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    FDX CORPORATION ANNUAL REPORT 1998 FDX CORPORATION ANNUAL REPORT 1998


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    =A WHOLE GREATER


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    On January 27, 1998, Federal Express Corporation launched a new era in transportation – again. Twenty-five years after it founded the express distribu- tion industry, FedEx acquired the Caliber System, Inc. compa- nies, leaders in ground small- package delivery, surface expedited shipping, less-than-truckload freight and integrated logistics management. From this historic union emerged a new brand of transportation leadership: FDX Corporation, a $16 billion distribution and logistics powerhouse. With its unprecedented portfolio =A NEW BRAND OF LEADERSHIP of shipping and logistics services, FDX is uniquely equipped to provide the comprehensive distribution solutions customers seek in today’s fast, competitive, interconnected global marketplace. The service, technology and marketing synergies created by FDX unlock exciting new opportunities for stockholders. In this inaugural annual report to FDX stockholders, you’ll dis- cover why the acquisition of Caliber System by FedEx involved more than simple addition – why for customers and stockholders alike, FDX equals a whole far greater than the sum of its parts. TER THAN THE SUM OF ITS PARTS


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    = A $400 BILLION P2


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    To Our Stockholders: During fiscal year 1998, FedEx celebrated its 25th year of industry leadership by laying the foundation for future growth with the acquisition of Caliber System, Inc., and the creation of FDX Corporation. Our consolidated results for the Frederick W. Smith Chairman, President and year were strong, revealing a $16 billion company with Chief Executive Officer net income of $583 million, excluding merger expenses. Earnings per share rose to a record $3.91. We are pleased with our financial achievements and excited about our growth opportunities. FDX is poised to take advantage of a global transportation market that – with the express, less-than-truckload and ground small-package MARKET OPPORTUNITY segments combined – is projected to grow from $75 billion today to nearly $400 billion over the next 20 years. Once again, we have changed the competitive landscape, creat- ing a one-stop source for global shipping and logistics solutions. No other corporation is better situated to take advantage of business trends such as “just-in-time” shipping, the explosive growth of elec- tronic commerce, and the proliferation of global sourcing and selling across markets. Prior to the acquisition, neither FedEx nor RPS individually could offer the same com- plementary mix of express and ground small-package delivery services. Now – operating independently yet CHAIRMAN’S LETTER P 3


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    working together under FDX – we’re winning busi- ness from our competitors by providing unmatched service, access and connectivity. When we announced the formation of FDX Corporation, many observers assumed that the Caliber acquisition made sense only if we fully integrated our operations. Based on 25 years of industry leader- ship and expertise, we are doing just the opposite – and for compelling strategic reasons. Simply layering the unique resource and operating requirements of a time-definite, global, express-delivery network onto a day-definite, ground small-package network would surely result in diminished service quality and increased costs. = COMPLETE ONE Under the FDX umbrella, we will leverage our shared strengths while operating each delivery network independently, with each focused on its respective markets. For FedEx, that means an unrelenting dedication to rapid, time-specific global delivery in 1, 2 or 3 business days. For RPS, that means continued commit- ment to its highly efficient and reliable, business-to-business, ground small-package delivery capability. The result for all FDX companies is optimal service quality, reliability and profitability. To capitalize on the synergies of our shared cus- tomer relationships, we are aggressively aligning sales and marketing initiatives across all FDX P 4 CHAIRMAN’S LETTER


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    companies, with particular attention to our primary opportunities – FedEx and RPS. We have identified more than one million FedEx customers who cur- rently have no relationship with RPS. Conversely, tens of thousands of RPS customers do not use FedEx for their inter- national or U.S. domestic express shipments. Given an opportunity to obtain the best of both delivery services, we find many businesses eager to become full-fledged “FDX customers.” FDX is now positioned to meet customer needs by providing comprehensive transportation, logistics and supply chain management solutions. -STOP SHIPPING + + + Increasingly, businesses are seeking strategic, cost-effective ways to manage their supply chains – the series of transportation and information exchanges required to convert parts and raw materials into finished, delivered products. Experience tells us that customers prefer one supplier to meet all of their distribution and logistics needs. And FDX has what it takes: Our unique global network, operational expertise and air route authorities cannot be repli- cated by the competition. With FDX, our cus- tomers have a strategic competitive weapon to squeeze time, mass and cost from the supply chain. CHAIRMAN’S LETTER P 5


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    Looking ahead, FDX will seize opportunities to drive revenue growth and build bottom-line results for our stockholders. We are focused on three primary growth strategies: 1) A collabora- tive sales process that leverages our shared customer relationships; 2) Aggressive global marketing of the broad FDX portfolio to tar- geted prospective customers; and 3) Strategic application of infor- mation systems to reduce costs and improve customer access and connectivity. We see a very bright future for FDX – and we’re not alone in our confidence. In June 1998, Wired magazine selected FDX as one of 40 “New Blue Chips,” companies that are “building the new = A NEW BRAND economy (using) technology, networks and information to reshape the world.” Of the 40 companies cited for possessing fundamental quali- ties necessary to succeed in a fast-changing economy – globalism, communication, innovation, technology and strategic vision – FDX was the only company deemed to possess all five fundamentals as core business elements. Thank you for your investment of capital and con- fidence in this new brand of leadership we call FDX. We expect to reward your investment by demonstrating that FDX Frederick W. Smith equals a historic opportunity for growth, Chairman, President and profitability and market leadership. Chief Executive Officer P 6 CHAIRMAN’S LETTER


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    OF LEADERSHIP + + + P7


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    = P8


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    SEND A MESSAGE JTECH More than one million JTECH pagers have been shipped around the world to hospitals, factories, auto dealerships, even church nursery centers. But perhaps the most critical shipments are the FedEx boxes that arrive just in time for Mother's Day, the busiest day of the year for restaurants. At Outback Steakhouse and other restaurants, customers hold on to the short-range pagers so they can be alerted when a table is ready, freeing them to stroll or browse nearby shops. Less urgent deliveries of replacement pagers or new orders are delivered via RPS. By using FDX services, JTECH sends a message to its customers: Your order will be there. TOTAL SOLUTIONS P9


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    P10


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    BUILD TO ORDER D E L L C O M P U T E R C O R P O R AT I O N Dell revolutionized the computer industry with a customer-focused direct business model that’s lean on inventory and cycle time, but long on logistics efficiencies, customization and customer delight. The company turns inventory in fewer than eight days, compared with 60 to 90 days through more tradi- tional indirect competitors. To keep its supply chain tight, Dell has FedEx deliver computers and parts from its factory in Malaysia to its largest Asian market – Japan. In North America, Caliber Logistics provides distribution and fleet management services for Dell facilities in Austin, Texas. FedEx, meanwhile, handles the express deliveries of several Dell products, displaying a commitment to velocity, quality and customer service that mirrors Dell’s own uniquely successful approach to business. P11


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    CALCULATE THE MOVES U N I S Y S C O R P . When a large corporation decentralizes shipping, it’s like a computer’s circuitry firing at random: interesting pyrotechnics, but not very productive. That’s why Unisys chose to harness the buying power of hundreds of sales offices, service locations and manufacturing sites by utilizing the transportation management services of FDX. Unisys employees simply call a toll-free number staffed by Caliber Logistics. Caliber distribution experts rely on FedEx, RPS, Roberts Express, and Viking Freight to ship everything from critical replacement parts to Unisys enterprise servers directly to the customer site. Each shipping decision reflects the most appropriate and cost-effective delivery solution. Now that computes. P12


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    CAPTURE THE MOMENTS A R T L E AT H E R When supplying 25,000 professional photographers with custom handmade photo albums, every- thing has to be picture perfect from order through delivery. So Art Leather, the world’s largest manufacturer of albums, folios and frames for professional photographers, and its partner, Gross National Products, offer customers a choice of FDX services to meet their deadlines and budgets: FedEx express services or RPS ground small-package delivery services. And the sky is no limit. Russian and U.S. commanders of the Mir Space Station recently exchanged commemorative Art Leather albums. This year, FedEx and RPS will deliver more than 200,000 Art Leather ship- ments, each one a thing memories are made of. P13


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    SHOP FOR VALUE S TAG E S TO R E S I N C . Challenged with opening one new department store a week, Stage Stores didn't have to shop long before selecting FDX as its distribution ally. Every day, RPS delivers up to 13,000 cartons of popular name- brand merchandise – from Levi Strauss to Liz Claiborne – to 630 stores trade-named Stage, Bealls and Palais Royal. Stage Stores relies on RPS as the distribution arm of its state-of-the-art inventory tracking system, which identifies and transfers slow-moving items and keeps staple merchandise in stock. Store advertising, payroll and other time- sensitive corporate shipments are delivered via FedEx. In other words, for one-stop shipping, Stage Stores shops FDX. P14


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    P15


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    DELIVER THE GOODS INGRAM MICRO INC. Ingram Micro, the largest worldwide distributor of computer technology products and services, is legendary for its commitment to same-day shipping of orders received by 5 p.m. When customers have some time to spare, RPS delivers a growing number of those shipments. For more time-sensitive deliveries, Ingram Micro did itself – and its customers – one better, locating its national distribution facility just minutes from the FedEx SuperHub in Memphis, Tennessee. By leveraging late-night cutoff times for next-day and two-day delivery, Ingram Micro cuts as much as a day off its order cycle time. When delivering the goods is your business, that’s time well spent. P16


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    FDX COMPANIES AT A GLANCE FDX is a unique holding company that provides strategic direction for FedEx and the Caliber companies. A $16 billion global transportation and logistics enterprise, FDX offers customers “total one-stop shopping” for solutions at all levels of the supply chain. Services offered by FDX companies include worldwide express delivery, ground small-package delivery, less-than-truckload freight delivery, and global logistics and electronic commerce solutions. FedEx, the world leader in global express distribution, offering time-certain delivery within 24 to 48 hours among markets that comprise more than 90 percent of the world’s gross domestic product. RPS, North America’s Roberts Express, the second-largest provider of world’s leading surface- business-to-business ground expedited carrier for small-package delivery. nonstop, time-critical and special-handling Employees and Contractors: 190,0 0 0 shipments. Headquarters: Memphis, Tennessee Stock Symbol: FDX Online: www.fdxcorp.com Caliber Logistics, a pioneer in Viking Freight, the foremost providing customized, integrated less-than-truckload freight carrier logistics and warehousing solu- in the western United States. tions worldwide. Mission and Values FDX will produce superior financial returns for its stockholders by providing high value-added logistics, transportation and related information services through focused operating companies. Customer require- ments will be met in the highest quality manner appropriate to each market segment served. FDX will strive to develop mutually rewarding relationships with its employees, partners and suppliers. Safety will be the first consider- ation in all operations. Corporate activities will be conducted to the highest ethical and professional standards. P17


