-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GK8ur9+x4pKGCVntU6D7w8Z+GVmbU5opGzsmt+fl0U0PCciShTuCsYGBjc7tCgFx 8m6VcTvjD5TuH9pC/WmTlA== 0001047469-97-000634.txt : 19971015 0001047469-97-000634.hdr.sgml : 19971015 ACCESSION NUMBER: 0001047469-97-000634 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971014 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERAL EXPRESS CORP CENTRAL INDEX KEY: 0000230211 STANDARD INDUSTRIAL CLASSIFICATION: AIR COURIER SERVICES [4513] IRS NUMBER: 710427007 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07806 FILM NUMBER: 97694827 BUSINESS ADDRESS: STREET 1: 2005 CORPORATE AVE CITY: MEMPHIS STATE: TN ZIP: 38132 BUSINESS PHONE: 9013693600 MAIL ADDRESS: STREET 1: 2005 CORPORATE AVE CITY: MEMPHIS STATE: TN ZIP: 38132 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED AUGUST 31, 1997, OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ______. COMMISSION FILE NUMBER: 1-7806 FEDERAL EXPRESS CORPORATION (Exact name of registrant as specified in its charter) Delaware 71-0427007 (State of incorporation) (I.R.S. Employer Identification No.) 2005 Corporate Avenue Memphis, Tennessee 38132 (Address of principal (Zip Code) executive offices) (901) 369-3600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock Outstanding Shares at September 30, 1997 Common Stock, par value $.10 per share 115,054,898 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION PAGE Condensed Consolidated Balance Sheets August 31, 1997 and May 31, 1997 . . . . . . . . . . . . . . . . . . . .3-4 Condensed Consolidated Statements of Income Three Months Ended August 31, 1997 and 1996. . . . . . . . . . . . . . . .5 Condensed Consolidated Statements of Cash Flows Three Months Ended August 31, 1997 and 1996. . . . . . . . . . . . . . . .6 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . 7-10 Review of Condensed Consolidated Financial Statements by Independent Public Accountants. . . . . . . . . . . . . . . . . . . . 11 Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . 12 Management's Discussion and Analysis of Results of Operations and Financial Condition. . . . . . . . . . . . . . . . . . . . . . . .13-17 PART II. OTHER INFORMATION Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . .18-19 EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .E-1 - 2 - FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
August 31, 1997 May 31, (Unaudited) 1997 ----------- ---------- (In thousands) Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . $ 209,782 $ 122,023 Receivables, less allowance for doubtful accounts of $40,164,000 and $36,175,000 . . . . . . . . . . 1,771,116 1,512,939 Spare parts, supplies and fuel. . . . . . . . . . . . . 323,532 313,337 Deferred income taxes . . . . . . . . . . . . . . . . . 157,629 149,158 Prepaid expenses and other. . . . . . . . . . . . . . . 52,446 35,132 ----------- ---------- Total current assets. . . . . . . . . . . . . 2,514,505 2,132,589 ----------- ---------- Property and Equipment, at Cost (Note 6) . . . . . . . . . . 10,083,465 9,818,936 Less accumulated depreciation and amortization. . . . . 5,371,533 5,196,856 ----------- ---------- Net property and equipment. . . . . . . . . . 4,711,932 4,622,080 ----------- ---------- Other Assets: Goodwill . . . . . . . . . . . . . . . . . . . . . . . 361,603 365,327 Equipment deposits and other assets (Note 6). . . . . . 431,316 505,490 ----------- ---------- Total other assets. . . . . . . . . . . . . . 792,919 870,817 ----------- ---------- $ 8,019,356 $7,625,486 ----------- ---------- ----------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 3 - FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' INVESTMENT
August 31, 1997 May 31, (Unaudited) 1997 ----------- ---------- (In thousands) Current Liabilities: Current portion of long-term debt (Note 3). . . . . . . $ 148,449 $ 126,666 Accounts payable. . . . . . . . . . . . . . . . . . . . 841,775 828,421 Accrued expenses (Note 2) . . . . . . . . . . . . . . . 1,150,212 1,007,696 ----------- ---------- Total current liabilities . . . . . . . . . . 2,140,436 1,962,783 ---------- ---------- Long-Term Debt, Less Current Portion (Note 3). . . . . . . . 1,438,233 1,397,954 ---------- ---------- Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . 170,229 159,165 ---------- ---------- Other Liabilities. . . . . . . . . . . . . . . . . . . . . . 1,167,120 1,143,070 ---------- ---------- Commitments and Contingencies (Notes 6 and 7) Common Stockholders' Investment (Note 5): Common Stock, $.10 par value; 200,000,000 shares authorized; 115,044,048 and 114,906,753 shares issued. . . . . . . . . . . . . 11,504 11,491 Other . . . . . . . . . . . . . . . . . . . . . . . 3,091,834 2,951,023 ---------- ---------- Total common stockholders' investment . . . . 3,103,338 2,962,514 ---------- ---------- $8,019,356 $7,625,486 ---------- ---------- ---------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 4 - FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended August 31, ----------------------- 1997 1996 ---------- ---------- (In thousands, except per share amounts) Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $3,297,218 $2,692,312 ---------- ---------- Operating Expenses: Salaries and employee benefits . . . . . . . . . . . . 1,450,487 1,231,423 Rentals and landing fees . . . . . . . . . . . . . . . 274,468 253,368 Depreciation and amortization . . . . . . . . . . . . 202,421 190,209 Fuel . . . . . . . . . . . . . . . . . . . . . . . . . 173,780 153,547 Maintenance and repairs. . . . . . . . . . . . . . . . 208,460 181,419 Other. . . . . . . . . . . . . . . . . . . . . . . . . 723,397 552,428 ---------- ---------- 3,033,013 2,562,394 ---------- ---------- Operating Income . . . . . . . . . . . . . . . . . . . . . 264,205 129,918 ---------- ---------- Other Income (Expense): Interest, net. . . . . . . . . . . . . . . . . . . . . (25,828) (21,759) Other, net . . . . . . . . . . . . . . . . . . . . . . 8,618 (420) ---------- ---------- (17,210) (22,179) ---------- ---------- Income Before Income Taxes . . . . . . . . . . . . . . . . 246,995 107,739 Income Tax Provision . . . . . . . . . . . . . . . . . . . 103,738 45,789 ---------- ---------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 143,257 $ 61,950 ---------- ---------- ---------- ---------- Earnings per Share . . . . . . . . . . . . . . . . . . . . $ 1.22 $ .54 ---------- ---------- ---------- ---------- Common and Common Equivalent Shares (Note 5) . . . . . . . 117,343 114,934 ---------- ---------- ---------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 5 - FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended August 31, ------------------------- 1997 1996 ---------- ---------- (In thousands) Net Cash Provided by Operating Activities. . . . . . . . . . . . $ 206,782 $ 279,481 ---------- ---------- Investing Activities: Purchases of property and equipment, including deposits on aircraft of $300,000 and $1,100,000. . . . . . . . . . . . . . . . . . . . . . . . . (365,957) (272,549) Proceeds from disposition of property and equipment: Sale-leaseback transactions. . . . . . . . . . . . . . . 81,500 - Reimbursements of A300 deposits. . . . . . . . . . . . . 85,169 42,026 Other dispositions . . . . . . . . . . . . . . . . . . . 8,046 879 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 14,513 16,401 ---------- ---------- Net cash used in investing activities. . . . . . . . . . . . . . (176,729) (213,243) ---------- ---------- Financing Activities: Proceeds from debt issuances . . . . . . . . . . . . . . . . . 267,105 - Principal payments on debt . . . . . . . . . . . . . . . . . . (209,446) (7,678) Proceeds from stock issuances. . . . . . . . . . . . . . . . . 3,591 3,196 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (3,544) (312) ---------- ---------- Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . 57,706 (4,794) ---------- ---------- Net increase in cash and cash equivalents. . . . . . . . . . . . 87,759 61,444 Cash and cash equivalents at beginning of period . . . . . . . . 122,023 93,419 ---------- ---------- Cash and cash equivalents at end of period . . . . . . . . . . . $ 209,782 $ 154,863 ---------- ---------- ---------- ---------- Cash payments for: Interest (net of capitalized interest) . . . . . . . . . . . . $ 8,631 $ 6,951 ---------- ---------- ---------- ---------- Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,817 $ 21,125 ---------- ---------- ---------- ---------- Non-cash investing and financing activities: Fair value of assets surrendered under exchange agreements (with two airlines) . . . . . . . . . . $ 25,741 $ - Fair value of assets acquired under exchange agreements . . . . . . . . . . . . . . . . . . . . 31,413 - ---------- ---------- Liabilities incurred . . . . . . . . . . . . . . . . . . . . . $ (5,672) $ - ---------- ---------- ---------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 6 - FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X, and should be read in conjunction with Federal Express Corporation's Annual Report on Form 10-K for the year ended May 31, 1997. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the consolidated financial position of Federal Express Corporation and subsidiaries as of August 31, 1997, the consolidated results of their operations for the three-month periods ended August 31, 1997 and 1996, and their consolidated cash flows for the three-month periods ended August 31, 1997 and 1996. Operating results for the three-month period ended August 31, 1997 are not necessarily indicative of the results that may be expected for the year ending May 31, 1998. The Company has entered into contracts which are designed to limit its exposure to fluctuations in jet fuel prices. Under these contracts, the Company makes (or receives) payments based on the difference between a specified lower (or upper) limit and the market price of jet fuel, as determined by an index of spot market prices representing various geographic regions. The difference is recorded as an increase or decrease in fuel expense. Certain prior period amounts have been reclassified to conform to the current presentation. (2) ACCRUED EXPENSES August 31, 1997 May 31, (Unaudited) 1997 ------------ ---------- (In thousands) Compensated absences . . . . . . . . . . $ 239,123 $ 234,284 Insurance. . . . . . . . . . . . . . . . 221,925 207,059 Taxes other than income taxes. . . . . . 142,937 143,541 Salaries . . . . . . . . . . . . . . . . 133,928 101,694 Employee benefits. . . . . . . . . . . . 104,505 108,679 Federal income taxes . . . . . . . . . . 98,628 25,658 Aircraft overhaul. . . . . . . . . . . . 76,217 84,006 Interest . . . . . . . . . . . . . . . . 46,898 28,165 Other. . . . . . . . . . . . . . . . . . 