- --------------------------------------------------------------------------------
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED FEBRUARY 28, 1999, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER: 1-7806
FEDERAL EXPRESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 71-0427007
(State of incorporation) (I.R.S. Employer
Identification No.)
2005 Corporate Avenue
Memphis, Tennessee 38132
(Address of principal (Zip Code)
executive offices)
(901) 369-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The number of shares of common stock outstanding as of March 31, 1999 was 1,000.
The Registrant is a wholly-owned subsidiary of FDX Corporation, and there is no
market for the Registrant's common stock.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT
PERMITTED BY GENERAL INSTRUCTION H(2).
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FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets
February 28, 1999 and May 31, 1998................................. 3-4
Condensed Consolidated Statements of Income
Three and Nine Months Ended February 28, 1999 and 1998............. 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 1999 and 1998....................... 6
Notes to Condensed Consolidated Financial Statements.................... 7-10
Review of Condensed Consolidated Financial Statements
by Independent Public Accountants.................................. 11
Report of Independent Public Accountants................................ 12
Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................ 13-22
PART II. OTHER INFORMATION
Legal Proceedings....................................................... 23
Exhibits and Reports on Form 8-K........................................ 23
EXHIBIT INDEX........................................................... E-1
- 2 -
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
- -------
February 28,
1999 May 31,
(Unaudited) 1998
-------------- -----------
(In thousands)
Current Assets:
Cash and cash equivalents................................................ $ 79,988 $ 104,606
Receivables, less allowances of $44,202,000
and $43,245,000........................................................ 1,802,063 1,669,568
Spare parts, supplies and fuel........................................... 281,636 338,745
Deferred income taxes.................................................... 192,046 183,063
Prepaid expenses and other............................................... 93,830 80,696
----------- -----------
Total current assets................................................. 2,449,563 2,376,678
----------- -----------
Property and Equipment, at Cost............................................. 11,890,954 11,063,893
Less accumulated depreciation and amortization........................... 6,275,918 5,863,325
----------- -----------
Net property and equipment........................................... 5,615,036 5,200,568
----------- -----------
Other Assets:
Goodwill................................................................. 342,345 351,507
Equipment deposits and other assets...................................... 408,574 504,353
----------- -----------
Total other assets................................................... 750,919 855,860
----------- -----------
$ 8,815,518 $ 8,433,106
----------- -----------
----------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND OWNER'S EQUITY
- ------------------------------
February 28,
1999 May 31,
(Unaudited) 1998
------------- -----------
(In thousands)
Current Liabilities:
Current portion of long-term debt........................................ $ 114,102 $ 257,529
Salaries, wages and benefits............................................. 511,994 547,073
Accounts payable......................................................... 894,286 965,167
Accrued expenses ........................................................ 662,152 631,530
Due to parent company.................................................... 113,293 -
----------- -----------
Total current liabilities............................................ 2,295,827 2,401,299
----------- -----------
Long-Term Debt, Less Current Portion ...................................... 1,161,484 1,185,180
Deferred Income Taxes...................................................... 209,129 218,328
Other Liabilities.......................................................... 1,456,766 1,226,570
Commitments and Contingencies (Notes 3 and 4)
Owner's Equity:
Common Stock, $.10 par value;
1,000 shares authorized, issued and outstanding........................ - -
Additional paid-in capital 893,469 893,469
Retained earnings........................................................ 2,824,768 2,535,537
Cumulative foreign currency
translation adjustments................................................ (25,925) (27,277)
----------- ------------
Total owner's equity................................................. 3,692,312 3,401,729
----------- -----------
$ 8,815,518 $ 8,433,106
----------- -----------
----------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
February 28, February 28,
--------------------------- ------------------------------
1999 1998 1999 1998
---------- ---------- ----------- ----------
(In thousands)
Revenues.............................................. $3,430,708 $3,232,799 $10,330,127 $9,829,176
Operating Expenses:
Salaries and employee benefits..................... 1,546,285 1,448,313 4,628,789 4,324,273
Rentals and landing fees........................... 343,827 321,112 985,345 912,059
Depreciation and amortization...................... 233,268 214,510 675,156 625,856
Maintenance and repairs............................ 219,363 199,789 666,195 594,265
Fuel............................................... 143,664 185,963 441,097 542,126
Merger expenses.................................... - 14,000 - 14,000
Other.............................................. 849,027 751,057 2,368,260 2,240,532
---------- ---------- ----------- ----------
3,335,434 3,134,744 9,764,842 9,253,111
---------- ---------- ----------- ----------
Operating Income...................................... 95,274 98,055 565,285 576,065
Other Income (Expense):
Interest, net...................................... (21,967) (30,024) (64,816) (84,501)
Other, net......................................... (8,063) 1,027 (14,230) 8,998
---------- ---------- ----------- ----------
(30,030) (28,997) (79,046) (75,503)
---------- ---------- ----------- ----------
Income Before Income Taxes............................ 65,244 69,058 486,239 500,562
Provision for Income Taxes............................ 22,214 34,884 196,927 216,116
---------- ---------- ----------- ----------
Net Income............................................ $ 43,030 $ 34,174 $ 289,312 $ 284,446
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
February 28,
------------------------------
1999 1998
------------ ------------
(In thousands)
Net Cash Provided by Operating Activities............................... $ 950,433 $ 683,638
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $7,792,000 in 1998.......................... (1,175,822) (1,189,420)
Proceeds from disposition of property
and equipment:
Sale-leaseback transactions....................................... 80,995 247,852
Reimbursements of A300 deposits................................... 25,130 106,991
Other dispositions................................................ 141,955 37,916
Other, net........................................................... 5,088 (3,386)
----------- -----------
Net cash used in investing activities................................... (922,654) (800,047)
----------- -----------
Financing Activities:
Proceeds from debt issuances......................................... - 267,105
Principal payments on debt........................................... (167,668) (235,952)
Net receipts from parent company..................................... 115,271 69,311
Other, net........................................................... - 14,443
----------- -----------
Net cash (used in) provided
by financing activities................................................ (52,397) 114,907
----------- -----------
Net decrease in cash and cash equivalents............................... (24,618) (1,502)
Cash and cash equivalents at beginning of period........................ 104,606 122,023
----------- -----------
Cash and cash equivalents at end of period.............................. $ 79,988 $ 120,521
----------- -----------
----------- -----------
Cash payments for:
Interest (net of capitalized interest)............................... $ 65,454 $ 72,712
----------- -----------
----------- -----------
Income taxes......................................................... $ 247,918 $ 297,001
----------- -----------
----------- -----------
Non-cash investing and financing activities:
Fair value of assets surrendered under
exchange agreements (with two airlines)............................. $ 39,881 $ 78,758
Fair value of assets acquired under
exchange agreements................................................. 21,603 64,904
----------- -----------
Fair value of assets surrendered in excess
of assets acquired.................................................. $ 18,278 $ 13,854
----------- -----------
----------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federal Express Corporation (the "Company") is a wholly-owned
subsidiary of FDX Corporation ("FDX").
