<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, 1999, 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
(State of incorporation) 71-0427007
(I.R.S. Employer
2005 Corporate Avenue Identification No.)
Memphis, Tennessee
(Address of principal 38132
executive offices) (Zip Code)
(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 |_|
The number of shares of common stock outstanding as of September 30, 1999 was
1,000. The Registrant is a wholly-owned subsidiary of FDX Corporation, and there
is no market for the Registrant's common stock.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT
PERMITTED BY GENERAL INSTRUCTION H(2).
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed Consolidated Balance Sheets
August 31, 1999 and May 31, 1999................................ 3-4
Condensed Consolidated Statements of Income
Three Months Ended August 31, 1999 and 1998..................... 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 1999 and 1998..................... 6
Notes to Condensed Consolidated Financial Statements................. 7-9
Review of Condensed Consolidated Financial Statements
by Independent Public Accountants............................... 10
Report of Independent Public Accountants............................. 11
Management's Discussion and Analysis of Results of Operations
and Financial Condition......................................... 12-19
PART II. OTHER INFORMATION
Legal Proceedings.................................................... 20
Exhibits and Reports on Form 8-K..................................... 20
EXHIBIT INDEX........................................................ E-1
</TABLE>
- 2 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
August 31,
1999 May 31,
(Unaudited) 1999
----------------------------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.....................................$ 98,373 $ 88,238
Receivables, less allowances of $56,493,000
and $45,432,000............................................. 1,817,188 1,840,613
Spare parts, supplies and fuel................................ 262,777 272,614
Deferred income taxes......................................... 226,843 220,709
Prepaid expenses and other.................................... 37,578 56,241
----------- -----------
Total current assets...................................... 2,442,759 2,478,415
Property and Equipment, at Cost.................................... 12,524,349 12,197,086
Less accumulated depreciation and amortization................ 6,668,180 6,454,579
----------- -----------
Net property and equipment................................ 5,856,169 5,742,507
Other Assets:
Goodwill...................................................... 336,508 339,425
Other......................................................... 526,939 555,628
----------- -----------
Total other assets........................................ 863,447 895,053
----------- -----------
$ 9,162,375 $ 9,115,975
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND OWNER'S EQUITY
August 31,
1999 May 31,
(Unaudited) 1999
----------- ------------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt.......................... $ 2,436 $ 14,938
Accrued salaries and employee benefits..................... 541,134 615,247
Accounts payable........................................... 912,634 983,350
Accrued expenses .......................................... 769,065 692,599
Due to parent company...................................... - 62,720
---------- ----------
Total current liabilities.............................. 2,225,269 2,368,854
Long-Term Debt, Less Current Portion ........................... 1,159,203 1,159,126
Deferred Income Taxes........................................... 216,607 221,509
Other Liabilities............................................... 1,581,880 1,502,481
Commitments and Contingencies (Notes 2 and 3)
Owner's Equity:
Common Stock, $.10 par value;
1,000 shares authorized, issued and outstanding.......... - -
Additional paid-in capital................................. 894,718 894,718
Retained earnings.......................................... 3,109,282 2,995,076
Accumulated other comprehensive income..................... (24,584) (25,789)
---------- ---------
Total owner's equity................................... 3,979,416 3,864,005
---------- ----------
$9,162,375 $9,115,975
---------- ----------
---------- ----------
</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,
----------------------------
1999 1998
------------- -----------
(In thousands)
<S> <C> <C>
Revenues......................................................$3,586,806 $3,417,183
Operating Expenses:
Salaries and employee benefits........................... 1,609,060 1,540,761
Rentals and landing fees................................. 346,742 313,422
Maintenance and repairs.................................. 238,281 228,739
Depreciation and amortization............................ 242,077 220,200
Fuel..................................................... 180,821 146,578
Other.................................................... 760,882 748,411
