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 September 30, 1999
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
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Atlanta, Georgia 30328
(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 for the past 90 days.
YES X NO
Common Stock, par value $.10 per share
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(Title of Class)
546,835,573 shares
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Outstanding as of October 12, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 (unaudited) and December 31, 1998
(In millions except share and per share amounts)
Assets 1999 1998
- ------ ------ -----
Current Assets:
Cash and cash equivalents $ 1,955 $ 1,240
Marketable securities 688 389
Accounts receivable 2,845 2,713
Prepaid employee benefit costs 997 703
Materials, supplies and other prepaid expenses 434 380
------ ------
Total Current Assets 6,919 5,425
Property, Plant and Equipment (including
aircraft under capitalized lease
obligations)- at cost, net of accumulated
depreciation and amortization of $8,812 in
1999 and $8,170 in 1998 11,567 11,384
Other Assets 231 258
------ ------
$18,717 $17,067
Liabilities and Shareowners' Equity
Current Liabilities:
Commercial paper $ 1,477 $ -
Accounts payable 1,313 1,322
Accrued wages and withholdings 1,333 1,092
Dividends payable - 247
Tax assessment 621 -
Deferred income taxes 80 114
Current maturities of long-term debt 678 410
Other current liabilities 596 532
------ ------
Total Current Liabilities 6,098 3,717
Long-Term Debt (including capitalized lease
obligations) 1,817 2,191
------ ------
Accumulated Postretirement Benefit
Obligation, Net 987 969
------ ------
Deferred Taxes, Credits and Other Liabilities 2,984 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 287 325
Retained earnings 7,191 7,280
Accumulated other comprehensive loss (134) (63)
------- ------
7,400 7,598
Treasury stock, at cost (12,083,786 and
11,605,952 shares in 1999 and 1998) (569) (425)
------- ------
6,831 7,173
$18,717 $17,067
See notes to unaudited consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Three Months and Nine Months Ended September 30, 1999 and 1998
(In millions except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
1999 1998 1999 1998
Revenue $ 6,715 $ 6,158 $19,606 $18,124
------ ------ ------ ------
Operating Expenses:
Compensation and benefits 3,849 3,585 11,226 10,587
Other 1,876 1,796 5,522 5,315
------ ------ ------ ------
5,725 5,381 16,748 15,902
------ ------ ------ ------
Operating Profit 990 777 2,858 2,222
------ ------ ------ ------
Other Income and (Expense):
Investment income 45 26 115 56
Interest expense (65) (54) (170) (169)
Tax assessment - - (1,786) -
Miscellaneous, net (8) (9) (30) (3)
------- ----- ------- ------
(28) (37) (1,871) (116)
------- ----- ------- ------
Income Before Income Taxes 962 740 987 2,106
Income Taxes 385 291 765 847
------ ------ ------- ------
Net Income $ 577 $ 449 $ 222 $ 1,259
====== ===== ====== ======
Basic Earnings Per Share $ 1.05 $ 0.83 $ 0.40 $ 2.31
====== ===== ====== ======
Diluted Earnings Per Share $ 1.03 $ 0.81 $ 0.39 $ 2.28
====== ===== ====== ======
See notes to unaudited consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Nine Months Ended September 30, 1999
(In millions except per share amounts)
(unaudited)
<TABLE>
<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 income:
Net income - - - 222 - - - 222
Foreign currency
adjustments - - - - (66) - - (66)
Unrealized loss on
marketable
securities - - - - (5) - - (5)
Comprehensive income $ 151
-----
Dividends ($.55 per share) - - - (311) - - - (311)
Gain on issuance of
treasury stock - - 5 - - - - 5
Stock award plans - - (43) - - 10 419 376
Treasury stock
purchases - - - - - (26) (1,196) (1,196)
Treasury stock
issuances - - - - - 16 633 633
---- ---- ----- ------ ------ ----- ------- ------
Balance, September 30, 559 $56 $287 $7,191 $(134) (12) $(569) $6,831
1999 ==== ==== ===== ====== ====== ===== ======= ======
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998
(In millions)
(unaudited)
1999 1998
Cash flows from operating activities:
Net income $ 222 $1,259
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 865 836
Postretirement benefits 18 75
Deferred taxes, credits, and other (79) 54
Stock award plans 304 218
Changes in assets and liabilities:
Accounts receivable (132) (38)
Prepaid employee benefit costs (294) 150
Materials, supplies and other
prepaid expenses (54) (10)
Accounts payable (9) 10
Accrued wages and withholdings 241 21
Dividends payable (247) (191)
Tax assessment 621 -
Other current liabilities 64 (30)
---- ------
Net cash from operating activities 1,520 2,354
----- -----
Cash flows from investing activities:
Capital expenditures (1,080) (1,022)
Disposals of property, plant and equipment 140 160
Purchases of marketable securities (2,089) (347)
Sales and maturities of marketable securities 1,785 -
Construction funds in escrow (138) -
Other asset receipts 15 91
---- -----
Net cash (used in) investing activities (1,367) (1,118)
----- -----
Cash flows from financing activities:
Proceeds from borrowings 1,617 227
Repayments of borrowings (246) (237)
Purchases of treasury stock (1,196) (430)
Issuances of treasury stock pursuant to stock
awards and employee stock purchase plans 740 306
Dividends (311) (219)
Other transactions (30) (3)
----- -----
Net cash from (used in) financing activities 574 (356)
----- -----
Effect of exchange rate changes on cash (12) (8)
---- -----
Net increase in cash and cash equivalents 715 872
Cash and cash equivalents:
Beginning of period 1,240 460
----- -----
End of period $1,955 $1,332
===== =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 927 $ 228
===== =====
Income taxes $ 660 $ 805
===== =====
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 September 30, 1999 by $28
million, or $.05 per share on a basic and diluted basis, and for the nine months
ended September 30, 1999 by $62 million, or $.11 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 September 30, 1999, the
results of operations for the three months and nine months ended September 30,
1999 and 1998, and cash flows for the nine months ended September 30, 1999 and
1998.