86,051 74,610 ---------- ---------- $1,150,212 $1,007,696 ---------- ---------- ---------- ---------- - 7 - (3) LONG-TERM DEBT August 31, 1997 May 31, (Unaudited) 1997 ------------ ---------- (In thousands) Unsecured notes payable, interest rates of 6.25% to 10.57%, due through 2098 $1,171,977 $ 928,525 Unsecured sinking fund debentures, interest rate of 9.63%, due through 2020 98,478 98,461 Commercial paper, effective interest rate of 5.75% - 200,904 Capital lease obligations and tax exempt bonds, due through 2017, interest rates of 5.35% to 8.30% 275,205 255,100 Less bond reserves 9,024 11,096 ---------- ---------- 266,181 244,004 Other debt, interest rates of 9.68% to 9.98% 50,046 52,726 ---------- ---------- 1,586,682 1,524,620 Less current portion 148,449 126,666 ---------- ---------- $1,438,233 $1,397,954 ---------- ---------- ---------- ---------- The Company has a revolving credit agreement with domestic and foreign banks that provides for a commitment of $1,000,000,000 through May 31, 2000, all of which was available at August 31, 1997. Interest rates on borrowings under this agreement are generally determined by maturities selected and prevailing market conditions. Commercial paper borrowings are backed by unused commitments under this revolving credit agreement and reduce the amount available under the agreement. Commercial paper borrowings are classified as long-term based on the Company's ability and intent to refinance such borrowings. In July 1997, the Memphis-Shelby County Airport Authority ("MSCAA") issued $20,105,000 of 5.35% Special Facilities Revenue Bonds. The proceeds of the bonds in combination with other funds were used to refund outstanding MSCAA 1982A 8.3% bonds on September 2, 1997. The 1997 bonds have a maturity date of July 1, 2012. The Company is obligated under an operating lease agreement with MSCAA to pay rentals equal to the principal and interest on the bonds. In July 1997, the Company issued $250,000,000 of 7.6% unsecured senior notes due July 1, 2097, under its July 1996 shelf registration with the Securities and Exchange Commission. (4) PREFERRED STOCK The Certificate of Incorporation authorizes the Board of Directors, at its discretion, to issue up to 4,000,000 shares of Series Preferred Stock. The stock is issuable in series which may vary as to certain rights and preferences and has no par value. As of August 31, 1997, none of these shares had been issued. (5) COMMON STOCKHOLDERS' INVESTMENT During the three-month period ended August 31, 1997, 197,295 shares of common and treasury stock were issued under employee incentive plans at prices ranging from $17.25 to $52.88 per share. During the same period, the Company acquired 60,000 shares of its common stock at a cost of $59.07 per share. On September 29, 1997, the stockholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the authorized common stock of the Company from 200,000,000 to 400,000,000 shares. - 8 - (6) COMMITMENTS As of August 31, 1997, the Company's purchase commitments for the remainder of 1998 and annually thereafter under various contracts are as follows (in thousands): Aircraft- Aircraft Related(1) Other(2) Total ---------- ---------- ---------- ---------- 1998 (remainder) $238,900 $252,800 $394,600 $886,300 1999 406,100 182,800 85,000 673,900 2000 369,500 392,400 13,500 775,400 2001 278,000 222,500 - 500,500 2002 38,000 114,700 - 152,700 (1) Primarily aircraft modifications, rotables and spare parts and engines. (2) Primarily vehicles, facilities, computers and other equipment. The Company is committed to purchase 13 Airbus A300s, four Airbus A310s, one DC10, seven MD11s and 50 Ayers ALM 200s to be delivered through 2002. Deposits and progress payments of $53,676,000 have been made toward these purchases. The Company may be required to purchase seven additional MD11s for delivery beginning no later than 2000 under a put option agreement. The Company has entered into agreements with two airlines to acquire 53 DC10 aircraft, spare parts, aircraft engines and other equipment, and maintenance services in exchange for a combination of aircraft engine noise reduction kits and cash. Delivery of these aircraft began in 1997 and will continue through 2001. Additionally, these airlines may exercise put options through December 31, 2003, requiring the Company to purchase up to 29 additional DC10s along with additional aircraft engines and equipment. During the quarter ended August 31, 1997, the Company acquired four Airbus A300s under operating leases. These aircraft were included as purchase commitments as of May 31, 1997. At the time of delivery, the Company sold its rights to purchase these aircraft to third parties who reimbursed the Company for its deposits on the aircraft and paid additional consideration. The Company then entered into operating leases with each of the third parties who purchased the aircraft from the manufacturer. Lease commitments added since May 31, 1997 for the four Airbus A300s and one MD11, purchased in 1997 then subsequently sold and leased back, are as follows (in thousands): 1998 $ 14,900 1999 29,100 2000 29,100 2001 29,100 2002 29,100 Thereafter 608,600 (7) LEGAL PROCEEDINGS Customers of the Company have filed four separate class-action lawsuits against the Company generally alleging that the Company has breached its contract with the plaintiffs in transporting packages shipped by them. These lawsuits allege that the Company continued to collect a 6.25% federal excise tax on the - 9 - transportation of property shipped by air after the tax expired on December 31, 1995, until it was reinstated in August of 1996. The plaintiffs seek certification as a class action, damages, an injunction to enjoin the Company from continuing to collect the excise tax referred to above, and an award of attorneys' fees and costs. Three of those cases were consolidated in Minnesota Federal District Court. That court stayed the consolidated cases in favor of a case filed in Circuit Court of Greene County, Alabama. The complaint in the Alabama case also alleges that the Company continued to collect the excise tax on the transportation of property shipped by air after the tax expired again on December 31, 1996. A fifth case, filed in the Supreme Court of New York, New York County, containing allegations and requests for relief substantially similar to the other four cases was dismissed with prejudice on the Company's motion on September 23, 1997. The court found that there was no breach of contract and and that the other causes of action were preempted by Federal law. The plaintiffs have the right to appeal. This case originally alleged that the Company continued to collect the excise tax on the transportation of property shipped by air after the tax expired on December 31, 1996. The New York complaint was later amended to cover the first expiration period of the tax (December 31, 1995 through August 27, 1996) covered in the original Alabama complaint. The air transportation excise tax expired on December 31, 1995, was reenacted by Congress effective August 27, 1996, and expired again on December 31, 1996. The excise tax was then reenacted by Congress effective March 7, 1997. The expiration of the tax relieved the Company of its obligation to pay the tax during the periods of expiration. The Taxpayer Relief Act of 1997, signed by President Clinton in August, extended the tax for 10 years through September 30, 2007. The Company intends to vigorously defend itself in these cases. No amount has been reserved for these contingencies. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not materially adversely affect the financial position or results of operations of the Company. (8) SUBSEQUENT EVENTS On October 6, 1997, the Company announced it signed a definitive agreement to acquire Caliber Systems, Inc. and its subsidiaries. The transaction will be accounted for as a pooling of interests. A new holding company, FDX Corporation, will be formed and will exchange 0.8 shares of its common stock for each share of Caliber Systems, Inc. stock and one share of its common stock for each share of Federal Express Corporation stock. The transaction, which has been approved by the Boards of Directors of both companies, is subject to the approval of shareholders of both companies, the U.S. Government and other regulatory agencies, and is expected to be completed in early calendar 1998. - 10 - REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BY INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP, independent public accountants, has performed a review of the condensed consolidated balance sheet of the Company as of August 31, 1997, and the related condensed consolidated statements of income for the three-month periods ended August 31, 1997 and 1996 and the condensed consolidated statements of cash flows for the three-month periods ended August 31, 1997 and 1996, included herein, as indicated in their report thereon included on page 12. -11 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Federal Express Corporation: We have reviewed the accompanying condensed consolidated balance sheet of Federal Express Corporation and subsidiaries as of August 31, 1997 and the related condensed consolidated statements of income for the three-month periods ended August 31, 1997 and 1996 and the condensed consolidated statements of cash flows for the three-month periods ended August 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Federal Express Corporation and subsidiaries as of May 31, 1997 and the related consolidated statements of income, changes in common stockholders' investment and cash flows for the year then ended. In our report dated June 30, 1997, we expressed an unqualified opinion on those financial statements, which are not presented herein. In our opinion, the accompanying condensed consolidated balance sheet as of May 31, 1997 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Memphis, Tennessee, October 6, 1997 - 12 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS For the three months ended August 31, 1997, the Company recorded net income of $143 million ($1.22 per share) on revenues of $3.3 billion compared with net income of $62 million ($.54 per share) on revenues of $2.7 billion for the same period in the prior year. These improved results reflect the effects of several non-recurring items, a rise in U.S. domestic revenue per package (yield) and increased volume of U.S. domestic and international express packages. The most significant non-recurring item impacting the results of operations was the Teamsters strike against United Parcel Service ("UPS"). During the 12 operating days of the strike, the Company delivered approximately 800,000 additional U.S. domestic express packages per day. It is difficult to estimate with precision the impact of this additional volume. However, the Company estimates that as much as 15% of this volume has been retained thus far. The Company analytically calculated that the volume not retained contributed approximately $150 million in U.S. domestic revenues. This additional revenue, net of applicable variable compensation, income taxes and variable costs, but not allocated fixed costs, resulted in an estimated additional $.25 to $.30 per share to the quarter's earnings. Also, the Company realized a net gain of $17 million from the insurance settlement and the release from certain related liabilities on a leased MD11 aircraft destroyed in an accident in July. This gain was almost equally divided between operating and non-operating income. An unrelated expense, which partially offset this gain, was an addition of $9 million to an operating reserve for the disposition of leased B747 aircraft. These aircraft, which are currently subleased, must undergo certain maintenance and repairs before the aircraft are transferred to a new lessee. The net effect of the MD11 gain and the B747 reserve on domestic and international operating income was immaterial. The combined effect of these aircraft-related items contributed approximately $.03 per share for the quarter, net of applicable variable compensation and income taxes. Revenues The following table shows a comparison of revenues (in millions): Three Months Ended August 31, ----------------------- Percent 1997 1996 Change -------- -------- -------- U.S. domestic express. . . . . . . $ 2,335 $ 1,908 +22% International Priority (IP). . . . 