Federal Express 2005 Annual Report Download - page 83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain of our operating leases contain other indemnification obli-
gations to the lessor, which are considered ordinary and
customary (e.g., use and environmental indemnifications). The
terms of these obligations range in duration and often are not lim-
ited. Such indemnification obligations continue until and, in many
cases, after expiration of the respective lease.
In conjunction with certain transactions, primarily sales or pur-
chases of operating assets or services in the ordinary course of
business, we sometimes provide routine indemnifications (e.g.,
environmental, tax and software infringement), the terms of
which range in duration and often are not limited.
FedEx’s publicly held debt (approximately $1.7 billion) is guaran-
teed by our subsidiaries. The guarantees are full and
unconditional, joint and several and any subsidiaries that are not
guarantors are minor as defined by Securities and Exchange
Commission regulations. FedEx, as the parent company issuer of
this debt, has no independent assets or operations. There are no
significant restrictions on our ability or the ability of any guaran-
tor to obtain funds from its subsidiaries by such means as a
dividend or loan.
Special facility revenue bonds have been issued by certain
municipalities primarily to finance the acquisition and construc-
tion of various airport facilities and equipment. In certain cases,
the bond proceeds were loaned to FedEx Express and are includ-
ed in long-term debt and, in other cases, the facilities were
leased to us and are accounted for as either capital leases or
operating leases. Approximately $760 million in principal of these
bonds (with total future principal and interest payments of
approximately $1.3 billion as of May 31, 2005) is unconditionally
guaranteed by FedEx Express. Of the $760 million bond principal,
$204 million was in capital lease obligations at May 31, 2005 and
the remainder was in operating leases.
NOTE 17: VARIABLE INTEREST ENTITIES
FedEx Express entered into a lease in July 2001 for two MD11 air-
craft. These assets are held by a separate entity, which was
established and is owned by independent third parties who pro-
vide financing through debt and equity participation. The original
cost of the assets under the lease was approximately $150 million.
This lease contains residual value guarantees that obligate FedEx
Express, not the third-party owners, to absorb the majority of the
losses, if any, of the entity. The lease also provides FedEx Express
with the right to receive any residual returns of the entity if they
occur. At May 31, 2005, the residual value guarantee associated
with this lease, which represents the maximum exposure to loss,
was $89 million. FIN 46 required us to consolidate the separate
entity that owns the two MD11 aircraft. Since the entity was cre-
ated before February 1, 2003, we measured the assets and
liabilities at their carrying amounts (the amounts at which they
would have been recorded in the consolidated financial state-
ments if FIN 46 had been effective at the inception of the lease).
As a result of this consolidation, the accompanying May 31, 2005
balance sheet includes an additional $120 million of fixed assets
and $125 million of long-term liabilities. The May 31, 2004 balance
sheet includes an additional $126 million of fixed assets and $133
million of long-term liabilities.
NOTE 18: COMMITMENTS
Annual purchase commitments under various contracts as of
May 31, 2005 were as follows (in millions):
Aircraft-
Aircraft Related(1) Other(2) Total
2006 $ 111 $237 $ 582 $ 930
2007 115 91 106 312
2008 131 74 48 253
2009 567 61 37 665
2010 517 56 22 595
Thereafter 625 70 166 861
(1) Primarily aircraft modifications.
(2) Primarily vehicles, facilities, computers, printing and other equipment and advertising
and promotions contracts.
The amounts reflected in the table above for purchase commit-
ments represent noncancelable agreements to purchase goods
or services. Commitments to purchase aircraft in passenger con-
figuration do not include the attendant costs to modify these
aircraft for cargo transport. Open purchase orders that are can-
celable are not considered unconditional purchase obligations
for financial reporting purposes.
As of May 31, 2005, FedEx Express is committed to purchase four
Airbus A300s, two Airbus A310s, nine ATR-72s, one MD11 and 10
Airbus A380s (a new high-capacity, long-range aircraft). FedEx
Express expects to take delivery of the MD11, four A300s, all of
the ATR-72s and one Airbus A310 in 2006. The remaining Airbus
A310 is expected to be delivered in 2007. FedEx Express expects
to take delivery of three of the 10 A380 aircraft in each of 2009,
2010 and 2011 and the remaining one in 2012. Deposits and
progress payments of $29 million have been made toward these
purchases and other planned aircraft-related transactions. In
addition, we have committed to modify our DC10 aircraft for pas-
senger-to-freighter and two-man cockpit configurations.
Payments related to these activities are included in the table
above. Aircraft and aircraft-related contracts are subject to
price escalations.
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