SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
- --------------------------------------------------------------------------
For the Quarter Ended June 30, 1999
Commission file number 0-4714
United Parcel Service of America, Inc.
- --------------------------------------------------------------------------
(Exact name of registrant specified in its charter)
Delaware 95-1732075
- --------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Glenlake Parkway, NE
- --------------------------------------------------------------------------
Atlanta, Georgia 30328
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (404) 828-6000
Not Applicable
- --------------------------------------------------------------------------
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 for the past 90 days.
YES X NO
Common Stock, par value $.10 per share
- --------------------------------------------------------------------------
(Title of Class)
547,375,998 shares
- --------------------------------------------------------------------------
Outstanding as of August 9, 1999
<PAGE>
PART I. ITEM 1- FINANCIAL INFORMATION
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 (unaudited) and December 31, 1998
(In millions except share and per share amounts)
Assets 1999 1998
Current Assets:
Cash and cash equivalents $ 1,778 $ 1,240
Marketable securities 1,465 389
Accounts receivable 2,628 2,713
Prepaid employee benefit costs 291 703
Materials, supplies and other prepaid expenses 442 380
Total Current Assets 6,604 5,425
Property, Plant and Equipment (including
aircraft under capitalized lease
obligations)- at cost, net of accumulated
depreciation and amortization of $8,588
in 1999 and $8,170 in 1998 11,466 11,384
Other Assets 232 258
$18,302 $17,067
Liabilities and Shareowners' Equity
Current Liabilities:
Commercial paper $ 719 $ -
Accounts payable 1,282 1,322
Accrued wages and withholdings 1,232 1,092
Dividends payable - 247
Tax assessment 1,672 -
Income taxes payable 226 12
Deferred income taxes 94 114
Current maturities of long-term debt 376 410
Other current liabilities 569 520
Total Current Liabilities 6,170 3,717
Long-Term Debt (including capitalized lease
obligations) 2,138 2,191
Accumulated Postretirement Benefit
Obligation, Net 1,017 969
Deferred Taxes, Credits and Other Liabilities 2,855 3,017
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 56 56
Additional paid-in capital 189 325
Retained earnings 6,614 7,280
Accumulated other comprehensive loss (147) (63)
6,712 7,598
Treasury stock, at cost (12,547,559 and
11,605,952 shares in 1999 and 1998) (590) (425)
6,122 7,173
$18,302 $17,067
See notes to unaudited consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
Three Months and Six Months Ended June 30, 1999 and 1998 (In
millions except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
1999 1998 1999 1998
Revenue $ 6,560 $ 6,107 $12,891 $11,966
Operating Expenses:
Compensation and benefits 3,725 3,531 7,377 7,002
Other 1,833 1,771 3,646 3,519
5,558 5,302 11,023 10,521
Operating Profit 1,002 805 1,868 1,445
Other Income and (Expense):
Investment income 39 16 70 30
Interest expense (56) (57) (105) (115)
Tax assessment (1,786) - (1,786) -
Miscellaneous, net (6) 1 (22) 6
(1,809) (40) (1,843) (79)
Income (Loss) Before
Income Taxes (807) 765 25 1,366
Income Taxes 47 307 380 556
Net Income (Loss) $ (854) $ 458 $ (355) $ 810
Basic Earnings (Loss)
Per Share $ (1.53) $ 0.84 $ (0.64) $ 1.49
Diluted Earnings (Loss)
Per Share $ (1.53) $ 0.83 $ (0.64) $ 1.47
See notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Six months Ended June 30, 1999
(In millions except per share amounts)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other Total
Common Stock Paid-In Retained Comprehensive Treasury Stock, At Cost Shareowners'
Shares Amount Capital Earnings Loss Shares Amount Equity
Balance, January 1, 1999 559 $56 $325 $7,280 $ (63) (12) $ (425) $7,173
Comprehensive loss:
Net loss - - - (355) - - - (355)
Foreign currency
adjustments - - - - (81) - - (81)
Unrealized loss on
marketable - - - - (3) - - (3)
securities
Comprehensive loss $(439)
Dividends ($.55 per - - - (311) - - - (311)
share)
Gain on issuance of - - 5 - - - - 5
treasury stock - - (141) - - 10 406 265
Stock award plans
Treasury stock - - - - - (25) (1,140) (1,140)
purchases - - - - - 14 569 569
Treasury stock
issuances
Balance, June 30, 1999 559 $56 $189 $6,614 $(147) (13) $ (590) $6,122
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months Ended June 30, 1999 and 1998
(In millions)
(unaudited)
1999 1998
Cash flows from operating activities:
Net income (loss) $ (355) $ 810
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 563 547
Postretirement benefits 48 50
Deferred taxes, credits, and other 38 (1)
Stock award plans (95) -
Changes in assets and liabilities:
Accounts receivable 85 58
Prepaid employee benefit costs 412 69
Materials, supplies and other
prepaid expenses (62) (62)
Accounts payable (40) (113)
Accrued wages and withholdings 140 74
