avatar Fedex Corporation Transportation, Communications, Electric, Gas, And Sanitary Services
  • Location: Tennessee 
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    M y w orld is bigger than my grandmother’s.

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    I can get the latest styles from around the world without leaving home.

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    M y brother actually w orks in an office.

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    I am a one-person global business.

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    M y children w ill think in terms of time zones, not borders.

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    I believe anything is possible.

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    W hat can you do that your grandfather couldn’t? W hat w ill your children be able to do that you can’t? Every generation expects easier access to more of w hat the w orld has to offer. M ore products and services. M ore information and ideas. M ore people and places. FedEx helped create that expectation. And w e deliver on it millions of times a day, providing the access to transform possibilities into reality. 5

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    TO OUR SHAREOW NERS: It w as a successful year for our company, our customers, and At FedEx, w e understand these expectations because w e our shareow ners as FedEx increased revenues and earnings helped create them. Our netw orks provide unprecedented to record levels. We also expanded our portfolio of services access to the modern w orld. through the strategic acquisition of Kinko’s, and w e developed new opportunities for sustained, profitable grow th. As a parent, I see this “ pow er of possibility” through the eyes of my children. As a business executive, I see how it is transform- For the fiscal year ended M ay 31, 2004, FedEx reported record ing our customers. Through either lens, it’s clear to me that this revenue of $24.7 billion, up 10 percent over the previous year. access generation w ill continue to set the agenda for today’s Net income grew to $838 million, and diluted earnings per global economy, seeking even greater access to everything they share rose to $2.76. At the same time, w e continued to focus need and desire w ithout regard to time or place. on margins, cash flow and return on investment w hile exerting the discipline to reduce capital spending to $1.3 billion. FedEx is in a great position to meet such expectations, creating opportunities across all our business lines. These financial results allow ed us to raise our quarterly divi- dend from $0.05 to $0.07 per share and deliver a total return to Expanding access to accelerate grow th our shareow ners of 15.4 percent during FY04. FedEx shares To exploit those opportunities, FedEx is w orking hard to have more than doubled in value during the last four years. increase access for our customers as w e expand our services and netw orks. W hile w e are proud of our financial performance in FY04, w e are more excited by the prospects for the future. Among the The Kinko’s acquisition opens customer access to a new suite reasons for our optimism is a trend that is not only redefining of business services. In February, w e completed the acquisi- business, it is redefining the w orld – the increasing desire for tion of Kinko’s, and before the end of M ay the rebranded FedEx access to products from every corner of the globe. Kinko’s Office and Print Centers began offering full-service FedEx Express and FedEx Ground shipping at virtually all U.S. Harnessing the “pow er of possibility” locations. This fast business integration is designed to capi- The w orld has changed significantly in my lifetime, giving rise talize on w hat w e see as a perfect alignment of companies. In to a new generation of individuals w ho believe they can have addition to providing more convenient retail access for FedEx the goods, services, and information they w ant and need any- shipping services, FedEx Kinko’s w ill also help us strengthen time, anyw here, and any w ay they w ant. Our society today is relationships w ith small businesses. In turn, FedEx w ill leverage not defined so much by age or geography or culture, but by the its relationships w ith large corporate customers to help FedEx belief that almost anything is possible. Kinko’s expand its fastest-grow ing business line – commercial document solutions. FedEx Corporation provides strategic leadership and consolidated financial reporting for the FedEx family of companies, managing a broad portfolio of transportation, e-commerce and business services. 7

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    LETTER TO SHAREOW NERS Expanded service areas improve access to the global market- right from the desktop. For customers w ho have moved place. Capitalizing on continued strong international shipping beyond the desktop, w e continue to provide FedEx tracking demand, FedEx Express added new air routes in Asia and began information via w ireless devices. And FedEx Kinko’s recently serving tw o new countries – Iraq and Kazakhstan – to bring the completed the rollout of T-M obile W i-Fi access in almost all total number of countries FedEx serves to 215. As the premier U.S. locations. all-cargo carrier serving China, w e announced plans for a new FedEx Express headquarters in Shanghai and w e expanded the Our commitment to a safe and sustainable environment con- number of cities available to our customers. We also opened key tinues. Across the FedEx family of companies, w e pushed for international markets for other FedEx companies. For example, increased energy efficiency in our vehicles and our opera- FedEx Custom Critical launched overnight service into M exico. tions. FedEx Express launched its first hybrid-engine delivery FedEx Kinko’s opened its first location there last November. vehicle, w hich w ill decrease particulate emissions by 90 per- cent and travel 50 percent farther on a gallon of fuel. We plan Enhanced service in existing markets gives customers greater to phase in the vehicles in select cities during the coming choice and reliability. In our core North American markets for year. For the third year in a row, the U.S. Environmental FedEx Freight and FedEx Ground, w e focused not just on get- Protection Agency and the U.S. Department of Energy have ting bigger, but also on becoming faster and more reliable to also recognized FedEx Kinko’s for its leadership in renew able help our customers streamline complex supply chains. FedEx energy purchases. Freight became the first carrier in the less-than-truckload freight industry to offer a no-fee money-back guarantee – a Operating efficiencies fuel earnings momentum seal of approval, if you w ill, of FedEx reliability and competitive W hile w e capitalized on grow th opportunities by increasing differentiation in that segment. We continued our planned $1.8 access for our customers, w e also took decisive internal billion netw ork expansion at FedEx Ground, and over the past action to increase efficiency and profitability – all part of our tw o years w e have accelerated service delivery commitments continued commitment to increasing shareow ner value. by one day in about 40 percent of our ground traffic lanes. The largest single initiative w as our business realignment at Advanced technology improves customer access to critical FedEx Express, a voluntary w orkforce reduction to help “ right- business information. Fedex.com continues to be one of the size” our netw ork and position us for sustained, profitable best and fastest sites in the business w orld, and w e are con- grow th. It w as a difficult but necessary action that helped stantly improving our online tools to support our goal of han- bring costs more in line w ith FedEx Express revenues. On a dling as many transactions as possible via electronic means. personal note, I w ould like to extend my thanks to all those Customers increasingly rely on FedEx InSight to provide criti- w ho elected one of the early retirement or voluntary sever- cal information about inbound shipments to help manage their ance offers – including many w ho helped build FedEx from the businesses more efficiently. W ith extensive online billing infor- very early days of our company. mation, our customers can also manage their FedEx account FedEx Express provides time-definite shipping FedEx Ground provides cost-effective, to 215 countries, including every street address day-definite shipping, specializing in in the United States, delivering small packages small-package business-to-business and freight usually in one to three business days. delivery w ith convenient U.S. residential service through FedEx Home Delivery. 8

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    LETTER TO SHAREOW NERS In the future, w e w ill continue to examine cost reduction M ore than 240,000 FedEx team members around the w orld, in opportunities yet still invest w isely in our fastest-grow ing net- all FedEx operating companies, are committed to our Purple w orks. In FY05, w e expect capital spending to rise modestly, Promise and the unw avering commitment to a great customer funding additional aircraft capacity for the grow ing FedEx experience w ith every transaction. Express international business and investing in FedEx Ground, FedEx Freight and FedEx Kinko’s. We believe that prudent No one championed this commitment more than Sheridan investment w ill allow us to generate strong grow th in earnings Garrison, a retired member of the FedEx Board of Directors and per share and cash flow for the coming fiscal year as w e chairman emeritus of FedEx Freight East. We w ere greatly benefit from our grow ing businesses and the full-year savings saddened by Sheridan’s untimely death in 2004, and he w ill be from our business realignment. missed by his colleagues, family and friends. Shaping the new global marketplace Among several recent board changes, w e w ere pleased to We believe the need and desire for access w ill only continue add an outstanding new director, Ken Glass, w ho serves as to grow. And w e intend to be w here FedEx has been for the c hairman, president and CEO of First Horizon National past three decades – on the leading edge of global trends that Corporation, and valued board member George M itchell shape the w ay all of us live and w ork. announced his decision to retire. We thank him for his dedication and contributions to our success. • We w ill continue to press for free and fair trade in order to increase global economic access and raise the standards of Guided by a strong board – and a leadership team that is sec- living in developing countries, lifting millions of people out of ond to none – I believe that FedEx is in great shape to meet the poverty. access demands for generations to come as w e continue to • We w ill continue to push for a safe and sustainable environ- perform for our shareow ners. ment, applying new technologies to help decrease the energy required to generate economic activity. Sincerely, • We w ill continue to be at the forefront of safety and security measures as the w orldw ide community w orks together to meet global challenges. Our commitment to access starts w ith our great FedEx people Frederick W. Smith and extends to our valued customers and shareow ners. It Chairman, President and Chief Executive Officer reaches across borders and time zones to shape the new global marketplace. FedEx Freight is the leading U.S. regional, FedEx Kinko’s Office and Print Services is less-than-truckload freight company, a leading provider of document solutions and delivering w ithin the United States and key business services, operating more than 1,200 international markets usually w ithin one digitally connected locations in 10 countries. to tw o business days. 9

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    Financial Highlights In millions, except earnings per share (1) 2004 2003 Percent Change Operating Results Revenues $ 24,710 $ 22,487 +10 Operating income 1,440 1,471 -2 Operating margin 5.8% 6.5% Net income 838 830 +1 Diluted earnings per common share $ 2.76 $ 2.74 +1 Average common and common equivalent shares 304 303 — Capital expenditures $ 1,271 $ 1,511 -16 Financial Position Total assets $ 19,134 $ 15,385 +24 Long-term debt, including current portion 3,587 2,017 +78 Common stockholders’ investment 8,036 7,288 +10 Revenue (in billions) Diluted earnings per common share Return on average equity 2000 2001 2002 2003 2004 (1) 2000 2001 2002 2003 2004 (1) 2000 2001 2002 2003 2004 (1) $18.3 $19.6 $20.6 $22.5 $24.7 $2.32 $1.99 $2.34 $2.74 $2.76 14.6% 10.9% 11.4% 12.0% 10.9% Capital expenditures (% of revenue) Debt to total capitalization Stock price (May 31 close) 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 8.9% 9.6% 7.8% 6.7% 5.1% 27.1% 26.4% 21.6% 21.7% 30.9% $35.50 $40.00 $53.95 $63.98 $73.58 (1) 2004 includes $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs and a $37 million, net of tax, or $0.12 per diluted share benefit related to a favorable ruling on an IRS tax case and the reduction of the company’s effective tax rate. 2004 also includes the results of operations of FedEx Kinko’s from February 12, 2004 (date of acquisition) including revenues of $621 million and operating income of $45 million.

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    How big is your w orld? Your notebook PC is manufactured 12 time zones aw ay, but your office is as close as FedEx Kinko’s. Your small business has a global reach w hile big business provides you next-door-neighbor service. Big or small, near or far, here are just a few w ays FedEx gives you greater access to a grow ing w orld of opportunities.

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    Tw o-thirds of the earth’s surface is w ater. Tracy M elton has it covered. “ A lifelong angler and tournament fisherman, Tracy M elton alw ays believed he could turn his love of big-game fishing into a profitable business. So, w hile participating in the entrepreneur program during his college days at the University of Southern California, he began putting together his plan. “ From the start, M elton thought far beyond any small business boundaries. W hat he really desired w as cost-effective access to fishing fanatics w orldw ide. FedEx helped him achieve his dream, w ithout a snag. “ W hen I started this business from my parents’ garage 11 years ago, FedEx saw the value of my business model and recognized the void I could fill,” M elton said. “ I’ve never forgotten that. So w e use FedEx for everything.” “ Today, M elton International Tackle is one of the fastest-grow ing names in the business, supplying big-game anglers around the w orld w ith the custom gear, hard-to-find lures and high-end equipment they need to pursue their passion. And FedEx has helped M elton make his global business possible. “ M y customers are passionate about big-game fishing. W hen they place an order, they don’t w ant to w ait for it,” said M elton. “ I have customers in Australia w ho’ve told me they get their orders from us faster than they can get orders from another part of Australia.” “ FedEx consistently answ ers M elton’s business demands by providing reliable service and competitive pricing. W ith customs-cleared, door-to-door deliveries to 215 countries, and a variety of time-definite services to meet every customer’s need, FedEx is helping M elton International Tackle build loyal relationships w ith the w orld’s most avid fishermen.

