Federal Express 1998 Annual Report Download - page 52

P50 FDX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At May 31, 1998, FedEx was committed to purchase
12 Airbus A300s, 35 MD11s and 50 Ayers ALM 200s
to be delivered through 2007. Deposits and progress
payments of $94,459,000 have been made toward
these purchases.
During 1997, FedEx entered into agreements with two
airlines to acquire 53 DC10s, spare parts, aircraft
engines and other equipment, and maintenance ser-
vices 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. Addi-
tionally, these airlines may exercise put options through
December 31, 2003, requiring FedEx to purchase up to
29 additional DC10s along with additional aircraft
engines and equipment.
In March 1998, put options were exercised by an airline
requiring FedEx to purchase seven MD11s for a total
purchase price of $416,000,000. Delivery of the air-
craft will begin in 2000.
FedEx has entered into contracts 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 specified lower (or
upper) limit and the market price of jet fuel, as deter-
mined by an index of spot market prices representing
various geographic regions. The difference is recorded
as an increase or decrease in fuel expense. At May 31,
1998, all such contracts had expired. At May 31,1997,
FedEx had contracts with various financial institutions
covering a total notional volume of 396,900,000 gal-
lons (approximately 54% of FedEx’s annual jet fuel con-
sumption), with some contracts extending through
May 1998. Based on market prices at May 31, 1997,
the fair value of these contracts was a liability of approx-
imately $418,000 as of such date. Under jet fuel con-
tracts, FedEx made payments of $28,764,000 in 1998,
received $15,162,000 (net of payments) in 1997 and
received $1,977,000 in 1996.
NOTE 15: LEGAL PROCEEDINGS
Customers of FedEx have filed four separate class-action
lawsuits against FedEx generally alleging that FedEx has
breached its contract with the plaintiffs in transporting
packages shipped by them. These lawsuits allege that
FedEx continued to collect a 6.25% federal excise tax on
the transportation of property shipped by air after the tax
expired on December 31, 1995, until it was reinstated in
August of 1996. The plaintiffs seek certification as a class
action, damages, an injunction to enjoin FedEx from con-
tinuing to collect the excise tax referred to above, and an
award of attorneys’ fees and costs. Three of those cases
were consolidated in Minnesota Federal District Court.
That court stayed the consolidated cases in favor of a
case filed in Circuit Court of Greene County, Alabama. The
stay was lifted in July 1998. The complaint in the
Alabama case also alleges that FedEx continued to collect
the excise tax on the transportation of property shipped
by air after the tax expired again on December 31,1996.
A fifth case, filed in the Supreme Court of New York,
New York County, containing allegations and requests
for relief substantially similar to the other four cases
was dismissed with prejudice on FedEx’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 have
appealed. This case originally alleged that FedEx contin-
ued to collect the excise tax on the transportation of
property shipped by air after the tax expired on Decem-
ber 31, 1996. The New York complaint was later
amended to cover the first expiration period of the tax
(December 31,1995 through August 27,1996) covered
in the original Alabama complaint.
The air transportation excise tax expired on December 31,
1995, was reenacted by Congress effective August 27,
1996, and expired again on December 31, 1996. The
excise tax was then reenacted by Congress effective
March 7, 1997. The expiration of the tax relieved FedEx
of its obligation to pay the tax during the periods of expi-
ration. The Taxpayer Relief Act of 1997, signed by Presi-
dent Clinton in August 1997, extended the tax for 10
years through September 30, 2007.
FedEx intends to vigorously defend itself in these cases.
No amount has been reserved for these contingencies.
FDX Corporation and its subsidiaries are subject to other
legal proceedings and claims which arise in the ordinary
course of their 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.
NOTE 16: DISCONTINUED OPERATIONS
On January 2, 1996, Caliber distributed to its share-
holders 95% of the issued and outstanding shares of
common stock of Roadway Express, Inc. (“REX”), its
wholly-owned subsidiary. This distribution, which was
tax-free for federal income tax purposes to Caliber
and its shareholders, was made to the holders of
record of Caliber’s common stock at the close of
business on December 29, 1995. Shareholders
received one share of REX common stock for every
two shares of Caliber common stock held on that
date. As a result, shareholders’ equity was reduced by
$199,700,000, which represented the book value of
the net assets distributed. Caliber’s remaining invest-
ment in REX amounted to $8,400,000 and is
included in other assets as of May 31, 1997. The
remaining investment in REX was sold during the first
quarter of 1998.
On November 6, 1995, Caliber announced plans to exit
the air freight business served by its wholly-owned sub-
sidiary, Roadway Global Air, Inc. (“RGA”). Caliber
recorded a pre-tax charge of $64,925,000 related to
the discontinuance of this business. Income from dis-
continuance of $4,875,000, net of tax, in 1998
included the favorable settlement of leases and other
contractual obligations.