Dividends payable (247) (191)
Tax assessment 1,442 -
Income taxes payable 214 (73)
Other current liabilities 49 110
Net cash from operating activities 2,192 1,278
Cash flows from investing activities:
Capital expenditures (597) (504)
Disposals of property, plant and equipment 50 120
Purchases of marketable securities (1,753) -
Sales and maturities of marketable securities 674 -
Construction funds in escrow (140) -
Other asset receipts 17 82
Net cash (used in) investing activities (1,749) (302)
Cash flows from financing activities:
Proceeds from borrowings 999 166
Repayments of borrowings (367) (173)
Purchases of treasury stock (1,140) (418)
Issuances of treasury stock pursuant to stock
awards and employee stock purchase plans 975 340
Dividends (311) (219)
Other transactions (41) (17)
Net cash from (used in) financing activities 115 (321)
Effect of exchange rate changes on cash (20) (12)
Net increase in cash and cash equivalents 538 643
Cash and cash equivalents:
Beginning of period 1,240 460
End of period $1,778 $1,103
Cash paid during the period for:
Interest (net of amount capitalized) $ 85 $ 205
Income taxes $ 423 $ 560
See notes to unaudited consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. For interim consolidated financial statement purposes, we compute our
tax provision on the basis of our estimated annual effective income tax rate,
and provide for accruals under our various employee benefit plans for each
three month period based on one quarter of the estimated annual expense.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which requires that certain costs to
develop or obtain computer software for internal use be capitalized. We adopted
the new standard on January 1, 1999. Prior to adoption of SOP 98-1, we expensed
all internal use software costs as incurred. The effect of adopting the SOP was
to increase net income for the three months ended June 30, 1999 by $16 million,
or $.03 per share on a basic and diluted basis, and for the six months ended
June 30, 1999 by $35 million, or $.06 per share on a basic and diluted basis.
2. In our opinion, 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,
1999, the results of operations for the three months and six months ended
June 30, 1999 and 1998, and cash flows for the six months ended June 30, 1999
and 1998.
3. The following table sets forth the computation of basic and diluted
earnings (loss) per share (in millions except per share amounts):
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Numerator:
Numerator for basic and diluted
Earnings (loss) per share - net
income (loss) $ (854) $458 $(355) $810
Denominator:
Weighted-average shares -
Denominator for basic earnings
(loss) per share 557 544 557 545
Effect of dilutive
securities:
Contingent shares -
Managers Incentive - 6 - 5
Plan
Stock option - 2 - 2
plans
Denominator for diluted earnings
(loss) 557 552 557 552
per share
Basic earnings (loss) per $(1.53) $0.84 $(0.64) $1.49
share
Diluted earnings (loss) per $(1.53) $0.83 $(0.64) $1.47
share
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. On August 9, 1999 the U.S. Tax Court issued an opinion unfavorable to
UPS regarding a previously announced Notice of Deficiency asserting that we
are liable for additional tax for the 1983 and 1984 tax years. The Court held
that we are liable for tax on income of Overseas Partners Ltd., a Bermuda
company, which has reinsured excess value package insurance purchased by our
customers beginning in 1984. The Court held that for the 1984 tax year we are
liable for taxes of $31 million on income reported by OPL, additions to tax of
$93 million and interest for a total after-tax exposure we estimate at
approximately $246 million. We are in the process of analyzing the Tax
Court opinion and are evaluating our possible responses, including an appeal or
negotiation of a settlement.
During the first quarter of 1999, the IRS issued two Notices of Deficiency
asserting that we are liable for additional tax for the 1985 through 1987 tax
years, and the 1988 through 1990 tax years. The primary assertions by the IRS
relate to the reinsurance of excess value package insurance, the issue raised
for the 1984 tax year. The additional tax sought by the IRS relating to package
insurance for these periods ranges, based on alternative theories, from $115
million to $121 million for the 1985 through 1987 tax years, and from $131
million to $138 million for the 1988 through 1990 tax years, plus additions to
tax and interest. The IRS has based its assertions on the same theories included
in the 1983-1984 Notice of Deficiency. We have filed petitions in the Tax Court
in response to these Notices. Based on the Tax Court opinion, we currently
estimate that our maximum total after-tax exposure for the tax years 1985
through 1990 could range up to $985 million. We are in the process of analyzing
our position in light of the Tax Court opinion and are evaluating our options,
including continuance of the litigation or negotiation of a settlement.