655 541 +21 International Express Freight (IXF) and Airport-to- Airport (ATA) . . . . . . . . . . 151 137 +10 Charter, Logistics services and other . . . . . . . . . . . . 156 106 +47 -------- -------- $ 3,297 $ 2,692 +22 -------- -------- -------- -------- - 13 - The following table shows a comparison of selected express and airfreight (IXF/ATA) statistics (in thousands, except dollar amounts): Three Months Ended August 31, ------------------ Percent 1997 1996 Change -------- -------- -------- U.S. domestic express: Average daily packages . . . . . . . . . 2,692 2,297 +17% Revenue per package . . . . . . . . . . $13.55 $12.98 + 4 IP: Average daily packages . . . . . . . . . 246 209 +18 Revenue per package . . . . . . . . . . $41.56 $40.37 + 3 IXF/ATA: Average daily pounds . . . . . . . . . . 2,652 2,340 +13 Revenue per pound. . . . . . . . . . . . $ .89 $ .92 - 3 The current quarter's increase in the Company's U.S. domestic package volume was augmented by additional volume resulting from the UPS strike. At the same time, yield increased 4% largely from the effects of the strike-related volume, much of which was near list price and above-average weight per package. Average weight per package also increased due to the roll-out of FedEx Express Saver, a three-day, deferred service. Continuing yield-management initiatives, including pursuing price increases on low-yielding accounts and discontinuing unprofitable accounts, also positively impacted yields. Management expects to retain a portion of the strike-related volume causing U.S. domestic package volumes to grow at rates similar to those experienced in the past two years. Management believes that U.S. domestic yields should remain stable year over year during the remainder of 1998 due to continued effects of yield-management actions and the introduction of distance-based pricing. Actual results may vary depending on the impact of competitive pricing changes, including distance-based pricing, customer responses to yield management initiatives and changing customer demand patterns. In the quarter ended August 31, 1996, the expiration of the air transportation excise tax added $28 million and 1% to U.S. domestic revenues and yields, respectively. The excise tax expired on December 31, 1995, was reenacted by Congress effective August 27, 1996, and expired again on December 31, 1996. The Company was not obligated to pay the tax during the periods in which it was expired. The excise tax was reenacted by Congress effective March 7, 1997, and in August 1997, it was extended for 10 years through September 30, 2007. The Company's IP revenues and volumes continued to experience strong growth during the quarter. Yields also increased during the quarter compared to the same period of the prior year. Management expects these revenue and volume trends to continue through the remainder of 1998, with yields remaining relatively constant. Actual IP results will depend on the impact of international economic conditions, actions by the Company's competitors, and regulatory conditions for international aviation rights. The Company's airfreight volume increased year-over-year, while yield experienced a year-over-year decline. IXF volumes (a space-confirmed, time-definite service) increased 30% for the quarter, but yields declined 6% for the same period. ATA volumes (a lower-priced, space-available service) decreased 10% for the quarter, with yields lower by 5% for the same period. Management expects airfreight yields to continue to decline, year-over-year, through the balance of the fiscal year. Actual results, however, will depend on the impact of international economic conditions, actions by the Company's competitors and regulatory conditions for international aviation rights. - 14 - Operating Expenses Salaries and employee benefits increased 18% for the quarter as a result of volume-related growth and increased provisions under the Company's performance-based, incentive compensation plans. Also included in the current quarter's expense is a $25 million special appreciation bonus for U.S. operations employees for their extra efforts during the UPS strike. Rentals and landing fees increased 8% for the quarter. This increase is primarily due to additional leased aircraft in the Company's fleet. As of August 31, 1997, the Company had 82 wide-bodied aircraft under operating lease compared with 76 as of August 31, 1996. The current quarter's expense is net of approximately half of a $17 million net gain resulting from the destruction of an MD11 aircraft in an accident in July. Management expects year-over-year increases in lease expense to continue as the Company enters into additional aircraft rental agreements during 1998 and thereafter. The Company expects to be able to convert its A300 purchase commitments into direct operating leases. (See Note 6 of Notes to Condensed Consolidated Financial Statements.) Fuel expense increased 13% for the quarter primarily due to an increase in gallons consumed (13%). The first quarter's increase in fuel expense includes payments made under contracts which limit the Company's exposure to fluctuations in jet fuel prices. Effective August 1, 1997, the Company lifted its temporary 2% fuel surcharge that had been in place on U.S. domestic shipments except FedEx SameDay service and including Puerto Rico and all U.S. export IP shipments, except those to the People's Republic of China and Hong Kong. This surcharge was implemented on February 3, 1997 to mitigate the impact of rising jet fuel prices. Maintenance and repairs expense increased 15% for the quarter. The increase is due primarily to higher year-over-year engine maintenance on A310 and DC10 aircraft and the majority of the additional reserve for the disposition of B747 aircraft, as discussed above. Management believes that maintenance and repairs expense will continue a long-term trend of year-over-year increases for the foreseeable future due to the Company's increasing fleet size, aging fleet and variety of aircraft types. Other operating expenses increased 31% for the quarter primarily due to expenses related to volume growth and expenses necessitated by the additional strike volume, including the transportation of packages by third parties, temporary manpower, uniforms and supplies and programming services. The cost of sales of engine noise reduction kits also increased year over year. Operating Income The Company's consolidated operating income increased 103% for the quarter ended August 31, 1997 from the prior year. U.S. domestic operating income was $241 million for the quarter, compared with $126 million for the prior year. Volume growth (17%) and yield improvements (4%), partially offset by an increase in cost per package (1%), resulted in a rise in operating income. As noted above, U.S. domestic operating results were significantly impacted by the UPS strike. Also included in U.S. domestic operating income was an incremental $22 million from the sales of aircraft engine noise reduction kits compared to last year's first quarter. U.S. domestic margin for the quarter was 9.9%, compared to 6.5% for the same period in the prior year. - 15 - The Company's international operating income was $23 million for the quarter, compared with $4 million for the prior year. The increase was attributable to strong growth in the Company's IP and IXF volumes partially offset by lower airfreight yields, increased provisions for variable compensation and higher aircraft lease and maintenance and repairs expenses. International operating margin for the quarter was 2.7%, compared to 0.5% for the same period in the prior year. Other Income and Expense and Income Taxes An increase in net interest expense of 19% for the quarter was due to higher debt levels. Other, net for the quarter ended August 31, 1997, includes a gain from an insurance settlement for an MD11 aircraft destroyed in an accident in July 1997, as discussed above. FINANCIAL CONDITION Liquidity Cash and cash equivalents totaled $210 million at August 31, 1997, and increased $88 million since May 31, 1997. Cash provided from operations was $207 million compared with $279 million for the same period in the prior year. The Company has a $1 billion revolving bank credit facility that is generally used to finance temporary operating cash requirements and to provide support for the issuance of commercial paper. Management believes that cash flow from operations, its commercial paper program and the revolving bank credit facility will adequately meet its working capital needs for the foreseeable future. Capital Resources The Company's operations are capital intensive, characterized by significant investments in aircraft, vehicles, computer and telecommunication equipment, package handling facilities and sort equipment. The amount and timing of capital additions are dependent on various factors including volume growth, new or enhanced services, geographical expansion of services, competition, availability of satisfactory financing and actions of regulatory authorities. Capital expenditures for the first three months of 1998 totaled $366 million and included one MD11, aircraft modifications, vehicles and ground support equipment and customer automation and computer equipment. In comparison, prior year expenditures totaled $273 million and included three A310s, vehicles and ground support equipment, and customer automation and computer equipment. An MD11 purchased in February 1997 was sold and leased back in the current quarter. For information on the Company's purchase commitments, see