3. The following table sets forth the computation of basic and diluted earnings
per share (in millions except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Numerator:
Numerator for basic and diluted
earnings per share -
Net Income $ 577 $ 449 $ 222 $1,259
======= ===== ==== =====
Denominator:
Weighted-average shares -
Denominator for basic earnings
per share 547 544 553 545
Effect of dilutive securities:
Contingent shares -
Managers Incentive Plan 8 7 6 5
Stock option plans 4 3 4 3
--- --- --- ---
Denominator for diluted earnings
per share 559 554 563 553
==== ==== ==== ====
Basic Earnings Per Share .83 $0.40 $2.31 $1.05
===== ===== ===== =====
Diluted Earnings Per Share $1.03 $0.81 $0.39 $2.28
===== ===== ===== =====
<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 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. ("OPL"), 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, penalties and penalty interest of $93 million and
interest for a total after-tax exposure estimated at approximately $246 million.
In addition, 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 IRS has based its
assertions on the same theories included in the 1983-1984 Notice of Deficiency.
We anticipate that the IRS will take similar positions for tax years
subsequent to 1990. Based on the Tax Court opinion, we currently estimate that
our total after-tax exposure for the tax years 1984 through 1999 could be as
high as $2.353 billion. We are in the process of analyzing our position in light
of the Tax Court opinion and are evaluating our options, including appeal of the
Tax Court decision, continuance of the litigation or negotiation of a
settlement.
In the second quarter 1999 financial statements, we recorded a tax
assessment charge of $1.786 billion, which included an amount for related state
tax liabilities. The charge included taxes of $915 million and interest of $871
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 at that time 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
classified the tax charge as income taxes.
We determined the size of our reserve with respect to these matters in
accordance with generally accepted accounting principles based on our estimate
of our most likely liability. In making this determination, we concluded that it
was more likely that we would be required to pay taxes on income reported by OPL
and interest, but that it was not probable that we would be required to pay any
penalties and penalty interest. If penalties and penalty interest ultimately are
determined to be payable, we would have to record an additional charge of up to
$681 million.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
On August 31, 1999, we deposited $1.349 billion with the IRS related to
these matters, without conceding the IRS's position or giving up our right to
appeal the Tax Court's decision, in order to stop the accrual of interest on
that amount of the IRS's claim. A portion of the funds used to make this deposit
can be attributed to the $758 million increase in our commercial paper liability
balance during the third quarter. We have sufficient cash, cash equivalents and
marketable securities on hand to deposit with the IRS, if we choose to do so,
the remaining amount necessary to satisfy our maximum estimated after-tax
exposure for these tax matters, without affecting our ability to meet our
foreseeable operating expenses and budgeted capital expenditures.
We have implemented a new arrangement for providing excess value package
insurance for our customers through UPS subsidiaries. This new arrangement will
result in including in our non-package operating segment the net operations of
the excess value package insurance program offered to our customers. This
revised arrangement should eliminate for future periods the issues considered by
the Tax Court in the Notices of Deficiency relating to OPL.
The IRS has proposed adjustments, unrelated to the OPL matters discussed
above, 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 proposed
adjustments, if sustained, would result in $88 million in additional tax for the
1985 through 1987 tax years and $267 million in additional tax for the 1988
through 1990 tax years.