We anticipate that the IRS will take positions similar to those described
above for tax years subsequent to 1990. Based on the Tax Court opinion, we
currently estimate that our maximum total after-tax exposure for the tax years
1991 through 1999 could range up to $1.122 billion.
In our second quarter 1999 financial statements, we have recorded a tax
assessment of $1.786 billion, which includes an amount for related state tax
liabilities. The charge includes interest of $871 million and taxes of $915
million. This assessment resulted in a tax benefit of $344 million related to
the interest component of the assessment. As a result, our net charge to net
income for the tax assessment was $1.442 billion, increasing our total after-
tax reserve with respect to these matters to $1.672 billion. The tax benefit of
deductible interest is included in income taxes; however, since none of the
income on which this tax assessment is based is our income, we have not classi-
fied the tax charge as income taxes.
We have sufficient cash, cash equivalents and marketable securities on
hand to deposit with the IRS, if we choose to do so, the full amount necessary
to satisfy our total estimated maximum after-tax exposure for these tax matters,
without affecting our ability to meet our foreseeable operating expenses and
budgeted capital expenditures.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
We are in the process of determining a new arrangement for providing
excess value package insurance for our customers through a UPS subsidiary. This
new arrangement will result in including in our income the total amount of
excess value premiums paid by our customers. This revised arrangement, once in
place, should eliminate for future periods the issues raised by the IRS in the
Notices of Deficiency and increase our net income in future periods as compared
to prior periods.
The IRS has also raised a number of unrelated issues regarding the timing
of deductions, the characterization of expenses as capital rather than ordinary
and our entitlement to the Investment Tax Credit and the Research Tax Credit in
the 1985 through 1990 tax years. These issues total $88 million in tax for the
1985 through 1987 tax years and $245 million in tax for the 1988 through 1990
tax years. Additions to tax and interest are in addition to these amounts. The
IRS may take similar positions for periods subsequent to 1990. The majority of
these adjustments capitalize items for which depreciation deductions would be
allowed in future years, and we believe their eventual resolution will not
result in a material adverse effect on our financial condition.
We are a defendant in various employment-related lawsuits. In one of these
actions, which alleges employment discrimination by UPS, class action status has
been granted, and the United States Equal Employment Opportunity Commission has
been granted the right to intervene. We are also a defendant in various other
lawsuits that arose in the normal course of business. In our opinion, none of
these cases is expected to have a material adverse effect upon our financial
condition.
5. We report our operations in three segments: U.S. domestic package operations,
international package operations and non-package operations. Package operations
represent our core business and are divided into regional operations around the
world. Regional operations managers are responsible for both domestic and export
operations within their geographic region. International package operations
include shipments wholly outside the U.S. as well as shipments with either
origin or distribution outside the U.S. Non-package operations, including
logistics, are distinct from package operations.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment information for the three months and six months ended June 30, is
as follows (in millions):
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Revenue:
U.S. domestic package $5,434 $5,090 $10,665 $ 9,982
International package 861 799 1,700 1,560
Non-package 265 218 526 424
================ ==================
Consolidated $6,560 $6,107 $12,891 $11,966
================ ==================
Operating profit:
U.S. domestic package $ 878 $ 747 $1,643 $1,341
International package 65 23 109 34
Non-package 33 35 58 70
Corporate 26 - 58 -
================ ==================
Consolidated $1,002 $ 805 $1,868 $1,445
================ ==================
Non-package operating profit included $58 and $53 million for the six
months ended June 30, 1999 and 1998, respectively, and $28 and $25 million for
the three months ended June 30, 1999 and 1998, respectively, of intersegment
profit with a corresponding amount of operating expense included in the U.S.
domestic package segment. Beginning in 1999, we have added a "Corporate"
line-item to our segment reporting, which reflects the impact of capitalized
software under SOP 98-1, not allocated to segments.
6. Certain prior period amounts have been reclassified to conform to the current
period presentation.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998
- -----------------------------------------
The following table sets forth information showing the change in revenue,
both in dollars and in percentage terms:
Three Months
Operating Segment Ended June 30, Change
1999 1998 $ %
(dollars in millions, unaudited)
U.S. domestic package $5,434 $5,090 $344 6.8%
International package 861 799 62 7.8
Non-package 265 218 47 21.6
Consolidated revenue $6,560 $6,107 $453 7.4
U.S. domestic package revenue increased primarily due to a 3.5% volume
increase and a shift by our customers to more time-definite services, as well as
an increase in rates. Package volume for our express and ground products
increased 8.1% and 2.7%, respectively.