Note 6 of Notes to Condensed Consolidated Financial Statements. In July 1997, $20 million of Memphis-Shelby County Airport Authority ("MSCAA") Special Facilities Revenue Bonds were issued. The proceeds of the bonds in combination with other funds were used to refund outstanding MSCAA 1982B bonds on September 2, 1997. Also in July 1997, the Company issued $250 million of unsecured senior notes with a maturity date of July 1, 2097, under the Company's July 1996 shelf registration with the Securities and Exchange Commission. Management believes that the capital resources available to the Company provide flexibility to access the most efficient markets for financing its capital acquisitions, including aircraft, and are adequate for the Company's future capital needs. - 16 - Statements in this "Management's Discussion and Analysis of Results of Operations and Financial Condition" or made by management of the Company which contain more than historical information may be considered forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) which are subject to risks and uncertainties. Actual results may differ materially from those expressed in the forward-looking statements because of important factors identified in this section. - 17 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Note 7 Legal Proceedings in Part I is hereby incorporated by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the 1997 Annual Meeting of Stockholders held on September 29, 1997, the Company's stockholders elected the Class II Directors to serve for a three-year term expiring at the 2000 Annual Meeting. The tabulation of votes with respect to each nominee for office was: Nominee For Withheld ----------------------- ----------- -------- Ralph D. DeNunzio 101,694,774 415,713 Charles T. Manatt 101,376,288 734,199 George J. Mitchell 101,678,171 432,316 Jackson W. Smart, Jr. 101,679,619 412,868 Joshua I. Smith 101,701,788 408,699 The stockholders also approved an amendment to the Company's Restated Certificate of Incorporation to increase the authorized common stock from 200,000,000 shares to 400,000,000 shares by a vote of 95,413,344 to 6,527,973 with 169,170 abstentions and broker non-votes. The stockholders also approved the Company's 1997 Stock Incentive Plan by a vote of 97,294,880 to 4,362,970 with 452,637 abstentions and broker non-votes. The stockholders also ratified the Board of Directors' designation of Arthur Andersen LLP as independent auditors for the fiscal year ended May 31, 1998 by a vote of 101,815,089 to 146,946 with 148,452 abstentions and broker non-votes. The stockholders defeated a stockholder proposal concerning guidelines and reporting provisions for certain political contributions made by the Company by a vote of 3,174,933 in favor of the proposal to 83,086,141 against with 6,067,469 abstentions and broker non-votes. Finally, the stockholders defeated a stockholder proposal concerning declassification of the Board of Directors by a vote of 35,956,654 in favor of the proposal to 49,859,934 against with 6,445,043 abstentions and broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit Number Description of Exhibit ------- ---------------------- 10.1 Letter Agreement No. 3 dated July 15, 1997, amending the Modification Services Agreement dated September 16, 1996, between McDonnell Douglas Corporation and Registrant. Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Commission. - 18 - 10.2 Eighteenth Supplemental Lease Agreement dated as of July 1, 1997, between the Authority and Registrant. 11.1 Statement re Computation of Earnings Per Share. 12.1 Computation of Ratio of Earnings to Fixed Charges. 15.1 Letter re Unaudited Interim Financial Statements. (b) Reports on Form 8-K. During the quarter ended August 31, 1997, the Registrant filed four Current Reports on Form 8-K. The first report was dated June 11, 1997 and filed under Item 5, Other Events and reported developments in certain class-action lawsuits against the Company. The second report was dated June 30, 1997 and filed under Item 5, Other Events. The report contained the Registrant's press release dated June 30, 1997 announcing its fourth quarter and fiscal year end financial results and its related computation of Ratio of Earnings to Fixed Charges. The third report was dated July 7, 1997 and filed under Item 7, Financial Statements and Exhibits. The report contained documents related to the issuance of unsecured senior notes. The fourth report was dated August 8, 1997 and filed under Item 5, Other Events and reported an insurance settlement on a destroyed aircraft. - 19 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FEDERAL EXPRESS CORPORATION (Registrant) Date: October 14, 1997 /s/ Michael W. Hillard ------------------------------ MICHAEL W. HILLARD VICE PRESIDENT & CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) - 20 - EXHIBIT INDEX Exhibit Number Description Of Exhibit - ------ ---------------------- 10.1 Letter Agreement No. 3 dated July 15, 1997, amending the Modification Services Agreement dated September 16, 1996, between McDonnell Douglas Corporation and Registrant. Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Commission. 10.2 Eighteenth Supplemental Lease Agreement dated as of July 1, 1997, between the Authority and Registrant. 11.1 Statement re Computation of Earnings Per Share. 12.1 Computation of Ratio of Earnings to Fixed Charges. 15.1 Letter re Unaudited Interim Financial Statements. E-1 EX-10.1 2 EXHIBIT 10.1 07-15-97 [LOGO] Letter Agreement No. 3 to DAC 96-29-M Federal Express Corporation 2005 Corporate Avenue Memphis, TN 38118 Federal Express Corporation ("Federal Express") and McDonnell Douglas Corporation ("MDC") have entered into Modification Services Agreement Document No. DAC 96-29-M (the "Modification Agreement") dated September 16, 1996, which Modification Agreement covers Federal Express' desire to incorporate certain modifications in its DC-10 aircraft (the "Aircraft", as defined in the Modification Agreement) and MDC desires to perform such modifications. As a further consideration of the parties hereto, this Letter Agreement No. 3 shall amend and constitute a part of said Modification Agreement. Federal Express has requested MDC to provide services for certain of the Aircraft and Option Aircraft (the "Stored Aircraft"); and MDC has agreed to provide such services; subject to the following terms and conditions set forth in this Letter Agreement. Terms not otherwise defined in this Letter Agreement shall have the same definitions ascribed to such terms in the Modification Agreement. 1. SERVICES Pursuant to Paragraph 2)H. of the Modification Agreement, Federal Express has the right to store up to twenty-five Aircraft at any one time at the Conversion Facility. Notwithstanding this, MDC hereby agrees to allow Federal Express the right to store up to fifty Stored Aircraft at any one time at the Conversion Facility which for the purposes of this Letter Agreement is defined to be the Dimension facility located in Goodyear, Arizona. The work cards set forth in Attachment A of this Letter Agreement will be performed by MDC or its subcontractor on each Stored Aircraft in accordance with the ASR process at the prices listed in Attachment A. Federal Express shall provide five days written notice of its intent to have a specific work card completed on a Stored Aircraft. If Federal Express determines additional storage work cards are required, such additional 07-15-97 Letter Agreement No. 3 to DAC 96-29-M Page 2 work may be completed in accordance with the ASR process. The ASR form listed in Attachment D hereto shall be utilized for any additional services provided in accordance with this Letter Agreement. If Federal Express requests removal of the engines by MDC on any Stored Aircraft during the term of this Letter Agreement, Federal Express shall provide to MDC 13,000 pounds of ballast for each Stored Aircraft so stored. Federal Express may provide used engines to be installed on the Stored Aircraft as ballast. 2. AIRCRAFT DELIVERY Federal Express shall be responsible for transporting each Stored Aircraft to the Conversion Facility. Federal Express shall provide MDC with five business days written notice of its intent to deliver a Stored Aircraft to the Conversion Facility. Notwithstanding Paragraph 5)A.1) of the Modification Agreement, delivery of a Stored Aircraft to the Conversion Facility does not constitute Delivery of an Aircraft by Federal Express. Upon arrival at the Conversion Facility, MDC shall execute a receipt in the form of Attachment B (the "Aircraft Delivery Receipt") for each Stored Aircraft. Upon completion of the required services listed in Attachment A, page A-1, MDC shall execute a receipt in the form of Attachment C (the "Aircraft Redelivery Receipt"). Any work required to have a Stored Aircraft Delivered for performance of the Services, excluding Aircraft towing, under the Modification Agreement may be completed by MDC or its Subcontractor in accordance with the ASR process. 3. OVERSIGHT AND INSPECTION Except for a Stored Aircraft on which MDC or MDC's subcontractor is performing services, Federal Express shall be responsible for oversight and inspection of the Stored Aircraft during the term of this Letter Agreement. 4. REMOVAL OF EQUIPMENT Prior to and during the storage period for each Stored Aircraft, certain Stored Aircraft components ("Parts") may be removed. Except as required for performance of the work cards set forth in Attachment A or ASRs, no Parts shall be removed without the prior approval of Federal Express pursuant to an executed ASR. All such Parts removals shall be accomplished in accordance with the procedures specified in the Modification Agreement. 07-15-97 Letter Agreement No. 3 to DAC 96-29-M Page 3 5. PRICE The price per Stored Aircraft for receiving, incoming inspection and handling of each Stored Aircraft shall be [ * ]. The price per Stored Aircraft for each work cards is set forth in Attachment A. The price excludes any material identified as BFE. The work cards, 11.1-01, 11.1-02, 11.1-03, 11.1-04, 11.1-05, 11.1-06 and 11.9 shall be accomplished on a Time and Material (T&M) basis with a Not-to-Exceed (NTE) price as listed for each of the first two Stored Aircraft and re-negotiated downward if feasible for subsequent Stored Aircraft. The price for additional work shall be set forth in the relevant ASR. All pricing is stated in 1996 year dollars and shall be escalated in accordance with the following escalation formula. ESCALATION FORMULA [ * ] where: AP = The Final Adjusted Price MP = The Base Price ECI = The latest released ECI Index value at the completion of the services computed to one decimal place (Note: 1.05 rounds to 1.1) 138.2 = The ECI Index value for June 1996 6. PAYMENT a. MDC will invoice Federal Express upon completion of the services provided hereunder. MDC's invoices shall be due and payable within 30 days of Federal Express' receipt of such invoice. b. If Federal Express fails to make any payments at the time and in the amounts required under this Letter Agreement, Federal Express shall pay MDC interest on the payment from the due date until the payment is received by MDC at the Prime Rate announced from time to time by Chase Manhattan Bank at its principal office in - --------------- *Blank space contained confidential information which has been filed separately with the Securities and Exchange commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. 