These interim financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of
Regulation S-X, and should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended May 31, 1998. Accordingly, significant
accounting policies and other disclosures normally provided have been omitted
since such items are disclosed therein.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the consolidated financial position of the Company as of February 28,
1999 and the consolidated results of its operations for the three and nine-month
periods ended February 28, 1999 and 1998, and its consolidated cash flows for
the nine-month periods ended February 28, 1999 and 1998. Operating results for
the three and nine-month periods ended February 28, 1999 are not necessarily
indicative of the results that may be expected for the year ending May 31, 1999.
Effective June 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The Statement
requires the Company to include within its financial statements information on
comprehensive income, which is defined as all activity impacting equity from
non-owner sources. For the Company, comprehensive income includes net income and
foreign currency translation adjustments. Total comprehensive income, net of
taxes, for the three months ended February 28, 1999 and 1998 was $38,875,000 and
$28,401,000, respectively. For the nine months ended February 28, 1999 and 1998,
total comprehensive income, net of taxes, was $290,664,000 and $268,112,000,
respectively.
Also effective June 1, 1998, the Company adopted Statement of Position
("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on accounting for these
costs, requiring certain of them to be capitalized. For the three and nine
months ended February 28, 1999, incremental costs of $7,000,000 and $21,300,000,
respectively, were capitalized. The Company estimates the pre-tax benefit of the
adoption of this Statement to be approximately $30,000,000 for 1999.
Certain prior period amounts have been reclassified to conform to the
current presentation.
- 7 -
(2) LONG-TERM DEBT
February 28,
1999 May 31,
(Unaudited) 1998
------------ -----------
(In thousands)
Unsecured notes payable, interest rates of
7.60% to 10.57%, due through 2098.......................................$ 888,050 $1,053,770
Unsecured sinking fund debentures, interest
rate of 9.63%, due through 2020......................................... 98,581 98,529
Capital lease obligations and tax exempt bonds,
interest rates of 5.35% to 7.88%,
due through 2017........................................................ 253,425 253,425
Less bond reserves...................................................... 9,024 9,024
---------- ----------
244,401 244,401
Other, interest rates of 9.68% to 9.98%................................... 44,554 46,009
---------- ----------
1,275,586 1,442,709
Less current portion.................................................... 114,102 257,529
---------- ----------
$1,161,484 $1,185,180
---------- ----------
---------- ----------
Unsecured notes payable as of February 28, 1999, include $648,675,000 due
through 2013 and $239,375,000 due in 2098.
(3) COMMITMENTS
As of February 28, 1999, the Company's purchase commitments for the
remainder of 1999 and annually thereafter under various contracts are as follows
(in thousands):
Aircraft-
Aircraft Related(1) Other(2) Total
-------- ---------- -------- --------
1999 (remainder) $186,200 $149,700 $171,100 $507,000
2000 507,200 292,200 149,700 949,100
2001 281,000 561,100 59,600 901,700
2002 306,000 178,300 - 484,300
2003 494,800 150,500 200 645,500
(1) Primarily aircraft modifications, rotables and spare parts and
engines.
(2) Vehicles, facilities, computers and other equipment.
The Company is committed to purchase six Airbus A300s, 33 MD11s, nine
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
$68,446,000 have been made toward these purchases.
The Company has agreements with two airlines to acquire 53 DC10 aircraft,
spare parts, aircraft engines and other equipment, and maintenance services in
exchange for a combination of aircraft engine noise reduction kits and cash.
Delivery of these aircraft began in 1997 and will continue through 2001.
Additionally, these airlines may exercise put options through December 31, 2003,
requiring the Company to purchase up to 20 additional DC10s along with
additional aircraft engines and equipment.
In January 1999, put options were exercised by an airline requiring the
Company to purchase nine DC10s for a total purchase price of $29,700,000.
Delivery of the aircraft began in March 1999.
During the nine-month period ended February 28, 1999, the Company
acquired six Airbus A300s under operating leases. These aircraft were included
as purchase commitments as of May 31, 1998. At the time of delivery, the Company
- 8 -
sold its rights to purchase these aircraft to third parties who reimbursed the
Company for its deposits on the aircraft and paid additional consideration. The
Company then entered into operating leases with each of the third parties who
purchased the aircraft from the manufacturer.