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    FedEx and HP invent a faster route from the factory floor to your front door. “ Every moment a computer sits on a w arehouse shelf, the less it is w orth. “ So FedEx and Hew lett-Packard created a supply chain solution that eliminates the shelf entirely, shipping HP’s industry-leading notebook PCs direct from manufacturing facilities in China to homes and businesses throughout North America in only tw o to three w orking days. “ FedEx International Priority DirectDistribution gives HP a clear advantage over many competitors, w ho commonly ship from Asian manufacturers to secondary assembly or distribution centers in the United States or Europe, delaying final delivery to customers. “ FedEx has helped us remove an entire step from our supply chain process,” explained Robert Gifford, vice president of HP w orldw ide logistics and program management. “ As a result, w e are not only able to respond faster to our customers’ needs, w e’ve been able to significantly reduce our inventory days and operating costs.” “ Throughout a five-year relationship in Asia, FedEx has responded quickly to the evolving needs of HP, including the migration of HP’s manufacturing partners from Taiw an to mainland China. “ To accommodate the shift, and to meet increasing demand from customers throughout China, FedEx Express vastly expanded its Shanghai operations, and recently created a new regional headquarters in the city. HP utilizes almost every offering in the FedEx portfolio of services. For example, HP counts on FedEx Freight to distribute original HP LaserJet toner cartridges. HPshopping.com turns to FedEx Home Delivery. And FedEx Trade Netw orks provides customs brokerage for HP around the w orld. HP has also chosen FedEx Kinko’s to operate 19 off-site document management locations for the company – plus one on-site facility just dow n the hall from the office of HP Chairman and CEO Carly Fiorina. 16

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    For a new breed of road warriors, the world is their office. “Vanessa Wendling’s office doesn’t have four walls. Instead, it has four wheels. And at least once a week, you can find it parked outside the FedEx Kinko’s Office and Print Center in Beverly Hills, California. “A medical pharmaceutical sales representative for Alcon Laboratories, Wendling is one of a vast and growing group of always-on-the-road mobile professionals who are changing the way business gets done in today’s world. “My success in my job is dependent upon my ability to be mobile and self-sufficient,” explained Wendling. “I’m in and out of doctors’ offices all day long, so I depend on FedEx Kinko’s to do the things I don’t have the time or resources to do myself.” “FedEx Kinko’s offers these mobile professionals the broadest range of business services in the industry, including one-stop copying and printing services, high-speed wired and wireless Internet access, videoconferencing, digital photo printing, signs and graphics, and computer usage. In addition, all FedEx Kinko’s U.S. locations assist customers with FedEx Express and FedEx Ground shipments. “We want mobile professionals to know that ‘our office is your office,’” said Gary M. Kusin, president and chief executive officer of FedEx Kinko’s. “We’re committed to providing them and their companies the tools they need to stay connected and succeed.” FedEx Kinko’s DocStore – a customizable online document service – also helps companies manage and distribute frequently printed documents with total security, storing them as digital files for on-demand printing by authorized employees. The service helps companies control print costs through reduced obsolescence and storage, and cuts document distribution times from weeks to hours.

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    Zappos.com w ins hearts by thinking out of the shoebox. Fans of Zappos.com love the online shoe store, show ering the dot-com success story w ith accolades ranging from “ thrilled” and “ aw esome” to “ I am so glad I found Zappos! ” How did the trendsetting retailer transform an ordinary shopping-mall experience into a Web-based phenomenon? Simple. Unparalleled selection. Satisfaction-driven service that includes free delivery and returns. And FedEx. By providing fast, money-back guaranteed delivery to each customer’s door, FedEx helps Zappos.com complete the loop in its quest to provide “ the best possible online shopping experience” and exceed the expectations of customers across the United States. It’s all part of w hat Zappos.com CEO Tony Hsieh calls the company’s “ Wow ” philosophy – to make customers say “ Wow ! ” w henever they interact w ith the company. This interaction begins on the company’s Web site and doesn’t end until its customers have their orders in-hand … and comfortably “ on-foot.” FedEx is also helping Zappos.com behind the scenes. Through a variety of customized FedEx automated solutions, the company has streamlined its shipping processes and reduced its costs, processing orders at “ dazzle-the-customer” speed. From desktop to doorstep, FedEx helps Zappos.com exceed the expectations of loyal customers w ho have helped more than double the company’s sales every year since it w as founded in 1999. Today, Zappos.com is expanding into new categories, including handbags. “ We don’t think of ourselves as a shoe retailer,” Hsieh says. “ We think of ourselves as a service company that happens to sell shoes.”

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    You don’t need X-ray vision to see a reliable supply chain partner. “ Building a reputation for reliability requires speed, innovation and service – three qualities that Siemens and FedEx have in common. A perfect example is the new digital radiography system from Siemens M edical Solutions, the AXIOM Aristos FX. “ The speed of digital imaging – available immediately, w ithout X-ray developing – nearly doubles the patient capacity of traditional equipment and greatly increases w orkflow efficiency. Results are transmitted electronically to physician view ing screens to support faster diagnosis. “ Through innovative use of technology, the AXIOM Aristos FX moves so patients don’t have to, and the state-of-the-art system emits less radiation. “ Better service revolves around a dedication to improved patient care, w ith Siemens equipment installed in thousands of medical facilities around the w orld. And FedEx provides the vital link w ith each customer. “ Customers rely on us for dependable systems and technology,” said Georg Krützfeldt, vice president of global process material logistics for Siemens M edical Solutions, a division of Siemens AG. “ We rely on FedEx to help us meet our service commitments and deliver critical parts to the right place at the right time.” “ By delivering parts for preventive maintenance, troubleshooting and the occasional repair, “ FedEx helps keep us up and running,” said Tom Karr, chief operating officer of Gw innett Health System. Tw o of the first five Aristos units in the United States are installed at Gw innett Outpatient Imaging Center in Law renceville, Georgia. “ Our business is all about taking care of the patient,” said Randy Hill (pictured at right), senior vice president of national service for Siemens M edical Solutions. “ M any patients have to take time off from w ork for these procedures. They may be anxious or in pain. W hen w e can serve them w ith fast, reliable technology, then w e’ve done our job.” 22

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    FedEx and ORBIS deliver the precious gift of sight. “ FedEx Express aircraft mechanic Valerie Suberg has w atched a mother – previously blinded by cataracts – see her baby for the first time. She looked on as tw o Ethiopian girls first saw their ow n reflections in a mirror. “ W ith the support of FedEx Express, Suberg recently concluded a tw o-year stint as a flight mechanic for the DC-10 Flying Eye Hospital of ORBIS International, a nonprofit, humanitarian organization dedicated to eliminating avoidable blindness in the developing w orld. “ This job is hard w ork. But being there w hen a blind child sees for the first time makes it all w orthw hile,” said Suberg w ho played an integral role in ORBIS’ mission, making sure all aircraft systems of the flying eye hospital and teaching facility operated flaw lessly, so ORBIS professionals and volunteer ophthalmic surgeons could treat and prevent blindness. “ Since 1982, FedEx has assisted ORBIS w ith more than 530 programs that have trained more than 63,000 ophthalmologists, biomedical engineers, nurses and other healthcare w orkers. In turn, these dedicated professionals provide care for an estimated 17.5 million blind and visually impaired people in 83 countries, including India, China, Ethiopia, Cuba, Syria, Bulgaria and Peru. “ In addition to providing aircraft inspection and maintenance, FedEx Express pilots join volunteers from another airline w ho fly the ORBIS aircraft on its missions. FedEx also provides free shipping of medical supplies and DC-10 replacement parts – many donated by the company – to support ORBIS’ w ork across the globe. “ FedEx employees amaze me,” said A.L. Ueltschi, chairman, ORBIS International Board of Directors. “ Across their pow erful w orldw ide netw ork, they extend to us their w hatever-it-takes attitude, innovative spirit and caring hearts to help us deliver the gift of sight. We couldn’t ask for more in a global sponsor.” In addition to support for ORBIS International, FedEx helps Heart to Heart International deliver food, medicine and emergency supplies to Vietnam, China, India and other developing nations. Among its many other relationships w ith charitable organizations, FedEx also provides financial support, complimentary shipping and storage of emergency supplies for the American Red Cross, helping to speed disaster response.

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    As China opens its doors, FedEx bids the w orld w elcome. “ FedEx has been a part of the China free-trade success story for 20 years, helping build the air transportation infrastructure needed to support China’s grow ing economic demands. “ Over that time, FedEx Express has grow n to become the largest international express carrier in the country, w ith service to more than 220 cities and plans to expand to 100 more during the next five years. “ W ith 11 flights every w eek through three major gatew ays – Beijing, Shanghai and Shenzhen – FedEx serves its customers w ith more flights into and out of China than any other U.S.-based cargo carrier. Plus, FedEx provides a money-back guarantee on its service to China. “ FedEx is benefiting enormously from the surge in China trade,” explained M ichael L. Ducker, executive vice president of FedEx Express. “ But w e’re also helping drive it. For its economic revolution to continue, China w ill need greater access to the global marketplace. That’s w hat FedEx provides.” “ Eddy Chan (pictured at right), FedEx Express China regional vice president and a 19-year FedEx veteran in the country, believes the company’s track record in China provides a major advantage in this continuing quest. “ We’ve developed a very good relationship w ith the Chinese government,” Chan said. “ We keep the lines of communication open to ensure w e are continuously balancing market demands w ith government regulations.” Thanks to a June 2004 agreement betw een the United States and China, U.S. cargo airlines w ill soon be granted 111 new w eekly flights into and out of China. W ith additional route authorities, FedEx Express hopes to initiate new flights connecting China to Europe, North and South America, and other parts of Asia.

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    Pm = e

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    Access know s no boundaries. It connects businesses and customers across time zones, borders, economies and cultures. It inspires the creation of new ideas, information, goods and services – many of w hich w e cannot envision today. One company provides more choice and more access for millions around the globe. FedEx.

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    M ESSAGE FROM THE CFO: In FY04, our great operating results created the headlines but • We once again reduced capital spending versus the prior our efforts to position FedEx for profitable future grow th w ere year – both in dollars and as a percent of revenue. In fact, the big story. You can read the details on the follow ing pages, w e’ve cut our capital-expenditures-to-revenue ratio in half w here w e’ve gone to great lengths to give our shareow ners since FY99. This capital discipline w ill result in low er ow ner- access to the opportunities and risks w e see through highly ship charges in coming years – specifically depreciation and transparent financial reporting and an extremely thorough lease expenses. analysis of our business. • There’s relief ahead on the pension expense front. We con- tributed $1.4 billion to our pension plans over the past tw o On strong demand for the entire portfolio of FedEx services, our fiscal years – much of it invested during the low points of the FedEx Express, FedEx Ground and FedEx Freight units all boost- market. Thanks to those contributions and asset returns of ed revenue. FedEx Kinko’s contributed $521 million in revenue almost 30 percent in our plan year ended in February, w e in its first full quarter as a FedEx company, and w as immedi- foresee a significant reduction in the grow th of pension ately accretive to earnings. As a result, FedEx Corporation expenses for FY05. w as able to grow revenue 10 percent to $24.7 billion and net income increased in spite of $435 million of one-time business And, for the second straight year, w e’ve rew arded shareow ners realignment costs. by increasing our dividend payment. We also are extremely pleased w ith our performance in key Finally, I w ant to emphasize the ongoing importance of strong areas including cash flow s, returns and margins. For the sec- corporate governance at FedEx and how it relates to our ond consecutive year w e earned returns w ell in excess of our Sarbanes-Oxley Section 404 (SOX 404) compliance efforts. cost of capital. FedEx has a long history of excellent internal controls, support- ed by a very thorough internal audit team, an active board of As outstanding as our financial results w ere, our list of accom- directors and more than 225 documented financial processes plishments in FY04 includes a number of additional items. and their related computer controls. To remain in front of this critical issue, w e expect to spend over $20 million and more • The voluntary early retirement and severance programs at than 60,000 hours in FY05 verifying that every step in our inter- FedEx Express made our largest operating company more nal controls processes comply w ith SOX 404. efficient and more profitable. Related expenses have been absorbed, and w hile the savings began during the second FedEx established a track record in FY04 that w e’re committed quarter of FY04, w e’ll see the full-year’s benefit in FY05. to build on. The year left us w ith not only great results but also • Kinko’s w as one of the most strategically important acquisi- great excitement about the future, and I encourage you to tions in our history. M ore than 1,200 convenient retail access read about both on the follow ing pages. points should attrac t signific antly more high-yielding packages into our netw ork. On a larger scale, FedEx Kinko’s redefines the future of the business services marketplace by creating a complete office on the road for mobile profes- sionals and other business customers. Nobody can match Alan B. Graf, Jr. our collection of services and solutions. Executive Vice President and Chief Financial Officer During During thethe year first w equarter adopted w ea announced new reporting a new structure reporting at FedEx structure to take at FedEx to• FedEx take advantage of existing Express Segment includes synergies FedEx andExpress further and growFedEx th opportunities. Trade advantage Through ofthis existing new structure, synergiesFedEx and further now hasgrow fourthcore opportunities. operating companies and Netw fourorks specialty companies. The CEOs of our specialty companies each Through report this to one reporting of our core structure, company the CEOs CEOs,ofcreating our specialty four reporting companiessegments: • FedEx Ground Segment includes FedEx Ground and FedEx Supply each report to one of our core company CEOs. As a result, w e now Chain Services have the follow ing four reporting segments: • FedEx Freight Segment includes FedEx Freight, FedEx Custom Critical and Caribbean Transportation Services • FedEx Kinko’s Segment includes FedEx Kinko’s 31