---------- ----------
3,377,863 3,198,111
---------- ----------
Operating Income.............................................. 208,943 219,072
Other Income (Expense):
Interest, net............................................ (19,024) (21,952)
Other, net............................................... (1,149) (4,438)
---------- ----------
(20,173) (26,390)
---------- ----------
Income Before Income Taxes.................................... 188,770 192,682
Provision for Income Taxes.................................... 74,564 79,963
---------- ----------
Net Income....................................................$ 114,206 $ 112,719
---------- ----------
---------- ----------
</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,
----------------------------
1999 1998
------------- -----------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities.....................$ 206,385 $ 322,119
Investing Activities:
Purchases of property and equipment...................... (307,240) (452,541)
Proceeds from disposition of property
and equipment:
Reimbursements of A300 and MD11 deposits............. 22,377 23,630
Other dispositions................................... 82,567 44,225
Other, net............................................. 257 71
--------- ---------
Net cash used in investing activities......................... (202,039) (384,615)
Financing Activities:
Principal payments on debt............................... (12,500) (6,000)
Borrowings from parent company........................... 18,289 78,178
--------- ---------
Net cash provided by financing activities..................... 5,789 72,178
--------- ---------
Net increase in cash and cash equivalents..................... 10,135 9,682
Cash and cash equivalents at beginning of period.............. 88,238 104,606
--------- ---------
Cash and cash equivalents at end of period....................$ 98,373 $ 114,288
--------- ---------
--------- ---------
Cash payments for:
Interest (net of capitalized interest)...................$ 18,199 $ 13,727
--------- ---------
--------- ---------
Income taxes.............................................$ 12,943 $ 18,653
--------- ---------
--------- ---------
Non-cash investing and financing activities:
Fair value of assets surrendered under
exchange agreements (with two airlines)................$ 11,670 $ 10,446
Fair value of assets acquired under
exchange agreements.................................... 9,674 6,690
--------- ---------
Fair value of assets surrendered in excess
of assets acquired.....................................$ 1,996 $ 3,756
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements of the Company 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 the Company's Annual
Report on Form 10-K for the year ended May 31, 1999. 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 the Company as of August 31, 1999
and the consolidated results of its operations and cash flows for the
three-month periods ended August 31, 1999 and 1998. Operating results for the
three-month period ended August 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending May 31, 2000.
Effective June 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The Statement
requires the Company to include within its financial statements information on
comprehensive income, which is defined as all activity impacting equity from
non-owner sources. For the Company, comprehensive income includes net income and
foreign currency translation adjustments. The foreign currency translation
adjustments were income of $1,205,000, net of taxes of $154,000, and loss of
$13,445,000, net of tax benefit of $3,376,000, for the three months ended August
31, 1999 and 1998, respectively. Total comprehensive income, net of taxes, for
the respective periods was $115,411,000 and $99,274,000.
On May 31, 1999, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Statement establishes standards for reporting information about operating
segments. The Company is in a single line of business and operates in one
business segment - the worldwide express transportation and distribution of
goods and documents.
Certain prior period amounts have been reclassified to conform to the
current presentation.
- 7 -
<PAGE>
(2) COMMITMENTS
As of August 31, 1999, the Company's purchase commitments for the
remainder of 2000 and annually thereafter under various contracts are as follows
(in thousands):
<TABLE>
<CAPTION>
Aircraft-
Aircraft Related(1) Other(2) Total
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
2000(remainder) $199,300 $259,700 $366,000 $825,000
2001 311,700 311,100 60,600 683,400
2002 315,200 359,300 8,500 683,000
2003 378,100 331,800 - 709,900
2004 200,800 142,300 - 343,100
</TABLE>
(1) Primarily aircraft modifications, rotables, spare parts and spare engines.
(2) Vehicles, facilities, computers and other equipment.
The Company is committed to purchase one A310, two A300s, 30 MD11s and 75
Ayres ALM 200s to be delivered through 2007. Deposits and progress payments of
$6,217,000 have been made toward these purchases.