Lease commitments added since May 31, 1998 for the six Airbus A300s and
one MD11 purchased and subsequently sold and leased back are as follows (in
thousands):
1999 $ 19,800
2000 37,100
2001 36,800
2002 38,400
2003 38,200
Thereafter 788,700
(4) LEGAL PROCEEDINGS
Customers of the Company have filed four separate class-action
lawsuits against the Company generally alleging that the Company has breached
its contract with the plaintiffs in transporting packages shipped by them.
These lawsuits allege that the Company continued to collect a 6.25% federal
excise tax on the transportation of property shipped by air after the excise
tax expired on December 31, 1995, until it was reinstated in August 1996. The
plaintiffs seek certification as a class action, damages, an injunction to
enjoin the Company from continuing to collect the excise tax referred to
above, and an award for attorneys' fees and costs. Three of those cases were
consolidated in Minnesota Federal District Court. That court stayed the
consolidated cases in favor of a case filed in Circuit Court of Greene
County, Alabama. The stay was lifted in July 1998. Summary judgement was
granted to the Company dismissing all claims in all three consolidated cases
in Minnesota. The plaintiffs did not appeal the dismissal, which is now
final. The complaint in the Alabama case also alleges that the Company
continued to collect the excise tax on the transportation of property shipped
by air after the tax expired on December 31, 1996.
A fifth case filed in the Supreme Court of New York, New York County,
containing allegations and requests for relief substantially similar to the
other four cases was dismissed with prejudice on the Company's motion on
October 7, 1997. The Court found that there was no breach of contract and
that the other causes of action were preempted by federal law. The plaintiffs
appealed the dismissal. This case originally alleged that the Company
continued to collect the excise tax on the transportation of property shipped
by air after the tax expired on December 31, 1996. The New York complaint was
later amended to cover the first expiration period of the tax (December 31,
1995 through August 27, 1996) covered in the original Alabama complaint. The
dismissal was affirmed by the appellate court on March 2, 1999 and is now
a final decision.
The air transportation excise tax expired on December 31, 1995, was
reenacted by Congress effective August 27, 1996, and expired again on December
31, 1996. The excise tax was then reenacted by Congress effective March 7, 1997.
The expiration of the tax relieved the Company of its obligation to pay the tax
during the periods of expiration. The Taxpayer Relief Act of 1997, signed by
President Clinton in August 1997, extended the tax for 10 years through
September 30, 2007.
The Company intends to vigorously defend itself in the remaining Alabama
case, which is still pending. No amount has been reserved for this contingency.
The Company is subject to other legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
aggregate liability, if any, with respect to these other actions will not
materially adversely affect the financial position or results of operations of
the Company.
- 9 -
(5) RELATED PARTY TRANSACTIONS
As of February 28, 1999, the Company had a total amount due to its
parent, FDX Corporation, of $178,646,000. This amount comprises an intercompany
operating payable of $113,293,000 included in Current Liabilities and
$65,353,000 included in Other Liabilities which represents the net activity from
participation in FDX's consolidated cash management program.
- 10 -
REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, has performed a
review of the condensed consolidated balance sheet of the Company as of February
28, 1999, and the related condensed consolidated statements of income for the
three and nine-month periods ended February 28, 1999 and 1998 and the condensed
consolidated statements of cash flows for the nine-month periods ended February
28, 1999 and 1998 included herein, as indicated in their report thereon included
on page 12.
- 11 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Federal Express Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Federal Express Corporation and subsidiaries as of February 28, 1999 and the
related condensed consolidated statements of income for the three and nine-month
periods ended February 28, 1999 and 1998 and the condensed consolidated
statements of cash flows for the nine-month periods ended February 28, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Federal Express
Corporation and subsidiaries as of May 31, 1998 and the related consolidated
statements of income, changes in owner's equity and cash flows for the year then
ended. In our report dated July 8, 1998, we expressed an unqualified opinion on
those financial statements, which are not presented herein. In our opinion, the
accompanying condensed consolidated balance sheet as of May 31, 1998 is fairly
stated in all material respects in relation to the consolidated balance sheet
from which it has been derived.
/s/ Arthur Andersen LLP
Memphis, Tennessee
March 17, 1999
- 12 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the third quarter ended February 28, 1999, the Company recorded
consolidated net income of $43 million on revenues of $3.4 billion compared with
net income of $34 million on revenues of $3.2 billion for the same period in the
prior year. For the nine months ended February 28, 1999, the Company recorded
consolidated net income of $289 million on revenues of $10.3 billion compared
with net income of $284 million on revenues of $9.8 billion for the same period
in the prior year. Earnings for the quarter and year-to-date periods, excluding
the following non-recurring items, reflect improved domestic and international
results, partially offset by continued weakness in trans-Pacific traffic.
On October 30, 1998, contract negotiations between the Company and the
FedEx Pilots Association ("FPA") were discontinued. In November, the FPA began
actively encouraging its members to decline all overtime work and issued ballots
seeking strike authorization. To avoid service interruptions related to a
threatened strike, the Company and its parent company, FDX Corporation ("FDX"),
began strike contingency planning including entering into agreements for
additional third party air and ground transportation and establishing special
financing arrangements. Subsequently, the FPA agreed to end all job actions for
60 days and negotiations resumed. Such negotiations resulted in a five-year
collective bargaining agreement that was ratified by the FPA membership in
February 1999 and will take effect on May 31, 1999. Costs associated with these
contingency plans, including contracts for supplemental airlift and ground
transportation and a business interruption credit facility established in
December 1998 by FDX, reduced the third quarter's pretax earnings by
approximately $91 million.
The prior year's third quarter results included $14 million of expenses
related to the acquisition of Caliber System, Inc. These expenses were primarily
investment banking fees.