The increase in international package revenue was primarily attributable
to overall improvement in product mix, specifically volume growth for express
and pan-European products. Although overall package volume increased only 0.4%
for international operations, all international operations posted volume
increases for express products, with the largest increases experienced in our
Asia Pacific and European operations.
The increase in non-package revenue resulted primarily from continued
growth of the UPS Logistics Group. This growth reflects both new business and
increased business with existing customers.
Operating expenses increased by $256 million, or 4.8%. Compensation and
benefit expenses accounted for $194 million of this increase. The operating
ratio improved from 86.8 during the second quarter of 1998 to 84.7 during the
second quarter of 1999. This improvement resulted primarily from containment of
operating expense growth through better utilization of existing capacity and
from continued company-wide cost containment efforts.
The following table sets forth information showing the change in operating
profit, both in dollars and in percentage terms:
Three Months
Operating Segment Ended June 30, Change
1999 1998 $ %
(dollars in millions, unaudited)
U.S. domestic package $ 878 $ 747 $131 17.5%
International package 65 23 42 182.6
Non-package 33 35 (2) (5.7)
Corporate 26 - 26 n/a
Consolidated operating profit $1,002 $ 805 $197 24.5
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
U.S. domestic package operating profit improved due to a 3.2% increase in
revenue per piece, combined with the volume increases discussed previously.
Operating expenses increased at a lower rate than revenue due to the factors
noted above.
International package operating profit almost tripled due to volume growth
in our higher revenue per piece express products. Revenue per piece for this
segment increased 7.4%. Both the Europe and Asia Pacific regions achieved
significant operating profit improvements.
The decrease in non-package operating profit reflects a decline in
operating profit for the UPS Logistics Group. The decline resulted primarily
from higher third-party transportation costs for its SonicAir subsidiary, higher
fuel costs for its UPS Truck Leasing subsidiary, and reduced margins for its
Martrac subsidiary due to the delay in the produce-harvesting season on the West
Coast.
Beginning in 1999, we have added a "Corporate" line-item to our segment
reporting, which reflects the impact of capitalized software under SOP 98-1, not
allocated to segments.
In our second quarter 1999 financial statements, we have recorded a charge
for a tax assessment, which reduced our net income by $1.442 billion. Further
discussion is included in the Liquidity and Capital Resources section.
Six Months Ended June 30, 1999 and 1998
- ---------------------------------------
The following table sets forth information showing the change in revenue,
both in dollars and in percentage terms:
Six Months
Operating Segment Ended June 30, Change
1999 1998 $ %
(dollars in millions, unaudited)
U.S. domestic package $10,665 $ 9,982 $683 6.8%
International package 1,700 1,560 140 9.0
Non-package 526 424 102 24.1
Consolidated revenue $12,891 $11,966 $925 7.7
U.S. domestic package revenue increased primarily due to a 3.1% volume
increase and a shift by our customers to more time-definite services, as well as
an increase in rates. Package volume for our express and ground products
increased 7.3% and 2.4%, respectively.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
During the first quarter of 1999, we increased rates for standard ground
shipments an average of 2.5% for commercial deliveries. The ground residential
charge continues to be $1.00 over the commercial ground rate, with an additional
delivery area surcharge added to certain less accessible areas. In addition, we
increased rates for UPS Next Day Air, UPS Next Day Air Saver and UPS 2nd Day Air
an average of 2.5%, while we decreased the rate for UPS 2nd Day Air A.M. by
2.2%. The rate for UPS Next Day Air Early A.M. did not change. Rates for
international shipments originating in the United States did not increase for
UPS Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS
International Standard service. Rate changes for shipments originating outside
the U.S. were made throughout the past year and varied by geographic market.
The increase in international package revenue was primarily attributable
to an overall improvement in product mix, specifically volume growth for express
and pan-European products. Although overall volume growth was relatively flat
for international operations, all international operations posted volume
increases for express products, with the largest increases experienced in our
Asia Pacific and European operations.
The increase in non-package revenue resulted primarily from continued
growth of the UPS Logistics Group. This growth reflects both new business and
increased business with existing customers.
Operating expenses increased by $502 million, or 4.8%. Compensation and
benefit expenses accounted for $375 million of this increase. The operating
ratio improved from 87.9 during 1998 to 85.5 during 1999. This improvement
resulted primarily from containment of operating expense growth through better
utilization of existing capacity and from continued company-wide cost
containment efforts. Fuel costs during the first six months of 1999 were also
slightly lower.
The following table sets forth information showing the change in operating
profit, both in dollars and in percentage terms:
Six Months
Operating Segment Ended June 30, Change
1999 1998 $ %
(dollars in millions, unaudited)
U.S. domestic package $1,643 $1,341 $302 22.5%
International package 109 34 75 220.6
Non-package 58 70 (12) (17.1)
Corporate 58 - 58 n/a
Consolidated operating profit $1,868 $1,445 $423 29.3
U.S. domestic package operating profit improved due to a 3.6% increase in
revenue per piece, combined with the volume increases discussed previously.