07-15-97 Letter Agreement No. 3 to DAC 96-29-M Page 4 New York, New York, plus one percent, or the maximum rate allowed by California law, whichever is lower. c. All payments made by Federal Express to MDC under this Agreement shall be in U.S. Dollars, made by wire transfer in immediately available funds and made to the following address: Chase Manhattan Bank 1 Chase Manhattan Plaza New York, New York 10015 ABA No. 021000021 McDonnell Douglas Corporation - Account No. 910-2-695492 Attn: Paul Trupia (or as otherwise notified) 07-15-97 Letter Agreement No. 3 to DAC 96-29-M Page 5 7. CONVERSION FACILITY RELOCATION In the event MDC requests relocation of the Conversion Facility during the term of this Letter Agreement, MDC and Federal Express shall be responsible for the following: a. MDC RESPONSIBILITIES: 1) Re-installation of any equipment removed by MDC or MDC's subcontractor during the performance of any services or additional work which is required for ferry of the Firm Aircraft and Option Aircraft which have been converted to Firm Aircraft under the Modification Agreement; 2) Ferry of such Aircraft by an MDC flight crew to the new conversion facility; and 3) Insuring such Aircraft during the ferry flight under its physical damage aircraft hull insurance program and Federal Express will be named as an additional insured. In no event will MDC's liability to Federal Express for partial or total loss or damage or destruction of an Aircraft during such ferry flight exceed the declared stipulated loss value of [ * ]. b. FEDERAL EXPRESS RESPONSIBILITIES: 1) Re-installation of all equipment other than that listed in 1) a) above which was removed from the Stored Aircraft; 2) Maintaining and or providing a Certificate of Airworthiness for each Stored Aircraft; 3) Completion of all mandatory Airworthiness Directives required to obtain a ferry permit for the ferry flight of each Stored Aircraft; 4) Replacement of any parts which have exceeded their safe life limit required to obtain a ferry permit for the ferry flight of each Stored Aircraft; and 5) Providing a ferry permit, if required, for the Stored Aircraft. - ----------------- *Blank space contained confidential information which has been filed separately with the Securities and Exchange commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. 07-15-97 Letter Agreement No. 3 to DAC 96-29-M Page 6 8. TERM This Letter Agreement will commence on the date of execution hereof and will remain in effect until either the completion of all Services performed under the Modification Agreement on all Aircraft or the earlier termination by written notice of Federal Express or MDC. In the event of early termination by Federal Express of this Letter Agreement, Federal Express shall pay for all work completed on each Stored Aircraft and not previously invoiced including all reasonable non-recurring material costs incurred up to a maximum of $500.00 per Stored Aircraft. Federal Express may continue to store the Aircraft in accordance with the terms and conditions of the Modification Agreement following early termination of this Letter Agreement. 9. INSURANCE a. Federal Express' General Coverage 1) Prior to the commencement of the services hereunder, Federal Express shall provide to MDC evidence of satisfactory insurance coverage for the Stored Aircraft. Said insurance coverage shall: a) be maintained at Federal Express' expense at all times during the term of this Letter Agreement and for a period of not less than two (2) years thereafter; b) name MDC and MDC's employees, officers, directors, representatives, subcontractors and agents as additional insureds under Federal Express' third party liability insurance; c) contain a severability of interest clause; and d) provide that the insurance is primary and without contribution from other insurance which may be available to the additional insureds; and e) include the following insurance in the amounts noted: (1) Federal Express shall maintain hull insurance coverage (in the amount of such Stored Aircraft's value prior to modification, including 07-15-97 Letter Agreement No. 3 to DAC 96-29-M Page 7 all components and parts removed from the Stored Aircraft and parts shipped from the Conversion Facility to other locations on the instructions of Federal Express or pursuant to the provisions of this Letter Agreement). (2) Third party liability coverage (in the amount of Federal Express' current coverage, but not less than $300,000,000). b. MDC's subcontractor Coverage 1) Prior to the commencement of the services hereunder, MDC's subcontractor shall provide Federal Express evidence of satisfactory insurance coverage. Said insurance coverage shall: a) be maintained at MDC's subcontractor's expense at all times during the term of this Letter Agreement and for a period of not less than two (2) years thereafter; b) name MDC and their respective employees, officers, directors, representatives and agents as additional insureds as regards work performed by subcontractor under its third party liability insurance, excluding gross negligence and willful misconduct of MDC; c) name Federal Express and their respective employees, officers, directors, representatives and agents as additional insureds as regards work performed by subcontractor under Subcontractor's third party liability insurance excluding operational liability, gross negligence and willful misconduct of Federal Express; d) contain a severability of interest clause; e) provide that the insurance is primary as regards work performed by subcontractor and without contribution from other insurance which may be available to the additional insureds; and, f) include the following insurance in the amounts noted: 07-15-97 Letter Agreement No. 3 to DAC 96-29-M Page 8 (i) Aviation Comprehensive Liability Insurance with a combined single limit of liability of not less than Three Hundred Million U.S. Dollars ($300,000,000.00) for Bodily Injury and Property Damage under Products Liability, Completed Operations Coverage and Premises Operation Liability; (ii) Hangar Keeper's Liability Insurance providing property damage coverage with limits of liability of Three Hundred Million U.S. Dollars ($300,000,000.00) per occurrence; and (iii) Worker's Compensation as required by applicable law and Employer's Liability Insurance of not less than One Million U.S. Dollars ($1,000,000.00) per occurrence unless a greater amount is required by law. g) In the event MDC performs the services, it will provide Federal Express evidence of insurance like the subcontractor coverage above. c. All insurance coverage set forth in Paragraphs a., and b. above shall: 1) except for workers compensation insurance, contain a waiver of subrogation by such parties insurers of any rights it may have against the other party and the other parties employees, officers, directors, representatives, agents and subcontractors; and 2) contain a clause which states that any cancellation, restriction or reduction in coverage shall only be effective upon thirty (30) days written notice to the other party of such cancellation, restriction or reduction in coverage. d. Except for any damage caused by gross negligence or willful misconduct on the part of MDC or MDC's subcontractors, Federal Express shall assume the risk of loss, damage or destruction of a Stored Aircraft or equipment for the period that such Stored Aircraft or equipment is in storage pursuant to this Letter Agreement. Federal Express will cause its physical damage aircraft hull 07-15-97 Letter Agreement No. 3 to DAC 96-29-M Page 9 insurers to waive all rights of subrogation against MDC and its subcontractors, except as may arise by the gross negligence or willful misconduct on the part of MDC or MDC's subcontractor. 10. EXECUTION This Letter Agreement and any amendments hereto may be executed in counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Execution by either party may be confirmed by electronic facsimile transmission of the signature page of the Agreement to the other party, and confirmation of receipt by telephonic or facsimile transmission. 11. LIMITATION OF LIABILITY a. With respect to the transactions contemplated by this Letter Agreement, neither party shall be liable for any consequential damages arising from claims brought by the other. b. In no event will MDC's or MDC's subcontractor's liability under this Letter Agreement to Federal Express for partial or total loss, damage or destruction of each Stored Aircraft exceed the sum of the stipulated loss value of [ * ]. c. Federal Express agrees to be solely liable for any and all environmental contamination (including but not limited to contamination of air, water or soil and any fines, penalties or clean up costs associated with such damage) as well as any other liability, penalties or fines associated with the use or release of, or exposure to hazardous substances directly arising out of or in connection with the storing of Stored Aircraft at the Conversion Facility prior to Delivery, except for any such environmental contamination arising out of or caused by MDC or its subcontractor's actions or failures to act. - ------------------ *Blank space contained confidential information which has been filed separately with the Securities and Exchange commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. 