FedEx
Annual Report 2000

Plain-text annual report

FedEx Corporation 2000 Annual Report Time-definite, global express transportation Small-package ground delivery (formerly RPS) Integrated logistics and supply chain solutions (formerly FDX Logistics) Expedited, door-to-door, super-critical delivery (formerly Roberts Express) Customs brokerage and trade facilitation solutions After two years as FDX Corporation, we have adopted a new name that, we believe, more accurately reflects our corporate identity: FedEx Corporation, the parent company for the FedEx family of services worldwide. Changes have occurred quickly, including new names for our major operating companies, new logos and new colors. And we are already beginning to see the benefits of a more focused, more effi- cient FedEx family of companies. But what has not changed is our fundamental business philoso- phy – to operate independently yet compete collectively. And what will never change is our mission – to produce superior financial returns for our shareowners as we serve our customers with the highest quality transportation, logistics and e-commerce solutions. SELECTED FINANCIAL DATA In thousands, except earnings per share 2000 1999 OPERATING RESULTS Revenues Operating income Operating margin Net income $18,256,945 $16,773,470 1,221,074 1,163,086 6.7% 6.9% 688,336 631,333 Earnings per share, assuming dilution Cash earnings per share, assuming dilution(1) Average common and common equivalent shares EBITDA(2) Capital expenditures, including equivalent capital(3) $ $ 2.32 6.22 296,326 $ 2,398,663 $ 1,991,600 $ $ 2.10 5.54 300,643 $ 2,194,373 $ 2,330,613 FINANCIAL POSITION Total assets Long-term debt Common stockholders’ investment $11,527,111 $10,648,211 1,782,790 4,785,243 1,374,606 4,663,692 (1) Net income plus depreciation and amortization divided by average common and common equivalent shares. (2) Earnings before interest, taxes, depreciation and amortization. (3) Represents actual cash expenditures plus the equivalent amount of cash that would have been expended for the acquisition of assets (principally aircraft), whose use was obtained through long-term operating leases entered into during the period. Percent Change + 9 + 5 + 9 +10 +12 – 1 + 9 –15 + 8 +30 + 3 $18.3 $16.8 $15.9 $2.32 $2.10 $1.69 14.6% 14.6% 13.5% FedEx 1 Corp. 98 99 00 98 99 00 98 99 00 REVENUES (in billions) EARNINGS PER SHARE RETURN ON AVERAGE EQUITY $2.4 $2.2 $2.0 $2.3 $2.3 $2.0 29.3% 27.1% 22.8% 98 99 00 98 99 00 98 99 00 (2) EBITDA (in billions) CAPITAL EXPENDITURES AND EQUIVALENTS (in billions) (3) DEBT TO TOTAL CAPITALIZATION 2 MESSAGE FROM THE CEO DEAR FELLOW SHAREOWNERS, This new strategic plan is based on three Just as we did in FY99 – when we overcame sound principles: significant challenges to post record rev- enues, record earnings per share and record service levels – FedEx Corporation has closed FY00 with the strong financial results that our shareowners have come to expect. > To leverage a significant point of competi- tive differentiation, we strengthened our superior business philosophy – to operate independently yet compete collectively. Independently, each company is free to focus For the 12 months ended May 31, 2000: on the distinct needs of its market segment, > Revenue rose 9% to $18.3 billion > Net income increased 9% to $688 million > Earnings per share rose to $2.32 versus $2.10 per diluted share a year ago, for a 10% gain. Continued economic strength – particularly in the high-tech and high-value-added sec- tors – led to improved growth rates in the without compromising networks or service. Collectively, the entire FedEx family works together to cross-sell services and choreo- graph customer solutions. > To extend the strength of the powerful FedEx brand name, we rebranded our major operating companies to include FedEx Express, FedEx Ground, FedEx Custom Critical, FedEx Logistics and FedEx Trade Networks. largest segment of our business, express > To provide a single point of access for our transportation. Our international express customers, we reorganized and created the new business continued to grow at the fastest pace, FedEx Corporate Services company, which with revenues rising 18%, led by increases in integrates customer-related activities such as Asia-Pacific and Europe. Combine our sales, marketing and information technology. improved growth rates with our demonstrated Through FedEx Services, our customers now fiscal responsibility – for example, holding have one “touch point” to connect with the full capital spending to less than $2 billion – and range of FedEx services – one sales rep, one toll- it’s evident that, for FY00, FedEx Corporation free customer service line, one Web site, one turned challenge into opportunity. customer automation platform and, soon, one FEDEX STRATEGIC PLAN “Challenge” was also the operative word for an increasingly competitive environment. To turn that challenge into our competitive advantage, FedEx Corporation conducted extensive research to develop a new strategic plan, which we unveiled in January and called “Project ARISE.” account number and one invoice. It’s really very simple. Our strategic plan is good for customers, good for shareowners and good for FedEx. Customers benefit from convenient, one-stop shopping for the full range of FedEx transportation, logistics and e-commerce solutions. Shareowners benefit from tangible, strategic opportunities for continued profitable growth. And, in the process, more than 200,000 employees and in the largest e-commerce distribution event contractors of FedEx Corporation benefit to date: the delivery of 250,000 Harry Potter from increased opportunities at a company books, with guaranteed Saturday delivery. widely regarded as one of America’s great places to work. STRATEGIC GROWTH OPPORTUNITIES Although our strategic initiatives will require additional spending over the next three years, we plan to mitigate those costs as we consoli- date support functions, rationalize services, and reduce administrative costs. More impor- tantly, we expect our new strategic plan to generate substantial incremental revenues and profits beginning in FY01 as we focus on the following growth opportunities: > Generate incremental volume in our core transportation businesses by cross-selling all FedEx services. For our customers, our diversified portfolio strategy is the right approach, offering the right FedEx service at the right time and the right price. > Attract new business from small and medium-sized customers. Our sales integration plan also calls for more dedicated attention to small and medium- sized customers. We plan to add more than 250 account executives – most dedicated to our smaller customers – and increase prospecting for new accounts by up to 35%. Why the special attention to small and medium-sized customers? First, these smaller accounts generate nearly half of total An estimated 1.7 million businesses ship FedEx revenue. Second, in today’s “start-up” both express and ground packages, account- business environment, smaller accounts ing for nearly 14 million shipments every day. have unique needs for transportation, logis- These “multi-mode” shippers need one con- tics, and information services. Whether it’s a venient, bundled solution, which is why our new Internet-based company or a traditional integrated sales force has been trained to brick-and-mortar firm, smaller companies cross-sell both FedEx Express and FedEx are sourcing and selling worldwide, and they Ground services. Since we consolidated our sales teams on April 1, we’ve already begun to see results. Many companies that have looked to FedEx only for reliable express transportation are now expanding to use our other services as well. In fact, our bundling strategy brought immediate – and high-profile – business as Amazon.com tapped FedEx Express and our new FedEx Home Delivery service to participate need a reliable business ally to help them navigate this global economy. > Create new revenue streams. Since we announced our new strategic plan last January, we have already taken two decisive steps to create entirely new revenue streams that complement our core businesses. FedEx 3 Corp. In February, we created the new FedEx Trade electronic customs clearance to speed an inter- Networks subsidiary to offer customs national shipment on to its final destination. brokerage and trade facilitation solutions for our global customers. This new operating company includes customs broker Tower Group International and World Tariff, Limited, the premier source of customs duty and tax information around the globe. Although ground transportation may be con- strained by geographic boundaries, FedEx Ground is uniquely positioned to take advan- tage of the surge in U.S. imports and exports as a member of the global FedEx family. In addition, its trucks can be an important In March, we launched the innovative new source of cross-border transportation through- FedEx Home Delivery service to major metro- out the NAFTA region. politan areas – and just three months later, as we issued FY00 earnings, we took advantage of our financial strength to accelerate plans for expansion. With options for delivery by 4 appointment, at night, or on Saturdays, we believe that FedEx Home Delivery truly fits the way we live, work and shop today. It’s a perfect solution for online merchants, many of whom have learned the hard way that timely, accu- rate fulfillment of orders is a virtual necessity. > Expand the high-margin international business. The fastest growth during FY00 continued We believe that international growth must remain a high priority as manufacturing becomes even more focused on high-tech and high-value-added items that are sold globally. > Capitalize on e-commerce. As the global economy continues at its robust pace, the evolution of e-commerce is having a profound effect. While total e-commerce is projected to generate about $450 billion in sales this year, it’s the business-to-business segment that will account for over 90% of those transactions. to be the FedEx Express international busi- No matter what the ultimate destination – ness, with revenue increasing 18% year over business or consumer – e-commerce start-ups year and gaining over 20% in the fourth quar- and traditional firms alike need one seamless, ter alone. But the global economy is also the rising tide for all FedEx companies – including the expedited service of FedEx Custom Critical throughout North America and Europe and the worldwide operations of FedEx Logistics. Our newest operating company, FedEx Trade Networks, is truly a global player, providing integrated system for Internet-based ordering and procurement, linked to the physical transportation and logistics solutions that ensure timely order fulfillment. And FedEx is positioned right at the heart of this trend. With our unmatched global physical network and our state-of-the-art information network, FedEx helps our customers bridge the e-world with the real world. > Provide meaningful supply chain solutions. In addition to these e-commerce solutions, FedEx enables companies of all sizes – whether they do business online or through traditional means – to streamline their sup- ply chains. The best way to explain the supply-chain concept is by example. One semiconductor company was sourcing components from 17 different countries. It took about three weeks to get the components from suppliers in those countries through the company’s North American warehouses and on to the end customers. But three weeks is a lifetime in an industry with high obsolescence rates. With a FedEx solution, the company cut its order-to-delivery time from three weeks to under five days, while increasing its ability to track goods in transit. Plus, $8 million of inventory was converted into usable product. That’s the true power – and the bottom-line impact – of innovative transportation, logis- tics and information solutions. In today’s business environment, it’s simply the smart way to work. And that’s why we view these integrated supply chain solutions as a major growth opportunity for all FedEx companies. As we move forward with our corporate repositioning, we must recognize that change is nothing new for FedEx. We’ve been chang- ing since day one and, in the process, helping to change the way the world works. To stay ahead of today’s high-tech, high-speed global economy, FedEx is changing in a very positive way – becoming more collaborative, more innovative and more efficient, with an absolute focus on continued growth in earn- ings and cash flow. Over a quarter-century ago, Federal Express invented the modern air/ground express indus- try and changed the business world dramati- cally. Now, we’re ready to reinvent ourselves – and our industry – for the 21st century. On a final note, I would like to express my personal gratitude for three of our distin- guished Board members: Charles Manatt, who resigned in December 1999 to become U.S. ambassador to the Dominican Republic; Robert Allen, who reaches our Board retire- ment age in September 2000; and Jackson Smart, who passed away in June. We will miss their keen intelligence, quick insight and business acumen, which have helped shape FedEx Corporation. FEDEX STRENGTH Frederick W. Smith Chairman, President As we close FY00, I am pleased to report that and Chief Executive Officer the state of FedEx Corporation is very strong indeed – with strong financial results, strong growth prospects and a strong business philosophy to guide our operations. FedEx 5 Corp. MESSAGE FROM THE CFO CONTINUED GROWTH, IMPROVED CASH FLOWS up our international network – route authori- FedEx Corporation posted solid financial ties that are now the envy of our competitors. performance in FY00 as we continued to suc- cessfully implement our portfolio manage- > Becoming less capital intensive ment strategy of operating our subsidiaries independently while competing collectively. With the FedEx Express core global network Nevertheless, it was a year of challenge and in place, we were able to reduce capital expen- change as we experienced some of the highest ditures compared to last year as a percentage fuel prices of the past decade and bore the ini- of revenues and on an absolute basis. Also, we tial costs of our new strategic plan. While continued to reallocate funds to other growth undertaking these repositioning actions, we opportunities like FedEx Ground, which sig- remained focused on our near-term commit- nificantly expanded the capacity of its pri- ment to our shareowners and achieved the mary business-to-business ground service, following results in FY00: and began the FedEx Home Delivery rollout. 