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    Global Connectivity Fast-Cycle Reliable DELIVERING SUPERIOR TRANSPORTATION, LOGISTICS, Integrated AND E-COM M ERCE SOLUTIONS WORLDWIDE E-Commerce High-Tech Networked FDX CORPORATION 1999 ANNUAL REPORT


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    FDX is a unique holding company that provides strategic direction for FedEx, RPS and the other FDX operating companies. A $17 billion global transportation and logistics enterprise, FDX offers a diverse portfolio of solutions at all levels of the supply chain. Services offered by FDX compa- nies include w orldw ide express delivery, ground small-package delivery, less-than-truckload freight delivery, and global logistics and electronic commerce solutions. FDX COM PANIES AT A GLANCE FedEx, the w orld leader in global express distribution, offering time-certain delivery w ithin 24 to 48 hours among markets that generate more than 90% of the w orld’s gross domestic product. RPS, North America’s second-largest provider of business-to-business ground Roberts Express, the w orld’s small-package delivery. leading surface-expedited carrier for nonstop, time-critical and special-handling shipments. Employees and Contractors: 190,000 Headquarters: M emphis, Tennessee Stock Symbol: FDX Online: w w w.fdxcorp.com FDX Global Logistics, a leader in providing customized, integrated logistics solutions w orldw ide. Viking Freight, the foremost less-than-truckload freight carrier in the w estern United States. M ISSION AND FDX w ill produce superior financial returns for its shareow ners by providing high value-added VALUES logistics, transportation and related information services through focused operating companies. Customer requirements w ill be met in the highest quality manner appropriate to each market segment served. FDX w ill strive to develop mutually rew arding relationships w ith its employees, partners and suppliers. Safety w ill be the first consideration in all operations. Corporate activities w ill be conducted to the highest ethical and professional standards.


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    FINANCIAL HIGHLIGHTS In thousands, except earnings per share 1999 1998 Percent Change OPERATING RESULTS Revenues $16,773,470 $15,872,810 + 6 Operating income 1,163,086 1,010,660 +15 Operating margin 6.9% 6.4% Net income 631,333 503,030 +26 Earnings per share, assuming dilution (1) $ 2.10 $ 1.69 +24 Earnings per share, excluding non-recurring items, assuming dilution (1)(2) $ 2.28 $ 1.95 +17 Average common and common equivalent shares (1) 300,643 298,408 + 1 FINANCIAL POSITION Total assets $10,648,211 $ 9,686,060 +10 Long-term debt 1,374,606 1,642,709 –16 Common stockholders’ investment 4,663,692 3,961,230 +18 Reflects the tw o-for-one stock split effected in the form of a 100% stock dividend on M ay 6, 1999. (1) Non-recurring items include a charge of $91 million ($54 million net of tax or $.18 per share, assuming dilution) in 1999 related to strike contingency planning, (2) a charge of $88 million ($80 million net of tax or $.26 per share, assuming dilution) in 1998 related to the acquisition of Caliber System, Inc., and a charge of $225 million ($175 million net of tax or $.59 per share, assuming dilution) in 1997 related to the restructuring of Viking Freight, Inc. operations. 14.6% $16.8 33.0% 13.5% $15.9 $2.28 29.3% $14.2 $2.10 $1.95 $1.69 22.8% $1.26 5.8% $0.67 97 98 99 97 98 99 97 98 99 97 98 99 97 98 99 REVENUES EARNINGS EARNINGS DEBT TO TOTAL RETURN ON (1) (in billions) PER SHARE PER SHARE CAPITALIZATION AVERAGE EQUITY EXCLUDING NON-RECURRING (1)(2) ITEM S 1


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    The FDX network turned challenge into opportunity as we proved that we deliver far more than packages. We deliver results. These results confirm that the w hole certainly is greater than the sum of its parts. Across every operating company, the entire FDX team is work- ing together to provide the total solutions that our customers demand and deserve. DEAR FELLOW SHAREOWNERS In our first full year of consolidated operations, FDX Corporation turned in a record performance in three very important areas. First, w e increased shareow ner value by grow ing profits, expanding margins, and strengthening our balance sheet. Second, w e enhanced our service offerings to help our customers create a competitive advantage in today’s global marketplace –providing inno- vative, technology-enabled supply chain solutions along w ith e-commerce connectivity. Third, w e continued our commitment to a ” people culture” that recognizes and rew ards the above-and- beyond efforts of our FDX employees and contractors. During the past year, w e also faced many challenges. Some w ere external, such as managing through the Asian economic crisis. Others w ere internal, including contract negotiations w ith the Fedex Pilots Association that required costly strike contingency plans before w e reached a five-year agreement. In some cases, these challenges required extraordinary efforts that may have deterred us from reaching some goals as quickly as w e w ould have liked. Still, the FDX net- w ork turned challenge into opportunity as w e proved that w e deliver far more than packages. We deliver results. FINANCIAL SUM M ARY: FDX Results for Shareow ners In FY99, FDX exercised strong financial discipline to increase net income and earnings per share at rates surpassing our solid revenue grow th. ● Revenue increased 6% to a record $16.8 billion. ● Net income jumped 26% to $631 million, reflecting package volume grow th as w ell as excel- lent cost controls and aggressive yield-management programs. ● Earnings per share rose to a record $2.10. ● FDX market value increased 73% , w hich led to our second tw o-for-one stock split in the past three years. As our results indicate, in FY99 FDX continued to deliver exceptional shareow ner value. PORTFOLIO M ANAGEM ENT: FDX Solutions for Customers When I reported to you last year, I emphasized the follow ing tw ofold strategy to capitalize on our broad range of service offerings: 1. Independently, each FDX operating company w ould remain focused on a distinct market segment in order to operate in the most efficient and profitable manner possible. 2. Collectively, w e w ould create synergies across companies through coordinated sales and mar- keting programs linked by state-of-the-art information technology. 2 FD X 19 9 9 A N N U A L REPO RT


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    Our customers want an easy, convenient way to connect to the high-tech, high-speed global marketplace. And it’s our responsibility to help them choose the right FDX network at the right time, w ith the right price. This strategy has paid off handsomely since FDX w as created 18 months ago. In FY99, our tw o largest operating companies –FedEx and RPS–each set new records for service levels and finan- cial results. Independently, that’s an outstanding accomplishment. But collectively, these results confirm that the w hole certainly is greater than the sum of its parts. Across every operating com- pany, the entire FDX team is w orking together to provide the total solutions that our customers demand and deserve. Operating Independently Each FDX company competes in a separate, w ell-defined segment of the total transportation and logistics market. ● FedEx–one of the most recognized business-to-business brands in the w orld –is the leader in virtually every segment of the information-intensive express transportation market. ● RPS offers cost-effective, guaranteed ground package delivery, utilizing state-of-the-art sortation and scanning technology. ● Viking Freight is the less-than-truckload leader in the w estern United States, providing reliable, on-time regional freight service. ● Roberts Express –w hich created the expedited delivery market –provides the fast response and special handling required to meet our customers’ service-critical needs. ● FDX Global Logistics offers one-stop shopping for complete supply chain solutions by combin- ing transportation, information, and physical logistics services. At FDX, w e also view these individual companies through a collective lens. While each company is focused on meeting distinct market needs, our customers have a lot in common. They w ant an easy, convenient w ay to connect to the high-tech, high-speed global marketplace. And it’s our responsibility to help them choose the right FDX netw ork at the right time, w ith the right price. Sharing Collective Strengths Leveraging cross-company synergies allow s FDX to deliver mean- ingful customer benefits in tw o very important areas. ● Customer Benefit #1: Coordinated sales and marketing programs are introducing our customers to FDX “ sister companies” that they haven’t done business w ith before. FDX has created a new collaborative sales group, called Worldw ide Services, to provide com- plete supply chain solutions to our larger customers w hen those solutions require the involve- ment of more than one FDX company. Worldw ide Services has already delivered incremental revenue and helped strengthen customer relationships. In response to market demand, w e have recently expanded this group’s responsibilities and have extended our cooperative sales strategy. Quite frankly, our customers have responded even more enthusiastically than w e had expected w hen given the opportunity to buy across the FDX portfolio. 3


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    Now, customers can sit at the dedicated computer installed in their offices and –w ith just a few keystrokes– sw itch between FedEx and RPS domestic shipping. FedEx remains the only U.S. all-express carrier w ith authority to fly to and from China. ● Customer Benefit #2: Information integration is making it easier for our customers to do busi- ness w ith FDX. When it comes to managing synergies across businesses, w e’ve found that seamless information integration is a critical component. In the past year, w e combined FedEx and RPS domestic ship- ping functionality on our FDX Pow erShip® and RPS M ulti-Ship® proprietary computer netw orks. Now, customers can sit at the dedicated computer installed in their offices and –w ith just a few keystrokes –sw itch betw een FedEx and RPS domestic shipping. In addition to improving our pro- prietary systems, w e have also upgraded the functionality on our Web sites and concluded an agreement w ith Netscape Netcenter, providing access to FedEx and RPS online services for more than 13 million users. Going forw ard, w e expect FDX technology to enhance a range of customer- related activities, including customer automation, tracking, and management reports. BUSINESS TRENDS: The FDX Global View As FDX continues to pursue its tw ofold strategy for portfolio management, w e are realizing our vision for a high-tech marketplace that requires fast, global reach –the same vision that drove the birth of Federal Express and the modern air/ground express delivery industry in the early 1970s. Today, FDX is uniquely positioned to take advantage of four major trends that are shaping w hat many now call the Netw ork Economy. Providing Fast, Global Reach As the w orld’s economy becomes more fully integrated –and as bar- riers and borders continue to come dow n –it just makes good economic sense to source and sell globally. That, in turn, has opened multiple legs of transportation on both the inbound “ sourcing” side as w ell as the outbound “ selling” side of virtually every multinational business. But this past year has tested many global companies, including FDX, w hich serves 210 countries principally through the FedEx system. Despite the softness in Pacific markets –a trend that only recently seems to be reversing itself –the FedEx international door-to-door express business still grew in FY99, though at less than its recent rate. This continued grow th is due, in part, to the flexibility of the FedEx global netw ork –the ability to reconfigure our system or simply to reroute existing flights in order to take advantage of favorable market trends. But in a “ business w ithout borders” environment, the true challenge is to create a framew ork for global commerce. As the w orld‘s largest express carrier, Federal Express supports an open avia- tion regime, w hich w e see as the best w ay to ensure free and fair trade in the air cargo industry in the 21st century. In FY99, a new bilateral agreement w as reached w ith China, doubling the frequencies available to U.S. carriers. FedEx remains the only U.S. all-express carrier w ith author- ity to fly to and from China. As w e continue to w ork tow ard true “ open skies” all around the w orld, FDX w ill also w ork aggressively tow ard other global issues, such as streamlined customs clearance procedures. 4 FD X 19 9 9 A N N U A L REPO RT


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    Our operating companies are helping customers move from managing inventory at rest to managing inven- tory in motion, providing the added FDX spent nearly $1.5 billion last year to value, visibility, and velocity that strengthen our superior technology capabilities companies need to succeed. and to attract the best and the brightest people. Serving and Served by High Tech The second major global trend is the increase in the high-tech, high value-added sector as a percentage of total economic activity. Information technology alone now contributes more than one-third of real economic grow th in the United States. But the high-value-added sector is much broader, including pharmaceuticals, automotive, electronics, avi- ation and other goods w ith high value per pound. Over the past 50 years, the w eight of the nation’s economic output has barely changed w hile the value has increased fivefold. As part of the new supply chain model, FDX is both a transporter and user of high-tech and high-value goods. We supply the transportation, information, and logistics solutions that help companies like Cisco, Dell, and Sun M icrosystems do business more effectively. But w e are also a customer of information technology goods. FDX spent nearly $1.5 billion last year to strengthen our superior technology capabilities and to attract the best and the brightest people. Speeding the Supply Chain The third influence is the increase in fast-cycle logistics as companies of all sizes discover the pow er of supply chain velocity. It’s not just doing business faster; it’s doing business smarter by replacing inventory w ith information. After all, a w arehouse is just an expensive place to put something so you know that you have it. That’s managing inventory at rest. Instead, if you can substitute real-time information to manage inventory in motion, you can dramatically reduce overhead and obsolescence w hile speeding time to market. To take advantage of the move tow ard faster, more efficient supply chains, last October w e cre- ated FDX Global Logistics. We believe that the future of logistics w ill not be in brick-and-mortar w arehouses, but in the kind of information-intensive services that have been a hallmark of FedEx and now FDX. Our operating companies are helping customers move from managing inventory at rest to managing inventory in motion, providing the added value, visibility, and velocity that com- panies need to succeed. Conducting Business Electronically Finally, perhaps the best w ay to minimize time and distance is through electronic commerce in general and the Internet in particular. FedEx w as a pioneer in electronic commerce long before the Internet w as opened for commercial use. In 1987, w e launched the original FedEx Pow erShip® netw ork of proprietary computers, allow - ing customers to process their shipments electronically. In 1996, w e added FedEx interNetShip® to our popular Web site at w w w.fedex.com, becoming the first company w ith true Internet shipping capabilities. In fact, FedEx interNetShip recently received the prestigious Computerw orld Smithsonian Aw ard for its innovative use of technology. Today, w ith a combination of FedEx Pow erShip computers, FedEx Ship® softw are, and FedEx interNetShip, more than tw o-thirds of U.S. domestic shipping transactions are handled electronically. As far as tw o million FedEx customers are concerned, it doesn’t matter w hether they use a designated computer terminal, proprietary soft- w are, or the Internet. It’s all about convenience, accessibility, and connectivity. 5