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    Financial Results 33 M anagement’s Discussion and Analysis 53 Consolidated Financial Statements 57 Notes to Consolidated Financial Statements 76 Report of Independent Registered Public Accounting Firm 77 Selected Financial Data 78 Board of Directors 79 Executive Officers and Senior M anagement 80 Corporate Information

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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL These companies form the core of our reportable segments. In 2004, w e changed the reporting and responsibility relationships The follow ing M anagement’s Discussion and Analysis of Results of our smaller business units so that they now report directly to a of Operations and Financial Condition (“ M D& A” ) describes the core segment. See Reportable Segments for further discussion. principal factors affecting the results of operations, liquidity, cap- ital resources and contractual cash obligations, as w ell as the The key factors that affect our operating results are as follow s: critical accounting policies and estimates, of FedEx Corporation • the overall customer demand for our various services; (also referred to as “ FedEx”). This discussion should be read in conjunction w ith the accompanying audited financial statements, • the volumes of transportation and business services provided w hich include additional information about our significant account- through our netw orks, primarily measured by our average daily ing polic ies, prac tic es and the transac tions that underlie our volume and shipment w eight; financial results. • the mix of services purchased by our customers; Our M D& A is c omprised of three major sec tions: Results of • the prices w e obtain for our services, primarily measured by Operations, Financial Condition and Critical Accounting Policies average price per shipment (yield); and Estimates. Results of Operations begins w ith an overview of consolidated 2004 results compared to 2003, and of 2003 results • our ability to manage our cost structure for capital expenditures c ompared to 2002. This sec tion inc ludes a disc ussion of key and operating expenses such as salaries and benefits, fuel and ac tions, suc h as our business realignment initiatives and the maintenance; and acquisition of FedEx Kinko’s, as w ell as a discussion of our out- • our ability to match operating costs to shifting volume levels. look for 2005. The overview is follow ed by a financial summary and narrative (inc luding a disc ussion of both historic al operating Except as otherw ise specified, references to years indicate our results and our outlook for 2005) for each of our four reportable fisc al year ended M ay 31, 2004 or ended M ay 31 of the year operating segments. We then provide an analysis of changes in referenced and comparisons are to the prior year. our balance sheet and cash flow s and discuss our financial com- mitments in the Financial Condition section. We conclude w ith a discussion of the critical accounting policies and estimates that w e believe are important to understanding the judgments and assumptions incorporated in our reported financial results. FedEx provides a broad portfolio of transportation, e-commerce and business servic es w ith c ompanies that operate indepen- dently and compete collectively under the respected FedEx brand. These operating companies are primarily represented by FedEx Express, the w orld’s largest express transportation c ompany; FedEx Ground, North America’s second largest provider of small- package ground delivery service; FedEx Freight, a leading U.S. provider of regional LTL freight servic es; and FedEx Kinko’s, a leading provider of document solutions and business services. 33

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    FEDEX CORPORATION RESULTS OF OPERATIONS CONSOLIDATED RESULTS The follow ing table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in mil- lions, except per share amounts) for the years ended M ay 31: $ Change Percent Change 2004 2003 2002 2004/2003 2003/2002 2004/2003 2003/2002 Revenues $24,710 $22,487 $20,607 2,223 1,880 10 9 Operating income 1,440 (1) 1,471 1,321 (31) 150 (2) 11 Operating margin 5.8% 6.5% 6.4% n/a n/a (70) bp 10 bp Net income $ 838 (1)(2) $ 830 $ 710 (3) 8 120 1 17 Diluted earnings per share $ 2.76 (1)(2) $ 2.74 $ 2.34(3) 0.02 0.40 1 17 (1) Includes $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs described below. See Note 4 to the accompanying audited financial statements. (2) Includes a $37 million, net of tax, or $0.12 per diluted share benefit related to a favorable ruling on a tax case and the reduction of our effective tax rate described below. See Note 11 to the accompanying audited financial statements. (3) Results for 2002 reflect our adoption of SFAS 142, “ Goodw ill and Other Intangible Assets.” We recognized an adjustment of $25 million ($15 million, net of tax, or $0.05 per diluted share) to reduce the carrying value of certain goodw ill to its implied fair value. See Note 3 to the accompanying audited financial statements. The follow ing table show s changes in revenues and operating income by reportable segment for 2004 compared to 2003, and 2003 compared to 2002 (in millions): $ Change Percent Change $ Change Percent Change Revenues Revenues Operating Income Operating Income 2004/2003 2003/2002 2004/2003 2003/2002 2004/2003 2003/2002 2004/2003 2003/2002 FedEx Express segment 1,030 1,029 6 7 (154) (1) (18) (20) (2) FedEx Ground segment 329 663 9 23 28 157 6 47 FedEx Freight segment 246 190 10 8 51 8 26 4 FedEx Kinko’s segment 521 n/a n/a n/a 39 n/a n/a n/a Other and Eliminations (2) 97 (2) n/a n/a 5 3 n/a n/a 2,223 1,880 10 9 (31) 150 (2) 11 (1) Includes $428 million of business realignment costs described below. (2) Includes the results of operations of FedEx Kinko’s from February 12, 2004 (date of acquisition) through February 29, 2004 (approximately $100 million of revenue and $6 million of operating income). Revenue grow th during 2004 w as attributable to increased vol- increased 11% as FedEx Ground significantly improved its oper- umes of FedEx Express International Priority (IP), FedEx Ground ating margin, w hich more than offset a decline in the operating and FedEx Freight shipments, as w ell as strong grow th of IP margin at FedEx Express. The sluggish economy, combined w ith yields at FedEx Express. Yield improvements at FedEx Ground and significant increases in pension and healthcare costs and higher FedEx Freight also contributed to revenue grow th. In addition, maintenance expenses, reduced profitability at FedEx Express in FedEx Kinko’s (acquired on February 12, 2004) added $621 million 2003 despite continued cost control efforts. of revenue during 2004. During 2003, revenue grow th w as due to Salaries and benefits expense increased 10% during 2004 due to the substantial grow th of our FedEx Ground business, increased higher inc entive c ompensation and pension c osts, w age rate international volumes at FedEx Express and higher revenues at increases and the acquisition of FedEx Kinko’s. Incentive com- FedEx Freight. Increased U.S. freight volumes at FedEx Express pensation increased approximately $240 million during 2004 due also contributed to consolidated revenue grow th in 2003, as w e to above-plan operating income, primarily at FedEx Express and benefited from a full tw elve months of revenue under the trans- FedEx Freight. Incentive compensation declined in 2003 based on portation agreement w ith the U.S. Postal Service (“ USPS” ), w hich below -plan performance at FedEx Express. Pension costs w ere commenced in late August 2001. approximately $115 million higher in 2004 (on top of an $80 million Operating income decreased 2% in 2004 as costs related to our inc rease in 2003), due princ ipally to low er disc ount rates and business realignment initiatives totaled $435 million (partially off- decreased returns on pension plan assets. Although not legally set by approximately $150 million of savings). See “ Business required, w e made $320 million in contributions to our qualified Realignment Costs” for a discussion of these costs and related U.S. pension plans in 2004 c ompared to total c ontributions savings. In total, operating expenses, other than business realign- exceeding $1 billion in 2003. Our 2003 contributions w ere made to ment costs, increased less than the increase in revenue during ensure our qualified U.S. pension plan assets exceeded the related 2004, despite significant increases in incentive compensation, ac c umulated benefit obligations at our February 28, 2003 plan pension and maintenance costs. During 2003, operating income measurement date. 34

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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS Other Income and Expense and Income Taxes Costs w ere also incurred in 2004 for the elimination of certain Net interest expense decreased slightly in 2004 as the effects of management positions at FedEx Express and other business the tax c ase desc ribed below offset inc reases to interest units based on the staff reductions from the voluntary programs expense. These increases w ere due to the amendment of aircraft and other cost reduction initiatives. Costs for the benefits pro- operating leases and the adoption of Financ ial Ac c ounting vided under the voluntary programs w ere rec ognized in the Standards Board Interpretation No. (“FIN”) 46, “ Consolidation of period that eligible employees accepted the offer. Other costs Variable Interest Entities, an Interpretation of ARB No. 51,” w hich associated w ith business realignment activities w ere recognized together resulted in eight M D11 aircraft being recorded as fixed in the period incurred. assets and the related obligations being recorded as long-term We recognized $435 million of business realignment costs during debt. Interest expense also increased due to additional borrow - 2004. Savings of approximately $150 million w ere realized, reflected ings related to the FedEx Kinko’s acquisition. Net interest expense primarily in low er salaries and benefits costs. The components of w as 15% low er in 2003 due to reduced borrow ings. our business realignment costs and changes in the related accru- In August 2003, w e received a favorable ruling from the U.S. als w ere as follow s for the year ended M ay 31, 2004 (in millions): District Court in M emphis over the tax treatment of jet engine Voluntary Voluntary maintenance costs. The Court held that these costs w ere ordinary Retirement Severance Other (1) Total and necessary business expenses and properly deductible. As a Beginning accrual balances $ – $ – $ – $ – result of this decision, w e recognized a one-time benefit in 2004 Charged to expense 202 158 75 435 of $26 million, net of tax, or $0.08 per diluted share, primarily Cash paid (8) (152) (31) (191) related to the reduction of accruals related to this matter and the Amounts charged to other recognition of interest earned on amounts previously paid to the assets/liabilities (194) – (22) (216) IRS. Future periods are not expected to be materially affected by Ending accrual balances $ – $ 6 $ 22 $ 28 the resolution of this matter. Although the IRS has appealed this (1) Other includes costs for management severance agreements, w hich are payable over ruling, w e believe the District Court’s ruling w ill be upheld (also, future periods, including compensation related to the modification of previously granted see Note 11 to the accompanying audited financial statements). stock options and incremental pension and healthcare benefits. Other also includes profes- sional fees directly associated w ith the business realignment initiatives and relocation costs. Our effective tax rate w as 36.5% in 2004, 38.0% in 2003 and 37.5% in 2002. The low er effective rate in 2004 w as primarily attributable Total cash payments under these programs are expected to be to the favorable dec ision in the tax c ase disc ussed above, approximately $220 million. Amounts charged to other assets/ stronger than anticipated international results and the results of liabilities relate primarily to inc remental pension and health- tax audits during 2004. Our stronger than anticipated international care benefits. results, along w ith other factors, increased our ability to credit Over the past few years, w e have taken many steps tow ard bring- inc ome taxes paid to foreign governments on foreign inc ome ing our expense grow th in line w ith revenue grow th, particularly against U.S. inc ome taxes paid on the same inc ome, thereby at FedEx Express, w hile maintaining our industry-leading service mitigating our exposure to double taxation. The 38.0% effective levels. We have significantly decreased capital expenditures by tax rate in 2003 w as higher than the 2002 rate primarily due to reducing aircraft orders, consolidating facilities and discontinu- low er state taxes in 2002. The effec tive tax rate exc eeds the ing low -value programs. These business realignment initiatives statutory U.S. federal tax rate primarily because of state income are another step in this ongoing process of reducing our cost taxes. For 2005, w e expect the effective tax rate to be approxi- struc ture in order to inc rease our c ompetitiveness, meet the mately 38.0%. The actual rate, how ever, w ill depend on a number future needs of our employees and provide the expected finan- of factors, including the amount and source of operating income. cial returns for our shareholders. Business Realignment Costs FedEx Kinko’s Acquisition During 2004, voluntary early retirement incentives w ith enhanced On February 12, 2004, w e ac quired FedEx Kinko’s for approxi- pension and postretirement healthcare benefits w ere offered to mately $2.4 billion in cash. We also assumed $39 million of capital certain groups of employees at FedEx Express w ho w ere age 50 lease obligations. FedEx Kinko’s is a leading provider of docu- or older. Voluntary cash severance incentives w ere also offered ment solutions and business services. Its netw ork of w orldw ide to eligible employees at FedEx Express. These programs, w hich locations offers access to color printing, finishing and presenta- commenced August 1, 2003 and expired during the second quar- tion services, Internet access, videoconferencing, outsourcing, ter, w ere limited to eligible U.S. salaried staff employees and managed services, Web-based printing and document manage- managers. Approximately 3,600 employees ac c epted offers ment solutions. under these programs. The response to these voluntary pro- grams substantially exceeded our expectations. Consequently, The transaction w as accounted for as a purchase. Accordingly, replac ement management and staff w ere required and some the assets and liabilities of FedEx Kinko’s w ere recorded at their employee departure dates w ere deferred (up to M ay 31, 2004). fair values and the exc ess of the purc hase pric e over the fair 35