6 > Solid EPS growth of 10% > Improved cash flow Strong cost reductions, productivity gains and With EBITDA increasing 9% to $2.4 billion, service level improvements, combined with we continued to make significant progress in fuel surcharges and fuel hedging, partially off- FY00 to becoming cash flow positive, which set the $273 million increase in fuel costs due we will achieve no later than FY03. to higher prices and the initial costs of our new go-to-market strategies. EPS growth also bene- fited as we returned cash to shareowners through the repurchase of 15 million shares of FedEx common stock. > Accelerated revenue growth of 9% With continued strong growth in our interna- tional express business and modest growth in our domestic express and ground business, FedEx Corporation achieved record revenues of $18.3 billion. Our international express business continued to benefit from our deci- Looking ahead, FY01 promises to be a pivotal year for our company as our new go-to-market strategies begin to gain traction. While the costs of these initiatives will cause some drag on our earnings growth, especially in the first half of the year, our growth and profitability should improve substantially as these efforts come to fruition and add to our base of busi- ness in the latter part of the year. For the full year, we expect our results will show a con- tinuation of solid growth with improving earnings, returns and cash flows. sion several years ago to aggressively develop Alan B. Graf, Jr. the unparalleled route authorities that make Executive Vice President and Chief Financial Officer MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Consolidated Results FedEx Corporation (also referred to herein as “FedEx” or the “Company”) results for 2000 reflect strong international package volume growth, particularly in Asia and Europe, and improved revenue per package (yield), which lessened the effect of higher fuel prices. U.S. domestic package volume growth during 2000 was below that experienced over the past two years. However, the Company’s execution of cost containment and productivity enhance- ment programs helped mitigate the impact of a decrease in U.S. domestic volume growth in 2000. Increased prices caused fuel expense to increase by $273 million in 2000. In response to higher fuel costs, several of our subsidiaries implemented fuel surcharges during 2000. At Federal Express Corporation (“FedEx Express”), the Company’s largest business segment, a 3% fuel surcharge on most U.S. domestic and international services was implemented effective February 1, 2000. Effective April 1, 2000, this surcharge was increased to 4%. The surcharge applies to all shipments tendered within the United States and all U.S. export ship- ments, where legally and contractually possible. We have also entered into jet fuel hedging contracts designed to limit our exposure to fluctuations in fuel prices. In 2000, we received approximately $18 million under these contracts, principally in the fourth quarter. FedEx Ground Package System, Inc. (“FedEx Ground”) also implemented a 1.25% fuel surcharge on all of its services, effective August 7, 2000, in response to continued high fuel costs. During 2000, we began a major rebranding and reorganization initiative that management believes will enable our operating subsidiaries to compete collectively while retaining the independent oper- ating structure of their business units. The new branding strategy extended the FedEx brand name to three subsidiaries and the Company, formerly FDX Corporation. The reorganization is designed to enhance revenue growth and improve financial returns by centralizing the sales, marketing, customer service and most of the information technology functions of our two largest subsidi- aries. Most of these functions were moved into a new corporate services company called FedEx Corporate Services, Inc. (“FedEx Services”) effec- tive June 1, 2000. We also launched our FedEx Home Delivery service in March 2000. This service was initially offered to approximately 50% of the U.S. population. The rebranding and reorganiza- tion actions and FedEx Home Delivery negatively affected 2000 operating income by approximately $40 million. As expected, operating profit from the sale of engine noise reduction kits (“hushkits”) declined by $50 million in 2000, following a $30 million decline in 1999. Operating results for 1999 included $81 million in operating expenses associated with strike con- tingency planning during contract negotiations between FedEx Express and the Fedex Pilots Association (“FPA”). To avoid service interruptions related to a threatened strike, FedEx began strike contingency planning, including entering into agreements for additional third-party air and ground transportation and establishing special financing arrangements. Negotiations with the FPA ulti- mately resulted in a five-year collective bargaining agreement that took effect on May 31, 1999. Operating results in 1998 included $88 million of expenses related to the acquisition of Caliber System, Inc. (“Caliber”) and the formation of FedEx. These expenses were primarily investment banking fees and payments to members of Caliber’s management in accordance with pre- existing management retention agreements. Exclud- ing these expenses, consolidated net income for 1998 was $583 million. Another significant item impacting 1998’s results of operations was the Teamsters strike against United Parcel Service (“UPS”) in August 1997. FedEx ana- lytically calculated that the volume not retained at the end of the first quarter of 1998 contributed approximately $170 million in revenues and approximately $.12 additional earnings per share. Other Income and Expense and Income Taxes Net interest expense increased 8% for 2000, due to higher average debt levels, primarily incurred as a result of FedEx’s stock repurchase program, FedEx 7 Corp. 8 acquisitions and bond redemptions. For 1999, net interest expense decreased 21% primarily due to lower debt levels. Other, net in 2000 included gains of approximately $12 million from an insurance settlement for a destroyed MD11 aircraft and approximately $11 million from the sale of securities held. In 1999 this category included approximately $10 million of expenses related to the Company’s strike contin- gency plans described above, primarily costs associ- ated with a business interruption credit facility. FedEx’s effective tax rate was 39.5% in 2000, 40.5% in 1999 and 44.6% in 1998. Excluding non- recurring items from the Caliber acquisition in 1998, the effective rate would have been 41.5% in 1998. The 39.5% effective tax rate in 2000 was lower than the 1999 effective rate primarily due to stronger results from international operations. Generally, the effective tax rate exceeds the statu- tory U.S. federal tax rate because of state income taxes and other factors as identified in Note 10 of Notes to Consolidated Financial Statements. For 2001, we expect the effective tax rate will not exceed, and could possibly be lower than, the 2000 rate. The actual rate, however, will depend on a number of factors, including the amount and source of operating income. Outlook In 2001, we expect FedEx will realize increased vol- umes and yields as a result of the rebranding and reorganization initiative begun in 2000. Training of the combined sales force was completed in the fourth quarter of 2000 and sales and marketing efforts to cross-sell express and ground services have begun. While there will be continued front- end costs associated with increasing the sales force and emphasizing marketing efforts on small and medium-sized customers, we expect the Company may begin to realize benefits from this initiative starting as early as the second quarter of 2001. Full integration of the customer service function, expected to be completed in the second half of 2001, will provide customers with one FedEx account number and a single point of contact for all express and ground services. However, there are certain risks and uncertainties associated with this initiative that could affect its success and FedEx’s future financial performance. Those risks and uncertainties include, but are not limited to, the complexities and costs associated with inte- grating the sales and marketing functions, includ- ing the technologies supporting those functions; market acceptance of the new branding strategy and the combined sales force; competitive responses to our actions, including those affecting pricing, and general U.S. and international eco- nomic conditions. We will continue to invest in the expansion of FedEx Home Delivery and have announced plans to accelerate the rollout of this service to achieve service coverage of approximately 80% of the U.S. population by September 2001. We believe this service will allow the Company to capture an increased share of the business-to-consumer ship- ping market, particularly in retail sales generated through the Internet. FedEx Home Delivery oper- ating losses are expected to approximate $50 mil- lion in 2001. Actual results for 2001 will depend upon a number of factors such as consumer demand for and satisfaction with the FedEx Home Delivery product, competitive responses to the product, the extent of our ability to penetrate the business-to-consumer electronic commerce mar- ket, and the ability to attract and retain qualified contractors for the delivery network. For 2001, fuel costs are expected to remain at levels approaching those experienced in the second half of 2000. FedEx currently has jet fuel hedges in place to fix the price of approximately one-third of the anticipated jet fuel usage for 2001 and anticipates retaining its fuel surcharge until such time as fuel costs have declined for a sustained period. The actual effect of the cost of fuel and our ability to mitigate price fluctuations through fuel surcharges and the use of jet fuel hedging contracts is subject to a number of uncertainties, including variability in the spot price of jet fuel, actions taken by foreign producers of crude oil, the actions of competitors and others within the transportation industry regarding fuel surcharges, and general U.S. and international economic conditions. FedEx Express The following table compares revenues and operating income (in millions) and selected statistics (in thou- sands, except dollar amounts) for the years ended May 31: 2000 1999 1998 Percent Change 2000/1999 1999/1998 Revenues: Package: U.S. overnight U.S. deferred International Priority (IP) Total package revenue Freight: U.S. International Total freight revenue Other $ 7,538 2,428 3,552 13,518 $ 7,185 2,271 3,019 12,475 $ 6,810 2,179 2,731 11,720 566 492 1,058 492 440 531 971 533 337 598 935 600 Total revenues $15,068 $13,979 $13,255 Operating income $ 900 $ 871 $ 837 Package: Average daily packages: U.S. overnight U.S. deferred IP Total packages Revenue per package (yield): U.S. overnight U.S. deferred IP Composite Freight: Average daily pounds: U.S. International Total freight Revenue per pound (yield): U.S. International Composite 2,020 916 319 3,255 1,957 894 282 3,133 1,886 872 259 3,017 $ 14.52 10.31 43.36 16.16 $ 14.34 9.93 41.87 15.56 $ 14.22 9.84 41.45 15.30 4,693 2,420 7,113 4,332 2,633 6,965 3,356 2,770 6,126 $ .47 .79 .58 $ .40 .79 .54 $ .40 .85 .60 FedEx 9 Corp. + 5 + 7 +18 + 8 +29 – 7 + 9 – 8 + 8 + 3 + 3 + 3 +13 + 4 + 1 + 4 + 4 + 4 + 8 – 8 + 2 +18 – + 7 + 6 + 4 +11 + 6 + 30 –11 + 4 –11 + 5 + 4 + 4 + 3 + 9 + 4 + 1 + 1 + 1 + 2 +29 – 5 +14 – – 7 –10 Revenues In 2000, total package revenue for FedEx Express increased 8%, principally due to increases in international package volume and yield. List price increases, including an average 2.8% domestic rate increase in March 1999, the fuel surcharges implemented in the second half of the year, an ongo- ing yield management program and a slight increase in average weight per package, all contributed to the increases in yields in 2000. While growth in U.S. domestic package volume was lower than anticipated, the higher-yielding IP services experi- enced strong growth, particularly in Asia and Europe. Total freight revenue increased in 2000 due to higher average daily pounds and improved yields in U.S. freight, offset by declines in international freight