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    We are also testing a new “service-sensitive” RPS residential delivery service to expand With a combination of FedEx PowerShip our comprehensive mix of transportation computers, FedEx Ship software, and and logistics solutions–and to open the door FedEx interNetShip, more than two- for additional Internet retail business. thirds of U.S. domestic shipping transactions are handled electronically. Overall, the Internet has done for e-commerce w hat Henry Ford did for the automobile: It’s taken a luxury for a few and turned it into an affordable tool for many. The Internet has opened e-commerce to companies of all sizes and has created a new global business channel for selling products and delivering digital information. When calculating the Internet’s full potential, how ever, it’s important to break aw ay from the “ buy-it.com” mentality in the popular press and look at the much larger business-to-business sector, w hich is more than 10 times the size of the business-to-consumer market. Business-to- business e-commerce is estimated to top $100 billion in sales this year and exceed the trillion- dollar sales mark by 2003. Computers and electronics –already tw o of our largest customer segments –account for almost half of this category, and supply chains are increasingly moving online. That’s w hy w e call business-to-business the “ sw eet spot” of e-commerce, and w hy w e view these electronic customer connections as an incremental and diversified source of revenue for FDX. While business-to-business e-commerce w ill be –by far –the largest segment, w e are also leverag- ing the strength of the FDX portfolio in the business-to-home market. FedEx w ill continue to han- dle the “ time-sensitive” side of residential deliveries, particularly for higher-value goods. But w e are also testing a new “service-sensitive” RPS residential delivery service to expand our compre- hensive mix of transportation and logistics solutions –and to open the door for additional Internet retail business. Depending on the results of the Pittsburgh-area test program, w e could roll out a business-to-residential RPS delivery service as early as next spring. Connecting the Netw ork Economy The new economy is global, high-tech, fast-cycle, and net- w orked through e-commerce –four trends that are coming together to change the w ay w e all live and w ork. People w ill increasingly have the ability to communicate and transact business any- w here, any time as w e move from mass production to mass customization. At FDX, our w orldw ide transportation netw ork connects our customers to the global market- place. Our inform ation netw ork connects our custom ers w ith their custom ers and w ith their supply chain alliances. But in the new economy, there’s one more essential netw ork. CORPORATE CULTURE: The FDX Commitment Trucks and airplanes can’t go anyw here w ithout people. Computers still can’t rule the w orld alone. Even in this Netw ork Economy –or perhaps especially in this Netw ork Economy –the essential ingredient is the human netw ork: people w ho keep the entrepreneurial spirit alive. I believe FDX has the best people netw ork anyw here, w ith more than 190,000 employees and contractors w ho w ill do “ absolutely, positively” w hatever it takes to serve our customers. 6 FD X 19 9 9 A N N U A L REPO RT


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    FDX has the best people network anyw here, w ith more than 190,000 employees and contractors w ho w ill do “absolutely, positively” w hatever it takes to serve our customers. In the past year, our companies have received more than their share of accolades, consistently ranking as one of the best places to w ork by publications such as Fortune and Working M other. But I believe the true measure of our people is found in the thousands of stories that play out every day, all around the w orld – w hether it’s a driver w ho springs into action to save the life of a stranger trapped in a w recked car, a courier w ho drives 200 miles out of her w ay on Christmas Eve to deliver medicine to a sick child, or an employee w ho decides to w alk 15 miles to w ork, in the middle of the night w ith snow and ice on the ground, w hen his regular ride falls through. Our people are the faces of FDX, and I believe that our company has a very special bond w ith our employees, our customers, and our shareow ners. To each of you, FDX makes a corporate commitment. ● To FDX teammates, w e thank you for your unw avering commitment to our customers, and w e pledge to strengthen our mutual opportunities. Our companies are great places to w ork because you make them that w ay. ● To FDX customers, w e pledge to help you succeed in the fast-changing global marketplace. Independently, FDX companies w ill provide the transportation, information, and e-commerce solutions you need for superior supply chain performance. Collectively, w e w ill make it easier for you to buy across the entire spectrum of FDX services, and w e w ill leverage technology to do so. ● To FDX shareow ners, w e pledge to continue our focus on increasing shareow ner value. Our five-year goals call for annual earnings grow th in the 12% to 15% range and return on equity at or above 20% . We expect to achieve these results by grow ing our business, improving operating margins, and making more efficient use of capital. Our FY99 performance w as a great start for our new company, but I believe the best is yet to come. FDX has built superior physical, virtual, and people netw orks not just to prepare for change, but to shape change on a global scale: to change the w ay w e all connect w ith each other in the new Netw ork Economy. Frederick W. Smith Chairman, President and Chief Executive Officer 7


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    M ESSAGE FROM THE FDX Corporation posted a strong financial performance in FY99. We successfully executed our CHIEF FINANCIAL OFFICER portfolio management strategy of independently operating our FDX subsidiaries to be more com- petitive in their distinct market segments, w hile w e exploited sales and marketing synergies across the FDX portfolio, utilizing w orld-class information and technology systems. With this new strategy, FDX achieved record revenue of $16.8 billion in FY99 w hile net income rose 26% to $631 million and earnings per share increased 24% to $2.10. Along with the earnings growth, FDX made significant progress in other important financial measures: 1. Increased profi t m argins. The FDX operating margin improved to 7.4% from 6.9% last year, excluding non-recurring pilot contingency costs and merger expenses. This improvement w as the result of proactive efforts to grow higher margin services –including RPS ground, FedEx international express and FedEx domestic boxes –faster than low er-margin FedEx deferred services, w hile increasing yields, improving productivity and service levels, and con- trolling costs. 2. Stable capital expenditures. While w e continued to improve the competitiveness, capacity and efficiency of the FDX physical and virtual netw orks, w e kept capital spending basically flat versus FY98. Now that the core FedEx global netw ork is in place, w e are slow ing the spending on FedEx infrastructure and investing in the most profitable grow th opportunities across the entire spectrum of the FDX organization. For example, w e announced a $500 million multi-year investment as part of our plan to double RPS capacity and increase RPS revenue approxi- mately 15% annually over the next five years. 3. Stronger balance sheet. FDX reduced debt and continued to improve debt to total capitaliza- tion to 23% this year from 29% in FY98. Similarly, debt to total capitalization, including aircraft leases, follow ed its dow nw ard trend, dropping to 53% from 57% the previous year. 4. Im proved returns and cash fl ow. With the actions enumerated above, w e improved our return on investment and made genuine progress tow ard becoming cash flow positive. These are key strategic objectives, and w e anticipate continued progress in FY00. As w e move into FY00, w e believe that our diverse global netw ork, portfolio management strat- egy, w orld-class information and technology systems, and strong balance sheet uniquely position FDX to succeed in today’s global marketplace. We remain dedicated to grow ing revenues, enhancing margins, stabilizing capital expenditures, providing greater returns, strengthening our balance sheet, improving cash flow –and enhancing shareow ner value. Alan B. Graf, Jr. Executive Vice President and Chief Financial Officer 8 FD X 19 9 9 A N N U A L REPO RT


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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FDX Corporation RESULTS OF OPERATIONS Effective M ay 31, 1999, FDX Corporation (together w ith its subsidiaries, the “ Company” ) adopted Statement of Financial Accounting Standards (“ SFAS” ) No. 131, “ Disclosures about Segments of an Enterprise and Related Information.” Under the guidelines provided in this Statement, the Company determined its reportable operating segments to be Federal Express Corporation (“ FedEx” ) and RPS, Inc. (“ RPS” ). For additional information on the Company’s operating segments, see Note 11 of Notes to Consolidated Financial Statements. CONSOLIDATED RESULTS Current year results reflect package volume grow th and improved revenue per package (yield) at both FedEx and RPS and low er fuel costs. Results of operations included various non-recurring items w hich affected reported earnings of $631 million in 1999 ($2.10 per share, assuming dilution), $503 million in 1998 ($1.69 per share, assuming dilution) and $196 million in 1997 ($.67 per share, assuming dilu- tion) as discussed below. On October 30, 1998, contract negotiations betw een FedEx and the Fedex Pilots Association (“ FPA” ) w ere discontinued. In November, the FPA began actively encouraging its members to decline all overtime w ork and issued ballots seeking strike authorization. To avoid service interruptions related to a threatened strike, the Company and FedEx began strike contingency planning, including entering into agreements for additional third-party air and ground transportation and establishing special financing arrangements. Subsequently, the FPA agreed to end all job actions for 60 days and negotiations resumed. Such negotiations resulted in a five-year collective bargaining agreement that w as ratified by the FPA membership in February 1999 and took effect on M ay 31, 1999. Costs associated w ith these contingency plans, including contracts for supplemental airlift and ground transportation and a business interruption credit facility, reduced the third quarter’s pre-tax earnings by approximately $91 million. Excluding these costs, earnings per share, assuming dilution, w as approximately $2.28 for 1999. Effective June 1, 1998, the Company adopted a new accounting standard that requires certain costs of softw are developed or obtained for internal use to be capitalized. Pre-tax income for 1999 increased $41 million as a result of the adoption of this standard. Results in 1998 included $88 million ($80 million, after taxes) of expenses related to the acquisition of Caliber System, Inc. (“ Caliber” ) and the formation of the Company. These expenses w ere primarily investment banking fees and payments to members of Caliber’s management in accordance w ith pre-existing management retention agreements. Excluding these expenses, consolidated net income for 1998 w as $583 million, or $1.95 per share, assuming dilution. Another significant item impacting 1998’s results of operations w as the Teamsters strike against United Parcel Service (“ UPS” ) in August 1997. The Company analytically calculated that the volume not retained at the end of the first quarter of 1998 contributed approx- imately $170 million in revenues and approximately $.12 additional earnings per share. In 1998, Viking Freight, Inc. (“ Viking” ) recognized a $16 million pre-tax gain from the sale of certain assets in its restructuring, w hich w as announced by Caliber on M arch 27, 1997. Under the restructuring plan, operations at Viking’s midw estern, eastern and northeastern divi- sions ceased on M arch 27, 1997, and Viking’s southw estern division operated through June 1997 and w as subsequently sold. Viking con- tinues to operate in the w estern United States. In connection w ith the restructuring, Viking recorded a non-cash asset impairment charge of $225 million in December 1996. Excluding the after-tax effect of this charge, consolidated net income for 1997 w as $371 mil- lion, or $1.26 per share, assuming dilution. Other Income and Expense and Income Taxes Net interest expense decreased 21% for 1999, primarily due to low er debt levels. For 1998, net interest expense increased 19% pri- marily due to low er levels of capitalized interest. Interest is capitalized during the modification of certain aircraft from passenger to freighter configuration and the construction of certain facilities. Other net expense in 1999 included approximately $10 million related to FedEx’s strike contingency plans described above, primarily costs associated w ith a business interruption credit facility. Other, net for 1998 included a gain of approximately $8 million from an insurance settlement for an MD11 aircraft destroyed in an accident in July 1997. In 1997 other, net included a $17 million gain from an insur- ance settlement for a DC10 aircraft destroyed by fire in September 1996. 9


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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS The Company’s effective tax rate w as 40.5% in 1999, 44.6% in 1998 and 53.9% in 1997. Excluding non-recurring items from the Caliber acquisition in 1998 and the Viking restructuring in 1997, the effective rate w ould have been 41.5% in 1998 and 43.0% in 1997. The 40.5% effective tax rate in 1999 w as low er than the 41.5% effective tax rate (excluding non-recurring items) in 1998 primarily due to the combi- nation of stronger results from international operations and low er w orldw ide income taxes on foreign earnings. Generally, the effective tax rate exceeds the statutory U.S. federal tax rate because of state income taxes and other factors as identified in Note 9 of Notes to Consolidated Financial Statements. For 2000, management expects the effective tax rate w ill not exceed, and could possibly be low er than, the 1999 rate. The actual rate, how ever, w ill depend on a number of factors, including the amount and source of operating income. FEDERAL EXPRESS CORPORATION The follow ing table compares revenues and operating income (in millions) and selected statistics (in thousands, except dollar amounts) for FedEx for the years ended M ay 31: Percent Change 1999/ 1998/ 1999 1998 1997 1998 1997 Revenues: Package: U.S. overnight $ 7,185 $ 6,810 $ 6,244 + 6 + 9 U.S. deferred 2,271 2,179 1,622 + 4 + 34 International Priority (IP) 3,019 2,731 2,351 +11 + 16 Total package revenue 12,475 11,720 10,217 + 6 + 15 Freight: U.S. 440 337 208 +30 + 62 International 531 598 604 –11 – 1 Total freight revenue 971 935 812 + 4 + 15 Other 533 600 491 –11 + 22 Total revenues $13,979 $13,255 $11,520 + 5 + 15 Operating income $ 871 $ 837 $ 699 + 4 + 20 Package: Average daily packages: U.S. overnight 1,957 1,886 1,809 + 4 + 4 U.S. deferred 894 872 675 + 3 + 29 IP 282 259 226 + 9 + 15 Composite 3,133 3,017 2,710 + 4 + 11 Revenue per package (yield): U.S. overnight $ 14.34 $ 14.22 $ 13.59 + 1 + 5 U.S. deferred 9.93 9.84 9.45 + 1 + 4 IP 41.87 41.45 40.91 + 1 + 1 Composite 15.56 15.30 14.84 + 2 + 3 Freight: Average daily pounds: U.S. 4,332 3,356 1,594 +29 +111 International 2,633 2,770 2,542 – 5 + 9 Composite 6,965 6,126 4,136 +14 + 48 Revenue per pound (yield): U.S. $ .40 $ .40 $ .51 – – 22 International .79 .85 .94 – 7 – 10 Composite .54 .60 .77 –10 – 22 10


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    FDX Corporation Revenues In 1999, FedEx experienced increased volume and slightly improved yields in its U.S. overnight, U.S. deferred and IP services. Grow th in higher-priced U.S. overnight and IP services and higher average w eight per package w ere the primary factors in revenue grow th. List price increases and other yield-management actions contributed to the yield improvement in 1999. FedEx, through enhanced technol- ogy, has also improved its ability to capture incremental revenue based upon certain package characteristics, such as w eight and pack- age dimensions. The U.S. deferred package grow th rate declined in 1999 in large part due to specific management actions to restrict grow th of these low er-yielding services. IP package volume and international freight pounds and yield w ere negatively impacted by w eakness in Asian markets, especially in U.S. outbound traffic destined for that region. In 1998, package revenue increased on a year-over-year basis primarily due to rapid grow th of U.S. deferred services, including FedEx Express Saver.® This grow th w as augmented by incremental UPS strike-related volume, the majority of w hich w as in the deferred serv- ice category. The increase in yield w as largely a result of yield-management actions, such as a 3% to 4% price increase targeted to list price and standard discount matrix customers for U.S. packages effective February 15, 1998. The expiration of the air cargo transportation excise tax added approximately $50 million to revenue in 1997. The tax expired on December 31, 1995, w as reenacted by Congress effective August 27, 1996, and expired again on December 31, 1996. FedEx w as not obligated to pay the tax during the periods in w hich it w as expired. The excise tax w as reenacted by Congress effective M arch 7, 1997, and, in August 1997 it w as extended for 10 years through September 30, 2007. Other revenue included sales of engine noise reduction kits, logistics services, Canadian domestic revenue, charter services and other. Operating Income Operating income increased in 1999 compared to 1998 in spite of $81 million in strike contingency costs in 1999 and continued w eak- ness in Asian markets. Low er fuel prices and cost controls, including adjustments in netw ork expansion and aircraft deployment plans, contributed to improved results. A decline in average jet fuel price per gallon of 23% w as partially offset by an increase in gallons consumed of 6% . Although international freight pounds and revenue per pound continued to decline in 1999, higher yielding IP volume continued to grow, utilizing capacity otherw ise occupied by freight. In 1998, operating income improved as package yield increased at a higher rate than cost per package. An increase in average daily pack- ages also contributed to the improvement in operating income. Fuel expense in 1998 rose slightly due to an increase in gallons consumed of 13% , largely offset by a decrease in average jet fuel price per gallon of 10% . In 1998, fuel expense included amounts paid by FedEx under contracts that w ere designed to limit FedEx’s exposure to fluctuations in jet fuel prices. Low er international freight yield, rising expenses associated w ith international expansion and foreign currency fluctuations negatively affected 1998 results. Operating income for 1998 included approximately $50 million related to the UPS strike as w ell as proceeds from a 2% temporary fuel surcharge on U.S. domestic shipments through August 1, 1997. Also included in 1998 w ere $14 million of expenses related to the acquisition of Caliber. Operating income for 1997 included the effects of the 2% temporary fuel surcharge and additional revenue due to the expiration of the air cargo transportation excise tax. In 1997, fuel expense included amounts received and paid by FedEx under contracts w hich w ere designed to limit FedEx’s exposure to fluctuations in jet fuel prices. Operating margins w ere 6.2% (6.8% excluding the strike contingency costs), 6.3% (5.9% excluding the aforementioned 1998 items) and 6.1% (5.2% excluding the aforementioned 1997 items) in 1999, 1998 and 1997, respectively. Year-over-year comparisons w ere also affected by fluctuations in the contribution from sales of engine noise reduction kits. Profit from these sales declined $30 million in 1999 after increasing $40 million in 1998. 11


