Only FedEx could create an industry, then 28 years later, grow into so

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FedExCorporation2001AnnualReport FedEx Corporation 2001 Annual Report FedEx Corporation 1. Financial Highlights 2. Message from the CEO 6.

Message from the CFO 7. Financial Information 35. Directors 36.

Of:cers 37. Corporate Information Only FedEx could create an industry, then 28 years later, grow into so much more than an covernight d success. Today, only FedEx offers dedicated networks for express, ground, freight, expedited delivery and unique trade services 3 when customers need greater choice and ;exibility in managing their supply chains.

Only FedEx delivers industry-leading, on-time service levels 3 when time is literally money. Only FedEx provides the right level of information intensity 3 when information about the package is still as important as delivery of the package itself. In FY01, only FedEx had the vision to acquire American Freightways 3 one of the nation 9s premier regional, less- than-truckload freight carriers.

With the acquisition, we formed FedEx Freight to oversee both American Freightways and Viking Freight. During a period of challenge and change, only FedEx remains focused on a unique business model 3 to operate each company independently, focused on the distinct needs of each customer segment, but also to compete collectively, leveraging our greatest strengths, the power of the FedEx brand and information ... more. less.

technology. That 9s why FedEx continues to deliver value for our shareowners, meaningful solutions for our customers and continued opportunityfor our employees. Consolidated sales, marketing and technology support Time-definite, global express package and freight delivery Small-package ground services, including FedEx Home Delivery Regional less-than- truckload freight services Exclusive-use, expedited, door-to-door delivery Customs brokerage and trade facilitation solutions 11 In thousands, except earnings per share 2001 2000Percent Change OPERATING RESULTS Revenues $19,629,040 $18,256,945 +8 Operating income 1,070,890 1,221,074 312 Operating margin 5.5% 6.7% Net income 584,371 688,336 315 Earnings per share, assuming dilution $1.99 $2.32 314 Earnings per share, excluding nonrecurring items, assuming dilution (1) $2.26 $2.32 33 Cash earnings per share, assuming dilution (2) $6.34 $6.22 +2 Average common and common equivalent shares 293,179 296,326 31 EBITDA (3) $2,347,300 $2,398,663 32 Capital expenditures (4) $1,893,384 $1,991,600 35 FINANCIAL POSITION Total assets $13,340,012 $11,527,111 +16 Long-term debt 2,121,511 1,782,790 +19 Common stockholders 9 investment 5,900,420 4,785,243 +23 (1) Nonrecurring items include primarily noncash charges of $124 million ($78 million after tax or $0.27 per diluted share) ass ociated with the curtailing of certain aircraft modi<cation and development programs and reorganizing operations at FedEx Supply Chain Services, Inc. (2) Net income plus depreciation and amortization divided by average common equivalent shares. (3) Represents earnings before interest, taxes, depreciation and amortization. (4) Represents actual cash expenditures plus the equivalent amount of cash that would have been expended for the acquisition of assets (principally aircraft), whose use was obtained through long-term operating leases entered into during the period. FINANCIAL HIGHLIGHTS $16.8 $15.9 $18.3 $19.6 01 00 99 98 REVENUES (in billions)RETURN ON AVERAGE EQUITY 14.6% 13.5% 14.6% 10.9% 01 00 99 98 EARNINGS PER SHARE $2.10 $1.69 $2.32 $1.99 01 00 99 98 DEBT TO TOTAL CAPITALIZATION 22.8% 29.3% 27.1% 26.4% 01 00 99 98 EBITDA (in billions) $2.2 $2.0 $2.4 $2.3 01 00 99 98 (3) CAPITAL EXPENDITURES (in billions) $2.3 $2.3 $2.0 $1.9 01 00 99 98 (4) June5 FedEx Corp. relaunches fedex.com to integrate express and ground functionality. 2 MESSAGE FROM THE CEO July8 FedEx Express and FedEx Home Delivery make e-commerce history with ?rst-day delivery of 250,000 Harry Potter books for Amazon.com. July31 FedEx Custom Critical acquires Passport Transport. DEAR FELLOW SHAREOWNERS, The current economic downturn hit almost without warning, leading experts from Wall Street to Main Street to search for easy explanations. But, at FedEx, we know that a time of great chal- lenge is also a time of great opportunity, a time to step back and take a look at the larger perspective. In any annual report, the consolidated ?nancial results capture just one snapshot in time. But there 9s a larger FedEx picture here for ?scal year 2001 3 a picture of solid ?rst-half revenue growth, improved cash @ows and effective yield management. FY01 Financial Results To view this big picture, look behind the numbers for the full year ended May 31, 2001, and examine the breakdowns for the ?rst and second half: " Annual revenue increased 8% to a record $19.6 billion, fueled by ?rst-half revenue growth of 9%. Second-half revenue was also above year-ago levels, but grew at a slower 6% pace. " Net income decreased 15% to $584 million for the year, despite a ?rst-half increase of 10%. In the second half, net income dropped 38%. " Earnings per share of $1.99 included a ?rst-half contribution of $1.25, up 15% over the prior year. The second-half contribution declined 39% causing EPS to fall 14% for the full year. The question is clear: What happened between the ?rst and sec- ond half? Certainly, the second-half numbers include one-time charges associated with curtailing certain aircraft modi?cation and development programs and reorganizing operations at FedEx Supply Chain Services. But larger issues are also at play. Slowing Consumer Demand Historically, times of economic slowdown can be traced to a fun- damental imbalance between supply and demand. Our current economic situation is no exception. After strong growth in consumer demand over a number of years 3 particularly the demand for high-tech goods 3 many companies ramped up supply only to discover that demand had dropped sharply. In some cases, faulty business models collapsed entirely. But the result was historically familiar 3 inventory oversupply led to increased obsolescence. For FedEx companies, that translated to softer demand for transportation and, speci?cally, for express transportation tied to the high-tech and durable goods sectors. 2000 Sept 12 FedEx Express signs a European operational agreement with La Poste. Sept 18 FedEx Ground opens Northeast Super Hub in Woodbridge, N.J. Aug 28 FedEx Express boosts global network with new Europe and Asia connections. Nov 12 FedEx Corp. agrees to acquire American Freightways, which will be teamed with Viking Freight to form FedEx Freight . 3 Feb 6 FedEx Ground extends FedEx Home Delivery coverage to 70% of the U.S. population. In the second half of this Bscal year, the U.S. economy fell harder than we expected, and the domestic downturn had a ripple effect on select international markets, particularly Asia, which is heavily integrated into U.S. high-tech manufacturing. It was a wild ride on the economic pendulum, swinging from the promise of the new Digital Economy back to an Industrial Economy in a cyclical correction. Now, we Bnd that pendulum moving back toward the center as excess is wrung out of the inventory buildup of last year and as manufacturers begin to come back into balance. The shakeout in the cdot-com d sector and the rationalization of a number of overbuilt sectors seem largely behind us now. When the economy picks up 3 hopefully sooner rather than later 3 FedEx customers can take advantage of the upturn by selecting the right mode of transportation with the right level of informa- tion intensity. By better managing both the supply chain and the demand cycle, we can all manage our way back to growth in a healthy economy. A FiscallyResponsible FedEx How did FedEx continue to increase revenue and yields in this difBcult economy? With prudent Bnancial management through pricing as well as customer and product mix. In addition, we deferred or cut capital spending and imposed