pounds. In 1999, FedEx Express experienced increased vol- ume and slightly improved yields in its U.S. overnight, U.S. deferred and IP services. Growth in higher-priced U.S. overnight and IP services 10 and higher average weight per package were the primary factors in revenue growth. List price increases and other yield-management actions contributed to the yield improvement in 1999. The U.S. deferred package growth rate declined in 1999 in large part due to specific management actions to restrict growth of these lower-yielding services. IP package volume and international freight pounds and yield were negatively affected by weakness in Asian markets, especially in U.S. outbound traffic destined for that region. Other revenue included Canadian domestic rev- enue, charter services, logistics services, sales of hushkits and other. Revenue from hushkit sales has continued to decline over the past three years and is expected to be negligible hereafter. Operating Income Operating income increased 3% in 2000 despite higher fuel costs and costs associated with the cor- porate realignment and reorganization of the sales, marketing and information technology functions. A 48% increase in average fuel price per gallon had a negative impact of approximately $260 million on 2000 fuel costs, including the results of jet fuel hedging contracts entered into to mitigate some of the increased jet fuel costs. Fuel surcharges imple- mented during 2000 offset the increase in fuel costs in the fourth quarter. As anticipated, mainte- nance and repairs increased in 2000 due to the timing of scheduled maintenance and a greater number of routine cycle checks resulting from fleet usage and certain Federal Aviation Administration directives. Operating income increased in 1999 compared to 1998 in spite of $81 million in strike contingency costs in 1999 and continued weakness in Asian markets. Lower fuel prices and cost controls, includ- ing adjustments in network expansion and aircraft deployment plans, contributed to improved results. A decline in average jet fuel price per gal- lon of 23% was 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 contin- ued to grow, utilizing capacity otherwise occupied by freight. In 1998, operating income improved as package yield increased at a higher rate than costs. An increase in average daily packages also contributed to the improvement in operating income. In 1998, fuel expense included amounts paid by FedEx Express under jet fuel hedging contracts that were designed to mitigate some of the increased jet fuel costs. Lower international freight yield, rising expenses associated with international expansion and foreign currency fluctuations along with expenses of $14 million related to the acquisition of Caliber negatively affected 1998 results. Oper- ating income for 1998 increased approximately $50 million related to the UPS strike. Proceeds from a 2% temporary fuel surcharge on U.S. domestic shipments through August 1, 1997 also had a favorable impact. Year-over-year comparisons were also affected by fluctuations in the contribution from sales of hushkits. Operating profit from these sales declined $50 million in 2000 and $30 million in 1999. Outlook We believe U.S. overnight package volumes for FedEx Express will grow in 2001 at rates higher than those experienced in 2000, with second half growth rates exceeding those in the first half of 2001. We believe U.S. deferred package volume growth rates at FedEx Express will be lower in 2001 as we implement the strategy of shifting a portion of these shipments to FedEx Ground. Improved domestic yields associated with the new sales ini- tiatives are also expected in 2001. We expect IP package volume growth rates to remain strong in 2001. Freight pounds are expected to continue to increase in 2001, with increases in the U.S. partially offset by continued declines in international freight, as it is replaced by higher-yielding priority packages. FedEx Express also plans to continue cost contain- ment and productivity enhancement programs in 2001. By lowering discretionary spending and limit- ing staffing additions, we expect to align control- lable costs with business growth; however, these actions will not affect plans for strategic spending in support of long-term growth goals. FedEx Express will continue to use the flexibility of its global network 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 condi- tions can affect short-term operating results. Actual results may vary depending on the success- ful implementation of our reorganization and rebranding initiative, the impact of competitive pricing changes, customer responses to yield management initiatives, the timing and extent of network refinement, actions by our competitors, including capacity fluctuations, jet fuel prices, regulatory conditions for aviation rights and the rate of domestic and international economic growth. In the past three years, the FedEx Express world- wide aircraft fleet has increased, resulting in a corresponding rise in maintenance expense. While we expect a predictable pattern of aircraft mainte- nance and repairs expense, unanticipated mainte- nance events will occasionally disrupt this pattern, resulting in periodic fluctuations in main- tenance and repairs expense. FedEx Express’s operating income from the sales of hushkits, which peaked in 1998 and declined in 1999 and 2000, is expected to become insignificant in 2001. FedEx Ground The following table compares revenues and operating income (in millions) and selected package statistics (in thousands, except dollar amounts) for the years ended May 31: Revenues Operating income Average daily packages Revenue per package (yield) 2000 $2,033 $ 226 1,442 $ 5.55 1999 $1,878 $ 231 1,385 $ 5.36 1998 $1,711 $ 171 1,326 $ 5.04 Percent Change 2000/1999 1999/1998 + 8 – 2 + 4 + 4 +10 +35 + 4 + 6 FedEx 11 Corp. Revenues Revenues for FedEx Ground increased 8% in 2000, while average daily packages increased 4% and yields increased 4%. The increase in yields is due to a 2.3% price increase, which was effective in February 1999 and a slight increase in the mix of higher yielding packages. In 1999, FedEx Ground’s revenue increased due to improving yields and steady volume growth. Yields were positively impacted by rate increases of 2.3% and 3.7% in February 1999 and 1998, respectively. During 1999, FedEx Ground recog- nized a year-to-date, one-time benefit of approxi- mately $6 million to align its estimation methodology for in-transit revenue with that of our other operating subsidiaries. Year-to-date package yield was increased by $.02 because of this one-time adjustment. Results for 1998 included incremental volume associated with the UPS strike. Excluding this incremental volume, average daily packages increased 6% for 1999. Operating Income Operating income for 2000 reflects higher operat- ing costs, due primarily to increases in capacity and technology, as well as the effects of FedEx Home Delivery and the rebranding and reorganiza- tion initiatives. Depreciation expense increased 20% in 2000 as new terminal facilities were opened late in 1999 and throughout the first half of 2000. In March 2000, FedEx Ground launched its new service, FedEx Home Delivery. This new serv- ice is dedicated to meeting the needs of business- to-consumer shippers. Currently, this service is available for approximately 50% of the U.S. popu- lation. An operating loss of $19 million was incurred by the home delivery service in 2000. Operating income increased in 1999 due to increased volume and yield-management actions. Results for 1998 contained approximately $6 million of incremental operating income associated with the UPS strike. 12 Outlook FedEx Ground continues to expand capacity in order to accommodate volume growth, while maintaining or improving yields. FedEx Ground opened two additional hub facilities in 2000 and will continue to expand package processing capac- ity to meet its growth plans. Package volume and yields are expected to increase in 2001 as the results of the new rebranding and reorganization effort are realized. FedEx Ground plans to accelerate its expansion of the home delivery service to reach approximately 80% of the U.S. population by September 2001 and full U.S. coverage by September 2002. We expect to incur operating losses on the FedEx Ground home delivery service of approximately $50 million in 2001, including costs associated with the accelera- tion of the expansion of the service. Actual results may vary depending on a number of factors, such as consumer demand for and satisfac- tion with the FedEx Ground product, the service coverage and brand awareness of the FedEx Ground product, competitive responses including pricing and capacity fluctuations, the rate of U.S. domestic economic growth, the extent of FedEx Ground’s abil- ity to penetrate the business-to-consumer electronic commerce market, and the ability to attract and retain qualified contractors for the delivery network. Other Operations Other operations include FedEx Global Logistics, Inc. (“FedEx Logistics”), a contract logistics pro- vider; FedEx Custom Critical, Inc. (“FedEx Custom Critical”), a critical-shipment carrier; FedEx Trade Networks, Inc. (“FedEx Trade Networks”), a trade services provider; Viking Freight, Inc. (“Viking”), a regional less-than-truckload freight carrier oper- ating in the western United States, and certain unallocated corporate items. Revenues Revenues from other operations increased 26% in 2000. Excluding the effects of businesses acquired in 2000, the increase was 15% compared with 1% in 1999, due to substantially higher revenues at FedEx Custom Critical combined with double-digit rev- enue growth at Viking. Revenue growth for 1999 reflects an increase at FedEx Custom Critical, offset by modest decreases at Viking and FedEx Logistics. Operating Income Increased operating income for 2000 is due to strong earnings at Viking and continued earnings growth at FedEx Custom Critical. Results for 2000 also include a $10 million favorable adjustment related to estimated future lease costs from the Viking restructuring. Operating income for 1999 reflected improved performances at FedEx Custom Critical, offset by a decline at FedEx Logistics. Operating income in 1998 includes $74 million in expenses, which were not allocated to operating seg- ments, for merger costs associated with the acquisi- tion of Caliber. These expenses were primarily investment banking fees and payments to mem- bers of Caliber’s management in accordance with pre-existing management retention agreements. FINANCIAL CONDITION Liquidity Cash and cash equivalents totaled $68 million at May 31, 2000, compared with $325 million at May 31, 1999. Cash flows from operating activities during 2000 totaled $1.6 billion, compared with $1.8 billion for 1999 and $1.6 billion for 1998. FedEx’s operations have generated increased cash earnings over the past three years. The following table compares cash earnings (in billions, except per share amounts) for the years ended May 31: EBITDA (earnings before interest, taxes, deprecia- tion and amortization) Cash earnings per share (net income plus depre- ciation and amortization divided by average common and common equivalent shares) 2000 1999 1998 $ 2.4 $ 2.2 $ 2.0 $6.22 $5.54 $4.92 The Company currently has a $1.0 billion revolv- ing credit facility that is generally used to finance temporary operating cash requirements and to provide support for the issuance of com- mercial paper. As of May 31, 2000, approximately $478 million of the credit facility remains avail- able. For more information regarding the credit facility, see Note 5 of Notes to Consolidated Financial Statements. During 2000, FedEx acquired three businesses for approximately $264 million, primarily in cash. These purchases were funded from operations and borrowings under our commercial paper program. On September 27, 1999, the Company’s Board of Directors approved a plan that authorized the pur- chase of up to 15 million, or approximately 5%, of FedEx’s outstanding shares of common stock. We completed the purchase of 15 million shares at an average cost of $39.75 per share. The purchase of these shares was funded principally through the issuance of commercial paper. Shares held in trea- sury will be used for general corporate purposes. FedEx Express redeemed $100 million of 9.625% unsecured sinking fund debentures on March 1, 2000. The bond redemption was financed with commercial paper borrowings. In 1999, FedEx filed a $1 billion shelf registration statement with the Securities and Exchange Commission (“SEC”), indicating that we may issue up to that amount in one or more offerings of either unsecured debt securities, preferred stock or com- mon stock, or a combination of such instruments. The Company may, at its option, direct FedEx Express to issue guarantees of the debt securities. We believe that cash flow from operations, our commercial paper program and revolving bank credit facility will adequately meet the Company’s working capital needs for the foreseeable future. Capital Resources FedEx’s operations are capital intensive, character- ized by significant investments in aircraft, vehicles, computer and telecommunications equipment, package handling facilities and sort equipment. The amount and timing of capital additions depend on various factors including volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of serv- ices, competition, availability of