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    HIGHLIGHTS OF THE YEAR The formation of FDX frees its member companies to focus on what they do best. In the case of FedEx, that is to provide the industry’s finest express-delivery services, just as it has for 25 years. Whether it’s rushing a drill bit to a Venezuelan oil field, moving semiconductors just-in-time between Asia and the United States, or delivering chemotherapy treatments to a hospital in Europe, FDX customers rely on FedEx for fast, dependable, time-specific delivery of high-value goods to more than 210 countries. With the world’s most advanced express-distribution network, and information systems that allow shippers and their customers global visibility of shipment status, FedEx and its 144,000 employees deliver more than 3 million boxes, documents and pallets each business day. + + + + + + + + + A C E L E B R AT I O N O F l To reduce transit times Osaka, Japan, with the I N N OVAT I O N along a route that links FedEx SuperHub in North America, Europe, Memphis. The flight makes Fiscal year 1998 marked the Middle East, India and possible unprecedented Federal Express Corporation’s Asia, a new around-the- next-business-day delivery by 25th anniversary, and with it world flight was launched in 10:30 a.m. – backed by the the latest in a string of serv- September 1997. FedEx Money-Back ice and technology innova- l To expand customers’ Guarantee – from key mar- tions that have made – and options for delivering heavy kets in Asia to thousands of kept – FedEx the industry freight, FedEx introduced U.S. cities, major Canadian leader since 1973. FedEx International markets and Mexico City. Despite Asia’s current finan- Economy® Freight, providing SERVICE EXCELLENCE cial situation, FedEx stuck by time-specific delivery (typi- its long-term strategy of cally within five business Even as it expanded the improving global connectivity days) for heavy, skidded ship- reach of its network, FedEx for FDX customers by refin- ments up to 1,500 lbs. continued to enhance the ing and strategically expand- l To enhance global connec- convenience and quality of ing FedEx’s worldwide tivity with Asia, FedEx added its service. network. Examples include: a nonstop daily flight with During an August 1997 overnight service linking strike by UPS employees, P18


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    HIGHLIGHTS OF THE YEAR + = FREEDOM TO FOCUS which caused FedEx, RPS period, FedEx paid a These service innovations, and other carriers to experi- $25 million Special Appre- plus the brand respect FedEx ence unusually high ship- ciation Bonus to nearly has earned among express ment volumes, FedEx 90,000 U.S. employees. shippers worldwide, helped employees earned system- FedEx generate revenues of Online, FedEx continued to wide ISO 9001 recertifica- more than $13 billion, a set the customer-service tion while handling 30 15 percent increase over pace, unveiling an upgrade percent more volume than fiscal year 1997. to its FedEx interNetShipSM normal. To recognize FedEx’s shipment processing capa- As the largest subsidiary in most treasured asset – its bility, and redesigning its the FDX family, FedEx people – for their absolute acclaimed Web site remains superbly positioned dedication to customer ser- (www.fedex.com) to improve to propel FDX to new levels vice during this challenging access and functionality for of growth and profitability. global customers. P19


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    HIGHLIGHTS OF THE YEAR For RPS, Inc., the FDX family of companies represents an ideal competitive enhancement to its current market position. RPS is North America’s second-largest provider of ground small-package delivery, with service available to 28 European countries and Puerto Rico. Having responded to competitive pressure to add express to its service mix by joining FDX, RPS now can concentrate on strategically expanding its core capability – delivering business-to-business packages at rates and service levels that make it the price-value leader in its market. = A $16 BILLION RPS, like its sister company, FedEx, is an industry leader customers and streamlines the daily handling of more in on-time performance. In than 1.3 million packages. early 1998, RPS enhanced In the past year alone, for its deserved reputation example, the company for reliability by an- added multiple-carrier nouncing a money-back shipment tracing and proof- guarantee on all of-delivery signature func- business-to-business tionality to its Web site ground deliveries within (www.shiprps.com), making the continental United it an even more customer- States, beginning in July. useful shipping tool. RPS also is a pioneer in RPS’s value to FDX cus- applying shipping-automation tomers is reflected in technology, which benefits continued double-digit growth in revenue and package volume.


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    HIGHLIGHTS OF THE YEAR As the premier brand name in less-than-truckload (LTL) freight movements throughout the western United States, Viking Freight, Inc. adds yet another important service to the diverse portfolio that FDX offers its customers. With next- and second- two customer advisory Viking’s commitment to business-day regional freight boards – one for corporate superior service has not service, plus direct ocean accounts, the other for gone unnoticed. In 1997, for service to Alaska and smaller shippers – to better the third time, the National Hawaii, Viking’s 4,700 anticipate and meet cus- Small Shipments Traffic employees handle approxi- tomers’ needs. Viking has Conference (NASSTRAC) mately 12,000 shipments enhanced its customer ser- named Viking its regional LTL per day, achieving on-time vice and today responds to carrier of the year. Readers delivery on more than most inquiries within sec- of Logistics Management 99 percent of all shipments. onds. Viking’s Web site and Distribution magazine (www.vikingfreight.com), voted Viking “Quality Carrier” Consistent with its “Easy To lets customers conduct busi- for 1998, the seventh Do Business With” philoso- ness electronically with con- year Viking has received phy, Viking recently created venience and confidence. this award. POWERHOUSE + + + + + + P21


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    HIGHLIGHTS OF THE YEAR Nearly 1,000 times each business day, Roberts Express, Inc. engineers and executes time- specific, door-to-door surface and air-charter delivery solutions that solve special-handling challenges for FDX customers within North America and Europe. How special? Consider the 60-ton stamping press Roberts recently delivered from Brescia, Italy, to Kokomo, Indiana. The largest shipment ever handled by Roberts, the press was delivered quickly and on time, keeping an automaker’s assembly plant up and running at peak efficiency and quality levels. + + + With 2,000 employees and mind, even in the most time- the system lets dispatchers owner-operators, Roberts is critical situations. evaluate at least 20 load and the world’s largest surface- traffic variables to help To promote ever higher expedited carrier. For ship- ensure that delivery vehicles levels of productivity and pers and their customers, are where they need to be, service, Roberts recently Roberts’ service guarantee when they need to be, for installed a dynamic vehicle and exceptional on-time per- optimum customer service allocation system. As cus- formance deliver peace of and fleet utilization. tomer orders are received, P22


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    HIGHLIGHTS OF THE YEAR From order-fulfillment systems to warehousing solutions, Caliber Logistics, Inc. develops and implements customized logistics solutions that help FDX customers manage costs, improve cus- tomer service and focus on their core business activities. With 3,500 employees and owner-operators worldwide, Caliber Logistics manages logistics for more than 100 FDX customer locations. It handles more than 3 million shipments per year and operates more than 6 million square feet of contract warehouse space. = SHARED STRENGTHS From its base of operations controlled, opportunistic in the United States and expansion by initiating opera- Canada, Caliber Logistics tions in Mexico and Asia. launched European opera- To help customers manage tions in the Netherlands in logistics activities and infor- 1996. Since then, new oper- mation seamlessly across ations in Belgium, Northern international borders, the Ireland and Scotland have company is deploying unique propelled European rev- transportation management enues to nearly 10 percent software. When installed, of the company’s annual initially in the United States total. During the second half and Europe, it will make of 1998, the company Caliber the first logistics sup- expects to continue its plier to offer customers a single transportation- management interface on both sides of the Atlantic. P23


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    MESSAGE FROM THE CHIEF FINANCIAL OFFICER The birth of FDX Corporation illustrates the financial synergies that can result when two complementary organizations combine strengths under a shared vision. $15.9 $14.3 The acquisition of Caliber System, Inc. by FedEx – a “pooling of interests” transaction – was accretive to FedEx earnings in fiscal year 1998. The transaction included no goodwill charges, produced a tax-free exchange of shares for Caliber stockholders, and left the FDX balance sheet in robust health. 97 98 REVENUES (in billions) $3.91 $2.53 (1) 97 98 FINANCIAL SECTION EARNINGS PER SHARE Stockholders can expect to We will manage the busi- While the birth of FDX was a benefit from growth trends ness as a portfolio. As a unique event in the trans- driving the multiple market result, decisions on capital portation industry, fiscal niches now served by FDX. investment, expansion of our year 1998 was, in many 33.3% For each one of the FDX delivery and information ways, another step on a con- 29.3% companies, we will focus on technology networks, and tinuum of excellence – that making appropriate service additions or is, a continuation of the investments in the technol- enhancements will be based financial performance, ser- ogy and transportation on achieving the highest vice and technology innova- assets necessary to opti- overall return on capital. In tion, and global leadership mize our enhanced profit addition, our collaborative FedEx stockholders have position in terms of earnings selling process will increase grown to expect. 97 98 performance and cash revenues for the operating DEBT TO TOTAL CAPITALIZATION flow. Our strict yield manage- companies through a tar- ment programs will geted program focusing on Alan B. Graf, Jr. continue to support profit- high-yielding business. Executive Vice President able volume growth. and Chief Financial Officer (1) Earnings Per Share assumes dilution and excludes non-recurring items. See footnote (1) on page 25. P24


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    FINANCIAL HIGHLIGHTS ON A LIKE-CALENDAR BASIS In thousands, except earnings per share and Other Operating Data 1998 1997 Percent Change OPERATING RESULTS Revenues $15,872,810 $14,265,288 + 11 Operating income 1,010,660 425,369 +138 Income from continuing operations before income taxes 899,518 343,865 +162 Net income 503,030 141,276 +256 Net income, excluding non-recurring items (1) 582,723 372,752 + 56 Earnings per share, assuming dilution $ 3.37 $ .96 +251 Earnings per share, excluding non-recurring items, assuming dilution (1) $ 3.91 $ 2.53 + 55 Average common and common equivalent shares 149,204 147,144 + 1 FINANCIAL POSITION Property and equipment, net $ 5,935,050 $ 5,460,293 + 9 Total assets 9,686,060 9,008,816 + 8 Long-term debt, less current portion 1,385,180 1,597,954 – 13 Common stockholders’ investment 3,961,230 3,448,095 + 15 OTHER OPERATING DATA FedEx Express package: Average daily package volume 3,025,999 2,715,894 + 11 Average pounds per package 8.5 7.2 + 18 Average revenue per pound $ 1.84 $ 2.11 – 13 Average revenue per package $ 15.69 $ 15.11 + 4 Airfreight: Average daily pounds 2,769,922 2,542,226 + 9 Average revenue per pound $ .85 $ .94 – 10 Operating weekdays 254 254 Aircraft fleet 613 584 RPS Average daily package volume 1,326,190 1,121,380 + 18 Average revenue per package $ 5.04 $ 4.93 + 2 Operating weekdays 256 257 Viking Shipments per day 13,287 30,771 – 57 Average revenue per hundredweight $ 9.28 $ 9.08 + 2 Operating weekdays 256 257 Average number of employees (based on a standard full-time workweek) 150,823 145,721 + 4 The information presented on page 24 and the table above compare the results for fiscal 1998 to 1997 as if Caliber System, Inc.’s prior year had ended May 24, 1997 and had included unaudited results from May 19, 1996 to May 24, 1997. However, the 1997 information discussed in the accompanying Management’s Discussion and Analysis of Results of Operations and Financial Condition and the 1997 amounts presented in the accompanying consolidated financial statements are based on Caliber System, Inc.’s audited prior fiscal year ended December 31, 1996. (1) Non-recurring items include a charge of $88 million ($80 million, net of tax, or $.54 per share, assuming dilution) in 1998 related to the acquisition of Caliber System, Inc., and charges of $310 million ($231 million, net of tax, or $1.57 per share, assuming dilution) in 1997 related to the restructuring of Viking Freight, Inc.’s operations. FDX CORPORATION P 2 5