  • Page 14

    M ANAGEM ENT’S DISCUSSION AND ANALYSIS Outlook FedEx w ill continue to manage yields w ith the goal of ensuring an appropriate balance betw een revenues generated and the cost of pro- viding services. M anagement expects its yield-management actions, including a 2.8% domestic rate increase implemented in M arch 1999, to support yield increases in 2000. M anagement believes package volumes in the U.S. w ill grow in 2000 at rates slightly below those experienced in 1999, w ith the grow th rate accelerating for IP services. Freight pounds are expected to continue to increase in 2000, w ith increases in the U.S. partially offset by continued declines in international freight. Freight yield is expected to decline in 2000 for both U.S. and international shipments. Actual results, how ever, may vary depending on the impact of competitive pricing changes, cus- tomer responses to yield-management initiatives, changing customer demand patterns, the timing and extent of netw ork refinement, actions by FedEx’s competitors, including capacity fluctuations, regulatory conditions for aviation rights and economic conditions. FedEx w ill continue to use the flexibility of its global netw ork infrastructure by reconfiguring its system and flights to meet market demands. While long-term profitability is expected to improve, incremental costs incurred during periods of strategic expansion and varying economic conditions can affect short-term operating results. Salaries and employee benefits costs have risen over the past three years, generally consistent w ith revenues. M anagement w ill con- tinue its cost control efforts, but expects salaries and employee benefits to continue to increase as a result of volume grow th and the incremental costs of the collective bargaining agreement w ith the FPA that became effective M ay 31, 1999. In the past three years, FedEx’s w orldw ide aircraft fleet has increased resulting in a corresponding rise in maintenance expense. FedEx expects a predictable pattern of aircraft maintenance and repairs expense. How ever, unanticipated maintenance events w ill occasion- ally disrupt this pattern, resulting in periodic fluctuations in maintenance and repairs expense. Given FedEx’s increasing fleet size, aging fleet and variety of aircraft types, management believes that maintenance and repairs expense w ill continue a trend of year-over-year increases for the foreseeable future. In addition, management expects scheduled maintenance and repairs expense for B727 engines and for other aircraft to increase in 2000 due to a greater number of routine cycle checks resulting from fleet usage and certain Federal Aviation Administration directives. FedEx’s operating income from the sales of engine noise reduction kits peaked in 1998, and is expected to decline approximately $60 million year over year in 2000 and to become insignificant by 2001. Actual results may differ depending primarily on the impact of actions by FedEx’s competitors and regulatory conditions. FedEx may enter into contracts in 2000 designed to limit its exposure to fluctuations in jet fuel prices. The timing and magnitude of such contracts may vary due to their availability and pricing. RPS, INC. RPS’s revenue and operating income increased in 1999 and 1998. Package volume and revenue per package also increased each year. The follow ing table compares revenues and operating income (in millions) and selected package statistics (in thousands, except dollar amounts) for RPS for the years ended M ay 31: Percent Change 1999/ 1998/ 1999 1998 1997 1998 1997 Revenues $1,878 $1,711 $1,347 +10 +27 Operating income $ 231 $ 171 $ 138 +35 +24 Average daily packages 1,385 1,326 1,067 + 4 +24 Revenue per package (yield) $ 5.36 $ 5.04 $ 4.96 + 6 + 2 12


  • Page 15

    FDX Corporation Revenues In 1999, RPS’s revenue increased due to improving yield and steady volume grow th. Yield w as positively impacted by rate increases of 2.3% and 3.7% in February 1999 and 1998, respectively. During 1999, RPS recognized a year-to-date, one-time benefit of approximately $6 million to align its estimation methodology for in-transit revenue w ith that of the Company’s other operating subsidiaries. Year-to-date package yield w as increased by $.02 because of this one-time adjustment. The prior year included incremental volume associated w ith the UPS strike. Excluding this incremental volume, average daily packages increased 6% and 23% for 1999 and 1998, respectively. Operating Income Operating income increased in 1999 due to increased volume and yield-management actions. The increase in operating income for 1998 resulted from package volume grow th and the positive effect of the UPS strike. Results for 1998 contained approximately $6 mil- lion of incremental operating income during the 12 days of the UPS strike. Operating margins w ere 12.3% , 10.0% and 10.3% in 1999, 1998 and 1997, respectively. Outlook In 2000, RPS w ill focus on volume and revenue grow th, cost controls, and service quality. Package processing capacity w ill be expanded to meet grow th goals. RPS w ill continue its yield improvement efforts. How ever, actual results w ill depend on the impact of competitive pricing changes, customer responses to yield-management initiatives and changing customer demand patterns. RPS is testing new delivery services to residential areas. Depending on the results of the test, RPS w ill determine w hen and to w hat extent, if any, these services are to be offered. If the new residential services are implemented, there w ill be additional start-up and capital costs associated w ith the implementation. OTHER OPERATIONS Other operations include Viking, a regional less-than-truckload freight carrier operating in the w estern United States; Roberts Express, Inc. (“ Roberts” ), a critical-shipment carrier; FDX Global Logistics, Inc. (“ Logistics” ), a contract logistics provider; and certain unallocated corporate charges. Revenues Revenues from other operations increased 1% and decreased 34% in 1999 and 1998, respectively. Revenue grow th for 1999 reflects an increase at Roberts, offset by modest decreases at Viking and Logistics. The decline in 1998 w as primarily attributable to the Viking restructuring in M arch 1997 in w hich operations at four of five divisions w ere terminated by June 1997. See “ Results of Operations – Consolidated Results” for additional information on the Viking restructuring. Operating Income Operating income from other operations reflected improved performance at Roberts in 1999, offset by a decline at Logistics. Viking’s 1999 performance also improved over 1998 operating income exclusive of a $16 million pre-tax gain in 1998 on the sale of assets as a result of Viking’s restructuring. In 1997, Viking recorded an asset impairment charge of $225 million ($175 million, after taxes) associated w ith its restructuring. Operating income in 1998 includes $74 million in expenses, w hich w ere not allocated to operating segments, for merger costs associ- ated w ith the acquisition of Caliber. These expenses w ere primarily investment banking fees and payments to members of Caliber’s management in accordance w ith pre-existing management retention agreements. In addition, in 1998 Caliber recorded approximately $5 million of income, net of tax, from discontinued operations relating to the exiting of the airfreight business by one of Caliber’s sub- sidiaries in 1995. 13


  • Page 16

    M ANAGEM ENT’S DISCUSSION AND ANALYSIS FINANCIAL CONDITION LIQUIDITY Cash and cash equivalents totaled $325 million at M ay 31, 1999, an increase of $96 million compared w ith increases of $69 million and $33 million in 1998 and 1997, respectively. Cash provided from operations during 1999 w as $1.8 billion compared w ith $1.6 billion and $1.1 billion in 1998 and 1997, respectively. The Company currently has available a $1.0 billion revolving bank credit facility that is gener- ally used to finance temporary operating cash requirements and to provide support for the issuance of commercial paper. M anagement believes that cash flow from operations, its commercial paper program and the revolving bank credit facility w ill ade- quately meet its w orking capital needs for the foreseeable future. CAPITAL RESOURCES The Company’s operations are capital intensive, characterized by significant investments in aircraft, vehicles, computer and telecom- munications equipment, package handling facilities and sort equipment. The amount and timing of capital additions depend on various factors including volume grow th, domestic and international economic conditions, new or enhanced services, geographical expansion of services, competition, availability of satisfactory financing and actions of regulatory authorities. Capital expenditures for 1999 totaled $1.8 billion and included aircraft modifications, facilities, customer automation and computer equipment, vehicles and ground support equipment and one M D11 aircraft (w hich w as subsequently sold and leased back). In com- parison, 1998 expenditures totaled $1.9 billion and included three M D11 aircraft (w hich w ere subsequently sold and leased back), four A310 aircraft, aircraft modifications, customer automation and computer equipment, facilities and vehicles and ground support equip- ment. For information on the Company’s purchase commitments, see Note 13 of Notes to Consolidated Financial Statements. The Company has historically financed its capital investments through the use of lease, debt and equity financing in addition to the use of internally generated cash from operations. Generally, management’s practice in recent years w ith respect to funding new w ide- bodied aircraft acquisitions has been to finance such aircraft through long-term lease transactions that qualify as off-balance sheet oper- ating leases under applicable accounting rules. M anagement has determined that these operating leases have provided economic benefits favorable to ow nership w ith respect to market values, liquidity and after-tax cash flow s. In the future, other forms of secured financing may be pursued to finance FedEx’s aircraft acquisitions w hen management determines that it best meets FedEx’s needs. FedEx has been successful in obtaining investment capital, both domestic and international, for long-term leases on terms acceptable to it although the marketplace for such capital can become restricted depending on a variety of economic factors beyond its control. See Note 4 of Notes to Consolidated Financial Statements for additional information concerning the Company’s debt and credit facilities. In July 1999, approximately $231 million of pass through certificates w ere issued to finance or refinance the debt portion of leveraged operating leases related to four A300 aircraft to be delivered through October 1999. In June 1998, approximately $833 million of pass through certificates w ere issued to finance or refinance the debt portion of FedEx’s leveraged operating leases related to eight A300 and five M D11 aircraft to be delivered through the summer of 1999. The pass through certificates are not direct obligations of, or guar- anteed by, the Company or FedEx, but amounts payable by FedEx under the leveraged operating leases are sufficient to pay the prin- cipal of and interest on the certificates. M anagement believes that the capital resources available to the Company provide flexibility to access the most efficient markets for financing its capital acquisitions, including aircraft, and are adequate for the Company’s future capital needs. M ARKET RISK SENSITIVE INSTRUM ENTS AND POSITIONS The Company currently has market risk sensitive instruments related to interest rates. As disclosed in Note 4 of Notes to Consolidated Financial Statements, the Company has outstanding unsecured long-term debt, exclusive of capital leases of $1.2 billion and $1.4 billion at M ay 31, 1999 and 1998, respectively. The Company does not have significant exposure to changing interest rates on its long-term debt because the interest rates are fixed. M arket risk for fixed-rate long-term debt is estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates and amounts to approximately $45 million as of M ay 31, 1999 ($55 million as of M ay 31, 1998). The underlying fair values of the Company’s long-term debt w ere estimated based on quoted market prices or on the current rates offered for debt w ith similar terms and maturities. The Company does not currently use derivative financial instru- ments to manage interest rate risk. 14


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    FDX Corporation The Company’s earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, as a result of transactions in foreign markets. At M ay 31, 1999, the result of a uniform 10% strengthening in the value of the dollar relative to the cur- rencies in w hich the Company’s transactions are denominated w ould result in a decrease in operating income of approximately $25 million for the year ending M ay 31, 2000 (the comparable amount in the prior year w as $15 million). This calculation assumes that each exchange rate w ould change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, w hich are a changed dollar value of the resulting reported operating results, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors’ services become more or less attractive. The Company’s sensitiv- ity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. In 1998 and 1997, FedEx entered into contracts that w ere designed to limit its exposure to fluctuations in jet fuel prices. FedEx hedges its exposure to jet fuel price market risk only on a conservative, limited basis. No such contracts w ere outstanding as of M ay 31, 1998, nor w ere any entered into during 1999. M anagement may enter into similar contracts in 2000, the timing and magnitude of w hich may vary due to the availability and pricing of such contracts. See Notes 2 and 13 of Notes to Consolidated Financial Statements for accounting policies regarding derivative instruments and additional information regarding jet fuel contracts. The Company does not purchase or hold any derivative financial instruments for trading purposes. DEFERRED TAX ASSETS At M ay 31, 1999, the Company had a net cumulative deferred tax liability of $3 million consisting of $735 million of deferred tax assets and $738 million of deferred tax liabilities. The reversals of deferred tax assets in future periods w ill be offset by similar amounts of deferred tax liabilities. EURO CURRENCY CONVERSION On January 1, 1999, 11 of the 15 member countries of the European Union fixed conversion rates betw een their existing sovereign currencies (“ legacy currencies” ) and a single currency called the euro. On January 4, 1999, the euro began trading on currency exchanges and became available for non-cash transactions. The legacy currencies w ill remain legal tender through December 31, 2001. Beginning January 1, 2002, euro-denominated bills and coins w ill be introduced, and by July 1, 2002, legacy currencies w ill no longer be legal tender. The Company established euro task forces to develop and implement euro conversion plans. The w ork of the task forces in preparing for the introduction of the euro and the phasing out of the various legacy currencies includes numerous facets such as converting infor- mation technology systems, adapting billing and payment systems and modifying processes for preparing financial reports and records. Since January 1, 1999, the Company’s subsidiaries have been prepared to quote rates to customers, generate billings and accept pay- ments, in both euros and legacy currencies. Based on the w ork of the Company’s euro task forces to date, the Company believes that the introduction of the euro, any price transparency brought about by its introduction and the phasing out of the legacy currencies w ill not have a material impact on the Company’s consolidated financial position, results of operations or cash flow s. Costs associated w ith the euro project are being expensed as incurred and are being funded entirely by internal cash flow s. 15


