increase was
attributable to strong growth in the Company's IP and IXF volumes partially
offset by lower airfreight yields, increased provisions for variable
compensation and higher aircraft lease and maintenance and repairs expenses.
International operating margin for the quarter was 2.7%, compared to 0.5% for
the same period in the prior year.
Other Income and Expense and Income Taxes
An increase in net interest expense of 19% for the quarter was due to
higher debt levels.
Other, net for the quarter ended August 31, 1997, includes a gain from an
insurance settlement for an MD11 aircraft destroyed in an accident in July 1997,
as discussed above.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $210 million at August 31, 1997, and
increased $88 million since May 31, 1997. Cash provided from operations was
$207 million compared with $279 million for the same period in the prior year.
The Company has a $1 billion revolving bank credit facility that is generally
used to finance temporary operating cash requirements and to provide support for
the issuance of commercial paper. Management believes that cash flow from
operations, its commercial paper program and the revolving bank credit facility
will adequately meet its working capital needs for the foreseeable future.
Capital Resources
The Company's operations are capital intensive, characterized by
significant investments in aircraft, vehicles, computer and telecommunication
equipment, package handling facilities and sort equipment. The amount and
timing of capital additions are dependent on various factors including volume
growth, new or enhanced services, geographical expansion of services,
competition, availability of satisfactory financing and actions of regulatory
authorities.
Capital expenditures for the first three months of 1998 totaled $366
million and included one MD11, aircraft modifications, vehicles and ground
support equipment and customer automation and computer equipment. In
comparison, prior year expenditures totaled $273 million and included three
A310s, vehicles and ground support equipment, and customer automation and
computer equipment. An MD11 purchased in February 1997 was sold and leased back
in the current quarter. For information on the Company's purchase commitments,
see Note 6 of Notes to Condensed Consolidated Financial Statements.
In July 1997, $20 million of Memphis-Shelby County Airport Authority
("MSCAA") Special Facilities Revenue Bonds were issued. The proceeds of the
bonds in combination with other funds were used to refund outstanding MSCAA
1982B bonds on September 2, 1997. Also in July 1997, the Company issued $250
million of unsecured senior notes with a maturity date of July 1, 2097, under
the Company's July 1996 shelf registration with the Securities and Exchange
Commission.
Management believes that the capital resources available to the Company
provide flexibility to access the most efficient markets for financing its
capital acquisitions, including aircraft, and are adequate for the Company's
future capital needs.
- 16 -
<PAGE>
Statements in this "Management's Discussion and Analysis of Results of
Operations and Financial Condition" or made by management of the Company which
contain more than historical information may be considered forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) which are subject to risks and uncertainties. Actual results may
differ materially from those expressed in the forward-looking statements because
of important factors identified in this section.
- 17 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 7 Legal Proceedings in Part I is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1997 Annual Meeting of Stockholders held on September 29, 1997, the
Company's stockholders elected the Class II Directors to serve for a three-year
term expiring at the 2000 Annual Meeting. The tabulation of votes with respect
to each nominee for office was:
Nominee For Withheld
----------------------- ----------- --------
Ralph D. DeNunzio 101,694,774 415,713
Charles T. Manatt 101,376,288 734,199
George J. Mitchell 101,678,171 432,316
Jackson W. Smart, Jr. 101,679,619 412,868
Joshua I. Smith 101,701,788 408,699
The stockholders also approved an amendment to the Company's Restated
Certificate of Incorporation to increase the authorized common stock from
200,000,000 shares to 400,000,000 shares by a vote of 95,413,344 to 6,527,973
with 169,170 abstentions and broker non-votes. The stockholders also approved
the Company's 1997 Stock Incentive Plan by a vote of 97,294,880 to 4,362,970
with 452,637 abstentions and broker non-votes. The stockholders also ratified
the Board of Directors' designation of Arthur Andersen LLP as independent
auditors for the fiscal year ended May 31, 1998 by a vote of 101,815,089 to
146,946 with 148,452 abstentions and broker non-votes.
The stockholders defeated a stockholder proposal concerning guidelines and
reporting provisions for certain political contributions made by the Company by
a vote of 3,174,933 in favor of the proposal to 83,086,141 against with
6,067,469 abstentions and broker non-votes. Finally, the stockholders defeated
a stockholder proposal concerning declassification of the Board of Directors by
a vote of 35,956,654 in favor of the proposal to 49,859,934 against with
6,445,043 abstentions and broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibit
------- ----------------------
10.1 Letter Agreement No. 3 dated July 15, 1997, amending the
Modification Services Agreement dated September 16, 1996, between
McDonnell Douglas Corporation and Registrant. Confidential
treatment has been requested for certain confidential portions of
this exhibit pursuant to Rule 24b-2 under the Securities and
Exchange Act of 1934, as amended. In accordance with Rule 24b-2,
these confidential portions have been omitted from this exhibit
and filed separately with the Commission.
- 18 -
<PAGE>
10.2 Eighteenth Supplemental Lease Agreement dated as of July 1, 1997,
between the Authority and Registrant.
11.1 Statement re Computation of Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
(b) Reports on Form 8-K.
During the quarter ended August 31, 1997, the Registrant filed four Current
Reports on Form 8-K. The first report was dated June 11, 1997 and filed under
Item 5, Other Events and reported developments in certain class-action lawsuits
against the Company.
The second report was dated June 30, 1997 and filed under Item 5, Other
Events. The report contained the Registrant's press release dated June 30, 1997
announcing its fourth quarter and fiscal year end financial results and its
related computation of Ratio of Earnings to Fixed Charges.
The third report was dated July 7, 1997 and filed under Item 7, Financial
Statements and Exhibits. The report contained documents related to the issuance
of unsecured senior notes.
The fourth report was dated August 8, 1997 and filed under Item 5, Other
Events and reported an insurance settlement on a destroyed aircraft.
- 19 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL EXPRESS CORPORATION
(Registrant)
Date: October 14, 1997 /s/ Michael W. Hillard
------------------------------
MICHAEL W. HILLARD
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 20 -
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Of Exhibit
- ------ ----------------------
10.1 Letter Agreement No. 3 dated July 15, 1997, amending the Modification
Services Agreement dated September 16, 1996, between McDonnell Douglas
Corporation and Registrant. Confidential treatment has been requested
for certain confidential portions of this exhibit pursuant to Rule
24b-2 under the Securities and Exchange Act of 1934, as amended. In
accordance with Rule 24b-2, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
10.2 Eighteenth Supplemental Lease Agreement dated as of July 1, 1997,
between the Authority and Registrant.
11.1 Statement re Computation of Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
E-1
<PAGE>
07-15-97
[LOGO]
Letter Agreement No. 3 to
DAC 96-29-M
Federal Express Corporation
2005 Corporate Avenue
Memphis, TN 38118
Federal Express Corporation ("Federal Express") and McDonnell Douglas
Corporation ("MDC") have entered into Modification Services Agreement Document
No. DAC 96-29-M (the "Modification Agreement") dated September 16, 1996, which
Modification Agreement covers Federal Express' desire to incorporate certain
modifications in its DC-10 aircraft (the "Aircraft", as defined in the
Modification Agreement) and MDC desires to perform such modifications. As a
further consideration of the parties hereto, this Letter Agreement No. 3 shall
amend and constitute a part of said Modification Agreement.