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    FINANCIAL HIGHLIGHTS Years ended May 31 In thousands, except earnings per share and Other Operating Data 1998 1997 Percent Change OPERATING RESULTS Revenues $15,872,810 $14,237,892 + 11 Operating income 1,010,660 507,002 + 99 Income from continuing operations before income taxes 899,518 425,865 +111 Net income 503,030 196,104 +157 Earnings per share, assuming dilution $ 3.37 $ 1.33 +153 Average common and common equivalent shares 149,204 147,228 + 1 FINANCIAL POSITION Property and equipment, net $ 5,935,050 $ 5,470,399 + 8 Total assets 9,686,060 9,044,316 + 7 Long-term debt, less current portion 1,385,180 1,597,954 – 13 Common stockholders’ investment 3,961,230 3,501,161 + 13 OTHER OPERATING DATA FedEx Express package: Average daily package volume 3,025,999 2,715,894 + 11 Average pounds per package 8.5 7.2 + 18 Average revenue per pound $ 1.84 $ 2.11 – 13 Average revenue per package $ 15.69 $ 15.11 + 4 Airfreight: Average daily pounds 2,769,922 2,542,226 + 9 Average revenue per pound $ .85 $ .94 – 10 Operating weekdays 254 254 Aircraft fleet 613 584 RPS Average daily package volume 1,326,190 1,067,104 + 24 Average revenue per package $ 5.04 $ 4.96 + 2 Operating weekdays 256 254 Viking Shipments per day 13,287 33,294 – 60 Average revenue per hundredweight $ 9.28 $ 9.04 + 3 Operating weekdays 256 254 Average number of employees (based on a standard full-time workweek) 150,823 145,995 + 3 See Note 1 to Notes to Consolidated Financial Statements for a discussion of the periods presented. P 2 6 FDX CORPORATION


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    M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F R E S U LT S O F O P E R A T I O N S A N D F I N A N C I A L C O N D I T I O N On January 27, 1998, Federal Express Corporation $281million ($1.92 per share, assuming dilution) for 1997 (“FedEx”) and Caliber System, Inc. (“Caliber”) became wholly- and 1996, respectively. Current year results reflect strong owned subsidiaries of a newly-formed holding company, domestic package volume growth and slightly improving FDX Corporation (together with its subsidiaries, the “Com- revenue per package (yield) at both FedEx and RPS, Inc. pany”). In this transaction, which was accounted for as a (“RPS”) and significant improvements in Viking’s operations. pooling of interests, Caliber shareholders received 0.8 FedEx’s net income for 1998 was $421 million com- shares of the Company’s common stock for each share of pared with $361 million and $308 million for 1997 and Caliber common stock. Each share of FedEx common stock 1996, respectively. Year-over-year improvements in was automatically converted into one share of the Com- FedEx’s consolidated results for the past three years pany’s common stock. There were approximately reflect double-digit growth of its express delivery pack- 146,800,000 of $.10 par value shares so issued or con- age volume and slight improvements in U.S. domestic verted. The accompanying financial statements have been yield. In 1998, U.S. domestic margins improved as restated to include the financial position and results of oper- yields increased at a higher rate than cost per package. ations for both FedEx and Caliber for all periods presented. However, international margins declined in the face of Caliber operated on a 13 four-week period calendar end- diminished airfreight revenues, foreign currency fluctua- ing December 31 with 12 weeks in each of the first tions and rising expenses. three quarters and 16 weeks in the fourth quarter. From continuing operations, Caliber recorded income of FedEx’s fiscal year ending May 31 consists of four, three- $78 million for 1998, a loss of $165 million for 1997 month quarters. The accompanying consolidated and income of $92 million for 1996. The current year results of operations and cash flows and the following income is attributable to strong volume growth and financial and statistical information for the year ended increased yields at RPS, Caliber’s ground small-package May 31, 1998 combine Caliber’s 53-week period from carrier, and improved operations at Viking since its May 25, 1997 to May 31, 1998 with FedEx’s year restructuring in March 1997 (discussed below). Exclud- ended May 31, 1998. The Company’s consolidated ing impairment charges related to the Viking restructur- financial position as of May 31, 1998 consists of Cal- ing, Caliber recorded net income of $10 million in 1997. iber’s financial position as of May 31, 1998 consolidated with FedEx’s financial position as of May 31, 1998. The Non-recurring Items accompanying consolidated results of operations and Results of operations included various non-recurring cash flows and the following financial and statistical items which affected reported earnings for 1998 and information for the years ended May 31, 1997 and 1997 as discussed below. 1996 combine Caliber’s 52 weeks ended December 31, 1996 and 1995, respectively, with FedEx’s years Current year results included $88 million ($80 million, ended May 31, 1997 and 1996, respectively. The Com- net of tax) of expenses related to the acquisition of Cal- pany’s consolidated financial position as of May 31, iber and the formation of the Company. These expenses 1997 consists of Caliber’s financial position as of were primarily investment banking fees and payments to December 31, 1996 consolidated with FedEx’s financial members of Caliber’s management in accordance with position as of May 31, 1997. pre-existing management retention agreements. Exclud- ing these expenses, consolidated net income for 1998 Due to the different fiscal year ends, Caliber’s results of was $583 million, or $3.91 per share, assuming dilu- operations for the period January 1, 1997 to May 24, tion. 1997 do not appear in the Consolidated Statements of Income and instead are recorded as a direct adjust- Also in the current year, Viking recognized a $16 million ment to equity. Caliber’s revenues, operating expenses gain from assets sold in its restructuring, which was and net loss for this period were $1.0 billion, $1.1 billion announced by Caliber on March 27, 1997. Under the and $41 million, respectively. Included in expenses for restructuring plan, operations at Viking’s midwestern, this period was an $85 million pre-tax charge ($56 mil- eastern and northeastern divisions ceased on March lion, net of tax) related to the restructuring of Viking 27, 1997, and Viking’s southwestern division operated Freight, Inc. (“Viking”), Caliber’s regional freight carrier through June 1997 and was subsequently sold. Viking (discussed below). continues to operate in the western United States where it has been a leader in the regional less-than- truckload market for many years. In connection with the RESULTS OF OPERATIONS restructuring, Caliber recorded a non-cash asset impairment charge of $225 million ($175 million, net of Consolidated net income for 1998 was $503 million tax) in December 1996 and an $85 million restructur- ($3.37 per share, assuming dilution) compared with ing charge in March 1997. Excluding the net effect of $196 million ($1.33 per share, assuming dilution) and the December 1996 charge, consolidated net income FDX CORPORATION P 2 7


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    MANAGEMENT ’S DISCUSSION AND ANALYSIS for 1997 was $371 million, or $2.52 per share, insurance settlement and the release from certain assuming dilution. related liabilities on a leased MD11 aircraft destroyed in In addition, Caliber recorded in 1998 approximately an accident in July 1997. This gain was recorded in $5 million of income, net of tax, from discontinued oper- operating and non-operating income in substantially ations related to the exiting of the airfreight business equal amounts. An unrelated expense, which partially served by Roadway Global Air, Inc. in 1995. offset this gain, was an addition of $9 million to an oper- ating reserve for the disposition of leased B747 air- A significant non-recurring item impacting 1998’s craft. In recording the additional reserve, maintenance results of operations was the Teamsters strike against and repairs and rentals and landing fees expenses were United Parcel Service (“UPS”) in August 1997. During increased. These aircraft, which were subleased, the 12 operating days of the strike, FedEx delivered underwent certain maintenance and repairs before approximately 800,000 additional U.S. domestic being transferred to a new lessee. The net effect of the express packages per day, and RPS delivered approxi- MD11 gain and the B747 reserve on FedEx’s domestic mately 300,000 additional packages per day. While it is and international operating income was immaterial. The difficult to estimate with precision the impact of this combined effect of these aircraft-related items con- additional volume, FedEx and RPS have retained a por- tributed approximately $.03 per share in the first quar- tion of this volume. The Company analytically calculated ter of 1998, net of applicable variable compensation that the volume not retained at the end of the first quar- and income taxes. ter contributed approximately $170 million in revenues to that quarter. This additional revenue, net of applicable FedEx’s 1997 results included a $15 million pre- variable compensation, income taxes and variable tax benefit to operating income from the settlement costs, but not allocated fixed costs, resulted in approxi- of a Tennessee personal property tax matter and a mately $.25 additional earnings per share, assuming $17 million gain in non-operating income from an insur- dilution, to the consolidated first quarter’s earnings. ance settlement for a DC10 destroyed by fire in Sep- tember 1996. FedEx recorded two aircraft-related items in the current year. FedEx realized a net gain of $17 million from the In 1998, FedEx’s U.S. domestic package volumes increased on a year-over-year basis primarily due to Revenues The following table shows a comparison of revenues for the years ended May 31: In millions Percent Change 1998 1997 1996 1998/1997 1997/1996 FedEx: U.S. domestic express $ 9,326 $ 8,073 $ 7,284 +16 +11 International Priority (IP) 2,731 2,351 1,997 +16 +18 International Express Freight (IXF) and Airport-to-Airport (ATA) 598 605 554 – 1 + 9 FedEx Air Charter 88 72 92 +21 –22 Logistics services 99 99 94 — + 5 (1) Other 413 320 253 +29 +27 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp 13,255 11,520 10,274 +15 +12 Caliber: RPS 1,710 1,344 1,293 +27 + 4 Viking 382 966 834 –60 +16 Other 526 408 321 +29 +27 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp $15,873 $14,238 $12,722 +11 +12 Includes the sale of engine noise reduction kits. (1) P 2 8 FDX CORPORATION


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    The following table shows a comparison of selected shipment statistics for the years ended May 31: In thousands, except dollar amounts Percent Change 1998 1997 1996 1998/1997 1997/1996 FedEx: U.S. domestic express: Average daily packages 2,767 2,490 2,246 +11 +11 Revenue per package $13.27 $12.77 $12.67 + 4 + 1 IP: Average daily packages 259 226 192 +15 +18 Revenue per package $41.45 $40.91 $40.58 + 1 + 1 IXF/ATA: Average daily pounds 2,770 2,542 2,144 + 9 +19 Revenue per pound $ .85 $ .94 $ 1.01 –10 – 7 Caliber: RPS: Average daily packages 1,326 1,067 1,043 +24 + 2 Revenue per package $ 5.04 $ 4.96 $ 4.92 + 2 + 1 Viking: Shipments per day 13.3 33.3 31.3 –60 + 6 Revenue per hundredweight $ 9.28 $ 9.04 $ 8.07 + 3 +12 rapid growth of its deferred services, including FedEx In 1998 and 1997, FedEx’s international non-express air- Express Saver. This growth was augmented by incre- freight revenues were a significant factor in determining mental UPS strike-related volume, the majority of which international profitability. FedEx uses ATA airfreight ser- was in the deferred service category. Excluding the vice (a lower-priced, space-available service) to fill space effects of a temporary 2% fuel surcharge and the expi- on international flights not used by express services such ration of the air cargo transportation tax on 1997 as IP or IXF. In 1998, weakness in Asian economies and yields, FedEx U.S. domestic yields rose 5% in 1998 as continued downward pressure on yields resulted in lower a result of continuing yield-management actions. These non-express airfreight prices and revenues than in actions included pursuing price increases on low-yielding 1997. In 1997, airfreight revenues increased year-over- accounts, discontinuing unprofitable accounts, increas- year, due to FedEx’s expansion in international markets, ing average weight per package and implementing a 3% despite excess market capacity and downward pressure to 4% price increase targeted to list price and standard on yields. discount matrix customers for U.S. domestic shipments The increases in FedEx’s other revenue in 1998 and effective February 15, 1998. 1997 were primarily attributable to increased sales of The expiration of the air cargo transportation excise tax engine noise reduction kits. added approximately $50 million to U.S. domestic rev- RPS’s revenue per day increased 26% and 3% in 1998 enues and 1% to U.S. domestic yields in both 1997 and and 1997, respectively, primarily due to increased aver- 1996. The tax expired on December 31, 1995, was age daily volume of 24% and 2% in these same years. reenacted by Congress effective August 27, 1996, and Over the same periods, RPS’s yield remained stable, expired again on December 31, 1996. FedEx was not and effective February 9, 1998, management imple- obligated to pay the tax during the periods in which it mented a 3.7% rate increase at RPS. was expired. The excise tax was reenacted by Congress effective March 7, 1997, and, in August 1997, it was On a daily basis, Viking’s revenue declined 61% year- extended for 10 years through September 30, 2007. over-year in 1998 and increased 15% in 1997. As a result of Viking’s restructuring in March 1997, in which FedEx’s IP service continued to experience double-digit operations at four of five divisions were terminated by growth in average daily volumes and revenues, with June 1997, Viking’s daily shipments declined 60% year- yields remaining relatively constant. Current year volume over-year in 1998. growth slowed to 15% year-over-year, primarily due to weakness in Asian markets. FDX CORPORATION P 2 9