satisfactory financ- ing and actions of regulatory authorities. The following table compares capital expenditures (including equivalent capital, which is defined below) for the years ended May 31 (in millions): Aircraft and related equipment Facilities and sort equipment Information and technology equipment Other equipment Total capital expenditures Equivalent capital, principally aircraft-related Total 2000 $ 469 437 378 343 1,627 1999 $ 606 466 366 332 1,770 365 561 $1,992 $2,331 FedEx finances a significant amount of its aircraft and certain other equipment needs using long- term operating leases. We believe the determina- tion to lease versus buy equipment is a financing decision, and both forms of financing are consid- ered when evaluating the resources committed for capital. The amount that the Company would have expended to purchase these assets had it not cho- sen to obtain their use through operating leases is considered equivalent capital in the table above. While capital expenditures over the past two years have been reduced based on lower than expected U.S. domestic volume growth at FedEx Express, we plan to continue to make strategic capital invest- ments in support of our long-term growth goals. For 2001, we expect capital spending, including equivalent capital, to approximate $2.3 billion. For information on the Company’s purchase com- mitments, see Note 14 of Notes to Consolidated Financial Statements. We have historically financed our capital invest- ments through the use of lease, debt and equity financing in addition to the use of internally gener- ated cash from operations. Generally, our practice in recent years with respect to funding new wide- bodied aircraft acquisitions has been to finance such aircraft through long-term lease transactions that qualify as off-balance sheet operating leases under applicable accounting rules. We have deter- mined that these operating leases have provided economic benefits favorable to ownership with respect to market values, liquidity and after-tax cash flows. In the future, other forms of secured financing may be pursued to finance FedEx Express’s FedEx 13 Corp. 14 aircraft acquisitions when we determine that it best meets FedEx Express’s needs. FedEx Express has been successful in obtaining investment capi- tal, both domestic and international, for long-term leases on terms acceptable to it although the mar- ketplace for such capital can become restricted depending on a variety of economic factors beyond its control. See Note 5 of Notes to Consolidated Financial Statements for additional information concerning the Company’s debt facilities. In July 1999, approximately $231 million of pass- through certificates were issued to finance or refi- nance the debt portion of leveraged operating leases related to four A300 aircraft, which were delivered in 2000. In June 1998, approximately $833 million of pass-through certificates were issued to finance or refinance the debt portion of FedEx Express’s leveraged operating leases related to eight A300 and five MD11 aircraft, which were delivered in 2000. The pass-through certificates are not direct obliga- tions of, or guaranteed by, the Company or FedEx Express, but amounts payable by FedEx Express under the leveraged operating leases are sufficient to pay the principal of and interest on the certifi- cates. In June 2000, FedEx Express filed a shelf reg- istration with the SEC, indicating that it may issue up to $450 million in pass-through certificates in one or more offerings to finance or refinance lever- aged operating aircraft leases. We believe that the capital resources available to us provide flexibility to access the most efficient mar- kets for financing its capital acquisitions, includ- ing aircraft, and are adequate for FedEx’s future capital needs. Market Risk Sensitive Instruments and Positions FedEx currently has market risk sensitive instru- ments related to interest rates; however, there is no significant exposure to changing interest rates on our long-term debt because the interest rates are fixed. As disclosed in Note 5 of Notes to Consolidated Financial Statements, FedEx has out- standing unsecured long-term debt exclusive of capital leases of $1.1 billion and $1.2 billion at May 31, 2000 and 1999, respectively. Market 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 $54 million as of May 31, 2000 ($45 million as of May 31, 1999). The under- lying fair values of our long-term debt were estimated based on quoted market prices or on the current rates offered for debt with similar terms and maturities. FedEx does not use derivative financial instruments to manage interest rate risk. FedEx’s earnings are affected by fluctuations in the value of the U.S. dollar, as compared with foreign currencies, as a result of transactions in foreign markets. At May 31, 2000, the result of a uniform 10% strengthening in the value of the dollar rela- tive to the currencies in which the Company’s transactions are denominated would result in a decrease in operating income of approximately $52 million for the year ending May 31, 2001 (the comparable amount in the prior year was $25 mil- lion). This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which 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 attrac- tive. FedEx’s sensitivity 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. FedEx has entered into jet fuel hedging contracts on behalf of its subsidiary FedEx Express, which are designed to limit its exposure to fluctuations in jet fuel prices. Under these contracts, FedEx makes (or receives) payments based on the difference between a fixed price and the market price of jet fuel, as determined by an index of spot market prices representing various geographic regions. The difference is recorded as an increase or decrease in fuel expense. Market risk for jet fuel is estimated as the potential decrease in earnings resulting from a hypothetical 10% increase in jet fuel prices applied to projected 2001 usage and amounts to approximately $49 million, net of hedging settlements, as of May 31, 2000. There were no such jet fuel hedging contracts at May 31, 1999. As of May 31, 2000, jet fuel hedging contracts cover approximately one-third of the estimated usage in 2001. See Notes 2 and 14 of Notes to Consolidated Financial Statements for accounting policy and additional information regarding jet fuel hedging contracts. FedEx does not purchase or hold any derivative financial instruments for trading purposes. Deferred Tax Assets At May 31, 2000, the Company had a net cumula- tive deferred tax liability of $27 million, consisting of $884 million of deferred tax assets and $911 mil- lion of deferred tax liabilities. The reversals of deferred tax assets in future periods will be offset by similar amounts of deferred tax liabilities. Euro Currency Conversion Since the beginning of the European Union’s tran- sition to the euro on January 1, 1999, our subsidiaries have been prepared to quote rates to customers, gen- erate billings and accept payments, in both euro and legacy currencies. The legacy currencies will remain legal tender through December 31, 2001. FedEx believes that the introduction of the euro, any price transparency brought about by its introduc- tion and the phasing out of the legacy currencies will not have a material impact on our consoli- dated financial position, results of operations or cash flows. Costs associated with the euro project are being expensed as incurred and are being funded entirely by internal cash flows. Year 2000 Compliance FedEx’s operating subsidiaries rely heavily on sophisticated information technology for their business operations. Our Year 2000 (“Y2K”) com- puter compliance issues were, therefore, broad and complex. Nothing has come to the Company’s attention that would cause it to believe that its Y2K compliance effort was not successful. Since 1996, FedEx has incurred approximately $115 million on Y2K compliance ($22 million in 2000), which was funded by internal cash flows. We do not expect to incur any material additional Y2K-related costs. We classified costs as Y2K for reporting purposes if they remedied only Y2K risks or resulted in the formulation of contingency plans and would otherwise have been unnecessary in the normal course of business. For 2000, Y2K expendi- tures were less than 10% of the Company’s total information technology expense budget. We believe that no significant information technology projects were deferred due to our Y2K compliance effort. FORWARD-LOOKING STATEMENTS Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to management’s views with respect to future events and financial performance. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical experience, or from future results expressed or implied by such forward-looking state- ments. Potential risks and uncertainties include, but are not limited to, economic and competitive conditions in the markets where FedEx operates, matching capacity to volume levels and other uncertainties detailed from time to time in FedEx’s Securities and Exchange Commission filings. FedEx 15 Corp. CONSOLIDATED STATEMENTS OF INCOME Years ended May 31 In thousands, except per share amounts REVENUES OPERATING EXPENSES Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and amortization Maintenance and repairs Fuel Other OPERATING INCOME OTHER INCOME (EXPENSE) Interest, net Other, net INCOME FROM CONTINUING OPERATIONS 16 BEFORE INCOME TAXES PROVISION FOR INCOME TAXES INCOME FROM CONTINUING OPERATIONS INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES NET INCOME EARNINGS PER COMMON SHARE Continuing operations Discontinued operations EARNINGS PER COMMON SHARE – ASSUMING DILUTION Continuing operations Discontinued operations The accompanying notes are an integral part of these consolidated financial statements. 2000 1999 1998 $18,256,945 $16,773,470 $15,872,810 7,597,964 1,674,854 1,538,713 1,154,863 1,101,424 918,513 3,049,540 7,087,728 1,537,785 1,396,694 1,035,118 958,873 604,929 2,989,257 6,647,140 1,481,590 1,304,296 963,732 874,400 726,776 2,864,216 17,035,871 15,610,384 14,862,150 1,221,074 1,163,086 1,010,660 (106,060) 22,726 (98,191) (3,831) (83,334) (102,022) 1,137,740 449,404 1,061,064 429,731 688,336 631,333 – 688,336 2.36 – 2.36 2.32 – 2.32 $ $ $ $ $ – 631,333 2.13 – 2.13 2.10 – 2.10 $ $ $ $ $ $ $ $ $ $ (124,413) 13,271 (111,142) 899,518 401,363 498,155 4,875 503,030 1.70 .02 1.72 1.67 .02 1.69 CONSOLIDATED BALANCE SHEETS May 31 In thousands ASSETS CURRENT ASSETS Cash and cash equivalents Receivables, less allowances of $85,972 and $68,305 Spare parts, supplies and fuel Deferred income taxes Prepaid expenses and other Total current assets PROPERTY AND EQUIPMENT, AT COST Flight equipment Package handling and ground support equipment and vehicles Computer and electronic equipment Other Less accumulated depreciation and amortization Net property and equipment OTHER ASSETS Goodwill Equipment deposits and other assets Total other assets LIABILITIES AND STOCKHOLDERS’ INVESTMENT CURRENT LIABILITIES Current portion of long-term debt Accrued salaries and employee benefits Accounts payable Accrued expenses Total current liabilities LONG-TERM DEBT, LESS CURRENT PORTION DEFERRED INCOME TAXES OTHER LIABILITIES COMMITMENTS AND CONTINGENCIES (Notes 6, 14 and 15) COMMON STOCKHOLDERS’ INVESTMENT Common stock, $.10 par value; 800,000 shares authorized; 298,573 and 297,987shares issued Additional paid-in capital Retained earnings Accumulated other comprehensive income Less treasury stock, at cost and deferred compensation Total common stockholders’ investment The accompanying notes are an integral part of these consolidated financial statements. FedEx 17 Corp. 2000 1999 $ 67,959 $ 325,323 2,547,043 2,153,166 255,291 317,784 96,667 291,922 290,721 79,896 3,284,744 3,141,028 4,960,204 4,270,596 2,416,666 3,095,077 14,742,543 7,659,016 4,556,747 3,858,788 2,363,637 2,940,735 13,719,907 7,160,690 7,083,527 6,559,217 500,547 658,293 1,158,840 344,002 603,964 947,966 $11,527,111 $10,648,211 $ 6,537 $ 14,938 755,747 1,120,855 1,007,887 740,492 1,133,952 895,375 2,891,026 2,784,757 1,776,253 1,359,668 344,613 293,462 1,729,976 1,546,632 29,857 1,079,462 4,295,041 (36,074) 5,368,286 583,043 29,799 1,061,312 3,615,797 (24,688) 4,682,220 18,528 4,785,243 4,663,692 $11,527,111 $10,648,211 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended May 31 In thousands OPERATING ACTIVITIES Income from continuing operations Adjustments to reconcile income from continuing operations to cash provided by operating activities: Depreciation and amortization Provision for uncollectible accounts Deferred income taxes and other noncash items Gain from disposals of property and equipment Changes in operating assets and liabilities, net of businesses acquired: Increase in receivables Decrease (increase) in other current assets Increase in accounts payable and other operating liabilities Other, net 2000 1999 1998 $ 688,336 $ 631,333 $ 498,155 1,154,863 1,035,118 963,732 71,107 (7,363) (17,068) (404,511) 70,720 107,543 (38,385) 55,649 (34,037) (2,330) (294,121) (155,720) 555,565 (19,337) 72,700 29,570 (7,188) (267,367) (102,203) 450,836 (32,963) Cash provided by operating activities 1,625,242 1,772,120 1,605,272 18 INVESTING ACTIVITIES Purchases of property and equipment, including deposits on aircraft of $1,500, $1,200 and $70,359 (1,627,418) (1,769,946) (1,880,173) Proceeds from dispositions of property and equipment: Sale-leaseback transactions Reimbursements of A300 and MD11 deposits Other dispositions Acquisitions of businesses Other, net – 24,377 165,397 (257,095) (13,378) 80,995 67,269 195,641 – (22,716) 322,852 106,991 162,672 – (471) Cash used in investing activities (1,708,117) (1,448,757) (1,288,129) FINANCING ACTIVITIES Principal payments on debt Proceeds from debt issuances Proceeds from stock issuances Dividends paid Purchase of treasury stock Other, net Cash used in financing activities CASH AND CASH EQUIVALENTS Cash (used in) provided by continuing operations Cash used in discontinued operations Balance at beginning of year Balance at end of year The accompanying notes are an integral part of these consolidated financial statements. (115,090) 517,664 15,523 – (606,506) 13,920 (174,489) (257,364) – 325,323 (269,367) – 49,932 – (8,168) (2) (533,502) 267,105 33,925 (7,793) (7,049) 110 (227,605) (247,204) 95,758 – 229,565 69,939 (1,735) 161,361 $ 67,959 $ 325,323 $ 229,565 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ INVESTMENT AND COMPREHENSIVE INCOME Common Stock Additional Retained Paid-in Earnings Capital $14,762 $ 937,978 $2,618,492 503,030 – – Accumulated Other Com- Deferred prehensive Treasury Compen- sation Stock Income Total $ 3,019 $ (55,482) $(17,608) $3,501,161 503,030 – – – – – (30,296) – – – – – – 492 (51,795) – – – (3,899) – – – – – – 586 (30,296) 472,734 (53,068) (3,899) (7,049) (393) System, Inc. treasury stock (156) 156 (66,474) 135 54,195 – 7,918 (7,204) 55,044 57,357 – (9,117) (1,765) – (7,049) (979) – – – – – – – – – – – 5,817 (18,409) – 5,817 3,961,230 631,333 FedEx 19 Corp. – 14,741 – – 992,821 – – 2,999,354 631,333 – (27,277) – – – – – 14,890 – – – – – – – – – (14,890) 168 68,491 – (611) 3,200 – – – – – – (611) 3,200 633,922 (8,168) (689) (8,168) (1,196) – 507 – – – 8,083 (8,273) 68,469 – 29,799 – – 1,061,312 – – 3,615,797 688,336 – (24,688) – – (1,281) – 8,928 (17,247) – 8,928 4,663,692 688,336 – – – – – – – – – – – – (9,021) (2,365) – – – – – (606,506) (790) – – 845 (9,021) (2,365) 676,950 (606,506) 55 58 18,150 (9,092) – 44,483 (14,725) 38,874 – – $29,857 $1,079,462 $4,295,041 – – 12,178 $(36,074) $(564,094) $(18,949) $4,785,243 12,178 – In thousands, except shares BALANCE AT MAY 31, 1997 Net income Foreign currency translation adjustment, net of deferred tax benefit of $2,793 Total comprehensive income Adjustment to conform Caliber System, Inc.’s fiscal year Cash dividends declared by Caliber System, Inc. Purchase of treasury stock Forfeiture of restricted stock Issuance of stock under employee incentive plans (1,466,895 shares) Cancellation of Caliber Amortization of deferred compensation BALANCE AT MAY 31, 1998 Net income Foreign currency translation adjustment, net of deferred tax benefit of $959 Unrealized gain on available-for- sale securities, net of deferred taxes of $2,100 Total comprehensive income Purchase of treasury stock Forfeiture of restricted stock Two-for-one stock split by FedEx Corporation in the form of a 100% stock dividend (148,931,996 shares) Issuance of stock under employee incentive plans (1,770,626 shares) Amortization of deferred compensation BALANCE AT MAY 31, 1999 Net income Foreign currency translation adjustment, net of deferred tax benefit of $1,881 Unrealized loss on available-for- sale securities, net of deferred tax benefit of $1,513 Total comprehensive income Purchase of treasury stock Forfeiture of restricted stock Issuance of stock under employee incentive plans and other (1,715,585 shares) Amortization of deferred compensation BALANCE AT MAY 31, 2000 The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION On January 19, 2000, a new branding strategy was announced that resulted in name changes of the holding company and certain operating com- panies to include the FedEx brand name. The name of the holding company was changed from FDX Corporation to FedEx Corporation (“FedEx”) and the following operating subsidiaries’ names were changed: Former Name New Name RPS, Inc. FedEx Ground Package System, Inc. FedEx Global Logistics, Inc. Roberts Express FedEx Custom FDX Logistics Critical, Inc. Brand Name FedEx Ground FedEx Logistics FedEx Custom Critical 20 The names of Federal Express Corporation (“FedEx Express”) and Viking Freight, Inc. (“Viking”) did not change. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consoli- dated financial statements include the accounts of FedEx Corporation and its subsidiaries. All signifi- cant intercompany accounts and transactions have been eliminated. PROPERTY AND EQUIPMENT. Expenditures for major additions, improvements, flight equipment modifications and certain equipment overhaul costs are capitalized. Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of property and equip- ment 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 pro- vided on a straight-line basis over the asset’s serv- ice life or related lease term as follows: Flight equipment Package handling and ground support equipment and vehicles Computer and electronic equipment Other 5 to 20 years 3 to 30 years 3 to 10 years 2 to 30 years Aircraft airframes and engines are assigned resid- ual 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 10 years. For income tax purposes, depreciation is generally computed using accelerated methods. DEFERRED GAINS. Gains on the sale and lease- back 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 May 31, 2000 and 1999, were deferred gains of $533,371,000 and $429,488,000, respectively. DEFERRED LEASE OBLIGATIONS. While certain of FedEx’s aircraft and facility leases contain fluc- tuating or escalating payments, the related rent expense is recorded on a straight-line basis over the lease term. Included in other liabilities at May 31, 2000 and 1999, were $354,566,000 and $321,248,000, respectively, representing the cumulative difference between rent expense and rent payments. SELF-INSURANCE ACCRUALS. FedEx is self- insured up to certain levels for workers’ compensa- tion, employee health care and vehicle liabilities. Accruals are based on the actuarially estimated undiscounted cost of claims. Included in other lia- bilities at May 31, 2000 and 1999, were $324,869,000 and $282,889,000, respectively, representing the long- term portion of self-insurance accruals for FedEx’s workers’ compensation and vehicle liabilities. CAPITALIZED INTEREST. Interest on funds used to finance the acquisition and modification of air- craft, construction of certain facilities, and devel- opment of certain software up to the date the asset is placed in service is capitalized and included in the cost of the asset. Capitalized interest was $34,823,000, $38,880,000 and $33,009,000 for 2000, 1999 and 1998, respectively. ADVERTISING. Advertising costs are generally expensed as incurred and are included in other operating expenses. Advertising expenses were $221,511,000, $202,104,000 and $183,253,000 in 2000, 1999 and 1998, respectively. CASH EQUIVALENTS. Cash equivalents in excess of current operating requirements are invested in short-term, interest-bearing instruments with maturities of three months or less at the date of pur- chase and are stated at cost, which approximates market value. Interest income was $15,116,000, $12,399,000 and $11,283,000 in 2000, 1999 and 1998, respectively. MARKETABLE SECURITIES. FedEx’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 within common stockholders’ investment. SPARE PARTS, SUPPLIES AND FUEL. Spare parts are stated principally at weighted-average cost; supplies and fuel are stated principally at standard cost, which approximates actual cost on a first-in, first-out basis. Neither method values inventory in excess of current replacement cost. GOODWILL. Goodwill is the excess of the pur- chase price over the fair value of net assets of businesses acquired. It is amortized on a straight- line basis over periods generally ranging from 15 to 40 years. Accumulated amortization was $165,624,000 and $157,106,000 at May 31, 2000 and 1999, respectively. IMPAIRMENT OF LONG-LIVED ASSETS. FedEx reviews long-lived assets for impairment when cir- cumstances indicate the carrying value of an asset may not be recoverable. If an impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. FOREIGN CURRENCY TRANSLATION. Trans- lation gains and losses of FedEx’s foreign opera- tions that use local currencies as the functional currency are accumulated and reported, net of related deferred income taxes, as a component of accumulated other comprehensive income within common stockholders’ investment. Transaction gains and losses that arise from exchange rate fluc- tuations on transactions denominated in a cur- rency other than the local functional currency are included in the results of operations. INCOME TAXES. Deferred income taxes are pro- vided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial state- ments. FedEx uses the liability method to account for income taxes, which requires deferred taxes to be recorded at the statutory rate expected to be in effect when the taxes are paid. FedEx has not provided for U.S. federal income taxes on its foreign subsidiaries’ earnings deemed to be permanently reinvested. Quantification of the deferred tax liability, if any, associated with perma- nently reinvested earnings is not practicable. REVENUE RECOGNITION. Revenue is recorded based on the percentage of service completed at the balance sheet date. RECENT PRONOUNCEMENTS. Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” was issued in June 1998, was subsequently amended by SFAS No. 137, and is now effective for fiscal years beginning after June 15, 2000 (2002 for FedEx). The Statement requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. The impact of the adoption of SFAS No. 133, if any, on earnings, com- prehensive income and financial position will depend on the amount, timing and nature of any agreements entered into by FedEx. As of May 31, 2000, FedEx has not adopted the provisions of SFAS No. 133. SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” was issued in June 2000, and amends SFAS No.133. SFAS No. 138 must be adopted concurrently with FedEx’s adoption of SFAS No. 133. FedEx does not believe the amendment will affect its implementation of SFAS No. 133. RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform to the 2000 presentation. USE OF ESTIMATES. The preparation of the con- solidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and lia- bilities and disclosure of contingent assets and lia- bilities 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. FedEx 21 Corp. 22 NOTE 3: BUSINESS COMBINATION AND ACQUISITIONS On January 27, 1998, FedEx Express became a wholly-owned subsidiary of FedEx Corporation in connection with the acquisition of Caliber System, Inc. (“Caliber”). The acquisition was accounted for as a pooling of interests. FedEx Corporation exchanged 0.8 shares of its common stock for each share of Caliber common stock. Each share of FedEx Express’s common stock was automatically converted into one share of FedEx Corporation common stock. On September 10, 1999, FedEx Logistics acquired the assets of GeoLogistics Air Services, Inc., an airfreight forwarder servicing freight shipments between the United States and Puerto Rico, for approximately $116,000,000 in cash. This business operates under the name Caribbean Transportation Services, Inc. The excess of purchase price over the estimated fair value of the net assets acquired ($103,000,000) has been recorded as goodwill and is being amortized ratably over 15 years. On February 29, 2000, FedEx acquired the com- mon stock of Tower Group International, a leader in the business of providing international customs clearance services, for approximately $140,000,000 in cash. This business is operating as a subsidiary of FedEx Trade Networks, Inc. (“FedEx Trade Networks”). The excess of purchase price over the estimated fair value of the net assets acquired ($30,000,000) has been recorded as goodwill and is being amortized ratably over 25 years. On March 31, 2000, FedEx acquired the common stock of World Tariff, Limited, a premier source of customs duty and tax information around the globe, for approximately $8,400,000 in cash and stock. This business is operating as a subsidiary of FedEx Trade Networks. The excess of purchase price over the estimated fair value of the net assets acquired ($8,300,000) has been recorded as goodwill and is being amortized ratably over 25 years. The operating results of these acquired companies are included in the operations of FedEx from the date of acquisition. Pro forma results including these acquisitions would not differ materially from reported results in any of the periods presented. NOTE 4: ACCRUED SALARIES AND EMPLOYEE BENEFITS AND ACCRUED EXPENSES The components of accrued salaries and employee benefits and accrued expenses were as follows: May 31 In thousands Salaries Employee benefits Compensated absences 2000 1999 $ 216,705 225,192 313,850 $216,647 236,741 287,104 Total accrued salaries and employee benefits $ 755,747 $740,492 Insurance Taxes other than income taxes Other $ 363,899 237,342 406,646 $345,804 225,378 324,193 Total accrued expenses $1,007,887 $895,375 NOTE 5: LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS May 31 In thousands Unsecured debt, interest rates of 7.60% to 10.57%, due through 2098 Unsecured sinking fund 2000 1999 $ 975,862 $ 988,120 debentures, interest rate of 9.63%, originally due through 2020, called during 2000 Commercial