Federal Express has requested MDC to provide services for certain of the
Aircraft and Option Aircraft (the "Stored Aircraft"); and MDC has agreed to
provide such services; subject to the following terms and conditions set forth
in this Letter Agreement. Terms not otherwise defined in this Letter Agreement
shall have the same definitions ascribed to such terms in the Modification
Agreement.
1. SERVICES
Pursuant to Paragraph 2)H. of the Modification Agreement, Federal Express
has the right to store up to twenty-five Aircraft at any one time at the
Conversion Facility. Notwithstanding this, MDC hereby agrees to allow
Federal Express the right to store up to fifty Stored Aircraft at any one
time at the Conversion Facility which for the purposes of this Letter
Agreement is defined to be the Dimension facility located in Goodyear,
Arizona.
The work cards set forth in Attachment A of this Letter Agreement will be
performed by MDC or its subcontractor on each Stored Aircraft in accordance
with the ASR process at the prices listed in Attachment A. Federal Express
shall provide five days written notice of its intent to have a specific
work card completed on a Stored Aircraft. If Federal Express determines
additional storage work cards are required, such additional
<PAGE>
07-15-97 Letter Agreement No. 3 to
DAC 96-29-M
Page 2
work may be completed in accordance with the ASR process. The ASR form
listed in Attachment D hereto shall be utilized for any additional
services provided in accordance with this Letter Agreement.
If Federal Express requests removal of the engines by MDC on any Stored
Aircraft during the term of this Letter Agreement, Federal Express shall
provide to MDC 13,000 pounds of ballast for each Stored Aircraft so stored.
Federal Express may provide used engines to be installed on the Stored
Aircraft as ballast.
2. AIRCRAFT DELIVERY
Federal Express shall be responsible for transporting each Stored Aircraft
to the Conversion Facility. Federal Express shall provide MDC with five
business days written notice of its intent to deliver a Stored Aircraft to
the Conversion Facility. Notwithstanding Paragraph 5)A.1) of the
Modification Agreement, delivery of a Stored Aircraft to the Conversion
Facility does not constitute Delivery of an Aircraft by Federal Express.
Upon arrival at the Conversion Facility, MDC shall execute a receipt in the
form of Attachment B (the "Aircraft Delivery Receipt") for each Stored
Aircraft. Upon completion of the required services listed in Attachment A,
page A-1, MDC shall execute a receipt in the form of Attachment C (the
"Aircraft Redelivery Receipt"). Any work required to have a Stored
Aircraft Delivered for performance of the Services, excluding Aircraft
towing, under the Modification Agreement may be completed by MDC or its
Subcontractor in accordance with the ASR process.
3. OVERSIGHT AND INSPECTION
Except for a Stored Aircraft on which MDC or MDC's subcontractor is
performing services, Federal Express shall be responsible for oversight and
inspection of the Stored Aircraft during the term of this Letter Agreement.
4. REMOVAL OF EQUIPMENT
Prior to and during the storage period for each Stored Aircraft, certain
Stored Aircraft components ("Parts") may be removed. Except as required
for performance of the work cards set forth in Attachment A or ASRs, no
Parts shall be removed without the prior approval of Federal Express
pursuant to an executed ASR. All such Parts removals shall be accomplished
in accordance with the procedures specified in the Modification Agreement.
<PAGE>
07-15-97 Letter Agreement No. 3 to
DAC 96-29-M
Page 3
5. PRICE
The price per Stored Aircraft for receiving, incoming inspection and
handling of each Stored Aircraft shall be [ * ].
The price per Stored Aircraft for each work cards is set forth in
Attachment A. The price excludes any material identified as BFE. The work
cards, 11.1-01, 11.1-02, 11.1-03, 11.1-04, 11.1-05, 11.1-06 and 11.9 shall
be accomplished on a Time and Material (T&M) basis with a Not-to-Exceed
(NTE) price as listed for each of the first two Stored Aircraft and
re-negotiated downward if feasible for subsequent Stored Aircraft.
The price for additional work shall be set forth in the relevant ASR.
All pricing is stated in 1996 year dollars and shall be escalated in
accordance with the following escalation formula.
ESCALATION FORMULA
[ * ]
where:
AP = The Final Adjusted Price
MP = The Base Price
ECI = The latest released ECI Index value at the completion of
the services computed to one decimal place (Note: 1.05 rounds to 1.1)
138.2 = The ECI Index value for June 1996
6. PAYMENT
a. MDC will invoice Federal Express upon completion of the services
provided hereunder. MDC's invoices shall be due and payable within
30 days of Federal Express' receipt of such invoice.
b. If Federal Express fails to make any payments at the time and in the
amounts required under this Letter Agreement, Federal Express shall pay
MDC interest on the payment from the due date until the payment is
received by MDC at the Prime Rate announced from time to time by Chase
Manhattan Bank at its principal office in
- ---------------
*Blank space contained confidential information which has been filed separately
with the Securities and Exchange commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
<PAGE>
07-15-97 Letter Agreement No. 3 to
DAC 96-29-M
Page 4
New York, New York, plus one percent, or the maximum rate allowed by
California law, whichever is lower.
c. All payments made by Federal Express to MDC under this Agreement shall
be in U.S. Dollars, made by wire transfer in immediately available
funds and made to the following address:
Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, New York 10015
ABA No. 021000021
McDonnell Douglas Corporation
- Account No. 910-2-695492
Attn: Paul Trupia (or as otherwise notified)
<PAGE>
07-15-97 Letter Agreement No. 3 to
DAC 96-29-M
Page 5
7. CONVERSION FACILITY RELOCATION
In the event MDC requests relocation of the Conversion Facility during the
term of this Letter Agreement, MDC and Federal Express shall be responsible
for the following:
a. MDC RESPONSIBILITIES:
1) Re-installation of any equipment removed by MDC or MDC's
subcontractor during the performance of any services or
additional work which is required for ferry of the Firm Aircraft
and Option Aircraft which have been converted to Firm Aircraft
under the Modification Agreement;
2) Ferry of such Aircraft by an MDC flight crew to the new
conversion facility; and
3) Insuring such Aircraft during the ferry flight under its physical
damage aircraft hull insurance program and Federal Express will
be named as an additional insured. In no event will MDC's
liability to Federal Express for partial or total loss or damage
or destruction of an Aircraft during such ferry flight exceed the
declared stipulated loss value of [ * ].
b. FEDERAL EXPRESS RESPONSIBILITIES:
1) Re-installation of all equipment other than that listed in 1) a)
above which was removed from the Stored Aircraft;
2) Maintaining and or providing a Certificate of Airworthiness for
each Stored Aircraft;
3) Completion of all mandatory Airworthiness Directives required to
obtain a ferry permit for the ferry flight of each Stored
Aircraft;
4) Replacement of any parts which have exceeded their safe life
limit required to obtain a ferry permit for the ferry flight of
each Stored Aircraft; and
5) Providing a ferry permit, if required, for the Stored Aircraft.