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    MANAGEMENT ’S DISCUSSION AND ANALYSIS Operating Expenses Fuel expense decreased in 1998 due to a 10% decline in Volume growth and expansion of the Company’s opera- average jet fuel price per gallon and a decrease in vehicle tions resulted in a trend of rising operating expenses. fuel consumption at Viking, partially offset by a 13% Presented below are year-over-year percentage increase in jet fuel gallons consumed. Fuel expense changes in selected operating expenses: increased in 1997due to a 12% and 8% rise in average jet fuel price per gallon and gallons consumed, respec- Percent Change tively. In 1997, the increase in average price per gallon of 1998/1997 1997/1996 jet fuel was due to higher jet fuel prices and a 4.3 cents Salaries and employee benefits + 8 +11 per gallon excise tax on aviation fuel, used domestically, Purchased transportation +18 +18 which became effective October 1, 1995. For the past Rentals and landing fees +14 +12 three years, fuel expense included amounts received and Depreciation and amortization + 4 + 9 paid by FedEx under contracts which are designed to Maintenance and repairs +13 +14 limit FedEx’s exposure to fluctuations in jet fuel prices. Fuel – 1 +20 In order to mitigate the impact of the increase in jet fuel Other +11 +17 prices experienced in 1997, FedEx implemented fuel sur- charges on airfreight shipments, effective December 1, Total operating expenses + 8 +15 1996, for shipments out of Europe and selected Asian countries. Additionally, the Company implemented fuel sur- charges, effective December 15, 1996, for airfreight ship- Salaries and employee benefits expense rose primarily ments originating in the United States, Latin America and due to higher employment levels associated with volume the remaining parts of Asia, except those to the People’s growth, partially offset in 1998 by a decline at Viking Republic of China and Hong Kong. These surcharges were after its restructuring. Increased provisions under the discontinued effective April 15 or June 1, 1997, depending Company’s performance-based, incentive compensation on the origin country. FedEx also implemented a tempo- plans in 1998 and 1997, and a $25 million special rary 2% fuel surcharge, effective February 3, 1997, on appreciation bonus in 1998 for U.S. operations employ- U.S. domestic shipments except FedEx Same Day service ees at FedEx for their extra efforts during the UPS strike and including Puerto Rico. This surcharge also applied to also contributed to the increases in salaries and all U.S. export IP shipments, except those to the People’s employee benefits expense. Republic of China and Hong Kong. This surcharge was Increases in purchased transportation were primarily lifted on August 1, 1997. volume related, with the majority of the increases occur- Increases in other operating expenses for 1998 and 1997 ring at RPS in 1998 and at FedEx in 1997. were primarily due to expenses related to volume growth Rentals and landing fees increased primarily due to addi- and, in 1998, expenses necessitated by additional volume tional aircraft leased by FedEx. As of May 31, 1998, the during the UPS strike, including temporary manpower and Company had 86 wide-bodied aircraft under operating uniforms and supplies. The cost of sales of engine noise lease compared with 78 as of May 31, 1997, and 74 as of reduction kits also increased in 1998 and 1997. May 31, 1996. Management expects year-over-year The Company’s work on the Year 2000 (“Y2K”) com- increases in lease expense to continue as the Company puter compliance issue began in 1996. The Company’s enters into additional aircraft rental agreements during Y2K compliance program consists of five parts: inven- 1999 and thereafter. tory, assessment, renovation, testing and implementa- In the past three years, FedEx’s aircraft fleet has tion. The Company has conducted an inventory and increased resulting in a corresponding rise in mainte- assessment of remediation required for business- nance expense. The rise in maintenance and repairs critical information technology applications. Project expense for 1998 was primarily due to higher engine plans have been created, and progress is being moni- maintenance expense on B727, DC10 and A310 air- tored on an ongoing basis. Upon completion, validation craft. As discussed above, most of the 1998 increase in of these efforts will be performed by an internal, inde- an operating reserve for the disposition of B747 air- pendent process. The Company’s goal is to have the craft was recorded as maintenance and repairs majority of these business-critical information technol- expense. In 1997, FedEx experienced higher engine ogy applications Y2K compliant by December 31, maintenance expense on MD11 and A310 aircraft. 1998. The Company is also in the process of complet- FedEx expects a predictable pattern of aircraft mainte- ing Company-wide inventory, assessment and remedia- nance and repairs expense. However, unanticipated tion project plans for business-critical personal maintenance events will occasionally disrupt this pat- computers and software, user applications and embedded- tern, resulting in periodic fluctuations in maintenance chip systems. The Company’s goal is to have the major- and repairs expense. Given FedEx’s increasing fleet size, ity of these business-critical components Y2K aging fleet and variety of aircraft types, management compliant by May 31, 1999. believes that maintenance and repairs expense will con- The Company is investigating the Y2K compliance sta- tinue a trend of year-over-year increases for the fore- tus of its vendors, suppliers and affiliates via the Com- seeable future. pany’s own internal vendor compliance effort. The P 3 0 FDX CORPORATION


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    Company will carry out this task through a Company- attributable to strong growth in the Company’s IP volumes wide effort, assisted by consultants, to address internal and airfreight pounds, partially offset by lower airfreight issues, and jointly with industry trade groups, to yields. International operating margins were 2.3%, 4.4% address issues related to third parties which are com- and 2.9% in 1998,1997 and 1996, respectively. mon to transportation companies. RPS reported operating income of $172 million, $136 The Company has incurred approximately $50 million to million and $174 million for 1998, 1997 and 1996, date, including consulting fees, internal staff costs and respectively. The increase in operating income for 1998 other expenses. The Company expects to incur addi- resulted from package volume growth and the positive tional expenses of approximately $100 million in the effect of the 12-day UPS strike. In 1997, despite a 4% next two years to be Y2K compliant. increase in revenues, higher fixed costs of RPS’s contin- While the Company believes it is taking all appropriate uing expansion and investment in technology and equip- steps to achieve Y2K compliance, its Y2K issues and any ment contributed to the decline in operating results. potential future business interruptions, costs, damages or Operating margins were 10.1%, 10.1% and 13.4% in losses related thereto, are dependent, to a significant 1998, 1997 and 1996, respectively. degree, upon the Y2K compliance of third parties, both Viking reported operating income of $28 million in domestic and international, such as government agencies, 1998, an operating loss of $362 million in 1997 and an customers, vendors and suppliers. The Y2K problem is operating loss of $40 million in 1996. As discussed pervasive and complex, as virtually every computer opera- above, operating results for 1998 include a $16 million tion will be affected in some way. Consequently, no assur- gain on the sale of certain Viking assets, and results for ance can be given that Y2K compliance can be achieved 1997 include a $225 million asset impairment charge. without significant additional costs. Operating margins were 7.3%, (37.5%) and (4.8%) in 1998, 1997 and 1996, respectively. Operating Income For additional information on the Company’s business The Company ’s consolidated operating income segments, see Note 12 of Notes to Consolidated increased 99% in 1998 and decreased 35% in 1997. Financial Statements. Operating income for 1998 benefited from the effect of the UPS strike; whereas, operating income for 1997 Other Income and Expense and Income Taxes was reduced by the Viking asset impairment charge of Net interest expense increased 19% for 1998, primar- $225 million. ily due to lower levels of capitalized interest at both FedEx’s consolidated operating income increased 20% FedEx and Caliber. Interest is capitalized during the and 12% in 1998 and 1997, respectively. modification of certain MD11 and DC10 aircraft from FedEx’s U.S. domestic operating income rose 35% and passenger to freighter configuration, among other pro- 3% in 1998 and 1997, respectively. In 1998, operating jects. For 1997, net interest expense increased 16% income improved primarily due to increases in revenue due to higher debt levels at Caliber and the loss of per package (3.9%) exceeding increases in cost per interest income from discontinued operations, partially package (2.9%) and due to a rise in average daily vol- offset by lower effective interest rates at FedEx. The ume (11%). Also, as noted above, 1998 U.S. domestic level of capitalized interest in 1997 was comparable to operating results were significantly impacted by the that of 1996. UPS strike. Sales of engine noise reduction kits con- Other, net for 1998 included a gain from an insurance tributed $127 million, $87 million and $63 million to settlement for an MD11 aircraft destroyed in an acci- FedEx’s U.S. domestic operating income in 1998, 1997 dent in July 1997. Other, net for 1997 included a $17 and 1996, respectively. In 1997, domestic operating million gain from an insurance settlement for a DC10 income included a $15 million pre-tax benefit from the aircraft destroyed by fire in September 1996. settlement of a Tennessee personal property tax mat- The Company’s effective tax rate was 44.6% in 1998, ter. Increases in cost per package (1.4%) exceeded 53.9% in 1997 and 43.0% in 1996. Excluding non- increases in revenue per package (0.8%), while aver- recurring items from the Caliber acquisition in 1998 age daily volume rose 11%. U.S. domestic operating and the Viking restructuring in 1997, the effective rate margins were 7.8%, 6.7% and 7.3% in 1998, 1997 would have been 41.5% in 1998 and 43.0% in 1997 and 1996, respectively. and 1996. In each year, the effective tax rate (exclusive International operating income declined $57 million in of non-recurring items) was greater than the statutory 1998, compared with a $59 million increase in 1997. U.S. federal tax rate primarily because of state income International operating results declined in 1998 as a taxes and other factors as identified in Note 9 of Notes result of slower growth of IP and IXF volumes during a to Consolidated Financial Statements. For 1999, period of international network expansion. Lower air- management expects the effective tax rate to remain freight yields, higher salaries and employee benefits and at a level similar to the 1998 rate (exclusive of non- aircraft lease expense, additional start-up costs for sev- recurring items). The actual rate, however, is depen- eral new international flights and the net effect of foreign dent on a number of factors, including the amount and currency fluctuations negatively impacted international source of operating income. results. The increase in operating income in 1997 was FDX CORPORATION P 3 1


