<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 NOVEMBER 30, 1998, 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 / /
The number of shares of common stock outstanding as of December 31, 1998 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
November 30, 1998 and May 31, 1998................................. 3-4
Condensed Consolidated Statements of Income
Three and Six Months Ended November 30, 1998 and 1997.............. 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 1998 and 1997........................ 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............................................ 12-20
PART II. OTHER INFORMATION
Legal Proceedings....................................................... 21
Exhibits and Reports on Form 8-K........................................ 21
EXHIBIT INDEX........................................................... E-1
</TABLE>
- 2 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
- ------
November 30,
1998 May 31,
(Unaudited) 1998
------------ -------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................ $ 96,963 $ 104,606
Receivables, less allowances of $45,883,000
and $43,245,000........................................................ 1,798,568 1,669,568
Spare parts, supplies and fuel........................................... 307,711 338,745
Deferred income taxes.................................................... 199,106 183,063
Prepaid expenses and other............................................... 28,730 80,696
----------- -----------
Total current assets................................................. 2,431,078 2,376,678
----------- -----------
Property and Equipment, at Cost............................................... 11,778,576 11,063,893
Less accumulated depreciation and amortization........................... 6,268,832 5,863,325
----------- -----------
Net property and equipment........................................... 5,509,744 5,200,568
----------- -----------
Other Assets:
Goodwill................................................................. 345,283 351,507
Equipment deposits and other assets...................................... 452,066 504,353
----------- -----------
Total other assets................................................... 797,349 855,860
----------- -----------
$ 8,738,171 $ 8,433,106
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND OWNER'S EQUITY
- ------------------------------
<TABLE>
<CAPTION>
November 30,
1998 May 31,
(Unaudited) 1998
-------------- ---------------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt........................................ $ 114,087 $ 257,529
Salaries, wages and benefits............................................. 592,909 547,073
Accounts payable......................................................... 930,414 965,167
Accrued expenses ........................................................ 696,847 631,530
----------- -----------
Total current liabilities............................................ 2,334,257 2,401,299
----------- -----------
Long-Term Debt, Less Current Portion ......................................... 1,161,406 1,185,180
Deferred Income Taxes......................................................... 213,056 218,328
Other Liabilities............................................................. 1,375,934 1,226,570
Commitments and Contingencies (Notes 3 and 4)
Owner's Equity:
Common Stock, $.10 par value;
1,000 shares authorized, issued and outstanding....................... - -
Additional paid-in capital............................................... 893,469 893,469
Retained earnings........................................................ 2,781,819 2,535,537
Cumulative foreign currency
translation adjustments............................................... (21,770) (27,277)
----------- -----------
Total owner's equity................................................. 3,653,518 3,401,729
----------- -----------
$ 8,738,171 $ 8,433,106
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
----------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Revenues................................................ $3,482,236 $3,299,159 $6,899,419 $6,596,377
Operating Expenses:
Salaries and employee benefits..................... 1,541,743 1,425,473 3,082,504 2,875,960
Rentals and landing fees........................... 328,096 316,479 641,518 590,947
Maintenance and repairs............................ 218,093 196,139 446,832 394,476
Depreciation and amortization...................... 221,688 208,925 441,888 411,346
Fuel............................................... 150,855 182,383 297,433 356,163
Other.............................................. 770,822 755,955 1,519,233 1,489,475
---------- ---------- ---------- ----------
3,231,297 3,085,354 6,429,408 6,118,367
---------- ---------- ---------- ----------
Operating Income........................................ 250,939 213,805 470,011 478,010
Other Income (Expense):
Interest, net...................................... (20,897) (28,649) (42,849) (54,477)
Other, net......................................... (1,729) (647) ( 6,167) 7,971
---------- ---------- ---------- ----------
(22,626) (29,296) (49,016) (46,506)
---------- ---------- ---------- ----------
Income Before Income Taxes.............................. 228,313 184,509 420,995 431,504
Provision for Income Taxes.............................. 94,750 77,494 174,713 181,232
---------- ---------- -------- ----------
Net Income.............................................. $ 133,563 $ 107,015 $ 246,282 $ 250,272
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
----------------------------
1998 1997
------------ -----------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities................................. $ 799,202 $ 514,141
Investing Activities:
Purchases of property and equipment,
including deposits on aircraft of $100,000
and $6,392,000...................................................... (864,283) (787,803)
Proceeds from disposition of property and equipment:
Sale-leaseback transactions...................................... 80,995 162,900
Reimbursements of A300 deposits.................................. 25,130 106,991
Other dispositions............................................... 140,878 36,190
Other, net........................................................... (692) 2,119
--------- ---------
Net cash used in investing activities..................................... (617,972) (479,603)
--------- ---------
Financing Activities:
Proceeds from debt issuances......................................... - 267,105
Principal payments on debt........................................... (167,668) (234,952)
Net payments to parent company....................................... (21,205) -
Other, net........................................................... - 4,463
--------- ---------
Net cash (used in) provided by financing activities....................... (188,873) 36,616
--------- ---------
Net (decrease) increase in cash
and cash equivalents..................................................... (7,643) 71,154
Cash and cash equivalents at beginning of period.......................... 104,606 122,023
--------- ---------
Cash and cash equivalents at end of period................................ $ 96,963 $ 193,177
--------- ---------
--------- ---------
Cash payments for:
Interest (net of capitalized interest)............................... $ 47,561 $ 51,171
--------- ---------
--------- ---------
Income taxes......................................................... $ 47,322 $ 234,668
--------- ---------
--------- ---------
Non-cash investing and financing activities:
Fair value of assets surrendered under
exchange agreements (with two airlines)............................ $ 26,006 $ 59,718
Fair value of assets acquired under
exchange agreements................................................ 14,300 47,606
--------- ---------
Fair value of assets surrendered in excess
of assets acquired................................................. $ 11,706 $ 12,112
--------- ---------
--------- ---------
</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
On January 27, 1998, Federal Express Corporation ("the Company") became a
wholly-owned subsidiary of FDX Corporation ("FDX").