Operating expenses increased at a lower rate than revenue, due to the factors
noted above.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
International package operating profit more than tripled due to volume
growth in our higher revenue per piece express products. Revenue per piece for
this segment increased 9.0%. The largest contributor to the operating profit
improvement was the Europe region, followed closely by the Asia Pacific region.
The decrease in non-package operating income reflects, in part, higher
third-party underwriting losses for UPINSCO, our captive insurance company,
lower profits for our UPS Logistics Group and start-up costs at UPS Capital
Corp. during the first six months of 1999.
Beginning in 1999, we have added a "Corporate" line-item to our segment
reporting, which reflects the impact of capitalized software under SOP 98-1, not
allocated to segments.
In our financial statements for the six months ended June 30, 1999, we
have recorded a charge for a tax assessment, which reduced our net income by
$1.442 billion. Further discussion is included in the Liquidity and Capital
Resources section.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Liquidity and Capital Resources
- -------------------------------
Our primary source of liquidity is our cash flow from operations. We
maintain significant cash, cash equivalents and marketable securities, amounting
to $3.2 billion at June 30, 1999. We maintain a commercial paper program under
which we are authorized to borrow up to $2.0 billion. Approximately $819 million
was outstanding under this program as of June 30, 1999. Since we do not intend
to refinance the full commercial paper balance outstanding at June 30, 1999,
$719 million has been classified as a current liability in our balance sheet.
We maintain two credit agreements with a consortium of banks. These
agreements provide revolving credit facilities of $1.25 billion each, with one
expiring in April 2000 and the other expiring in April 2003. There were no
borrowings under either of these agreements as of June 30, 1999.
We also maintain a European medium-term note program with a borrowing
capacity of $1.0 billion. Under this program, we may issue notes from time to
time denominated in a variety of currencies. At June 30, 1999, $500 million was
available under this program.
In January 1999, we filed a shelf registration statement with the SEC,
under which we may issue debt of up to $2.0 billion, which may be denominated in
a variety of currencies. There is currently no debt issued under this shelf
registration.
On July 21, 1999 we began the process of creating a publicly traded common
stock. We will be asking our shareowners to approve a merger to create a new
capital structure, and we then intend to offer shares to the public. Within
several months after the offering, we intend to use the resulting net proceeds
to fund a cash tender offer for some of our common stock. The public offering
and the tender offer should not materially impact our cash, cash equivalents and
marketable securities balances.
On August 9, 1999 the U.S. Tax Court issued an opinion unfavorable to UPS
regarding a previously announced Notice of Deficiency asserting that we are
liable for additional tax for the 1983 and 1984 tax years. The Court held that
we are liable for tax on income of Overseas Partners Ltd., a Bermuda company,
which has reinsured excess value package insurance purchased by our customers
beginning in 1984. The Court held that for the 1984 tax year we are liable for
taxes of $31 million on income reported by OPL, additions to tax of $93 million
and interest for a total after-tax exposure we estimate at approximately $246
million. We are in the process of analyzing the Tax Court opinion and are
evaluating our possible responses, including an appeal or negotiation of a
settlement.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
During the first quarter of 1999, the IRS issued two Notices of Deficiency
asserting that we are liable for additional tax for the 1985 through 1987 tax
years, and the 1988 through 1990 tax years. The primary assertions by the IRS
relate to the reinsurance of excess value package insurance, the issue raised
for the 1984 tax year. The additional tax sought by the IRS relating to package
insurance for these periods ranges, based on alternative theories, from $115
million to $121 million for the 1985 through 1987 tax years, and from $131
million to $138 million for the 1988 through 1990 tax years, plus additions to
tax and interest. The IRS has based its assertions on the same theories included
in the 1983-1984 Notice of Deficiency. We have filed petitions in the Tax Court
in response to these Notices. Based on the Tax Court opinion, we currently
estimate that our maximum total after-tax exposure for the tax years 1985
through 1990 could range up to $985 million. We are in the process of analyzing
our position in light of the Tax Court opinion and are evaluating our options,
including continuance of the litigation or negotiation of a settlement.
We anticipate that the IRS will take positions similar to those described
above for tax years subsequent to 1990. Based on the Tax Court opinion, we
currently estimate that our maximum total after-tax exposure for the tax years
1991 through 1999 could range up to $1.122 billion.