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    MANAGEMENT ’S DISCUSSION AND ANALYSIS Outlook Viking’s strategy for 1999 is to maintain its market leader- Management is committed to achieving long-term earn- ship in the western United States, improve yields and invest ings growth by providing transportation, high value- in updated information systems and other technologies. added logistics and related information services through The Company will continue to invest in technologies that focused operating companies. This frequently involves a improve the efficiency of package pick-up, sorting, track- significant front-end investment in assets, technology ing and delivery and that improve customer access and and personnel that may reduce near-term profitability. connectivity. The Company will also continue projects As discussed in Revenues above, a key reason for the designed to enhance productivity and strengthen the increase in FedEx’s U.S. domestic yield was the contin- Company’s infrastructure. Assuming effective implemen- ued yield-management actions of implementing price tation, these investments are expected to reduce trans- increases on low-yielding accounts, discontinuing portation cost per package. unprofitable accounts, increasing average weight per Effective June 1, 1998, the Company adopted a new package and implementing a 3% to 4% rate increase in accounting standard which provides guidance on February 1998. Management believes yields will con- accounting for the costs of software developed or tinue to benefit from these actions in 1999, while pack- obtained for internal use. This standard requires that age volumes will grow at a lower rate in 1999 than in certain of these costs be capitalized, and the Company the past several years. FedEx will continue to manage estimates the pre-tax benefit of the adoption to be yields with the goal of ensuring an appropriate balance approximately $30 million for 1999. between revenues generated and the cost of providing express services. Actual results, however, may vary depending primarily on the impact of competitive pricing FINANCIAL CONDITION changes, customer responses to yield-management ini- tiatives, changing customer demand patterns and Liquidity domestic economic conditions. Cash and cash equivalents totaled $230 million at FedEx’s operating income from the sales of engine noise May 31, 1998, an increase of $69 million during 1998 reduction kits peaked in 1998 and is expected to decline compared with an increase of $33 million in 1997 and a $45 million year-over-year in 1999 and to become decrease of $244 million in 1996. Cash provided from insignificant by 2001. Actual results may differ depend- operations during 1998 was $1.7 billion compared with ing primarily on the impact of actions by FedEx’s com- $1.1 billion and $1.2 billion in 1997 and 1996, respectively. petitors and regulatory conditions. The Company currently has available a $1.0 billion revolv- ing bank credit facility that is generally used to finance tem- While FedEx’s long-term strategy for international opera- porary operating cash requirements and to provide tions is to improve global connectivity for its customers support for the issuance of commercial paper. Manage- by strategically expanding its worldwide network, inter- ment believes that cash flow from operations, its commer- national economic developments, including the current cial paper program and the revolving bank credit facility will Asian economic difficulties, may limit short-term growth adequately meet its working capital needs for the fore- of FedEx’s international services and profits. Manage- seeable future. ment expects, however, strategic expansion to allow for continued, long-term growth of these services. Capital Resources Management expects IP average daily volume to con- The Company’s operations are capital intensive, charac- tinue its strong growth in 1999, and IP yields to remain terized by significant investments in aircraft, vehicles, relatively constant. With respect to airfreight, manage- computer and telecommunication equipment, package ment believes volumes and yields will decline year-over- handling facilities and sort equipment. The amount and year in 1999. Actual results for IP or airfreight, timing of capital additions are dependent on various fac- however, will depend on international economic condi- tors including volume growth, domestic and interna- tions, actions by FedEx’s competitors and regulatory tional economic conditions, new or enhanced services, conditions for international aviation rights. geographical expansion of services, competition and To boost customer confidence and RPS’s competitive availability of satisfactory financing. position, RPS introduced a guaranteed ground offering Capital expenditures for 1998 totaled $1.9 billion and in July 1998 for business-to-business shipments. Manage- included three MD11 aircraft (which were subsequently ment expects RPS’s package volume to continue to grow, sold and leased back), four Airbus A310 aircraft, air- as projected facility expansions begin to address cur- craft modifications, customer automation and computer rent capacity constraints. Yields will likely remain stable equipment, facilities and vehicles and ground support or increase slightly. Actual results, however, will depend equipment. In comparison, prior year expenditures primarily on the impact of competitive pricing changes, totaled $1.8 billion and included ten Airbus A310 actions by RPS’s competitors, changing customer demand aircraft, two MD11 aircraft (which were subsequently patterns and domestic economic conditions. sold and leased back, one in 1997 and one in 1998), customer automation and computer equipment and P 3 2 FDX CORPORATION


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    vehicles and ground support equipment. For information rates on its long-term debt because the interest rates are on the Company’s purchase commitments, see Note 14 fixed. Market risk for fixed-rate long-term debt is estimated of Notes to Consolidated Financial Statements. as the potential decrease in fair value resulting from a The Company has historically financed its capital hypothetical 10% increase in interest rates and amounts investments through the use of lease, debt and equity to approximately $55 million as of May 31, 1998. The financing in addition to the use of internally generated underlying fair values of the Company’s long-term debt cash from operations. Generally, management’s prac- were estimated based on quoted market prices or on tice in recent years with respect to funding new wide- the current rates offered for debt with similar terms bodied aircraft acquisitions has been to finance such and maturities. The Company does not use derivative aircraft through long-term lease transactions that financial instruments to manage interest rate risk. qualify as off-balance sheet operating leases under The Company’s earnings are affected by fluctuations in applicable accounting rules. Management has deter- the value of the U.S. dollar as compared to foreign cur- mined that these operating leases have provided eco- rencies, as a result of transactions in foreign markets. nomic benefits favorable to ownership with respect to At May 31, 1998, the result of a uniform 10% strength- market values, liquidity and after-tax cash flows. In the ening in the value of the dollar relative to the currencies future, other forms of secured financing may be pur- in which the Company’s transactions are denominated sued to finance the Company’s aircraft acquisitions would result in a decrease in operating income of when management determines that it best meets the approximately $15 million for the year ending May 31, Company’s needs. The Company has been successful 1999. This calculation assumes that each exchange in obtaining investment capital, both domestic and rate would change in the same direction relative to the international, for long-term leases on terms accept- U.S. dollar. In addition to the direct effects of changes in able to it although the marketplace for such capital exchange rates, which are a changed dollar value of the can become restricted depending on a variety of eco- resulting sales, changes in exchange rates also affect nomic factors beyond the control of the Company. See the volume of sales or the foreign currency sales price Note 4 of Notes to Consolidated Financial Statements as competitors’ services become more or less attrac- for additional information concerning the Company’s tive. The Company’s sensitivity analysis of the effects of debt and credit facilities. changes in foreign currency exchange rates does not In July 1997, $20 million of Memphis-Shelby County Airport factor in a potential change in sales levels or local cur- Authority (“MSCAA”) Special Facilities Revenue Bonds were rency prices. issued. The proceeds of the bonds in combination with In the past three years, FedEx has entered into con- other funds were used to refund outstanding MSCAA tracts which are designed to limit its exposure to fluc- 1982B bonds on September 2, 1997. Also in July 1997, tuations in jet fuel prices. FedEx hedges its exposure FedEx issued $250 million of unsecured senior notes with a to jet fuel price market risk only on a conservative, lim- maturity date of July1, 2097, under FedEx’s July1996 shelf ited basis. No such contracts were outstanding as of registration statement filed with the Securities and May 31, 1998. See Note 14 of Notes to Consolidated Exchange Commission. Financial Statements for accounting policy and addi- In June 1998, approximately $833 million of pass through tional information regarding jet fuel contracts. certificates were issued under shelf registration state- The Company does not purchase or hold any derivative ments filed with the Securities and Exchange Commission financial instruments for trading purposes. to finance or refinance the debt portion of leveraged leases related to eight Airbus A300 and five MD11 aircraft to be Deferred Tax Assets delivered through the summer of 1999. The pass through At May 31, 1998, the Company had a net cumula- certificates are not direct obligations of, or guaranteed by, tive deferred tax liability of $41 million consisting of the Company or FedEx, but amounts payable by FedEx $601 million of deferred tax assets and $642 million of under the leveraged leases are sufficient to pay the princi- deferred tax liabilities. The reversals of deferred tax pal of and interest on the certificates. assets in future periods will be offset by similar amounts Management believes that the capital resources avail- of deferred tax liabilities. able to the Company provide flexibility to access the most efficient markets for financing its capital acquisi- tions, including aircraft, and are adequate for the Com- Statements in this “Management’s Discussion and pany’s future capital needs. Analysis of Results of Operations and Financial Condi- tion” or made by management of the Company which Market Risk Sensitive Instruments and Positions contain more than historical information may be consid- The Company currently has market risk sensitive instru- ered forward-looking statements (as such term is ments related to interest rates. As disclosed in Note 4 of defined in the Private Securities Litigation Reform Act of Notes to Consolidated Financial Statements, the Company 1995) which are subject to risks and uncertainties. has outstanding unsecured debt of $1.6 billion at May 31, Actual results may differ materially from those 1998, of which $1.4 billion is long-term. The Company expressed in the forward-looking statements because of does not have significant exposure to changing interest important factors identified in this section. FDX CORPORATION P 3 3


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    C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E Years ended May 31 In thousands, except Earnings Per Share 1998 1997 1996 REVENUES $15,872,810 $14,237,892 $12,721,791 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Operating Expenses: Salaries and employee benefits 6,647,140 6,150,247 5,557,962 Purchased transportation 1,481,590 1,252,901 1,064,925 Rentals and landing fees 1,285,655 1,131,543 1,014,024 Depreciation and amortization 963,550 926,089 851,992 Maintenance and repairs 884,280 781,708 686,185 Fuel 726,768 734,722 612,243 Merger expenses 88,000 —- — Restructuring and impairment charges (16,000) 225,036 — Other 2,801,167 2,528,644 2,154,908 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp 14,862,150 13,730,890 11,942,239 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp OPERATING INCOME 1,010,660 507,002 779,552 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Other Income (Expense): Interest, net (124,413) (104,195) (90,190) Other, net 13,271 23,058 12,732 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp (111,142) (81,137) (77,458) pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Income from Continuing Operations Before Income Taxes 899,518 425,865 702,094 Provision for Income Taxes 401,363 229,761 301,908 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Income from Continuing Operations 498,155 196,104 400,186 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp DISCONTINUED OPERATIONS, NET OF INCOME TAXES: Loss from discontinued operations — — (69,950) Income (loss) from discontinuance 4,875 — (49,664) pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp 4,875 — (119,614) pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp NET INCOME $ 503,030 $ 196,104 $ 280,572 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp EARNINGS (LOSS) PER COMMON SHARE: Continuing operations $ 3.40 $ 1.35 $ 2.76 Discontinued operations .03 — (.82) pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $ 3.43 $ 1.35 $ 1.94 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp EARNINGS (LOSS) PER COMMON SHARE — ASSUMING DILUTION: Continuing operations $ 3.34 $ 1.33 $ 2.74 Discontinued operations .03 — (.82) pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $ 3.37 $ 1.33 $ 1.92 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. P 3 4 FDX CORPORATION


  • Page 37

    C O N S O L I D AT E D B A L A N C E S H E E T S May 31 In thousands 1998 1997 ASSETS Current Assets: Cash and cash equivalents $ 229,565 $ 160,852 Receivables, less allowances of $61,409 and $68,130 1,943,423 1,877,972 Spare parts, supplies and fuel 364,714 339,353 Deferred income taxes 232,790 196,959 Prepaid expenses and other 109,640 68,592 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Total current assets 2,880,132 2,643,728 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Property and Equipment, at Cost: Flight equipment 4,056,541 3,741,407 Package handling and ground support equipment and vehicles 3,425,279 3,131,060 Computer and electronic equipment 2,162,624 1,957,917 Other 2,819,430 2,557,564 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp 12,463,874 11,387,948 Less accumulated depreciation and amortization 6,528,824 5,917,549 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Net property and equipment 5,935,050 5,470,399 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Other Assets: Goodwill 356,272 370,342 Equipment deposits and other assets 514,606 559,847 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Total other assets 870,878 930,189 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $ 9,686,060 $ 9,044,316 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp LIABILITIES AND STOCKHOLDERS’ INVESTMENT Current Liabilities: Short-term debt $ — $ 230,000 Current portion of long-term debt 257,529 126,666 Accounts payable 1,145,410 999,782 Accrued expenses 1,400,900 1,223,039 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Total current liabilities 2,803,839 2,579,487 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Long-Term Debt, Less Current Portion 1,385,180 1,597,954 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Deferred Income Taxes 274,147 181,835 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Other Liabilities 1,261,664 1,183,879 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Commitments and Contingencies (Notes 5, 14 and 15) Common Stockholders’ Investment: Common stock, $.10 par value; 400,000 shares authorized; 147,411 and 147,624 shares issued 14,741 14,762 Additional paid-in capital 992,821 937,978 Retained earnings 2,972,077 2,621,511 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp 3,979,639 3,574,251 Less treasury stock, at cost, and deferred compensation 18,409 73,090 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Total common stockholders’ investment 3,961,230 3,501,161 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $ 9,686,060 $ 9,044,316 The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets. FDX CORPORATION P 3 5