The prior year's year-to-date results of operations included the impact
of the Teamsters strike against United Parcel Service ("UPS") in August 1997.
The Company analytically calculated that the volume not retained at the end of
the first quarter of 1998 contributed approximately $150 million and $50 million
in U.S. domestic revenues and operating income, respectively, in that quarter.
Revenues
The following table shows a comparison of revenues (in millions):
Third Quarter YTD Period
Ended Ended
February 28, February 28,
------------------ Percent ------------------- Percent
1999 1998 Change 1999 1998 Change
------ ------ ------- ------- ------ -------
U.S. domestic express......................... $2,445 $2,301 + 6 $ 7,310 $6,902 + 6
International Priority (IP)................... 730 663 +10 2,217 2,018 +10
International Express Freight
(IXF) and Airport-to-Airport
(ATA)....................................... 129 140 - 7 402 456 -12
Charter, Logistics services
and other................................... 127 129 - 2 401 453 -11
------ ------ ------- ------
$3,431 $3,233 + 6 $10,330 $9,829 + 5
------ ------ ------- ------
------ ------ ------- ------
- 13 -
The following table shows a comparison of selected operating statistics
(packages and pounds in thousands):
Third Quarter YTD Period
Ended Ended
February 28, February 28,
------------------ Percent ------------------ Percent
1999 1998 Change 1999 1998 Change
------ ------ ------- ------ ------ -------
U.S. domestic express:
Average daily packages........................ 2,972 2,819 + 5 2,850 2,747 + 4
Revenue per package........................... $13.27 $12.95 + 2 $13.43 $13.22 + 2
IP:
Average daily packages........................ 279 255 +10 276 255 + 8
Revenue per package........................... $42.14 $41.28 + 2 $42.02 $41.58 + 1
IXF/ATA:
Average daily pounds.......................... 2,645 2,690 - 2 2,661 2,775 - 4
Revenue per pound............................. $ .79 $ .82 - 4 $ .79 $ .87 - 9
Operating weekdays............................. 62 63 191 190
The Company's U.S. domestic express package revenue rose as both package
volume and revenue per package (yield) increased for the quarter and
year-to-date periods. During these periods, the Company experienced increased
volume of its higher-priced, overnight services and increased average weight per
package. Each of these factors contributed to the rise in U.S. domestic yield
for the quarter and nine-month periods. The year-to-date results for the prior
year included the additional volume during the UPS strike, which was primarily
in the deferred service category and generally at list price. Excluding the
revenue and volume associated with the UPS strike and the proceeds from a
temporary fuel surcharge in the prior year, U.S. domestic average daily package
volume and yield increased 5% and 3% year over year, respectively, for the
nine-month period. Management expects total U.S. domestic express package volume
in the fourth quarter of 1999 to grow at a rate consistent with the current year
year-to-date growth rate. Management believes that U.S. domestic yield should
continue to increase slightly, year over year, during the fourth quarter of 1999
due to continued effects of yield-management actions, including a list rate
increase averaging 2.8% for U.S. domestic shipments effective March 15, 1999.
Also, through enhanced technology, the Company has improved its ability to
capture incremental revenue based upon certain package characteristics, such as
weight and package dimensions. Actual results may vary depending on the impact
of domestic economic conditions, competitive pricing changes, customer responses
to yield-management initiatives and changing customer demand patterns.
IP revenue increased 10% for the quarter and year-to-date periods as
average daily packages and yield increased during these periods. The Company's
IP volume growth rates are less than those experienced in prior years primarily
due to weakness in Asian markets, especially in U.S. outbound traffic to that
region. Management expects the fourth quarter IP volume growth rate to be
consistent with the current year year-to-date growth rate. IP yield increased 2%
and 1% for the quarter and year-to-date periods, respectively, primarily as a
result of increased weight per package. Management expects IP yield to remain
constant or improve slightly as a result of increased weight per package. Actual
IP results will depend on international economic conditions, actions by the
Company's competitors and regulatory conditions for international aviation
rights.
- 14 -
The Company's airfreight (IXF/ATA) volume, revenue and yield declined
year over year for the quarter and nine-month periods. IXF volume (a
space-confirmed, time-definite service) increased 1% for the quarter and
year-to-date periods, but yield declined 2% and 8% for the same periods. ATA
volume (a lower-priced, space-available service) decreased 8% and 14% for the
quarter and year-to-date periods, respectively, with yield lower by 12% and 13%
for the same periods. Airfreight yield has declined year over year since the
second quarter of 1996, with both volume and yield declining for the past three
quarters. Management expects these trends to continue through the balance of
1999 and has adjusted the Company's expansion and aircraft deployment plans
accordingly. These adjustments include deferring additional flights, reducing
capacity on certain routes, suspending flights and redeploying aircraft to areas
with capacity constraints. Actual airfreight results will depend on
international economic conditions, actions by the Company's competitors,
including capacity fluctuations, and regulatory conditions for international
aviation rights.
Operating Expenses
Salaries and employee benefits increased 7% for both the quarter and
year-to-date periods, primarily due to package volume-related increases in the
number of employees and increased provisions for the Company's performance-based
incentive compensation plans.
Increases of 7% and 8% in rentals and landing fees for the quarter and
year-to-date periods, respectively, were primarily due to additional
facilities leased by the Company. The current year's expense includes
additional building leases at the Indianapolis and Alliance-Fort Worth hubs.
In the third quarter, supplemental aircraft lease and equipment lease expense
declined year over year. As discussed below, incremental leases associated
with strike contingency planning are included in other operating expenses. In
the prior year's third quarter, supplemental leased aircraft were added to
meet the demands of increased package volume and to replace an MD11 destroyed
in July 1997. In the current quarter, supplemental leased aircraft were not
as extensively required (excluding strike contingency costs described below)
because sufficient leased fleet aircraft were available for the Company's
capacity needs. As of February 28, 1999, the Company had 93 wide-bodied
aircraft under operating lease compared with 85 as of February 28, 1998.