The Company has entered into agreements with two airlines to acquire 53
DC10 aircraft (41 of which had been received as of August 31, 1999), 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 24 additional DC10s along with
additional aircraft engines and equipment.
During the three-month period ended August 31, 1999, the Company acquired
three A300s and one MD11 under operating leases. These aircraft were included as
purchase commitments as of May 31, 1999. 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, 1999 for the three A300s and one
MD11 are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 13,800
2001 21,800
2002 21,700
2003 22,100
2004 23,700
Thereafter 490,100
</TABLE>
(3) LEGAL PROCEEDINGS
There are two 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
transportation of property shipped by air after the excise tax expired on
December 31, 1995, until it was reinstated in August 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. One case was filed in Circuit Court of
Greene County, Alabama. On October 6, 1999, the Greene County Circuit Court
dismissed all claims against the Company by entering summary judgment. The
plaintiffs have 42 days from the date of this judgment to appeal to the
Alabama Supreme Court.
- 8 -
<PAGE>
The other case, which was filed in the Supreme Court of New York, New
York County, and contained allegations and requests for relief substantially
similar to the Alabama case, was dismissed with prejudice on the Company's
motion on October 7, 1997. The Court found that there was no breach of
contract and that the other causes of action were preempted by federal law.
The plaintiffs appealed the dismissal. 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 dismissal was affirmed by the appellate court on March 2,
1999. The plaintiffs have until October 18, 1999 to seek permission to appeal
to the highest New York appellate court. If the plaintiffs either fail to
seek appeal before October 18, 1999 or if the court refuses permission to
appeal as of such date, the dismissal of this case will become final.
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 1997, 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 this contingency.
The Company is subject to other legal proceedings and claims that 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.
(4) RELATED PARTY TRANSACTIONS
As of August 31, 1999, the Company had a receivable balance due from its
parent, FDX Corporation, of $64,060,000. Included in the receivable amount is an
intercompany operating receivable of $1,088,000 included in Current Assets and
$63,100,000 included in Other Assets. The net amount due from FDX Corporation as
of May 31, 1999 was $18,541,000. This amount comprises an intercompany operating
payable of $62,720,000 included in Current Liabilities and $81,300,000 included
in Other Assets. The long-term amounts primarily represent the net activity from
participation in FDX Corporation's consolidated cash management program.
- 9 -
<PAGE>
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, 1999, and the related condensed consolidated statements of income and cash
flows for the three-month periods ended August 31, 1999 and 1998, included
herein, as indicated in their report thereon included on page 11.
- 10 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Federal Express Corporation:
We have reviewed the accompanying condensed consolidated balance sheet
of Federal Express Corporation and subsidiaries as of August 31, 1999 and the
related condensed consolidated statements of income and cash flows for the
three-month periods ended August 31, 1999 and 1998. 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 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, 1999 and the related consolidated
statements of income, changes in owner's equity and comprehensive income and
cash flows for the year then ended. In our report dated June 29, 1999, 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, 1999 is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Memphis, Tennessee
September 15, 1999
- 11 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Current quarter results reflect higher fuel prices and lower than
expected volume growth in the U.S. domestic markets. Increased fuel costs
negatively affected first quarter operating income by $26 million compared to
the prior year. Strong package volume growth in certain international markets
contributed positively to the quarter's earnings.
Higher fuel costs and recent trends in domestic and international
package volume growth are expected to continue for the remainder of 2000. If
fuel costs continue at projected levels, operating income for the year could
be negatively impacted by more than $150 million compared to the prior year.
Stronger cost controls to restrain short-term spending combined with
productivity enhancements have been implemented in light of lower volume
growth. Certain capital spending projects are being delayed; however, the
Company plans to continue to make strategic capital investments in support of
its long-term growth goals.
Actual results for the remainder of 2000 may vary depending upon many
factors such as economic growth rates, rates of volume growth in the U.S.
domestic markets, the actions of competitors, the spot price of aviation fuel
(which has continued to increase in the early part of the Company's second
quarter), the extent to which the Company enters into contracts designed to
limit its exposure to fluctuations in jet fuel prices, and the amount and
timing of temporary fuel surcharges or other pricing actions, if any.