paper, effective – 98,598 interest rate of 6.73% 521,031 – Capital lease obligations and tax exempt bonds, interest rates of 5.35% to 7.88%, due through 2017 Less bond reserves Other debt, interest rates of 9.68% to 11.12% Less current portion 253,569 9,024 244,545 253,425 9,024 244,401 41,352 43,487 1,782,790 6,537 1,374,606 14,938 $1,776,253 $1,359,668 FedEx has a $1,000,000,000 revolving credit agree- ment with domestic and foreign banks. The revolv- ing credit agreement comprises two 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 October 13, 2000. Interest rates on borrow- ings under this agreement are generally determined by maturities selected and prevailing market condi- tions. The agreement contains certain covenants and restrictions, none of which are expected to sig- nificantly affect FedEx’s operations or its ability to pay dividends. As of May 31, 2000, approximately $2,093,000,000 was available for the payment of dividends under the restrictive covenant of the agreement. Commercial paper borrowings are backed by unused commitments under this revolv- ing credit agreement and reduce the amount avail- able under the agreement. Borrowings under this credit agreement and commercial paper borrow- ings are classified as long-term based on FedEx’s ability and intent to refinance such borrowings. At May 31, 2000, $478,000,000 of the $1,000,000,000 commitment amount was available. Unsecured sinking fund debentures in the amount of $100,000,000, originally due through 2020, were redeemed by FedEx Express on March 1, 2000. Other income (expense) includes a charge of approximately $6,000,000, which represents pre- miums paid to the holders of the bonds retired and the write-off of the related unamortized deferred finance charges and discount. The components of unsecured debt were as follows: Scheduled annual principal maturities of long-term debt for the five years subsequent to May 31, 2000, are as follows: $6,500,000 in 2001; $202,600,000 in 2002; $6,100,000 in 2003; $25,100,000 in 2004; and $5,500,000 in 2005. FedEx’s long-term debt, exclusive of capital leases, had carrying values of $1,063,000,000 and $1,178,000,000 at May 31, 2000 and 1999, respec- tively, compared with fair values of approximately $1,055,000,000 and $1,250,000,000 at those dates. The estimated fair values were determined based on quoted market prices or on the current rates offered for debt with similar terms and maturities. NOTE 6: LEASE COMMITMENTS FedEx 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 agree- ments that generally provide for cancellation upon 30 days’ notice. May 31 In thousands Senior debt, interest rates of 7.80% to 9.88%, due through 2013 Bonds, interest rate of 7.60%, 2000 1999 The components of property and equipment recorded under capital leases were as follows: $673,970 $673,779 May 31, In thousands due in 2098 239,382 239,376 Medium term notes, interest rates of 9.95% to 10.57%, due through 2007 62,510 74,965 $975,862 $988,120 Of the senior debt outstanding at May 31, 2000 and 1999, $200,000,000 was issued by Caliber. On April 28, 2000, FedEx assumed all obligations relating to the notes, including restrictive covenants limiting the ability of FedEx and its sub- sidiaries to incur liens on assets and enter into leasing transactions. These notes mature on August 1, 2006 and bear interest at 7.80%. Tax exempt bonds were issued by the Memphis- Shelby County Airport Authority (“MSCAA”) and the City of Indianapolis. Lease agreements with the MSCAA and a loan agreement with the City of Indianapolis covering the facilities and equipment financed with the bond proceeds obligate FedEx Express to pay rentals and loan payments, respec- tively, equal to the principal and interest due on the bonds. Package handling and ground support equipment and vehicles Facilities Computer and electronic equipment and other Less accumulated amortization 2000 1999 $226,580 134,442 $245,041 134,442 6,852 367,874 260,526 6,496 385,979 268,696 $107,348 $117,283 Rent expense under operating leases for the years ended May 31 was as follows: In thousands 2000 1999 1998 Minimum rentals $1,298,821 $1,246,259 $1,135,567 60,925 98,755 Contingent rentals 59,839 $1,397,576 $1,306,098 $1,196,492 Contingent rentals are based on hours flown under supplemental aircraft leases. A summary of future minimum lease payments under capital leases and noncancellable operating leases (principally aircraft and facilities) with an FedEx 23 Corp. 24 initial or remaining term in excess of one year at May 31, 2000 is as follows: In thousands 2001 2002 2003 2004 2005 Thereafter Capital Leases $ 15,195 15,174 15,024 14,894 14,828 287,673 Operating Leases $ 1,258,109 1,087,035 990,125 926,290 877,701 9,263,996 $362,788 $14,403,256 At May 31, 2000, the present value of future mini- mum lease payments for capital lease obliga- tions, including certain tax exempt bonds, was $200,259,000. FedEx Express makes payments under certain leveraged operating leases that are sufficient to pay principal and interest on certain pass-through cer- tificates. The pass-through certificates are not direct obligations of, or guaranteed by, FedEx or FedEx Express. NOTE 7: PREFERRED STOCK The Certificate of Incorporation authorizes the Board of Directors, at its discretion, to issue up to 4,000,000 shares of Series Preferred Stock. The stock is issuable in series, which may vary as to certain rights and preferences, and has no par value. As of May 31, 2000, none of these shares had been issued. NOTE 8: COMMON STOCKHOLDERS’ INVESTMENT Stock Compensation Plans At May 31, 2000, FedEx had options and awards outstanding under stock-based compensation plans described below. As of May 31, 2000, there were 25,210,811 shares of common stock reserved for issuance under these plans. The Board of Directors has authorized repurchase of FedEx’s common stock necessary for grants under its restricted stock plans. As of May 31, 2000, 13,418,185 of the 27,688,302 total shares repur- chased by FedEx at an average cost of $27.42 (including the 15,000,000 shares repurchased under the current year stock repurchase program, see Note 9) had been reissued under the above- mentioned plans. FedEx applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to measure compensation expense for its plans. Compensation cost for the restricted stock plans was $12,178,000, $8,928,000 and $5,817,000 for 2000, 1999 and 1998, respectively. If compensation cost for FedEx’s stock-based compensation plans had been deter- mined under SFAS No. 123, “Accounting for Stock- Based Compensation,” FedEx’s net income and earnings per share would have been the pro forma amounts indicated below: In thousands, except per share data Net income: As reported Pro forma 2000 1999 1998 $688,336 659,601 $631,333 609,960 $503,030 489,556 Earnings per share, assuming dilution: As reported Pro forma $ 2.32 2.23 $ 2.10 2.03 $ 1.69 1.64 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 FedEx after May 31, 1995, and because options vest over several years and additional grants could be made. Fixed Stock Option Plans Under the provisions of FedEx’s stock incentive plans, options may be granted to certain key employees (and, under the 1997 plan, to directors who are not employees of FedEx) to purchase shares of common stock of FedEx 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 determined at the discre- tion of the Compensation Committee of the Board of Directors. Presently, option vesting periods range from one to eight years. At May 31, 2000, there were 9,714,810 shares available for future grants under these plans. Beginning with the grants made on or after June 1, 1995, the fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions for each option grant: Dividend yield Expected volatility Risk-free interest rate Expected lives 2000 0% 30% 5.6%–6.8% 2.5–9.5 years 1999 0% 25% 4.2%–5.6% 2.5–5.5 years 1998 0% 25% 5.4%–6.5% 2.5–6.5 years The following table summarizes information about FedEx’s fixed stock option plans for the years ended May 31: 2000 1999 1998 Weighted- Average Exercise Price $23.11 50.79 18.81 33.81 29.12 21.44 Weighted- Average Exercise Price $19.74 31.80 17.86 26.59 23.11 18.57 Weighted- Average Exercise Price $17.09 28.20 13.45 19.51 19.74 16.92 Shares 13,523,460 2,485,544 (2,336,984) (283,568) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) 13,388,452 5,349,626 Shares 13,388,452 3,377,500 (3,135,640) (230,780) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) 13,399,532 4,404,146 Shares 13,399,532 3,218,450 (1,232,699) (374,632) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) 15,010,651 5,781,855 Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Exercisable at end of year The weighted-average fair value of options granted during the year was $16.63, $9.12 and $8.25 for the years ended May 31, 2000, 1999 and 1998, respectively. The following table summarizes information about fixed stock options outstanding at May 31, 2000: Range of Exercise Prices $ 8.63–$10.91 12.00– 16.50 17.50– 25.19 26.44– 37.25 38.69– 55.94 8.63– 55.94 Options Outstanding Options Exercisable Weighted- Average Remaining Outstanding Contractual Life Number Weighted- Average Exercise Price 281,246 2,095,522 4,523,806 5,068,127 3,041,950 (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) 15,010,651 1.2 years 3.9 years 5.7 years 7.7 years 9.2 years 6.7 years $ 9.73 15.48 20.16 30.61 51.15 29.12 Weighted- Average Exercise Price $ 9.73 15.51 20.65 29.73 40.07 21.44 Number Exercisable 281,246 1,649,622 2,139,188 1,655,299 56,500 (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) 5,781,855 Restricted Stock Plans Under the terms of FedEx’s Restricted Stock Plans, shares of FedEx’s common stock are awarded to key employees. All restrictions on the shares expire over periods varying from two to five years from their date of award. Shares are valued at the market price of FedEx’s common stock at the date of award. Compensation related to these plans is recorded as a reduction of common stockholders’ investment and is being amortized to expense as restrictions on such shares expire. The following table summarizes infor- mation about restricted stock awards for the years ended May 31: Awarded Forfeited 2000 1999 1998 Weighted- Average Shares Fair Value 283,750 20,000 $51.90 37.71 Weighted- Average Shares Fair Value 252,000 16,900 $32.71 44.38 Weighted- Average Shares Fair Value 240,000 28,000 $32.99 34.94 At May 31, 2000, there were 485,350 shares available for future awards under these plans. FedEx 25 Corp. NOTE 9: COMPUTATION OF EARNINGS PER SHARE The calculation of basic earnings per share and earnings per share, assuming dilution, for the years ended May 31 was as follows: In thousands, except per share amounts Income from continuing operations Income from discontinued operations Net income applicable to common stockholders Average shares of common stock outstanding Basic earnings per share: Continuing operations Discontinued operations Average shares of common stock outstanding Common equivalent shares: Assumed exercise of outstanding dilutive options Less shares repurchased from proceeds of assumed exercise of options Average common and common equivalent shares Earnings per share, assuming dilution: Continuing operations Discontinued operations 2000 1999 1998 $688,336 – $631,333 – $498,155 4,875 $688,336 $631,333 $503,030 291,727 295,983 293,401 $ $ 2.36 – 2.36 $ $ 2.13 – 2.13 $ $ 1.70 .02 1.72 291,727 295,983 293,401 12,735 (8,136) 13,090 (8,430) 13,849 (8,842) 296,326 300,643 298,408 $ $ 2.32 – 2.32 $ $ 2.10 – 2.10 $ $ 1.67 .02 1.69 26 In September 1999, FedEx’s Board of Directors approved a plan that authorized the purchase of up to 15,000,000, or approximately 5%, of FedEx’s outstanding shares of common stock. FedEx completed its purchases under the plan in 2000 at an average cost of $39.75 per share. As of May 31, 2000, FedEx had 14,128,998 shares in treasury for general corporate purposes. NOTE 10: INCOME TAXES The components of the provision for income taxes for the years ended May 31 were as follows: In thousands 2000 1999 1998 Current provision: Domestic Federal State and local Foreign Deferred provision (credit): Domestic Federal State and local Foreign $365,137 48,837 39,844 $385,164 49,918 22,730 $267,471 32,839 36,543 453,818 457,812 336,853 (3,444) 469 (1,439) (4,414) (21,773) (4,437) (1,871) (28,081) 56,408 7,860 242 64,510 $449,404 $429,731 $401,363 Income taxes have been provided for foreign opera- tions based upon the various tax laws and rates of the countries in which FedEx’s operations are con- ducted. There is no direct relationship between FedEx’s overall foreign income tax provision and foreign pretax book income due to the different methods of taxation used by countries throughout the world. In 1998, FedEx entities in foreign locations reported a net foreign pretax loss of $98,000,000, comprising foreign pretax income of $208,000,000 and foreign pretax losses of $306,000,000. A reconciliation of the statutory federal income tax rate to FedEx’s effective income tax rate for the years ended May 31 is as follows: Statutory U.S. income tax rate Increase resulting from: State and local income taxes, net of federal benefit Nonrecurring items (1998 Caliber acquisition) Other, net Effective tax rate Effective tax rate (excluding nonrecurring item) 2000 35.0% 2.8 – 1.7 39.5% 39.5% 1999 35.0% 1998 35.0% 2.8 – 2.7 40.5% 40.5% 2.7 3.1 3.8 44.6% 41.5% The significant components of deferred tax assets and