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    FEDEX CORPORATION value of assets ac quired w as rec orded as goodw ill. A signifi- Airline Stabilization Compensation cant amount of the purchase price w as recorded as goodw ill, Operations in 2002 w ere signific antly affec ted by the terrorist as the ac quisition of FedEx Kinko’s expands our portfolio of attacks on September 11, 2001. During 2002, w e recognized a total business servic es, w hile providing a substantially enhanc ed of $119 million of c ompensation under the Air Transportation capability to provide package-shipping services to small- and Safety and System Stabilization Act (the “ Act” ), of w hich $101 medium-sized business customers through FedEx Kinko’s array million had been received as of M ay 31, 2004. The amounts rec- of retail store locations. ognized w ere for our estimate of losses w e incurred as a result of the mandatory grounding of our aircraft and for incremental losses The assets and liabilities related to FedEx Kinko’s have been inc urred through Dec ember 31, 2001. All amounts rec ognized included in the accompanying audited balance sheet based on a w ere reflec ted as reduc tion of operating expense under the purchase price allocation. The allocation of the purchase price caption “ Airline stabilization compensation.” to the fair value of the assets acquired, liabilities assumed and goodw ill, as w ell as the assignment of goodw ill to our reportable In the fourth quarter of 2003, the Department of Transportation segments, w as based primarily on internal estimates of c ash (“ DOT”) asserted that w e w ere overpaid by $31.6 million and has flow s and independent appraisals. We used an independent demanded repayment. We have filed requests for administrative appraisal firm to determine the fair value of certain assets and and judicial review. We received an opinion from the District of liabilities, primarily property and equipment and acquired intan- Columbia U.S. Court of Appeals stating that most of the determi- gible assets, including the Kinko’s trade name, customer-related nations that w e requested w ere not yet ripe for decision and the intangibles, technology assets and contract-based intangibles. Court w ill not rule prior to final determination by the DOT and W hile the purchase price allocation is substantially complete and exhaustion of administrative remedies. w e do not expect any material adjustments, w e may make adjust- Pursuant to the Federal Aviation Administration reauthorization ments to the purc hase pric e alloc ation if new data bec omes enacted during the third quarter of 2004, the General Accounting available. See Notes 2 and 3 to the accompanying audited finan- Office submitted a report to Congress on June 4, 2004, on the cri- c ial statements for further disc ussion of the purc hase pric e teria and proc edures used by the Sec retary of Transportation allocation and goodw ill and intangible assets. under the Ac t. Issuanc e of the report frees the DOT to make The results of operations of FedEx Kinko’s have been included in a final determination on our c laim and also reinforc es the our c onsolidated financ ial statements from February 12, 2004. Congressional directive to the DOT to refer any remaining dis- During 2004, FedEx Kinko’s contributed $621 million of revenue puted c laims to an administrative law judge upon an affec ted and $0.06 per diluted share of earnings, w hich includes approxi- claimant’s request. mately $15 million of interest and financing costs and $3 million We agreed to mediation w ith the DOT, but it did not result in a of rebranding costs. Note 2 to the accompanying audited finan- resolution of the dispute. We w ill continue to pursue our claim c ial statements inc ludes the unaudited pro forma results of for compensation under the Act. operations of FedEx as if the ac quisition had oc c urred as of the beginning of 2003. The ac c ounting literature establishes We believe that w e have complied w ith all aspects of the Act, firm guidelines around how this pro forma information is pre- that it is probable w e w ill ultimately collect the remaining $18 mil- sented, w hich precludes the assumption of business synergies. lion receivable and that w e w ill not be required to pay any portion Therefore, this unaudited pro forma information is not intended of the DOT’s $31.6 million demand. We cannot be assured of the to represent, nor do w e believe it is indicative of the consolidated ultimate outc ome; how ever, it is reasonably possible that a results of operations of FedEx that w ould have been reported had material reduction to the $119 million of compensation w e have the ac quisition been c ompleted as of the beginning of 2003. previously recognized under the Act could occur. Based on the Furthermore, this pro forma information is not representative of DOT’s assertion, the range for potential loss on this matter is zero the future consolidated results of operations of FedEx. to $49.6 million. We paid a portion of the purc hase pric e from available c ash Outlook balances. To finance the remainder of the purchase price, w e During 2005 (particularly during the first half), w e expect the U.S. entered into a six-month c redit fac ility for $2 billion. During economy to sustain the grow th evident in the second half of 2004. February 2004, w e issued commercial paper backed by unused This grow th is supported by strong corporate earnings, higher commitments under this facility. In M arch 2004, w e replaced the c onsumer c onfidenc e (led by both inc reasing inc ome and an c ommerc ial paper w ith the issuanc e of $1.6 billion of senior improving job market) and public sector improvement. The macro unsecured notes in three maturity tranches: one, three and five economic environment during 2004 w as particularly challenging years at $600 million, $500 million and $500 million, respectively. for our business, as the manufacturing and w holesale sectors We c anc eled the six-month c redit fac ility in M arc h 2004. See of the ec onomy lagged behind gross domestic produc t, and Notes 2 and 6 of the accompanying audited financial statements year-over-year performance in the economy lagged sequential for further discussion. quarter-to-quarter grow th. We expec t the c urrent ec onomic 36

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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS expansion to broaden into the manufacturing and w holesale sec- The pilots of FedEx Express, w hich represent a small number of tors during 2005 as supported by the recent strengthening of FedEx Express total employees, are employed under a collective durable goods sales, indicating the inventory restocking cycle has bargaining agreement. Negotiations w ith the pilots’ union began in started. This is further supported by the positive year-over-year M arch 2004, as the current agreement became amendable on M ay volume trends across all our transportation companies in the 31, 2004. We w ill continue to operate under our current agreement fourth quarter of 2004. We also expect a strong global economy in w hile w e negotiate w ith our pilots. Our financial results for 2005 2005, evidenced by recent broad-based grow th across multiple may be affected by the results of these negotiations. How ever, w e sectors and regions, particularly in Asia. cannot estimate the financial impact, if any, the results of these negotiations may have on our results of operations. Our outlook anticipates revenue and earnings grow th in all our reportable segments for 2005, as w e continue to leverage our Increased security requirements for air cargo carriers have been “compete collectively” philosophy. Our optimism stems from put in place and have not had a material impact on our operating increasing customer demand for services across our operating results for the periods presented. Although no specific proposals companies, a low er cost structure at FedEx Express, as w ell as have been issued, further measures may be forthc oming. The improving w orldw ide economic conditions. During 2005, w e impact on our results of operations of any such additional mea- expect continued strong grow th of international volumes and sures is unknow n. yields at FedEx Express. We expect only slight U.S. domestic vol- Future results w ill depend upon a number of factors, including ume grow th at FedEx Express, w ith higher U.S. domestic yields to U.S. and international economic conditions, the impact from any account for a large portion of revenue grow th at FedEx Express. terrorist activities or international conflicts, our ability to match We anticipate improved volumes and yields at FedEx Ground and our cost structure and capacity w ith shifting volume levels, our FedEx Freight, as FedEx Ground continues its multi-year capacity ability to effectively leverage our new service and grow th initia- expansion plan and FedEx Freight continues to grow its regional tives and our ability to effectively operate, integrate and leverage and interregional business and enhance its portfolio of services. the FedEx Kinko’s business. In addition, adjustments to our fuel FedEx Kinko’s revenue is projected to be approximately $2.1 billion, surc harges at FedEx Express lag c hanges in ac tual jet fuel w hich is significantly higher than the partial year revenue included prices paid. Therefore, our operating income could be materially in our 2004 results. FedEx Kinko’s w ill focus on continuing to gen- affected should the spot price of jet fuel suddenly change by a erate revenue grow th by aggressively grow ing current lines of significant amount or should w e be unable to further increase our business and by leveraging its new relationship w ith FedEx. fuel surcharges in response to rising fuel prices due to competi- We anticipate significant year-over-year grow th of both operating tive pressures. See “ Forw ard-Looking Statements” for a more income and margins. These measures w ill be positively impacted c omplete disc ussion of potential risks and unc ertainties that by revenue grow th and the full-year savings from our business could materially affect our future performance. realignment initiatives (w hich are expected to be approximately Seasonality of Business $80 million to $90 million higher than 2004 savings) discussed Our express pac kage and freight businesses are seasonal in above. Over the past several years w e have experienced signifi- nature. Historically, the U.S. express package business experi- cant year-over-year increases in pension cost. For 2005, w e expect ences an increase in volumes in late November and December. a modest $30 million increase in pension cost, as 2004 actual asset International business, partic ularly in the Asia to U.S. market, returns have substantially improved the funded status of our pen- peaks in October and November due to U.S. holiday sales. Our sion plans in spite of a continued decline in the discount rate. first and third fiscal quarters, because they are summer vacation Also, incentive compensation programs w ere reinstated to more and post w inter-holiday seasons, have historic ally exhibited normalized levels in 2004, after several years of declines. Our man- low er volumes relative to other periods. agement teams continue to examine additional cost reduction and operational productivity opportunities as w e focus on optimizing The transportation and business services industries are affected our netw orks, improving our service offerings, enhancing the cus- direc tly by the state of the overall domestic and international tomer experience and positioning FedEx to increase cash flow and economies. Seasonal fluctuations affect volumes, revenues and financial returns by improving our operating margin. earnings. Normally, the fall of each year is the busiest shipping period for FedEx Ground, w hile late December, January, June and During 2005, w e expec t to inc ur approximately $20 million of July of each year are the slow est periods. For FedEx Freight, the expenses related to the FedEx Kinko’s rebranding. In addition, w e spring and fall of each year are the busiest periods and the latter plan to open approximately 70 new FedEx Kinko’s loc ations, part of December, January and February of each year are the including many internationally. Despite these costs, w e expect slow est periods. Shipment levels, operating costs and earnings FedEx Kinko’s to c ontribute to earnings grow th in 2005 as w e for each of our transportation companies can also be adversely move quickly to expand our service offerings at its U.S. locations. affected by inclement w eather. See “ FedEx Kinko’s Acquisition” and “ Reportable Segments” for additional discussion. 37