  • Page 38

    C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S Years ended May 31 In thousands 1998 1997 1996 OPERATING ACTIVITIES Income from continuing operations $ 498,155 $ 196,104 $ 400,186 Adjustments to reconcile income from continuing operations to cash provided by operating activities: Depreciation and amortization 963,731 928,799 857,951 Provision for uncollectible accounts 59,616 40,634 38,963 Provision (benefit) for deferred income taxes and other 45,548 (9,610) 34,355 Restructuring and impairment charges (16,000) 225,036 — Gain from disposals of property and equipment (5,741) (20,143) (7,040) Changes in assets and liabilities, net of effects from dispositions of businesses: Increase in receivables (254,283) (426,357) (205,427) Increase in other current assets (102,203) (443,799) (65,038) Increase in accounts payable, accrued expenses and other liabilities 453,721 647,780 114,612 Other, net 63,829 (29,266) 15,971 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Cash provided by operating activities 1,706,373 1,109,178 1,184,533 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp INVESTING ACTIVITIES Purchases of property and equipment, including deposits on aircraft of $70,359, $26,107 and $68,202 (1,880,173) (1,762,979) (1,700,376) Proceeds from dispositions of property and equipment: Sale-leaseback transactions 322,852 162,400 176,500 Reimbursements of A300 deposits 106,991 63,039 143,859 Other dispositions 135,329 39,423 32,619 Net receipts from (advances to) discontinued operations 1,735 (2,527) (60,000) Other, net (75,964) 24,612 77,208 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Cash used in investing activities (1,389,230) (1,476,032) (1,330,190) pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp FINANCING ACTIVITIES Principal payments on debt (533,502) (9,670) (264,004) Proceeds from debt issuances 267,105 433,404 214,798 Proceeds from stock issuances 33,925 31,013 36,566 Dividends paid (7,793) (34,825) (54,688) Other, net (6,939) (9,741) (4,898) pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Cash (used in) provided by financing activities (247,204) 410,181 (72,226) pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp CASH AND CASH EQUIVALENTS Cash provided by (used in) continuing operations 69,939 43,327 (217,883) Cash used in discontinued operations (1,735) (10,802) (26,118) Balance at beginning of year 161,361 128,327 372,328 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Balance at end of year $ 229,565 $ 160,852 $ 128,327 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. P 3 6 FDX CORPORATION


  • Page 39

    C O N S O L I D AT E D S TAT E M E N T S O F C H A N G E S I N C O M M O N S T O C K H O L D E R S ’ I N V E S T M E N T In thousands, except shares Additional Common Paid-in Retained Treasury Deferred Stock Capital Earnings Stock Compensation BALANCE AT MAY 31,1995 $ 8,888 $863,035 $2,444,886 $(55,122) $ (724) Cash dividends declared by Caliber System, Inc. — — (54,706) — — Distribution of Roadway Express, Inc. — — (199,745) — — Purchase of treasury stock — — — (13,009) — Forfeiture of restricted stock — — — (1,068) 1,130 Issuance of common and treasury stock under employee incentive plans (932,105 shares) 72 40,051 — 17,477 (13,898) Amortization of deferred compensation — — — — 2,227 Foreign currency translation adjustment — — (7,626) — — Net income — — 280,572 — — ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp BALANCE AT MAY 31,1996 8,960 903,086 2,463,381 (51,722) (11,265) Cash dividends declared by Caliber System, Inc. — — (28,184) — — Purchase of treasury stock — — — (15,057) — Forfeiture of restricted stock — — — (803) 720 Two-for-one stock split by Federal Express Corporation in the form of a 100% stock dividend 5,699 — (5,699) — — Issuance of common and treasury stock under employee incentive plans (1,336,116 shares) 103 34,892 — 12,100 (10,484) Amortization of deferred compensation — — — — 3,421 Foreign currency translation adjustment — — (4,091) — — Net income — — 196,104 — — BALANCE AT MAY 31, 1997 14,762 937,978 2,621,511 (55,482) (17,608) Adjustment to conform Caliber System, Inc.’s fiscal year — 492 (51,795) (1,765) — Cash dividends declared by Caliber System, Inc. — — (3,899) — — Purchase of treasury stock — — — (7,049) — Forfeiture of restricted stock — — — (979) 586 Issuance of common and treasury stock under employee incentive plans (1,466,895 shares) 135 54,195 — 7,918 (7,204) Cancellation of Caliber System, Inc. treasury stock (156) 156 (66,474) 57,357 — Amortization of deferred compensation — — — — 5,817 Foreign currency translation adjustment — — (30,296) — — Net income — — 503,030 — — ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp BALANCE AT MAY 31,1998 $14,741 $992,821 $2,972,077 $ — $(18,409) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. FDX CORPORATION P 3 7


  • Page 40

    N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S NOTE 1: BUSINESS COMBINATION AND BASIS OF first three quarters and 16 weeks in the fourth quar- PRESENTATION ter. FedEx’s fiscal year ending May 31 consists of four, three-month quarters. The Company’s consoli- On January 27, 1998, Federal Express Corporation dated results of operations and cash flows for the (“FedEx”) and Caliber System, Inc. (“Caliber”) became year ended May 31, 1998 comprise Caliber’s 53- wholly-owned subsidiaries of a newly-formed holding week period from May 25, 1997 to May 31, 1998 company, FDX Corporation (together with its sub- consolidated with FedEx’s year ended May 31, 1998. sidiaries, the “Company”). In this transaction, which was The Company’s consolidated financial position as of accounted for as a pooling of interests, Caliber share- May 31, 1998 consists of Caliber’s financial position holders received 0.8 shares of the Company’s common as of May 31, 1998 consolidated with FedEx’s finan- stock for each share of Caliber common stock. Each cial position as of May 31, 1998. The Company’s share of FedEx common stock was automatically con- consolidated results of operations and cash flows verted into one share of the Company’s common stock. for the years ended May 31, 1997 and 1996 com- There were approximately 146,800,000 of $0.10 par prise Caliber’s calendar years 1996 and 1995 con- value shares so issued or converted. The accompanying solidated with FedEx’s fiscal years 1997 and 1996. financial statements have been restated to include the The Company’s consolidated financial position as of financial position and results of operations for both May 31, 1997 consists of Caliber’s financial position FedEx and Caliber for all periods presented. as of December 31, 1996 consolidated with FedEx’s financial position as of May 31, 1997. Caliber operated on a 13 four-week period calendar ending December 31 with 12 weeks in each of the The results of operations for FedEx and Caliber and the combined amounts presented in the Company’s consolidated financial statements are as follows: Years Ended Six Months Ended In thousands May 31, November 30, 1997 1997 1996 (Unaudited) Revenues: FedEx $11,519,750 $10,273,619 $6,596,377 Caliber 2,718,142 2,448,172 1,212,132 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $14,237,892 $12,721,791 $7,808,509 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Net Income (Loss): FedEx $ 361,227 $ 307,777 $ 250,272 Caliber (165,123) (27,205) 64,329 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $ 196,104 $ 280,572 $ 314,601 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Other Changes in Common Stockholders’ Investment: FedEx $ 25,148 $ 22,793 $ (3,254) Caliber (32,531) (251,888) (3,826) pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $ (7,383) $ (229,095) $ (7,080) Due to the different fiscal year ends, Caliber’s results for Company’s Consolidated Statements of Changes in the 20-week period from January 1, 1997 to May 24, Common Stockholders’ Investment for the year ended 1997 are not included in the restated financial state- May 31, 1998 to reflect this activity. ments for 1998 or 1997. For this period, Caliber had In 1998, the Company incurred $88,000,000 of revenues of $1,028,119,000, operating expenses of expenses related to the acquisition of Caliber and the $1,083,898,000, a net loss of $40,912,000, divi- formation of the Company, primarily investment banking dends declared of $10,883,000 and other changes, fees and payments to members of Caliber’s manage- net, in common stockholders’ investment of $1,273,000. ment in accordance with pre-existing management Accordingly, an adjustment has been included in the retention agreements. P 3 8 FDX CORPORATION


  • Page 41

    NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING Capitalized interest. Interest on funds used to finance POLICIES the acquisition and modification of aircraft and construc- tion of certain facilities up to the date the asset is Principles of consolidation. The consolidated financial placed in service is capitalized and included in the cost statements include the accounts of FDX Corporation of the asset. Capitalized interest was $33,009,000, and its subsidiaries. All significant intercompany $45,717,000 and $44,624,000 for 1998, 1997 and accounts and transactions have been eliminated. 1996, respectively. Property and equipment. Expenditures for major addi- Advertising. Advertising costs are generally expensed as tions, improvements, flight equipment modifications, incurred and are included in other operating expenses. and certain overhaul costs are capitalized. Maintenance Adver tising expenses were $183,253,0 0 0 , and repairs are charged to expense as incurred, except $162,337,000 and $145,592,000 for 1998, 1997 and for B747 airframe and engine overhaul maintenance 1996, respectively. which is accrued and charged to expense on the basis Cash equivalents. Cash equivalents are cash in excess of hours flown. The cost and accumulated depreciation of current operating requirements invested in short- of property and equipment disposed of are removed term, interest-bearing instruments with maturities of from the related accounts, and any gain or loss is three months or less at the date of purchase and are reflected in the results of operations. stated at cost, which approximates market value. Inter- For financial reporting purposes, depreciation and est income was $11,283,000, $5,885,000 and amortization of property and equipment is provided on a $19,059,000 in 1998, 1997 and 1996, respectively. straight-line basis over the asset’s service life or related Spare parts, supplies and fuel. Spare parts are stated lease term as follows: principally at weighted-average cost; supplies and fuel are stated principally at standard cost which approximates Flight equipment 5 to 20 years actual cost on a first-in, first-out basis. Neither method values inventory in excess of current replacement cost. Package handling and ground support equipment and vehicles 5 to 30 years Goodwill. Goodwill is the excess of the purchase price Computer and electronic equipment 3 to 10 years over the fair value of net assets of businesses acquired. Other 2 to 30 years It is amortized on a straight-line basis over periods rang- ing up to 40 years. Accumulated amortization was $144,580,000 and $131,927,000 at May 31, 1998 Aircraft airframes and engines are assigned residual and 1997, respectively. values ranging from 10% to 20% of asset cost. All other property and equipment have no assigned residual val- Foreign currency translation. Translation gains and ues. Vehicles are depreciated on a straight-line basis losses of the Company’s foreign operations that use over 5 to 10 years. local currencies as the functional currency are accumu- lated and reported, net of related deferred income For income tax purposes, depreciation is generally com- taxes, as a component of common stockholders’ invest- puted using accelerated methods. ment. Transaction gains and losses that arise from Deferred gains. Gains on the sale and leaseback of air- exchange rate fluctuations on transactions denominated craft and other property and equipment are deferred in a currency other than the local functional currency and amortized over the life of the lease as a reduction of are included in the results of operations. rent expense. Included in other liabilities at May 31, Income taxes. Deferred income taxes are provided for 1998 and 1997, were deferred gains of $338,119,000 the tax effect of temporary differences between the tax and $340,166,000, respectively. basis of assets and liabilities and their reported Deferred lease obligations. While certain of the Com- amounts in the financial statements. The Company uses pany’s aircraft and facility leases contain fluctuating or the liability method to account for income taxes, which escalating payments, the related rent expense is requires deferred taxes to be recorded at the statutory recorded on a straight-line basis over the lease term. rate expected to be in effect when the taxes are paid. Included in other liabilities at May 31, 1998 and 1997, The Company has not provided for U.S. federal income were $324,203,000 and $289,822,000, respec- taxes on its foreign subsidiaries’ earnings deemed to be tively, representing the cumulative difference between permanently reinvested. Quantification of the deferred rent expense and rent payments. tax liability, if any, associated with permanently rein- Self-insurance reserves. The Company is self-insured up vested earnings is not practicable. to certain levels for workers’ compensation, employee Revenue recognition. Revenue is generally recognized health care and vehicle liabilities. Reserves are based upon delivery of shipments. For shipments in transit, on the actuarially estimated cost of claims. Included in revenue is recorded based on the percentage of serv- other liabilities at May 31, 1998 and 1997, were ice completed. $277,696,000 and $275,663,000, respectively, rep- resenting the long-term portion of self-insurance Earnings per share. In accordance with the provisions reserves for the Company’s workers’ compensation and of Statement of Financial Accounting Standards vehicle liabilities. FDX CORPORATION P 3 9