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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS YEAR 2000 COM PLIANCE INTRODUCTION The Company’s operating subsidiaries rely heavily on sophisticated information technology (“ IT” ) for their business operations. For example, FedEx maintains electronic connections w ith approximately tw o million customers via its proprietary products and technolo- gies. The Company’s Year 2000 (“ Y2K” ) computer compliance issues are, therefore, broad and complex. The FedEx Y2K Project Office, w hich w as established in 1996, coordinates and supports FedEx’s Y2K compliance effort. The Company has also engaged a major international consulting firm to assist its subsidiaries in their Y2K program management. The Company’s Y2K compliance efforts are focused on business-critical items. Hardw are, softw are, systems, technologies and appli- cations are considered “ business-critical” if a failure w ould either have a material adverse impact on the Company’s business, financial condition or results of operations or involve a safety risk to employees or customers. STATE OF READINESS Generally, the Company believes that FedEx’s Y2K compliance effort is on schedule. The Company’s other operating subsidiaries are substantially on schedule. IT Systems FedEx’s compliance effort for all business-critical infrastructure and applications softw are (collectively, “ IT Systems” ) is substantially complete. FedEx has inventoried all IT Systems. Assessment/design (researching the compliance status and determining the impact of, and renovation requirements for, the IT Systems) and renovation (making IT Systems compliant) are substantially complete. Testing, w hich involves validating compliance, is also substantially complete. Within IT Systems, certification of application softw are, w hich involves FedEx’s independent, internal review to verify w hether the appropriate testing process has occurred, is approximately 98% complete. Noncompliant applications as of M ay 31, 1999 include systems dependent upon external government or vendor inter- faces and are expected to be compliant by September 1, 1999. How ever, contingency plans w ill be in place to help mitigate any negative impact of the noncompliance of such systems. Within IT Systems, certification of the operating system softw are and program product softw are (collectively, “ infrastructure” ) at FedEx is substantially complete. FedEx’s IT Systems compliance effort is targeted to be 100% complete by September 1, 1999. The Company’s other operating subsidiaries have completed the inventory and assessment phases relating to business-critical IT Systems. The remaining phases relating to IT Systems are under w ay. The IT Systems compliance effort of the Company’s other operating subsidiaries is targeted to be 100% complete by November 1, 1999. Non-IT Systems FedEx’s Y2K program relating to business-critical purchased hardw are and softw are, custom ized softw are applications, facilities/equipment and other embedded chip systems (collectively, “ Non-IT Systems” ) is 98% complete. The inventory and assessment phases relating to the Non-IT Systems of the Company’s other operating subsidiaries are targeted for completion by July 31, 1999, w ith the remaining phases targeted for completion by November 1, 1999. FedEx has established several definitions for compliance related to Non-IT Systems. For air infrastructure components (such as air- ports and air traffic systems), FedEx defines compliant to mean that these components are being aggressively assessed and that approved processes are in place to monitor their evolving status and develop specific operational contingency plans. For business- critical suppliers and affiliates, FedEx defines compliant to mean that the suppliers and affiliates have been assessed, and a con- tingency plan has been developed as necessary. For the automated shipping solutions offered to customers, FedEx defines compliant to mean that FedEx has made available a compli- ant version of the associated shipping solution. A customer may choose to remain on a noncompliant version of softw are if the cus- tomer is w illing to assume the associated risks and there are no potentially unfavorable impacts on FedEx’s internal systems. The implementation of Y2K-compliant automated shipping solutions by customers, particularly w here development is required by the customer, w ill likely continue through December 31, 1999 and beyond. FedEx w ill continue to test the combinations of features, functionality and methods of use contained in its shipping solutions through December 31, 1999 and w ill make changes as required. 16


  • Page 19

    FDX Corporation For electronic interfaces w ith customers and suppliers, FedEx defines compliant to mean that it has made compliant transaction sets available and has made systems modifications that enable FedEx to translate noncompliant versions that mitigate the potential impact to FedEx’s internal systems. Y2K INTERFACES WITH M ATERIAL THIRD PARTIES The Company’s operating subsidiaries are making concerted efforts to understand the Y2K status of third parties (including, among others, domestic and international government agencies, customs bureaus, U.S. and international airports and air traffic control sys- tems, customers, independent contractors, vendors and suppliers) w hose Y2K standing could either have a material adverse effect on the Company’s business, financial condition or results of operations or involve a safety risk to employees or customers. All of the Company’s operating subsidiaries are actively encouraging Y2K compliance on the part of third parties and are developing contingency plans in the event of their Y2K noncompliance. In conjunction w ith the International Air Transport Association (IATA) and the Air Transport Association of America (ATA), FedEx is involved in a global and industry-w ide effort to understand the Y2K compliance status of airports, air traffic systems, customs clear- ance and other U.S. and international government agencies, and common vendors and suppliers. FedEx has developed contingency plans to minimize the impact of Y2K issues on its air operations. Contingency plans w ill be implemented, as necessary, to mitigate the impact of Y2K problems that might arise during the transition into 2000. FedEx’s vendor and product compliance program includes the follow ing tasks: assessing vendor compliance status; product testing; tracking vendor compliance progress; developing contingency plans, including identifying alternate suppliers, as needed; addressing contract language; replacing, renovating or upgrading parts; requesting presentations from vendors or making on-site assessments, as required; and sending questionnaires. Failure to respond to these questionnaires results in further mail or phone correspondence, con- tingency plan development and/or vendor/product replacement. The Company’s other operating subsidiaries are developing a supply chain dependency model to assess the risk levels associated w ith the Y2K noncompliance of material third parties. TESTING FedEx’s Y2K testing effort includes functional testing of remedial measures and regression testing to validate that changes have not altered existing functionality. FedEx’s test plans include sections that define the scope of the testing effort, roles and responsibilities of test participants, the test approach planned, softw are, hardw are and data requirements, and test environments/techniques to be used as w ell as other sections defining the test effort. System functionality for future date accuracy is being verified and documented. FedEx uses an independent, internal process to verify that the appropriate testing process has occurred. A separate homogenous Y2K mainframe environment has been created to test operating system softw are and program products soft- w are. The Y2K mainframe environment is designed to accomplish future date “ end-to-end” testing of the larger applications and to validate interface communications betw een applications. COSTS TO ADDRESS Y2K COM PLIANCE Since 1996, the Company has incurred approximately $93 million on Y2K compliance ($43 million in 1999), w hich includes internal and external softw are/hardw are analysis, repair, vendor and supplier assessments, risk mitigation planning, and related costs. The Company continues to monitor its total expected costs associated w ith Y2K compliance efforts, and currently expects that it w ill incur additional total costs of approximately $35 million, including depreciation of $10 million. Remaining Y2K expenditures w ill include proj- ect management of the corporate contingency effort and the command and control center, further system audit and validation, and project management to ensure compliance of new systems development. The Company classifies costs as Y2K for reporting pur- poses if they remedy only Y2K risks or result in the formulation of contingency plans and w ould otherw ise be unnecessary in the nor- mal course of business. The Company’s Y2K compliance effort is being funded entirely by internal cash flow s. For the fiscal year ended M ay 31, 1999, Y2K expenditures w ere less than 10% of the Company’s total IT expense budget. Although there are opportunity costs to the Company’s Y2K compliance effort, management believes that no significant information technology projects have been deferred due to this w ork. 17


  • Page 20

    M ANAGEM ENT’S DISCUSSION AND ANALYSIS CONTINGENCY PLANNING AND RISKS FedEx’s key contingency plans w ere completed by January 31, 1999. These plans address the activities to be performed in preparation for and during a Y2K-related failure that could have an immediate and significant impact on normal operations. A Y2K-related failure could include, but is not limited to, pow er outages, system or equipment failures, erroneous data, loss of communications and failure of a supplier or vendor. The contingency plans include, among other things, items such as pre-arranging alternative operating loca- tions, replacing non-Y2K compliant suppliers and vendors, using back-up systems equipment and stockpiling additional inventory and supplies. They also outline alternative procedures, including manual ones, that can be performed in order to carry out mission-critical functions and trouble-shooting procedures the IT organization can follow to bring internal systems and equipment back into operation after a Y2K-related failure. The plans also establish procedures for company-w ide communications. These are in addition to the Company’s operational contingency plans for the pick-up, delivery and movement of packages. FedEx has created a Y2K contingency command and control center that w ill link to its other operations command and control centers. Key personnel w ill be on call beginning November 1999 and on site by December 31, 1999. FedEx’s goal for completing all other contingency plans is September 30, 1999. Plans covering vendor and supplier issues are substan- tially complete. These plans are in place to minimize Y2K-related risks that a vendor and supplier might pose if they are behind in their ow n Y2K efforts. As of M ay 31, 1999, FedEx had substantially completed the development of its testing plans. Testing w ill include struc- tured w alk-throughs, mock drills and simulations and is expected to be completed by October 31, 1999. The Company’s other operating subsidiaries have substantially completed their business-critical Y2K contingency plans and are currently formulating other contingency plans for non-business-critical Y2K compliance issues. Although the cost of developing contingency plans is included in the total project costs described above, the cost of implementing any necessary contingency plans is not know n at this time. Due to the general uncertainty inherent in the Company’s Y2K compliance, mainly resulting from the Company’s dependence upon the Y2K compliance of the government agencies and third-party suppliers, vendors and customers w ith w hom the Company deals, the Company believes that there is no single most reasonably likely w orst case scenario. How ever, the Company believes that a most reasonably likely w orst case scenario could include, but is not limited to, the follow ing situations: delivery delays and the related re-routing costs due to the lack of readiness of airports and air traffic systems, principally outside the United States; the inability to serve certain customers or geographic areas due to their lack of compliance or lack of readiness of customs bureaus in various countries and busi- ness continuance capabilities of suppliers, vendors, customers and independent contractors, including third-party pick-up and delivery providers on w hom the Company relies in some international locations; and service delays or failures associated w ith the global utili- ties and telecommunications infrastructure. The Company’s Y2K program, including related contingency planning, is designed to sub- stantially lessen the possibility of significant interruptions of normal operations. Despite its efforts to date, the Company may still incur substantial expenditures or experience significant delays in delivering its services as Y2K problems, both domestic and international, become know n. Noncompliant systems of vendors, suppliers, customers and other third parties could also adversely affect the Company. While costs related to the lack of Y2K compliance of third parties, business interruptions, litigation and other liabilities related to Y2K issues could materially and adversely affect the Company’s business, results of operations and financial condition, the Company expects its Y2K compliance efforts to reduce significantly the Company’s level of uncertainty about the impact of Y2K issues affecting both its IT Systems and Non-IT Systems. Statements in this “ M anagement’s Discussion and Analysis of Results of Operations and Financial Condition” or made by manage- ment of the Company that contain more than historical information may be considered forw ard-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), w hich are subject to risks and uncertainties. Actual results may differ materially from those expressed in the forw ard-looking statements because of important factors identified in this section. 18


  • Page 21

    CONSOLIDATED STATEM ENTS OF INCOM E FDX Corporation Years ended M ay 31 In thousands, except Earnings Per Share 1999 1998 1997 REVENUES $16,773,470 $15,872,810 $14,237,892 OPERATING EXPENSES Salaries and employee benefits 7,087,728 6,647,140 6,150,247 Purchased transportation 1,537,785 1,481,590 1,252,901 Rentals and landing fees 1,396,694 1,304,296 1,138,690 Depreciation and amortization 1,035,118 963,732 928,833 M aintenance and repairs 958,873 874,400 773,765 Fuel 604,929 726,776 734,722 M erger expenses – 88,000 – Restructuring and impairment charges (credits) – (16,000) 225,036 Other 2,989,257 2,792,216 2,526,696 15,610,384 14,862,150 13,730,890 OPERATING INCOM E 1,163,086 1,010,660 507,002 OTHER INCOM E (EXPENSE) Interest, net (98,191) (124,413) (104,195) Other, net (3,831) 13,271 23,058 (102,022) (111,142) (81,137) INCOM E FROM CONTINUING OPERATIONS BEFORE INCOM E TAXES 1,061,064 899,518 425,865 PROVISION FOR INCOM E TAXES 429,731 401,363 229,761 INCOM E FROM CONTINUING OPERATIONS 631,333 498,155 196,104 INCOM E FROM DISCONTINUED OPERATIONS, NET OF INCOM E TAXES – 4,875 – NET INCOM E $ 631,333 $ 503,030 $ 196,104 EARNINGS PER COM M ON SHARE Continuing operations $ 2.13 $ 1.70 $ .67 Discontinued operations – .02 – $ 2.13 $ 1.72 $ .67 EARNINGS PER COM M ON SHARE – ASSUM ING DILUTION Continuing operations $ 2.10 $ 1.67 $ .67 Discontinued operations – .02 – $ 2.10 $ 1.69 $ .67 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 19


  • Page 22

    CONSOLIDATED BALANCE SHEETS FDX Corporation M ay 31 In thousands 1999 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 325,323 $ 229,565 Receivables, less allow ances of $68,305 and $61,409 2,153,166 1,943,423 Spare parts, supplies and fuel 291,922 364,714 Deferred income taxes 290,721 232,790 Prepaid expenses and other 79,896 109,640 Total current assets 3,141,028 2,880,132 PROPERTY AND EQUIPM ENT, AT COST Flight equipment 4,556,747 4,056,541 Package handling and ground support equipment and vehicles 3,858,788 3,425,279 Computer and electronic equipment 2,363,637 2,162,624 Other 2,940,735 2,819,430 13,719,907 12,463,874 Less accumulated depreciation and amortization 7,160,690 6,528,824 Net property and equipment 6,559,217 5,935,050 OTHER ASSETS Goodw ill 344,002 356,272 Equipment deposits and other assets 603,964 514,606 Total other assets 947,966 870,878 $10,648,211 $ 9,686,060 LIABILITIES AND STOCKHOLDERS’ INVESTM ENT CURRENT LIABILITIES Current portion of long-term debt $ 14,938 $ 257,529 Accrued salaries and employee benefits 740,492 611,750 Accounts payable 1,133,952 1,145,410 Accrued expenses 895,375 789,150 Total current liabilities 2,784,757 2,803,839 LONG-TERM DEBT, LESS CURRENT PORTION 1,359,668 1,385,180 DEFERRED INCOM E TAXES 293,462 274,147 OTHER LIABILITIES 1,546,632 1,261,664 COM M ITM ENTS AND CONTINGENCIES (Notes 5, 13 and 14) COM M ON STOCKHOLDERS’ INVESTM ENT Common stock, $.10 par value; 400,000 shares authorized; 297,987 and 147,411 shares issued 29,799 14,741 Additional paid-in capital 1,061,312 992,821 Retained earnings 3,615,797 2,999,354 Accumulated other comprehensive income (24,688) (27,277) 4,682,220 3,979,639 Less treasury stock, at cost, and deferred compensation 18,528 18,409 Total common stockholders’ investment 4,663,692 3,961,230 $10,648,211 $ 9,686,060 The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets. 20