- 12 -
<PAGE>
The following table compares revenues and operating income (in millions)
and selected statistics (in thousands, except yield amounts) for the three
months ended August 31:
<TABLE>
<CAPTION>
Percent
1999 1998 Change
---- ---- ------
<S> <C> <C> <C>
Revenues:
Package:
U.S. overnight $1,832 $1,779 + 3
U.S. deferred 559 544 + 3
International Priority (IP) 819 725 +13
----- -----
Total package revenue 3,210 3,048 + 5
Freight:
U.S. 130 100 +30
International 127 134 - 5
------ ------
Total freight revenue 257 234 +10
Other 120 135 -12
------ ------
Total revenues $3,587 $3,417 + 5
====== ======
Operating income $ 209 $ 219 - 5
====== ======
Package statistics:
Average daily packages:
U.S. overnight 1,953 1,880 + 4
U.S. deferred 839 835 + 1
IP 297 265 +12
------ ------
Composite 3,089 2,980 + 4
Revenue per package (yield):
U.S. overnight $ 14.44 $ 14.33 + 1
U.S. deferred 10.25 9.88 + 4
IP 42.42 41.45 + 2
Composite 15.99 15.50 + 3
Freight statistics:
Average daily pounds:
U.S. 4,555 3,930 +16
International 2,505 2,620 - 4
------- -------
Composite 7,060 6,550 + 8
Revenue per pound (yield):
U.S. $ .44 $ .39 +13
International .78 .77 + 1
Composite .56 .54 + 4
</TABLE>
- 13 -
<PAGE>
Revenues
Package revenue increased as the Company experienced increases in both
package volume and revenue per package (yield) in the current quarter. The most
significant increase in revenues was in the higher-yielding IP services, which
experienced significant growth, particularly in Asia, and an improved growth
rate in U.S. outbound shipments. U.S. deferred package volume was consistent
with prior year first quarter levels, due, in part, to management actions to
restrict growth of these lower-yielding services. List price increases,
including an average 2.8% domestic rate increase in March 1999, and other yield
management actions also contributed to the higher yields in the current quarter.
Management expects these trends in package volume and yield to continue
throughout 2000. Actual results, however, may vary depending on a number of
factors, including the impact of competitive pricing changes, customer responses
to yield-management initiatives, changing customer demand patterns, actions by
the Company's competitors, regulatory conditions for aviation rights and
economic conditions.
Total freight revenue also increased in the current quarter, due to higher
average daily pounds and yields in the U. S. freight market. International
freight revenue continued to decline in line with management's expectations.
Other revenue included sales of engine noise reduction kits, charter
services, Canadian domestic revenue, logistics services and other.
Operating Income
Operating income declined due to higher fuel costs and lower than
expected growth in U.S. package services. Aircraft fuel expenses increased 26%
over the prior year quarter. Average cost per gallon increased 20% and gallons
consumed increased 5%. From time to time, the Company may enter into contracts
designed to limit its exposure to fuel price fluctuations, the timing and
magnitude of which may vary due to availability and pricing of such contracts.
No such contracts were in place in either the current or prior year's first
quarter. If the current trends continue, the Company may also take other actions
related to fuel costs, including, but not limited to, implementing temporary
fuel surcharges or other pricing actions.
Rentals and landing fees increased due to an increase in aircraft and
facilities leases entered into due to planned volume growth. Aircraft lease
expense rose 15% over the prior year quarter. As of August 31, 1999, the Company
had 100 wide-bodied aircraft under operating lease compared with 89 as of August
31, 1998. Management expects year-over-year increases in lease expense to
continue if the Company enters into additional aircraft rental agreements during
2000 and thereafter.