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, 1998. 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 November 30,
1998 and the consolidated results of its operations for the three and six-month
periods ended November 30, 1998 and 1997, and its consolidated cash flows for
the six-month periods ended November 30, 1998 and 1997. Operating results for
the three and six-month periods ended November 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending May 31, 1999.
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. Total comprehensive income, net of
taxes, for the three months ended November 30, 1998 and 1997 was $152,515,000
and $100,356,000, respectively. For the six months ended November 30, 1998 and
1997, total comprehensive income, net of taxes, was $251,789,000 and
$239,711,000, respectively.
Also effective June 1, 1998, the Company adopted Statement of Position
("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on accounting for these
costs, requiring certain of them to be capitalized. For the three and six months
ended November 30, 1998, incremental costs of $7,900,000 and $14,300,000,
respectively, were capitalized.
Certain prior period amounts have been reclassified to conform to the
current presentation.
- 7 -
<PAGE>
(2) LONG-TERM DEBT
<TABLE>
<CAPTION>
November 30,
1998 May 31,
(Unaudited) 1998
--------------- ------------
(In thousands)
<S> <C> <C>
Unsecured notes payable, interest rates of
7.60% to 10.57%, due through 2098.......................................$ 887,974 $1,053,770
Unsecured sinking fund debentures, interest
rate of 9.63%, due through 2020......................................... 98,564 98,529
Capital lease obligations and tax exempt bonds,
interest rates of 5.35% to 7.88%, due through 2017...................... 253,425 253,425
Less bond reserves...................................................... 9,024 9,024
---------- ----------
244,401 244,401
Other, interest rates of 9.68% to 9.98%................................... 44,554 46,009
---------- ----------
1,275,493 1,442,709
Less current portion.................................................... 114,087 257,529
---------- ----------
$1,161,406 $1,185,180
---------- ----------
---------- ----------
</TABLE>
(3) COMMITMENTS
As of November 30, 1998, the Company's purchase commitments for
the remainder of 1999 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>
1999 (remainder) $ 77,600 $273,100 $254,400 $ 605,100
2000 641,800 565,400 165,900 1,373,100
2001 269,800 509,000 69,500 848,300
2002 240,600 156,200 18,100 414,900
2003 457,400 156,600 - 614,000
</TABLE>
(1) Primarily aircraft modifications, rotables and spare parts and
engines.
(2) Vehicles, facilities, computers and other equipment.
The Company is committed to purchase six Airbus A300s, 33 MD11s and 50
Ayres ALM 200s to be delivered through 2007. Deposits and progress payments of
$68,594,000 have been made toward these purchases.
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 six-month period ended November 30, 1998, the Company acquired
six Airbus A300s under operating leases. These aircraft were included as
purchase commitments as of May 31, 1998. 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.
- 8 -
<PAGE>
Lease commitments added since May 31, 1998 for the six Airbus A300s and
one MD11 purchased in the first quarter of 1999 and subsequently sold and
leased back, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 19,800
2000 37,100
2001 36,800
2002 38,400
2003 38,200
Thereafter 788,700
</TABLE>
(4) 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 transportation of property shipped by air after the 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. 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 stay was lifted in
July 1998. 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 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 have appealed.
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 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 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.
(5) RELATED PARTY TRANSACTIONS
As of November 30, 1998, the Company had a net receivable balance due
from its parent, FDX Corporation, of $18,960,000, which is included in Other
assets. This amount comprises an intercompany operating payable of $52,160,000
and a receivable balance of $71,120,000, representing the net activity from
funds transferred between FDX and the Company for working capital purposes.
- 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
November 30, 1998, and the related condensed consolidated statements of
income for the three and six-month periods ended November 30, 1998 and 1997
and the condensed consolidated statements of cash flows for the six-month
periods ended November 30, 1998 and 1997, 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 November 30, 1998 and the
related condensed consolidated statements of income for the three and six-month
periods ended November 30, 1998 and 1997 and the condensed consolidated
statements of cash flows for the six-month periods ended November 30, 1998 and
1997. 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, 1998 and the related consolidated
statements of income, changes in owner's equity and cash flows for the year then
ended. In our report dated July 8, 1998, 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, 1998 is fairly
stated in all material respects in relation to the consolidated balance sheet
from which it has been derived.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Memphis, Tennessee
December 16, 1998
- 11 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the second quarter ended November 30, 1998, the Company recorded
consolidated net income of $134 million on revenues of $3.5 billion compared
with net income of $107 million on revenues of $3.3 billion for the same period
in the prior year. For the six months ended November 30, 1998, the Company
recorded consolidated net income of $246 million on revenues of $6.9 billion
compared with net income of $250 million on revenues of $6.6 billion for the
same period in the prior year.