During the nine-month period, the additional leased fleet aircraft
contributed to the rise in rental and landing fees. The prior year's first
quarter expense was favorably impacted by approximately $9 million of a $17
million net gain resulting from the destruction of a leased MD11 aircraft in
an accident in July 1997 (described below in Other Income and Expense).
Management expects year-over-year increases in lease expense to continue as
the Company enters into additional aircraft rental agreements during 1999 and
thereafter, including the conversion of A300 purchase commitments into direct
operating leases. (See Note 3 of Notes to Condensed Consolidated Financial
Statements.)
Maintenance and repairs expense increased 10% and 12% for the quarter
and year-to-date periods, respectively, primarily due to higher
year-over-year engine maintenance expense on MD11 and B727 aircraft. In the
first quarter of 1998, an accrual for the disposition of leased B747 aircraft
was increased $9 million, with the majority of this increase recorded as
maintenance and repairs expense. Management believes that maintenance and
repairs expense will continue a long-term trend of year-over-year increases
for the foreseeable future due to the increasing size and age of the
Company's fleet and the variety of aircraft types.
Fuel expense fell 23% and 19% for the quarter and nine-month periods,
respectively, primarily as a result of declines in jet fuel price per gallon
(29% and 25%, respectively), partially offset by increases in jet fuel gallons
consumed (8% and 6%, respectively). The prior year's fuel expense included
payments made by the Company under contracts which were designed to limit the
Company's exposure to fluctuations in jet fuel prices. Effective August 1, 1997,
the Company lifted its temporary 2% fuel surcharge that had been in place on
certain U.S. domestic and U.S. export shipments. This surcharge was implemented
on February 3, 1997 to mitigate the impact of rising jet fuel prices.
- 15 -
Other operating expense increased 13% and 6% for the quarter and
year-to-date periods, respectively, primarily due to approximately $76 million
recorded in the current year third quarter associated with strike contingency
planning. These contingency costs consist principally of aircraft lease expense
and lease termination fees. The prior year's first quarter included incremental
expenses associated with the additional volume during the UPS strike. Other
operating expense includes transportation of packages by third parties,
temporary labor and other outside service contracts, communications expense and
the cost of sales of engine noise reduction kits.
Operating Income
The Company's consolidated operating income decreased 3% for the quarter
and 2% for the year-to-date period from the prior year. Excluding the impact of
strike contingency expenses in the current year and merger-related expenses and
the benefit of the UPS strike in the prior year, operating income increased 57%
and 20% for the quarter and year-to-date periods primarily due to improved
results in the Company's U.S. domestic operations. Improved international
results, excluding the contingency costs, also contributed to the increased
operating income for the third quarter.
U.S. domestic operating income was $112 million and $535 million for
the quarter and year-to-date periods ended February 28, 1999. Prior year
amounts were $105 million and $513 million for these same periods. During the
current quarter, approximately $52 million of contingency costs were incurred
by U.S. domestic operations. Included in the third quarter of the prior year
were $14 million of expenses related to the acquisition of Caliber System,
Inc. The prior year's first quarter operating income included approximately
$50 million related to the UPS strike as well as proceeds from a 2% temporary
fuel surcharge through August 1, 1997. Excluding these non-recurring items in
the current and prior years, operating income increased 38% and 29% for the
quarter and year-to-date periods. These increases were due to yield increases
(2.5% and 2.6% for the quarter and year-to-date periods, respectively) and
package volume growth (5% for both the quarter and year-to-date periods).
Cost per package remained constant for the periods. Sales of engine noise
reduction kits contributed $24 million and $81 million to U.S. domestic
operating income in the third quarter and year-to-date periods ended
February 28, 1999, compared with $26 million and $97 million in the same
periods in the prior year. U.S. domestic operating margins were 4.5% and 7.1%
(6.5% and 7.8% excluding the contingency costs) for the quarter and
nine-month periods, respectively, compared with 4.4% and 7.2% (5.0% and 6.5%,
excluding the aforementioned prior year items) for the same periods in the
prior year.
The Company's international operations reported an operating loss of $17
million for the third quarter and operating income of $31 million for the
year-to-date period, compared with a loss of $7 million and income of $63
million for the same periods of the prior year. During the current quarter,
approximately $29 million of contingency costs were incurred by international
operations. Excluding these expenses, international operating results improved
for the third quarter primarily due to lower fuel costs and cost controls. Both
the quarter and year-to-date results were negatively impacted by slower IP
volume growth, declining airfreight volume and yield at a time of year-over-year
capacity increases and fixed costs associated with the increased capacity,
including salaries and employee benefits and aircraft lease expense.
International operating margins were -1.9% and 1.1% (1.3% and 2.1%, excluding
contingency costs) for the quarter and year-to-date periods, respectively,
compared with -0.8% and 2.4% for the same periods in the prior year.
- 16 -
Other Income and Expense
Net interest expense declined 27% and 23% for the quarter and
year-to-date periods, respectively, due to lower average debt levels.
Other, net for the current quarter includes approximately $10 million of
expenses related to the Company's contingency plans, primarily costs associated
with the business interruption credit facility discussed below.
Other, net for the prior year's first quarter included a gain from an
insurance settlement for an MD11 aircraft destroyed in an accident in July 1997.
At that time, the Company realized a net gain of $17 million from the insurance
settlement and the release from certain related liabilities on the leased
aircraft. Approximately $8 million of this gain was recorded in non-operating
income.