Maintenance and repairs increased 4% in the first quarter compared to the
prior year period. Given the Company's increasing fleet size, aging fleet and
variety of aircraft types, management believes that maintenance and repairs
expense for the remainder of 2000 will increase at a rate higher than that
experienced in the first quarter. In part, this higher expense will likely be
attributed to scheduled maintenance and repairs expense and a greater number of
routine cycle checks resulting from fleet usage and certain Federal Aviation
Administration directives.
Salaries and employee benefits increased only 4% in the first quarter as
higher costs in connection with the agreement with the Fedex Pilots Association
were offset by improved productivity and lower provisions for variable
compensation.
Contributions from the sales of engine noise reduction kits declined $14
million year over year. Management expects similar declines for each of the
remaining quarters of the year.
- 14 -
<PAGE>
Other Income and Expense and Income Taxes
Net interest expense declined from the prior year, primarily due to
lower debt levels. The effective tax rate for the first quarter was 39.5%
compared to 41.5% in the prior year, reflecting stronger results from
international operations.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $98 million at August 31, 1999.
Management believes that cash flow from operations, FDX Corporation's
commercial paper program and the revolving bank credit facility will
adequately meet the Company's 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 telecommunications
equipment, package handling facilities and sort equipment. The amount and timing
of capital additions depend on various factors including volume growth, domestic
and international economic conditions, 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 2000 totaled $307
million and included aircraft, aircraft modifications, vehicles and ground
support equipment, facilities and customer automation and computer equipment. In
comparison, 1999 expenditures included one MD11, aircraft modifications,
customer automation and computer equipment and vehicles and ground support
equipment. For information on the Company's purchase commitments, see Note 2 of
Notes to Consolidated Condensed Financial Statements.
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.
Market Risk Sensitive Instruments and Positions
There have been no material changes in the Company's market risk
sensitive instruments and positions since its disclosure in its Annual Report on
Form 10-K for the year ended May 31, 1999.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
fixed conversion rates between their existing sovereign currencies ("legacy
currencies") and a single currency called the euro. On January 4, 1999, the euro
began trading on currency exchanges and became available for non-cash
transactions. The legacy currencies will remain legal tender through December
31, 2001. Beginning January 1, 2002, euro-denominated bills and coins will be
introduced, and by July 1, 2002, legacy currencies will no longer be legal
tender.
The Company established euro task forces to develop and implement euro
conversion plans. The work of the task forces in preparing for the introduction
of the euro and the phasing out of the various legacy currencies includes
numerous facets such as converting information technology systems, adapting
billing and payment systems and modifying processes for preparing financial
reports and records.
- 15 -
<PAGE>
Since January 1, 1999, the Company has been prepared to quote rates to
customers, generate billings and accept payments, in both euro and legacy
currencies. Based on the work of the Company's euro task forces to date, the
Company believes that the introduction of the euro, any price transparency
brought about by its introduction and the phasing out of the legacy currencies
will not have a material impact on the Company's consolidated financial
position, results of operations or cash flows. Costs associated with the euro
project are being expensed as incurred and are being funded entirely by internal
cash flows.
YEAR 2000 COMPLIANCE
Introduction
The Company relies heavily on sophisticated information technology
("IT") for its business operations. For example, the Company maintains
electronic connections with approximately two million customers via its
proprietary products and technologies. The Company's Year 2000 ("Y2K")
computer compliance issues are, therefore, broad and complex. The FedEx Y2K
Project Office, which was established in 1996, coordinates and supports the
Company's Y2K compliance effort.
The Company's Y2K compliance efforts are focused on business-critical
items. Hardware, software, systems, technologies and applications are considered
"business-critical" if a failure would either have a material adverse impact on
the Company's business, financial condition or results of operations or involve
a safety risk to employees or customers.
State of Readiness
Generally, the Company believes that its Y2K compliance effort is
substantially on schedule.
IT Systems
The Company's compliance effort for all business-critical
infrastructure and applications software (collectively, "IT Systems") is
substantially complete. The Company has inventoried all IT Systems.