- -----------------
*Blank space contained confidential information which has been filed separately
with the Securities and Exchange commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
<PAGE>
07-15-97 Letter Agreement No. 3 to
DAC 96-29-M
Page 6
8. TERM
This Letter Agreement will commence on the date of execution hereof and
will remain in effect until either the completion of all Services performed
under the Modification Agreement on all Aircraft or the earlier termination
by written notice of Federal Express or MDC. In the event of early
termination by Federal Express of this Letter Agreement, Federal Express
shall pay for all work completed on each Stored Aircraft and not
previously invoiced including all reasonable non-recurring material costs
incurred up to a maximum of $500.00 per Stored Aircraft. Federal
Express may continue to store the Aircraft in accordance with the terms and
conditions of the Modification Agreement following early termination of
this Letter Agreement.
9. INSURANCE
a. Federal Express' General Coverage
1) Prior to the commencement of the services hereunder, Federal
Express shall provide to MDC evidence of satisfactory insurance
coverage for the Stored Aircraft. Said insurance coverage shall:
a) be maintained at Federal Express' expense at all times
during the term of this Letter Agreement and for a period of
not less than two (2) years thereafter;
b) name MDC and MDC's employees, officers, directors,
representatives, subcontractors and agents as additional
insureds under Federal Express' third party liability
insurance;
c) contain a severability of interest clause; and
d) provide that the insurance is primary and without
contribution from other insurance which may be available to
the additional insureds; and
e) include the following insurance in the amounts noted:
(1) Federal Express shall maintain hull insurance coverage
(in the amount of such Stored Aircraft's value prior to
modification, including
<PAGE>
07-15-97 Letter Agreement No. 3 to
DAC 96-29-M
Page 7
all components and parts removed from the Stored
Aircraft and parts shipped from the Conversion
Facility to other locations on the instructions of
Federal Express or pursuant to the provisions of this
Letter Agreement).
(2) Third party liability coverage (in the amount of
Federal Express' current coverage, but not less than
$300,000,000).
b. MDC's subcontractor Coverage
1) Prior to the commencement of the services hereunder, MDC's
subcontractor shall provide Federal Express evidence of
satisfactory insurance coverage. Said insurance coverage shall:
a) be maintained at MDC's subcontractor's expense at all times
during the term of this Letter Agreement and for a period of
not less than two (2) years thereafter;
b) name MDC and their respective employees, officers,
directors, representatives and agents as additional insureds
as regards work performed by subcontractor under its third
party liability insurance, excluding gross negligence and
willful misconduct of MDC;
c) name Federal Express and their respective employees,
officers, directors, representatives and agents as
additional insureds as regards work performed by
subcontractor under Subcontractor's third party liability
insurance excluding operational liability, gross negligence
and willful misconduct of Federal Express;
d) contain a severability of interest clause;
e) provide that the insurance is primary as regards work
performed by subcontractor and without contribution from
other insurance which may be available to the additional
insureds; and,
f) include the following insurance in the amounts noted:
<PAGE>
07-15-97 Letter Agreement No. 3 to
DAC 96-29-M
Page 8
(i) Aviation Comprehensive Liability Insurance with a
combined single limit of liability of not less than
Three Hundred Million U.S. Dollars ($300,000,000.00)
for Bodily Injury and Property Damage under Products
Liability, Completed Operations Coverage and Premises
Operation Liability;
(ii) Hangar Keeper's Liability Insurance providing
property damage coverage with limits of liability of
Three Hundred Million U.S. Dollars ($300,000,000.00)
per occurrence; and
(iii) Worker's Compensation as required by applicable law
and Employer's Liability Insurance of not less than
One Million U.S. Dollars ($1,000,000.00) per
occurrence unless a greater amount is required by
law.
g) In the event MDC performs the services, it will provide
Federal Express evidence of insurance like the subcontractor
coverage above.
c. All insurance coverage set forth in Paragraphs a., and b. above shall:
1) except for workers compensation insurance, contain a waiver of
subrogation by such parties insurers of any rights it may have
against the other party and the other parties employees,
officers, directors, representatives, agents and subcontractors;
and
2) contain a clause which states that any cancellation, restriction
or reduction in coverage shall only be effective upon thirty (30)
days written notice to the other party of such cancellation,
restriction or reduction in coverage.
d. Except for any damage caused by gross negligence or willful misconduct
on the part of MDC or MDC's subcontractors, Federal Express shall
assume the risk of loss, damage or destruction of a Stored Aircraft or
equipment for the period that such Stored Aircraft or equipment is in
storage pursuant to this Letter Agreement. Federal Express will cause
its physical damage aircraft hull
<PAGE>
07-15-97 Letter Agreement No. 3 to
DAC 96-29-M
Page 9
insurers to waive all rights of subrogation against MDC and its
subcontractors, except as may arise by the gross negligence or willful
misconduct on the part of MDC or MDC's subcontractor.
10. EXECUTION
This Letter Agreement and any amendments hereto may be executed in
counterparts, each of which shall be deemed an original and all of which
shall constitute one and the same Agreement. Execution by either party may
be confirmed by electronic facsimile transmission of the signature page of
the Agreement to the other party, and confirmation of receipt by telephonic
or facsimile transmission.
11. LIMITATION OF LIABILITY
a. With respect to the transactions contemplated by this Letter Agreement,
neither party shall be liable for any consequential damages arising
from claims brought by the other.
b. In no event will MDC's or MDC's subcontractor's liability under this
Letter Agreement to Federal Express for partial or total loss, damage
or destruction of each Stored Aircraft exceed the sum of the stipulated
loss value of [ * ].
c. Federal Express agrees to be solely liable for any and all
environmental contamination (including but not limited to contamination
of air, water or soil and any fines, penalties or clean up costs
associated with such damage) as well as any other liability, penalties
or fines associated with the use or release of, or exposure to
hazardous substances directly arising out of or in connection with the
storing of Stored Aircraft at the Conversion Facility prior to
Delivery, except for any such environmental contamination arising out
of or caused by MDC or its subcontractor's actions or failures to act.
- ------------------
*Blank space contained confidential information which has been filed separately
with the Securities and Exchange commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
<PAGE>
07-15-97 Letter Agreement No. 3 to
DAC 96-29-M
Page 10
If the foregoing correctly sets forth our understanding, please execute this
Letter Agreement in the space provided below.
