SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
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For the Quarter Ended June 30, 1998
Commission file number 0-4714
United Parcel Service of America, Inc.
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(Exact name of registrant specified in its charter)
Delaware 95-1732075
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Glenlake Parkway, NE
Atlanta, Georgia 30328
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (404) 828-6000
Not Applicable
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Former name, address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements of the past 90 days.
YES X NO
Common Stock, par value $.10 per share
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(Title of Class)
559,000,000 shares
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Outstanding as of August 13, 1998
<PAGE>
PART I. ITEM 1- FINANCIAL INFORMATION
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 (unaudited) and December 31, 1997
(In millions except share amounts)
ASSETS 1998 1997
- ------ ---- ----
CURRENT ASSETS:
Cash and short-term investments $ 1,103 $ 460
Accounts receivable 2,412 2,405
Prepaid employee benefit costs 600 669
Materials, supplies and other prepaid expenses 487 417
Common stock held for stock plans 514 526
------ ------
TOTAL CURRENT ASSETS 5,116 4,477
PROPERTY, PLANT AND EQUIPMENT (including
aircraft under capitalized lease
obligations)- at cost, net of accumulated
depreciation and amortization of
$7,858 in 1998 and $7,495 in 1997 10,863 11,007
OTHER ASSETS 275 428
------ ------
$16,254 $15,912
====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,094 $ 1,207
Accrued wages and withholdings 1,268 1,194
Dividends payable - 191
Deferred income taxes 150 140
Current maturities of long-term debt 243 41
Other current liabilities 662 625
------ ------
TOTAL CURRENT LIABILITIES 3,417 3,398
LONG-TERM DEBT (including capitalized lease
obligations) 2,374 2,583
------ ------
ACCUMULATED POSTRETIREMENT BENEFIT
OBLIGATION, NET 961 911
------ ------
DEFERRED TAXES, CREDITS AND OTHER LIABILITIES 2,948 2,933
------ ------
SHAREOWNERS' EQUITY:
Preferred stock, no par value,
Authorized 200,000,000 shares, none issued - -
Common stock, par value $.10 per share,
Authorized 900,000,000 shares, issued
559,000,000 and 562,000,000, net of
21,000,000 and 18,000,000 in treasury, at
June 30, 1998 and December 31, 1997 56 56
Additional paid-in capital - -
Retained earnings 6,596 6,112
Cumulative foreign currency adjustments (98) (81)
------ ------
6,554 6,087
------ ------
$16,254 $15,912
====== ======
See notes to consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months and Six Months Ended June 30, 1998 and 1997
(In millions except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
1998 1997 1998 1997
---- ---- ---- ----
Revenue $ 6,107 $ 5,846 $11,966 $11,510
------ ------ ------ ------
Operating Expenses:
Compensation and
benefits 3,531 3,406 7,002 6,825
Other 1,771 1,822 3,519 3,641
------ ------ ------ ------
5,302 5,228 10,521 10,466
------ ------ ------ ------
Operating Profit 805 618 1,445 1,044
------ ------ ------ ------
Other income and
(expense):
Interest income 16 9 30 19
Interest expense (57) (37) (115) (78)
Miscellaneous, net 1 (8) 6 (15)
------ ------ ------ ------
(40) (36) (79) (74)
Income before income
taxes 765 582 1,366 970
Income taxes 307 242 556 402
------ ------ ------ ------
Net income $ 458 $ 340 $ 810 $ 568
====== ====== ====== ======
Basic earnings per
share $ 0.84 $ 0.61 $ 1.49 $ 1.03
====== ====== ====== ======
Diluted earnings per
share $ 0.83 $ 0.61 $ 1.47 $ 1.01
====== ====== ====== ======
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Six Months Ended June 30, 1998
(In millions)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cumulative
Additional Foreign Total
Common Stock Paid-In Retained Currency Shareowners'
Shares Amount Capital Earnings Adjustments Equity
------ ------ ------- -------- ----------- ------
Balance, January 1, 1998 562 $56 $- $6,112 $(81) $6,087
Comprehensive income:
Net income - - - 810 - 810
Foreign currency
adjustments - - - - (17) (17)
------
Comprehensive income 793
------
Dividends
($.40 per share) - - - (219) - (219)
Gain on issuance of
common stock held
for stock plans - - 8 - - 8
Exercise of stock
options - - (8) (17) - (25)
Reclassification of
common stock (3) - - (90) - (90)