very diligent inter- nal cost controls on travel, entertainment, outside services, new hires and other discretionary spending. Given the slowdown in volume, we began to cright-size d our transportation networks, making sure that we don 9t carry excess capacity any more than our customers carry obsolete inventory. All the while, we remained focused on the Bve growth strategies that we presented to employees beginning in September 2000: " Grow our core transportation business. " Grow internationally. " Grow our logistics and supply chain offerings. " Grow through e-commerce. " Grow through new services or alliances. It may sound incongruous to be focused on growth during an eco- nomic decline, but our real challenge is to respond to temporary market corrections without sacriBcing long-term opportunity. One year of soft results will not change our commitment to growth or deter us from our goals 3 improving EPS by 10% to 15% per year, increasing cash Cow, improving margins and increasing our return on capital. In this regard, we will continue to manage our revenue based not just on volume but on yield as well. Apr 18 FedEx Ground , American Freightways and Viking Freight win NASSTRAC 9s Carrier of the Year Award for their respective markets. 2001 Jan 10 FedEx Express enters into two landmark service agreements with the U.S. Postal Service. Feb 26 FedEx Express extends shipping times for customers in many major markets with its FedEx Extra Hours SM service. Jan 16 FedEx Express announces plan to become a launch customer for Airbus A380-800F. Apr 2 FedEx Express initiates an additional China frequency, for a total of 11 weekly Cights. Mar 23 FedEx Ground awarded ISO 9002 registration, joining FedEx Express and FedEx Services as a bearer of the worldwide ISO quality standard. 4 The Diversi ed FedEx Portfolio Perhaps the most signiDcant difference in our response to this economic slowdown versus the 1990 391 recession is a simple fact: FedEx is not the same company we were then. In 1991, we were a $7.7 billion business focused exclusively on express trans- portation. Our international network was incomplete. While we had made signiDcant investments in technology, the Internet as we know it did not exist. Today, FedEx has expanded and diversiDed its portfolio to com- pete across a wide spectrum of the transportation market. FedEx offers the broadest range of transportation, logistics and infor- mation services of any company, anywhere 3 express, ground, freight and even expedited delivery. And we 9ve leveraged the strength of that portfolio over the past year. When U.S. demand for FedEx Express transportation began to wane in the second half of last year, the FedEx Ground business continued to grow. In February, we completed the acquisition of American Freightways and created FedEx Freight, which over- sees our regional less-than-truckload freight services, including Viking Freight in the western United States. No competitor can match the scope and breadth of our transportation services in general and our freight offering in particular. Our FY01 performance, even during tough economic times, con- Drms that the FedEx philosophy of operating independently and competing collectively is working, particularly the adjustments we made in January 2000, when we rebranded our major operat- ing companies and reorganized to better meet customer needs. It 9s clear now that our customers are responding positively to these strategic changes. Strong Customer Relationships When the Smithsonian Institution 9s National Zoological Park needed reliable delivery of two pandas from China, FedEx was the obvious choice. When Ford Motor Company needed around-the- clock, critical-parts support for its commercial truck customers, FedEx won the business. Wal-Mart, Compaq, General Motors and other valued customers have recently honored FedEx companies as ccarrier of the year. d In January, we announced major new service agreements between FedEx and the U.S.Postal Service. In one agreement, FedEx Express agreed to provide air transportation for certain Postal Service products, beginning in August 2001. The U.S. Postal Service also agreed to the placement of FedEx Drop Boxesoutside U.S. Post OfDces nationwide, beginning in March2001. These landmark public-private agreements create a winning busi- ness alliance. The Postal Service wins with access to reliable, consolidated air transportation service. FedEx was the only transportation company with the capacity and expertise to make that happen. FedEx wins by generating an estimated $7 billion in revenue over the life of the seven-year contract. And the American public wins with greater choice, Eexibility and convenience for their shipping needs. Superior FedEx Technology One interesting byproduct of the Postal Service business alliance is the advanced technology that will allow FedEx to scan and read postal bar codes. It 9s in keeping with our customer-focused technology 3 helping our customers link seamlessly to the FedEx system and use information to help manage their business. The FedEx Web site (fedex.com) is one of the most renowned and easiest to use, and we have continued to enhance our leading- edge, Internet technology. This year alone, we relaunched the site to integrate express and ground functionality, introduced a powerful suite of international shipping tools called FedEx Global Trade Manager SM , opened the online market to small-and medium-sized businesses with FedEx eCommerce Builder, and announced the development of FedEx InSight SM to enhance ship- ment visibility and control for select customers. For over two decades, FedEx has been the industry leader in cus- tomer automation, and now we 9re moving from the desktop to the wireless environment. FedEx was the Drst transportation com- pany to be listed on the AT&T Digital PocketNet Service, and in the coming months we plan to expand our wireless capabilities to improve service and productivity. As we 9ve been saying since the late 1970s, the information about a package is just as important as the delivery of the package itself. That 9s why FedEx is dedicated to integrated transportation and information services 3 so we can deliver meaningful solu- tions for customers in today 9s complex business environment. Unsurpassed Global Reach FedEx entered this economic slowdown as a strong, diversiDed company 3 and we will come out even stronger. After all, we emerged from the 1998 399 cAsian Flu d as the leader in Hong Kong, Japan, Taiwan and Malaysia, in addition to our long-standing No.1 position in China, where we currently serve 190 cities with 11weekly Eights. Our two strongest international regions 3 Asia-PaciDc and Europe 3 continued their growth trends during FY01. In Europe, 5 The FedEx physical network provides unsurpassed global reach, serving 211 countries with the most reliable service in the industry. The FedEx technology network enables real-time information to help customers manage supply and demand on a global scale. And, on a personal note, let me add that FedEx has the best human network anywhere 3 a culture long recognized as a great place to work with a passion for customer service. When I faced heart bypass surgery in late November, I knew that this company would continue under the leadership of the strongest manage- ment team we 9ve ever <elded 3 and that more than 215,000 employ- ees and contractors all around the world would always rise to any challenge. I 9d like to say, once more, a public cthank you d for the overwhelming support that hastened my complete recovery. It 9s all about perspective. In a year when others faltered, FedEx increased revenue, improved yield-per-package and generated a return for our shareowners. As soon as the imbalance of supply and demand rights itself, FedEx will leverage the strength of our global family of companies 3 and the strength of our customer relationships 3 not just to resume our own record of pro<table growth, but to help restore growth for our customers. Frederick W. Smith Chairman, President and