The prior year's year-to-date results of operations included the impact
of the Teamsters strike against United Parcel Service ("UPS") in August 1997.
During the 12 operating days of the strike, the Company delivered approximately
800,000 additional U.S. domestic express packages per day. The Company
analytically calculated that the volume not retained at the end of the first
quarter of 1998 contributed approximately $150 million and $50 million in U.S.
domestic revenues and operating income, respectively, in that quarter.
Earnings for the quarter and year-to-date periods, excluding the impact
of the UPS strike, reflect improved domestic results, partially offset by
continued weakness in trans-Pacific traffic and a general softness in many
international economies.
Revenues
The following table shows a comparison of revenues (in millions):
<TABLE>
<CAPTION>
Second Quarter YTD Period
Ended Ended
November 30, November 30,
------------------ Percent ------------------ Percent
1998 1997 Change 1998 1997 Change
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
U.S. domestic express......................... $2,442 $2,266 + 8 $4,865 $4,601 + 6
International Priority (IP)................... 762 699 + 9 1,487 1,354 +10
International Express Freight
(IXF) and Airport-to-Airport
(ATA)..................................... 139 166 -17 272 317 -14
Charter, Logistics services
and other................................. 139 168 -17 275 324 -15
------ ------ ------ ------
$3,482 $3,299 + 6 $6,899 $6,596 + 5
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- 12 -
<PAGE>
The following table shows a comparison of selected operating statistics
(packages and pounds in thousands):
<TABLE>
<CAPTION>
Second Quarter YTD Period
Ended Ended
November 30, November 30,
------------------ Percent ------------------ Percent
1998 1997 Change 1998 1997 Change
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
U.S. domestic express:
Average daily packages........................ 2,860 2,732 + 5 2,791 2,712 + 3
Revenue per package........................... $13.55 $13.17 + 3 $13.51 $13.36 + 1
IP:
Average daily packages........................ 285 265 + 8 275 256 + 8
Revenue per package........................... $42.45 $41.89 + 1 $41.96 $41.73 + 1
IXF/ATA:
Average daily pounds.......................... 2,719 2,984 - 9 2,669 2,816 - 5
Revenue per pound............................. $ .81 $ .88 - 8 $ .79 $ .89 -11
Operating weekdays............................... 63 63 129 127
</TABLE>
The Company's U.S. domestic package revenue rose as both package volume
and revenue per package (yield) increased for the quarter and year-to-date
periods. During these periods, the Company experienced increased volume of its
higher-priced, overnight services and increased average weight per package. Both
of these factors contributed to the rise in U.S. domestic yield for the quarter
and six-month periods. A threatened strike by the Fedex Pilots Association
("FPA") in November had a nominal negative effect on U.S. domestic package
volume growth. The year-to-date results for the prior year included the
additional volume during the UPS strike, which was primarily in the deferred
service category and generally at list price. Excluding the revenue and volume
associated with the UPS strike and the proceeds from a temporary fuel surcharge
in the prior year, U.S. domestic average daily package volume and yield
increased 5% and 3% year over year, respectively, for the six-month period.
Management expects total U.S. domestic express package volume in 1999 to
continue to grow at a lower rate than that experienced in the past two fiscal
years. Management believes that U.S. domestic yield should remain stable or
increase slightly, year over year, during the remainder of 1999 due to continued
effects of yield-management actions and the Company's improved ability to
capture incremental revenue due to it based upon certain package
characteristics, such as weight and package dimensions. Actual results may vary
depending on the impact of domestic economic conditions, competitive pricing
changes, customer responses to yield-management initiatives and changing
customer demand patterns.
The Company's IP revenue increased 9% and 10% for the quarter and
year-to-date periods, respectively, as average daily packages and yields
increased during these periods. IP volume growth rates continue to lag behind
those experienced in prior years primarily due to weakness in Asian markets,
especially in U.S. outbound traffic to that region. IP yields increased 1% for
the quarter and year-to-date periods as the Company initiated limited pricing
changes to offset various international currency fluctuations. Management
expects IP growth rates to be constrained during the remainder of the fiscal
year, primarily due to continuing international economic weakness. Management
expects IP yields to remain constant or improve slightly as a result of
currency-related pricing changes. Actual IP results will depend on international
economic conditions, actions by the Company's competitors and regulatory
conditions for international aviation rights.
- 13 -
<PAGE>
The Company's airfreight (IXF/ATA) volume, revenue and yield declined
year over year for the quarter and six-month periods. IXF volume (a
space-confirmed, time-definite service) decreased 2% for the quarter and was
flat year-to-date, but yield declined 9% and 11% for the same periods. ATA
volume (a lower-priced, space-available service) decreased 23% and 16% for the
quarter and year-to-date periods, respectively, with yield lower by 13% and 14%
for the same periods. Management expects airfreight volume and yield to continue
to decline, year over year, through the balance of fiscal 1999. Due to the
impact of difficult international economic conditions on IP and airfreight
traffic, management has adjusted the Company's expansion and aircraft deployment
plans accordingly. Actual airfreight results will depend on international
economic conditions, actions by the Company's competitors, including capacity
fluctuations, and regulatory conditions for international aviation rights.
Operating Expenses
Salaries and employee benefits increased 8% and 7% for the quarter and
year-to-date periods. Salaries and wages, as well as group insurance, increased
for these periods primarily due to an increase in the number of employees, which
was volume-related.