Assessment/design (researching the compliance status and determining the
impact of, and renovation requirements for, the IT Systems), renovation
(making IT Systems compliant), testing (validating compliance), certification
(independent internal verification that appropriate testing process has
occurred) of application software, and certification of operating system
software and program product software (collectively, "infrastructure") are
all substantially complete. Contingency plans will be in place to help
mitigate any negative impact of applications, particularly those systems that
are dependant on governmental or vendor interfaces, that are ultimately
determined to be non-compliant.
Non-IT Systems
The Company's Y2K program relating to business-critical purchased
hardware and software, customized software applications, facilities/equipment
and other embedded chip systems (collectively, "Non-IT Systems") is
substantially complete.
The Company has established several definitions for compliance related to
Non-IT Systems. For air infrastructure components (such as airports and air
traffic systems), the Company defines compliant to mean that these components
are being aggressively assessed and that approved processes are in place to
monitor their evolving status and develop specific operational contingency
plans. For business critical suppliers and affiliates, the Company defines
compliant to mean that the suppliers and affiliates have been assessed, and a
contingency plan has been developed as necessary.
- 16 -
<PAGE>
For the automated shipping solutions offered to customers, the Company
defines compliant to mean that the Company has made available a compliant
version of the associated shipping solution. A customer may choose to remain on
a non-compliant version of software if the customer is willing to assume the
associated risks and there are no potentially unfavorable impacts on the
Company's internal systems. The implementation of Y2K-compliant automated
shipping solutions by customers, particularly where development is required by
the customer, will likely continue through December 31, 1999 and beyond. The
Company will continue to test the combinations of features, functionality and
methods of use contained in its shipping solutions through December 31, 1999 and
will make changes as required.
For electronic interfaces with customers and suppliers, the Company
defines compliant to mean that it has made compliant transaction sets available
and has made systems modifications that enable the Company to translate
non-compliant versions that mitigate the potential impact to the Company's
internal systems.
Y2K Interfaces with Third Parties
The Company is making a concerted effort to understand the Y2K status of
third parties (including, among others, domestic and international government
agencies, customs bureaus, U.S. and international airports and air traffic
control systems, customers, independent contractors, vendors and suppliers)
whose Y2K standing could either have a material adverse effect on the Company's
business, financial condition or results of operations or involve a safety risk
to employees or customers. The Company's is actively encouraging Y2K compliance
on the part of third parties and is developing contingency plans in the event of
their Y2K non-compliance.
In conjunction with the International Air Transport Association (IATA)
and the Air Transport Association of America (ATA), the Company is involved in a
global and industry-wide effort to understand the Y2K compliance status of
airports, air traffic systems, customs clearance and other U.S. and
international government agencies, and common vendors and suppliers. The Company
has developed contingency plans to minimize the impact of Y2K issues on its air
operations. Contingency plans will be implemented, as necessary, to mitigate the
impact of Y2K problems that might arise during the transition into 2000.
The Company's vendor and product compliance program includes the
following tasks: assessing vendor compliance status; product testing; tracking
vendor compliance progress; developing contingency plans, including identifying
alternate suppliers, as needed; addressing contract language; replacing,
renovating or upgrading parts; requesting presentations from vendors or making
on-site assessments, as required; and sending questionnaires. Failure to respond
to these questionnaires results in further mail or phone correspondence,
contingency plan development and/or vendor/product replacement.
Testing
The Company's Y2K testing effort includes functional testing of remedial
measures and regression testing to validate that changes have not altered
existing functionality. The Company's test plans include sections which define
the scope of the testing effort, roles and responsibilities of test
participants, the test approach planned, software, hardware and data
requirements, and test environments/techniques to be used as well as other
sections defining the test effort. System functionality for future date accuracy
is being verified and documented. The Company uses an independent, internal
process to verify that the appropriate testing process has occurred.