The Company's effective tax rates of 34.0% and 40.5% for the quarter and
year-to-date periods, respectively, compare with rates of 50.5% and 43.2% for
these periods in the prior year. The decline in the year-to-date rate from 41.5%
recorded in the first half of 1999 to 40.5% is primarily due to the combination
of stronger than expected year-to-date results from international operations and
lower worldwide income taxes on foreign earnings. The prior year rates were
affected by certain one-time, merger-related costs which were nondeductible for
federal and state income tax purposes. Excluding the impact of those
nondeductible costs, the effective tax rate was 42.0% for the prior year's
quarter and year-to-date periods.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $80 million at February 28, 1999, a
decrease of $25 million since May 31, 1998. Cash provided from operations for
the first nine months of 1999 was $950 million compared with $684 million for
the same period in the prior year.
In December 1998, FDX Corporation established a $1.0 billion business
interruption credit facility with a 364-day maturity to fund working capital
needs and contingency plan expenses in the event of an actual or threatened
business interruption due to labor issues with the FPA. In addition, FDX
Corporation amended its existing revolving credit agreement to allow for this
business interruption credit facility and to extend part of the agreement,
previously expiring in January 1999, to January 2000. On February 4, 1999, the
business interruption credit facility was canceled following the ratification of
the contract by the members of the FPA. Approximately $10 million in fees and
interest were incurred in connection with this facility.
Management believes that cash flow from operations, FDX Corporation's
commercial paper program and bank revolving credit facility will adequately meet
the Company's working capital needs for the foreseeable future.
Capital Resources
The Company's operations are capital intensive, characterized by
significant investments in aircraft, vehicles, computer and telecommunication
equipment, package handling facilities and sort equipment. The amount and timing
of capital additions depend on various factors including global economic
conditions, volume growth, new or enhanced services, geographical expansion of
services, competition, availability of satisfactory financing and actions of
regulatory authorities.
- 17 -
Capital expenditures for the first nine months of 1999 totaled $1.2
billion and included one MD11, aircraft modifications, vehicles and ground
support equipment and customer automation and computer equipment. Prior year
expenditures also totaled $1.2 billion and included three MD11s, two A310s,
aircraft modifications, vehicles and ground support equipment and customer
automation and computer equipment. An MD11 purchased in June 1998 was sold and
leased back in September 1998. In June and September 1997 and February 1998,
three MD11s purchased in February, June and November 1997 were sold and leased
back. For information on the Company's purchase commitments, see Note 3 of Notes
to Condensed Consolidated Financial Statements.
Management believes that the capital resources available to the Company
provide flexibility to access the most efficient markets for financing capital
acquisitions, including aircraft, and are adequate for the Company's future
capital needs.
Market Risk Sensitive Instruments and Positions
There have been no material changes in the Company's market risk
sensitive instruments and positions since its disclosure in its Annual Report on
Form 10-K for the year ended May 31, 1998.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
fixed conversion rates between their existing sovereign currencies ("legacy
currencies") and a single currency called the euro. On January 4, 1999, the euro
began trading on currency exchanges and became available for non-cash
transactions. The legacy currencies will remain legal tender through December
31, 2001. Beginning January 1, 2002, euro-denominated bills and coins will be
introduced, and by July 1, 2002, legacy currencies will no longer be legal
tender.
The Company established a euro task force to develop and implement euro
conversion plans. The work of the task force in preparing for the introduction
of the euro and the phasing out of the various legacy currencies includes
numerous facets such as converting information technology systems, adapting
billing and payment systems and modifying processes for preparing financial
reports and records.
Since January 1, 1999, the Company has been prepared to quote rates to
customers, generate billings and accept payments, in both euros and legacy
currencies. Based on the work of the Company's euro task force to date, the
Company believes that the introduction of the euro, any price transparency
brought about by its introduction and the phasing out of the legacy currencies
will not have a material impact on the Company's consolidated 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.
- 18 -
YEAR 2000 COMPLIANCE
Introduction
The Company relies heavily on sophisticated information technology ("IT")
for its business operations. For example, the Company maintains electronic
connections with more than a million customers via its proprietary products and
technologies. The Company's Year 2000 ("Y2K") computer compliance issues are,
therefore, broad and complex. The Y2K Project Office, which was established in
1996, coordinates and supports the Company's Y2K compliance effort. The Company
has also engaged a major international consulting firm to assist it in its Y2K
program management.
The Company's Y2K compliance efforts are focused on business-critical
items. Hardware, software, systems, technologies and applications are considered
"business-critical" if a failure would either have a material adverse impact on
the Company's business, financial condition or results of operations or involve
a safety risk to employees or customers.
State of Readiness
Generally, the Company believes that its Y2K compliance effort is on
schedule.
IT SYSTEMS
The Company's compliance effort for all business-critical infrastructure
and applications software (collectively, "IT Systems") is 98% complete. The
Company has inventoried all IT Systems. Assessment/design (researching the
compliance status and determining the impact of, and renovation requirements
for, the IT Systems) and renovation (making IT Systems compliant) are
substantially complete. Testing, which involves validating compliance, is also
substantially complete. Within IT Systems, certification of application
software, which involves the Company's independent, internal review to verify
whether the appropriate testing process has occurred, is approximately 96%
complete. Certification of the operating system software and program product
software (collectively, "infrastructure") is 85% complete. The Company's IT
Systems compliance effort is targeted to be 100% complete by September 1, 1999.
At present, a substantial portion of the key IT Systems are expected to be
compliant by May 31, 1999. Those IT Systems which will most likely not be
compliant until after May 31, 1999 include systems dependent upon external
government or vendor interfaces. While all IT Systems are still expected to be
compliant by September 1, 1999, contingency plans will be in place to mitigate
any negative impact of the non-compliance of such systems.