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    N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S No. 128, “Earnings Per Share,” basic earnings per SFAS Nos. 130, 131 and 132 only affect financial disclo- share is computed by dividing net income by the number sures in interim and annual reports; therefore, the of weighted-average common shares outstanding during adoption of these accounting standards will not have an the year. Diluted earnings per share is computed by impact on the Company’s financial condition or results dividing net income by the number of weighted-average of operations. common and common equivalent shares outstanding Effective June 1,1998, the Company adopted Statement during the year (See Note 8). of Position (“SOP”) 98-1, “Accounting for the Cost of Recent pronouncements. In 1999, the Company will Computer Software Developed or Obtained for Internal adopt the provisions of three Statements of Financial Use,” released by the American Institute of Certified Accounting Standards (“SFAS”) recently issued by the Public Accountants in March 1998. SOP 98-1 provides Financial Accounting Standards Board. SFAS No. 130, guidance on accounting for these costs and requires “Reporting Comprehensive Income,” establishes stan- that certain related expenses be capitalized. The Com- dards for displaying comprehensive income and its pany estimates the pre-tax benefit of the adoption of components in a full set of general purpose financial this Statement to be approximately $30,000,000 in statements. SFAS No. 131, “Disclosures about Seg- 1999. ments of an Enterprise and Related Information,” estab- Reclassifications. Certain prior year amounts have been lishes standards for reporting information about reclassified to conform to the 1998 presentation. operating segments in annual financial statements and requires reporting selected information about operating Use of estimates. The preparation of the consolidated segments in interim financial reports issued to share- financial statements in conformity with generally holders. SFAS No. 132, “Employers’ Disclosures about accepted accounting principles requires management to Pensions and Other Postretirement Benefits,” standard- make estimates and assumptions that affect the izes the disclosures for pensions and other postretire- reported amounts of assets and liabilities and disclosure ment benefits to the extent practicable, requires of contingent assets and liabilities at the date of the additional information on changes in the benefit obliga- financial statements and the reported amounts of rev- tions and fair values of plan assets that will facilitate enues and expenses during the reporting period. Actual financial analysis and eliminates other disclosures no results could differ from those estimates. longer useful as prescribed in previous standards. NOTE 3: ACCRUED EXPENSES May 31 In thousands 1998 1997 Insurance $ 292,173 $ 266,397 Compensated absences 278,550 260,724 Employee benefits 190,056 145,556 Taxes other than income taxes 188,464 159,180 Salaries 143,876 126,030 Aircraft overhaul 73,643 84,006 Other 234,138 181,146 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $1,400,900 $1,223,039 P 4 0 FDX CORPORATION


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    NOTE 4: LONG-TERM DEBT May 31 In thousands 1998 1997 Unsecured notes payable, interest rates of 7.60% to 10.57%, due through 2098 $1,253,770 $1,128,525 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Unsecured sinking fund debentures, interest rate of 9.63%, due through 2020 98,529 98,461 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Commercial paper — 200,904 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Capital lease obligations and tax exempt bonds, due through 2017, interest rates of 5.35% to 7.88% 253,425 255,100 Less bond reserves 9,024 11,096 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp 244,401 244,004 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Other debt, interest rates of 9.68% to 9.98% 46,009 52,726 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp 1,642,709 1,724,620 Less current portion 257,529 126,666 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $1,385,180 $1,597,954 The Company has a revolving credit agreement with In July 1997, the MSCAA issued $20,105,000 of domestic and foreign banks that provides for a total 5.35% Special Facilities Revenue Bonds. The proceeds commitment of $1,000,000,000, all of which was of the bonds in combination with other funds were used available at May 31,1998. This agreement is composed to refund outstanding MSCAA 1982B 8.3% bonds on of two parts. The first part provides for a commitment September 2, 1997. The 1997 bonds have a maturity of $800,000,000 through January 15, 2003. The sec- date of September 1, 2012. FedEx is obligated under a ond part provides for a commitment of $200,000,000 lease agreement with MSCAA to pay rentals equal to through January 14, 1999. Interest rates on borrowings the principal and interest on the bonds. under this agreement are generally determined by maturi- In July 1997, FedEx issued $250,000,000 of 7.6% ties selected and prevailing market conditions. The agree- unsecured senior notes due July 1, 2097, under its July ment contains certain covenants and restrictions, none of 1996 shelf registration statement filed with the Securi- which are expected to significantly affect operations or the ties and Exchange Commission. ability to pay dividends. As of May 31,1998, approximately $1,066,000,000 was available for the payment of divi- Scheduled annual principal maturities of long-term debt dends under the restrictive covenant of the agreement. for the five years subsequent to May 31, 1998, are as Commercial paper borrowings are backed by unused com- follows: $257,500,000 in 1999; $14,900,000 in mitments under the revolving credit agreement and 2000; $11,300,000 in 2001; $206,900,000 in reduce the amount available under the agreement. Bor- 2002; and $10,900,000 in 2003. rowings under this credit agreement and commercial The Company’s long-term debt, exclusive of capital paper borrowings are classified as long-term based on the leases, had carrying values of $1,446,000,000 and Company’s ability and intent to refinance such borrowings. $1,322,000,000 at May 31, 1998 and 1997, respec- Tax exempt bonds were issued by the Memphis-Shelby tively, compared with fair values of approximately County Airport Authority (“MSCAA”) and the City of Indi- $1,597,000,000 and $1,423,000,000 at those anapolis. A lease agreement with the MSCAA and a loan dates. The estimated fair values were determined based agreement with the City of Indianapolis covering the facil- on quoted market prices or on current rates offered for ities and equipment financed with the bond proceeds debt with similar terms and maturities. obligate FedEx to pay rentals and loan payments, respec- tively, equal to principal and interest due on the bonds. NOTE 5: LEASE COMMITMENTS Caliber has issued $200,000,000 of unsecured notes which is included in long-term debt. The notes mature The Company utilizes certain aircraft, land, facilities and on August 1, 2006 and bear interest at 7.80%. The equipment under capital and operating leases which notes contain restrictive covenants limiting the ability of expire at various dates through 2025. In addition, sup- Caliber and its subsidiaries to incur liens on assets and plemental aircraft are leased under agreements which enter into certain leasing transactions. generally provide for cancellation upon 30 days’ notice. FDX CORPORATION P 4 1


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    N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Property and equipment recorded under capital leases at May 31 was as follows: In thousands 1998 1997 Package handling and ground support equipment and vehicles $261,985 $274,017 Facilities 134,442 134,442 Computer and electronic equipment and other 6,518 6,520 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp 402,945 414,979 Less accumulated amortization 274,494 277,406 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $128,451 $137,573 Rent expense under operating leases for the years ended May 31 was as follows: In thousands 1998 1997 1996 Minimum rentals $1,135,567 $ 986,758 $866,865 Contingent rentals 60,925 57,806 61,164 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $1,196,492 $1,044,564 $928,029 Contingent rentals are based on mileage under supplemental aircraft leases. A summary of future minimum lease payments under capital leases and non-cancellable operating leases (principally air- craft and facilities) with an initial or remaining term in excess of one year at May 31, 1998 follows: In thousands Capital Leases Operating Leases 1999 $ 15,023 $ 960,462 2000 15,023 918,193 2001 15,023 843,352 2002 15,023 778,016 2003 15,023 716,559 Thereafter 317,397 8,225,590 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp $392,512 $12,442,172 At May 31, 1998, the present value of future minimum lease payments for capital lease obligations was $200,183,000. NOTE 6: PREFERRED STOCK Company’s common stock necessary for grants under its restricted stock plans. As of May 31, 1998, The Certificate of Incorporation authorizes the Board of a total of 6,112,517 shares at an average cost of Directors, at its discretion, to issue up to 4,000,000 $23.61 per share had been purchased and reissued shares of Series Preferred Stock. The stock is issuable under the above-mentioned plans. On January 27, 1998, in series which may vary as to certain rights and prefer- as part of the Caliber acquisition,1,950,251 shares of Cal- ences and has no par value. As of May 31, 1998, none iber treasury stock (equivalent to 1,560,201 shares of of these shares had been issued. FDX common stock) were cancelled. The Company applies Accounting Principles Board Opin- NOTE 7: COMMON STOCKHOLDERS’ INVESTMENT ion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its plans. Stock Compensation Plans Accordingly, no compensation cost was recognized for At May 31,1998, the Company had options and awards its fixed stock option plans. The compensation cost outstanding under 12 stock-based compensation plans charged against income for its restricted stock plans consisting of nine fixed stock option plans and three was $5,817,000, $3,421,000 and $2,227,000 for restricted stock plans, which are described below. As of 1998, 1997 and 1996, respectively. Had compensation May 31, 1998, there were 10,049,688 shares of com- cost for the Company’s stock-based compensation plans mon stock reserved for issuance under these plans. The been determined consistent with SFAS 123, “Account- Board of Directors has authorized repurchase of the ing for Stock-Based Compensation,” P 4 2 FDX CORPORATION


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    the Company’s net income and earnings per share would have been the pro forma amounts indicated below: In thousands, except per share data 1998 1997 1996 Net income: As reported $503,030 $196,104 $280,572 Pro forma 489,556 187,624 275,299 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Earnings per share, assuming dilution: As reported $ 3.37 $ 1.33 $ 1.92 Pro forma 3.28 1.27 1.89 The pro forma disclosures, applying SFAS 123, are not (and, under the 1993 plan, to directors who are not likely to be representative of pro forma disclosures for employees of the Company) to purchase shares of com- future years. The pro forma effect is not expected to be mon stock of the Company at a price not less than its fully reflected until 2002 since SFAS 123 is applicable to fair market value at the date of grant. Options granted options granted by the Company after May 31, 1995, have a maximum term of 10 years. Vesting require- and because options vest over several years and addi- ments are determined at the discretion of the Compen- tional grants could be made. sation Committee of the Board of Directors. Presently, option vesting periods range from one to seven years. Fixed Stock Option Plans At May 31, 1998, there were 2,863,362 shares avail- Under the provisions of the Company’s stock incentive able for future grants under these plans. plans, options may be granted to certain key employees Beginning with the grants made on or after June 1, 1995, the fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions for each option grant: 1998 1997 1996 Dividend yield 0% 0% 0% Expected volatility 25% 25% 25% Risk-free interest rate 5.4%–6.5% 5.8%–6.9% 5.9%–6.4% Expected lives 2.5–6.5 years 2.5–8.5 years 2.5–7.5 years The following table summarizes information about the Company’s fixed stock option plans for the years ended May 31: 1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 6,761,730 $34.17 6,444,178 $31.53 6,377,979 $27.59 Granted 1,242,772 56.40 1,700,532 40.04 1,823,369 40.71 Exercised (1,168,492) 26.89 (1,136,503) 27.30 (1,421,890) 25.41 Forfeited (141,784) 39.01 (268,030) 35.98 (335,280) 32.46 pppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppp Outstanding at end of year 6,694,226 39.47 6,740,177 34.21 6,444,178 31.53 pppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppp Exercisable at end of year 2,674,813 33.84 2,265,149 27.84 2,452,800 25.10 FDX CORPORATION P 4 3