  • Page 23

    CONSOLIDATED STATEM ENTS OF CASH FLOWS FDX Corporation Years ended M ay 31 In thousands 1999 1998 1997 OPERATING ACTIVITIES Income from continuing operations $ 631,333 $ 498,155 $ 196,104 Adjustments to reconcile income from continuing operations to cash provided by operating activities: Depreciation and amortization 1,035,118 963,732 928,833 Provision for uncollectible accounts 55,649 72,700 40,634 Deferred income taxes and other non-cash items (34,037) 45,570 (9,610) Restructuring and impairment charges (credits) – (16,000) 225,036 Gain from disposals of property and equipment (2,330) (7,188) (20,143) Changes in assets and liabilities, net of effects from disposition of business: Increase in receivables (294,121) (267,367) (426,357) Increase in other current assets (155,720) (102,203) (443,799) Increase in accounts payable and other operating liabilities 555,565 450,836 647,780 Other, net (19,337) (32,963) (29,300) Cash provided by operating activities 1,772,120 1,605,272 1,109,178 INVESTING ACTIVITIES Purchases of property and equipment, including deposits on aircraft of $1,200, $70,359 and $26,107 (1,769,946) (1,880,173) (1,762,979) Proceeds from dispositions of property and equipment: Sale-leaseback transactions 80,995 322,852 162,400 Reimbursements of A300 and M D11 deposits 67,269 106,991 63,039 Other dispositions 195,641 162,672 62,991 Net receipts from (advances to) discontinued operations – 1,735 (2,527) Other, net (22,716) (2,206) 1,044 Cash used in investing activities (1,448,757) (1,288,129) (1,476,032) FINANCING ACTIVITIES Principal payments on debt (269,367) (533,502) (9,670) Proceeds from debt issuances – 267,105 433,404 Proceeds from stock issuances 49,932 33,925 31,013 Dividends paid – (7,793) (34,825) Other, net (8,170) (6,939) (9,741) Cash provided by (used in) financing activities (227,605) (247,204) 410,181 CASH AND CASH EQUIVALENTS Cash provided by continuing operations 95,758 69,939 43,327 Cash used in discontinued operations – (1,735) (10,802) Balance at beginning of year 229,565 161,361 128,327 Balance at end of year $ 325,323 $ 229,565 $ 160,852 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 21


  • Page 24

    CONSOLIDATED STATEM ENTS OF CHANGES IN STOCKHOLDERS’ INVESTM ENT AND COM PREHENSIVE INCOM E FDX Corporation Accumulated Additional Other Common Paid-in Retained Comprehensive Treasury Deferred In thousands, except shares Stock Capital Earnings Income Stock Compensation Total BALANCE AT M AY 31, 1996 $ 8,960 $ 903,086 $2,456,271 $ 7,110 $(51,722) $(11,265) $3,312,440 Net income – – 196,104 – – – 196,104 Foreign currency translation adjustment, net of deferred taxes of $756 – – – (4,091) – – (4,091) Total comprehensive income 192,013 Cash dividends declared by Caliber System, Inc. – – (28,184) – – – (28,184) Purchase of treasury stock – – – – (15,057) – (15,057) Forfeiture of restricted stock – – – – (803) 720 (83) Tw o-for-one stock split by Federal Express Corporation in the form of a 100% stock dividend (56,994,074 shares) 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) 36,611 Amortization of deferred compensation – – – – – 3,421 3,421 BALANCE AT M AY 31, 1997 14,762 937,978 2,618,492 3,019 (55,482) (17,608) 3,501,161 Net income – – 503,030 – – – 503,030 Foreign currency translation adjustment, net of deferred tax benefit of $2,793 – – – (30,296) – – (30,296) Total comprehensive income 472,734 Adjustment to conform Caliber System, Inc.’s fiscal year – 492 (51,795) – (1,765) – (53,068) Cash dividends declared by Caliber System, Inc. – – (3,899) – – – (3,899) Purchase of treasury stock – – – – (7,049) – (7,049) Forfeiture of restricted stock – – – – (979) 586 (393) Issuance of common and treasury stock under employee incentive plans (1,466,895 shares) 135 54,195 – – 7,918 (7,204) 55,044 Cancellation of Caliber System, Inc. treasury stock (156) 156 (66,474) – 57,357 – (9,117) Amortization of deferred compensation – – – – – 5,817 5,817 BALANCE AT M AY 31, 1998 14,741 992,821 2,999,354 (27,277) – (18,409) 3,961,230 Net income – – 631,333 – – – 631,333 Foreign currency translation adjustment, net of deferred tax benefit of $959 – – – (611) – – (611) Unrealized gain on available-for-sale securities, net of deferred taxes of $2,100 – – – 3,200 – – 3,200 Total comprehensive income 633,922 Purchase of treasury stock – – – – (8,168) – (8,168) Forfeiture of restricted stock – – – – (1,196) 507 (689) Tw o-for-one stock split by FDX Corporation in the form of a100% stock dividend (148,931,996 shares) 14,890 – (14,890) – – – – Issuance of common and treasury stock under employee incentive plans (1,770,626 shares) 168 68,491 – – 8,083 (8,273) 68,469 Amortization of deferred compensation – – – – – 8,928 8,928 BALANCE AT M AY 31, 1999 $29,799 $1,061,312 $3,615,797 $(24,688) $ (1,281) $(17,247) $4,663,692 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 22


  • Page 25

    NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS FDX Corporation NOTE 1: BUSINESS COM BINATION AND BASIS OF PRESENTATION On M arch 17, 1999, the Board of Directors declared a tw o-for-one stock split in the form of a 100% stock dividend that w as paid on M ay 6, 1999 to stockholders of record on April 15, 1999. All per share amounts have been adjusted to reflect the stock split. On January 27, 1998, Federal Express Corporation (“ FedEx” ) and Caliber System, Inc. (“ Caliber” ) became w holly-ow ned subsidiaries of a new ly formed holding company, FDX Corporation (together w ith its subsidiaries, the “ Company” ). In this transaction, w hich w as accounted for as a pooling of interests, Caliber stockholders received 0.8 shares of the Company’s common stock for each share of Caliber common stock. Each share of FedEx common stock w as automatically converted into one share of the Company’s common stock. There w ere approximately 146,800,000 of $0.10 par value shares so issued or converted. The accompanying financial state- ments include the financial position and results of operations for both FedEx and Caliber for all periods presented. The Company operates on four, three-month quarters w ith a fiscal year ending M ay 31. Prior to becoming a subsidiary of the Company, Caliber operated on a 13 four-w eek period calendar ending December 31, w ith 12 w eeks in each of the first three quarters and 16 w eeks in the fourth quarter. The Company’s consolidated results of operations and cash flow s for the year ended M ay 31, 1998 comprise Caliber’s 53-w eek period from M ay 25, 1997 to M ay 31, 1998 consolidated w ith FedEx’s year ended M ay 31, 1998. For years prior to 1998, the Company’s consolidated results of operations, cash flow s and financial position comprise Caliber’s information for the calendar year ending just prior to the Company’s fiscal year end consolidated w ith FedEx’s information for that fiscal year. Due to the different fiscal year ends, Caliber’s results for the 20 -w eek period from January 1, 1997 to M ay 24, 1997 are not included in the financial statements for 1998 or 1997. For this period, Caliber had revenues of $1,028,119,000, operating expenses of $1,083,898,000, a net loss of $40,912,000, dividends declared of $10,883,000 and other changes, net, in common stockholders’ investment of $1,273,000. Accordingly, an adjustment w as included in the Company’s Consolidated Statements of Changes in Stockholders’ Investment and Comprehensive Income for the year ended M ay 31, 1998 to reflect this activity. In 1998, the Company incurred $88,000,000 of expenses related to the acquisition of Caliber and the formation of the Company, pri- marily investment banking fees and payments to members of Caliber’s management in accordance w ith pre-existing management retention agreements. NOTE 2: SUM M ARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of FDX Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. PROPERTY AND EQUIPM ENT. Expenditures for major additions, improvements, flight equipment modifications, and certain overhaul costs are capitalized. M aintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of property and equipment disposed of are removed from the related accounts, and any gain or loss is reflected in the results of operations. For financial reporting purposes, depreciation and amortization of property and equipment is provided on a straight-line basis over the asset’s service life or related lease term as follow s: Flight equipment 5 to 20 years Package handling and ground support equipment and vehicles 5 to 30 years Computer and electronic equipment 3 to 10 years Other 2 to 30 years Aircraft airframes and engines are assigned residual values ranging from 10% to 20% of asset cost. All other property and equipment have no material residual values. Vehicles are depreciated on a straight-line basis over five to ten years. For income tax purposes, depreciation is generally computed using accelerated methods. DEFERRED GAINS. Gains on the sale and leaseback of aircraft and other property and equipment are deferred and amortized over the life of the lease as a reduction of rent expense. Included in other liabilities at M ay 31, 1999 and 1998, w ere deferred gains of $429,488,000 and $338,119,000, respectively. 23


  • Page 26

    NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS DEFERRED LEASE OBLIGATIONS. While certain of the Company’s aircraft and facility leases contain fluctuating or escalating payments, the related rent expense is recorded on a straight-line basis over the lease term. Included in other liabilities at M ay 31, 1999 and 1998, w ere $321,248,000 and $324,203,000, respectively, representing the cumulative difference betw een rent expense and rent payments. SELF-INSURANCE ACCRUALS. The Company is self-insured up to certain levels for w orkers’ compensation, employee health care and vehicle liabilities. Accruals are based on the actuarially estimated undiscounted cost of claims. Included in other liabilities at M ay 31, 1999 and 1998, w ere $282,889,000 and $277,696,000, respectively, representing the long-term portion of self-insurance accruals for the Company’s w orkers’ compensation and vehicle liabilities. CAPITALIZED INTEREST. Interest on funds used to finance the acquisition and modification of aircraft and construction of certain facili- ties up to the date the asset is placed in service is capitalized and included in the cost of the asset. Capitalized interest w as $38,880,000, $33,009,000, and $45,717,000 for 1999, 1998 and 1997, respectively. ADVERTISING. Advertising costs are generally expensed as incurred and are included in other operating expenses. Advertising expenses w ere $202,104,000, $183,253,000 and $162,337,000 for 1999, 1998 and 1997, respectively. CASH EQUIVALENTS. Cash equivalents in excess of current operating requirements are invested in short-term, interest-bearing instru- ments w ith maturities of three months or less at the date of purchase and are stated at cost, w hich approximates market value. Interest income w as $12,399,000, $11,283,000,and $5,885,000 in 1999, 1998 and 1997, respectively. M ARKETABLE SECURITIES. The Company’s marketable securities are available-for-sale securities and are reported at fair value. Unrealized gains and losses are reported, net of related deferred income taxes, as a component of accumulated other comprehensive income w ithin common stockholders’ investment. SPARE PARTS, SUPPLIES AND FUEL. Spare parts are stated principally at w eighted-average cost; supplies and fuel are stated principally at standard cost, w hich approximates actual cost on a first-in, first-out basis. Neither method values inventory in excess of current replacement cost. GOODWILL. Goodw ill is the excess of the purchase price over the fair value of net assets of businesses acquired. It is amortized on a straight-line basis over periods ranging up to 40 years. Accumulated amortization w as $157,106,000 and $144,580,000 at M ay 31, 1999 and 1998, respectively. FOREIGN CURRENCY TRANSLATION. Translation gains and losses of the Company’s foreign operations that use local currencies as the functional currency are accumulated and reported, net of related deferred income taxes, as a component of accumulated other com- prehensive income w ithin common stockholders’ investment. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in the results of operations. INCOM E TAXES. Deferred income taxes are provided for the tax effect of temporary differences betw een the tax basis of assets and lia- bilities and their reported amounts in the financial statements. The Company uses the liability method to account for income taxes, w hich requires deferred taxes to be recorded at the statutory rate expected to be in effect w hen the taxes are paid. The Company has not provided for U.S. federal income taxes on its foreign subsidiaries’ earnings deemed to be permanently rein- vested. Quantification of the deferred tax liability, if any, associated w ith permanently reinvested earnings is not practicable. REVENUE RECOGNITION. Revenue is recorded based on the percentage of service completed for shipments in transit at the balance sheet date. EARNINGS PER SHARE. In accordance w ith the provisions of Statement of Financial Accounting Standards (“ SFAS” ) No. 128, “ Earnings Per Share,” basic earnings per share is computed by dividing net income by the number of w eighted-average common shares outstanding during the year. Earnings per share, assuming dilution, is computed by dividing net income by the number of w eighted- average common shares and common stock equivalents outstanding during the year (see Note 8). 24


  • Page 27

    FDX Corporation RECENT PRONOUNCEM ENTS. The Company adopted SFAS No. 130, “ Reporting Comprehensive Income,” during the first quarter of 1999. This Statement requires that foreign currency translation and unrealized gains or losses on the Company’s available-for-sale securities be included in other comprehensive income and that the accumulated balance of other comprehensive income be sepa- rately displayed. Prior year information has been restated to conform to the requirements of the Statement. On June 1, 1998, the Company adopted Statement of Position (“ SOP” ) 98 -1, “ Accounting for the Costs of Computer Softw are Developed or Obtained for Internal Use.” Pre-tax income for 1999 increased by $41,000,000 as a result of the adoption of this standard. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities,” w hich w as subsequently amended by SFAS No. 137 and is now effective for fiscal years beginning after June 15, 2000. The Statement requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instru- ments at fair value. The impact, if any, on earnings, comprehensive income and financial position of the adoption of SFAS No. 133 w ill depend on the amount, timing and nature of any agreements entered into by the Company. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants released SOP 98 -5 requiring that start-up activities be expensed as incurred. SOP 98 -5 is effective for fiscal years beginning after December 31, 1998. This SOP w ill not have a material impact on the Company’s operations. RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform to the 1999 presentation. USE OF ESTIM ATES. The preparation of the consolidated financial statements in conformity w ith generally accepted accounting princi- ples requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclo- sure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3: ACCRUED SALARIES AND EM PLOYEE BENEFITS AND ACCRUED EXPENSES The components of accrued salaries and employee benefits and accrued expenses w ere as follow s: M ay 31 In thousands 1999 1998 Salaries $158,846 $143,876 Employee benefits 282,325 189,324 Compensated absences 299,321 278,550 Total accrued salaries and employee benefits $740,492 $611,750 Insurance $345,804 $292,905 Taxes other than income taxes 225,378 190,046 Other 324,193 306,199 Total accrued expenses $895,375 $789,150 NOTE 4: LONG-TERM DEBT AND OTHER FINANCING ARRANGEM ENTS M ay 31 In thousands 1999 1998 Unsecured debt, interest rates of 7.60% to 10.57% , due through 2098 $ 988,120 $1,253,770 Unsecured sinking fund debentures, interest rate of 9.63% , due through 2020 98,598 98,529 Capital lease obligations and tax exempt bonds, interest rates of 5.35% to 7.88% , due through 2017 253,425 253,425 Less bond reserves 9,024 9,024 244,401 244,401 Other debt, interest rates of 9.68% to 9.98% 43,487 46,009 1,374,606 1,642,709 Less current portion 14,938 257,529 $1,359,668 $1,385,180