NON-IT SYSTEMS
The inventory and assessment phases of the Company's Y2K program
relating to business-critical purchased hardware and software, customized
software applications, facilities/equipment and other embedded chip systems
(collectively, "Non-IT Systems") are 100% complete. The remaining phases
relating to the Company's Non-IT Systems are targeted for completion by May
31, 1999. The Company is 85% complete with the remediation effort on Non-IT
Systems. All development and implementation scheduled from the present until
May 31, 1999 is being closely monitored, and while there is the possiblity
that some activities may take place after the target date, the Company
believes that it will be substantially complete by May 31, 1999. Possible
exceptions include implementation of the Company's automated shipping
solutions by customers and rollout to the Company's customers of the FedEx
Onsite Server upgrade, which may require some development on the part of the
customer.
- 19 -
The Company has established several definitions for compliance related to
Non-IT Systems. For air infrastructure components (such as airports and air
traffic systems), the Company defines compliant to mean that these components
are being aggressively assessed and that approved processes are in place to
monitor their evolving status and develop specific operational contingency
plans. For business critical suppliers and affiliates, the Company defines
compliant to mean that the suppliers and affiliates have been assessed, and a
contingency plan has been developed as necessary.
For the automated shipping solutions offered to customers, the Company
defines compliant to mean that the Company has made available a compliant
version of the associated shipping solution. A customer may choose to remain
on a non-compliant version of software if the customer is willing to assume
the associated risks and there are no potentially unfavorable impacts on the
Company's internal systems.
For electronic interfaces with customers and suppliers, the Company
defines compliant to mean that it has made compliant transaction sets available
and has made systems modifications that enable the Company to translate
non-compliant versions that mitigate the potential impact to the Company's
internal systems.
Y2K Interfaces with Material Third Parties
The Company is making concerted efforts to understand the Y2K status of
third parties (including, among others, domestic and international government
agencies, customs bureaus, U.S. and international airports and air traffic
control systems, customers, independent contractors, vendors and suppliers)
whose Y2K standing could either have a material adverse effect on the Company's
business, financial condition or results of operations or involve a safety risk
to employees or customers. The Company is actively encouraging Y2K compliance on
the part of third parties and is developing contingency plans in the event of
their Y2K non-compliance.
In conjunction with the International Air Transport Association (IATA)
and the Air Transport Association of America (ATA), the Company is involved in a
global and industry-wide effort to understand the Y2K compliance status of
airports, air traffic systems, customs clearance and other U.S. and
international government agencies, and common vendors and suppliers. The Company
has developed contingency plans to minimize the impact of Y2K issues on its air
operations. Contingency plans will be implemented, as necessary, to mitigate the
impact of Y2K problems that might arise during the transition into 2000.
The Company's vendor and product compliance program includes the
following tasks: assessing vendor compliance status; product testing; tracking
vendor compliance progress; developing contingency plans, including identifying
alternate suppliers, as needed; addressing contract language; replacing,
renovating or upgrading parts; requesting presentations from vendors or making
on-site assessments, as required; and sending questionnaires. Failure to respond
to these questionnaires results in further mail or phone correspondence,
contingency plan development and/or vendor/product replacement.
- 20 -
Testing
The Company's Y2K testing effort includes functional testing of remedial
measures and regression testing to validate that changes have not altered
existing functionality. The Company's test plans include sections which define
the scope of the testing effort, roles and responsibilities of test
participants, the test approach planned, software, hardware and data
requirements, and test environments/techniques to be used as well as other
sections defining the test effort. System functionality for future date accuracy
is being verified and documented. The Company uses an independent, internal
process to verify that the appropriate testing process has occurred.
A separate homogenous Y2K mainframe environment has been created to
test operating system software and program product software. The Y2K
mainframe environment is designed to accomplish future date "end to end"
testing of the larger applications and to validate interface communications
between applications.
Costs to Address Y2K Compliance
Since 1996, the Company has incurred approximately $75 million on Y2K
compliance, which includes internal and external software/hardware analysis,
repair, vendor and supplier assessments, risk mitigation planning, and
related costs. The Company continues to monitor its total expected costs
associated with Y2K compliance efforts, and currently expects that it will
incur additional total costs of approximately $45 million, including
depreciation of $10 million. Forty percent of the remaining expenses,
excluding depreciation, relate to the Y2K remediation efforts during the
fourth quarter. Y2K expenditures after May 31, 1999 will include project
management of the corporate contingency effort and the command and control
center, further system audit and validation, and project management to ensure
compliance of new systems development. The Company classifies costs as Y2K
for reporting purposes if they remedy only Y2K risks or result in the
formulation of contingency plans and would otherwise be unnecessary in the
normal course of business.
The Company's Y2K compliance effort is being funded entirely by internal
cash flows. For the fiscal year ending May 31, 1999, Y2K expenditures are
expected to represent less than 10% of the Company's total IT expense budget.
Although there are opportunity costs to the Company's Y2K compliance effort,
management believes that no significant information technology projects have
been deferred due to this work.
Contingency Planning and Risks
The Company's key contingency plans were completed by January 31,
1999. These plans address the activities to be performed by personnel in
preparation for and during a Y2K-related failure that could have an immediate
and significant impact on normal operations. A Y2K-related failure could
include, but is not limited to, power outages, system or equipment failures,
erroneous data, loss of communications and failure of a supplier or vendor.