FEDERAL EXPRESS CORPORATION MCDONNELL DOUGLAS CORPORATION
/S/ TERRY NORD /S/ THOMAS C. MOORE
- --------------------------------- --------------------------------
Signature Signature
TERRY NORD THOMAS C. MOORE
-------------------------------- --------------------------------
Printed Name Printed Name
VP - AIRCRAFT BASE MAINTENANCE VICE PRESIDENT - CONTRACTS
-------------------------------- --------------------------------
Title Title
JULY 29, 1997
--------------------------------
Date
APPROVED
AS TO LEGAL FORM
KHS 7-23-97
- ----------------------------------
LEGAL DEPT
<PAGE>
Attachment A to
Letter Agreement No. 3
DAC 96-29-M
Page A-1
FEDERAL EXPRESS MD-10 AIRCRAFT
------------------------------
WORK CARDS
----------
CARD REVISION PRICE PER
NUMBER CARD TITLE DATE AIRCRAFT
- --------------------------------------------------------------------------------
11.1 Engines/Thrust Reversers/APU Preservation 6/2/97 [ * ]
(material is BFE) (Ballast)
Engine Thrust Reverser (TR) [ * ]
*11.1-01 Removal #1 + 6/2/97 [ * ]
*11.1-02 Removal #2 + 6/2/97 [ * ]
*11.1-03 Removal #3 + 6/2/97 [ * ]
Engine [ * ]
*11.1-04 Removal #1 +@ 6/2/97 [ * ]
*11.1-05 Removal #2 +@ 6/2/97 [ * ]
*11.1-06 Removal #3 +@ 6/2/97 [ * ]
11.1-07 APU Removal preserve fuel control unit 6/2/97 [ * ]
(work items 1,2 & 3 only)
11.2 Lavatory Commode Removal (items 1 & 3 4/29/97 [ * ]
only)
11.3 Potable Water System - Preservation 4/29/97 [ * ]
11.4 Aircraft Batteries - Removal 4/29/97 [ * ]
11.5 Cockpit/Emergency Exit Windows - 4/1/97 [ * ]
Preservation
11.6 Landing Gear - Preservation Temporary 4/1/97 [ * ]
Location
11.7 Landing Gear - Preservation Final Location 4/29/97 [ * ]
11.8 Pitot/Static Ports - Preservation 4/1/97 [ * ]
- ----------------
*Blank space contained confidential information which has been filed separately
with the Securities and Exchange commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
<PAGE>
07-15-97 Attachment A to
Letter Agreement No. 3 to
DAC 96-29-M
Page 2
CARD REVISION PRICE PER
NUMBER CARD TITLE DATE AIRCRAFT
- -------------------------------------------------------------------------------
*11.9 Aircraft Lubrication 5/1/97 [ * ]
12.1 Forward Avionics compartment Equipment 4/29/97 [ * ]
Removal
12.5 Bilge Areas L-48 to R-48 - Preservation 4/1/97 [ * ]
12.6 Landing Gear Wheel Well LPS Treatment 4/1/97 [ * ]
12.7 Engine Mounts/Truss Fittings - Preservation 4/1/97 [ * ]
12.8 Aircraft Fuel System - Preservation (fuel 4/1/97 [ * ]
ballasting to 40,000 lbs.) (material is BFE)
New Install Rudder Gust Locks (material is BFE) [ * ]
New Leave 3 Passenger doors open. Install gill [ * ]
liner material with avionic filter tapes inside
for fuselage ventilation (material is BFE)
New Cap Engine Inlets and Exhaust (No. 1, 2 and [ * ]
3) (material is BFE)
New Remove Oxygen canisters from seats, [ * ]
discharge and pack in hazardous material
drum for shipping/disposal by Federal
Express.
Note: The above pricing assumes the engine shipping stands, TR shipping
containers, APU shipping stand and BFE designated items are furnished
by Federal Express in a timely manner.
* These work cards are to be accomplished on a T&M basis for the
first two Stored Aircraft with NTE exceed pricing as noted and
re-negotiated downward if feasible for subsequent Stored
Aircraft.
+ Price includes loading unit into truck for shipping.
@ Price includes removal of exhaust cone as required for shipping.
- ------------------
*Blank space contained confidential information which has been filed separately
with the Securities and Exchange commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
<PAGE>
07-15-97
Attachment B to
Letter Agreement No. 3
DAC 96-29-M
AIRCRAFT DELIVERY RECEIPT
MDC does hereby accept delivery of one (1)_____________________ aircraft,
Factory Serial no.____________ , FAA Registration No.____________ , together
with three (3)__________________ engines (if installed), Manufacturer's Serial
Nos._______________ ,______________ , and__________________ , together with all
fixed equipment, parts, components and accessories installed thereon and all
loose equipment specified in the inventory list from Federal Express, such
delivery having been made at___________________________________________ , at
_______________(a.m./p.m.) on the__________________day of___________________ ,
in accordance with Letter Agreement No. 3 to DAC 96-29-M between FEDERAL
EXPRESS AND MDC.
MDC does hereby accept delivery of the Aircraft for the services required by
this Letter Agreement No. 3.
MCDONNELL DOUGLAS CORPORATION
BY:
-----------------------------
TITLE:
--------------------------
Fuel on Board: (U.S. gallons)
--------------------
<PAGE>
07-15-97
Attachment C to
Letter Agreement No. 3 to
DAC 96-29-M
AIRCRAFT REDELIVERY RECEIPT
MDC does hereby certify that one (1)_____________________________ aircraft,
Factory Serial no._____________ , FAA Registration No.______________ , together
with three (3)______________engines (if installed), Manufacturer's Serial Nos.
____________ ,__________________ ,________________ , has had services
completed in accordance with Letter Agreement No. 3 to DAC 96-29-M.
Redelivery is hereby made by MDC of the above referenced aircraft together with
all fixed equipment, parts, components and accessories installed thereon and all
loose equipment specified in the inventory list provided by Federal Express at
delivery.
Place: Date: Time:
------------------ --------------------- -------------------------
FEDERAL EXPRESS CORPORATION MCDONNELL DOUGLAS CORPORATION
BY: BY:
------------------------------------
TITLE: TITLE:
------------------------------ --------------------------------
Fuel on Board: (U.S. gallons)
---------------------
<PAGE>
07-15-97
Attachment D to
Letter Agreement No. 3
DAC 96-29-M
Page A-2
ADDITIONAL SERVICES REQUEST
[LOGO] AUTHORIZATION FORM ASR NUMBER _______
- -------------------------------------------------------------------------------
FEDEX GENERATING ITEM: MDC W/O NUMBER:
- -------------------------------------------------------------------------------
TECHNICAL DOCUMENTS AND SPECIFICATIONS:
- -------------------------------------------------------------------------------
GENERAL DESCRIPTION:
- -------------------------------------------------------------------------------
MATERIALS:
- -------------------------------------------------------------------------------
MATERIAL PROVISIONING RESPONSIBILITY: SCHEDULING IMPACT:
/ / MDC / / FedEx
- -------------------------------------------------------------------------------
ESTIMATED MATERIAL COST: ESTIMATED MAN-HOURS:
- -------------------------------------------------------------------------------
DELIVERY DATE: MDC ENGINEERING:
- -------------------------------------------------------------------------------
REDELIVERY DATE: AGREED TO FIXED PRICE:
- -------------------------------------------------------------------------------
OTHER: (Specify)
Authorized By: Date:
------------------------------------------ --------------
Federal Express Corporation
Accepted By: Date:
------------------------------------------ --------------
McDonnell Douglas Corporation
<PAGE>
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EIGHTEENTH SUPPLEMENTAL LEASE AGREEMENT
BY AND BETWEEN
MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY
AND
FEDERAL EXPRESS CORPORATION
DATED AS OF JULY 1, 1997
AMENDING THE CONSOLIDATED AND RESTATED LEASE AGREEMENT DATED AS OF AUGUST 1,
1979 BETWEEN THE MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY AND FEDERAL EXPRESS
CORPORATION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1 Definitions ...................................... 7
2 Granting Leasehold ............................... 7
3 Term; Delivery and Acceptance of Possession ..... 8
4 Rental ........................................... 8
5 Hazardous Substances/Waste........................ 9
6 Lease Agreement Still in Effect; Provisions
Thereof Applicable to this Eighteenth Supplemental
Lease Agreement .................................. 10
7 Descriptive Headings ............................. 11
8 Effectiveness of this Eighteenth Supplemental
Lease Agreement................................... 11
9 Execution of Counterparts ........................ 11
10 Summaries......................................... 11
Notary ........................................... 13
Leased Parcel Summary ............................ 14
Rental Summary ................................... 16
<PAGE>
EIGHTEENTH SUPPLEMENTAL LEASE AGREEMENT
THIS EIGHTEENTH SUPPLEMENTAL LEASE AGREEMENT, made and entered into as of
the 1st of July, 1997, by and between MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY
(herein sometimes referred to as "Authority"), a public and governmental body
politic and corporate of the State of Tennessee, and FEDERAL EXPRESS
CORPORATION (herein sometimes referred to as "Tenant"), a corporation duly
organized and existing under the laws of the State of Delaware and qualified
to do business in the State of Tennessee.