  • Page 28

    NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS The Company has a $1,000,000,000 revolving credit agreement w ith domestic and foreign banks. The revolving credit agreement comprises tw o parts. The first part provides for a commitment of $800,000,000 through January 27, 2003. The second part provides for a 364-day commitment for $200,000,000 through January 14, 2000. Interest rates on borrow ings under this agreement are gener- ally determined by maturities selected and prevailing market conditions. The agreement contains certain covenants and restrictions, none of w hich are expected to significantly affect the Company’s operations or its ability to pay dividends. As of M ay 31, 1999, approx- imately $1,588,000,000 w as available for the payment of dividends under the restrictive covenant of the agreement. Commercial paper borrow ings are backed by unused commitments under this revolving credit agreement and reduce the amount available under the agreement. At M ay 31, 1999, all of the $1,000,000,000 commitment amount w as available. The components of unsecured debt w ere as follow s: M ay 31 In thousands 1999 1998 Senior debt, interest rates of 7.80% to 9.88% , due through 2013 $673,779 $ 773,532 Bonds, interest rate of 7.60% , due in 2098 239,376 249,344 M edium term notes, interest rates of 9.95% to 10.57% , due through 2007 74,965 230,894 $988,120 $1,253,770 Of the senior debt outstanding at M ay 31, 1999 and 1998, $200,000,000 w as issued by Caliber. The Caliber notes mature on August 1, 2006 and bear interest at 7.80% . The notes contain restrictive covenants limiting the ability of Caliber and its subsidiaries to incur liens on assets and enter into leasing transactions. Tax exempt bonds w ere issued by the M emphis-Shelby County Airport Authority (“ M SCAA” ) and the City of Indianapolis. Lease agreements w ith the M SCAA and a loan agreement w ith the City of Indianapolis covering the facilities and equipment financed w ith the bond proceeds obligate FedEx to pay rentals and loan payments, respectively, equal to principal and interest due on the bonds. Scheduled annual principal maturities of long-term debt for the five years subsequent to M ay 31, 1999, are as follow s: $14,900,000 in 2000; $11,500,000 in 2001; $207,100,000 in 2002; $11,100,000 in 2003; and $30,100,000 in 2004. The Company’s long-term debt, exclusive of capital leases, had carrying values of $1,178,000,000 and $1,446,000,000 at M ay 31, 1999 and 1998, respectively, compared w ith fair values of approximately $1,250,000,000 and $1,597,000,000 at those dates. The estimated fair values w ere determined based on quoted market prices or on current rates offered for debt w ith similar terms and maturities. NOTE 5: LEASE COM M ITM ENTS The Company utilizes certain aircraft, land, facilities and equipment under capital and operating leases that expire at various dates through 2027. In addition, supplemental aircraft are leased under agreements that generally provide for cancellation upon 30 days’ notice. The components of property and equipment recorded under capital leases w ere as follow s: M ay 31 In thousands 1999 1998 Package handling and ground support equipment and vehicles $245,041 $261,985 Facilities 134,442 134,442 Computer and electronic equipment and other 6,496 6,518 385,979 402,945 Less accumulated amortization 268,696 274,494 $117,283 $128,451 26


  • Page 29

    FDX Corporation Rent expense under operating leases for the years ended M ay 31 w as as follow s: In thousands 1999 1998 1997 M inimum rentals $1,246,259 $1,135,567 $ 986,758 Contingent rentals 59,839 60,925 57,806 $1,306,098 $1,196,492 $1,044,564 Contingent rentals are based on hours flow n under supplemental aircraft leases. A summary of future minimum lease payments under capital leases and non-cancellable operating leases (principally aircraft and facil- ities) w ith an initial or remaining term in excess of one year at M ay 31, 1999 is as follow s: In thousands Capital Leases Operating Leases 2000 $ 15,023 $ 1,011,957 2001 15,023 933,339 2002 15,023 876,055 2003 15,023 809,770 2004 14,894 764,550 Thereafter 302,502 8,717,952 $377,488 $13,113,623 At M ay 31, 1999, the present value of future minimum lease payments for capital lease obligations including certain tax exempt bonds w as $200,077,000. FedEx makes payments under certain leveraged operating leases that are sufficient to pay principal and interest on certain pass through certificates. The pass through certificates are not direct obligations of, or guaranteed by, the Company or FedEx. NOTE 6: PREFERRED STOCK The Certificate of Incorporation authorizes the Board of Directors, at its discretion, to issue up to 4,000,000 shares of Series Preferred Stock. The stock is issuable in series, w hich may vary as to certain rights and preferences, and has no par value. As of M ay 31, 1999, none of these shares had been issued. NOTE 7: COM M ON STOCKHOLDERS’ INVESTM ENT STOCK COM PENSATION PLANS At M ay 31, 1999, the Company had options and aw ards outstanding under stock-based compensation plans described below. As of M ay 31, 1999, there w ere 16,712,860 shares of common stock reserved for issuance under these plans. The Board of Directors has authorized repurchase of the Company’s common stock necessary for grants under its restricted stock plans. As of M ay 31, 1999, a total of 12,479,946 shares at an average cost of $12.23 per share had been purchased and reissued under the above-mentioned plans. The Company applies Accounting Principles Board Opinion No. 25, “ Accounting for Stock Issued to Employees,” and related interpre- tations to measure compensation expense for its plans. Compensation cost for the restricted stock plans w as $8,928,000, $5,817,000 and $3,421,000 for 1999, 1998 and 1997, respectively. If compensation cost for the Company’s stock-based compensation plans had been determined under SFAS No. 123, “ Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share w ould have been the pro forma amounts indicated below : In thousands, except per share data 1999 1998 1997 Net Income: As reported $631,333 $503,030 $196,104 Pro forma 609,960 489,556 187,624 Earnings per share, assuming dilution: As reported $ 2.10 $ 1.69 $ .67 Pro forma $ 2.03 $ 1.64 $ .64 27


  • Page 30

    NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS The pro forma disclosures, applying SFAS No. 123, are not likely to be representative of pro forma disclosures for future years. The pro forma effect is not expected to be fully reflected until 2002 since SFAS No. 123 is applicable to options granted by the Company after M ay 31, 1995, and because options vest over several years and additional grants could be made. FIXED STOCK OPTION PLANS Under the provisions of the Company’s stock incentive plans, options may be granted to certain key employees (and, under the 1997 plan, to directors w ho are not employees of the Company) to purchase shares of common stock of the Company at a price not less than its fair market value at the date of grant. Options granted have a maximum term of 10 years. Vesting requirements are deter- mined at the discretion of the Compensation Committee of the Board of Directors. Presently, option vesting periods range from one to seven years. At M ay 31, 1999, there w ere 2,564,228 shares available for future grants under these plans. Beginning w ith the grants made on or after June 1, 1995, the fair value of each option grant w as estimated on the grant date using the Black-Scholes option-pricing model w ith the follow ing assumptions for each option grant: 1999 1998 1997 Dividend yield 0% 0% 0% Expected volatility 25% 25% 25% Risk-free interest rate 4.2%–5.6% 5.4% –6.5% 5.8% –6.9% Expected lives 2.5–5.5 years 2.5–6.5 years 2.5–8.5 years The follow ing table summarizes information about the Company’s fixed stock option plans for the years ended M ay 31: 1999 1998 1997 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 13,388,452 $19.74 13,523,460 $17.09 12,888,356 $15.76 Granted 3,377,500 31.80 2,485,544 28.20 3,401,064 20.02 Exercised (3,135,640) 17.86 (2,336,984) 13.45 (2,273,006) 13.65 Forfeited (230,780) 26.59 (283,568) 19.51 (536,060) 17.99 Outstanding at end of year 13,399,532 23.11 13,388,452 19.74 13,480,354 17.10 Exercisable at end of year 4,404,146 18.57 5,349,626 16.92 4,530,298 13.92 The w eighted-average fair value of options granted during the year w as $9.12, $8.25 and $8.12 for the years ended M ay 31, 1999, 1998 and 1997, respectively. The follow ing table summarizes information about fixed stock options outstanding at M ay 31, 1999: Options Outstanding Options Exercisable Weighted- Weighted- Weighted- Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price $ 7.64–$11.28 380,234 2.2 years $ 9.74 380,234 $ 9.74 11.56– 16.50 2,633,758 4.5 years 15.30 1,752,758 15.27 17.50– 25.19 4,996,172 6.6 years 20.20 1,733,194 20.53 26.44– 36.94 5,317,368 8.7 years 30.42 488,460 28.23 39.88– 48.44 72,000 8.5 years 40.48 49,500 39.88 7.64– 48.44 13,399,532 6.9 years 23.11 4,404,146 18.57 28


  • Page 31

    FDX Corporation RESTRICTED STOCK PLANS Under the terms of the Company’s Restricted Stock Plans, shares of the Company’s common stock are aw arded to key employees. All restrictions on the shares expire over periods varying from tw o to five years from their date of aw ard. Shares are valued at the market price of the Company’s common stock at the date of aw ard. Compensation related to these plans is recorded as a reduction of com- mon stockholders’ investment and is being amortized to expense as restrictions on such shares expire. The follow ing table summa- rizes information about aw ards under the principal restricted stock plans for the years ended M ay 31: 1999 1998 1997 Weighted- Weighted- Weighted- Average Average Average Shares Fair Value Shares Fair Value Shares Fair Value Aw arded 252,000 $32.71 240,000 $32.99 403,800 $25.97 Forfeited 16,900 44.38 28,000 34.94 36,000 20.02 At M ay 31, 1999, there w ere 749,100 shares available for future aw ards under these plans. NOTE 8: COM PUTATION OF EARNINGS PER SHARE The calculation of basic earnings per share and earnings per share, assuming dilution, for the years ended M ay 31 w as as follow s: In thousands, except per share amounts: 1999 1998 1997 Income from continuing operations $631,333 $498,155 $196,104 Income from discontinued operations – 4,875 – Net income applicable to common stockholders $631,333 $503,030 $196,104 Average shares of common stock outstanding 295,983 293,401 291,426 Basic earnings per share: Continuing operations $ 2.13 $ 1.70 $ .67 Discontinued operations – .02 – $ 2.13 $ 1.72 $ .67 Average shares of common stock outstanding 295,983 293,401 291,426 Common equivalent shares: Assumed exercise of outstanding dilutive options 13,090 13,849 12,200 Less shares repurchased from proceeds of assumed exercise of options (8,430) (8,842) (9,170) Average common and common equivalent shares 300,643 298,408 294,456 Earnings per share, assuming dilution: Continuing operations $ 2.10 $ 1.67 $ .67 Discontinued operations – .02 – $ 2.10 $ 1.69 $ .67 29


  • Page 32

    NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS NOTE 9: INCOM E TAXES The components of the provision for income taxes for the years ended M ay 31 w ere as follow s: In thousands 1999 1998 1997 Current provision: Domestic Federal $385,164 $267,471 $153,244 State and local 49,918 32,839 29,344 Foreign 22,730 36,543 44,165 457,812 336,853 226,753 Deferred provision (credit): Domestic Federal (21,773) 56,408 577 State and local (4,437) 7,860 95 Foreign (1,871) 242 2,336 (28,081) 64,510 3,008 $429,731 $401,363 $229,761 The Company’s operations included the follow ing pre-tax income (loss) w ith respect to entities in foreign locations for the years ended M ay 31: In thousands 1999 1998 1997 Entities w ith pre-tax income $ 256,000 $ 208,000 $ 205,000 Entities w ith pre-tax losses (296,000) (306,000) (191,000) $ (40,000) $ (98,000) $ 14,000 Income taxes have been provided for foreign operations based upon the various tax law s and rates of the countries in w hich the Company’s operations are conducted. There is no direct relationship betw een the Company’s overall foreign income tax provision and foreign pre-tax book income due to the different methods of taxation used by countries throughout the w orld. A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for the years ended M ay 31 is as follow s: 1999 1998 1997 Statutory U.S. income tax rate 35.0% 35.0% 35.0% Increase resulting from: State and local income taxes, net of federal benefit 2.8 2.7 2.9 Non-recurring items (1998 Caliber acquisition, 1997 Viking restructuring) – 3.1 10.9 Other, net 2.7 3.8 5.1 Effective tax rate 40.5% 44.6% 53.9% Effective tax rate (excluding non-recurring items) 40.5% 41.5% 43.0% 30


  • Page 33

    FDX Corporation The significant components of deferred tax assets and liabilities as of M ay 31 w ere as follow s: In thousands 1999 1998 Deferred Deferred Deferred Deferred Tax Assets Tax Liabilities Tax Assets Tax Liabilities Depreciation $ – $608,719 $ – $523,843 Deferred gains on sales of assets 122,515 – 86,053 – Employee benefits 151,559 32,183 126,513 22,595 Self-insurance accruals 228,020 – 204,303 – Other 233,331 97,264 183,941 95,729 $735,425 $738,166 $600,810 $642,167 NOTE 10: EM PLOYEE BENEFIT PLANS The Company sponsors defined benefit pension plans and postretirement health care plans. The Company has adopted SFAS No. 132, “ Employers’ Disclosures About Pensions and Other Postretirement Benefits,” w hich changes the presentation of information about pension and other postretirement benefit plans. Disclosures for prior years have been restated. PENSION PLANS. The defined benefit pension plans cover substantially all employees. The largest plans cover U.S. employees age 21 and over, w ith at least one year of service and provide benefits based on final average earnings and years of service. Plan funding is actuarially determined, and is also subject to certain tax law limitations. International defined benefit pension plans provide benefits primarily based on final earnings and years of service and are funded in accordance w ith local law s and income tax regulations. Plan assets consist primarily of marketable equity securities and fixed income instruments. During 1999 benefits provided under certain of the Company’s pension plans w ere enhanced, principally in connection w ith the ratification on February 4, 1999 of a collective bargain- ing agreement betw een FedEx and the Fedex Pilots Association (“ FPA” ). These benefit enhancements are reflected in the funded sta- tus of the plans at M ay 31, 1999 but did not materially affect pension cost in 1999. POSTRETIREM ENT HEALTH CARE PLANS. FedEx offers medical and dental coverage to eligible U.S. retirees and their eligible dependents. Vision coverage is provided for retirees, but not their dependents. Substantially all FedEx U.S. employees become eligible for these benefits at age 55 and older, if they have permanent, continuous service w ith FedEx of at least 10 years after attainment of age 45 if hired prior to January 1, 1988, or at least 20 years after attainment of age 35 if hired on or after January 1, 1988. Life insurance benefits are provided only to retirees of the former Tiger International, Inc. w ho retired prior to acquisition. RPS, Inc. (“ RPS” ) offers similar benefits to its eligible retirees. 31