We believe that our practice of expensing the items that the IRS alleges
should have been capitalized is consistent with the practices of other industry
participants. We expect that we will prevail on substantially all of these
issues. Should the IRS prevail, however, unpaid interest on these adjustments
through 1999 could aggregate up to $396 million, after the benefit of related
tax deductions. Since the majority of these adjustments propose to capitalize
items for which depreciation deductions would be allowed in subsequent years,
the effect would be to substantially reduce the net impact of these adjustments
and related interest. The IRS's proposed adjustments include penalties and
penalty interest. We believe that the possibility that such penalties and
penalty interest will be sustained is remote. The IRS may take similar positions
with respect to some of these issues for each of the years from 1991 through
1999. We believe the eventual resolution of these issues will not result in a
material adverse effect upon our financial condition, results of operations or
liquidity.
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 effect upon our financial condition,
results of operations or liquidity.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
On September 28, 1999, Linda Dee Starkman, a UPS shareowner, filed a
purported class action complaint against us and each member of our board of
directors. The action, which was filed in the Court of Chancery for the State of
Delaware in and for New Castle County, seeks to enjoin our proposed public
offering and its related transactions and to recover unspecified damages,
attorneys' fees and experts' fees. The complaint alleges that the proposed
transactions violate our certificate of incorporation and that our directors
breached their fiduciary duties in approving and recommending the proposed
transactions. A hearing is scheduled for October 18, 1999, at which the Court
will consider plaintiff's motion for a preliminary injunction to prevent the
proposed transactions. We anticipate that the Court will rule promptly on
plaintiff's motion.
We believe that this action has no merit, and we are defending it
vigorously. We do not expect that this action will have a material effect upon
our financial condition, results of operations or liquidity.
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.
Segment information for the three months and nine months ended September
30, is as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
U.S. domestic package $5,574 $5,147 $16,239 $15,129
International package 862 782 2,562 2,342
Non-package 279 229 805 653
------ ------ ------ ------
Consolidated $6,715 $6,158 $19,606 $18,124
====== ====== ======= =======
Operating profit (loss):
U.S. domestic package $ 879 $ 757 $ 2,522 $ 2,098
International package 38 (15) 147 19
Non-package 27 35 85 105
Corporate 46 - 104 -
------ ------ ------ ------
Consolidated $ 990 $ 777 $ 2,858 $ 2,222
====== ====== ======= =======
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Non-package operating profit included $28 and $30 million for the three
months ended September 30, 1999 and 1998, respectively, and $85 and $84 million
for the nine months ended September 30, 1999 and 1998, respectively, of
intersegment profit with a corresponding amount of operating expense included in
the U.S. domestic package segment. Consolidated operating profit for the three
months and nine months ended September 30, 1999 included $46 million and $104
million, respectively, of capitalized software costs that were not allocated to
individual segments.
6. The major components of other operating expenses for the three months and
nine months ended September 30, are as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Repairs and maintenance $ 231 $ 213 $ 674 $ 625
Depreciation and amortization 302 289 865 836
Purchased transportation 407 364 1,168 1,063
Fuel 174 142 467 443
Other occupancy 74 79 263 275
Other expenses 688 709 2,085 2,073
----- ----- ----- -----
Consolidated $1,876 $1,796 $5,522 $5,315
===== ====== ====== =====
7. 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 September 30, 1999 and 1998
The following tables set forth information showing the change in revenue,
average daily package volume and average revenue per piece, both in dollars or
amounts and in percentage terms:
Three Months Ended
September 30, Change
1999 1998 $ %
---- ---- - -
Revenue (in millions):
U.S. domestic package:
Next Day Air $1,344 $1,184 $160 13.5%
Deferred 649 586 63 10.8
Ground 3,581 3,377 204 6.0
----- ----- ------
5,574 5,147 427 8.3
International package:
Domestic 221 230 (9) (3.9)
Export 641 552 89 16.1
----- ----- ------
Total International package 862 782 80 10.2
Non-package 279 229 50 21.8
----- ------ ------
Consolidated $6,715 $6,158 $557 9.0%
======= ====== ======
Average Daily Package Volume #
(in thousands): -
U.S. domestic package:
Next Day Air 1,046 913 133 14.6%
Deferred 789 704 85 12.1
Ground 9,849 9,319 530 5.7
----- ------ -----
Total U.S. domestic package 11,684 10,936 748 6.8
International package:
Domestic 691 693 (2) (.3)
Export 298 244 54 22.1
----- ----- -----
Total International package 989 937 52 5.5
------- ------- -----
Consolidated 12,673 11,873 800 6.7%
======= ======= =====
Operating days in period 64 65
$
Average Revenue Per Piece: -
U.S. domestic package:
Next Day Air $20.08 $19.95 $.13 .7%
Deferred 12.85 12.81 .04 .3
Ground 5.68 5.58 .10 1.8
Total U.S. domestic package 7.45 7.24 .21 2.9
International:
Domestic 5.00 5.11 (.11) (2.2)
Export 33.61 34.80 (1.19) (3.4)
Total International package 13.62 12.84 .78 6.1
Consolidated $ 7.94 $ 7.68 $.26 3.4%
====== ====== ======
<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 revenue increased primarily due to volume gains
across all product lines, as the demand for these products remained strong
throughout the third quarter. In addition, we continue to see volume from our
higher revenue per piece express (Next Day Air and Deferred) products grow
faster than our Ground products. However, ground volume grew at a 5.7% rate,
which is better than we experienced in the first half of the year.