W I T N E S S E T H:
WHEREAS, Authority and Tenant on October 3, 1979 entered into a
Consolidated and Restated Lease Agreement dated as of August 1, 1979; and
WHEREAS, Authority and Tenant on April 7, 1981 entered into a First
Supplemental Lease Agreement dated as of April 1, 1981 (the "First Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land, buildings, and equipment to be included in the Project as
defined in the Lease Agreement all as set forth therein (such additional land,
buildings, and equipment being defined therein and hereinafter referred to as
the "1981 Federal Express Project"), all as set forth therein; and
WHEREAS, the Authority and Tenant on May 6, 1982 entered into a Second
Supplemental Lease Agreement dated as of January 1, 1982 (the "Second
Supplemental Lease Agreement") so as to provide for the lease by Tenant from
Authority of additional land to be included in this Project, all as set forth
therein; and
WHEREAS, Authority and Tenant on December 9, 1982 entered into a Third
Supplemental Lease Agreement dated as of November 1, 1982 (the "Third
Supplemental Lease Agreement") so
3
<PAGE>
as to release certain items consisting of buildings and leased equipment in the
1981 Federal Express Project; and
WHEREAS, Authority and Tenant on September 29, 1983 entered into a Fourth
Supplemental Lease Agreement dated as of July 1, 1983 (the "Fourth Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in the Project, all as set forth therein; and
WHEREAS, Authority and Tenant on April 23, 1984 entered into a Fifth
Supplemental Lease Agreement dated as of February 1, 1984 (the "Fifth
Supplemental Lease Agreement") so as to provide for the lease by Tenant from
Authority of additional land to be included in this Project, all as set forth
therein; and
WHEREAS, Authority and Tenant on November 19, 1984 entered into a Sixth
Supplemental Lease Agreement dated as of April 1, 1984 (the "Sixth Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in this Project, all as set forth therein; and
WHEREAS, Authority and Tenant on November 19, 1984 entered into a Seventh
Supplemental Lease Agreement dated as of June 1, 1984 (the "Seventh Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in this Project, all as set forth therein; and
WHEREAS, Authority and Tenant on November 4, 1988 entered into a Eighth
Supplemental Lease Agreement dated as of July 1, 1988, (the "Eighth Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in this Project, all as set forth therein; and
4
<PAGE>
WHEREAS, Authority and Tenant on July 12, 1989 entered into a Ninth
Supplemental Lease Agreement dated as of June 1, 1989, (the "Ninth Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in this Project, all as set forth therein; and
WHEREAS, Authority and Tenant on October 1, 1991 entered into a Tenth
Supplemental Lease Agreement dated as of October 1, 1991, (the "Tenth
Supplemental Lease Agreement") so as to provide for the lease by Tenant from
Authority of additional land to be included in this Project, all as set forth
therein; and
WHEREAS, Authority and Tenant on July 1, 1994 entered into a Eleventh
Supplemental Lease Agreement dated July 1, 1994, (the "Eleventh Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in this Project, all as set forth therein; and
WHEREAS, Authority and Tenant on July 1, 1993 entered into a Twelfth
Supplemental Lease Agreement dated July 1, 1993, (the "Twelfth Supplemental
Lease Agreement") so as to release a certain parcel of land from the 1981
Federal Express Project as described on Exhibit 1 attached thereto; and
WHEREAS, Authority and Tenant on June 1, 1995 entered into a Thirteenth
Supplemental Lease Agreement dated June 1, 1995, (the "Thirteenth Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in this Project and so as to release a certain
parcel of land from the 1981 Federal Express Project, all as set forth therein;
and
5
<PAGE>
WHEREAS, Authority and Tenant on December 1, 1995 entered into a Fourteenth
Supplemental Lease Agreement dated January 1, 1996, (the "Fourteenth
Supplemental Lease Agreement") so as to provide for the lease by Tenant from
Authority of additional land to be included in this Project, all as set forth
therein; and
WHEREAS, Authority and Tenant on January 1, 1997 entered into a Fifteenth
Supplemental Lease Agreement dated January 1, 1997, (the "Fifteenth Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in this Project, all as set forth therein; and
WHEREAS, Authority and Tenant on April 1, 1997 entered into a Sixteenth
Supplemental Lease Agreement dated April 1, 1997, (the "Sixteenth Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in this Project, all as set forth therein; and
WHEREAS, Authority and Tenant on May 1, 1997 entered into a Seventeenth
Supplemental Lease Agreement dated May 1, 1997, (the "Seventeenth Supplemental
Lease Agreement") so as to provide for the lease by Tenant from Authority of
additional land to be included in this Project, all as set forth therein; and
WHEREAS, the said Consolidated and Restated Lease Agreement dated as of
August 1, 1979, together with the First through the Seventeenth Supplemental
Lease Agreements is herein referred to as the "Lease Agreement"; and
WHEREAS, Authority and Tenant have agreed to further supplement the Lease
Agreement so as to lease to Tenant certain additional land under this Eighteenth
Supplemental Lease Agreement.
6
<PAGE>
NOW THEREFORE, for and in consideration of the mutual promises, covenants
and agreements hereinafter contained to be kept and performed by the parties
hereto and upon the provisions and conditions hereinafter set forth, Authority
and Tenant do hereby covenant and agree, and each for itself does hereby
covenant and agree, as follows:
SECTION 1. DEFINITIONS. Except as otherwise provided herein, and unless
the context shall clearly require otherwise, all words and terms used in
this Eighteenth Supplemental Lease Agreement which are defined in the Lease
Agreement, shall, for all purposes of this Eighteenth Supplemental Lease
Agreement, have the respective meanings given to them in the Lease Agreement.
SECTION 2. GRANTING OF LEASEHOLD. In addition to the lease and demise to
Tenant of the land in the Lease Agreement, the Authority hereby leases and
demises to Tenant, and Tenant hereby takes and hires from Authority, subject to
the provisions and conditions set forth in the Lease Agreement and this
Eighteenth Supplemental Lease Agreement, the additional land designated as new
Lease Parcels 38 and 39 which is located on the Memphis-Shelby County Airport
Authority property situated in Memphis, Shelby County, Tennessee, and being more
particularly described as follows:
PARCEL 38
(WEST GSE LOT)
Being a portion of land contained entirely within the Memphis/Shelby County
Airport Authority property, City of Memphis, Shelby County, State of
Tennessee and being more particularly described by metes and bounds as
follows:
COMMENCING at a point being the intersection of the centerline of Taxiway
Zulu with the centerline of Taxiway Charlie, said point being N01DEG.