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    FEDEX CORPORATION NEW ACCOUNTING PRONOUNCEM ENTS FEDEX EXPRESS SEGM ENT No new accounting pronouncements had a material effect on our The follow ing table compares revenues, operating expenses and financial position, results of operations or cash flow s during 2004. operating income and margin (dollars in millions) and selected statistic s (in thousands, exc ept yield amounts) for the years REPORTABLE SEGM ENTS ended M ay 31: FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s Percent Change 2004/ 2003/ form the core of our reportable segments. In 2004, w e changed 2004 2003 2002 2003 2002 the reporting and responsibility relationships of our smaller Revenues: business units so they now report direc tly to a c ore segment. Package: Prior year amounts have been rec lassified to c onform to the U.S. overnight box $ 5,558 $ 5,432 $ 5,338 2 2 new segment presentation. Our reportable segments include the U.S. overnight follow ing businesses: envelope 1,700 1,715 1,755 (1) (2) FedEx Express Segment FedEx Express (express transportation) U.S. deferred 2,592 2,510 2,383 3 5 FedEx Trade Netw orks Total U.S. domestic (global trade services) package revenue 9,850 9,657 9,476 2 2 International FedEx Ground Segment FedEx Ground (small-package Priority (IP) 5,131 4,367 3,834 17 14 ground delivery) Total package FedEx Supply Chain Services revenue 14,981 14,024 13,310 7 5 (contract logistics) Freight: U.S. 1,609 1,564 1,273 3 23 FedEx Freight Segment FedEx Freight (regional LTL freight) International 393 400 384 (2) 4 FedEx Custom Critical Total freight (surface-expedited transportation) revenue 2,002 1,964 1,657 2 19 Caribbean Transportation Services Other (1) 514 479 471 7 2 (airfreight forw arding) Total revenues 17,497 16,467 15,438 6 7 FedEx Kinko’s Segment FedEx Kinko’s (document solutions Operating expenses: and business services) Salaries and employee benefits 7,403 7,001 6,565 6 7 FedEx Services provides customer-facing sales, marketing and Purchased information technology support, primarily for FedEx Express and transportation 694 609 564 14 8 FedEx Ground. The costs for these activities are allocated based Rentals and on metrics such as relative revenues and estimated services pro- landing fees 1,531 1,557 1,531 (2) 2 vided. These allocations materially approximate the cost of Depreciation and providing these functions. The line item “ Intercompany charges” amortization 810 818 819 (1) – on the accompanying financial summaries of our reportable seg- Fuel 1,343 1,231 1,009 9 22 ments includes the allocations from FedEx Services to FedEx M aintenance Express, FedEx Ground and FedEx Freight, allocations for services and repairs 1,193 1,087 983 10 11 provided betw een operating companies, and certain other costs Airline stabilization such as corporate management fees related to services received compensation – – (119) n/a n/a for general corporate oversight, including executive officers and Business realignment certain legal and finance functions. M anagement evaluates seg- costs 428 – – n/a n/a ment financial performance based on operating income. Intercompany charges 1,442 1,328 1,331 9 – Other 2,024 2,053 1,954 (1) 5 Total operating expenses 16,868 15,684 14,637 8 7 Operating income $ 629 $ 783 $ 801 (20) (2) Operating margin 3.6% 4.8% 5.2% 38

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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS Percent Change surcharge increases, became effective January 5, 2004. Freight 2004/ 2003/ 2004 2003 2002 2003 2002 revenue increased in 2004 due to increased yields related to ser- Package Statistics (2) vice mix, despite low er volumes. Average daily package volume (ADV): FedEx Express segment total revenues increased 7% in 2003, U.S. overnight box 1,179 1,176 1,170 – 1 largely due to increased IP and U.S. freight revenues. Year-over- U.S. overnight year revenue comparisons reflect the impact in 2002 of the envelope 667 679 699 (2) (3) terrorist attacks on September 11, 2001, w hich adversely affected U.S. deferred 925 897 868 3 3 both U.S. outbound international shipments and U.S. domestic Total U.S. shipments, and the economic decline that began in calendar 2001. domestic ADV 2,771 2,752 2,737 1 1 IP volume grow th occurred predominantly in Asia and Europe, IP 396 369 340 7 9 w hich experienced average daily volume grow th rates of 21% and Total ADV 3,167 3,121 3,077 1 1 11%, respectively, during 2003. IP yield improvements during 2003 Revenue per package (yield): w ere due to favorable exchange rate differences, increased fuel U.S. overnight box $ 18.49 $ 18.18 $17.90 2 2 surcharge revenue and grow th in higher-yielding lanes. U.S. overnight envelope 10.00 9.95 9.84 1 1 U.S. domestic pac kage revenue inc reased 2% in 2003 due to U.S. deferred 10.99 11.02 10.77 – 2 higher yield and volumes in the U.S. deferred and overnight box U.S. domestic categories. The increase in U.S. domestic package yield during composite 13.94 13.82 13.58 1 2 2003 w as due to higher fuel surcharge revenue and average list IP 50.75 46.59 44.16 9 6 pric e inc reases. Higher U.S. freight revenues from inc reased Composite average daily pounds during 2003 also affected year-over-year package yield 18.55 17.69 16.96 5 4 revenue comparisons, as w e benefited from a full tw elve months of operations and higher shipping levels under our transportation Freight Statistics (2) contract w ith the USPS, w hich began in August 2001. Average daily freight pounds: Fuel surcharge revenue w as higher in 2004 and 2003 primarily U.S. 8,519 8,969 7,736 (5) 16 due to higher jet fuel pric es and the introduc tion of c ertain International 2,093 2,174 2,082 (4) 4 international dynamic fuel surcharges in September 2002. Our Total average daily dynamic fuel surcharges are based on the spot price for jet fuel. freight pounds 10,612 11,143 9,818 (5) 13 During 2003, fuel surcharge revenue w as also higher because our Revenue per pound (yield): dynamic index for determining our U.S. domestic fuel surcharge U.S. $ 0.74 $ 0.69 $ 0.65 7 6 w as not implemented until the second quarter of 2002. Using this International 0.74 0.72 0.72 3 – index, the U.S. domestic fuel surcharge ranged betw een 3.0% Composite and 6.5% during 2004, 2.0% and 5.5% during 2003 and betw een freight yield 0.74 0.69 0.66 7 5 0% and 3% from November 2001 through M ay 2002. International (1) Other includes FedEx Trade Netw orks. fuel surcharges ranged betw een 2% and 6.5% during 2004 and (2) Package and freight statistics include only the operations of FedEx Express. w ere as high as 6% during 2003. FedEx Express Segment Revenues FedEx Express Segment Operating Income FedEx Express segment total revenues inc reased 6% in 2004, During 2004, operating income decreased 20% due to business principally due to higher IP revenues in Asia, Europe and U.S. out- realignment costs totaling $428 million (partially offset by approx- bound. IP revenues inc reased signific antly on volume grow th imately $150 million of savings). Higher incentive compensation (7%) and higher yield (9%). Asia experienced strong average daily and pension costs and base salary increases, as w ell as higher volume grow th (led by China w ith volume grow th of over 50%), maintenance expenses, w ere offset by revenue grow th and ongo- w hile outbound shipments from Europe, the United States and ing cost control efforts. In addition, 2004 benefited from one Latin America continued to improve. The increase in IP yield w as additional operating day. During 2003, the 2% decrease in operat- largely attributable to Europe. The yield increase w as primarily ing income and the decline in operating margin at FedEx Express due to higher average w eight per package, favorable exchange w ere attributable to increased employee benefits costs, higher rate differences and higher fuel surcharge revenue. maintenance expenses and, to a lesser extent, the net impact of higher fuel costs in an economic environment of sluggish U.S. U.S. domestic package revenue increased 2% in 2004 as both vol- domestic average daily package volumes. Contributing to the umes and yields grew slightly. For U.S. domestic composite yield, decrease in operating income w as one few er operating day. a small decline in average rate per pound w as offset by increases Operating results during 2003 w ere also impacted by unusually in average w eight per package and fuel surcharge revenue. For inclement w eather during the w inter and spring, w hich decreased U.S. domestic shipments and U.S. outbound international ship- business shipping, reduced operational efficiency and increased ments, an average list price increase of 2.5%, along w ith certain certain operating costs, such as for snow removal and de-icing. 39

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    FEDEX CORPORATION Salaries and benefits w ere higher during 2004 due to higher incen- FedEx Express Segment Outlook tive compensation and pension costs and w age rate increases. We anticipate revenue grow th at FedEx Express during 2005, in This increase w as partially offset by savings from the business both the domestic and international markets. Revenue increases realignment initiatives. The 2003 increase w as due to w age rate w ill be led by IP, w here w e expect volume and yield grow th, par- increases and higher pension and healthcare costs. In addition, ticularly in Asia, U.S. outbound and Europe. We expect only slight higher salaries and benefits w ere partially the result of cost U.S. domestic volume grow th at FedEx Express, w ith higher U.S. increases related to the USPS contract. Incentive compensation domestic yields to account for a large portion of revenue grow th provisions declined in 2003 based on below -plan performance. at FedEx Express. Purchased transportation costs increased in 2004 and 2003 as IP We expect significant operating margin improvement at FedEx volume grow th led to an increase in contract pickup and delivery Express during 2005, led by the full-year salaries and benefits services. Higher maintenance costs in both 2004 and 2003 w ere savings of our 2004 business realignment initiatives. These cost primarily due to the timing of sc heduled airc raft maintenanc e management actions and improved volumes, along w ith a sharp events, higher utilization of airc raft related to USPS volumes focus on productivity, are expected to produce improved opera- and a higher average age of c ertain types of our airc raft. tional efficiency. In addition, w e expect additional improvement Interc ompany c harges inc reased during 2004 due to higher due to IP volume grow th w ith solid inc remental margins, incentive compensation, healthcare and pension costs and base increased U.S. domestic yields and volumes aided by the FedEx salary increases at FedEx Services. Kinko’s retail presence and the impact of reduced capital spend- ing in prior years. W hile capital expenditures at FedEx Express Fuel costs w ere higher in 2004 due to a 10% increase in the aver- are expected to be higher than 2004 due to planned aircraft pur- age price per gallon of aircraft fuel, as fuel consumption w as flat. chases to support IP volume grow th, they are expected to remain How ever, fuel surcharge revenue more than offset higher jet fuel below historical levels. prices primarily due to the introduction of certain international dynamic fuel surcharges in September 2002. Fuel consumption FEDEX GROUND SEGM ENT w as higher in 2003, primarily due to an increase in aircraft usage The follow ing table compares revenues, operating expenses and as a result of incremental U.S. freight pounds transported under operating income and margin (dollars in millions) and selected the USPS agreement and IP volume grow th. Fuel costs w ere also package statistics (in thousands, except yield amounts) for the higher in 2003 due to a 16% increase in the average price per years ended M ay 31: gallon of airc raft fuel. Higher net fuel c osts at FedEx Express Percent Change negatively affected operating income during 2003, as fuel sur- 2004/ 2003/ 2004 2003 2002 2003 2002 charge revenue increases w ere not sufficient to offset higher jet fuel prices. Revenues $ 3,910 $ 3,581 $ 2,918 9 23 Operating expenses: Rentals and landing fees decreased in 2004 due to the amend- Salaries and ment of operating leases for six M D11 aircraft that resulted in employee benefits 740 709 623 4 14 these aircraft being recorded as fixed assets under capital lease. Purchased transportation 1,465 1,327 1,067 10 24 In addition, as discussed in Note 16 to the accompanying audited Rentals 98 88 85 11 4 financial statements, tw o additional M D11s w ere recorded as Depreciation and fixed assets at September 1, 2003 as a result of the adoption of amortization 154 155 136 (1) 14 FIN 46. Depreciation and amortization expense declined slightly Fuel 16 11 5 45 120 due to dec reases in c apital spending, despite the additional M aintenance and repairs 95 89 76 7 17 depreciation from the eight M D11 aircraft added to fixed assets. Business realignment During 2003, other operating expenses inc reased at FedEx costs 1 – – n/a n/a Express as reimbursements in 2002 from the USPS for netw ork Intercompany charges 432 346 256 25 35 expansion c osts w ere reflec ted as c redits in other operating Other 387 362 333 7 9 expenses. These reimbursements, how ever, had no effec t on Total operating operating inc ome, as they represented the rec overy of inc re- expenses 3,388 3,087 2,581 10 20 mental costs incurred. Partially offsetting operating costs during Operating income $ 522 $ 494 $ 337 6 47 2003 w as a gain from the insuranc e settlement on an airc raft Operating margin 13.4% 13.8% 11.5% destroyed in an accident in July 2002 that resulted in a net $8 Average daily million favorable impact on operating income. During 2002, other package volume (1) 2,285 2,168 1,755 5 24 operating expenses inc luded $27 million from the favorable Revenue per package resolution of certain state tax matters. (yield) (1) $ 6.48 $ 6.25 $ 6.11 4 2 (1) Package statistics include only the operations of FedEx Ground. 40