--- --- -- ------ ----- ------
Balance, June 30, 1998 559 $56 $- $6,596 $ (98) $6,554
=== === == ====== ===== ======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
(In millions)
(unaudited)
1998 1997
Cash flows from operating activities: ---- ----
Net income $ 810 $ 568
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 547 517
Postretirement benefits 50 56
Deferred taxes, credits and other (1) 170
Changes in assets and liabilities:
Accounts receivable 58 92
Prepaid employee benefit costs 69 62
Materials, supplies and other
prepaid expenses (62) 69
Common stock held for stock plans 12 17
Accounts payable (113) (59)
Accrued wages and withholdings 74 (54)
Dividends payable (191) (194)
Other current liabilities 37 152
----- -----
Net cash provided from operating activities 1,290 1,396
----- -----
Cash flows from investing activities:
Capital expenditures (504) (772)
Disposals of property, plant and equipment 120 67
Other asset receipts 82 14
----- -----
Net cash (used in) investing activities (302) (691)
----- ----
Cash flows from financing activities:
Proceeds from borrowings 166 732
Repayment of borrowings (173) (941)
Reclassification of common stock (90) -
Dividends (219) (195)
Other transactions (17) (6)
----- -----
Net cash (used in) financing activities (333) (410)
----- -----
Effect of exchange rate changes on cash (12) (16)
----- -----
Net increase in cash and short-term investments 643 279
Cash and short-term investments:
Beginning of period 460 392
----- -----
End of period $1,103 $ 671
===== =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 176 $ 60
===== =====
Income taxes $ 560 $ 141
===== =====
See notes to consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Six Months Ended June 30, 1998 and 1997
(unaudited)
1. For interim consolidated financial statement purposes, UPS computes its tax
provision on the basis of its estimated annual effective income tax rate and
provides for accruals under its various employee benefit plans based on one
quarter of the estimated annual expense for each three month period. Effective
January 1, 1998, UPS adopted Statement of Financial Accounting Standards No. 130
("FAS 130"), "Reporting Comprehensive Income". FAS 130 requires comprehensive
income and its components to be separately displayed within the financial
statements. Comprehensive income, which totaled $793 million for the six months
ended June 30, 1998, includes net income and foreign currency adjustments and is
displayed in the Consolidated Statement of Shareowners' Equity. Comprehensive
income for the comparable six months of 1997 totaled $501 million and was
comprised of net income of $568 million less foreign currency adjustments of $67
million.
2. In the opinion of management, the accompanying interim, unaudited,
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position as of
June 30, 1998, the results of operations for the three months and six months
ended June 30, 1998 and 1997, and cash flows for the six months ended June 30,
1998 and 1997.
3. The following table sets forth the computation of basic and diluted earnings
per share (in millions except per share amounts):
Three Months Six Months
Ended Ended
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Numerator for basic and diluted
earnings per share - net income $ 458 $ 340 $ 810 $ 568
===== ===== ===== =====
Denominator:
Weighted-average shares- denominator
for basic earnings per share 544 554 545 554
Effect of dilutive securities:
Additional contingent shares -
managers incentive plan 6 5 5 4
Stock option plans 2 2 2 2
------ ------ ------ ------
Denominator for diluted earnings
per share 552 561 552 560
====== ====== ====== ======
Basic earnings per share $0.84 $0.61 $1.49 $1.03
====== ====== ====== ======
Diluted earnings per share $0.83 $0.61 $1.47 $1.01
====== ====== ====== ======
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Six Months Ended June 30, 1998 and 1997
(unaudited)
4. During the second quarter of 1995, the Company received a Notice of
Deficiency from the United States Internal Revenue Service ("IRS") asserting
that it is liable for additional tax for the 1983 and 1984 tax years. The Notice
of Deficiency is based in large part on the theory that UPS is liable for tax on
income of Overseas Partners Ltd., a Bermuda company, which has reinsured excess
value package insurance purchased by UPS's customers from unrelated insurers.