A 4% and 9% increase in rentals and landing fees for the quarter and
year-to-date periods, respectively, was primarily due to additional facilities
being leased by the Company. The current year's expense includes additional
building leases at the Indianapolis and Alliance-Fort Worth hubs. In the second
quarter, supplemental aircraft lease and equipment lease expense declined year
over year. In the prior year's second quarter, supplemental leased aircraft had
been added to meet the demands of increased package volume during peak season
and to replace an MD11 destroyed in July 1997, whereas in the current quarter,
leased fleet aircraft were available for the capacity needs. As of November 30,
1998, the Company had 93 wide-bodied aircraft under operating lease compared
with 84 as of November 30, 1997. During the six-month period, the additional
leased fleet aircraft contributed to the rise in rental and landing fees. The
prior year's first quarter expense was favorably impacted by approximately $9
million of a $17 million net gain resulting from the destruction of a leased
MD11 aircraft in an accident in July 1997 (described below in Other Income and
Expense). Management expects year-over-year increases in lease expense to
continue as the Company enters into additional aircraft rental agreements during
1999 and thereafter. The Company expects to be able to convert its A300 purchase
commitments into direct operating leases. (See Note 3 of Notes to Condensed
Consolidated Financial Statements.)
Maintenance and repairs expense increased 11% and 13% for the quarter and
year-to-date periods, respectively, primarily due to higher year-over-year
engine maintenance expense on MD11 and B727 aircraft. In the first quarter of
1998, an accrual for the disposition of leased B747 aircraft was increased $9
million, with the majority of this increase recorded as maintenance and repairs
expense. 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 increasing size and age of the Company's fleet and the variety of aircraft
types.
Fuel expense fell 17% and 16% for the quarter and six-month periods,
respectively, primarily as a result of declines in jet fuel price per gallon
(22% and 23%, respectively), partially offset by increases in jet fuel gallons
consumed (2% and 6%, respectively). The prior year's fuel expense included
payments made by the Company under contracts which were designed to 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
certain U.S. domestic and U.S. export shipments. This surcharge was implemented
on February 3, 1997 to mitigate the impact of rising jet fuel prices.
- 14 -
<PAGE>
Other operating expense increased only 2% for the quarter and
year-to-date periods, respectively, primarily due to the effect of cost
constraints and lower cost of sales of engine noise reduction kits. The prior
year's first quarter included incremental expenses associated with the
additional volume during the UPS strike. Other operating expense includes
transportation of packages by third parties, temporary labor and other outside
service contracts, communications expense and the cost of sales of engine noise
reduction kits.
On October 30, 1998, contract negotiations between the Company and the
FPA were discontinued. In November, the FPA began actively encouraging its
members to decline all overtime work and issued ballots seeking strike
authorization. To avoid service interruptions related to a threatened strike,
the Company and its parent company (FDX Corporation) began strike contingency
planning including entering into agreements for additional third party air
and ground transportation and establishing special financing arrangements.
Subsequently, the FPA agreed to end all job actions for 60 days and
negotiations resumed. Such negotiations have resulted in a tentative
agreement subject to ratification by the FPA membership in February 1999.
Costs associated with these contingency plans, including contracts for
supplemental airlift and ground transportation, are expected to reduce pretax
earnings between $110 million to $120 million, adversely affecting the
Company's earnings for the second half of 1999. These costs did not
materially affect the second quarter.
Operating Income
The Company's consolidated operating income increased 17% for the quarter
and decreased 2% for the year-to-date period from the prior year. Excluding the
impact of the UPS strike in the prior year, operating income increased 10% for
the year-to-date period primarily due to improved results in the Company's U.S.
domestic operations.
U.S. domestic operating income was $217 million and $422 million for the
quarter and year-to-date periods ended November 30, 1998. Prior year amounts
were $167 million and $408 million for these same periods. The prior year's
first quarter operating income included approximately $50 million related to the
UPS strike as well as proceeds from a 2% temporary fuel surcharge through August
1, 1997. Excluding these prior year factors, operating income increased 30% and
26% for the quarter and year-to-date periods. These increases were due to yield
increases (2.9% and 2.6% for the quarter and year-to-date periods, respectively)
exceeding increases in cost per package (0.8% for the quarter and year-to-date
periods) and package volume growth of 5% for both of these periods. Cost per
package rose only slightly for the periods primarily due to lower jet fuel
prices, the effect of cost controls and increased productivity through higher
service levels. Sales of engine noise reduction kits contributed $28 million and
$57 million to U.S. domestic operating income in the second quarter and
year-to-date periods ended November 30, 1998, compared with $34 million and $71
million in the same periods in the prior year. U.S. domestic operating margins
were 8.6% and 8.4% for the quarter and six-month periods, respectively, compared
with 7.1% and 8.5% (7.1% and 7.2%, excluding the aforementioned prior year
items) for the same periods in the prior year.
The Company's international operating income was $34 million and $48
million for the quarter and year-to-date periods, respectively, compared with
$46 million and $70 million for the same periods of the prior year.
International operating results declined as a result of slower IP volume growth
and declining airfreight volumes and yields at a time of year-over-year capacity
increases. Fixed costs associated with the increased capacity, including
salaries and employee benefits and aircraft lease expense, also negatively
impacted international results, but were partially offset by lower fuel costs.