56'39"E, a distance of 736.87' from the existing centerline of Runway 9/27;
thence northerly along said centerline of Taxiway Charlie, N01DEG. 56'39"E
a distance of 136.15' to a point; thence westerly departing from said
centerline of Taxiway Charlie, N88DEG. 03'21"W a distance of 160.00' to a
point, said point being the TRUE POINT OF BEGINNING; thence westerly along
a line being 129.50' north of and parallel with the centerline of said
Taxiway Zulu N85DEG. 42'55"W a distance of 356.31' to a point, said point
7
<PAGE>
being 100.00' southeast of the centerline of Runway 3/21 (Closed); thence
northeasterly along a line being 100.00' southeast of and parallel with the
said centerline of Runway 3/21 (Closed) N32DEG.30'14"W a distance of
700.21' to a point, said point being 160.00' west of the said centerline of
Taxiway Charlie; thence southerly along a line being 160.00' west of and
parallel with the said centerline of Taxiway Charlie S01DEG. 56'39"W a
distance of 617.51' to the POINT OF BEGINNING. Said described land
containing 109,921 square feet or 2.523 acres, more or less.
PARCEL 39
(FEEDER RAMP)
Being a part of the Memphis-Shelby County Airport Authority property,
located at the Memphis International Airport within the City of Memphis,
Shelby County, State of Tennessee and being more particularly described by
metes and bounds as follows:
Commencing at the centerline intersection of Taxiway "Charlie" and Taxiway
"Zulu"; then northerly along said centerline of Taxiway "Charlie" N01DEG.
56'39"E a distance of 1510.49' to a point; thence westerly departing from
said centerline of Taxiway "Charlie" and perpendicular to said Taxiway
"Charlie" N88DEG. 03'21"W a distance of 160.00" to a point, said point
being the TRUE POINT OF BEGINNING; thence continuing westerly N88DEG.
03'21"W a distance of 584.25' to a point; thence northerly N01DEG. 56'39"E
a distance of 552.50' to a point; thence easterly S88DEG. 03'21"E a
distance of 200.00' to a point; thence northerly N01DEG. 56'39"E a distance
of 25.00' to a point; thence easterly S88DEG. 03'21"E a distance of 25.00'
to a point; thence northerly N01DEG. 56'39"E a distance of 75.00' to a
point; thence easterly S88DEG. 03'21"E a distance of 266.00' to a point;
thence northerly N01DEG. 56'39"E a distance of 54.49' to a point; thence
easterly S88DEG. 03'21"E a distance of 93.25' to a point, said point being
160.00' west of the said centerline of Taxiway "Charlie"; thence southerly
parallel with and 160.00' west of said Taxiway "Charlie" S01DEG. 56'39"W a
distance of 706.99' to the POINT OF BEGINNING. Said described property
containing 364,430 square feet or 8.366 acres, more or less.
SECTION 3. TERM; DELIVERY AND ACCEPTANCE OF POSSESSION. The terms of
this Eighteenth Supplemental Lease Agreement shall commence at 12:01 A.M. on
July 1, 1997 for the land described as Parcels 38 and 39 and shall expire at
such time as the Lease Agreement shall expire, to-wit: August 31, 2012 or upon
such earlier termination, extension or otherwise as provided therein. Authority
shall deliver to Tenant sole and exclusive possession of that portion of the
land, leased hereby as of the date commencement of the term hereof, subject
however, to Authority's right-of-entry set forth in Section 21 of the Lease
Agreement.
SECTION 4. RENTAL. In addition and supplemental to the rentals
required to be paid to the Authority pursuant to Section 5 of the Lease
Agreement (including all prior supplemental
8
<PAGE>
lease agreements), during the term of this Eighteenth Supplemental Lease
Agreement, Tenant shall pay to the Authority in advance on the first business
day of each month $3,858.06 in equal installments beginning July 1, 1998, a
total rental payment of $46,296.66 per year, which the parties hereto agree is
based upon an aggregate of 474,351 square feet of area at an annual rental rate
of ($0.0976) per square foot.
SECTION 5. HAZARDOUS SUBSTANCES/WASTE. Tenant, at its own expense, may
arrange for a Phase 1 Environmental Survey on the land described as Parcel 38
and Parcel 39 by a reputable environmental consultant to determine the existence
of "Hazardous Substances", as such term is defined in this Agreement. In the
event that "Hazardous Substances" are discovered during excavation for
construction on Parcel 38 and Parcel 39, and such "Hazardous Substances" require
special handling, removal or disposal ("Remediation"), then Tenant shall
immediately notify Authority. The Tenant and Authority will confer and jointly
determine the method for handling, removing or disposing of the "Hazardous
Substances" within 14 days after Tenant provides the Authority, in writing, its
plan for Remediation. The form of Remediation agreed to by the parties must
comply with "Environmental Laws", as such term is defined below. In the event
that Tenant and Authority are unable to agree on a method for handling, removing
or disposing of the "Hazardous Substances" due to differing interpretations of
the requirements for Remediation as set forth in the applicable "Environmental
Laws", then the form of Remediation will be determined by the appropriate
federal, state or local agency with relevant regulatory and enforcement
jurisdiction over the subject site. Authority will grant to Tenant a rent
credit equal to the reasonable documented costs paid by Tenant for the
Remediation such "Hazardous Substances" associated with Parcel 38 and Parcel 39.
9
<PAGE>
The term "HAZARDOUS SUBSTANCES", as used in this Eighteenth Supplemental
Lease Agreement, shall mean any hazardous or toxic substances, materials or
wastes, including, but not limited to, those substances, materials, and wastes
(i) listed in the United States Department of Transportation Hazardous Materials
Table (49 CFR Section 172.101) or by the Environmental Protection Agency as
hazardous substances (40 CFR Part 302) and amendments thereto, (ii) designated
as a "Hazardous Substance" pursuant to Section 311 of the Clean Water Act, 33
U.S.C. Section 1251 et seq. (33 U.S.C. Section 1321) or listed pursuant to
Section 307 of the Clean Water Act (33 U.S.C. Section 1317, (iii) defined as a
"Hazardous Waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901, et seq. (42 U.S.C. Section 6903), or (iv)
defined as "Hazardous Substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C.Section 9601,
et seq. 42 U.S.C. Section 9601) or any other substances, (including, without
limitation, asbestos and raw materials which include hazardous constituents),
the general, discharge or removal of which or the use of which is restricted,
prohibited or penalized by any "Environmental Law", which term shall mean any
Federal, State or local law, regulation, or ordinance relating to pollution or
protection of the environment.
SECTION 6. LEASE AGREEMENT STILL IN EFFECT; PROVISIONS THEREFORE
APPLICABLE TO THIS SUPPLEMENTAL LEASE AGREEMENT. All of the terms, provisions,
conditions, covenants and agreements of the Lease Agreement, as supplemented,
shall continue in full force and effect as supplemented hereby, and shall be
applicable to each of the provisions of this Eighteenth Supplemental Lease
Agreement during the term hereof with the same force and effect as though the
provisions hereof were set forth in the Lease Agreement.