The deficiency sought by the IRS relating to package insurance is based on a
number of theories, which the Company believes are inconsistent, and ranges from
$8 million to $35 million of tax, plus penalties and interest for 1984.
Agents for the IRS have also asserted in reports that UPS is liable for
additional tax for the 1985 through 1990 tax years. The additional tax sought by
the agents relating to package insurance for these periods range from $89
million to $148 million for the 1985 through 1987 tax years and up to $174
million for the 1988 through 1990 tax years, plus penalties and interest. The
IRS has based their assertions on the same theories included in the above
described Notice of Deficiency.
In addition, the IRS and its agents have raised a number of other issues
relating to the timing of deductions; the characterization of expenses as
capital rather than ordinary; and UPS's entitlement to the Investment Tax Credit
and the Research Tax Credit in the 1983 through 1990 tax years. These issues
total $32 million in tax for the 1983 and 1984 tax years, $95 million in tax for
the 1985 through 1987 tax years, and $228 million in tax for the 1988 through
1990 tax years. Penalties and interest are in addition to these amounts. The
majority of these adjustments would reverse in future years.
In August 1995, the Company filed a petition in Tax Court in opposition to
the Notice of Deficiency related to the 1983 and 1984 tax years. The matter was
tried before the Tax Court in two sessions, from September 15 through September
30, 1997, and from November 6 through November 7, 1997. Even though the Tax
Court has no scheduled date for the opinion to be rendered, the Company does not
anticipate a decision until the beginning of 1999, at the earliest. Management
still believes that the eventual resolution of the matters raised by the IRS
will not result in a material adverse effect upon the financial condition of the
Company.
The Company has appealed with the IRS all material issues related to the
1985 through 1990 tax years. The IRS may take positions similar to those in the
reports described above for periods after 1990.
The Company is a defendant in various employment-related lawsuits. In one
of these actions, which alleges employment discrimination by the Company, class
action status has been granted, and the United States Equal Employment
Opportunity Commission has been granted the right to intervene. This lawsuit is
in its early stages, and the Company is presently unable to estimate its
exposure.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Six Months Ended June 30, 1998 and 1997
(unaudited)
In the pilot litigation previously reported, the Company has negotiated
settlements with nearly all of the plaintiff pilots in an aggregate amount not
material to the Company. Settlement discussions continue with a small number of
the non-settling plaintiffs.
In addition to the preceding, UPS is a defendant in various other lawsuits
which arose in the normal course of business. In the opinion of management, none
of these cases are expected to have a material adverse effect upon the financial
condition of the Company.
5. Certain prior period amounts have been reclassified to conform to the current
period presentation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
For the three months ended June 30, 1998, revenue increased by $261
million, or 4.5%, in comparison with the three months ended June 30, 1997. For
the second quarter of 1998, domestic revenue totaled $5.308 billion, an increase
of $208 million, or 4.1%, over the second quarter of 1997, and international
revenue totaled $799 million, an increase of $53 million, or 7.0%.
Domestic revenue increased primarily as a result of generally higher
yields along with continued improvement in product mix. Although domestic
express volume was up 2.8%, total domestic volume was down 3.9% for the quarter.
In general, domestic ground volume has not returned to levels which existed
prior to the August 1997 International Brotherhood of Teamsters strike.
In reaction to this continued decrease, UPS has launched several
initiatives which are intended to regain lost volume and provide future growth.
The most significant of these initiatives was the introduction of Guaranteed
Ground service on May 4, 1998. At no additional cost to customers, this service
provides a time-definite service for business-to-business ground packages and
includes a money-back guarantee. The cost of customer refunds to date has been
minimal. Given the short time period in which the program has been in place, it
is premature to determine the overall impact it will have on operating results.