The Company's international operating margins were 3.5% and 2.5% for the quarter
and year-to-date periods, respectively, compared with 4.9% and 3.8% for the same
periods in the prior year.
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<PAGE>
Other Income and Expense
Net interest expense declined 27% and 21% for the quarter and
year-to-date periods, respectively, due to lower average debt levels.
Other, net for the prior year's first quarter included a gain from an
insurance settlement for an MD11 aircraft destroyed in an accident in July 1997.
At that time, the Company realized a net gain of $17 million from the insurance
settlement and the release from certain related liabilities on the leased
aircraft. Approximately $8 million of this gain was recorded in non-operating
income.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $97 million at November 30, 1998, a
decrease of $8 million since May 31, 1998. Cash provided from operations for the
first six months of 1999 was $799 million compared with $514 million for the
same period in the prior year.
In December 1998, FDX Corporation established a $1.0 billion business
interruption facility with a 364-day maturity to fund, among other things,
working capital needs and contingency plan expenses in the event of an actual
or threatened business interruption due to labor issues with the FPA. In
addition, FDX Corporation amended its existing $1.0 billion revolving credit
agreement to allow for this business interruption facility. Concurrently, FDX
Corporation extended part of the agreement, previously expiring in January
1999, to January 2000.
Management believes that cash flow from operations and FDX Corporation's
commercial paper program, bank revolving credit facility and business
interruption 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 telecommunication
equipment, package handling facilities and sort equipment. The amount and timing
of capital additions depend on various factors including global economic
conditions, 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 six months of 1999 totaled $864
million and included one MD11, aircraft modifications, vehicles and ground
support equipment and customer automation and computer equipment. In comparison,
prior year expenditures totaled $788 million and included two MD11's, aircraft
modifications, vehicles and ground support equipment and customer automation and
computer equipment. An MD11 purchased in June 1998 was sold and leased back in
September 1998. In June and September 1997, two MD11's purchased in February and
June 1997 were sold and leased back. For information on the Company's purchase
commitments, see Note 3 of Notes to Condensed Consolidated Financial Statements.
Management believes that the capital resources available to the Company
provide flexibility to access the most efficient markets for financing capital
acquisitions, including aircraft, and are adequate for the Company's future
capital needs.
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<PAGE>
Market Risk Sensitive Instruments and Positions
There have been no material changes in the Company's market risk
sensitive instruments and positions since May 31, 1998. A description of these
instruments and positions is disclosed in the Company's Annual Report on Form
10-K for the year ended May 31, 1998.
Euro Currency Conversion
On January 1, 1999, the euro became the common legal currency of 11 of
the 15 member countries of the European Union. On that date, the participating
countries fixed conversion rates between their existing sovereign currencies
("legacy currencies") and 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 a euro task force to develop and implement euro
conversion plans. The work of the task force 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. Costs associated with the euro project are being expensed
as incurred and are being funded entirely by internal cash flows.
Since January 1, 1999, the Company has been prepared to quote rates to
customers, generate billings and accept payments in both euros and legacy
currencies. Based on the work of the Company's euro task force 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
are not likely to have a material impact on the Company's consolidated financial
position, results of operations or 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 more than a million customers via its proprietary products and
technologies. The Company's Year 2000 ("Y2K") computer compliance issues are,
therefore, broad and complex. The Y2K Project Office, which was established in
1996, coordinates and supports the Company's Y2K compliance effort. The Company
has engaged a major international consulting firm to assist it in its Y2K
program management.
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. Generally, the Company believes that
its Y2K compliance effort is on schedule.
- 17 -
<PAGE>
State of Readiness
The Company's compliance effort for all business-critical infrastructure
and applications software (collectively, "IT Systems") is 95% 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) and renovation (making IT Systems compliant) are
substantially complete. Testing, which involves validating compliance, is
approximately 95% complete. Within IT Systems, certification of application
software, which involves the Company's independent, internal review to verify
that the appropriate testing process has occurred, was approximately 95%
complete as of December 31, 1998. Certification of the operating system software
and program product software, (collectively, "infrastructure") is 55% complete.
The Company's IT Systems compliance effort is targeted to be 100% complete by
September 1, 1999.
The inventory and assessment phases of 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") are 100% complete. The remaining phases
relating to the Company's Non-IT Systems are targeted for completion by May
31, 1999. The Company is 45% complete with the remediation effort on Non-IT
Systems.
Y2K Interfaces with Material Third Parties
The Company is making concerted efforts 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, vendors and suppliers) whose Y2K non-compliance 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 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'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 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.
- 18 -
<PAGE>
A separate homogenous Y2K mainframe environment has been created to test
all operating system software and program product software. The Y2K environment
is designed to accomplish future date "end to end" testing of the larger
applications and to validate interface communications between applications. The
Company uses an independent, internal process to verify that the appropriate
testing process has occurred.