Chief Executive Of<cer annual volume growth of 24% held virtually steady from <rst half to second half. In Asia, however, the economic slowdown was apparent with 21% volume growth in the <rst half, slowing to just 3% growth in the second half for an overall 12% annual growth rate. But, to stay focused on the larger picture, remember that the operative word internationally is cgrowth d 3 and it continues to surpass U.S. domestic volume gains. As we focus on maximizing our global network and moving our product mix more toward higher-yielding FedEx International Priority ® shipments, we are also looking ahead to future inter- national needs. In January, FedEx Express announced it intends to acquire the Airbus A380-800F high-capacity, long-range air- craft, taking delivery beginning in 2008. The A380 will be capable of =ying directly between Asia, Europe and U.S. hubs with nearly twice the payload of current MD11 aircraft. Also in FY01, we added our <rst converted MD10s to the domestic system, with modi<cations to enhance mechanical reliability and to recon<g- ure the cockpit for two crew members instead of three. Both changes will help us run our global air system more ef<ciently while maintaining superior, on-time service for our customers. What Happens Next? Over the years, we have carefully diversi<ed across global regions and across transportation sectors to create a strong and growing FedEx. If there 9s a secret to our success, it lies in our bal- anced physical, information and human networks. 6 MESSAGE FROM THE CFO FedEx Corporation 9s 7nancial performance improved signi7cantly during the 7rst half of 7scal year 2001 as our new go-to-market strategies generated volume and yield growth at FedExExpress and FedExGround. The second half of the year was more 7nan- cially challenging, however, as our package business was severely impacted by a rapidly slowing economy, particularly in the high-tech and durable goods sectors. Despite these adverse economic conditions, we made considerable progress toward our 7nancial goal of becoming cash 8ow positive. In fact, exclud- ing the costs associated with our acquisition of American Freightways, we attained net cash 8ow positive status last year as we pursued the following strategies: Portfolio Expansion The acquisition of American Freightways and the formation of FedEx Freight expanded and enhanced our already formidable arsenal of supply chain solutions. Teamed with Viking Freight, the largest Western regional less-than-truckload carrier, American Freightways provides the perfect extension of our increasingly popular less-than-truckload offering to virtually all U.S. ZIPcodes. Yield Improvement We continued to execute good yield management strategies in FY01 even with a weakening economy and a slowdown in volume growth. Package and freight yields improved as we continued to manage our rate levels, customer diversity and volume and freight mix. Since our yields, especially at FedEx Express, are not quite as high as our primary competitor, we still have substantial opportunity to leverage our industry-leading service offerings and powerful and trusted brand to grow yields, revenues and margins as the economy improves. Cost Containment We are proud that we were able to contain costs last year while still providing the best service in the industry. Cost reduction programs included a freeze on most hiring, substantially reduc- ing bonus incentive compensation related to pro7tability and a comprehensive reduction in discretionary expenses at all operating companies. These steps will remain in place until our pro7tability returns to acceptable levels. Capital Discipline For the third year in a row, we managed to lower our capital expenditures as both a percentage of revenue and on an absolute basis, while at the same time expanding our network and improving service. Because of the sluggish growth of the economy this past year, we thoroughly reviewed our long-term capacity needs. As a result, we adjusted our aircraft programs to better match capacity to customer demand as well as maximize pro7tability now and in the future. The outlook for FY02 is certainly challenging, but we will con- tinue our efforts to penetrate the small- and medium-sized customer base, develop our new alliance with the U.S. Postal Service, expand our FedEx Home Delivery service and promote our new FedEx Freight network. All the while, we will remain focused on cost containment and capital expenditure discipline in order to achieve positive cash 8ow. With the unmatched serv- ice of dedicated employees and contractors worldwide, we will continue to successfully overcome the challenges of today 9s envi- ronment and position our company for future growth and superior margins, returns and cash 8ows as the economy recovers. Alan B. Graf, Jr. Executive Vice President and Chief Financial Of7cer 7 MANAGEMENT 9S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS CONSOLIDATED RESULTS The following table compares revenues, operating income, net income and earnings per diluted share (in millions, except for per share amounts) for the Qscal years ended May 31: Percent Change 2001/ 2000/ 2001 20001999 2000 1999 Revenues $19,629 $18,257$16,773 +8 +9 Operating income 1,071 1,2211,163 312 +5 Net income 584 688631 315 +9 Earnings per diluted share 1.99 2.322.10 314 +10 Our results for 2001 reRect strong performance for the Qrst half of the year, which was more than offset by the effects of weakened economic conditions in the second half of the year. Operating results for 2001 also reRect charges of $124 million ($78 million after tax or $0.27 per diluted share) primarily related to noncash asset impairment charges at FedEx Express. Revenue growth in 2001 included, among other things, the effects of the acquisition of American Freightways, which added approxi- mately $630 million to 2001 revenues. Excluding the effects of business acquisitions in both years, revenues increased 3% for 2001. This increase is largely due to the continued revenue growth of FedEx Express International Priority (IP) packages, although at a lower rate than that experienced in 2000. Despite the negative economic effects on demand in the last half of the year, double-digit volume growth rates during 2001 were experi- enced in the European and Asian markets. U.S. domestic package volume at FedEx Express declined slightly from 2000. Volume growth was slightly higher than 2000 at FedEx Ground, as this subsidiary continued to grow its core business and expand its FedEx Home Delivery service offering. Effective February 1, 2001, FedEx Express implemented list rate increases averaging 4.9% for shipments within the U.S. and 2.9% for U.S. export shipments. FedEx Ground also implemented a list rate increase of 3.1% on February 5, 2001. Increased product rev- enue per package (yield) for 2001 for most services included the effects of these rate increases, the effects of fuel surcharges and other yield-management strategies, including a sales focus on higher yielding business. These revenue increases were partially offset by a decrease in other revenues, primarily decreased sales of engine noise reduction kits (hushkits) at FedEx Express. As a result of sharply lower domestic volumes at FedEx Express in the second half of 2001 and lowered growth forecasts, man- agement committed to eliminate certain excess aircraft capacity related to our MD10 program. The MD10 program upgrades and modiQes our older DC10 aircraft to make them more compatible with our newer MD11 aircraft. By curtailing the MD10 program, we will avoid approximately $1.1 billion of future capital expendi- tures over the next seven years. In addition, due to the bank- ruptcy of Ayres Corporation, we expensed deposits and related items in connection with the Ayres ALM 200 aircraft program. We also took actions to reorganize our FedEx Supply Chain Services subsidiary to eliminate certain unproQtable, nonstrategiclogistics business and reduce its overhead. Following is a summary of these principally noncash charges (in millions) taken in the fourth quarter of 2001: Impairment of certain assets related to the MD10 aircraft program$93 Strategic realignment of logistics subsidiary22 Ayres program9 Total$124 In addition to the actions described above, we took other meas- ures during 2001, such as reducing variable compensation pro- grams, limiting stafQng additions and lowering discretionary spending, in an effort to better match our cost structure and capacity to current business volumes. Excluding the above charges and the effect of business acquisi- tions, operating income decreased 5% in 2001. Incremental losses from the continued expansion of our FedEx Ground Home Delivery service negatively affected operating income by $34 mil- lion in 2001. Operating results also reRect the continuing implementation of the rebranding and reorganization initiatives begun in 2000. The sales, marketing and most of the information technology functions of our two largest subsidiaries are now centralized in FedEx Services. We have substantially completed the expansion and retraining of our sales force, but continue to incur costs associated with the retooling of our automation systems and vehicle and facilities rebranding. These costs were approximately $26 million for 2001. Increased fuel prices negatively impacted year-over-year expenses by approximately $160 million for 2001, net of the effects of jet fuel hedging contracts. In response to higher fuel costs, fuel surcharges have been implemented at all of our transpor- tation subsidiaries, including a 1.25% fuel surcharge that was Management 9s Discussion and Analysis 8 implemented at FedEx Ground on August 7, 2000 and a 4% fuel surcharge, implemented in 2000, that was in place at FedEx Express throughout 2001. These surcharges offset the impact of higher fuel costs in 2001. We received approximately $92 million in 2001 under jet fuel hedg- ing contracts. Due to slightly moderating fuel prices and the con- tinuation of our fuel surcharge program, we effectively closed our hedge positions by entering into offsetting jet fuel hedging contracts during the fourth quarter of 2001. We may, however, enter into jet fuel hedging contracts in the future. During 2001, we formed a new segment specializing in the regional less-than-truckload ( cLTL d) ground transportation of freight. FedEx Freight was formed in the third quarter of 2001 in connection with the acquisition of American Freightways. The acquisition was accounted for as a purchase and resulted in the recognition of approximately $600 million in goodwill. FedEx Freight also includes Viking. The acquisition of American Freightways was slightly accretive to 2001 earnings per diluted share. For further information regarding the acquisition, see cLiquidity d and Note 2 to our Qnancial statements. Our compensation programs include substantial cash incentive plans, which are based on Qnancial and operating performance. Results for 2001 included a reduction in operating costs related to such plans. Costs for pension and postretirement beneQt pro- grams were approximately $70 million lower, due principally to higher discount rates and improved asset performance in 2000. As expected, operating proQt from the sale of hushkits declined $40million in 2001 to $8 million, following a decline of $50 million in2000. For 2000, operating results reRected strong international volume and yield growth. However, U.S. domestic package volume growth was below that experienced in 1999. SigniQcantly higher fuel prices resulted in an increase in fuel expense of $273 million, net of $18 million received under jet fuel hedging contracts. On February1, 2000, management implemented a 3% fuel surcharge at FedEx Express in response to the higher fuel costs. Effective April1, 2000, the surcharge was increased to 4%. In the last half of 2000, we began the major rebranding and reorganization initiative of centralizing certain functions in order to enhance revenue growth and improve Qnancial returns. FedEx Home Delivery also was launched in March 2000. The rebranding and reorganization actions and FedEx Home Delivery negatively affected 2000 operating income by approximately $21 million and $19 million, respectively. Operating results for 1999 included $81 million in operating expenses associated with strike contingency planning during contract negotiations between FedEx Express and the Fedex Pilots Association ( cFPA d). To avoid service interruptions related to a threatened strike, we began strike contingency planning, including entering into agreements for additional third-party air and ground transportation and establishing special Qnancing arrangements. Negotiations with the FPA ultimately resulted in a Qve-year collective bargaining agreement that took effect on May 31, 1999. Other Income and Expense and Income Taxes For 2001, net interest expense increased 36% due to higher bor- rowings that were primarily incurred as a result of the prior year stock repurchase program and additional debt incurred for the American Freightways acquisition. Net interest expense increased 8% for 2000, due to higher average debt levels, pri- marily incurred as a result of our stock repurchase program, busi- ness acquisitions and bond redemptions. Other, net in 2000 included gains of approximately $12 million from an insurance settlement for a destroyed MD11 aircraft and approximately $11 million from the sale of securities. Our effective tax rate was 37.0% in 2001, 39.5% in 2000 and 40.5% in 1999. The 37.0% effective tax rate in 2001 was lower than the 2000 effective rate primarily due to the utilization of excess for- eign tax credits. Generally, the effective tax rate exceeds the statutory U.S. federal tax rate because of state income taxes and other factors as identiQed in Note 9 to our Qnancial statements. For 2002, we expect the effective tax rate to be in the approximate range of 38.0% to 39.0%. Outlook Although management believes that the current economic down- turn is largely cyclical, we expect it to persist at least through the Qrst half of 2002. We plan to align capital spending with operating FedEx Corporation 9 cash Row, continue strict controls over discretionary spending and implement other measures to reduce commitments for lift capacity in excess of our needs (see cFedEx Express 3 Outlook d). Cash incentive programs for 2002 have been substantially reduced for most employees, including all members of senior management, and these programs will begin to pay out only if we exceed our 2002 Qnancial targets. However, anticipated reduc- tions in 2002 incentive costs are expected to be offset by higher pension expense resulting from changes in discount rates and unrealized market declines in pension assets. Despite the near-term economic outlook, we continue to believe that we are well positioned for long-term growth. In January 2001, FedEx Express entered into a business alliance with the U.S. Postal Service, which is expected to generate revenue of approx- imately $7 billion over seven years and is consistent with our goals of improving margins, cash Rows and returns. The alliance consists of two service agreements. In the Qrst nonexclusive agreement, FedEx Express will install drop boxes at U.S. Post OfQces, and in the second agreement, FedEx Express will provide airport-to-airport transportation of Priority, Express and First Class Mail. On June 18, 2001, we ofQcially launched the national rollout of FedEx Drop Boxes at post ofQces throughout the coun- try, implementing the Qrst of these service agreements. FedEx Express is scheduled to begin the agreement for air transporta- tion in late August 2001. In 2002, we will also continue the busi- ness alliance in Europe with La Poste, established in 2001. The acquisition of American Freightways substantially enhanced our overall transportation portfolio by enabling us to offer a regional LTL service virtually everywhere in the United States. During 2002, we will focus on increasing volumes and yields in our core high-quality next- and second-day regional freight serv- ices. In addition, we will continue to expand our FedEx Home Delivery network and will continue to pursue new service and business opportunities, such as those mentioned above, in sup- port of our long-term growth goals. Actual results for 2002 will depend upon a number of factors, including the extent and duration of the current economic down- turn, our ability to match capacity with volume levels and our abil- ity to effectively implement our new service and growth initiatives. See cForward-Looking Statements d for a more complete descrip- tion of potential risks and uncertainties that could affect our future performance. Recent Accounting Pronouncements We adopted Statement of Financial Accounting Standards No.