  • Page 34

    NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS The follow ing table provides a reconciliation of the changes in the pension and postretirement health care plans’ benefit obligations and fair value of assets over the tw o-year period ended M ay 31, 1999, and a statement of the funded status as of M ay 31, 1999 and 1998: In thousands Pension Plans Postretirement Health Care Plans 1999 1998 1999 1998 CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $4,121,795 $3,142,168 $ 217,027 $ 174,503 Service cost 331,005 250,753 23,676 18,385 Interest cost 288,221 245,697 16,962 14,767 Amendments and benefit enhancements 125,145 – 1,681 40 Actuarial (gain) loss (426,863) 543,071 (7,402) 14,292 Plan participant contributions – – 679 818 Foreign currency exchange rate changes 2,796 (10,174) – – Benefits paid (56,580) (49,720) (6,437) (5,778) Benefit obligation at end of year $4,385,519 $4,121,795 $ 246,186 $ 217,027 CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $4,434,870 $3,632,684 $ – $ – Actual return on plan assets 451,738 766,148 – – Foreign currency exchange rate changes (1,283) (786) – – Company contributions 123,686 86,544 5,758 4,960 Plan participant contributions – – 679 818 Benefits paid (56,580) (49,720) (6,437) (5,778) Fair value of plan assets at end of year $4,952,431 $4,434,870 $ – $ – FUNDED STATUS OF THE PLANS $ 566,912 $ 313,075 $(246,186) $(217,027) Unrecognized actuarial (gain) loss (595,238) (197,366) (20,809) (13,531) Unrecognized prior service (benefit) cost 132,116 5,757 291 (1,477) Unrecognized transition amount (11,852) (13,197) – – Prepaid (accrued) benefit cost $ 91,938 $ 108,269 $(266,704) $(232,035) AM OUNTS RECOGNIZED IN THE BALANCE SHEET AT M AY 31: Prepaid benefit cost $ 188,423 $ 184,547 $ – $ – Accrued benefit liability (96,485) (76,278) (266,704) (232,035) M inimum pension liability (86,000) (847) – – Intangible asset 86,000 847 – – Prepaid (accrued) benefit cost $ 91,938 $ 108,269 $(266,704) $(232,035) Net periodic benefit cost for the years ended M ay 31 w as as follow s: In thousands Pension Plans Postretirement Health Care Plans 1999 1998 1997 1999 1998 1997 Service cost $ 331,005 $ 250,753 $246,443 $23,676 $18,385 $17,830 Interest cost 288,221 245,697 221,975 16,962 14,767 13,663 Expected return on plan assets (483,709) (377,421) (334,475) – – – Net amortization and deferral (1,948) (2,304) 12,547 (211) (709) (252) $ 133,569 $ 116,725 $146,490 $40,427 $32,443 $31,241 WEIGHTED-AVERAGE ACTUARIAL ASSUM PTIONS 1999 1998 1997 1999 1998 1997 Discount rate 7.5% 7.0% 8.0% 7.3% 7.2% 7.8% Rate of increase in future compensation levels 4.6 4.6 5.4 – – – Expected long-term rate of return on assets 10.9 10.3 10.3 – – – 32


  • Page 35

    FDX Corporation The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans w ith accumulated bene- fit obligations in excess of plan assets w ere $201,700,000, $172,800,000 and $2,600,000, respectively, as of M ay 31, 1999, and $91,100,000, $66,700,000 and $1,900,000, respectively, as of M ay 31, 1998. The minimum pension liability and corresponding intangible asset recognized in the balance sheet at M ay 31, 1999 relate to the collective bargaining agreement betw een FedEx and the FPA. FedEx’s future medical benefit costs w ere estimated to increase at an annual rate of 9.0% during 2000, decreasing to an annual grow th rate of 5.25% in 2008 and thereafter. Future dental benefit costs w ere estimated to increase at an annual rate of 7.75% during 2000, decreasing to an annual grow th rate of 5.25% in 2010 and thereafter. FedEx’s cost is capped at 150% of the 1993 employer cost and, therefore, w ill not be subject to medical and dental trends after the capped cost is attained, projected to be in 2001. Caliber’s health care costs w ere estimated to increase at an annual rate of 7.9% during 2000, decreasing to an annual grow th rate of 5.25% in 2006 and thereafter. A 1% change in these annual trend rates w ould not have a significant impact on the accumulated postretirement benefit obligation of the Company at M ay 31, 1999, or 1999 benefit expense. The Company pays claims as incurred. PROFIT SHARING PLANS. The profit sharing plans cover substantially all U.S. employees age 21 and over, w ith at least one year of serv- ice w ith the Company as of the contribution date. The plans provide for discretionary employer contributions w hich are determined annually by the Board of Directors. Profit sharing expense w as $137,500,000 in 1999, $124,700,000 in 1998 and $107,400,000 in 1997. Included in these expense amounts are cash distributions made directly to employees of $46,800,000, $43,100,000 and $28,600,000 in 1999, 1998 and 1997, respectively. NOTE 11: BUSINESS SEGM ENT INFORM ATION The Company adopted SFAS No. 131, “ Disclosures about Segments of an Enterprise and Related Information,” effective M ay 31, 1999. The Statement establishes standards for reporting information about operating segments. Operating segments, as defined, are com- ponents of an enterprise about w hich separate financial information is available that is evaluated regularly by the chief operating decision-maker in allocating resources and assessing performance. FDX is a global transportation and logistics provider primarily composed of FedEx, the w orld’s largest express transportation company, and RPS, a business-to-business ground small-package carrier. Other operating companies included in the FDX portfolio are Viking Freight, Inc. (“ Viking” ), a less-than-truckload carrier operating principally in the w estern United States; Roberts Express, Inc., a critical- shipment carrier; and FDX Global Logistics, Inc., a contract logistics provider. Other also includes certain unallocated corporate charges. Based on the guidelines provided in SFAS No. 131, the Company determined its reportable operating segments to be FedEx and RPS, both of w hich operate in single lines of business. The Company evaluates financial performance based on operating income. 33


  • Page 36

    NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS The follow ing table provides a reconciliation of reportable segment revenues, depreciation and amortization, operating income and segment assets to the Company’s consolidated financial statement totals: Consolidated In thousands FedEx RPS Other Total Revenues 1999 $13,979,277 $1,878,107 $ 916,086 $16,773,470 1998 13,254,841 1,710,882 907,087 15,872,810 1997 11,519,750 1,346,803 1,371,339(1) 14,237,892 Depreciation and Amortization 1999 $ 912,002 $ 82,640 $ 40,476 $ 1,035,118 1998 844,606 79,835 39,291 963,732 1997 777,374 69,857 81,602 928,833 Operating Income (Loss) 1999 $ 871,476(2) $ 231,010 $ 60,600 $ 1,163,086 (3) 1998 836,733 171,203 2,724 1,010,660 1997 699,042 138,112 (330,152)(4) 507,002 Segment Assets 1999 $ 9,115,975 $ 896,723 $ 635,513 $10,648,211 1998 8,433,106 846,139 406,815 9,686,060 (1) Includes revenue of certain Viking divisions that w ere subsequently sold. See Note 15. (2) Includes $81,000,000 of FedEx strike contingency costs. See Note 15. (3) Includes $74,000,000 of merger expenses. See Note 1. (4) Includes a $225,000,000 charge related to the Viking restructuring. See Note 15. The follow ing table provides a reconciliation of reportable segment capital expenditures to the Company’s consolidated totals for the years ended M ay 31: Consolidated In thousands FedEx RPS Other Total 1999 $1,550,161 $179,969 $ 39,816 $1,769,946 1998 1,761,963 78,041 40,169 1,880,173 1997 1,470,592 152,836 139,551 1,762,979 34


  • Page 37

    FDX Corporation The follow ing table presents the Company’s revenue by service type and geographic information for the years ended or as of M ay 31: In thousands 1999 1998 1997 REVENUE BY SERVICE TYPE FedEx: Package: U.S. overnight $ 7,185,462 $6,810,211 $6,243,790 U.S. deferred 2,271,151 2,179,188 1,621,647 International Priority 3,018,828 2,731,140 2,351,092 Freight: U.S. 439,855 337,098 207,729 International 530,759 597,861 604,472 Other 533,222 599,343 491,020 Total FedEx 13,979,277 13,254,841 11,519,750 RPS 1,878,107 1,710,882 1,346,803 Other 916,086 907,087 1,371,339 $16,773,470 $15,872,810 $14,237,892 GEOGRAPHIC INFORM ATION (1 ) Revenues U.S. $12,910,107 $12,231,537 $11,001,733 International 3,863,363 3,641,273 3,236,159 $16,773,470 $15,872,810 $14,237,892 Long-lived Assets U.S. $ 6,506,424 $ 5,817,111 International 1,000,759 988,817 $ 7,507,183 $ 6,805,928 (1) Generally, international revenue includes shipments that either originate in or are destined to locations outside the United States. Long-lived assets include property and equipment, goodw ill and other long-term assets. Flight equipment is allocated betw een geographic areas based on usage. NOTE 12: SUPPLEM ENTAL CASH FLOW INFORM ATION Cash paid for interest expense and income taxes for the years ended M ay 31 w as as follow s: In thousands 1999 1998 1997 Interest (net of capitalized interest) $114,326 $130,250 $108,828 Income taxes 437,340 355,563 195,253 Non-cash investing and financing activities for the years ended M ay 31 w ere as follow s: In thousands 1999 1998 1997 Fair value of assets surrendered under exchange agreements (w ith tw o airlines) $48,248 $90,428 $62,018 Fair value of assets acquired under exchange agreements 34,580 78,148 46,662 Fair value of assets surrendered in excess of assets acquired 13,668 12,280 15,356 NOTE 13: COM M ITM ENTS AND CONTINGENCIES The Company’s annual purchase commitments under various contracts as of M ay 31, 1999, w ere as follow s: Aircraft- In thousands Aircraft Related (1) Other (2) Total 2000 $431,400 $329,700 $528,000 $1,289,100 2001 310,300 626,300 78,200 1,014,800 2002 316,900 229,200 8,500 554,600 2003 381,500 193,600 – 575,100 2004 200,800 7,800 – 208,600 (1) Primarily aircraft modifications, rotables, spare parts and spare engines. (2) Facilities, vehicles, computer and other equipment. 35


  • Page 38

    NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS At M ay 31, 1999, FedEx w as committed to purchase five A300s, 31 M D11s, six DC10s (in addition to those discussed in the follow ing paragraph) and 75 Ayres ALM 200s to be delivered through 2007. Deposits and progress payments of $27,407,000 have been made tow ard these purchases. FedEx has agreements w ith tw o airlines to acquire 53 DC10 aircraft (39 of w hich had been received as of M ay 31, 1999), spare parts, aircraft engines and other equipment, and maintenance services in exchange for a combination of aircraft noise reduction kits and cash. Delivery of these aircraft began in 1997 and w ill continue through 2001. Additionally, these airlines may exercise put options through December 31, 2003, requiring FedEx to purchase up to 20 additional DC10s along w ith additional aircraft engines and equipment. In January 1999, put options w ere exercised by an airline requiring FedEx to purchase nine DC10s (in addition to those discussed in the preceding paragraph) for a total purchase price of $29,700,000. Delivery of the aircraft began in M arch 1999 and is expected to be com- pleted by January 2000. FedEx entered into contracts in previous years w hich w ere designed to limit its exposure to fluctuations in jet fuel prices. Under these contracts, FedEx made (or received) payments based on the difference betw een a specified low er (or upper) limit and the market price of jet fuel, as determined by an index of spot market prices representing various geographic regions. The difference w as recorded as an increase or decrease in fuel expense. At M ay 31, 1998, all such contracts had expired. Under jet fuel contracts, FedEx made pay- ments of $28,764,000 in 1998 and received $15,162,000 (net of payments) in 1997. NOTE 14: LEGAL PROCEEDINGS There are tw o separate class-action law suits against FedEx generally alleging that FedEx has breached its contract w ith the plaintiffs in transporting packages shipped by them. These law suits allege that FedEx continued to collect a 6.25% federal excise tax on the trans- portation of property shipped by air after the tax expired on December 31, 1995, until it w as reinstated in August 1996. The plaintiffs seek certification as a class action, damages, an injunction to enjoin FedEx from continuing to collect the excise tax referred to above, and an aw ard of attorneys’ fees and costs. One case w as filed in Circuit Court of Greene County, Alabama. The other case, w hich w as filed in the Supreme Court of New York, New York County, and contained allegations and requests for relief substantially similar to the Alabama case, w as dismissed w ith prejudice on FedEx’s motion on October 7, 1997. The Court found that there w as no breach of contract and that the other causes of action w ere preempted by federal law. The plaintiffs appealed the dis- missal. This case originally alleged that FedEx continued to collect the excise tax on the transportation of property shipped by air after the tax expired on December 31, 1996. The New York complaint w as later amended to cover the first expiration period of the tax (December 31, 1995 through August 27, 1996) covered in the original Alabama complaint. The dismissal w as affirmed by the appellate court on M arch 2, 1999. The plaintiffs are now seeking permission to appeal to the next appellate level. The air transportation excise tax expired on December 31, 1995, w as reenacted by Congress effective August 27, 1996, and expired again on December 31, 1996. The excise tax w as then reenacted by Congress effective M arch 7, 1997. The expiration of the tax relieved FedEx of its obligation to pay the tax during the periods of expiration. The Taxpayer Relief Act of 1997, signed by President Clinton in August 1997, extended the tax for ten years through September 30, 2007. FedEx intends to vigorously defend itself in these cases. No amount has been reserved for this contingency. The Company and its subsidiaries are subject to other legal proceedings and claims that arise in the ordinary course of their business. In the opinion of management, the aggregate liability, if any, w ith respect to these other actions w ill not materially adversely affect the financial position or results of operations of the Company. 36