Costs to Address Y2K Compliance
Since 1996, the Company has incurred approximately $66 million in expense
on Y2K compliance which includes internal and external software/hardware
analysis, repair and related costs. The Company expects that its Y2K compliance
efforts will require additional total costs of approximately $72 million,
including capital expenditures of $12 million. In order to provide a consistent,
objective method for identifying financial resources consumed for Y2K efforts,
the Company classifies expenditures as Y2K costs for reporting purposes if they
remedy only Y2K risks 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, 1999, Y2K expenditures are
expected to represent 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 has begun developing contingency plans for Y2K
non-compliance. These plans will include identifying alternate suppliers,
vendors, procedures and operational sites, generating supply/equipment lists,
conducting staff training and developing communication plans. Any significant
incremental costs associated with these plans will not become known until these
plans are fully developed. A Company-wide contingency planning task force has
been formed to ensure appropriate coverage and coordination of these plans and
to integrate these with the Company's existing contingency plans. The Company's
goal for completion of key Y2K contingency plans is January 31, 1999, with all
other Y2K contingency plans targeted for completion by September 30, 1999. The
Company plans to establish a contingency command and control center by April 30,
1999 to address issues caused by Y2K non-compliance, with key personnel on call
beginning November 1999.
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 is unable to determine at this time the most
reasonably likely worst case scenario. However, the Company believes that the
greatest Y2K exposure exists in the following areas: lack of readiness of
airports and air traffic systems and the global utilities and telecommunications
infrastructure; lack of compliance and business continuance capabilities of
suppliers, vendors, customers and independent contractors; and lack of readiness
of third party pick-up and delivery providers on whom the Company relies in some
offshore locations. However, the Company believes that its Y2K program,
including related contingency planning, should significantly lessen the
possibility of significant interruptions of normal operations. 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.
- 19 -
<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.
- 20 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 4 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
10.1 Nineteenth Supplemental Lease Agreement dated as of
September 1, 1998 by and between the Company and the
Memphis-Shelby County Airport Authority.
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.
During the quarter ended November 30, 1998, the Registrant filed four
Current Reports on Form 8-K dated September 21, September 22, October 22 and
November 17, 1998, respectively. All four reports were filed under Item 7,
Financial Statements and Exhibits, and contained documents related to 1998-1
Pass Through Certificates.
- 21 -
<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: January 11, 1999 /s/ MICHAEL W. HILLARD
---------------------------
MICHAEL W. HILLARD
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.1 Nineteenth Supplemental Lease Agreement dated as of
September 1, 1998 by and between the Company and the
Memphis-Shelby County Airport Authority.
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).
E-1
<PAGE>
EXHIBIT 10.1
EXECUTION COPY
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NINETEENTH SUPPLEMENTAL LEASE AGREEMENT
BY AND BETWEEN
MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY
AND
FEDERAL EXPRESS CORPORATION
DATED AS OF SEPTEMBER 1, 1998
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
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
1 Definitions...........................................................................7
2 Granting Leasehold....................................................................7
3 Term, Delivery and Acceptance of Possession...........................................8
4 Rental ............................................................................8
5 Hazardous Substances/Waste............................................................8
6 Lease Agreement Still in Effect; Provisions Thereof Applicable
to this Nineteenth Supplemental Lease Agreement.......................................10
7 Descriptive Headings..................................................................10
8 Effectiveness of this Nineteenth Supplemental Lease Agreement.........................10
9 Execution of Counterparts.............................................................10
10 Summaries ............................................................................10
Notary ............................................................................12
Leased Parcel Summary.................................................................13
Rental Summary........................................................................15
</TABLE>
<PAGE>
NINETEENTH SUPPLEMENTAL LEASE AGREEMENT
THIS NINETEENTH SUPPLEMENTAL LEASE AGREEMENT, made and entered into as of
the 1st of September, 1998 , 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.
WITNESSETH:
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
3
<PAGE>
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 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
4
<PAGE>
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 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
5
<PAGE>
and so as to release a certain parcel of land from the 1981 Federal Express
Project, all as set forth therein; and
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, Authority and Tenant on July 1, 1997 entered into an Eighteenth
Supplemental Lease Agreement dated July 1, 1997 (the Eighteenth 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
6
<PAGE>
WHEREAS, the said Consolidated and Restated Lease Agreement dated as of
August 1, 1979, together with the First through the Eighteenth 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 Nineteenth
Supplemental Lease Agreement.
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
Nineteenth Supplemental Lease Agreement which are defined in the Lease
Agreement, shall, for all purposes of this Nineteenth 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
Nineteenth Supplemental Lease Agreement, the additional land designated as new
West Ramp Expansion which is located on the Memphis-Shelby County Airport
Authority property situated in Memphis, Shelby County, Tennessee, and being more
particularly described in exhibit A:
7
<PAGE>
SECTION 3. TERM, DELIVERY AND ACCEPTANCE OF POSSESSION. The terms of
this Nineteenth Supplemental Lease Agreement shall commence at 12:01 A.M. on
September 1, 1998 for the land described as West Ramp Expansion 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 lease agreements), during the term of this
Nineteenth Supplemental Lease Agreement, Tenant shall pay to the Authority in
advance on the first business day of each month $8,820.48 in equal installments
beginning September 1, 1999 or date of beneficial occupancy whichever occurs
first, a total rental payment of 105,845.73 per year, which the parties hereto
agree is based upon an aggregate of 867,588 square feet of area at an annual
rental rate of ($0.1220) per square foot.
SECTION 5. HAZARDOUS SUBSTANCES/WASTE. Tenant, at its own expense, may
arrange for a Phase I Environmental Survey on the land described as West Ramp
Expansion 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
West Ramp Expansion, 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
8
<PAGE>
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 of such "Hazardous Substances"
associated with West Ramp Expansion.
The term "HAZARDOUS SUBSTANCES", as used in this Nineteenth 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
9
<PAGE>
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 Nineteenth 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.