10
<PAGE>
SECTION 7. DESCRIPTIVE HEADINGS. The descriptive headings of the sections
of this Eighteenth Supplemental Lease Agreement are inserted for convenience of
reference only and do not constitute a part of this Eighteenth Supplemental
Lease Agreement and shall not affect the meaning, construction, interpretation
or effect of this Eighteenth Supplemental Lease Agreement.
SECTION 8. EFFECTIVENESS OF THIS SUPPLEMENTAL LEASE AGREEMENT. This
Eighteenth Supplemental Lease Agreement shall become effective at 12:01 a.m. on
July 1, 1997.
SECTION 9. EXECUTION OF COUNTERPARTS. This Eighteenth Supplemental Lease
Agreement may be simultaneously executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.
SECTION 10. SUMMARIES. For the convenience of both parties a Leased
Parcel Summary and a Rental Summary are attached to this Lease Agreement.
11
<PAGE>
IN WITNESS WHEREOF, THE MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY AND
FEDERAL EXPRESS CORPORATION have caused this Eighteenth Supplemental Lease
Agreement to be duly executed in their respective behalfs, as of the day and
year first above written.
WITNESS: MEMPHIS-SHELBY COUNTY AIRPORT
AUTHORITY
/S/J. McMICHAEL BY: /S/LARRY D. COX
- ------------------------------- -------------------------------
TITLE: EXECUTIVE VICE PRESIDENT TITLE: PRESIDENT
------------------------- -----------------------------
Approved as to Form and Legality:
/S/R. GRATTAN BROWN, JR.
- -----------------------------------
R. Grattan Brown, Jr., Attorney for Authority
WITNESS: FEDERAL EXPRESS CORPORATION
/S/LEANNA M. JOHNSON BY: /S/WILEY JOHNSON, JR.
- ------------------------------ -----------------------------------
TITLE: Project Coordinator TITLE: Managing Director, Real Estate
---------------------- --------------------------------
And Airport Development
--------------------------------
12
<PAGE>
(STATE OF TENNESSEE )
(COUNTY OF SHELBY )
On this 4th day of July, 1997, before me appeared LARRY D. COX, to me
personally known, who, being by me duly sworn (or affirmed), did say that he
is the President of the Memphis-Shelby County Airport Authority, the within
named Lessor, and that he as such President, being authorized so to do,
executed the foregoing instrument for the purposes therein contained, by
signing the name of the Authority by himself as such President.
MY COMMISSION EXPIRES
9/17/97 /S/Carol D. Wolfe
- ------------------------- ------------------------------
Notary Public
(seal)
STATE OF TENNESSEE )
COUNTY OF SHELBY )
On this 1st day of JULY, 1997, before me appeared Wiley Johnson, Jr., to
me personally known, who, being by me duly sworn (or affirmed), did say that
he is the MANAGING DIRECTOR OF REAL ESTATE of Federal Express Corporation,
the within named Lessee, and that he as such MANAGING DIRECTOR, being
authorized so to do, executed the foregoing instrument for the purposes
therein contained, by signing the name of the Corporation by himself as such
MANAGING DIRECTOR.
MY COMMISSION EXPIRES
My Commission Expires: Dec. 7, 1998 /S/Leanna M. Johnson
- --------------------------------------- -----------------------------
Notary Public
(seal)
13
<PAGE>
FEDERAL EXPRESS LEASED PARCELS SUMMARY
PARCEL EFFECTIVE
LEASE ACRES SQUARE FEET AGREEMENT DATE
- ------ ----- ----------- --------- ----
BASE-LEASE
----------
Revised 9 128.469 Consolidated & 08/01/79
Restated
10 1.612 70,200 Consolidated & 08/01/79
Restated
11 1.044 45,359 Consolidated & 08/01/79
Restated
PREVIOUS SUPPLEMENTS
--------------------
12 2.707 117,915 First 04/01/81
Supplemental
13 6.860 298,830 Second 01/01/82
Supplemental
14 14.586 635,377 Fourth 07/01/83
Supplemental
15 12.689 552,723 Fourth 07/01/83
Supplemental
Rev 16 18.281 (19.685) 796,312 Fifth 02/01/84
Supplemental
Rev 17 19.616 (124.992) 5,210,477 Sixth 04/01/84
Supplemental
18 2.717 118,353 Sixth 04/01/84
Supplemental
19 41.606 1,812,352 Seventh 06/01/84
Supplemental
25 0.435 18,933 Eighth 07/01/88
Supplemental
20 11.275 491,127 Ninth 06/01/89
Supplemental
27 11.192 487,512 Tenth 10/01/91
Supplemental
27 A(West) 4.058 176,777 Eleventh 07/01/94
Supplemental
27 B(West) 5.706 248,533 Eleventh 07/01/94
Supplemental
Southwest
Ramp 2.350 102,366 Eleventh 07/01/94
Supplemental
14
<PAGE>
PARCEL EFFECTIVE
LEASE ACRES SQUARE FEET AGREEMENT DATE
- ------ ----- ----------- --------- ---------
32 (removed) 22.972 1,000,681 Twelfth 07/01/93
Supplemental
33 8.998 391,942 Thirteenth 06/01/95
Supplemental
36 3.050 132,837 Thirteenth 06/01/95
Supplemental
Hangar 8 (removed) 36,946,33 Thirteenth 06/01/95
Supplemental
34 9.951 433,461 Fourteenth 01/01/96
Supplemental
21 19.134 833,476 Fifteenth 01/01/97
Supplemental
22A (North) 3.214 140,000 Sixteenth 04/01/97
Supplemental
37 2.692 117,283 Seventeenth 05/01/97
Supplemental
THIS SUPPLEMENT
---------------
38 2.523 109,921 EIGHTEENTH 07/01/97
SUPPLEMENTAL
39 8.366 364,430 EIGHTEENTH 07/01/97
SUPPLEMENTAL
OPTIONS
-------
22B (South) 3.310 144,200 Option, Expires 5/31/99
29 3.85 167,706 Option, Expires 9/30/2001
ASSIGNMENTS
-----------
23 5.923 258,008 Graber Assignment,
Expires 12/31/2000
Invoice FEC
Final Increase 1/1/96
24 9.964 434,030 Southwide Assignment
Expires 5/14/2013
Invoice FEC
Next Increase 5/15/98
26 9.532 415,213 BICO Assignment,
Expires 7/31/2021
Invoice FEC
Next Increase 8/01/2011
28 10.68 465,221 Equitable Life Assignment
Expires 5/14/2013
Invoice FEC
Next Increase 5/15/98
15
<PAGE>
RENTAL - FEDERAL EXPRESS
Effective July 1, 1998
ANNUAL
CATEGORY NUMBER OF RENTAL RATE
OF SPACE SQUARE FEET PER SQ. FT. ANNUAL RENTAL
- -------- ----------- ----------- -------------
Bldg. T-376 1,240 1.221 $ 1,514.04
Unimproved Ground 6,043,916 0.098 592,303.77
Improved Apron 2,395,802 0.122 292,287.84
Hangar Property 72,092.67 0.903 65,099.68
Hangar Office 28,000 1.465 41,020.00
International Park 9,694,700 0.171 1,657,793.70
Former IRS Facility 2,255,137.24 1,200,000.00
------------- -------------
20,490,887.91 $3,850,019.03
BREAKDOWN OF SPACE
------------------
SQ. FT. SQ. FT.