( cSFAS d) 133, cAccounting for Derivative Instruments and Hedging Activities d (as amended by SFAS 137 and SFAS 138) at the beginning of 2002. The adoption of this Statement will not have a material effect on our Qnancial position or results of oper- ations for 2002. Because of our previously mentioned fourth quar- ter 2001 actions regarding jet fuel hedging contracts, none of the jet fuel hedging contracts held at May 31, 2001 qualify for hedge accounting treatment. However, our usual jet fuel hedging pro- gram does qualify for cash Row hedge accounting treatment under which changes in the fair market value of these contracts are recorded to Accumulated Other Comprehensive Income. During July 2001, SFAS 142, cGoodwill and Other Intangible Assets d was issued by the Financial Accounting Standards Board. Under SFAS 142, goodwill amortization ceases when the new standard is adopted. The new rules also require an initial goodwill impairment assessment in the year of adoption and annual impairment tests thereafter. We are permitted under the rules to adopt this Statement effective June 1, 2001 or defer adoption until June 1, 2002. Once adopted, goodwill amortization of approximately $36 million on an annualized basis will cease. We have not yet determined if any impairment charges will result from the adoption of this Statement. At this time, we anticipate the adoption of these rules, effective as of June 1, 2001. REPORTABLE SEGMENTS The formation of FedEx Services, effective June 1, 2000, changed the way certain costs are captured and allocated between our operating segments. For example, salaries, wages and beneQts, depreciation and other costs for the sales, marketing and infor- mation technology departments previously incurred at FedEx Express and FedEx Ground are now allocated to these operating segments and are included in the line item cIntercompany charges d on the accompanying Qnancial summaries of our reportable segments. Consequently, certain segment expense data presented is not comparable to prior periods. We believe the total amounts allocated to the business segments reasonably reRect the cost of providing such services. Management 9s Discussion and Analysis 10 FEDEX EXPRESS The following table compares revenues and operating income (in millions) and selected statistics (in thousands, except dollar a mounts) for the years ended May 31: Percent Change 2001/ 2000/ 2001 2000 (1) 1999 (1) 2000 1999 Revenues: Package: U.S. overnight box (2) $5,830 $5,684$5,409 +3 +5 U.S. overnight envelope (3) 1,871 1,8541,776 +1 +4 U.S. deferred 2,492 2,4282,271 +3 +7 Total domestic package revenue 10,193 9,9669,456 +2 +5 International Priority (IP) 3,940 3,5523,019 +11 +18 Total package revenue 14,133 13,51812,475 +5 +8 Freight: U.S. 651 566440 +15 +29 International 424 492531 314 37 Total freight revenue 1,075 1,058971 +2 +9 Other 326 492533 334 38 Total revenues $15,534 $15,068$13,979 +3 +8 Operating expenses: Salaries and employee beneQts 6,301 Purchased transportation 584 Rentals and landing fees 1,419 Depreciation and amortization 797 Fuel 1,063 Maintenance and repairs 968 Intercompany charges 1,317 Other (4) 2,238 Total operating expenses 14,687 14,16813,108 +4 +8 Operating income $847 $900$871 36 +3 Percent Change 2001/ 2000/ 2001 20001999 2000 1999 Package: Average daily packages: U.S. overnight box 1,264 1,2491,207 +1 +3 U.S. overnight envelope 757 771750 32 +3 U.S. deferred 899 916894 32 +3 Total domestic packages 2,920 2,9362,851 31 +3 IP 346 319282 +8 +13 Total packages 3,266 3,2553,133 3 +4 Revenue per package (yield): U.S. overnight box $18.09 $17.70$17.51 +2 +1 U.S. overnight envelope 9.69 9.369.24 +4 +1 U.S. deferred 10.87 10.319.93 +5 +4 Domestic composite 13.69 13.2112.96 +4 +2 IP 44.70 43.3641.87 +3 +4 Composite 16.97 16.1615.56 +5 +4 Freight: Average daily pounds: U.S. 4,337 4,6934,332 38 +8 International 2,208 2,4202,633 39 38 Total freight 6,545 7,1136,965 38 +2 Revenue per pound (yield): U.S. $.59 $.47$.40 +26 +18 International .75 .79.79 35 3 Composite .64 .58.54 +10 +7 (1) Operating expense detail for 2000 and 1999 has been omitted, as this data is not comparable to 2001. See cReportable Segments d above. (2) The U.S. overnight box category includes packages exceeding 8 ounces inweight. (3) The U.S. overnight envelope category includes envelopes weighing 8 ounces orless. (4) Includes $93 million charge for impairment of certain assets related to the MD10 air- craft program and $9 million charge related to the Ayres aircraft program. FedEx Corporation 11 Revenues Total package revenue increased 5% for 2001, principally due to increases in yields and IP volumes, partially offset by a decrease in other revenue. Total package yield increased 5% as a result of our continued yield management strategy, which includes limiting growth of less proQtable business and recovering the higher cost of fuel through a fuel surcharge. The February 2001 domestic rate increases also contributed to the higher yield. While the IP volume growth rate was 8% for 2001, this rate was signiQcantly impacted by weakness in the Asian economy in the last half of the year. Average daily volumes for that region have slowed from a 26% year-over-year growth rate in the Qrst quarter of 2001 to a 1% year-over-year decline in the fourth quarter of 2001. For the year, FedEx Express experienced IP average daily volume growth rates of 24% and 12% in the European and Asian markets, respectively. In the U.S., average daily domestic pack- age volume declined 1% year over year due to the economic soft- ness experienced in the last half of 2001. Total freight revenue increased slightly in 2001 due to signiQcantly improved yields in U.S. freight, partially offset by declines in domestic freight volume and international freight volume and yield. Other revenue included Canadian domestic revenue, charter services, logistics services, sales of hushkits and other. As expected, revenue from hushkit sales, which has continued to decline over the past few years, was negligible in 2001. In 2000, total package revenue for FedEx Express increased 8%, principally due to increases in international package volume and yield. List price increases, including an average 2.8% domestic rate increase in March 1999, the fuel surcharges implemented in the second half of the year, an ongoing yield management pro- gram and a slight increase in average weight per package, all contributed to the increases in yields in 2000. While growth in U.S. domestic package volume was lower than anticipated, the higher-yielding IP services experienced strong growth, par- ticularly in Asia and Europe. Total freight revenue increased in 2000 due to higher average daily pounds and improved yields in U.S. freight, offset by declines in international freight pounds. Operating Income Excluding the fourth quarter charges related to aircraft, FedEx Express operating income increased 6% in 2001, despite the slowdown in revenue growth. Increased fuel expense reRects a 17% increase in average jet fuel price per gallon, which con- tributed to a negative impact of approximately $150 million, including the results of jet fuel hedging contracts entered into to mitigate some of the increased jet fuel costs. The effect of higher fuel costs on operating income was fully offset by a 