liabilities as of May 31 were as follows: In thousands Property, equipment and leases Employee benefits Self-insurance accruals Other 2000 1999 Deferred Tax Assets $206,239 207,297 245,923 224,615 Deferred Tax Liabilities $686,547 127,784 – 96,572 Deferred Tax Assets $122,515 198,750 228,020 233,331 Deferred Tax Liabilities $608,719 79,374 – 97,264 $884,074 $910,903 $782,616 $785,357 NOTE 11: EMPLOYEE BENEFIT PLANS PENSION PLANS. FedEx sponsors defined benefit pension plans covering a majority of all employees. The largest plans cover certain U.S. employees age 21 and over, with at least one year of service, and provide benefits based on average earnings and years of service. Plan funding is actuarially deter- mined, and is also subject to certain tax law limita- tions. International defined benefit pension plans provide benefits primarily based on final earnings and years of service and are funded in accordance with local laws and income tax regulations. Plan assets consist primarily of marketable equity secu- rities and fixed income instruments. During 1999, benefits provided under certain of FedEx’s pension plans were enhanced, principally in connection with the ratification on February 4, 1999, of a col- lective bargaining agreement between FedEx Express and the Fedex Pilots Association (“FPA”). These benefit enhancements are reflected in the funded status of the plans at May 31, 2000 and 1999, but did not materially affect pension cost in either year. POSTRETIREMENT HEALTH CARE PLANS. FedEx Express offers medical and dental coverage to eligible U.S. retirees and their eligible depen- dents. Vision coverage is provided for retirees, but not their dependents. Substantially all FedEx Express U.S. employees become eligible for these benefits at age 55 and older, if they have perma- nent, continuous service with FedEx Express 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. who retired prior to acquisition. FedEx Ground offers similar benefits to its eligible retirees. FedEx 27 Corp. 28 The following table provides a reconciliation of the changes in the pension and postretirement health care plans’ benefit obligations and fair value of assets over the two-year period ended May 31, 2000 and a state- ment of the funded status as of May 31, 2000 and 1999: In thousands CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year Service cost Interest cost Amendments, benefit enhancements and acquisitions Actuarial gain Plan participant contributions Foreign currency exchange rate changes Benefits paid Benefit obligation at end of year CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year Actual return on plan assets Foreign currency exchange rate changes Company contributions Plan participant contributions Benefits paid Fair value of plan assets at end of year FUNDED STATUS OF THE PLANS Unrecognized actuarial gain Unrecognized prior service cost Unrecognized transition amount Prepaid (accrued) benefit cost Pension Plans Postretirement Health Care Plans 2000 1999 2000 1999 $ 4,385,519 $4,121,795 331,005 288,221 125,145 (427,179) – 3,112 (56,580) 337,780 336,143 12,853 (510,132) – (618) (67,800) $ 246,186 26,450 19,579 1,420 (28,607) 1,112 – (9,133) $ 217,027 23,676 16,962 1,681 (7,402) 679 – (6,437) $ 4,493,745 $4,385,519 $ 257,007 $ 246,186 $ 4,952,431 $4,434,870 451,738 (1,283) 123,686 – (56,580) 630,706 (5,192) 217,271 – (67,800) $ – – – 8,021 1,112 (9,133) $ – – – 5,758 679 (6,437) $ 5,727,416 $4,952,431 $ – $ – $ 1,233,671 $ 566,912 (595,238) 132,116 (11,852) (1,173,903) 121,697 (10,529) $(257,007) (49,286) 254 – $(246,186) (20,809) 291 – $ 170,936 $ 91,938 $(306,039) $(266,704) AMOUNTS RECOGNIZED IN THE BALANCE SHEET AT MAY 31: Prepaid benefit cost Accrued benefit liability Minimum pension liability Intangible asset Prepaid (accrued) benefit cost $ 302,935 $ 188,423 (96,485) (86,000) 86,000 (131,999) (12,662) 12,662 $ – (306,039) – – $ – (266,704) – – $ 170,936 $ 91,938 $(306,039) $(266,704) Net periodic benefit cost for the years ended May 31 was as follows: In thousands Pension Plans Postretirement Health Care Plans Service cost Interest cost Expected return on plan assets Net amortization and deferral 2000 1999 1998 $ 337,780 336,143 (546,169) 5,977 $ 331,005 288,221 (483,709) (1,948) $ 250,753 245,697 (377,421) (2,304) $ 133,731 $ 133,569 $ 116,725 2000 $26,450 19,579 – (93) $45,936 1999 $23,676 16,962 – (211) $40,427 1998 $18,385 14,767 – (709) $32,443 WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS Discount rate Rate of increase in future compensation levels Expected long-term rate of return on assets 2000 8.5% 1999 7.5% 1998 7.0% 2000 8.3% 1999 7.3% 1998 7.2% 5.0 10.9 4.6 10.9 4.6 10.3 – – – – – – The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obli- gations in excess of plan assets were $177,900,000, $126,300,000 and $2,700,000, respectively, as of May 31, 2000, and $201,700,000, $172,800,000 and $2,600,000, respectively, as of May 31, 1999. The minimum pension liability and corresponding intangible asset recognized in the balance sheet at May 31, 1999, relate principally to the collective bargaining agreement between FedEx Express and the FPA. During 2000, FedEx obtained the necessary approvals to fund a substantial portion of these benefits in the qualified pension plan, and the mini- mum liability and related intangible asset have been reduced accordingly. FedEx Express’s future medical benefit costs were estimated to increase at an annual rate of 8.5% dur- ing 2001, decreasing to an annual growth rate of 6.3% in 2006 and thereafter. Future dental benefit costs were estimated to increase at an annual rate of 7.5% during 2001, decreasing to an annual growth rate of 6.3% in 2006 and thereafter. FedEx Express’s cost is capped at 150% of the 1993 employer cost and, therefore, will not be subject to medical and dental trends after the capped cost is attained, projected to be in 2001. A 1% change in these annual trend rates would not have a signifi- cant impact on the accumulated postretirement benefit obligation at May 31, 2000, or 2000 benefit expense. Claims are paid as incurred. PROFIT SHARING PLANS. The profit sharing plans cover a majority of U.S. employees age 21 and over, with at least one year of service with FedEx as of the contribution date. The plans provide for dis- cretionary employer contributions, which are determined annually by the Board of Directors. Profit sharing expense was $125,300,000 in 2000, $137,500,000 in 1999 and $124,700,000 in 1998. Included in these expense amounts are cash distri- butions made directly to employees of $39,100,000, $46,800,000 and $43,100,000 in 2000, 1999 and 1998, respectively. NOTE 12: BUSINESS SEGMENT INFORMATION FedEx Corporation is a global transportation and logistics provider primarily composed of FedEx Express, the world’s largest express transportation company, and FedEx Ground, a ground small-package carrier. Other operating companies included in the FedEx Corporation portfolio are FedEx Logistics, a contract logistics provider; FedEx Custom Critical, a critical-shipment carrier; FedEx Trade Networks, a global trade services company; and Viking, a regional less-than-truckload freight carrier operat- ing principally in the western United States. Other also includes certain unallocated corporate items. FedEx has determined its reportable operating seg- ments to be FedEx Express and FedEx Ground, both of which operate in single lines of business. FedEx evaluates financial performance based on operating income. The following table provides a reconciliation of reportable segment revenues, depreciation and amortiza- tion, operating income and segment assets to FedEx’s consolidated financial statement totals: FedEx 29 Corp. In thousands Revenues 2000 1999 1998 Depreciation and amortization 2000 1999 1998 Operating income 2000 1999 1998 Segment assets 2000 1999 (1) Includes $81,000,000 of strike contingency costs. See Note 16. (2) Includes $74,000,000 of merger expenses. FedEx Express FedEx Ground Consolidated Total Other $15,068,338 $2,032,570 $1,156,037 $18,256,945 916,086 16,773,470 907,087 15,872,810 13,979,277 13,254,841 1,878,107 1,710,882 $ 997,735 $ 912,002 844,606 99,140 $ 82,640 79,835 57,988 $ 1,154,863 1,035,118 40,476 963,732 39,291 $ 899,610 $ 225,812 $ 871,476(1) 836,733 231,010 171,203 95,652 $ 1,221,074 1,163,086 60,600 2,724(2) 1,010,660 $ 9,740,539 $1,057,519 $ 729,053 $11,527,111 635,513 10,648,211 9,115,975 896,723 The following table provides a reconciliation of reportable segment capital expenditures to FedEx’s consolidated totals for the years ended May 31: In thousands 2000 1999 1998 FedEx Express $1,330,904 1,550,161 1,761,963 FedEx Ground $244,073 179,969 78,041 Consolidated Total Other $52,441 $1,627,418 1,769,946 1,880,173 39,816 40,169 The following table presents FedEx’s revenue by service type and geographic information for the years ended or as of May 31: In thousands REVENUE BY SERVICE TYPE FedEx Express: Package: U.S. overnight U.S. deferred International priority Freight: U.S. International Other 30 Total FedEx Express FedEx Ground Other GEOGRAPHIC INFORMATION (1) Revenues: U.S. International Long-lived assets: U.S. International 2000 1999 1998 $ 7,537,844 $ 7,185,462 $ 6,810,211 2,179,188 2,731,140 2,428,002 3,551,593 2,271,151 3,018,828 566,259 492,280 492,360 439,855 530,759 533,222 337,098 597,861 599,343 15,068,338 13,979,277 13,254,841 1,710,882 1,878,107 907,087 916,086 2,032,570 1,156,037 $18,256,945 $16,773,470 $15,872,810 $13,804,849 $12,910,107 $12,231,537 3,641,273 3,863,363 4,452,096 $18,256,945 $16,773,470 $15,872,810 $ 7,224,219 $ 6,506,424 1,000,759 1,018,148 $ 8,242,367 $ 7,507,183 (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, goodwill and other long-term assets. Flight equipment is allocated between geographic areas based on usage. NOTE 13: SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest expense and income taxes for the years ended May 31 was as follows: In thousands Interest (net of capitalized interest) Income taxes 2000 1999 1998 $124,964 354,614 $114,326 437,340 $130,250 355,563 Noncash investing and financing activities for the years ended May 31 were as follows: In thousands Fair value of assets surrendered under exchange agreements (with two airlines) Fair value of assets acquired under exchange agreements Fair value of assets surrendered (under) over fair value of assets acquired Fair value of treasury stock issued in business acquisition 2000 $19,450 28,018 $ (8,568) $ 6,817 1999 $48,248 34,580 $13,668 1998 $90,428 78,148 $12,280 $ – $ – NOTE 14: COMMITMENTS AND CONTINGENCIES FedEx’s annual purchase commitments under various contracts as of May 31, 2000, were as follows: In thousands 2001 2002 2003 2004 2005 (1) Primarily aircraft modifications, rotables, spare parts and spare engines. (2) Primarily facilities, vehicles, computer and other equipment. At May 31, 2000, FedEx Express was committed to purchase 28 MD11s, 13 DC10s (in addition to those discussed in the following paragraph) and 75 Ayres ALM 200s to be delivered through 2007. Deposits and progress payments of $7,100,000 have been made toward these purchases. FedEx Express has agreements with two airlines to acquire 53 DC10 aircraft (49 of which had been received as of May 31, 2000), spare parts, aircraft engines and other equipment, and maintenance services in exchange for a combination of aircraft engine noise reduction kits and cash. Delivery of these aircraft began in 1997 and will continue through 2001. Additionally, these airlines may exer- cise put options through December 31, 2003, requiring FedEx Express to purchase up to 11 addi- tional DC10s along with additional aircraft engines and equipment. In April 2000, put options were exercised by an air- line requiring FedEx Express to purchase six DC10s (in addition to those discussed in the preceding paragraph) for a total purchase price of $26,400,000. Delivery of the aircraft is expected to be completed by April 2001. In January 1999, put options were exercised by an airline requiring FedEx Express to purchase six DC10s (in addition to those discussed above) for a total purchase price of $21,150,000. Delivery of five of the aircraft was completed by August 1999, and the commitment to purchase the sixth aircraft has been cancelled. FedEx has entered into jet fuel hedging contracts on behalf of its subsidiary FedEx Express, which are designed to limit its exposure to fluctua- tions in jet fuel prices. Under these jet fuel hedging Aircraft $222,500 252,000 441,700 235,000 165,400 Aircraft- Related(1) $427,600 381,300 456,900 446,500 452,200 Other(2) Total $376,300 $1,026,400 651,600 906,200 689,100 625,200 18,300 7,600 7,600 7,600 contracts, FedEx makes (or receives) payments based on the difference between a fixed price and the market price of jet fuel, as determined by an index of spot market prices representing various geographic regions. The difference is recorded as an increase or decrease in fuel expense. Under jet fuel hedging contracts, FedEx received $18,512,000 in 2000 and made payments of $28,764,000 in 1998. There was no jet fuel hedging activity in 1999. As of May 31, 2000, contracts in place to fix the price of jet fuel cover a total notional volume of 352,822,000 gallons, or approximately one-third of the estimated usage in 2001. Based on current market prices, the fair value of these jet fuel hedg- ing contracts, which have no carrying value, was an asset of approximately $51,060,000 at May 31, 2000. There