The contingency plans include, among other things, items such as
pre-arranging alternative operating locations, replacing non-Y2K compliant
suppliers and vendors, using back-up systems equipment and stockpiling
additional inventory and supplies. They also outline alternative procedures,
including manual ones, personnel can perform in order to carry out their
mission-critical functions and trouble-shooting procedures the IT
organization can follow to bring internal systems and equipment back into
operation after a Y2K-related failure. The plans also establish procedures
for company-wide communications. These are in addition to the Company's
operational contingency plans for the pick-up, delivery and movement of
packages. The Company expects to have a Y2K contingency command and control
center by April 30, 1999 that will link to the Company's other operations
command and control centers. Key personnel will be on call beginning November
1999 and on site beginning December 31, 1999.
- 21 -
The Company's goal for completing all other contingency plans is
September 30, 1999. Plans covering vendor and supplier issues are targeted for
completion by May 31, 1999 to minimize the risks, if any, that these third
parties may not be on schedule in their own Y2K efforts. The Company's goal for
developing testing plans is May 31, 1999. Testing will include structured
walk-throughs, mock drills and simulations and is expected to be completed by
October 31, 1999. Although the cost of developing contingency plans is included
in the total project costs described above, the cost of implementing any
necessary contingency plans is not known at this time.
Due to the general uncertainty inherent in the Company's Y2K
compliance, mainly resulting from the Company's dependence upon the Y2K
compliance of the government agencies and third-party suppliers, vendors and
customers with whom the Company deals, the Company believes that there is no
single most reasonably likely worst case scenario. However, the Company
believes that a most reasonably likely worst case scenario could include, but
is not limited to, the following situations: delivery delays and the related
re-routing costs due to the lack of readiness of airports and air traffic
systems, principally outside the United States; the inability to serve
certain customers or geographic areas due to their lack of compliance and
business continuance capabilities of suppliers, vendors, customers and
independent contractors, including third party pick-up and delivery providers
on whom the Company relies in some offshore locations; and service delays or
failures due to the global utilities and telecommunications infrastructure.
The Company's Y2K program, including related contingency planning, is
designed to substantially lessen the possibility of significant interruptions
of normal operations. Despite its efforts to date, the Company may still
incur substantial expenditures or experience significant delays in delivering
its services as Y2K problems, both domestic and international, become known.
Non-compliant systems of vendors, suppliers, customers and other third
parties could also adversely affect the Company. While costs related to the
lack of Y2K compliance of third parties, business interruptions, litigation
and other liabilities related to Y2K issues could materially and adversely
affect the Company's business, results of operations and financial condition,
the Company expects its Y2K compliance efforts to reduce significantly the
Company's level of uncertainty about the impact of Y2K issues affecting both
its IT Systems and Non-IT Systems.
* * *
Statements in this "Management's Discussion and Analysis of Results of
Operations and Financial Condition" or made by management of the Company which
contain more than historical information may be considered forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) which are subject to risks and uncertainties. Actual results may
differ materially from those expressed in the forward-looking statements because
of important factors identified in this "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
- 22 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 4 Legal Proceedings in Part I is hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibit
------- ----------------------
10.1 Amendment dated March 19, 1998 to Sales Agreement dated
April 7, 1995 between American Airlines, Inc. and
Registrant. Confidential treatment has been requested
for certain confidential portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended. In accordance with Rule 24b-2,
these confidential portions have been omitted from the
exhibit and filed separately.
10.2 Amendment dated January, 1999 to Sales Agreement dated
April 7, 1995 between American Airlines, Inc. and
Registrant. Confidential treatment has been requested
for certain confidential portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended. In accordance with Rule 24b-2,
these confidential portions have been omitted from the
exhibit and filed separately.
10.3 Letter Agreement No. 9 dated January 27, 1999, amending
the Modification Services Agreement dated September 16,
1996 between McDonnell Douglas Corporation and
Registrant. Confidential treatment has been requested
for certain confidential portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended. In accordance with Rule 24b-2,
these confidential portions have been omitted from the
exhibit and filed separately.
10.4 Amendment No. 1 dated January 22, 1999, amending the
Modification Services Agreement dated September 16,
1996 between McDonnell Douglas Corporation and
Registrant. Confidential treatment has been requested
for certain confidential portions of this Exhibit
pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended. In accordance with Rule 24b-2,
these confidential portions have been omitted from the
exhibit and filed separately.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter ended
February 28, 1999.
- 23 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL EXPRESS CORPORATION
(Registrant)
Date: April 12, 1999 /s/ MICHAEL W. HILLARD
--------------------------------------
MICHAEL W. HILLARD
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 24 -
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.1 Amendment dated March 19, 1998 to Sales Agreement dated
April 7, 1995 between American Airlines, Inc. and
Registrant. Confidential treatment has been requested for
certain confidential portions of this Exhibit pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934, as
amended. In accordance with Rule 24b-2, these confidential
portions have been omitted from the exhibit and filed
separately.
10.2 Amendment dated January, 1999 to Sales Agreement dated
April 7, 1995 between American Airlines, Inc. and
Registrant. Confidential treatment has been requested for
certain confidential portions of this Exhibit pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934, as
amended. In accordance with Rule 24b-2, these confidential
portions have been omitted from the exhibit and filed
separately.
10.3 Letter Agreement No. 9 dated January 27, 1999, amending the
Modification Services Agreement dated September 16, 1996
between McDonnell Douglas Corporation and Registrant.
Confidential treatment has been requested for certain
confidential portions of this Exhibit pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. In
accordance with Rule 24b-2, these confidential portions have
been omitted from the exhibit and filed separately.
10.4 Amendment No. 1 dated January 22, 1999, amending the
Modification Services Agreement dated September 16, 1996
between McDonnell Douglas Corporation and Registrant.
Confidential treatment has been requested for certain
confidential portions of this Exhibit pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. In
accordance with Rule 24b-2, these confidential portions have
been omitted from the exhibit and filed separately.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
E-1