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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS FedEx Ground Segment Revenues Operating margins improved in 2003 as FedEx Ground realized Revenues increased during 2004 due to higher volumes and yield substantial improvements in pickup and delivery and linehaul improvement, led by increased usage of our home delivery ser- productivity. Similar to 2004, intercompany charges increased due vice. Average daily volume continued its sequential grow th in the to the utilization of a larger portion of allocated resources from fourth quarter, w ith a 12% increase over the fourth quarter of 2003, FedEx Services. Salaries and employee benefits increased in 2003 up from 1%, 3% and 6% grow th in the first, second and third quar- due to higher pension costs and increases in staffing to support ters, respectively. The low er average daily volume increase for volume grow th. Operating results during 2003 w ere also impacted 2004 w as due to a difficult year-over-year comparison, as first by inclement w eather during the w inter and spring, w hich w as quarter 2003 volume included an estimated 140,000 to 150,000 daily more severe than in previous years. packages as a result of the threat of a UPS w ork stoppage. In addi- The inc rease in operating inc ome in both 2004 and 2003 w as tion, 2004 benefited from tw o additional operating days. The FedEx also attributable to improved home delivery service results. In Ground segment realized 23% revenue grow th in 2003, despite one September 2002, FedEx Ground c ompleted the build-out of its less operating day, due to increased volumes in our business-to- national home delivery netw ork, enabling it to reach nearly 100% business shipments and continued grow th of our home delivery of U.S. residences, w ith evening, w eekend and day- and time- service. During 2003, our home delivery service added facilities to specific delivery options, all backed by a money-back guarantee. reach nearly 100% coverage of the U.S. population. Our home delivery service became profitable during 2003. This Yield at FedEx Ground increased in 2004 primarily due to general service had an operating loss of $32 million during 2002. rate increases and an increase in extra services revenue, par- FedEx Ground Segment Outlook tially offset by higher customer discounts and the elimination of We expect FedEx Ground to return to double-digit revenue grow th the fuel surcharge in January. An average list price increase of in 2005, led by increased home delivery and next-business day 1.9% on FedEx Ground servic es bec ame effec tive J anuary 5, package volume and modest yield improvement. Average daily 2004. On that date, the fuel surcharge for all FedEx Ground ship- volume is expec ted to improve on its 2004 grow th of 5%. ments w as discontinued. In 2003, year-over-year yield increases Antic ipated yield improvements from the average list pric e w ere due to an average list pric e inc rease of 3.9%, w hic h increase and extra services revenue w ill be partially offset by the became effective January 6, 2003. Partially offsetting the effect impact from the elimination of FedEx Ground’s fuel surcharge in of the price increase w ere higher levels of discounts and low er January 2004. FedEx Ground w ill also continue to place emphasis average w eight per package. on improving on-time delivery, productivity and safety. In the third quarter of 2002, FedEx Ground implemented a dynamic During 2005, w e expect continued grow th in capital spending at fuel surcharge, based on the spot price for on-highw ay diesel fuel. FedEx Ground as w e c ontinue to foc us on netw ork c apac ity Before its elimination in January 2004, this surcharge ranged expansion. As a result of losses at FedEx Supply Chain Services, betw een 1.25% and 1.50% during 2004, betw een 0.75% and 2.00% higher facility expenses due to expansion and slow er yield grow th during 2003 and betw een 0.50% and 0.75% from February through primarily due to the elimination of FedEx Ground’s fuel surcharge, M ay 2002. w e expect the 2005 operating margin w ill be comparable to 2004. FedEx Ground Segment Operating Income Operating income increased in 2004 due to volume grow th, yield improvements and inc reased produc tivity. These gains w ere partially offset by higher interc ompany c harges, inc reased healthcare and pension costs and expenses related to terminal expansions and relocations. FedEx Ground utilized a larger por- tion of allocated sales, marketing, information technology and customer support resources. The cost of providing these services increased due to higher incentive compensation, healthcare and pension c osts and base salary inc reases at FedEx Servic es. Operating margin for the segment w as also negatively affected by operating losses at FedEx Supply Chain Services. 41

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    FEDEX CORPORATION FEDEX FREIGHT SEGM ENT due to the grow th of our interregional freight service. During 2003, The follow ing table show s revenues, operating expenses and operating income also increased due to LTL revenue grow th and operating income and margin (dollars in millions) and selected cost management. Low er depreciation and amortization during statistics for the years ended M ay 31: 2003 reflects increased gains from the sale of operating assets in Percent Change the ordinary course of business. 2004/ 2003/ 2004 2003 2002 2003 2002 Operating margin improved more than 100 basis points in 2004 Revenues $2,689 $2,443 $2,253 10 8 on strong revenue grow th. Low er operating margins in 2003 Operating expenses: reflect higher maintenance and repairs expenses, w hich include Salaries and $8 million of incremental expenses associated w ith rebranding employee benefits 1,427 1,303 1,218 10 7 our tw o regional LTL carriers under the common name “ FedEx Purchased transportation 254 224 197 13 14 Freight.” The rebranding project began in the fourth quarter of Rentals and landing fees 100 105 101 (5) 4 2002 and is expected to be complete in 2005. Through the end of Depreciation and 2004, rebranding expenses totaled $31 million of the anticipated amortization 92 88 91 5 (3) total projec t c ost of $41 million. These c osts, w hic h are being Fuel 122 107 87 14 23 expensed as incurred, consist primarily of incremental external M aintenance costs for rebranding tractors and trailers. and repairs 116 115 91 1 26 Intercompany charges 21 17 13 24 31 FedEx Freight Segment Outlook Other 313 291 270 8 8 We expect revenue to continue to grow in 2005, due to both LTL Total operating yield improvement and LTL daily shipment grow th. Continued expenses 2,445 2,250 2,068 9 9 market share grow th, a general rate increase and a relatively sta- Operating income $ 244 $ 193 $ 185 26 4 ble industry-pricing environment are expected to contribute to Operating margin 9.1% 7.9% 8.2% LTL yield improvement. We implemented a general rate increase Average daily of 5.9%, effective June 14, 2004. Our no-fee money-back guaran- LTL shipments tee, implemented in September 2003, c ontinues to be a differ- (in thousands) 58 56 56 4 – entiator in the market, generating additional business w ith new Weight per LTL and existing customers. Continued consolidation among carriers shipment (lbs) 1,127 1,114 1,114 1 – and an improving economy are providing many opportunities for LTL yield (revenue per FedEx Freight to promote its profitable interregional servic e. hundredw eight) $14.23 $13.40 $12.41 6 8 In addition, through c ollaboration w ith other FedEx operating companies, FedEx Freight is increasing business levels w ith its FedEx Freight Segment Revenues major customers. Contributing to the positive outlook for 2005 is The double-digit inc rease in FedEx Freight segment revenues FedEx Freight’s disciplined approach to yield management, cou- during 2004 w as primarily due to increases in LTL yield and LTL pled w ith strategic investments in capacity. average daily shipments. Year-over-year grow th in LTL average daily shipments accelerated to 11% in the fourth quarter of 2004, FEDEX KINKO’S SEGM ENT reflecting a strengthening economy and market-share gains. LTL The follow ing table show s revenues, operating expenses and yield grew 6% during the year, reflecting incremental fuel sur- operating income and margin (dollars in millions) for the fourth c harges due to higher fuel pric es, grow th in our interregional quarter ended M ay 31, 2004: freight service, a 5.9% general rate increase in June 2003 and Revenues $521 favorable contract renew als. In addition, 2004 had one additional Operating expenses: operating day. Revenues increased 8% during 2003 due to improved Salaries and employee benefits 185 LTL yield, despite the continued impact of a slow economy, severe Rentals 115 w inter w eather and one few er operating day during the year. Depreciation and amortization 33 FedEx Freight Segment Operating Income M aintenance and repairs 9 The 26% increase in operating income at the FedEx Freight seg- Other 140 ment during 2004 w as primarily attributable to LTL revenue grow th Total operating expenses 482 and cost management. Operating margins improved as yield man- Operating income $ 39 agement and operational productivity gains outpaced increased Operating margin 7.5% incentive compensation, fuel, insurance and claims, pension and healthcare costs. Purchased transportation increased primarily 42

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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS FedEx Kinko’s Segment Operating Results FINANCIAL CONDITION The results of operations of FedEx Kinko’s are inc luded in our LIQUIDITY consolidated results from the date of acquisition (February 12, Cash and cash equivalents totaled $1.046 billion at M ay 31, 2004, 2004). The FedEx Kinko’s segment w as formed in the fourth quar- c ompared to $538 million at M ay 31, 2003. The follow ing table ter of 2004. The results of operations from February 12, 2004 (the provides a summary of our cash flow s for the years ended M ay 31 date of acquisition) through February 29, 2004 w ere included in (in millions): “ Other and Eliminations” (approximately $100 million of revenue 2004 2003 2002 and $6 million of operating income). FedEx Kinko’s has focused on strengthening its c urrent lines of business, w hic h inc lude Net cash provided by black-and-w hite, color and custom printing, copying and binding operating activities $ 3,020 $ 1,871 $ 2,228 servic es, fac ilities management and outsourc ing, high-speed Investing activities: Internet access and computer usage, signs and graphics, sale of Business acquisition, net of retail products and others. Fourth quarter revenue w as primarily cash acquired (2,410) – (35) driven by strong performance in signs and graphics, finishing ser- Capital expenditures and vices and retail products. As in-home technological advances other investing activities (1,252) (1,490) (1,577) have impac ted the traditional retail w alk-up business, FedEx Net cash used in investing activities (3,662) (1,490) (1,612) Kinko’s has expanded its efforts to attract a larger share of the Financing activities: commercial document solutions and business service market. Principal payments on debt (319) (10) (320) Proceeds from debt issuances 1,599 – – FedEx Kinko’s operating margin benefited from strong revenue Repurchase of treasury stock (179) (186) (177) performance during the fourth quarter. Additionally, our efforts to Dividends paid (66) (60) – optimize production machines w ithin each store location resulted Other financing activities 115 82 91 in reduced lease and maintenance costs. Negatively impacting Net cash provided by (used in) operating margin w as approximately $3 million of rebranding financing activities 1,150 (174) (406) c osts. The c aption “ Other” in the financ ial summary on the Net increase in cash and preceding page includes supplies and other direct costs, such as cash equivalents $ 508 $ 207 $ 210 paper and toner. FedEx Kinko’s Segment Outlook The $1.149 billion increase in cash flow s from operating activities In 2005, FedEx Kinko’s w ill foc us on c ontinuing to generate in 2004 w as largely attributable to low er pension contributions. revenue grow th by leveraging its new relationship w ith FedEx. Working capital management more than offset cash paid related FedEx Kinko’s plans to open approximately 70 new locations in to the business realignment initiatives. The $357 million decrease 2005, including many internationally. In addition, there are signifi- in c ash flow provided by operating ac tivities in 2003 reflec ted cant opportunities for grow th in full-service color copies, finishing increased funding to our qualified pension plans, partially offset services and signs and graphics product offerings. We expect by improved earnings and low er levels of estimated federal operating margins to decrease in 2005, as FedEx Kinko’s w ill absorb income tax payments. Although not legally required, w e made a portion of the FedEx Corporation headquarters’ fees commencing cash contributions to our qualified U.S. pension plans of $1.1 bil- in 2005 and approximately $20 million in rebranding costs. lion during 2003 (compared to $320 million in 2004 and $150 million in 2002). On April 26, 2004, w e announced the new brand identity for FedEx Kinko’s retail locations – FedEx Kinko’s Office and Print Centers. Cash Used for Business Acquisitions. On February 12, 2004, w e Follow ing this announcement, w e began accepting packages to acquired all of the common stock of FedEx Kinko’s for approxi- be shipped from our U.S. loc ations. This c apability w ill also mately $2.4 billion in cash. See “ Debt Financing Activities” and allow FedEx Kinko’s to launch “ pack-and-ship” services in 2005. “ FedEx Kinko’s Acquisition” for further discussion. During 2002, a M anagement is also focusing on cost reduction and control, w ith subsidiary of FedEx Trade Netw orks acquired certain assets of continued focus on machine optimization, increased opportunities Fritz Companies, Inc. at a cost of $36.5 million. See Note 2 of the for strategic sourcing of operating expenses such as supplies accompanying audited financial statements for further discus- and machines and implementing best practices across the FedEx sion of these acquisitions. Kinko’s netw ork. Capital expenditures are expected to be approx- Cash Used for Capital Investments. For 2004, capital expenditures imately $125 million, primarily for technology- and equipment- declined due to low er aircraft expenditures at FedEx Express, related projects, real estate and rebranding. partially offset by an increase from netw ork capacity expansion at FedEx Ground. Capital expenditures w ere also low er in 2003 due to management’s cost reduction actions in 2001 and 2002, despite deliveries of aircraft during 2003 that w ere scheduled and committed to w ell before the economic slow dow n. See “ Capital Resources” for further discussion. 43