The increase in international revenue was primarily attributable to a $46
million or 8.7% increase in international export revenue. In addition,
international domestic revenue improved $7 million, or 3.0%. Driving this
improvement were volume increases of 14.5% and 10.2% for international export
and domestic operations, respectively. The continued strengthening of the U.S.
dollar reduced the revenue increases for both international export and domestic
revenues.
Consolidated operating expenses increased by $74 million, or 1.4%, while
the operating ratio improved from 89.4 during 1997 to 86.8 during 1998. The
containment of operating expense growth was inclusive of a 3.7% increase in
compensation and benefits costs. Contributing to the containment of operating
costs were lower fuel costs and the reduction of overhead costs. Fuel prices
during the second quarter of 1998 were significantly less than in 1997, and are
subject to general market fluctuations.
Operating profit for the period increased $187 million, or 30.3%. The
increase is primarily attributable to improved yields on U.S. domestic products,
improved international operating results and the overall containment of
operating expense growth.
Income before income taxes ("pre-tax income") increased $183 million, or
31.4%. Domestic pre-tax income amounted to $724 million, an increase of $153
million, or 26.7% over the corresponding quarter of the previous year. The
increase is primarily attributable to containment of operating expense growth
and improved revenue yields as discussed above. International pre-tax income
amounted to $41 million, an improvement of $30 million over the corresponding
quarter of the previous year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
Pre-tax income associated with international export and domestic
operations improved by $27 million and $3 million, respectively. The
continuation of these favorable trends in international export and domestic
operations resulted primarily from higher volume, improved product mix, lower
fuel costs and better utilization of existing capacity. Furthermore, despite the
recent economic problems in Asia, operating results associated with that region
have continued to improve, and UPS has been minimally affected by the decline in
Asian currency values. This is due, in part, to focusing on volume moving to and
from Asia where rates are generally denominated in or pegged to U.S. dollars.
Export volume increased by 20.7% and 3.8% for international and U.S. origin
export shipments, respectively.
Net income increased by $118 million, or 34.7%, over the corresponding
quarter of the prior year. The net increase resulted primarily from improved
yields on U.S. domestic products, improved international operating results and
the overall containment of operating expense growth.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 and 1997
For the six months ended June 30, 1998, revenue increased by $456 million,
or 4.0%, in comparison with the six months ended June 30, 1997. During the same
period, domestic revenue totaled $10.405 billion, an increase of $350 million,
or 3.5%, over 1997, and international revenue totaled $1.561 billion, an
increase of $106 million, or 7.2%.
Domestic revenue increased primarily as a result of generally higher
yields, along with continued improvement in product mix. Although domestic
express volume was up 4.0%, total domestic volume was down 3.9% for the six
months. In general, domestic ground volume has not returned to levels which
existed prior to the August 1997 International Brotherhood of Teamsters strike.
See the discussion for the three months ended June 30, 1998 and 1997 regarding
the Company's efforts to address this situation.
During the first quarter of 1998, rates for standard ground shipments were
increased an average of 3.6% for commercial deliveries, and the ground
residential premium increased from $.80 to $1.00 over the commercial ground
rate. In addition, rates for UPS Next Day Air, UPS 2nd Day Air and 3 Day Select
each increased approximately 3.3%. Rates for international shipments originating
in the United States did not increase for UPS Worldwide Express, UPS Worldwide
Expedited and UPS Standard Service to Canada. Rate changes for shipments
originating outside the United States have been made throughout the past year
and vary by geographic market.
The increase in international revenue was primarily attributable to a $92
million or 9.1% increase in international export revenue. In addition,
international domestic revenue improved $14 million, or 3.0%. Driving this
improvement were volume increases of 16.4% and 13.2% for international export
and domestic operations, respectively. The continued strengthening of the U.S.
dollar reduced the revenue increases for both international export and domestic
revenues.