--------- ---------
Bldg. T-376 Parcel 4 1,240
- ----------- ---------
1,240
UNIMPROVED GROUND Parcel 1 130,900
Parcel 2 50,000
Parcel 3 192,400
Parcel 4 32,540
Parcel 6 89,700
Parcel 9 1,167,337
Parcel 19 1,812,362
Parcel 20 491,127
Parcel 27A 176,777
Parcel 27B 248,533
Southwest Ramp 102,366
Parcel 33 391,942
Parcel 36 132,837
Parcel 34 433,461
Parcel 37 117,283
Parcel 38 109,921
Parcel 39 364,430
---------
6,043,916
IMPROVED APRON Parcel 1 850,250
Parcel 2 226,900
Parcel 7 577,540
Parcel 9 253,600
Parcel 27 487,512
-------
2,395,802
16
<PAGE>
SQ. FT. SQ. FT.
--------- ---------
HANGAR PROPERTY Parcel 1 44,336
Parcel 2 27,756.67
---------
72,092.67
HANGAR OFFICE Parcel 1 22,400
Parcel 2 5,600
------ 28,000
INTERNATIONAL PARK Parcel 5 24,000
Parcel 8 247,254
Parcel 9 1,586,172
Parcel 10 70,200
Parcel 11 45,359
Parcel 12 117,915
Parcel 13 298,830
Parcel 14 556,334
Parcel 15 552,723
Parcel 16 796,312
Parcel 17 4,288,839
Parcel 18 118,353
Parcel 25 18,933
Parcel 21 833,476
Parcel 22A 140,000
------------
9,694,700
FORMER IRS FACILITY 2,255,137.24 2,255,137.24
------------
TOTAL: 20,490,887.91
17
<PAGE>
EXHIBIT 11.1
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Net income applicable to common and common equivalent shares and the
weighted average number of shares used in the calculation of earnings per share
for the three-month periods ended August 31, 1997 and 1996 were as follows (in
thousands, except per share amounts):
Three Months Ended
August 31,
----------------------
1997 1996
-------- --------
Net income applicable to common and
common equivalent shares. . . . . . . . . . . . . $143,257 $ 61,950
-------- --------
-------- --------
Average shares of common stock outstanding. . . . . 114,970 113,844
Common Equivalent Shares:
Assumed exercise of outstanding dilutive
options . . . . . . . . . . . . . . . . . . . . 6,999 5,233
Less shares repurchased from proceeds of assumed
exercise of options . . . . . . . . . . . . . . (4,626) (4,143)
-------- --------
Average common and common equivalent shares . . . . 117,343 114,934
-------- --------
-------- --------
Earnings per share. . . . . . . . . . . . . . . . . $ 1.22 $ .54
-------- --------
-------- --------
The computation of the number of shares repurchased from the proceeds of
the assumed exercise of outstanding dilutive options is based upon the average
market price of the Company's common stock during the periods. Common
equivalent shares are excluded in periods in which their assumed exercise would
have an anti-dilutive effect.
Fully diluted earnings per share are substantially the same as earnings per
share.
<PAGE>
EXHIBIT 12.1
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended May 31, August 31,
---------------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- ---------- ---------- -------- --------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes . . . . . . . . . $203,576 $378,462 $522,084 $ 539,959 $ 628,221 $107,739 $246,995
Add back:
Interest expense, net of
capitalized interest . . . . . . . . . 168,762 152,170 130,923 105,449 95,689 22,875 27,364
Amortization of debt
issuance costs . . . . . . . . . . . . 4,906 2,860 2,493 1,628 1,328 335 337
Portion of rent expense
representative of
interest factor. . . . . . . . . . . . 262,724 285,261 329,370 386,254 434,846 102,983 111,883
-------- -------- -------- ---------- ---------- -------- --------
Earnings as adjusted . . . . . . . . . . . . $639,968 $818,753 $984,870 $1,033,290 $1,160,084 $233,932 $386,579
-------- -------- -------- ---------- ---------- -------- --------
-------- -------- -------- ---------- ---------- -------- --------
Fixed Charges:
Interest expense, net of
capitalized interest. . . . . . . . . . . $168,762 $152,170 $130,923 $ 105,449 $ 95,689 $ 22,875 $ 27,364
Capitalized interest . . . . . . . . . . . . 31,256 29,738 27,381 39,254 39,449 10,036 9,987
Amortization of debt
issuance costs. . . . . . . . . . . . . . 4,906 2,860 2,493 1,628 1,328 335 337
Portion of rent expense
representative of
interest factor.. . . . . . . . . . . . . 262,724 285,261 329,370 386,254 434,846 102,983 111,883
-------- -------- -------- ---------- ---------- -------- --------
$467,648 $470,029 $490,167 $ 532,585 $ 571,312 $136,229 $149,571
-------- -------- -------- ---------- ---------- -------- --------
-------- -------- -------- ---------- ---------- -------- --------
Ratio of Earnings to Fixed Charges . . . . . 1.4 1.7 2.0 1.9 2.0 1.7 2.6
-------- -------- -------- ---------- ---------- -------- --------
-------- -------- -------- ---------- ---------- -------- --------
</TABLE>
<PAGE>
EXHIBIT 15.1
October 6, 1997
Federal Express Corporation
2005 Corporate Avenue
Memphis, Tennessee 38132
We are aware that Federal Express Corporation will be incorporating by reference
in its previously filed Registration Statements No. 2-74000, 2-95720, 33-20138,
33-38041, 33-55055, 333-03443, and 333-07691 its Report on Form 10-Q for the
quarter ended August 31, 1997, which includes our report dated October 6, 1997
covering the unaudited interim financial information contained therein. Pursuant
to Regulation C of the Securities Act of 1933, that report is not considered
part of these registration statements prepared or certified by our firm or a
report prepared or certified by our firm within the meaning of Sections 7 and 11
of the Act.
Very truly yours,
Arthur Andersen LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED STATEMENTS OF INCOME ON
PAGES 3-5 OF THE COMPANY'S FORM 10Q FOR THE QUARTERLY PERIOD ENDING AUGUST 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 209,782
<SECURITIES> 0
<RECEIVABLES> 1,811,280
<ALLOWANCES> 40,164
<INVENTORY> 323,532
<CURRENT-ASSETS> 2,514,505
<PP&E> 10,083,465
<DEPRECIATION> 5,371,533
<TOTAL-ASSETS> 8,019,356
<CURRENT-LIABILITIES> 2,140,436
<BONDS> 1,438,233
0
0
<COMMON> 11,504
<OTHER-SE> 3,091,834
<TOTAL-LIABILITY-AND-EQUITY> 8,019,356
<SALES> 0
<TOTAL-REVENUES> 3,297,218
<CGS> 0
<TOTAL-COSTS> 3,033,013
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,828
<INCOME-PRETAX> 246,995
<INCOME-TAX> 103,738
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,257
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