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    FEDEX CORPORATION Debt Financ ing Ac tivities. Our c ommerc ial paper program is Dividends. Our Board of Directors declared our first-ever cash div- backed by unused commitments under tw o credit agreements, idend on M ay 31, 2002. Dividends paid in 2004 and 2003 w ere $66 totaling $1 billion, and reduces the amount available under these million and $60 million, respectively. On M ay 28, 2004, our Board of agreements. Commercial paper borrow ings of $1.9 billion w ere Directors declared a dividend of $0.07 per share of common stock, necessary to finance part of our $2.4 billion acquisition of FedEx an increase of $0.01 per share over the previous dividend payment. Kinko’s. These borrow ings w ere backed by a new six-month $2 The dividend w as paid on July 1, 2004 to stockholders of record as billion credit agreement. During February 2004, w e issued com- of the close of business on June 10, 2004. Each quarterly dividend mercial paper backed by unused commitments under this facility. payment is subject to review and approval by our Board of In M arch 2004, w e issued $1.6 billion of senior unsecured notes Directors, and w e intend to evaluate our dividend payment amount in three maturity tranc hes: one, three and five years, at $600 on an annual basis at the end of each fiscal year. million, $500 million and $500 million, respectively. These notes Other Liquidity Information. We believe that cash flow from oper- are guaranteed by all of our subsidiaries that are not considered ations, our commercial paper program and revolving bank credit minor under Securities and Exchange Commission (“ SEC” ) regu- facilities w ill adequately meet our w orking capital and capital lations. Net proceeds from these borrow ings w ere used to repay expenditure needs for the foreseeable future. our c ommerc ial paper borrow ings bac ked by the six-month facility. We canceled the six-month credit facility in M arch 2004. CAPITAL RESOURCES At M ay 31, 2004, no c ommerc ial paper borrow ings w ere out- Despite the recent decrease in capital spending, our operations standing and the entire $1 billion under the revolving c redit remain c apital intensive, c harac terized by signific ant invest- agreements w as available for future borrow ings. Our debt and ments in aircraft, vehicles, computer hardw are and softw are and revolving c redit agreements c ontain c ertain c ovenants and telec ommunic ations equipment, pac kage-handling fac ilities restrictions, none of w hich are expected to affect our operations and sort equipment. The amount and timing of capital additions or ability to pay dividends. depend on various fac tors, inc luding preexisting c ontrac tual During 2004, $250 million of senior unsecured notes matured and commitments, anticipated volume grow th, domestic and inter- w ere paid. In addition, $25 million of existing unsecured debt at national ec onomic c onditions, new or enhanc ed servic es, FedEx Express matured and w as paid. During the third quarter of geographical expansion of services, competition, availability of 2003, commercial paper borrow ings of $200 million w ere necessary satisfactory financing and actions of regulatory authorities. to finance part of the cash contribution to our qualified pension The follow ing table c ompares c apital expenditures by asset plans. All of the commercial paper borrow ings w ere repaid by category and reportable segment for the years ended M ay 31 (in April 11, 2003. At M ay 31, 2003, no commercial paper w as out- millions): Percent Change standing. For more information regarding our credit facilities, see 2004/ 2003/ Note 6 of the accompanying audited financial statements. 2004 2003 2002 2003 2002 We have a $1.0 billion shelf registration statement w ith the SEC to Aircraft and related provide flexibility and efficiency w hen obtaining financing. Under equipment $ 372 $ 762 $ 730 (51) 4 this shelf registration statement w e may issue, in one or more Facilities and sort offerings, either unsecured debt securities, common stock or a equipment 332 254 292 31 (13) combination of such instruments. The entire $1 billion is available Information technology for future financings. investments 249 273 288 (9) (5) Vehicles and other Cash Used for Share Repurchases. During 2004 and 2002, our equipment 318 222 305 43 (27) Board of Directors authorized us to buy back a total of 15.0 million Total capital shares of common stock. During the first half of 2004, w e repur- expenditures $1,271 $1,511 $1,615 (16) (6) chased 2.6 million shares at an average price of $68.14 per share, w hich decreased cash flow s by approximately $179 million. No FedEx Express segment $ 592 $ 917 $1,069 (35) (14) shares w ere repurchased during the second half of 2004. We FedEx Ground segment 314 252 214 25 18 repurchased 3.3 million shares in 2003 at an average price of $56.66 FedEx Freight segment 130 139 86 (6) 62 per share and this decreased cash flow s by $186 million. During FedEx Kinko’s segment 36 – – n/a n/a 2002, w e repurchased approximately 3.3 million shares of our com- Other 199 203 246 (2) (17) mon stock, at a cost of approximately $177 million or an average of Total capital $52.70 per share. Based on our current financing strategy, w e have expenditures $1,271 $1,511 $1,615 (16) (6) significantly reduced the number of shares w e expect to repur- chase and instead are issuing new shares in connection w ith our Capital expenditures w ere 16% low er in 2004, w ith the year-over- equity compensation programs. A total of 5.75 million shares year dec rease due to low er airc raft expenditures at FedEx remain under existing share repurchase authorizations. Express, partially offset by an increase from netw ork capacity expansion at FedEx Ground. Capital expenditures w ere 6% low er 44

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    M ANAGEM ENT’S DISCUSSION AND ANALYSIS during 2003. This decrease w as primarily at the FedEx Express Amounts Reflected in Balance Sheet segment, w here capital expenditures w ere 14% low er. We con- We have other c ommerc ial c ommitments, not reflec ted in the tinued to make investments in FedEx Ground’s infrastructure and table above, that w ere incurred in the normal course of business information technology, and w e also made capital investments to to support our operations, including surety bonds and standby let- expand FedEx Freight. ters of credit. These instruments are generally required under certain U.S. self-insurance programs and are used in the normal Our capital expenditures are expected to be approximately $1.65 course of international operations. W hile the notional amounts of billion in 2005, w ith much of the year-over-year increase coming these instruments are material, there are no additional contingent from planned aircraft expenditures at FedEx Express to support liabilities associated w ith them because the underlying liabilities IP volume grow th. We also continue to invest in infrastructure are already reflected in our balance sheet. upgrades and sc anning tec hnologies, the multi-year c apac ity expansion of the FedEx Ground netw ork, expansion of the FedEx We have certain operating leases that w ere arranged using vari- Kinko’s netw ork and replacement vehicle needs at FedEx Freight. able interest entities under terms that are considered customary in the airline industry. As discussed in Note 16 to the accompa- Because of substantial lead times associated w ith the manufac- nying audited financial statements, w e consolidated one of these ture or modific ation of airc raft, w e must generally plan our entities in the second quarter of 2004 in accordance w ith FIN 46. aircraft orders or modifications three to eight years in advance. As a result of this consolidation, the accompanying audited M ay Therefore, w e must make c ommitments regarding our airlift 31, 2004 balance sheet includes an additional $126 million of fixed requirements years before aircraft are actually needed. We are assets and $133 million of long-term liabilities, and the payment c losely managing our c apital spending based on c urrent and of these debt obligations is included in the table above. anticipated volume levels and w ill defer or limit capital additions w here economically feasible, w hile continuing to invest strategi- FedEx Express amended tw o leases for M D11 aircraft during 2004, cally in grow ing business segments. w hich required FedEx Express to record $110 million in both fixed assets and long-term liabilities. During 2003, FedEx Express CONTRACTUAL CASH OBLIGATIONS amended four leases for M D11 aircraft, w hich now commits FedEx The follow ing table sets forth a summary of our contractual cash Express to firm purchase obligations for tw o of these aircraft obligations as of M ay 31, 2004. Certain of these contractual obli- during both 2005 and 2006. As a result, the amended leases w ere gations are reflec ted in our balanc e sheet, w hile others are ac c ounted for as c apital leases, w hic h added $221 million to disc losed as future obligations under ac c ounting princ iples both fixed assets and long-term liabilities at M ay 31, 2003. The generally accepted in the United States. Excluding the current future payments of these capital lease obligations are reflected portion of long-term debt and capital lease obligations, this table in the table above. does not include amounts already recorded on our balance sheet We have other long-term liabilities reflected in our balance sheet, as current liabilities at M ay 31, 2004. inc luding deferred inc ome taxes, pension and postretirement Payments Due by Fiscal Year There- healthcare liabilities and self-insurance accruals. The payment (in millions) 2005 2006 2007 2008 2009 after Total obligations associated w ith these liabilities are not reflected in Amounts reflected in Balance Sheet: the table above due to the absenc e of sc heduled maturities. Long-term debt (1) $ 613 $ 265 $ 844 $ – $ 499 $ 832 $ 3,053 Therefore, the timing of these payments cannot be determined, Capital lease exc ept for amounts estimated to be payable in 2005 that are obligations (2) 160 122 22 99 11 225 639 included in current liabilities. Other cash obligations not reflected in Balance Sheet: Other Cash Obligations Not Reflected in Balance Sheet Unconditional The amounts reflected in the table above for purchase commit- purchase ments represent noncancelable agreements to purchase goods obligations (3) 601 255 252 212 643 1,439 3,402 or services. Such contracts include those for certain purchases Operating leases 1,707 1,555 1,436 1,329 1,169 7,820 15,016 of aircraft, aircraft modifications, vehicles, facilities, computers, Total $3,081 $2,197 $2,554 $1,640 $2,322 $10,316 $22,110 printing and other equipment and advertising and promotions c ontrac ts. Open purc hase orders that are c anc elable are not (1) Amounts do not include related interest. See Note 6 for the applicable interest rates. (2) Capital lease obligations represent principal and interest payments. c onsidered unc onditional purc hase obligations for financ ial (3) See Note 17 to the accompanying audited financial statements. reporting purposes and are not included in the table above. Such purc hase orders often represent authorizations to purc hase We have certain contingent liabilities that are not accrued in our rather than binding agreements. balance sheet in accordance w ith accounting principles gener- ally accepted in the United States. These contingent liabilities are not included in the table above. 45