Consolidated operating expenses increased by $55 million, or 0.5%, while
the operating ratio improved from 90.9 during 1997 to 87.9 during 1998. The
containment of operating expense growth was inclusive of a 2.6% increase in
compensation and benefits costs. Contributing to the containment of operating
costs were lower fuel costs and the reduction of overhead costs. Fuel prices
during the first six months of 1998 were significantly less than in 1997, and
are subject to general market fluctuations.
Operating profit for the period increased $401 million, or 38.4%. The
increase is primarily attributable to improved yields on U.S. domestic products,
improved international operating results and the overall containment of
operating expense growth.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 and 1997
Income before income taxes ("pre-tax income") increased $396 million, or
40.8%. Domestic pre-tax income amounted to $1.291 billion, an increase of $301
million, or 30.4% over the corresponding period of the previous year. The
increase is primarily attributable to containment of operating expense growth
and improved revenue yields as discussed above. International pre-tax income
amounted to $75 million, an improvement of $95 million over the loss of the
corresponding period of the previous year.
Pre-tax income associated with international export and domestic
operations improved by $76 million and $19 million, respectively. The
continuation of these favorable trends in international export and domestic
operations resulted primarily from higher volume, improved product mix, lower
fuel costs and better utilization of existing capacity. Furthermore, despite the
recent economic problems in Asia, operating results associated with that region
have continued to improve, and UPS has been minimally affected by the decline in
Asian currency values. This is due, in part, to focusing on volume moving to and
from Asia where rates are generally denominated in or pegged to U.S. dollars.
Export volume increased by 23.8% and 3.9% for international and U.S. origin
export shipments, respectively.
Net income increased by $242 million, or 42.6%, over the corresponding
period of the prior year. The net increase resulted primarily from improved
yields on U.S. domestic products, improved international operating results and
the overall containment of operating expense growth.
The results of operations for the three and six months ended June 30,
1998, are not necessarily indicative of the results to be expected for the full
year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Liquidity and Capital Resources
In April 1998, UPS renegotiated and extended its two credit agreements
with a consortium of banks. These agreements provide revolving credit facilities
of $1.25 billion each with one expiring April 29, 1999, and the other April 30,
2003.
Management believes that the resources described above, combined with the
Company's internally generated resources and other credit facilities, will
provide adequate sources of liquidity and capital resources to meet its expected
long-term needs for the operation of its business, including anticipated capital
expenditures and purchase commitments.
During 1995, the Company received a Notice of Deficiency from the United
States Internal Revenue Service ("IRS") asserting that it is liable for
additional tax for the 1983 and 1984 tax years. Agents for the IRS have also
asserted in reports that UPS is liable for additional tax for the 1985 through
1990 tax years. The Company is also a defendant in various employment-related
lawsuits. Reference is made here to Note 4 to the accompanying unaudited
consolidated financial statements for more information.
Future Accounting Changes
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities"("FAS
133"), which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The new
statement is effective for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged but not required. Because of the Company's limited
use of derivatives, management does not anticipate that the adoption of FAS 133
will have a significant effect on earnings or the financial position of the
Company.
Impact of the Year 2000 Issue
Introduction
- ------------
The term "year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Impact of the Year 2000 Issue (continued)
State of Readiness
- ------------------
In 1995, UPS created a Year 2000 Committee tasked with evaluating the year
2000 issue and taking the appropriate actions. The Year 2000 Committee has
developed and is currently implementing a comprehensive initiative (the
"Initiative") to make its information technology assets, including embedded
microprocessors ("IT assets") and non-IT assets year 2000 ready. The Initiative
covers the following eight phases: (i) inventory of all IT and non-IT assets,
(ii) assessment of repair requirements, (iii) repair of IT and non-IT assets,
(iv) testing of individual IT and non-IT assets to determine correct
manipulation of dates and date-related data, (v) certification by users that IT
and non-IT assets correctly handle dates and date-related data, (vi) selected
verification by UPS internal auditors that phases (i) through (v) were properly
completed for business critical IT and non-IT assets, (vii) integration testing
of multiple IT and non-IT assets, both internally developed and vendor-provided,
to determine correct manipulation of dates and date-related data, and (viii)
creation of contingency plans in the event of year 2000 failures.