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    N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The weighted-average fair value of options granted during the year was $16.49, $16.23 and $13.07 for the years ended May 31, 1998, 1997 and 1996, respectively. The following table summarizes information about fixed stock options outstanding at May 31, 1998: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price $15.28—$22.56 363,615 4.0 years $19.80 362,975 $19.80 $23.13—$33.25 1,977,616 5.4 years 30.30 1,199,998 29.97 $35.00—$52.88 3,983,415 7.8 years 43.41 1,111,840 42.61 $59.06—$79.75 369,580 9.4 years 65.38 — — pppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppp $15.28—$79.75 6,694,226 7.0 years 39.47 2,674,813 33.84 Restricted Stock Plans Under the terms of the Company’s Restricted Stock market price of the Company’s common stock at the Plans, shares of the Company’s common stock are date of award. Compensation expense related to these awarded to key employees. All restrictions on the plans is recorded as a reduction of common stock- shares expire over periods varying from two to five holders’ investment and is being amortized as restric- years from their date of award. Shares are valued at the tions on such shares expire. The following table summarizes information about restricted stock awards for the years ended May 31: 1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Shares Fair Value Shares Fair Value Shares Fair Value Awarded 120,000 $65.98 201,900 $51.93 350,500 $39.65 Forfeited 14,000 69.88 18,000 40.03 29,000 38.96 At May 31, 1998, there were 492,100 shares available for future awards under these plans. P 4 4 FDX CORPORATION


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    NOTE 8: COMPUTATION OF EARNINGS PER SHARE The calculation of basic and diluted earnings per share for the years ended May 31 was as follows: In thousands, except per share amounts: 1998 1997 1996 Income from continuing operations $498,155 $196,104 $400,186 Loss from discontinued operations — — (69,950) Income (loss) from discontinuance 4,875 — (49,664) pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp Net income applicable to common stockholders $503,030 $196,104 $280,572 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp Average shares of common stock outstanding 146,701 145,713 144,695 Basic earnings per share: Continuing operations $ 3.40 $ 1.35 $ 2.76 Discontinued operations Loss from discontinued operations — — (.48) Income (loss) from discontinuance .03 — (.34) pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp $ 3.43 $ 1.35 $ 1.94 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp Average shares of common stock outstanding 146,701 145,713 144,695 Common equivalent shares: Assumed exercise of outstanding dilutive options 6,924 6,100 5,250 Less shares repurchased from proceeds of assumed exercise of options (4,421) (4,585) (4,102) pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp Average common and common equivalent shares 149,204 147,228 145,843 Diluted earnings per share: Continuing operations $ 3.34 $ 1.33 $ 2.74 Discontinued operations Loss from discontinued operations — — (.48) Income (loss) from discontinuance .03 — (.34) pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp $ 3.37 $ 1.33 $ 1.92 NOTE 9: INCOME TAXES The components of the provision for income taxes for the years ended May 31 were as follows: In thousands 1998 1997 1996 Current provision: Domestic Federal $267,471 $153,244 $197,948 State and local 32,839 29,344 24,431 Foreign 36,543 44,165 37,759 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp 336,853 226,753 260,138 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp Deferred provision: Domestic Federal 56,408 577 35,021 State and local 7,860 95 4,398 Foreign 242 2,336 2,351 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp 64,510 3,008 41,770 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp $401,363 $229,761 $301,908 FDX CORPORATION P 4 5


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    N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The Company’s operations included the following income (loss) with respect to entities in foreign locations for the years ended May 31: In thousands 1998 1997 1996 Entities with pre-tax income $ 208,000 $ 205,000 $ 153,000 Entities with pre-tax losses (306,000) (191,000) (236,000) pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp $ (98,000) $ 14,000 $ (83,000) Income taxes have been provided for foreign operations overall foreign income tax provision and foreign pre-tax based upon the various tax laws and rates of the coun- book income due to the different methods of taxation tries in which the Company’s operations are conducted. used by countries throughout the world. There is no direct relationship between the Company’s A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for the years ended May 31 is as follows: 1998 1997 1996 Statutory U.S. income tax rate 35.0% 35.0% 35.0% Increase resulting from: Goodwill amortization 0.5 0.9 1.0 Foreign operations 0.8 0.7 1.7 State and local income taxes, net of federal benefit 2.7 2.9 2.6 Other, net 2.5 3.5 2.7 Non-recurring items (Caliber acquisition 1998, Viking restructuring 1997) 3.1 10.9 — pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp Effective tax rate 44.6% 53.9% 43.0% pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp Effective tax rate (excluding non-recurring items) 41.5% 43.0% 43.0% The significant components of deferred tax assets and liabilities as of May 31 were as follows: In thousands 1998 1997 Deferred Deferred Deferred Deferred Tax Assets Tax Liabilities Tax Assets Tax Liabilities Depreciation $ — $523,843 $ — $429,350 Deferred gains on sales of assets 86,053 — 83,413 — Employee benefits 126,513 22,595 88,467 18,830 Self-insurance reserves 204,303 — 196,684 — Other 183,941 95,729 189,986 95,246 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp $600,810 $642,167 $558,550 $543,426 NOTE 10: PENSION AND PROFIT SHARING PLANS The Company sponsors defined benefit pension plans funding is actuarially determined, subject to certain tax covering substantially all employees. The largest plans law limitations. cover U.S. domestic employees age 21 and over, with International defined benefit pension plans provide ben- at least one year of service and provide benefits based efits primarily based on final earnings and years of on final average earnings and years of service. Plan service and are funded in accordance with local laws and income tax regulations. P 4 6 FDX CORPORATION


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    The following table sets forth the funded status of the plans as of May 31: In thousands 1998 1997 Plan assets at fair value $4,434,870 $3,615,028 Actuarial present value of the projected benefit obligation for service rendered to date 4,121,795 3,151,083 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Plan assets in excess of projected benefit obligation 313,075 463,945 Unrecognized net gains from past experience different from that assumed and effects of changes in assumptions (196,519) (338,491) Prior service cost not yet recognized in net periodic cost 5,757 16,063 Unrecognized transition amount (13,197) (13,695) Adjustment required to recognize minimum liability (847) — pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Net pension asset $ 108,269 $ 127,822 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Accumulated benefit obligation $2,865,542 $2,098,875 pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp Vested benefit obligation $2,684,692 $1,950,809 Net periodic pension cost for the years ended May 31 included the following components: In thousands 1998 1997 1996 Service cost — benefits earned during the period $ 250,753 $ 246,443 $ 196,990 Interest cost on projected benefit obligation 245,697 221,975 174,130 Actual return on plan assets (730,436) (463,442) (474,434) Net amortization and deferral 350,711 141,514 260,335 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp $116,725 $ 146,490 $ 157,021 The following actuarial assumptions were used in determining net pension cost and projected benefit obligations: 1998 1997 1996 Weighted-average discount rate 7.0% 8.0% 7.9% Weighted-average rate of increase in future compensation levels 4.6 5.4 5.4 Weighted-average expected long-term rate of return on assets 10.3 10.3 9.3 Plan assets consist primarily of marketable equity secu- NOTE 11: POSTRETIREMENT BENEFIT PLANS rities and fixed income instruments. The Company also has profit sharing plans, which cover FedEx offers medical and dental coverage to all eligible substantially all U.S. domestic employees age 21 and U.S. domestic retirees and their eligible dependents. over, with at least one year of service with the Company Vision coverage is provided for retirees, but not their as of the contribution date. The plans provide for discre- dependents. Substantially all of FedEx’s U.S. domestic tionary employer contributions which are determined employees become eligible for these benefits at age 55 annually by the Board of Directors. Profit sharing and older, if they have permanent, continuous service expense was $124,700,000 in 1998, $107,400,000 with FedEx of at least 10 years after attainment of age in 1997 and $95,000,000 in 1996. The 1998 amount 45 if hired prior to January 1, 1988, or at least 20 consists of contributions to the plans of $81,600,000 years after attainment of age 35, if hired on or after and cash distributions made outside the plans directly January 1, 1988. Life insurance benefits are provided to employees of $43,100,000. The 1997 amount con- only to retirees of the former Tiger International, Inc. sists of contributions to the plans of $78,800,000 and who retired prior to acquisition. cash distributions made outside the plans directly to Certain of the Caliber companies offer similar benefits employees of $28,600,000. to their eligible retirees. FDX CORPORATION P 4 7


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    N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The following table sets forth the accrued postretirement benefit cost as of May 31: In thousands 1998 1997 Accumulated postretirement benefit obligation: Retirees $ 52,559 $ 46,469 Fully eligible active employees 44,141 42,221 Other active employees, not fully eligible 120,327 95,844 pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp 217,027 184,534 Unrecognized net gain 13,531 29,291 Unrecognized prior service benefit 1,477 — pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp $232,035 $213,825 Net postretirement benefit cost for the years ended May 31 was as follows: In thousands 1998 1997 1996 Service cost $18,385 $17,830 $13,608 Interest cost 14,767 13,663 12,577 Amortization of accumulated gains (619) (252) (802) Amortization of unrecognized prior service benefit (90) — — pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppppppppppppppppppppppppppppppppppppp $32,443 $31,241 $25,383 FedEx’s future medical benefit costs were estimated to May 31, 1998 and 1997, respectively. The Company increase at an annual rate of 9.5% during 1999, pays claims as incurred. decreasing to an annual growth rate of 5.25% in 2008 and thereafter. Future dental benefit costs were esti- NOTE 12: BUSINESS SEGMENT INFORMATION mated to increase at an annual rate of 8.0% during 1999, decreasing to an annual growth rate of 5.25% in 2010 and thereafter. FedEx’s cost is capped at 150% The Company is primarily composed of the operations of of 1993 employer cost and, therefore, will not be sub- FedEx and RPS, Inc. (“RPS”). FedEx is in a single line of ject to medical and dental trends after the capped cost business — the worldwide express transportation and is attained, projected to be in 2000. Caliber’s health distribution of goods and documents. RPS is a ground care costs were estimated to increase at an annual small-package carrier. The operations represented in rate of 8.5% during 1999, decreasing to an annual the Other category are also in the transportation indus- growth rate of 5.25% in 2005 and thereafter. Primar- try and include Viking Freight, Inc. (“Viking”), a regional ily because of the cap on FedEx’s cost, a 1% increase in freight carrier, Caliber Logistics, Inc., a contract logis- these annual trend rates would not have a significant tics provider and Roberts Express, Inc., a surface expe- impact on the accumulated postretirement benefit dited carrier. obligation of the Company at May 31, 1998, or 1998 For reporting purposes, operations for FedEx are classi- b e n ef i t ex p e n s e . T h e we i g h t e d - av e ra g e d i s - fied into two geographic areas, U.S. domestic and inter- count rates used in estimating the accumulated post- national. Shipments which either originate in or are retirement benefit obligation were 7.2% and 7.8% at destined to locations outside the United States are cate- gorized as international. P 4 8 FDX CORPORATION

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