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    FEDEX CORPORATION The amounts reflected in the table above for operating leases are material to our financ ial statements. M anagement has represent future minimum lease payments under noncancelable disc ussed the development and selec tion of these c ritic al operating leases (principally aircraft and facilities) w ith an initial accounting policies and estimates w ith the Audit Committee of or remaining term in excess of one year at M ay 31, 2004. In the our Board of Direc tors and w ith our independent registered past, w e financed a significant portion of our aircraft needs (and public accounting firm. certain other equipment needs) using operating leases (a type of “off-balance sheet financing” ). At the time that the decision to PENSION COST lease w as made, w e determined that these operating leases We sponsor defined benefit pension plans covering a majority of w ould provide economic benefits favorable to ow nership w ith our employees. The ac c ounting for pension benefits is deter- respect to market values, liquidity and after-tax cash flow s. mined by standardized accounting and actuarial methods that include numerous estimates, including: discount rates; expected In accordance w ith accounting principles generally accepted in long-term investment returns on plan assets; future salary the United States, our operating leases are not recorded in our increases; and employee turnover, mortality and retirement ages. balanc e sheet. Credit rating agenc ies routinely use this infor- mation c onc erning minimum lease payments required for our The determination of our annual pension cost is highly sensitive operating leases to calculate our debt capacity. In addition, w e to changes in these estimates because w e have a large, active have guarantees under certain operating leases, amounting to w orkforce and w e have a significant amount of assets in the pen- $43 million as of M ay 31, 2004, for the residual values of vehicles sion plans. For example, only 6% of the partic ipants c overed and facilities at the end of the respective operating lease peri- under our principal pension plan are retired and currently receiv- ods. Based upon our expec tation that none of these leased ing benefits and the average remaining service life of our assets w ill have a residual value at the end of the lease term that employees approximates 14 years (normal retirement is at age 60). is materially less than the value specified in the related operat- Therefore, the payout of pension benefits w ill occur over a long ing lease agreement, w e do not believe it is probable that w e w ill period in the future. This long-time period increases the sensitivity be required to fund any amounts under the terms of these of our annual pension cost to changes in these key estimates. guarantee arrangements. Accordingly, no accruals have been Total pension cost increased approximately $115 million in 2004 recognized for these guarantees. and approximately $80 million in 2003 primarily due to changes to these estimates. For 2005 w e expect a smaller increase (approxi- In the future, other forms of secured financing and direct pur- mately $30 million), as 2004 actual asset returns have substantially chases may be used to obtain capital assets if w e determine that improved the funded status of our pension plans in spite of a con- they best suit our needs. We have been successful in obtaining tinued decline in the discount rate. Pension cost is included in the investment capital, both domestic and international, for long-term salaries and employee benefits caption in our income statements. leases on acceptable terms, although the marketplace for such Follow ing are the components of pension cost recognized in our c apital c an bec ome restric ted depending on a variety of ec o- income statements (in millions): nomic factors. We believe the capital resources available to us 2004 2003 2002 provide flexibility to access the most efficient markets for financ- ing capital acquisitions, including aircraft, and are adequate for Service cost $ 376 $ 374 $ 348 our future capital needs. Interest cost 490 438 409 Expected return on plan assets (597) (594) (621) CRITICAL ACCOUNTING POLICIES AND ESTIM ATES Net amortization and deferral 74 10 13 $ 343 $ 228 $ 149 The preparation of financ ial statements in ac c ordanc e w ith accounting principles generally accepted in the United States Follow ing is a discussion of the estimates w e consider most crit- requires management to adopt accounting policies and make sig- ical to determining our pension costs: nificant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there Discount Rate. This is the interest rate used to discount the esti- are alternative policies or estimation techniques that could be mated future benefit payments that have been earned to date used. We maintain a thorough process to review the application (the projected benefit obligation) to their net present value. The of our accounting policies and to evaluate the appropriateness discount rate is determined each year at the plan measurement of the many estimates that are required to prepare the financial date (end of February) and affects the succeeding year’s pen- statements of a large, global corporation. How ever, even under sion cost. A decrease in the discount rate has a negative effect optimal circumstances, estimates routinely require adjustment on pension expense. based on c hanging c irc umstanc es and the rec eipt of new or This assumption is highly sensitive for us as a one-basis-point better information. change in the discount rate at February 29, 2004 affects our 2005 The policies and estimates discussed below include the financial pension expense by approximately $1.8 million and our 2004 statement elements that are either the most judgmental or involve accumulated benefit obligation by approximately $11 million. For the selection or application of alternative accounting policies and example, the 21-basis-point decrease in the discount rate to 6.78% 46

  • Page 49

    M ANAGEM ENT’S DISCUSSION AND ANALYSIS for 2005 from 6.99% for 2004 w ill negatively affect our 2005 pen- Because of the introduction of the Portable Pension Account (dis- sion cost by approximately $38 million. Our 2004 pension cost w as cussed below ) for 2004 (w hich w ill reduce our liability duration negatively affected by approximately $20 million by the 12-basis- over time), as w ell as the significant additional contributions w e point decrease in the discount rate to 6.99% for 2004 from 7.11% made into the plans in late 2003 and the continuing deterioration of for 2003. the equity markets through February 28, 2003, w e performed a more recent asset/liability study for 2004, w hich supported a long- We determine the discount rate (w hich is required to be the rate at term return on assets of 9.10%. The results of this study w ere w hich the projected benefit obligation could be effectively settled reaffirmed for 2005 by our third-party professional investment as of the measurement date) w ith the assistance of actuaries, w ho advisors and actuaries and support our current asset allocation calculate the yield on a theoretical portfolio of high-grade corpo- strategy, w hich is summarized below : rate bonds w ith coupon payments and maturities that generally match our expected benefit payments. This methodology is Asset Class Target % of Plan Assets consistently applied and involves little subjectivity. How ever, the Domestic equities 53% calculated discount rate can change materially from year to year International equities 17 based on economic market conditions that impact yields on Private equities 5 corporate bonds. Total equities 75 Long duration fixed income securities 15 Plan Assets. Pension plan assets are invested primarily in listed Other fixed income securities 10 securities. Our pension plans hold only a minimal investment in 100% FedEx common stock. The estimated average rate of return on plan assets is a long-term, forw ard-looking assumption that also Our allocation of assets at February 29, 2004 approximates the materially affects our pension cost. It is intended to be the expected target allocation above. Our actual compound return on assets future long-term rate of earnings on plan assets. At February 29, w as 9.4% for the 15-year period ended M arch 31, 2004. Based 2004, w ith over $7.7 billion of plan assets, a one-basis-point on these factors, w e w ill retain 9.10% as our estimated future change in this assumption affects pension cost by approximately rate of return on pension assets for 2005. The 100-basis-point $750,000 (a decrease in the assumed expected long-term rate of decrease in the expected long-term rate of return for 2004 nega- return has a negative effect on pension expense). tively affected our 2004 pension cost by approximately $65 million. Establishing the expected future rate of investment return on our Our 2003 pension cost w as negatively affected by approximately pension assets is a judgmental matter. M anagement considers $48 million by the 80-basis-point decrease in the expected long- the follow ing factors in determining this assumption: term rate of return to 10.10% for 2003 from 10.90% for 2002. • the duration of our pension plan liabilities, w hich drives the Pension expense is also affected by the accounting policy used investment strategy w e can employ w ith our pension plan assets. to determine the value of plan assets at the measurement date. We use a calculated-value method to determine the value of plan • the types of investment classes in w hich w e invest our pension assets, w hich helps mitigate short-term volatility in market per- plan assets and the expected compound return w e can reason- formance (both increases and decreases). Another method used ably expec t those investment c lasses to earn over the next in practice applies the market value of plan assets at the mea- 10- to 15-year time period (or such other time period that may surement date. The application of the calculated-value method be appropriate). reduc ed 2004 and 2003 pension c ost by approximately $106 • the investment returns w e can reasonably expect our active million and $35 million, respectively. Application of the calculated- investment management program to achieve in excess of the value method w ill approximate the market-value method in 2005. returns w e could expect if investments w ere made strictly in Salary Increases. The assumed future increase in salaries and indexed funds. w ages is also a key estimate in determining pension cost. We cor- We review the expected long-term rate of return on an annual relate changes in estimated future salary increases to changes in basis and revise it as appropriate. Also, w e periodically commis- the discount rate (since that is an indicator of general inflation and sion detailed asset/liability studies performed by third-party cost of living adjustments) and general estimated levels of prof- professional investment advisors and actuaries. These studies itability (since most incentive compensation is a component of project our estimated future pension payments and evaluate the pensionable w ages). For 2005 pension cost, a one-basis-point efficiency of the allocation of our pension plan assets into various change in the rate of estimated future salaries affects pension investment categories. These studies also generate probability- c ost by approximately $900,000 (a dec rease in this rate w ill adjusted expected future returns on those assets. The study decrease pension cost). This assumption varies directly w ith the performed for 2003 supported the reasonableness of our 10.10% discount rate changes (reflecting general inflation trends); how - return assumption used for 2003 based on our liability duration and ever, the current rate is deemed to be at or near the floor based market conditions at the time w e set this assumption (in 2002). on current pay structures and improving company performance. 47

  • Page 50

    FEDEX CORPORATION Therefore, w e w ill hold this assumption constant for determina- Cumulative unrecognized actuarial losses w ere approximately tion of 2005 pension c ost. The dec rease in this assumption to $1.7 billion through February 29, 2004, improved from $2.2 billion at 3.15% for 2004 from 3.25% favorably impacted 2004 pension cost February 28, 2003. These unrecognized losses primarily reflect the by approximately $10 million. dec lining disc ount rate and the dec lining stoc k market during 2003, 2002 and 2001. These amounts may be recovered in future Follow ing is information concerning the funded status of our pen- periods through actuarial gains. How ever, to the extent that the sion plans as of M ay 31, 2004 and 2003 (in millions): discount rate remains low and market performance does not con- 2004 2003 tinue to improve, these unrec ognized ac tuarial losses may be Funded Status of Plans: recognized in future periods. Accumulated benefit obligation (ABO): Qualified U.S. domestic plans $7,069 $ 5,725 The net amounts reflec ted in our balanc e sheet related to Other plans 358 284 pension items include a substantial prepaid pension asset. This Total ABO $7,427 $ 6,009 results from excess cash contributions to the plans over amounts Projected benefit obligation (PBO) $8,683 $ 7,117 that are recognized as pension expense for financial accounting Fair value of plan assets 7,783 5,825 purposes. Amounts ac c rued as liabilities (inc luding minimum PBO in excess of plan assets (900) (1,292) pension liabilities) relate primarily to unfunded nonqualified plans Unrecognized actuarial losses, and international pension plans w here additional funding may not principally due to investments provide a current tax deduction. and changes in discount rate 1,694 2,247 Effective in 2004, w e amended the FedEx Corporation Employees’ Unamortized prior service cost and other 113 116 Pension Plan to add a cash balance feature, w hich w e call the Amounts Included in Balance Sheets $ 907 $ 1,071 Portable Pension Ac c ount. We expec t the Portable Pension Components of Amounts Included Account w ill help reduce the long-term grow th of our pension lia- in Balance Sheets: bilities. All employees hired after M ay 31, 2003 w ill ac c rue Prepaid pension cost $1,127 $ 1,269 benefits under the Portable Pension Account formula. Eligible Accrued pension liability (220) (198) employees as of M ay 31, 2003 w ere able to choose betw een con- M inimum pension liability (67) (42) tinuing to accrue benefits under the traditional pension benefit Intangible asset and other 67 42 formula or accruing future benefits under the Portable Pension Net amounts recognized in balance sheets $ 907 $ 1,071 Account formula. The election w as entirely optional. There w as no conversion of existing accrued benefits to a cash balance. All Cash Amounts: benefits earned through M ay 31, 2003, including those applicable Cash contributions during the year $ 335 $ 1,072 to employees elec ting the Portable Pension Ac c ount, w ill be Benefit payments during the year $ 136 $ 103 determined under a traditional pension plan formula. Accordingly, it w ill be several years before the impact of the low er benefit pro- The funded status of the plans reflects a snapshot of the state of vided under this formula has a signific ant impac t on our total our long-term pension liabilities at the plan measurement date. pension expense. Declining interest rates (w hich increase the discounted value of the PBO) and recent fluctuations in the stock market have signif- Under the Portable Pension Account, the retirement benefit is icantly impacted the funded status of our plans. How ever, our expressed as a dollar amount in a notional account that grow s plans remain adequately funded to provide benefits to our employ- w ith annual credits based on pay, age and years of credited ser- ees as they come due and current benefit payments are nominal vice and interest on the notional account balance. An employee’s c ompared to our total plan assets (benefit payments for 2004 pay credits w ill be determined each year under a graded formula w ere less than 2% of plan assets at M ay 31, 2004). that combines age w ith years of service for points. The plan interest credit rate w ill vary from year to year based on the selected U.S. Although not legally required, w e made $320 million in c ontri- Treasury maturity, w ith a 4% minimum and a maximum based on butions to our qualified U.S. pension plans in 2004 compared to the government rate. Employees are fully vested on completion of total contributions exceeding $1 billion in 2003. Our 2003 contri- five years of service. butions w ere made to ensure our qualified pension plan assets exc eeded the related ac c umulated benefit obligations at our February 28, 2003 plan measurement date. Currently, w e do not expect any contributions for 2005 w ill be legally required. Based on the substantial improvement in the funded status of our qualified plans, w e do not currently expect to contribute any funds to our qualified defined benefit plans in 2005. 48

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