Since UPS believes that the majority of its business critical IT assets
are controlled by UPS's Information Services Group ("IS Group"), implementation
of the Initiative for these IT assets was scheduled to occur first. Such assets
include, but are not limited to, package tracking, billing, customer telephone
service center, and UPS OnLine(R) Automation systems. As of June 30, 1998, the
first six phases of the Initiative had been completed for the majority of such
IT assets that have been internally developed and a significant portion of the
first six phases had been completed for such IT assets that were developed by
third parties. The completion of the six phases for these assets is scheduled
for the end of the first quarter of 1999.
Implementation of the Initiative for non-IT assets and IT assets
controlled by all business functions other than the IS Group are in the earlier
phases of the Initiative, with the majority of the functions having completed
the inventory phase. The completion of the first six phases for all such assets
is scheduled by the end of the second quarter of 1999. The Initiative calls for
system integration testing of all UPS IT and non-IT assets to begin no later
than the end of the first quarter of 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Impact of the Year 2000 Issue (continued)
UPS is also contacting suppliers who provide both critical IT assets and
non-information technology-related goods and services (e.g. vehicles, fuel,
packaging materials, and forms) to (1) evaluate their Year 2000 compliance plans
and state of readiness and (2) determine whether a year 2000-related event will
impede the ability of such suppliers to continue to provide such goods and
services as the year 2000 is approached and reached. UPS has received assurances
from a vast majority of suppliers of IT assets controlled by the IS Group that
these assets will correctly manipulate dates and date-related data as the year
2000 is approached and reached. UPS is evaluating these assurances for their
accuracy and adequacy. UPS has not yet received a significant number of
responses from suppliers of non-IT and IT assets controlled by business
functions other than the IS Group. As a general matter, UPS is vulnerable to
significant suppliers' inability to remedy their own year 2000 issues.
Further, UPS also relies, both domestically and internationally, upon
government agencies (particularly the Federal Aviation Administration), utility
companies, telecommunication service companies and other service providers
outside of UPS's control. There is no assurance that such suppliers,
governmental agencies, or other third parties will not suffer a year 2000
business disruption. Such failures could have a material adverse affect on UPS's
financial condition and results of operations.
In addition, UPS has retained an independent consultant ("Consultant") to
assess (1) whether the Initiative, if appropriately administered, can result in
year 2000 readiness, and (2) UPS's progress with respect to the Initiative. If
the Consultant determines that the Initiative will not adequately lead to year
2000 readiness, the Consultant will provide recommendations for appropriately
adjusting the Initiative. The Consultant will periodically review UPS's progress
and recommend any necessary adjustments.
Costs to Address the Year 2000 Issue
- ------------------------------------
To date, UPS estimates that it has spent approximately $27 million on
implementation of the Initiative with the majority of the work being performed
by Company employees. UPS expects to be able to provide an estimate of remaining
costs to fully implement the Initiative by the time it files its third quarter
Form 10-Q. Furthermore, UPS believes such costs will not have a material effect
on liquidity or financial condition. UPS intends to fund from operations the
costs of implementing the Initiative. While UPS has incurred an opportunity cost
for implementing the Initiative, thus possibly deferring potentially beneficial
information technology projects, UPS has not deferred any specific information
technology project as a result of the implementation of the Initiative.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Impact of the Year 2000 Issue (continued)
Risks Presented by the Year 2000 Issue
- --------------------------------------
Until system integration testing is substantially in process, UPS cannot
fully estimate the risks of its year 2000 issue. To date, UPS has not identified
any IT assets under the control of the IS Group that present a material risk of
not being year 2000 ready or for which a suitable alternative cannot be
implemented. However, as the Initiative proceeds into subsequent phases, it is
possible that UPS may identify assets that do present a risk of a year
2000-related disruption. It is also possible that such a disruption could have a
material adverse effect on financial condition and results of operations. In
addition, if any third parties who provide goods or services that are critical
to UPS's business activities fail to appropriately address their year 2000
issues, there could be a material adverse effect on UPS's financial condition
and results of operations.