were no such jet fuel hedging con- tracts in place at May 31, 1999. NOTE 15: LEGAL PROCEEDINGS FedEx and its subsidiaries are subject to legal pro- ceedings and claims that arise in the ordinary course of their business. In the opinion of manage- ment, the aggregate liability, if any, with respect to these actions will not materially adversely affect FedEx’s financial position or results of operations. NOTE 16: OTHER EVENTS In 2000, FedEx Express recorded nonoperating gains of approximately $11,000,000 from the sale of securities and approximately $12,000,000 from the insurance settlement for a leased MD11 destroyed in October 1999. To avoid service interruptions related to a threat- ened strike by the FPA in November 1998, FedEx and FedEx Express implemented strike contingency plans including entering into agreements for FedEx 31 Corp. additional third-party air and ground transportation and establishing special financing arrangements. Subsequently, a five-year collective bargaining agreement was ratified by the FPA membership in February 1999 and became effective May 31, 1999. Costs associated with these contingency plans were approximately $91,000,000. Of these costs, approx- imately $81,000,000, primarily the cost of contracts for supplemental airlift and ground transportation, was included in operating expenses. The remaining $10,000,000 was included in nonoperating expenses and represents the costs associated with obtaining additional short-term financing capabilities. In 1998, FedEx Express realized a net gain of $17,000,000 from the insurance settlement and the release from certain related liabilities on a leased MD11 aircraft destroyed in an accident in July 1997. The gain was recorded in operating and non- operating income in substantially equal amounts. FedEx incurred $88,000,000 of merger expenses related to the acquisition of Caliber and the forma- tion of FedEx in 1998, primarily investment bank- ing fees and payments to members of Caliber’s management in accordance with pre-existing man- agement retention agreements. There are no remaining accrued costs at May 31, 2000 related to the merger. On March 27, 1997, Caliber announced a major restructuring of its Viking subsidiary. In connection with the restructuring, Viking recorded a pretax restructuring charge of $85,000,000 ($56,400,000 net of tax) in the period from January 1, 1997 to May 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 included asset impairment charges, future lease costs and other contractual obligations, employee severance and other benefits and other exit costs. Gains on assets sold in the restructur- ing of $16,000,000 were recognized in the third quarter of 1998 and estimates, primarily for future lease costs, were revised in 2000 resulting in a favorable adjustment of approximately $10,000,000. There are no remaining accrued restructuring costs at May 31, 2000. On November 6, 1995, Caliber announced plans to exit the airfreight business served by its wholly- owned subsidiary, Roadway Global Air, Inc. Income from discontinuance of $4,875,000, net of tax, in 1998 included the favorable settlement of leases and other contractual obligations. NOTE 17: SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED) 32 In thousands, except earnings per share 2000 Revenues Operating income Income before income taxes Net income Earnings per common share Earnings per common share – assuming dilution 1999(1) Revenues Operating income Income before income taxes Net income Earnings per common share Earnings per common share – assuming dilution First Quarter Second Quarter Third Quarter Fourth Quarter 283,807 262,880 159,034 $4,319,977 $4,570,104 $4,518,057 $4,848,807 426,260 404,934 244,991 .86 .85 206,472 186,998 113,128 304,535 282,928 171,183 .39 $ .39 $ .58 $ .57 $ .53 $ .52 $ $ $ 283,843 255,348 149,379 $4,082,302 $4,209,237 $4,098,418 $4,383,513 390,218 372,043 221,365 .74 .73 336,987 312,404 182,756 152,038 121,269 77,833 .26 $ .26 $ .62 $ .61 $ .51 $ .50 $ $ $ (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 FedEx related to the threatened strike by the FPA. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of FedEx Corporation: We have audited the accompanying consolidated balance sheets of FedEx Corporation (a Delaware corporation) and subsidiaries as of May 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income and cash flows for each of the three years in the period ended May 31, 2000. These financial statements are the responsi- bility of FedEx’s management. Our responsibility is to express an opinion on these financial state- ments based on our audits. We conducted our audits in accordance with audit- ing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes exam- ining, on a test basis, evidence supporting the amounts and disclosures in the financial state- ments. An audit also includes assessing the accounting principles used and significant esti- mates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FedEx Corporation as of May 31, 2000 and 1999, and the results of its opera- tions and its cash flows for each of the three years in the period ended May 31, 2000, in conformity with accounting principles generally accepted in the United States. Memphis, Tennessee June 27, 2000 FedEx 33 Corp. SELECTED CONSOLIDATED FINANCIAL DATA Years ended May 31, In thousands, except per share amounts and Other Operating Data 2000 1999 1998 1997 1996 OPERATING RESULTS Revenues Operating income(1) Income from continuing operations $18,256,945 1,221,074 $16,773,470 1,163,086 $15,872,810 1,010,660 $14,237,892 507,002 $12,721,791 779,552 before income taxes 1,137,740 Income from continuing operations 688,336 1,061,064 631,333 899,518 498,155 425,865 196,104 702,094 400,186 Income (loss) from discontinued operations(2) – – 4,875 – (119,614) Net income(1) PER SHARE DATA Earnings (loss) per share: Basic: Continuing operations Discontinued operations(2) 34 Assuming dilution: Continuing operations Discontinued operations(2) $ 688,336 $ 631,333 $ 503,030 $ 196,104 $ 280,572 $ $ $ $ 2.36 – 2.36 2.32 – 2.32 $ $ $ $ 2.13 – 2.13 2.10 – 2.10 $ $ $ $ 1.70 .02 1.72 1.67 .02 1.69 $ $ $ $ .67 – .67 .67 – .67 $ $ $ $ 1.38 (.41) .97 1.37 (.41) .96 Average shares of common stock 291,727 295,983 293,401 291,426 289,390 Average common and common equivalent shares Cash dividends (3) FINANCIAL POSITION 296,326 – 300,643 – 298,408 – 294,456 – 291,686 – Property and equipment, net $ 7,083,527 $ 6,559,217 $ 5,935,050 $ 5,470,399 $ 4,973,948 Total assets 11,527,111 10,648,211 Long-term debt, less current portion 1,776,253 Common stockholders’ investment 4,785,243 1,359,668 4,663,692 9,686,060 1,385,180 3,961,230 9,044,316 1,597,954 3,501,161 8,088,241 1,325,277 3,312,440 OTHER OPERATING DATA FedEx Express: Operating weekdays Aircraft fleet FedEx Ground: Operating weekdays Average full-time 257 663 254 256 634 253 254 613 256 254 584 254 256 557 252 equivalent employees 163,324 156,386 150,823 145,995 (1) In connection with its restructuring, Viking recorded a pretax asset impairment charge of $225,000,000 ($175,000,000, net of tax) in 1997. (2) Discontinued operations include the operations of Roadway Express, Inc., a wholly-owned subsidiary of Caliber, whose shares were distributed to Caliber stockholders on January 2, 1996, and Roadway Global Air, Inc., a wholly-owned subsidiary of Caliber, which exited the airfreight business in calendar 1995. (3) Caliber declared dividends of $3,899,000, $28,184,000, and $54,706,000, for 1998, 1997, and 1996, respectively. Caliber declared additional dividends of $10,833,000 from January 1, 1997 to May 25, 1997 that are not included in the preceding amounts. FedEx has never paid cash dividends on its common stock. BOARD OF DIRECTORS ROBERT H. ALLEN (2) Private Investor and Managing Partner Challenge Investment Partners Investment firm JAMES L. BARKSDALE (3) Founder The Barksdale Group Venture capital firm ROBERT L. COX (1) Partner Waring Cox Law firm RALPH D. DENUNZIO (2*) President Harbor Point Associates, Inc. Private investment and consulting firm JUDITH L. ESTRIN (3*) President and Chief Executive Officer Packet Design, Inc. Internet technology company PHILIP GREER (1*) Senior Managing Director Weiss, Peck & Greer, L.L.C. Investment management firm J.R. HYDE, III (2) Chairman Pittco Management, LLC Investment management company DR. SHIRLEY A. JACKSON (3) President Rensselaer Polytechnic Institute Technological university GEORGE J. MITCHELL (1) Special Counsel Verner, Liipfert, Bernhard, McPherson and Hand Law firm FREDERICK W. SMITH Chairman, President and Chief Executive Officer FedEx Corporation DR. JOSHUA I. SMITH (1) Vice Chairman and President iGate, Inc. Broadband networking company PAUL S. WALSH (2) Group Chief Operating Officer Diageo plc Consumer food and beverage company PETER S. WILLMOTT (1) Chairman and Chief Executive Officer Willmott Services, Inc. Retail and consulting firm (1) Audit Committee (2) Compensation Committee (3) Information Technology Oversight Committee (*) Committee Chair FedEx 35 Corp. EXECUTIVE OFFICERS FedEx Corporation FREDERICK W. SMITH Chairman, President and Chief Executive Officer ALAN B. GRAF, JR. Executive Vice President and Chief Financial Officer ROBERT B. CARTER Executive Vice President and Chief Information Officer FedEx Express DAVID J. BRONCZEK President and Chief Executive Officer DAVID F. REBHOLZ Executive Vice President, Operations and Systems Support MICHAEL L. DUCKER Executive Vice President, International 36 KENNETH R. MASTERSON Executive Vice President, General Counsel and Secretary T. MICHAEL GLENN Executive Vice President, Market Development and Corporate Communications JAMES S. HUDSON Corporate Vice President and Chief Accounting Officer FedEx Ground DANIEL J. SULLIVAN President and Chief Executive Officer IVAN T. HOFMANN Executive Vice President and Chief Operating Officer RODGER G. MARTICKE Executive Vice President FedEx Logistics JOSEPH C. MCCARTY President and Chief Executive Officer FedEx Custom Critical R. BRUCE SIMPSON President and Chief Executive Officer FedEx Trade Networks G. EDMOND CLARK President and Chief Executive Officer Viking Freight DOUGLAS G. DUNCAN President and Chief Executive Officer FINANCIAL INFORMATION, INCLUDING FORM 10-K: Copies of FedEx Corporation’s Annual Report on Form 10-K (excluding exhibits), other FedEx documents filed with the Securities and Exchange Commission (SEC) and other FedEx financial and statistical information are available on FedEx’s Web site at www.fedex.com. You will be mailed a copy of the Form 10-K upon request to Investor Relations, FedEx Corporation, 942 South Shady Grove Road, Memphis, Tennessee 38120, (901) 818-7200. FedEx documents filed electron- ically with the SEC can also be found on the Internet at the SEC’s Web site at www.sec.gov. INSTITUTIONAL INVESTOR INQUIRIES: Contact J.H. Clippard, Jr., Vice President, Investor Relations, FedEx Corporation, 942 South Shady Grove Road, Memphis, Tennessee 38120, (901) 818-7200, or visit FedEx’s Web site at www.fedex.com. AUDITORS: Arthur Andersen LLP, Memphis, Tennessee. EQUAL EMPLOYMENT OPPORTUNITY: FedEx Corporation is firmly committed to afford Equal Employment Opportunity to all individuals regard- less of age, sex, race, color, religion, national ori- gin, 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 way of life. We adhere to those principles not just because they’re the law, but because it’s the right thing to do. SERVICE MARKS: Federal Express,® FedEx,® and the FedEx ® logo are registered service marks of Federal Express Corporation. Reg. U.S. Pat. & Tm. Off. and in certain other countries. The FedEx ExpressSM logo, the FedEx GroundSM logo and the FedEx Custom CriticalSM logo are service marks of Federal Express Corporation. CORPORATE INFORMATION STOCK LISTING: FedEx Corporation’s common stock is listed on The New York Stock Exchange under the ticker symbol FDX. STOCKHOLDERS: At July 15, 2000, there were 16,293 stockholders of record. MARKET INFORMATION: Following are high and low sale prices, by quarter, for FedEx Corporation common stock in 2000 and 1999 adjusting for a two- for-one stock split in the form of a 100% stock divi- dend that was paid on May 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 2000 High Low FY 1999 High Low $57 1⁄800 38 1⁄200 $3329⁄32 2411⁄32 $47 5⁄160 34 7⁄80 0 $3323⁄32 2113⁄16 $4715⁄16 33 3⁄160 $49 00000 33 9⁄320 $427⁄16 309⁄16 $617⁄80 449⁄16 CORPORATE HEADQUARTERS: 942 South Shady Grove Road, Memphis, Tennessee 38120, (901) 369-3600. ANNUAL MEETING: The annual meeting of stockholders will be held at the Westin William Penn Hotel, 530 William Penn Place, Pittsburgh, Pennsylvania on Monday, September 25, 2000, at 10:00 a.m. EDT. GENERAL AND MEDIA INQUIRIES: Contact Shirlee M. Clark, Director, Public Relations, FedEx Corporation, 942 South Shady Grove Road, Memphis, Tennessee 38120, (901) 395-3460. SHAREOWNER ACCOUNT INQUIRIES: Con- tact 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. For information on the DirectService™ Investment Program for Share- owners of FedEx Corporation, call (800) 524-3120. This program provides an alternative to traditional retail brokerage methods of purchasing, holding and selling FedEx common stock. Portions of this annual report were printed on recycled paper. i m o c . n o s d d a . w w w i n o s d d A y b n g s e D i FedEx Corporation 942 South Shady Grove Road Memphis, Tennessee 38120 www.fedex.com 

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