In our second quarter 1999 financial statements, we have recorded a tax
assessment of $1.786 billion, which includes an amount for related state tax
liabilities. The charge includes interest of $871 million and taxes of $915
million. This assessment resulted in a tax benefit of $344 million related to
the interest component of the assessment. As a result, our net charge to net
income for the tax assessment was $1.442 billion, increasing our total after-
tax reserve with respect to these matters to $1.672 billion. The tax benefit of
deductible interest is included in income taxes; however, since none of the
income on which this tax assessment is based is our income, we have not classi-
fied the tax charge as income taxes.
We have sufficient cash, cash equivalents and marketable securities on
hand to deposit with the IRS, if we choose to do so, the full amount necessary
to satisfy our total estimated maximum after-tax exposure for these tax matters,
without affecting our ability to meet our foreseeable operating expenses and
budgeted capital expenditures.
We are in the process of determining a new arrangement for providing
excess value package insurance for our customers through a UPS subsidiary. This
new arrangement will result in including in our income the total amount of
excess value premiums paid by our customers. This revised arrangement, once in
place, should eliminate for future periods the issues raised by the IRS in the
Notices of Deficiency and increase our net income in future periods as compared
to prior periods.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
State of Readiness
- ------------------
In 1995, we created a Year 2000 Committee tasked with evaluating the year
2000 issue and taking appropriate action to address the implications of the year
2000 issue for us. The Year 2000 Committee has developed and is implementing
a comprehensive initiative to make our business critical information
technology assets, including embedded microprocessor systems incorporated
into computer hardware and related software, and business critical non-IT
assets, such as vehicles, facilities, equipment and their embedded micro-
processor systems, year 2000 ready. The year 2000 initiative covers the
following eight phases:
1. inventory of IT and non-IT assets
2. assessment of repair requirements
3. repair of IT and non-IT assets
4. unit and system integration testing of individual IT and non-IT
assets to determine correct manipulation of dates and date-related
data
5. certification by users that IT and non-IT assets correctly handle
dates and date-related data
6. selected verification by our internal auditors that phases 1 through
5 were properly completed for IT and non-IT assets
7. "end-to-end" testing of selected IT and non-IT assets, both
internally developed and vendor-provided, to determine correct
manipulation of dates and date-related data and
8. creation of contingency plans in the event of year 2000 failures
Since we believe that the majority of our business critical IT assets are
controlled by our Information Services Group ("IS Group"), we began the
implementation of the year 2000 initiative with these assets. Generally, we
consider an IT asset to be business critical if its failure would have a
material adverse effect on package movement, customer relations or our financial
condition, liquidity or results of operations, or if other factors (including
regulatory requirements) require the characterization of the IT asset as
business critical. This group includes, for example, package tracking, billing,
customer telephone service centers and UPS OnLine (R) automation systems.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
As of July 31, 1999:
- The first seven phases of the year 2000 initiative had been
completed for substantially all of the IT assets which are controlled
by our IS Group.
- The first six phases of the year 2000 initiative had been
completed for approximately ninety-one percent (91%) of the other
assets covered by the year 2000 initiative (non-IT assets and IT
assets controlled by all business functions other than the IS Group).
We have contacted suppliers who provide both critical IT assets and other
critical goods and services such as vehicles, fuel, packaging materials, and
forms to evaluate their year 2000 compliance plans and state of readiness and to
determine whether a year 2000-related event will impede the ability of such
suppliers to continue to provide such goods and services. We have received
assurances from substantially all of our suppliers of critical 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. We have reviewed
the responses received from these vendors to evaluate the accuracy and adequacy
of the disclosures made by the vendors as to their year 2000 compliance status.
Moreover, the majority of these assets are subject to evaluation under
applicable phases of our year 2000 initiative.
In addition, we have sent letters to all of our suppliers of critical
non-IT and IT assets controlled by business functions other than the IS Group.
As of July 31, 1999:
- We have received responses from substantially all of these
suppliers.
- We are reviewing these responses to evaluate the assertions from
the vendors as to their year 2000 compliance status.
- We are seeking additional information from certain vendors to
substantiate their claims of year 2000 readiness.
- We are also conducting interface testing between ourselves and
vendors who transfer data directly with us.
We have conducted meetings with the majority of business critical
suppliers. We intend to develop appropriate contingency plans for any business
critical supplier that does not provide an adequate response to us on a timely
basis. As a general matter, we are vulnerable to the inability of such suppliers
to remedy their own year 2000 issues.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
We also rely, both domestically and internationally, upon government
agencies, particularly the Federal Aviation Administration, telecommunication
service companies, utility companies and other service providers outside of our
control. As part of the year 2000 initiative, we are involved with several
national and international associations to pursue common year 2000 objectives.