Contingency Plans
- -----------------
The Initiative calls for the development of contingency plans for UPS's
at-risk business functions including the IS Group. Because UPS has not begun
systems integration testing, and, accordingly, has not fully assessed its risks
from potential year 2000 failures, UPS has not yet developed year 2000-specific
contingency plans. UPS will develop such plans if the results of systems
integration testing identify a business function at risk. In addition, as a
normal course of business, UPS maintains and deploys contingency plans designed
to address various other potential business interruptions. These plans may be
applicable to address the interruption of support provided by third parties
resulting from their failure to be year 2000 ready.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and Liquidity and Capital Resources, and other parts of
this Report, contain "forward-looking" statements about matters that are
inherently difficult to predict. Those statements include statements regarding
the intent, belief or current expectations of UPS and its management. Some of
the important factors that affect these statements have been described above as
each subject is discussed. Such forward-looking statements involve risks and
uncertainties that may affect future developments such as, for example, the
ability to deal with the year 2000 issue, including problems that may arise on
the part of third parties. If the modifications and conversions required to make
UPS year 2000 ready are not made or are not completed on a timely basis, the
resulting problems could have a material impact on the operations of the
Company. This impact could, in turn, have a material adverse effect on the
Company's results of operations and financial condition.
<PAGE>
PART II
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of shareowners of the Registrant was held on April 30,
1998.
Proxies for the meeting were solicited pursuant to Regulation 14A under
the Securities Exchange Act of 1934, there was no solicitation in opposition to
management's nominees as listed in Item No. 1 in the proxy statement, and all of
such nominees were elected.
1. The results of the voting by the shareowners for directors are presented
below.
Percent of
Director Number of Votes Total Voting
-------- --------------- ------------
John W. Alden For 470,311,286 95.37%
Withheld 22,834,305 4.63%
William H. Brown, III For 480,845,606 97.51%
Withheld 12,299,985 2.49%
Robert J. Clanin For 481,960,417 97.73%
Withheld 11,185,174 2.27%
Michael L. Eskew For 481,761,577 97.69%
Withheld 11,384,014 2.31%
James P. Kelly For 480,720,922 97.48%
Withheld 12,424,669 2.52%
Ann M. Livermore For 481,805,905 97.70%
Withheld 11,339,686 2.30%
Gary E. MacDougal For 480,801,405 97.50%
Withheld 12,344,186 2.50%
Joseph R. Moderow For 482,444,700 97.83%
Withheld 10,700,891 2.17%
Kent C. Nelson For 475,205,971 96.36%
Withheld 17,939,620 3.64%
Victor A. Pelson For 481,949,328 97.73%
Withheld 11,196,263 2.27%
John W. Rogers For 481,081,227 97.55%
Withheld 12,064,364 2.45%
Charles L. Schaffer For 482,942,508 97.93%
Withheld 10,203,083 2.07%
Lea N. Soupata For 472,828,887 95.88%
Withheld 20,316,704 4.12%
Robert M. Teeter For 481,651,868 97.67%
Withheld 11,493,723 2.33%
Thomas H. Weidemeyer For 481,212,303 97.58%
Withheld 11,933,288 2.42%
<PAGE>
PART II
2. The proposal and the results of the voting by the shareowners for the
auditors are presented below.
Percent of
Number of Votes Total Voting
--------------- ------------
To confirm the appointment of Deloitte &
Touche LLP, independent auditors, as For 486,452,745 98.64%
auditors of UPS and its subsidiaries for Against 5,131,646 1.04%
the year ending December 31, 1998 Abstain 1,561,200 0.32%
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits: none
B) Reports on Form 8-K: no reports on Form 8-K were filed during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED PARCEL SERVICE OF AMERICA, INC.
(Registrant)
By: /S/ Robert J. Clanin
--------------------------------
Robert J. Clanin
Senior Vice President,
Treasurer and
Chief Financial Officer
Date: August 13, 1998
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