4% fuel sur- charge, in effect since April 1, 2000. Operating income was favor- ably affected by reduced variable compensation and pension costs, coupled with intensiQed cost controls over discretionary spending. The decrease in maintenance and repairs expense pri- marily reRects fewer aircraft engine maintenance events due to the timing of scheduled maintenance and favorable negotiated rates with vendors. Operating income increased 3% in 2000 despite higher fuel costs and costs associated with the corporate realignment and reor- ganization of the sales, marketing and information technology functions. A 48% increase in average fuel price per gallon had a negative impact of approximately $260 million on 2000 fuel costs, including the results of jet fuel hedging contracts entered into to mitigate some of the increased jet fuel costs. Fuel surcharges implemented during 2000 partially offset the increase in 2000 fuel costs. Maintenance and repairs increased in 2000 due to the tim- ing of scheduled maintenance and a greater number of routine cycle checks resulting from Reet usage and certain Federal Aviation Administration directives. Operating income in 1999 was negatively impacted by $81 million in strike contingency costs and weakness in Asian markets. Year-over-year comparisons were also affected by declining con- tributions from sales of hushkits. Operating proQt from these sales declined $40 million in 2001 and $50 million in 2000. Outlook For 2002, U.S. domestic package volumes are expected to decline slightly. We believe that IP package volumes will grow at approxi- mately the same rate as 2001. New services, including the U.S. Postal Service agreements, are expected to increase revenues in2002. Operating margin for this segment is expected to decrease in 2002 (excluding the 2001 charges related to aircraft programs), as increased pension and health care costs, costs associated with new services and annual wage increases are not expected to be completely offset by suspension of variable compensation pro- grams and reductions in discretionary spending. Management 9s Discussion and Analysis 12 Because of substantial lead times associated with the manufac- ture or modiQcation of aircraft, we must generally plan our aircraft orders or modiQcations three to eight years in advance. Therefore, we must make projections regarding our needed airlift capacity many years before the aircraft is actually needed. Our past projec- tions included assumptions of volume growth that have not mate- rialized and, in light of current economic projections, are not expected to do so in the near future. Therefore, we will continue to evaluate further reductions in aircraft programs in order to ration- alize available capacity with current and anticipated business vol- umes where it is economically practicable to do so. FEDEX GROUND The following table compares revenues and operating income (in millions) and selected package statistics (in thousands, except dollar amounts) for the years ended May 31: Percent Change 2001/ 2000/ 2001 2000 (1) 1999 (1) 2000 1999 Revenues $2,237 $2,033$1,878 +10 +8 Operating expenses: Salaries and employee beneQts 450 Purchased transportation 881 Rentals and landing fees 67 Depreciation and amortization 111 Fuel 8 Maintenance and repairs 63 Intercompany charges 215 Other 267 Total operating expenses 2,062 1,8071,647 +14 +10 Operating income $175 $226$ 231 323 32 Average daily packages 1,520 1,4421,385 +5 +4 Revenue per package (yield) $5.79 $5.55$ 5.36 +4 +4 (1) Operating expense detail for 2000 and 1999 has been omitted, as this data is not comparable to 2001. See cReportable Segments d above. Revenues FedEx Ground revenues increased 10% in 2001 due to increases in volume and yield. The year-over-year increase in average daily packages of 5% represents positive volume growth experienced in all major sectors served by FedEx Ground, including our FedEx Home Delivery service. The 4% year-over-year yield increase was primarily due to the February 2001 list rate increase of 3.1%, the 1.25% fuel surcharge imposed in August 2000 and ongoing yield management efforts. Revenues for FedEx Ground increased 8% in 2000, while average daily packages increased 4% and yields increased 4%. The increase in yields was due to a 2.3% price increase, which was effective in February 1999, and a slight increase in the mix of higher yielding packages. Operating Income The 2001 year-over-year decrease in operating income of 23% was primarily due to incremental FedEx Home Delivery operating losses and rebranding and reorganization expenses, which totaled $45 million. Excluding the negative effect of this amount, operating income decreased 2% from 2000. Facility openings and expansions, as well as increased investments in information systems, resulted in increased depreciation, rental and other property-related expenses. Operating income for 2000 reRected higher operating costs than 1999, due primarily to increases in capacity and technology, as well as the effects of FedEx Home Delivery and the rebranding and reorganization initiatives. Depreciation expense increased 20% in 2000 as new terminal facilities were opened late in 1999 and throughout the Qrst half of 2000. The FedEx Home Delivery service, dedicated to meeting the needs of business-to-consumer shippers, was launched in March 2000. An operating loss of $19million was incurred by the home delivery service in 2000. Outlook FedEx Ground will continue expansion of the FedEx Home Delivery network to serve an estimated 80% of the U.S. population by September 2001. Revenues and volumes for this service are expected to continue to grow as the network is expanded and the service becomes available in additional markets. In addition to uti- lizing 2002 capital for expansion, FedEx Ground will also implement and improve information systems in order to increase productivity. We expect to incur an operating loss for the home delivery service in 2002 that is approximately the same as that experienced in 2001, primarily due to continued network expansion costs and inclusion of a full year for the terminals that opened during 2001. FedEx Ground will also continue to incur vehicle rebranding costs, although these expenses are expected to be slightly lower than the 2001 level. FEDEX FREIGHT The FedEx Freight segment, formed in the third quarter of 2001, includes the Qnancial results of Viking from December 1, 2000, and the Qnancial results of American Freightways from January 1, 2001 (the date of acquisition for Qnancial reporting purposes). FedEx Corporation 13 The following table shows revenues and operating income (in mil- lions) and selected statistics for the year ended May 31: 2001 Revenues $835 Operating expenses: Salaries and employee beneQts 489 Purchased transportation 23 Rentals and landing fees 27 Depreciation and amortization 44 Fuel 41 Maintenance and repairs 39 Intercompany charges 1 Other 116 Total operating expenses 780 Operating income $55 Shipments per day (1) 56,012 Weight per shipment(lbs) (1) 1,132 Revenue per hundredweight (1) $11.83 (1) Based on portion of the year including both American Freightways and Viking (January through May). Operating Results FedEx Freight has experienced lower than expected volumes since formation of the segment in third quarter 2001, due to the economic slowdown. The lower than expected volumes were partially offset by strong yields. The complementary geographic regions served by American Freightways and Viking are expected to have a positive impact on results of operations for this segment. Both companies will continue to focus on day-deQnite regional LTL service, but will also collaborate as partners to serve cus- tomers who have multiregional LTL needs. On July 10, 2001, FedEx Freight announced a general rate increase of 5.9% to be effective August 6, 2001. Fuel surcharges for this segment included the following at May31,2001: ShipmentsShipments OperatingUnderEqual to or Over Subsidiary20,000 pounds20,000 pounds American Freightways3%7% Viking3%6% The