- 17 -
<PAGE>
A separate homogenous Y2K mainframe environment has been created to test
operating system software and program products software. The Y2K mainframe
environment is designed to accomplish future date "end to end" testing of the
larger applications and to validate interface communications between
applications.
Costs to Address Y2K Compliance
Since 1996, the Company has incurred approximately $87 million on Y2K
compliance ($6 million in the first quarter of 2000), which includes internal
and external software/hardware analysis, repair, vendor and supplier
assessments, risk mitigation planning, and related costs. The Company continues
to monitor its total expected costs associated with Y2K compliance efforts, and
currently expects that it will incur additional total costs of approximately $19
million, including depreciation of $8 million. Remaining Y2K expenditures will
include project management of the corporate contingency effort and the command
and control center, further system audit and validation, and project management
to ensure compliance of new systems development. The Company classifies costs as
Y2K for reporting purposes if they remedy only Y2K risks or result in the
formulation of contingency plans and would otherwise be unnecessary in the
normal course of business.
The Company's Y2K compliance effort is being funded entirely by internal
cash flows. For the fiscal year ending May 31, 2000, Y2K expenditures are
expected to be less than 10% of the Company's total IT expense budget. Although
there are opportunity costs to the Company's Y2K compliance effort, management
believes that no significant information technology projects have been deferred
due to this work.
Contingency Planning and Risks
The Company's key contingency plans were completed by January 31, 1999.
These plans address the activities to be performed in preparation for and during
a Y2K-related failure that could have an immediate and significant impact on
normal operations. A Y2K-related failure could include, but is not limited to,
power outages, system or equipment failures, erroneous data, loss of
communications and failure of a supplier or vendor. The contingency plans
include, among other things, items such as pre-arranging alternative operating
locations, replacing non-Y2K compliant suppliers and vendors, using back-up
systems equipment and stockpiling additional inventory and supplies. They also
outline alternative procedures, including manual ones, that can be performed in
order to carry out mission-critical functions and trouble-shooting procedures
the IT organization can follow to bring internal systems and equipment back into
operation after a Y2K-related failure. The plans also establish procedures for
company-wide communications. These are in addition to the Company's operational
contingency plans for the pick-up, delivery and movement of packages. The
Company has created a Y2K contingency command and control center that will link
to its other operations command and control centers. Key personnel will be on
call beginning November 1999 and on site by December 31, 1999.
Other contingency plans, including those covering vendor and supplier
issues are substantially complete. These plans are in place to minimize
Y2K-related risks that a vendor and supplier might pose if they are behind in
their own Y2K efforts. Testing activities, including structured walk-throughs,
mock drills and simulations are underway and are planned for completion by
October 31, 1999. Although the cost of developing contingency plans is included
in the total project costs described above, the cost of implementing any
necessary contingency plans is not known at this time.
- 18 -
<PAGE>
Due to the general uncertainty inherent in the Company's Y2K
compliance, mainly resulting from the Company's dependence upon the Y2K
compliance of the government agencies and third-party suppliers, vendors and
customers with whom the Company deals, the Company believes that there is no
single most reasonably likely worst case scenario. However, the Company
believes that a most reasonably likely worst case scenario could include, but
is not limited to, the following situations: delivery delays and the related
re-routing costs due to the lack of readiness of airports and air traffic
systems, principally outside the United States; the inability to serve
certain customers or geographic areas due to their lack of compliance or lack
of readiness of customs bureaus in various countries and business continuance
capabilities of suppliers, vendors, customers and independent contractors,
including third party pick-up and delivery providers on whom the Company
relies in some international locations; and service delays or failures due to
the global utilities and telecommunications infrastructure. The Company's Y2K
program, including related contingency planning, is designed to substantially
lessen the possibility of significant interruptions of normal operations.