SECTION 7. DESCRIPTIVE HEADINGS. The descriptive headings of the
sections of this Nineteenth Supplemental Lease Agreement are inserted for
convenience of reference only and do not constitute a part of this Nineteenth
Supplemental Lease Agreement and shall not affect the meaning, construction,
interpretation or effect of this Nineteenth Supplemental Lease Agreement.
SECTION 8. EFFECTIVENESS OF THIS SUPPLEMENTAL LEASE AGREEMENT. This
Nineteenth Supplemental Lease Agreement shall become effective at 12:01 a.m. on
September 1, 1998.
SECTION 9. EXECUTION OF COUNTERPARTS. This Nineteenth 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.
10
<PAGE>
IN WITNESS WHEREOF, THE MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY AND
FEDERAL EXPRESS CORPORATION have caused this Nineteenth 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/ BY: /S/LARRY D. COX
- ------------------------------ ---------------
TITLE: DIRECTOR OF PROPERTIES 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/ JOHN SCHUSSLER BY: /S/GRAHAM R. SMITH
- ------------------ ------------------
TITLE: SR. AIRPORT PROP. REP. TITLE: VP
---------------------- ---------------
APPROVED
AS TO LEGAL FORM
BCB 8-26-98
-----------
Legal Dept.
11
<PAGE>
(STATE OF TENNESSEE)
(COUNTY OF SHELBY )
On this 14th day of September, 1998, 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
My Commission Expires Feb. 23, 2000 /s/
- ----------------------------------- -----------------------------------
Notary Public
(seal)
STATE OF TENNESSEE )
COUNTY OF SHELBY )
On this 8th day of September, 1998, before me appeared Graham Smith, to
me personally known, who, being by me duly sworn (or affirmed), did say that
he is a Vice President of Properties of Federal Express Corporation, the
within named Lessee, and that he as such Vice President, 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 Vice President.
MY COMMISSION EXPIRES
My Commission Expires Dec. 7, 1998 /s/
- ---------------------------------- -----------------------------------
Notary Public
(seal)
12
<PAGE>
FEDERAL EXPRESS LEASED PARCELS SUMMARY
<TABLE>
<CAPTION>
PARCEL EFFECTIVE
LEASE ACRES SQUARE FEET AGREEMENT DATE
- ----- ----- ----------- --------- ----
BASE-LEASE
----------
<S> <C> <C> <C> <C>
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 17 119.616 (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
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
PARCEL EFFECTIVE
LEASE ACRES SQUARE FEET AGREEMENT DATE
- ----- ----- ----------- --------- ----
<S> <C> <C> <C> <C>
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
38 2.523 109,921 Eighteenth 07/01/97
Supplemental
39 8.366 364,430 Eighteenth 07/01/97
Supplemental
THIS SUPPLEMENT
---------------
West Ramp 19.917 867,583 Nineteenth 08/01/98
Expansion 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 I/l/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
</TABLE>
14
<PAGE>
RENTAL - FEDERAL EXPRESS
Effective September 1, 1998
<TABLE>
<CAPTION>
ANNUAL
CATEGORY NUMBER OF RENTAL RATE
OF SPACE SQUARE FEET PER SQ. FT. ANNUAL RENTAL
- -------- ----------- ----------- -------------
<S> <C> <C> <C>
Bldg. T-376 1,240 1.5258 $1,891.99
Unimproved Ground 6,911,504 0.1220 843,203.48
Improved Apron 2,395,802 0.1525 365,359.80
Hangar Property 72,092.67 1.1291 81,399.83
Hangar Office 28,000 1.8311 51,270.80
International Park 9,694,700 0.2138 2,072,726.80
------
Former IRS Facility 2,255,137.24 4.97 1,200,000.00
------------ ------------
21,358,475.91 $4,615,852.70
</TABLE>
BREAKDOWN OF SPACE
<TABLE>
<CAPTION>
SQ. FT. SQ. FT.
------- -------
<S> <C> <C> <C>
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
West Ramp Expansion 867,588 6,911,504.00
-------
IMPROVED APRON Parcel 1 850,250
- --------------
Parcel 2 226,900
Parcel 7 577,540
Parcel 9 253,600
Parcel 27 487 5-12
--------
2,395,802.00
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SQ. FT. SQ. FT.