07-15-97 Letter Agreement No. 3 to DAC 96-29-M Page 10 If the foregoing correctly sets forth our understanding, please execute this Letter Agreement in the space provided below. FEDERAL EXPRESS CORPORATION MCDONNELL DOUGLAS CORPORATION /S/ TERRY NORD /S/ THOMAS C. MOORE - --------------------------------- -------------------------------- Signature Signature TERRY NORD THOMAS C. MOORE -------------------------------- -------------------------------- Printed Name Printed Name VP - AIRCRAFT BASE MAINTENANCE VICE PRESIDENT - CONTRACTS -------------------------------- -------------------------------- Title Title JULY 29, 1997 -------------------------------- Date APPROVED AS TO LEGAL FORM KHS 7-23-97 - ---------------------------------- LEGAL DEPT Attachment A to Letter Agreement No. 3 DAC 96-29-M Page A-1 FEDERAL EXPRESS MD-10 AIRCRAFT ------------------------------ WORK CARDS ---------- CARD REVISION PRICE PER NUMBER CARD TITLE DATE AIRCRAFT - -------------------------------------------------------------------------------- 11.1 Engines/Thrust Reversers/APU Preservation 6/2/97 [ * ] (material is BFE) (Ballast) Engine Thrust Reverser (TR) [ * ] *11.1-01 Removal #1 + 6/2/97 [ * ] *11.1-02 Removal #2 + 6/2/97 [ * ] *11.1-03 Removal #3 + 6/2/97 [ * ] Engine [ * ] *11.1-04 Removal #1 +@ 6/2/97 [ * ] *11.1-05 Removal #2 +@ 6/2/97 [ * ] *11.1-06 Removal #3 +@ 6/2/97 [ * ] 11.1-07 APU Removal preserve fuel control unit 6/2/97 [ * ] (work items 1,2 & 3 only) 11.2 Lavatory Commode Removal (items 1 & 3 4/29/97 [ * ] only) 11.3 Potable Water System - Preservation 4/29/97 [ * ] 11.4 Aircraft Batteries - Removal 4/29/97 [ * ] 11.5 Cockpit/Emergency Exit Windows - 4/1/97 [ * ] Preservation 11.6 Landing Gear - Preservation Temporary 4/1/97 [ * ] Location 11.7 Landing Gear - Preservation Final Location 4/29/97 [ * ] 11.8 Pitot/Static Ports - Preservation 4/1/97 [ * ] - ---------------- *Blank space contained confidential information which has been filed separately with the Securities and Exchange commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. 07-15-97 Attachment A to Letter Agreement No. 3 to DAC 96-29-M Page 2 CARD REVISION PRICE PER NUMBER CARD TITLE DATE AIRCRAFT - ------------------------------------------------------------------------------- *11.9 Aircraft Lubrication 5/1/97 [ * ] 12.1 Forward Avionics compartment Equipment 4/29/97 [ * ] Removal 12.5 Bilge Areas L-48 to R-48 - Preservation 4/1/97 [ * ] 12.6 Landing Gear Wheel Well LPS Treatment 4/1/97 [ * ] 12.7 Engine Mounts/Truss Fittings - Preservation 4/1/97 [ * ] 12.8 Aircraft Fuel System - Preservation (fuel 4/1/97 [ * ] ballasting to 40,000 lbs.) (material is BFE) New Install Rudder Gust Locks (material is BFE) [ * ] New Leave 3 Passenger doors open. Install gill [ * ] liner material with avionic filter tapes inside for fuselage ventilation (material is BFE) New Cap Engine Inlets and Exhaust (No. 1, 2 and [ * ] 3) (material is BFE) New Remove Oxygen canisters from seats, [ * ] discharge and pack in hazardous material drum for shipping/disposal by Federal Express. Note: The above pricing assumes the engine shipping stands, TR shipping containers, APU shipping stand and BFE designated items are furnished by Federal Express in a timely manner. * These work cards are to be accomplished on a T&M basis for the first two Stored Aircraft with NTE exceed pricing as noted and re-negotiated downward if feasible for subsequent Stored Aircraft. + Price includes loading unit into truck for shipping. @ Price includes removal of exhaust cone as required for shipping. - ------------------ *Blank space contained confidential information which has been filed separately with the Securities and Exchange commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. 07-15-97 Attachment B to Letter Agreement No. 3 DAC 96-29-M AIRCRAFT DELIVERY RECEIPT MDC does hereby accept delivery of one (1)_____________________ aircraft, Factory Serial no.____________ , FAA Registration No.____________ , together with three (3)__________________ engines (if installed), Manufacturer's Serial Nos._______________ ,______________ , and__________________ , together with all fixed equipment, parts, components and accessories installed thereon and all loose equipment specified in the inventory list from Federal Express, such delivery having been made at___________________________________________ , at _______________(a.m./p.m.) on the__________________day of___________________ , in accordance with Letter Agreement No. 3 to DAC 96-29-M between FEDERAL EXPRESS AND MDC. MDC does hereby accept delivery of the Aircraft for the services required by this Letter Agreement No. 3. MCDONNELL DOUGLAS CORPORATION BY: ----------------------------- TITLE: -------------------------- Fuel on Board: (U.S. gallons) -------------------- 07-15-97 Attachment C to Letter Agreement No. 3 to DAC 96-29-M AIRCRAFT REDELIVERY RECEIPT MDC does hereby certify that one (1)_____________________________ aircraft, Factory Serial no._____________ , FAA Registration No.______________ , together with three (3)______________engines (if installed), Manufacturer's Serial Nos. ____________ ,__________________ ,________________ , has had services completed in accordance with Letter Agreement No. 3 to DAC 96-29-M. Redelivery is hereby made by MDC of the above referenced aircraft together with all fixed equipment, parts, components and accessories installed thereon and all loose equipment specified in the inventory list provided by Federal Express at delivery. Place: Date: Time: ------------------ --------------------- ------------------------- FEDERAL EXPRESS CORPORATION MCDONNELL DOUGLAS CORPORATION BY: BY: ------------------------------------ TITLE: TITLE: ------------------------------ -------------------------------- Fuel on Board: (U.S. gallons) --------------------- 07-15-97 Attachment D to Letter Agreement No. 3 DAC 96-29-M Page A-2 ADDITIONAL SERVICES REQUEST [LOGO] AUTHORIZATION FORM ASR NUMBER _______ - ------------------------------------------------------------------------------- FEDEX GENERATING ITEM: MDC W/O NUMBER: - ------------------------------------------------------------------------------- TECHNICAL DOCUMENTS AND SPECIFICATIONS: - ------------------------------------------------------------------------------- GENERAL DESCRIPTION: - ------------------------------------------------------------------------------- MATERIALS: - ------------------------------------------------------------------------------- MATERIAL PROVISIONING RESPONSIBILITY: SCHEDULING IMPACT: / / MDC / / FedEx - ------------------------------------------------------------------------------- ESTIMATED MATERIAL COST: ESTIMATED MAN-HOURS: - ------------------------------------------------------------------------------- DELIVERY DATE: MDC ENGINEERING: - ------------------------------------------------------------------------------- REDELIVERY DATE: AGREED TO FIXED PRICE: - ------------------------------------------------------------------------------- OTHER: (Specify) Authorized By: Date: ------------------------------------------ -------------- Federal Express Corporation Accepted By: Date: ------------------------------------------ -------------- McDonnell Douglas Corporation EX-10.2 3 EXHIBIT 10.2 EXECUTION COPY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIGHTEENTH SUPPLEMENTAL LEASE AGREEMENT BY AND BETWEEN MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY AND FEDERAL EXPRESS CORPORATION DATED AS OF JULY 1, 1997 AMENDING THE CONSOLIDATED AND RESTATED LEASE AGREEMENT DATED AS OF AUGUST 1, 1979 BETWEEN THE MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY AND FEDERAL EXPRESS CORPORATION. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS SECTION PAGE 1 Definitions ...................................... 7 2 Granting Leasehold ............................... 7 3 Term; Delivery and Acceptance of Possession ..... 8 4 Rental ........................................... 8 5 Hazardous Substances/Waste........................ 9 6 Lease Agreement Still in Effect; Provisions Thereof Applicable to this Eighteenth Supplemental Lease Agreement .................................. 10 7 Descriptive Headings ............................. 11 8 Effectiveness of this Eighteenth Supplemental Lease Agreement................................... 11 9 Execution of Counterparts ........................ 11 10 Summaries......................................... 11 Notary ........................................... 13 Leased Parcel Summary ............................ 14 Rental Summary ................................... 16 EIGHTEENTH SUPPLEMENTAL LEASE AGREEMENT THIS EIGHTEENTH SUPPLEMENTAL LEASE AGREEMENT, made and entered into as of the 1st of July, 1997, by and between MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY (herein sometimes referred to as "Authority"), a public and governmental body politic and corporate of the State of Tennessee, and FEDERAL EXPRESS CORPORATION (herein sometimes referred to as "Tenant"), a corporation duly organized and existing under the laws of the State of Delaware and qualified to do business in the State of Tennessee. W I T N E S S E T H: WHEREAS, Authority and Tenant on October 3, 1979 entered into a Consolidated and Restated Lease Agreement dated as of August 1, 1979; and WHEREAS, Authority and Tenant on April 7, 1981 entered into a First Supplemental Lease Agreement dated as of April 1, 1981 (the "First Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land, buildings, and equipment to be included in the Project as defined in the Lease Agreement all as set forth therein (such additional land, buildings, and equipment being defined therein and hereinafter referred to as the "1981 Federal Express Project"), all as set forth therein; and WHEREAS, the Authority and Tenant on May 6, 1982 entered into a Second Supplemental Lease Agreement dated as of January 1, 1982 (the "Second Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on December 9, 1982 entered into a Third Supplemental Lease Agreement dated as of November 1, 1982 (the "Third Supplemental Lease Agreement") so 3 as to release certain items consisting of buildings and leased equipment in the 1981 Federal Express Project; and WHEREAS, Authority and Tenant on September 29, 1983 entered into a Fourth Supplemental Lease Agreement dated as of July 1, 1983 (the "Fourth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in the Project, all as set forth therein; and WHEREAS, Authority and Tenant on April 23, 1984 entered into a Fifth Supplemental Lease Agreement dated as of February 1, 1984 (the "Fifth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on November 19, 1984 entered into a Sixth Supplemental Lease Agreement dated as of April 1, 1984 (the "Sixth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on November 19, 1984 entered into a Seventh Supplemental Lease Agreement dated as of June 1, 1984 (the "Seventh Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on November 4, 1988 entered into a Eighth Supplemental Lease Agreement dated as of July 1, 1988, (the "Eighth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and 4 WHEREAS, Authority and Tenant on July 12, 1989 entered into a Ninth Supplemental Lease Agreement dated as of June 1, 1989, (the "Ninth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on October 1, 1991 entered into a Tenth Supplemental Lease Agreement dated as of October 1, 1991, (the "Tenth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on July 1, 1994 entered into a Eleventh Supplemental Lease Agreement dated July 1, 1994, (the "Eleventh Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on July 1, 1993 entered into a Twelfth Supplemental Lease Agreement dated July 1, 1993, (the "Twelfth Supplemental Lease Agreement") so as to release a certain parcel of land from the 1981 Federal Express Project as described on Exhibit 1 attached thereto; and WHEREAS, Authority and Tenant on June 1, 1995 entered into a Thirteenth Supplemental Lease Agreement dated June 1, 1995, (the "Thirteenth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project and so as to release a certain parcel of land from the 1981 Federal Express Project, all as set forth therein; and 5 WHEREAS, Authority and Tenant on December 1, 1995 entered into a Fourteenth Supplemental Lease Agreement dated January 1, 1996, (the "Fourteenth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on January 1, 1997 entered into a Fifteenth Supplemental Lease Agreement dated January 1, 1997, (the "Fifteenth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on April 1, 1997 entered into a Sixteenth Supplemental Lease Agreement dated April 1, 1997, (the "Sixteenth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, Authority and Tenant on May 1, 1997 entered into a Seventeenth Supplemental Lease Agreement dated May 1, 1997, (the "Seventeenth Supplemental Lease Agreement") so as to provide for the lease by Tenant from Authority of additional land to be included in this Project, all as set forth therein; and WHEREAS, the said Consolidated and Restated Lease Agreement dated as of August 1, 1979, together with the First through the Seventeenth Supplemental Lease Agreements is herein referred to as the "Lease Agreement"; and WHEREAS, Authority and Tenant have agreed to further supplement the Lease Agreement so as to lease to Tenant certain additional land under this Eighteenth Supplemental Lease Agreement. 