American Freightways fuel surcharge, which was in effect at the time of the acquisition, is tied to the cRetail on Highway Diesel Fuel Price d as published by the U.S. Department of Energy and changes weekly based on changes in the index. A fuel surcharge has been in effect at Viking since August 16, 1999. The Viking fuel surcharge on shipments equal to or over 20,000 pounds was increased to 7% effective June 4, 2001. Outlook In 2002, FedEx Freight will seek to improve yield, volume and margins by capitalizing on its excellent geographic coverage and by provid- ing superior on-time performance. FedEx Freight will continue to pursue synergies, such as leveraging information technology capa- bilities between American Freightways and Viking in order to improve cost structure, service and customer satisfaction levels. OTHER OPERATIONS Other operations include FedEx Custom Critical, a critical-shipment carrier; FedEx Trade Networks, a global trade services company; FedEx Supply Chain Services, a contract logistics provider; and certain unallocated corporate items. The operating results of Viking prior to December 1, 2000, are also included in this category. Revenues Revenues from other operations were $1 billion, $1.2 billion and $.9 billion in 2001, 2000 and 1999, respectively. Excluding the effects of businesses acquired during the comparable periods and the revenues of Viking, revenues from other operations decreased 11% in 2001, principally due to lower year-over-year revenues at FedEx Custom Critical. The demand for services pro- vided by this operating subsidiary (critical shipments) is highly elastic and tied to key economic indicators, principally in the automotive industry, where volumes have continued to decline since the beginning of 2001. The increase in other revenues from 1999 to 2000 was 15%, excluding the effects of businesses acquired in 2000, due to sub- stantially higher revenues at FedEx Custom Critical combined with double-digit revenue growth at Viking. Operating Income Operating income (loss) from other operations was ($6.7) million, $95.7 million and $60.6 million in 2001, 2000 and 1999, respectively. Operating income in 2001 decreased 150%, excluding the effects of businesses acquired during the comparable periods and the operations of Viking. The decrease reRects the effect of the eco- nomic slowdown on FedEx Custom Critical and FedEx Supply Chain Services and costs associated with the reorganization of FedEx Supply Chain Services. Increased operating income for 2000 was due to strong earn- ings at Viking and continued earnings growth at FedEx Custom Critical. Results for 2000 also included a $10 million favorable adjustment related to estimated future lease costs from the 1997 Viking restructuring. Management 9s Discussion and Analysis 14 Outlook In 2002, we will continue the strategic realignment of FedEx Supply Chain Services. The new FedEx Supply Chain Services business model includes substantially less emphasis on warehousing activi- ties and an increased focus on alliance-based and information technology-sensitive business. The new business model is more consistent with management 9s strategy for this operating sub- sidiary, which is to pursue business that enhances the services offered by other operating companies in the FedEx family. FINANCIAL CONDITION LIQUIDITY Cash and cash equivalents totaled $121 million at May 31, 2001, compared to $68 million at May 31, 2000. Cash Rows from operat- ing activities during 2001 totaled $2.0 billion, compared to $1.6 bil- lion for 2000 and $1.8 billion for 1999. Because we incur signiQcant noncash charges, including depre- ciation and amortization, related to the material capital assets utilized in our business, we believe that the following cash-based measures are useful to us and to our investors as an additional means of evaluating our Qnancial condition. These measures should not be considered as a superior alternative to net income, operating income or cash from operations, or to any other operat- ing or liquidity performance measure as deQned by generally accepted accounting principles. FedEx 9s operations have generated increased cash earnings per share over the past three years. The following table compares cash earnings (in billions, except per share amounts) for the years ended May 31: 2001 20001999 EBITDA (earnings before interest, taxes, depreciation and amortization) $2.3 $2.4$2.2 Cash earnings per share (net income plus depreciation and amortization divided by average common and common equivalent shares) $6.34 $6.22$5.54 We have a $1.0 billion revolving credit facility that is generally used to Qnance temporary operating cash requirements and to provide support for the issuance of commercial paper. As of May31, 2001, the entire credit facility remained available and no commercial paper was outstanding. For more information regard- ing the credit facility, see Note 4 to our Qnancial statements. During 2001, we acquired American Freightways in a transaction accounted for as a purchase. The $978 million purchase price was a combination of cash and FedEx common stock (11.0 million shares of treasury stock were utilized). We also assumed approx- imately $240 million in American Freightways debt. On February 12, 2001, we issued $750 million of senior unsecured notes in three maturity tranches: three, Qve and ten years, at $250million each. Net proceeds from the borrowings were used to repay indebtedness, principally borrowings under our commer- cial paper program, and for general corporate purposes. These notes are guaranteed by all of our subsidiaries that are not con- sidered minor under Securities and Exchange Commission ( cSEC d) regulations. For more information regarding debt instru- ments, see Notes 1 and 4 to our Qnancial statements. During 2002, certain existing debt at FedEx Express will mature, principally $175 million of 9.875% Senior Notes due April 1, 2002. These notes and the other scheduled 2002 debt payments are reRected in the current portion of long-term debt at May 31, 2001. In 1999, we Qled a $1 billion shelf registration statement with the SEC, indicating that we may issue up to that amount in one or more offerings of either unsecured debt securities, preferred stock or common stock, or a combination of such instruments. We may, at our option, direct FedEx Express to issue guarantees of the debt securities. We believe that cash Row from operations, our commercial paper program and revolving bank credit facility will adequately meet our working capital needs for the foreseeable future. CAPITAL RESOURCES As mentioned previously, our operations are capital intensive, characterized by signiQcant investments in aircraft, vehicles, computer and telecommunications equipment, package-handling facilities and sort equipment. The amount and timing of capital additions depend on various factors, including volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, competition, avail- ability of satisfactory Qnancing and actions of regulatory authorities. FedEx Corporation 15 The following table compares capital expenditures (including equivalent capital, which is deQned below) for the years ended May 31 (in millions): 2001 20001999 Aircraft and related equipment $756 $469$606 Facilities and sort equipment 353 437466 Information and technology equipment 406 378366 Other equipment 378 343332 Total capital expenditures 1,893 1,6271,770 Equivalent capital, principally aircraft-related 3 365561 Total $1,893 $1,992$2,331 We Qnance a signiQcant amount of aircraft and certain other equipment needs using long-term operating leases. We believe the determination to lease versus buy equipment is a Qnancing decision, and both forms of Qnancing are considered when evalu- ating the resources committed for capital. The amount we would have expended to purchase these assets had we not chosen to obtain their use through operating leases is considered equiva- lent capital in the table above. Capital expenditures (including equivalent capital) over the past two years