Despite its efforts to date, the Company may still incur substantial
expenditures or experience significant delays in delivering its services as
Y2K problems, both domestic and international, become known. Non-compliant
systems of vendors, suppliers, customers and other third parties could also
adversely affect the Company. While costs related to the lack of Y2K
compliance of third parties, business interruptions, litigation and other
liabilities related to Y2K issues could materially and adversely affect the
Company's business, results of operations and financial condition, the
Company expects its Y2K compliance efforts to reduce significantly the
Company's level of uncertainty about the impact of Y2K issues affecting both
its IT Systems and Non-IT Systems.
* * *
STATEMENTS IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION" OR MADE BY MANAGEMENT OF THE COMPANY THAT
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.
- 19 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 3 Legal Proceedings in Part I is hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibit
------ -----------------------
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter ended August
31, 1999.
- 20 -
<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 13, 1999 /S/ MICHAEL W. HILLARD
------------------------------------------
MICHAEL W. HILLARD
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 21 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- -------- ----------------------
<S> <C>
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
</TABLE>
E-1
<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,
----------------------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
-------- -------- ---------- ---------- ---------- -------- --------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes..... $522,084 $ 539,959 $ 628,221 $ 735,213 $ 770,700 $192,682 $188,770
Add back:
Interest expense, net of
capitalized interest....... 130,923 105,449 95,689 117,726 90,595 23,181 20,059
Amortization of debt
issuance costs............. 2,493 1,628 1,328 1,339 9,199 206 154
Portion of rent expense
representative of
interest factor............ 329,370 386,254 434,846 499,823 535,486 128,743 161,363
-------- ---------- ---------- ---------- ---------- -------- ---------
Earnings as adjusted........... $984,870 $1,033,290 $1,160,084 $1,354,101 $1,405,980 $344,812 $370,346
-------- ---------- ---------- ---------- ---------- -------- ---------
-------- ---------- ---------- ---------- ---------- -------- ---------
Fixed Charges:
Interest expense, net of
capitalized interest......... $130,923 $ 105,449 $ 95,689 $ 117,726 $ 90,595 $ 23,181 $ 20,059
Capitalized interest........... 27,381 39,254 39,449 31,443 35,152 10,958 7,716
Amortization of debt
issuance costs............... 2,493 1,628 1,328 1,339 9,199 206 154
Portion of rent expense
representative of
interest factor.............. 329,370 386,254 434,846 499,823 535,486 128,743 161,363
-------- ---------- ---------- ---------- ---------- -------- --------
$490,167 $ 532,585 $ 571,312 $ 650,331 $ 670,432 $163,088 $189,292
-------- ---------- ---------- ---------- ---------- -------- --------
-------- ---------- ---------- ---------- ---------- -------- --------
Ratio of Earnings to Fixed Charges. 2.0 1.9 2.0 2.1 2.1 2.1 2.0
-------- ---------- ---------- ---------- ---------- -------- --------
-------- ---------- ---------- ---------- ---------- -------- --------
</TABLE>
<PAGE>
EXHIBIT 15.1
September 15, 1999
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, 333-49411 and 333-80001 its Report on Form 10-Q
for the quarter ended August 31, 1999, which includes our report dated September
15, 1999 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,
/s/ 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 CONSOLIDATED STATEMENTS OF
INCOME ON PAGES 3-5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDING
AUGUST 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 98,373
<SECURITIES> 0
<RECEIVABLES> 1,873,681
<ALLOWANCES> 56,493
<INVENTORY> 262,777
<CURRENT-ASSETS> 2,442,759
<PP&E> 12,524,349
<DEPRECIATION> 6,668,180
<TOTAL-ASSETS> 9,162,375
<CURRENT-LIABILITIES> 2,225,269
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,979,416
<TOTAL-LIABILITY-AND-EQUITY> 9,162,375
<SALES> 0
<TOTAL-REVENUES> 3,586,806
<CGS> 0
<TOTAL-COSTS> 3,377,863
<OTHER-EXPENSES> 1,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,024
<INCOME-PRETAX> 188,770
<INCOME-TAX> 74,564
<INCOME-CONTINUING> 114,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,206
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