6 NOW THEREFORE, for and in consideration of the mutual promises, covenants and agreements hereinafter contained to be kept and performed by the parties hereto and upon the provisions and conditions hereinafter set forth, Authority and Tenant do hereby covenant and agree, and each for itself does hereby covenant and agree, as follows: SECTION 1. DEFINITIONS. Except as otherwise provided herein, and unless the context shall clearly require otherwise, all words and terms used in this Eighteenth Supplemental Lease Agreement which are defined in the Lease Agreement, shall, for all purposes of this Eighteenth Supplemental Lease Agreement, have the respective meanings given to them in the Lease Agreement. SECTION 2. GRANTING OF LEASEHOLD. In addition to the lease and demise to Tenant of the land in the Lease Agreement, the Authority hereby leases and demises to Tenant, and Tenant hereby takes and hires from Authority, subject to the provisions and conditions set forth in the Lease Agreement and this Eighteenth Supplemental Lease Agreement, the additional land designated as new Lease Parcels 38 and 39 which is located on the Memphis-Shelby County Airport Authority property situated in Memphis, Shelby County, Tennessee, and being more particularly described as follows: PARCEL 38 (WEST GSE LOT) Being a portion of land contained entirely within the Memphis/Shelby County Airport Authority property, City of Memphis, Shelby County, State of Tennessee and being more particularly described by metes and bounds as follows: COMMENCING at a point being the intersection of the centerline of Taxiway Zulu with the centerline of Taxiway Charlie, said point being N01DEG. 56'39"E, a distance of 736.87' from the existing centerline of Runway 9/27; thence northerly along said centerline of Taxiway Charlie, N01DEG. 56'39"E a distance of 136.15' to a point; thence westerly departing from said centerline of Taxiway Charlie, N88DEG. 03'21"W a distance of 160.00' to a point, said point being the TRUE POINT OF BEGINNING; thence westerly along a line being 129.50' north of and parallel with the centerline of said Taxiway Zulu N85DEG. 42'55"W a distance of 356.31' to a point, said point 7 being 100.00' southeast of the centerline of Runway 3/21 (Closed); thence northeasterly along a line being 100.00' southeast of and parallel with the said centerline of Runway 3/21 (Closed) N32DEG.30'14"W a distance of 700.21' to a point, said point being 160.00' west of the said centerline of Taxiway Charlie; thence southerly along a line being 160.00' west of and parallel with the said centerline of Taxiway Charlie S01DEG. 56'39"W a distance of 617.51' to the POINT OF BEGINNING. Said described land containing 109,921 square feet or 2.523 acres, more or less. PARCEL 39 (FEEDER RAMP) Being a part of the Memphis-Shelby County Airport Authority property, located at the Memphis International Airport within the City of Memphis, Shelby County, State of Tennessee and being more particularly described by metes and bounds as follows: Commencing at the centerline intersection of Taxiway "Charlie" and Taxiway "Zulu"; then northerly along said centerline of Taxiway "Charlie" N01DEG. 56'39"E a distance of 1510.49' to a point; thence westerly departing from said centerline of Taxiway "Charlie" and perpendicular to said Taxiway "Charlie" N88DEG. 03'21"W a distance of 160.00" to a point, said point being the TRUE POINT OF BEGINNING; thence continuing westerly N88DEG. 03'21"W a distance of 584.25' to a point; thence northerly N01DEG. 56'39"E a distance of 552.50' to a point; thence easterly S88DEG. 03'21"E a distance of 200.00' to a point; thence northerly N01DEG. 56'39"E a distance of 25.00' to a point; thence easterly S88DEG. 03'21"E a distance of 25.00' to a point; thence northerly N01DEG. 56'39"E a distance of 75.00' to a point; thence easterly S88DEG. 03'21"E a distance of 266.00' to a point; thence northerly N01DEG. 56'39"E a distance of 54.49' to a point; thence easterly S88DEG. 03'21"E a distance of 93.25' to a point, said point being 160.00' west of the said centerline of Taxiway "Charlie"; thence southerly parallel with and 160.00' west of said Taxiway "Charlie" S01DEG. 56'39"W a distance of 706.99' to the POINT OF BEGINNING. Said described property containing 364,430 square feet or 8.366 acres, more or less. SECTION 3. TERM; DELIVERY AND ACCEPTANCE OF POSSESSION. The terms of this Eighteenth Supplemental Lease Agreement shall commence at 12:01 A.M. on July 1, 1997 for the land described as Parcels 38 and 39 and shall expire at such time as the Lease Agreement shall expire, to-wit: August 31, 2012 or upon such earlier termination, extension or otherwise as provided therein. Authority shall deliver to Tenant sole and exclusive possession of that portion of the land, leased hereby as of the date commencement of the term hereof, subject however, to Authority's right-of-entry set forth in Section 21 of the Lease Agreement. SECTION 4. RENTAL. In addition and supplemental to the rentals required to be paid to the Authority pursuant to Section 5 of the Lease Agreement (including all prior supplemental 8 lease agreements), during the term of this Eighteenth Supplemental Lease Agreement, Tenant shall pay to the Authority in advance on the first business day of each month $3,858.06 in equal installments beginning July 1, 1998, a total rental payment of $46,296.66 per year, which the parties hereto agree is based upon an aggregate of 474,351 square feet of area at an annual rental rate of ($0.0976) per square foot. SECTION 5. HAZARDOUS SUBSTANCES/WASTE. Tenant, at its own expense, may arrange for a Phase 1 Environmental Survey on the land described as Parcel 38 and Parcel 39 by a reputable environmental consultant to determine the existence of "Hazardous Substances", as such term is defined in this Agreement. In the event that "Hazardous Substances" are discovered during excavation for construction on Parcel 38 and Parcel 39, and such "Hazardous Substances" require special handling, removal or disposal ("Remediation"), then Tenant shall immediately notify Authority. The Tenant and Authority will confer and jointly determine the method for handling, removing or disposing of the "Hazardous Substances" within 14 days after Tenant provides the Authority, in writing, its plan for Remediation. The form of Remediation agreed to by the parties must comply with "Environmental Laws", as such term is defined below. In the event that Tenant and Authority are unable to agree on a method for handling, removing or disposing of the "Hazardous Substances" due to differing interpretations of the requirements for Remediation as set forth in the applicable "Environmental Laws", then the form of Remediation will be determined by the appropriate federal, state or local agency with relevant regulatory and enforcement jurisdiction over the subject site. Authority will grant to Tenant a rent credit equal to the reasonable documented costs paid by Tenant for the Remediation such "Hazardous Substances" associated with Parcel 38 and Parcel 39. 9 The term "HAZARDOUS SUBSTANCES", as used in this Eighteenth Supplemental Lease Agreement, shall mean any hazardous or toxic substances, materials or wastes, including, but not limited to, those substances, materials, and wastes (i) listed in the United States Department of Transportation Hazardous Materials Table (49 CFR Section 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto, (ii) designated as a "Hazardous Substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. Section 1251 et seq. (33 U.S.C. Section 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. Section 1317, (iii) defined as a "Hazardous Waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq. (42 U.S.C. Section 6903), or (iv) defined as "Hazardous Substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.Section 9601, et seq. 42 U.S.C. Section 9601) or any other substances, (including, without limitation, asbestos and raw materials which include hazardous constituents), the general, discharge or removal of which or the use of which is restricted, prohibited or penalized by any "Environmental Law", which term shall mean any Federal, State or local law, regulation, or ordinance relating to pollution or protection of the environment. SECTION 6. LEASE AGREEMENT STILL IN EFFECT; PROVISIONS THEREFORE APPLICABLE TO THIS SUPPLEMENTAL LEASE AGREEMENT. All of the terms, provisions, conditions, covenants and agreements of the Lease Agreement, as supplemented, shall continue in full force and effect as supplemented hereby, and shall be applicable to each of the provisions of this Eighteenth Supplemental Lease Agreement during the term hereof with the same force and effect as though the provisions hereof were set forth in the Lease Agreement. 10 SECTION 7. DESCRIPTIVE HEADINGS. The descriptive headings of the sections of this Eighteenth Supplemental Lease Agreement are inserted for convenience of reference only and do not constitute a part of this Eighteenth Supplemental Lease Agreement and shall not affect the meaning, construction, interpretation or effect of this Eighteenth Supplemental Lease Agreement. SECTION 8. EFFECTIVENESS OF THIS SUPPLEMENTAL LEASE AGREEMENT. This Eighteenth Supplemental Lease Agreement shall become effective at 12:01 a.m. on July 1, 1997. SECTION 9. EXECUTION OF COUNTERPARTS. This Eighteenth Supplemental Lease Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. SECTION 10. SUMMARIES. For the convenience of both parties a Leased Parcel Summary and a Rental Summary are attached to this Lease Agreement. 