have been reduced in response to lower U.S.domestic volume growth at FedEx Express. This trend of lower U.S. domestic volume growth, along with the current year economic slowdown and its effects on IP volume growth, has resulted in future excess airlift capacity. During the fourth quarter of 2001, we began the process of reducing certain planned aircraft programs, which is expected to result in lower capital expenditures in future periods (see Note 15 to our Qnan- cial statements). For 2002, we expect capital spending, including equivalent capital, to approximate the level of 2001 capital expenditures. We plan to continue to make strategic capital investments, particularly in information technology and ground network expansion, in support of our long-term growth goals. For information on our purchase commitments, see Note 13 to our Qnancial statements. We have historically Qnanced our capital investments through the use of lease, debt and equity Qnancing in addition to the use of internally generated cash from operations. Generally, our prac- tice in recent years with respect to funding new wide-bodied aircraft acquisitions has been to Qnance such aircraft through long-term lease transactions that qualify as off-balance sheet operating leases under applicable accounting rules. We have determined that these operating leases have provided economic beneQts favorable to ownership with respect to market values, liquidity and after-tax cash Rows. In the future, other forms of secured Qnancing may be pursued to Qnance aircraft acquisitions when we determine that it best meets our needs. Historically, we have been successful in obtaining investment capital, both domestic and international, for long-term leases on acceptable terms, although the marketplace for such capital can become restricted depending on a variety of economic factors beyond our control. See Note 4 to our Qnancial statements for additional infor- mation concerning our debt facilities. We believe the capital resources available to us provide Rexi- bility to access the most efQcient markets for Qnancing capital acquisitions, including aircraft, and are adequate for our future capital needs. MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS While we currently have market risk sensitive instruments related to interest rates, we have no signiQcant exposure to changing interest rates on our long-term debt because the interest rates are Qxed. As disclosed in Note 4 to our Qnancial statements, we have outstanding long-term debt (exclusive of capital leases) of $1.9 billion and $1.1 billion at May31, 2001 and 2000, respectively. Market risk for Qxed-rate, long-term debt is estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates and amounts to approximately $55 mil- lion as of May 31, 2001 ($54 million as of May 31, 2000). The under- lying fair values of our long-term debt were estimated based on quoted market prices or on the current rates offered for debt with similar terms and maturities. Presently, derivative instruments are not used to manage interest rate risk. Our earnings are affected by Ructuations in the value of the U.S.dollar compared to foreign currencies as a result of trans- actions in foreign markets. At May 31, 2001, the result of a uniform 10% strengthening in the value of the dollar relative to the curren- cies in which our transactions are denominated would result in a decrease in operating income of approximately $70 million for the year ending May 31, 2002 (the comparable amount in the prior year was approximately $50 million). This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In practice, our experience is that exchange rates in the principal foreign markets where we have foreign cur- rency denominated transactions tend to have offsetting Ructua- tions. Therefore, the calculation above is not indicative of our actual experience in foreign currency transactions. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting reported operating results, changes in exchange rates also affect the volume of sales or the Management 9s Discussion and Analysis 16 foreign currency sales price as competitors 9 services become more or less attractive. The sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. Our earnings are also affected by Ructuations in jet fuel prices. Market risk for jet fuel is estimated as the potential decrease in earnings resulting from a hypothetical 10% increase in projected jet fuel prices applied to projected 2002 usage and amounts to approximately $100 million as of May 31, 2001, compared with approximately $50 million, net of hedging settlements, as of May31, 2000. Because we also use fuel surcharges to adjust our pricing in response to changes in fuel costs, the calculations above are not necessarily indicative of the impact of changing fuel prices on our earnings. As of May 31, 2001, all outstanding jet fuel hedging contracts were effectively closed by entering into offsetting jet fuel hedging contracts. See Notes 1 and 13 to our Qnancial statements for accounting policy and additional infor- mation regarding jet fuel hedging contracts. We do not purchase or hold any material derivative Qnancial instruments for trading purposes. EURO CURRENCY CONVERSION Since the beginning of the European Union 9s transition to the euro on January 1, 1999, our subsidiaries have been prepared to quote rates to customers, generate billings and accept payments in both euro and legacy currencies. The legacy currencies will remain legal tender through December 31, 2001. We believe the introduc- tion of the euro, any price transparency brought about by its introduction and the phasing out of the legacy currencies will not have a material impact on our consolidated Qnancial position, results of operations or cash Rows. Costs associated with the euro project are being expensed as incurred and are being funded entirely by internal cash Rows. FORWARD-LOOKING STATEMENTS Certain statements contained in this report are cforward-looking statements d within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to man- agement 9s views with respect to future events and Qnancial per- formance. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements. Accordingly, a forward-looking statement is not a prediction of future events or circumstances, and those future events or circum- stances may not occur. A forward-looking statement is usually identiQed by our use of certain terminology, including cbelieves, d cexpects, d cmay, d cwill, d cshould, d cseeks, d cpro forma, d cantici- pates, d cintends d or cplans d or by discussions of strategies, intentions or outlook. Potential risks and uncertainties include, but are not limited to " Economic conditions in the markets in which we operate, which can affect demand for our services. " Our ability to match aircraft, vehicle and sort capacity with cus- tomer volume levels. " The costs and complexities associated with the integration of certain of our sales, marketing, customer service and informa- tion technology functions. " Market acceptance of our new sales, marketing and branding strategies, as well as our residential home delivery service. " Competition from other providers of transportation and logistics services, including competitive responses to our new initiatives. " Our ability to adapt to technological change and to compete with new or improved services offered by our competitors. " Changes in customer demand patterns, including the impact of technology developments on demand for our services. " Increases in aviation and motor fuel prices. " Work stoppages, strikes or slowdowns by our employees. " Our ability, and that of our principal competitors, to obtain and maintain aviation rights in important international markets. " Changes in government regulation. " Changes in weather. " Availability of Qnancing on termsacceptableto us. " Other uncertainties detailed herein and from time to time in our Securities and Exchange Commission Qlings and press

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