For example, we have been and remain involved, through our participation in the
International Air Transport Association (IATA) and the Air Transport Association
of America (ATA), in a global and industry-wide effort to understand the year
2000 compliance status of airports, air traffic systems, customs clearance and
other U.S. and international government agencies, and common vendors and
suppliers. In addition, we continue to monitor publicly available information
describing the year 2000 compliance plans and status of our vendors. But we
cannot assure you that suppliers, governmental agencies, or other third parties
will not suffer a year 2000 business disruption. Such failures could have a
material adverse affect on our financial condition, liquidity or results of
operations.
We are aware that the media and other third parties have reported that
year 2000 compliance activity is generally considered to be further ahead in the
United States than in some other countries. We continue to monitor these reports
and to evaluate the possible impact of year 2000 events outside of the United
States on our operations. Additionally, we have included contingency planning
for international operations in our overall contingency planning process.
We have also retained independent consultants to assess whether the year
2000 initiative, if appropriately implemented, can result in our year 2000
readiness and our progress on the year 2000 initiative. Based on our
consultants' July 1999 review, the initiative is progressing at a satisfactory
rate to achieve year 2000 readiness. In addition, our consultants are involved
in the contingency planning phase of the year 2000 initiative.
Testing
- -------
As part of the year 2000 initiative, we maintain a testing program to
determine whether our business critical IT and non-IT assets are year 2000
ready. Our testing program is conducted in three stages:
- The initial stage - "unit testing" - consists of testing individual
systems (units) for year 2000 readiness. Unit testing includes, for
example, testing a particular application to ensure that it correctly
manipulates dates and date-related data and properly operates in a year
2000 ready environment. Following successful completion of unit testing, a
system will move into stage two.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
- Stage two - "integration testing" - includes testing interfaces between
systems units to ensure that these interfaces will correctly send and
receive date-related data. Stages one and two are included in phase four
of the overall year 2000 initiative. All business critical IT and non-IT
assets are subject to the first two testing stages. After successful
completion of phases four and five of the year 2000 initiative, certain
tested assets are subject to independent review and verification by our
internal auditors in conjunction with phase six of the year 2000
initiative.
- Stage three - "end- to -end testing" - involves validating core
business processes. We perform end-to-end testing on selected core
processes. We have completed our end-to-end testing program for
substantially all business critical IT assets related to the selected
core processes. We plan to complete the majority of end-to-end testing
for other assets by the end of the third quarter of 1999.
- In addition, with respect to business critical IT assets, we maintain
a change management process to reduce the likelihood that remediation
efforts adversely affect functionality and to retest units or systems
after changes where appropriate.
We are currently deploying IT and non-IT assets that have completed at
least the fifth phase of the year 2000 initiative and will continue that process
throughout 1999. We have not deferred any major information technology project
as a result of the implementation of the year 2000 initiative, although we may
have incurred an opportunity cost in dedicating resources to year 2000
compliance activity rather than other endeavors. We have elected to limit the
deployment of new releases, upgrades or implementation of information technology
assets from October 1, 1999 through January 31, 2000, to facilitate our ability
to manage year 2000 related concerns.
Costs to Address the Year 2000 Issue
- ----------------------------------------
We estimate that we have spent approximately $78 million through June 30,
1999 on implementation of the year 2000 initiative, with the majority of the
work being performed by our employees. We expect to spend an estimated
additional $24 million to complete the year 2000 initiative.
These costs do not include the costs of developing our year 2000
contingency plans. Currently, we estimate that we will incur approximately $6
million to $10 million in direct costs in connection with developing our
contingency plans.
We are also incurring costs in connection with the assessment and
remediation of IT assets and non-IT assets that are not business critical. Our
management believes that the costs associated with such activities are
significantly less than the costs of our year 2000 initiative.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
These are our management's best estimates and may be revised as additional
information becomes available. We intend to fund all costs associated with our
year 2000 efforts from operations.
Risks Presented by the Year 2000 Issue
- -----------------------------------------
Our failure to appropriately address a material year 2000 issue, or the
failure by any third parties who provide goods or services that are critical
to our business activities to appropriately address their year 2000 issues,
could have a material adverse effect on our financial condition, liquidity or
results of operations. To date, we have not identified any material IT or
non-IT assets critical to our operations that present a material risk of
not being year 2000 ready, that cannot be replaced with a suitable alternative,
or for which we do not have an acceptable contingency plan. As the year 2000
initiative has proceeded, we have identified our highest risk third party
providers that present a potential risk of a year 2000-related disruption. We
will continue to monitor these suppliers and develop contingency plans, as
necessary. Although there is inherent uncertainty in the year 2000 problem,
we expect that the year 2000 initiative will significantly reduce our level of
uncertainty about our year 2000 issues. At this point, we believe that our most
reasonably likely worst case scenario will result from challenges presented by
year 2000 disruptions experienced by third parties located both within and
outside the United States, such as the following:
- air traffic control systems
- airports
- customers
- customs brokerage
- railroads
- utility service providers
- other government agencies
- other suppliers
A significant disruption in services provided by such a third party could have a
material adverse impact on our financial condition, liquidity or results of
operations.