11 IN WITNESS WHEREOF, THE MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY AND FEDERAL EXPRESS CORPORATION have caused this Eighteenth Supplemental Lease Agreement to be duly executed in their respective behalfs, as of the day and year first above written. WITNESS: MEMPHIS-SHELBY COUNTY AIRPORT AUTHORITY /S/J. McMICHAEL BY: /S/LARRY D. COX - ------------------------------- ------------------------------- TITLE: EXECUTIVE VICE PRESIDENT TITLE: PRESIDENT ------------------------- ----------------------------- Approved as to Form and Legality: /S/R. GRATTAN BROWN, JR. - ----------------------------------- R. Grattan Brown, Jr., Attorney for Authority WITNESS: FEDERAL EXPRESS CORPORATION /S/LEANNA M. JOHNSON BY: /S/WILEY JOHNSON, JR. - ------------------------------ ----------------------------------- TITLE: Project Coordinator TITLE: Managing Director, Real Estate ---------------------- -------------------------------- And Airport Development -------------------------------- 12 (STATE OF TENNESSEE ) (COUNTY OF SHELBY ) On this 4th day of July, 1997, before me appeared LARRY D. COX, to me personally known, who, being by me duly sworn (or affirmed), did say that he is the President of the Memphis-Shelby County Airport Authority, the within named Lessor, and that he as such President, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the Authority by himself as such President. MY COMMISSION EXPIRES 9/17/97 /S/Carol D. Wolfe - ------------------------- ------------------------------ Notary Public (seal) STATE OF TENNESSEE ) COUNTY OF SHELBY ) On this 1st day of JULY, 1997, before me appeared Wiley Johnson, Jr., to me personally known, who, being by me duly sworn (or affirmed), did say that he is the MANAGING DIRECTOR OF REAL ESTATE of Federal Express Corporation, the within named Lessee, and that he as such MANAGING DIRECTOR, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the Corporation by himself as such MANAGING DIRECTOR. MY COMMISSION EXPIRES My Commission Expires: Dec. 7, 1998 /S/Leanna M. Johnson - --------------------------------------- ----------------------------- Notary Public (seal) 13 FEDERAL EXPRESS LEASED PARCELS SUMMARY PARCEL EFFECTIVE LEASE ACRES SQUARE FEET AGREEMENT DATE - ------ ----- ----------- --------- ---- BASE-LEASE ---------- Revised 9 128.469 Consolidated & 08/01/79 Restated 10 1.612 70,200 Consolidated & 08/01/79 Restated 11 1.044 45,359 Consolidated & 08/01/79 Restated PREVIOUS SUPPLEMENTS -------------------- 12 2.707 117,915 First 04/01/81 Supplemental 13 6.860 298,830 Second 01/01/82 Supplemental 14 14.586 635,377 Fourth 07/01/83 Supplemental 15 12.689 552,723 Fourth 07/01/83 Supplemental Rev 16 18.281 (19.685) 796,312 Fifth 02/01/84 Supplemental Rev 17 19.616 (124.992) 5,210,477 Sixth 04/01/84 Supplemental 18 2.717 118,353 Sixth 04/01/84 Supplemental 19 41.606 1,812,352 Seventh 06/01/84 Supplemental 25 0.435 18,933 Eighth 07/01/88 Supplemental 20 11.275 491,127 Ninth 06/01/89 Supplemental 27 11.192 487,512 Tenth 10/01/91 Supplemental 27 A(West) 4.058 176,777 Eleventh 07/01/94 Supplemental 27 B(West) 5.706 248,533 Eleventh 07/01/94 Supplemental Southwest Ramp 2.350 102,366 Eleventh 07/01/94 Supplemental 14 PARCEL EFFECTIVE LEASE ACRES SQUARE FEET AGREEMENT DATE - ------ ----- ----------- --------- --------- 32 (removed) 22.972 1,000,681 Twelfth 07/01/93 Supplemental 33 8.998 391,942 Thirteenth 06/01/95 Supplemental 36 3.050 132,837 Thirteenth 06/01/95 Supplemental Hangar 8 (removed) 36,946,33 Thirteenth 06/01/95 Supplemental 34 9.951 433,461 Fourteenth 01/01/96 Supplemental 21 19.134 833,476 Fifteenth 01/01/97 Supplemental 22A (North) 3.214 140,000 Sixteenth 04/01/97 Supplemental 37 2.692 117,283 Seventeenth 05/01/97 Supplemental THIS SUPPLEMENT --------------- 38 2.523 109,921 EIGHTEENTH 07/01/97 SUPPLEMENTAL 39 8.366 364,430 EIGHTEENTH 07/01/97 SUPPLEMENTAL OPTIONS ------- 22B (South) 3.310 144,200 Option, Expires 5/31/99 29 3.85 167,706 Option, Expires 9/30/2001 ASSIGNMENTS ----------- 23 5.923 258,008 Graber Assignment, Expires 12/31/2000 Invoice FEC Final Increase 1/1/96 24 9.964 434,030 Southwide Assignment Expires 5/14/2013 Invoice FEC Next Increase 5/15/98 26 9.532 415,213 BICO Assignment, Expires 7/31/2021 Invoice FEC Next Increase 8/01/2011 28 10.68 465,221 Equitable Life Assignment Expires 5/14/2013 Invoice FEC Next Increase 5/15/98 15 RENTAL - FEDERAL EXPRESS Effective July 1, 1998 ANNUAL CATEGORY NUMBER OF RENTAL RATE OF SPACE SQUARE FEET PER SQ. FT. ANNUAL RENTAL - -------- ----------- ----------- ------------- Bldg. T-376 1,240 1.221 $ 1,514.04 Unimproved Ground 6,043,916 0.098 592,303.77 Improved Apron 2,395,802 0.122 292,287.84 Hangar Property 72,092.67 0.903 65,099.68 Hangar Office 28,000 1.465 41,020.00 International Park 9,694,700 0.171 1,657,793.70 Former IRS Facility 2,255,137.24 1,200,000.00 ------------- ------------- 20,490,887.91 $3,850,019.03 BREAKDOWN OF SPACE ------------------ SQ. FT. SQ. FT. --------- --------- Bldg. T-376 Parcel 4 1,240 - ----------- --------- 1,240 UNIMPROVED GROUND Parcel 1 130,900 Parcel 2 50,000 Parcel 3 192,400 Parcel 4 32,540 Parcel 6 89,700 Parcel 9 1,167,337 Parcel 19 1,812,362 Parcel 20 491,127 Parcel 27A 176,777 Parcel 27B 248,533 Southwest Ramp 102,366 Parcel 33 391,942 Parcel 36 132,837 Parcel 34 433,461 Parcel 37 117,283 Parcel 38 109,921 Parcel 39 364,430 --------- 6,043,916 IMPROVED APRON Parcel 1 850,250 Parcel 2 226,900 Parcel 7 577,540 Parcel 9 253,600 Parcel 27 487,512 ------- 2,395,802 16 SQ. FT. SQ. FT. --------- --------- HANGAR PROPERTY Parcel 1 44,336 Parcel 2 27,756.67 --------- 72,092.67 HANGAR OFFICE Parcel 1 22,400 Parcel 2 5,600 ------ 28,000 INTERNATIONAL PARK Parcel 5 24,000 Parcel 8 247,254 Parcel 9 1,586,172 Parcel 10 70,200 Parcel 11 45,359 Parcel 12 117,915 Parcel 13 298,830 Parcel 14 556,334 Parcel 15 552,723 Parcel 16 796,312 Parcel 17 4,288,839 Parcel 18 118,353 Parcel 25 18,933 Parcel 21 833,476 Parcel 22A 140,000 ------------ 9,694,700 FORMER IRS FACILITY 2,255,137.24 2,255,137.24 ------------ TOTAL: 20,490,887.91 17 EX-11.1 4 EXHIBIT 11.1 STATEMENT RE COMPUTATION OF EARNINGS EXHIBIT 11.1 FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Net income applicable to common and common equivalent shares and the weighted average number of shares used in the calculation of earnings per share for the three-month periods ended August 31, 1997 and 1996 were as follows (in thousands, except per share amounts): Three Months Ended August 31, ---------------------- 1997 1996 -------- -------- Net income applicable to common and common equivalent shares. . . . . . . . . . . . . $143,257 $ 61,950 -------- -------- -------- -------- Average shares of common stock outstanding. . . . . 114,970 113,844 Common Equivalent Shares: Assumed exercise of outstanding dilutive options . . . . . . . . . . . . . . . . . . . . 6,999 5,233 Less shares repurchased from proceeds of assumed exercise of options . . . . . . . . . . . . . . (4,626) (4,143) -------- -------- Average common and common equivalent shares . . . . 117,343 114,934 -------- -------- -------- -------- Earnings per share. . . . . . . . . . . . . . . . . $ 1.22 $ .54 -------- -------- -------- -------- The computation of the number of shares repurchased from the proceeds of the assumed exercise of outstanding dilutive options is based upon the average market price of the Company's common stock during the periods. Common equivalent shares are excluded in periods in which their assumed exercise would have an anti-dilutive effect. Fully diluted earnings per share are substantially the same as earnings per share. EX-12.1 5 EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO EXHIBIT 12.1 FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
Three Months Ended Year Ended May 31, August 31, ---------------------------------------------------------- ------------------ 1993 1994 1995 1996 1997 1996 1997 -------- -------- -------- ---------- ---------- -------- -------- (In thousands, except ratios) Earnings: Income before income taxes . . . . . . . . . $203,576 $378,462 $522,084 $ 539,959 $ 628,221 $107,739 $246,995 Add back: Interest expense, net of capitalized interest . . . . . . . . . 168,762 152,170 130,923 105,449 95,689 22,875 27,364 Amortization of debt issuance costs . . . . . . . . . . . . 4,906 2,860 2,493 1,628 1,328 335 337 Portion of rent expense representative of interest factor. . . . . . . . . . . . 262,724 285,261 329,370 386,254 434,846 102,983 111,883 -------- -------- -------- ---------- ---------- -------- -------- Earnings as adjusted . . . . . . . . . . . . $639,968 $818,753 $984,870 $1,033,290 $1,160,084 $233,932 $386,579 -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- -------- -------- Fixed Charges: Interest expense, net of capitalized interest. . . . . . . . . . . $168,762 $152,170 $130,923 $ 105,449 $ 95,689 $ 22,875 $ 27,364 Capitalized interest . . . . . . . . . . . . 31,256 29,738 27,381 39,254 39,449 10,036 9,987 Amortization of debt issuance costs. . . . . . . . . . . . . . 4,906 2,860 2,493 1,628 1,328 335 337 Portion of rent expense representative of interest factor.. . . . . . . . . . . . . 262,724 285,261 329,370 386,254 434,846 102,983 111,883 -------- -------- -------- ---------- ---------- -------- -------- $467,648 $470,029 $490,167 $ 532,585 $ 571,312 $136,229 $149,571 -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- -------- -------- Ratio of Earnings to Fixed Charges . . . . . 1.4 1.7 2.0 1.9 2.0 1.7 2.6 -------- -------- -------- ---------- ---------- -------- -------- -------- -------- -------- ---------- ---------- -------- --------
EX-15.1 6 EXHIBIT 15.1 LETTER RE UNAUDITED INTERIM FIN. STAT EXHIBIT 15.1 October 6, 1997 Federal Express Corporation 2005 Corporate Avenue Memphis, Tennessee 38132 We are aware that Federal Express Corporation will be incorporating by reference in its previously filed Registration Statements No. 2-74000, 2-95720, 33-20138, 33-38041, 33-55055, 333-03443, and 333-07691 its Report on Form 10-Q for the quarter ended August 31, 1997, which includes our report dated October 6, 1997 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered part of these registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, Arthur Andersen LLP EX-27 7 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED STATEMENTS OF INCOME ON PAGES 3-5 OF THE COMPANY'S FORM 10Q FOR THE QUARTERLY PERIOD ENDING AUGUST 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAY-31-1998 JUN-01-1997 AUG-31-1997 209,782 0 1,811,280 40,164 323,532 2,514,505 10,083,465 5,371,533 8,019,356 2,140,436 1,438,233 0 0 11,504 3,091,834 8,019,356 0 3,297,218 0 3,033,013 0 0 25,828 246,995 103,738 0 0 0 0 143,257 1.22 1.22
-----END PRIVACY-ENHANCED MESSAGE-----