------- -------
<S> <C> <C> <C>
HANGAR PROPERTY Parcel 1 44,336
- ---------------
Parcel 2 27,756.67
---------
72,092.67
HANGAR OFFICE Parcel 1 22,400
- -------------
Parcel 2 5,600
-----
28,000.00
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 18,9338
Parcel 21 833,476
Parcel 22A 140,000
-------
9,694,700.00
FORMER IRS FACILITY 2,255,137.24 2,255,137.24
- ------------------- ------------
TOTAL: 21,358,475.91
</TABLE>
16
<PAGE>
EXHIBIT A
Being a parcel of land contained entirely within the Memphis/Shelby County
Airport Authority property located in the City of Memphis, Shelby County, State
of Tennessee being more particularly described by metes and bounds as follows:
Commencing, at the centerline intersection of Taxiway Alpha and Taxiway Charlie;
thence along said centerline of Taxiway Charlie, North 01 degrees 56 minutes 38
seconds East a distance of 2847.76' to a point; thence departing from and
perpendicular to said centerline of Taxiway Charlie, North 88 degrees 03 minutes
22 seconds West a distance of 161.54' to the TRUE POINT OF BEGINNING; thence
along a line being perpendicular to the centerline of said Taxiway Alpha, South
04 degrees 17 minutes 22 seconds West a distance of 238.05' to a point-, thence
along a line being parallel with and 2600.7 I' north of said centerline of
Taxiway Alpha, South 85 degrees 42 minutes 38 seconds East a distance of 19.91'
to a point; thence along a line being perpendicular to said centerline of
Taxiway Alpha, South 04 degrees 17 minutes 22 seconds West a distance of 541.48'
to a point; thence South 32 degrees 30 minutes 14 seconds West a distance of
318.75' to a point; thence along a line being parallel with and 1778.36' north
of said centerline of Taxiway Alpha, North 85 degrees 42 minutes 38 seconds West
a distance of 455.70' to a point; thence along a line being perpendicular to
said centerline of Taxiway Alpha, North 04 degrees 17 minutes 22 seconds East a
distance of 2 1 0.00' to a point; thence along a line being parallel with and
1988.36' north of said centerline of Taxiway Alpha, North 85 degrees 42 minutes
38 seconds West a distance of 352.33' to a point; thence along a line being
perpendicular to said centerline of Taxiway Alpha, North 04 degrees 17 minutes
22 seconds East a distance of 53.33' to a point; thence along a line being
parallel with and 2041.70' north of said centerline of Taxiway Alpha, South 85
degrees 42 minutes 38 seconds East a distance of 47.32' to a point; thence along
a line being perpendicular to said centerline of Taxiway Alpha, North 04 degrees
17 minutes 22 seconds East a distance of 782.16' to a point; thence along a line
being parallel with and 2823.86' north of said centerline of Taxiway Alpha,
South 85 degrees 42 minutes 38 seconds East a distance of 285.47' to a point of
curvature; thence along the arc of a curve to the left having a radius of 22.50'
(Long Chord: North 48 degrees 07 minutes 01 seconds East, 32.46') and arc
distance of 36.26' to a point; thence along a line being parallel with and
744.25' west of said centerline of Taxiway Charlie, South 01 degrees 56 minutes
39 seconds West a distance of 32.39' to a point; thence along a line being
perpendicular to said centerline of Taxiway Charlie, South 88 degrees 03 minutes
21 seconds East a distance of 582.7 I' to the TRUE POINT OF BEGINNING.
Said property containing 867,588 square feet or 19.917 Acres, more or less.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12.1
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
Six Months Ended
Year Ended May 31, November 30,
----------------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- ---------- ---------- ---------- -------- ------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes.............. $378,462 $522,084 $539,959 $628,221 $735,213 $431,504 $420,995
Add back:
Interest expense, net of
capitalized interest................ 152,170 130,923 105,449 95,689 117,726 58,901 45,267
Amortization of debt
issuance costs...................... 2,860 2,493 1,628 1,328 1,339 679 406
Portion of rent expense
representative of
interest factor..................... 285,261 329,370 386,254 434,846 499,823 241,347 263,010
-------- -------- --------- --------- ---------- -------- -------
Earnings as adjusted.................... $818,753 $984,870 $1,033,290 $1,160,084 $1,354,101 $732,431 $729,678
-------- -------- ---------- ---------- ---------- -------- --------
-------- -------- ---------- ---------- ---------- -------- --------
Fixed Charges:
Interest expense, net of
capitalized interest.................. $152,170 $130,923 $ 105,449 $ 95,689 $ 117,726 $ 58,901 $ 45,267
Capitalized interest.................... 29,738 27,381 39,254 39,449 31,443 15,955 19,842
Amortization of debt
issuance costs........................ 2,860 2,493 1,628 1,328 1,339 679 406
Portion of rent expense
representative of
interest factor....................... 285,261 329,370 386,254 434,846 499,823 241,347 263,010
-------- -------- ---------- ---------- ---------- -------- --------
$470,029 $490,167 $ 532,585 $ 571,312 $ 650,331 $316,882 $328,525
-------- -------- ---------- ---------- ---------- -------- --------
-------- -------- ---------- ---------- ---------- -------- --------
Ratio of Earnings to Fixed Charges...... 1.7 2.0 1.9 2.0 2.1 2.3 2.2
-------- -------- ---------- ---------- ---------- -------- --------
-------- -------- ---------- ---------- ---------- -------- --------
</TABLE>
<PAGE>
EXHIBIT 15.1
December 16, 1998
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 333-49411 its Report on
Form 10-Q for the quarter ended November 30, 1998, which includes our report
dated December 16, 1998 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
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 ENDED
NOVEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 96,963
<SECURITIES> 0
<RECEIVABLES> 1,844,451
<ALLOWANCES> 45,883
<INVENTORY> 307,711
<CURRENT-ASSETS> 2,431,078
<PP&E> 11,778,576
<DEPRECIATION> 6,268,832
<TOTAL-ASSETS> 8,738,171
<CURRENT-LIABILITIES> 2,334,257
<BONDS> 1,161,406
0
0
<COMMON> 0
<OTHER-SE> 3,653,518
<TOTAL-LIABILITY-AND-EQUITY> 8,738,171
<SALES> 0
<TOTAL-REVENUES> 6,899,419
<CGS> 0
<TOTAL-COSTS> 6,429,408
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,849
<INCOME-PRETAX> 420,995
<INCOME-TAX> 174,713
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 246,282
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