Contingency Plans
- -----------------
In the normal course of business, we maintain and deploy contingency
plans designed to address potential business interruptions. These plans
may be applicable to address the interruption of support provided by third
parties resulting from their failur to be year 2000 ready. We have also
established a Contingency Plan Committee to monitor and address the development
of additional contingency plans. The year 2000 initiative calls for us to
conduct risk assessment reviews to determine whether an additional contingency
plan should be developed. Under this process, a contingency plan may be
required for reasons other than an expectation of failure, such as the
importance of a business process. The majority of business units have completed
risk assessment reviews. The business units are in the process of developing
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
year 2000 contingency plans required by these reviews. We expect that
substantially all contingency plans will be complete by October 31, 1999.
We have also elected to establish Command and Control Centers at our key
operational locations and at other regional centers of operations, to facilitate
management of year 2000 events. Our contingency plans call for some of our
employees to be involved in such contingency planning activities as command
center staffing, plan implementation at operating locations and to validate IT
and non-IT assets before and during the millenium weekend. We will monitor year
2000 events which may result in additional staffing needs beyond the millenium
weekend.
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
our intent, belief or current expectations. 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 our ability to discover and correct potential year
2000 issues and the ability of third parties to appropriately address their year
2000 issues. If the modifications and conversions required to make us year 2000
ready are not made or are not completed on a timely basis, the resulting
problems could have a material adverse effect on the our financial condition,
liquidity or results of operations.
<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 29,
1999.
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.
Director Percent of
Number of Votes Total Voting
John W. Alden For 480,591,381 96.71%
Withheld 16,346,811 3.29%
William H. Brown, III For 488,918,843 98.39%
Withheld 8,019,349 1.61%
Robert J. Clanin For 489,615,309 98.53%
Withheld 7,322,883 1.47%
Michael L. Eskew For 490,070,978 98.62%
Withheld 6,867,214 1.38%
James P. Kelly For 489,747,399 98.55%
Withheld 7,190,793 1.45%
Ann M. Livermore For 489,447,783 98.49%
Withheld 7,490,409 1.51%
Gary E. MacDougal For 488,174,342 98.24%
Withheld 8,763,850 1.76%
Joseph R. Moderow For 490,256,367 98.66%
Withheld 6,681,825 1.34%
Kent C. Nelson For 485,688,723 97.74%
Withheld 11,249,469 2.26%
Victor A. Pelson For 489,346,217 98.47%
Withheld 7,591,975 1.53%
John W. Rogers For 488,478,294 98.30%
Withheld 8,459,898 1.70%
Charles L. Schaffer For 490,219,272 98.65%
Withheld 6,718,920 1.35%
Lea N. Soupata For 484,732,078 97.54%
Withheld 12,206,114 2.46%
Robert M. Teeter For 489,631,762 98.53%
Withheld 7,306,430 1.47%
Thomas H. Weidemeyer For 489,414,083 98.49%
Withheld 7,524,109 1.51%
<PAGE>
PART II
2. The proposal and the results of the voting by the shareowners for the
auditors are presented below.
Percent of
Total
Number of votes Voting
----------------- ----------
To confirm the appointment of Deloitte &
Touche LLP, independent auditors, as For 491,374,285 98.88%
auditors of UPS and its subsidiaries for Against 3,322,768 0.67%
the year ending December 31, 1999 Abstain 2,241,139 0.45%
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 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000809697
<NAME> United Parcel Service of America, Inc.
<MULTIPLIER> 1,000,000
<CURRENCY> US$
<S>
<C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1.00000
<CASH> 1,778
<SECURITIES> 1,465
<RECEIVABLES> 2,628
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,604
<PP&E> 20,054
<DEPRECIATION> 8,588
<TOTAL-ASSETS> 18,302
<CURRENT-LIABILITIES> 6,170
<BONDS> 2,138
0
0
<COMMON> 56
<OTHER-SE> 6,066
<TOTAL-LIABILITY-AND-EQUITY> 18,302
<SALES> 12,891
<TOTAL-REVENUES> 12,891
<CGS> 0
<TOTAL-COSTS> 11,023
<OTHER-EXPENSES> 22
<LOSS-PROVISION> 1,786
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 25
<INCOME-TAX> 380
<INCOME-CONTINUING> (355)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (355)
<EPS-BASIC> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