  • Page 39

    FDX Corporation NOTE 15: OTHER EVENTS On October 30, 1998, contract negotiations betw een FedEx and the FPA w ere discontinued. In November, the FPA began actively encouraging its members to decline overtime w ork and issued ballots seeking strike authorization. To avoid service interruptions related to a threatened strike, the Company and FedEx began strike contingency planning including entering into agreements for additional third-party air and ground transportation and establishing special financing arrangements. Subsequently, the FPA agreed to end all job actions for 60 days and negotiations resumed. Such negotiations resulted in a five-year collective bargaining agreement that w as ratified by the FPA membership in February 1999 and became effective M ay 31, 1999. Costs associated w ith these contingency plans w ere approximately $91,000,000. Of these costs, approximately $81,000,000, primarily the cost of contracts for supplemental airlift and ground transportation, w as included in operating expenses. The remaining $10,000,000 w as included in non-operating expenses and represents the costs associated w ith obtaining additional short-term financing capabilities. In 1998, FedEx realized a net gain of $17,000,000 from the insurance settlement and the release from certain related liabilities on a leased M D11 aircraft destroyed in an accident in July 1997. The gain w as recorded in operating and non-operating income in substan- tially equal amounts. In 1997, FedEx’s operating income included a $15,000,000 pretax benefit from the settlement of a Tennessee personal property tax matter. Also in 1997, FedEx recorded a $17,100,000 non-operating gain from an insurance settlement for a DC10 aircraft destroyed by fire in September 1996. On M arch 27, 1997, Caliber announced a major restructuring of its Viking subsidiary. As a result of the restructuring, Viking’s south- w estern division (formerly Central Freight Lines Inc.) w as sold during the first quarter of 1998 and operations at Viking’s midw estern, eastern and northeastern divisions (formerly Spartan Express, Inc. and Coles Express, Inc.) ceased on M arch 27, 1997. In connection w ith the restructuring, Viking recorded a pretax asset impairment charge of $225,000,000 ($175,000,000, net of tax) in 1997 and a pretax restructuring charge of $85,000,000 ($56,400,000, net of tax) in the period from January 1, 1997 to M ay 24, 1997. This restructuring charge is included in the adjustment to conform Caliber’s fiscal year in the accompanying Consolidated Statements of Changes in Stockholders’ Investment and Comprehensive Income and, therefore, is excluded from the Consolidated Statements of Income. Components of the $85,000,000 restructuring charge include asset impairment charges, future lease costs and other con- tractual obligations, employee severance and other benefits and other exit costs. Gains on assets sold in the restructuring of $16,000,000 w ere recognized in the third quarter of 1998. The long-lived asset impairment charge in 1997 of $225,000,000 resulted from Caliber’s assessment of the ongoing value of property and equipment (primarily real estate and revenue equipment) used in Viking’s operations that w as determined to be impaired under SFAS No. 121, “ Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” Accordingly, these assets w ere w ritten dow n to fair value in the Company’s M ay 31, 1997 financial statements. Fair value w as based on estimates of appraised values for real estate and quoted prices for equipment. Assets held for sale from the restructuring (principally real estate and revenue equipment) are included in property and equipment in the accompanying consolidated balance sheet. Caliber completed the sale of substantially all of the assets to be disposed of during 1999 and 1998. Remaining accrued restructuring costs at M ay 31, 1999 of $16,000,000 relate primarily to future lease obligations and claims. On November 6, 1995, Caliber announced plans to exit the airfreight business served by its w holly-ow ned subsidiary, Roadw ay Global Air, Inc. Income from discontinuance of $4,875,000, net of tax, in 1998 included the favorable settlement of leases and other contrac- tual obligations. 37


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    NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS NOTE 16: SUM M ARY OF QUARTERLY OPERATING RESULTS (UNAUDITED) In thousands, except earnings per share First Quarter Second Quarter Third Quarter Fourth Quarter 1999 (1) Revenues $4,082,302 $4,209,237 $4,098,418 $4,383,513 Operating income 283,843 336,987 152,038 390,218 Income before income taxes 255,348 312,404 121,269 372,043 Net income 149,379 182,756 77,833 221,365 Earnings per common share $ .51 $ .62 $ .26 $ .74 Earnings per common share – assuming dilution $ .50 $ .61 $ .26 $ .73 1998 (2) Revenues $3,866,491 $3,942,018 $3,986,304 $4,077,997 Operating income 303,905 288,949 95,381 322,425 Income before income taxes 284,786 256,719 63,670 294,343 Income from continuing operations 164,777 149,824 12,836 170,718 Net income 164,777 149,824 17,711 170,718 Earnings per common share $ .56 $ .51 $ .06 $ .58 Earnings per common share – assuming dilution $ .55 $ .50 $ .06 $ .57 (1) Third quarter 1999 results included approximately $91,000,000 of expenses ($54,100,000 net of tax or $.18 per share, assuming dilution) for contingency plans made by the Company related to the threatened strike by the FPA. (2) First quarter 1998 included Caliber’s results for the 12-week period from May 25, 1997 to August 16, 1997 consolidated with FedEx’s results for the three months ended August 31, 1997. Second quarter 1998 included Caliber’s results for the 12-week period from August 17, 1997 to November 8, 1997 consoli- dated with FedEx’s results for the three months ended November 30, 1997. Third quarter 1998 included Caliber’s results for the 16-week period from November 9, 1997 to February 28, 1998 consolidated with FedEx’s results for the three months ended February 28, 1998. Third quarter 1998 results included $88,000,000 of expenses ($80,000,000 net of tax or $.26 per share, assuming dilution) related to the acquisition of Caliber and the formation of the Company. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of FDX Corporation: We have audited the accompanying consolidated balance sheets of FDX Corporation (a Delaw are corporation) and subsidiaries as of M ay 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income and cash flow s for each of the three years in the period ended M ay 31, 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated statements of income, stockholders’ equity and cash flow s for the year ended December 31, 1996, of Caliber System, Inc., a company acquired during 1998 in a transaction accounted for as a pooling of interests, as discussed in Note 1. Such state- ments are included in the consolidated financial statements of FDX Corporation for the year ended M ay 31, 1997, and reflect total rev- enues of 19% of the related FDX Corporation consolidated total. These statements w ere audited by other auditors w hose report has been furnished to us, and our opinion, insofar as it relates to amounts included for Caliber System, Inc., is based solely upon the report of the other auditors. We conducted our audits in accordance w ith generally accepted auditing standards. Those standards require that w e plan and perform the audit to obtain reasonable assurance about w hether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as w ell as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of FDX Corporation as of M ay 31, 1999 and 1998, and the results of their operations and their cash flow s for each of the three years in the period ended M ay 31, 1999, in conformity w ith generally accepted accounting principles. M emphis, Tennessee June 29, 1999 38


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    SELECTED CONSOLIDATED FINANCIAL DATA FDX Corporation Years ended M ay 31, In thousands, except per share amounts and Other Operating Data 1999 1998 1997 1996 1995 OPERATING RESULTS Revenues $16,773,470 $15,872,810 $14,237,892 $12,721,791 $11,719,596 Operating income 1,163,086 1,010,660 507,002 779,552 756,247 Income from continuing operations before income taxes 1,061,064 899,518 425,865 702,094 693,564 Income from continuing operations 631,333 498,155 196,104 400,186 396,125 Income (loss) from discontinued operations (1) – 4,875 – (119,614) (78,977) Net income $ 631,333 $ 503,030 $ 196,104 $ 280,572 $ 317,148 PER SHARE DATA (2) Earnings (loss) per share: Basic Continuing operations $ 2.13 $ 1.70 $ .67 $ 1.38 $ 1.38 Discontinued operations (1) – .02 – (.41) (.27) $ 2.13 $ 1.72 $ .67 $ .97 $ 1.11 Assuming dilution Continuing operations $ 2.10 $ 1.67 $ .67 $ 1.37 $ 1.37 Discontinued operations (1) – .02 – (.41) (.27) $ 2.10 $ 1.69 $ .67 $ .96 $ 1.10 Average shares of common stock 295,983 293,401 291,426 289,390 286,978 Average common and common equivalent shares 300,643 298,408 294,456 291,686 289,002 Cash dividends (3) – – – – – FINANCIAL POSITION Property and equipment, net $ 6,559,217 $ 5,935,050 $ 5,470,399 $ 4,973,948 $ 4,421,312 Total assets 10,648,211 9,686,060 9,044,316 8,088,241 7,943,218 Long-term debt, less current portion 1,359,668 1,385,180 1,597,954 1,325,277 1,324,711 Common stockholders’ investment 4,663,692 3,961,230 3,501,161 3,312,440 3,260,963 OTHER OPERATING DATA FEDEX Operating w eekdays 256 254 254 256 255 Aircraft fleet 634 613 584 557 496 RPS Operating w eekdays 253 256 254 252 253 Average full-time equivalent employees 156,386 150,823 145,995 See Note 1 of the Notes to Consolidated Financial Statements for a discussion of the periods presented. (1) Discontinued operations include the operations of Roadw ay Express, Inc., a w holly-ow ned subsidiary of Caliber that w as distributed to Caliber stock- holders on January 2, 1996, and Roadw ay Global Air, Inc., a w holly-ow ned subsidiary of Caliber, w hich exited the airfreight business in calendar 1995. (2) Reflects tw o-for-one stock splits effected in the form of 100% stock dividends on November 4, 1996 and M ay 6, 1999. (3) Caliber declared dividends of $3,899,000, $28,184,000, $54,706,000, and $54,620,000 for 1998, 1997, 1996, and 1995, respectively. Caliber declared additional dividends of $10,883,000 from January 1, 1997 to M ay 25, 1997, that are not included in the preceding amounts. FedEx did not pay dividends in the years show n. FDX does not intend to pay dividends on FDX common stock. 39


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    CORPORATE INFORM ATION Stock listing: The Company’s common stock is listed on The New York Stock Exchange under the ticker symbol FDX. Stockholders: At July 15, 1999, there w ere 15,431 stockholders of record. M arket information: Follow ing are high and low closing prices, by quarter, for FDX Corporation common stock in 1999 and 1998 adjust- ing for a tw o-for-one stock split effected in the form of a 100% stock dividend that w as paid on M ay 6, 1999 to stockholders of record on April 15, 1999. No cash dividends have been declared by the Company. First Quarter Second Quarter Third Quarter Fourth Quarter FY 1999 High $33 3⁄32 $327⁄160 $47 5⁄822 $61 3⁄422 Low 25 1⁄32 22 3⁄160 33 3⁄162 45 27⁄32 FY 1998 High $35 29⁄3 $41 9⁄322 $34 27⁄32 $37 1⁄822 Low 26 ⁄22 1 30 ⁄32 17 28 ⁄162 3 30 5⁄822 Corporate headquarters: 942 South Shady Grove Road, M emphis, Tennessee 38120, (901) 369 -3600. Annual meeting: The annual meeting of stockholders w ill be held at Hôtel Le Bristol, 112, rue du Faubourg Saint-Honoré, 75008 Paris, France on M onday, September 27, 1999, at 10:00 a.m. local time. Inquiries: For financial information, contact J.H. Clippard, Jr., Vice President, Investor Relations, FDX Corporation, 942 South Shady Grove Road, M emphis, Tennessee 38120, (901) 818 -7200. For general information, contact Shirlee M. Clark, Director, Public Relations, FDX Corporation, 942 South Shady Grove Road, M emphis, Tennessee 38120, (901) 395 -3460. Form 10-K: A copy of the Company’s Annual Report on Form 10 -K (excluding exhibits), filed w ith the Securities and Exchange Commission (SEC), is available free of charge. You w ill be mailed a copy upon request to J.H. Clippard, Jr., Vice President, Investor Relations, FDX Corporation, 942 South Shady Grove Road, M emphis, Tennessee 38120, (901) 818 -7200. Company documents filed electronically w ith the SEC can also be found on the Internet at the SEC’s Web site (http://w w w.sec.gov). Auditors: Arthur Andersen LLP, M emphis, Tennessee. Registrar and transfer agent: Equiserve –First Chicago Trust Division, Shareholder Services, P.O. Box 2500, Jersey City, New Jersey 07303-2500, (800) 446 -2617 / John H. Ruocco (312) 407-5153. Information on the DirectServiceTM Investment Program for Share- ow ners of FDX Corporation may be obtained by calling (800) 524 -3120. This program provides an alternative to traditional retail brokerage methods of purchasing, holding and selling FDX common stock. Equal Employment Opportunity: FDX Corporation is firmly committed to afford Equal Employment Opportunity to all individuals regardless of age, sex, race, color, religion, national origin, citizenship, disability, or status as a Vietnam era or special disabled veteran. We are strongly bound to this commitment because adherence to Equal Employment Opportunity principles is the only acceptable w ay of life. We adhere to those principles not just because they’re the law, but because it’s the right thing to do. Service M arks: FDXSM and FDX Global LogisticsSM and logo are service marks of FDX Corporation. Federal Express,® FedEx,® and logo, FedEx Pow ership,® FedEx Ship,® FedEx Same Day,® FedEx interNetShip® and FedEx Express Saver® are registered trademarks and service marks of Federal Express Corporation. Reg. U.S. Pat. & Tm. Off. and in certain foreign countries. RPS® and logo and RPS M ulti-Ship® are registered service marks and trademarks of RPS, Inc. Reg. U.S. Pat. & Tm. Off. Viking Freight SM is a service mark of Viking Freight, Inc. Roberts Express® is a registered service mark of Roberts Express, Inc. Reg. U.S. Pat. & Tm. Off. Pow ership® is used by FDX Corporation under license from Federal Express Corporation. 40


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    BOARD OF DIRECTORS AND SENIOR OFFICERS BOARD OF DIRECTORS Robert H. Allen (2) George J. M itchell (1) Private Investor and M anaging Partner Special Counsel Challenge Investment Partners Verner, Liipfert, Bernhard, M cPherson and Hand Investment firm Law firm Robert L. Cox (1) Jackson W. Smart, Jr. (2* ) Partner Chairman, Executive Committee Waring Cox First Commonw ealth, Inc. Law firm M anaged dental care company Ralph D. DeNunzio (2) Frederick W. Smith President Chairman, President and Chief Executive Officer Harbor Point Associates, Inc. FDX Corporation Private investment and consulting firm Dr. Joshua I. Smith (1) Judith L. Estrin (1) Chairman, President and Chief Executive Officer Senior Vice President and Chief Technology Officer The M AXIM A Corporation Cisco Systems, Inc. Information and data processing firm Networking systems company Paul S. Walsh (2) Philip Greer (1* ) Chairman, President and Chief Executive Officer Senior M anaging Director The Pillsbury Company Weiss, Peck & Greer, L.L.C. Consumer food and beverage company Investment management firm Peter S. Willmott (1) J.R. Hyde, III (2) Chairman and Chief Executive Officer Chairman Willmott Services, Inc. Pittco, Inc. Retail and consulting firm Investment company (1) Audit Committee Charles T. M anatt (2) (2) Compensation Committee Chairman Committee Chairman (* ) M anatt, Phelps & Phillips Law firm SENIOR OFFICERS Frederick W. Smith Kenneth R. M asterson Chairman, President and Executive Vice President, Chief Executive Officer General Counsel and Secretary Alan B. Graf, Jr. Dennis H. Jones Executive Vice President and Executive Vice President and Chief Financial Officer Chief Information Officer Design by Addison w w w.addison.com T. M ichael Glenn James S. Hudson Executive Vice President, Corporate Vice President and M arket Development and Chief Accounting Officer Corporate Communications Portions of this annual report w ere printed on recycled paper.


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    Information-Intensive Supply Chain Innovation Velocity Value-Added Visibility Real-Time FDX Corporation 942 South Shady Grove Road M emphis, Tennessee 38120 w w w.fdxcorp.com


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