The increase in international package revenue was primarily attributable
to overall improvement in product mix, specifically volume growth for our export
(Express, Expedited and Transborder) products. Overall package volume increased
5.5% for international operations, with all international operations posting
strong volume increases for express products, the largest of which occurred in
our Asia Pacific and European operations. The decline in export revenue per
piece is due to higher growth rates for our lower revenue yielding European
transborder products.
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 $344 million, or 6.4%. Compensation and
benefit expenses accounted for the majority, $264 million, of this increase.
Other operating expenses increased $80 million due to higher purchased
transportation and fuel costs. The increase in purchased transportation costs
was primarily due to increased business for our Worldwide Logistics subsidiary,
while the $32 million, or 22.5%, increase in fuel costs was primarily due to the
low fuel prices we benefited from in 1998. The operating ratio improved from
87.4 during the third quarter of 1998 to 85.3 during the third quarter of 1999.
This improvement resulted primarily from containment of operating expense growth
through better utilization of existing capacity.
The following table sets forth information showing the change in operating
profit, both in dollars and in percentage terms:
Three Months Ended
September 30, Change
Operating Segment 1999 1998 $ %
----------------- ---- ---- - -
(dollars in millions)
U.S. domestic package $ 879 $ 757 $122 16.1%
International package 38 (15) 53 353.3
Non-package 27 35 (8) (22.9)
Corporate 46 - 46 n/a
----- ---- ----
Consolidated operating profit $ 990 $ 777 $213 27.4
===== ==== ====
U.S. domestic package operating profit improved due to the volume and
revenue improvements discussed previously, combined with the containment of
operating expense growth.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Our international package operations posted an operating profit in 1999,
compared to a loss in the prior year, due to a 22.1% volume growth in our higher
revenue per piece export products. Both the Europe and Asia Pacific regions
achieved significant operating profit improvements.
The decrease in non-package operating profit relates to continued start-up
costs at UPS Capital Corporation, higher third party underwriting losses for
UPINSCO, our captive insurance company, and a reduction in intersegment profit.
The UPS Logistics Group experienced a small improvement in operating profit
compared to last year, which reverses a trend that was experienced earlier this
year. As discussed in the Liquidity and Capital Resources section, we have
implemented a new arrangement for providing excess value package insurance for
our customers through UPS subsidiaries. This new arrangement will result in
including in our non-package operating segment the net operations of the excess
value package insurance program offered to our customers. We expect this
arrangement will increase our operating profit for the non-package segment by
approximately $60 million to $70 million in the fourth quarter of 1999.
Beginning in 1999, we have added a "Corporate" line-item to our segment
reporting. This line-item reflects a new accounting pronouncement that requires
us to capitalize some of our costs to develop or obtain computer software for
internal use. These costs are not allocated to segments.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Nine Months Ended September 30, 1999 and 1998
The following table sets forth information showing the change in revenue,
average daily package volume and average revenue per piece, both in dollars and
in percentage terms:
Nine Months Ended
September 30, Change
1999 1998 $ %
---- ---- - -
Revenue (in millions):
U.S. domestic package:
Next Day Air $3,834 $ 3,442 $ 392 11.4%
Deferred 1,897 1,765 132 7.5
Ground 10,508 9,922 586 5.9
------ ------ ----
Total U.S. domestic package 16,239 15,129 1,110 7.3
International package:
Domestic 678 692 (14) (2.0)
Export 1,884 1,650 234 14.2
----- ----- ----
Total International package 2,562 2,342 220 9.4
Non-package 805 653 152 23.3
----- ----- ----
Consolidated $19,606 $18,124 $1,482 8.2%
======= ======= ======
Average Daily Package Volume #
(in thousands):
U.S. domestic package:
Next Day Air 1,012 912 100 11.0%
Deferred 790 736 54 7.3
Ground 9,709 9,382 327 3.5
----- ------ ----
Total U.S. domestic 11,511 11,030 481 4.4
International package:
Domestic 686 713 (27) (3.8)
Export 290 246 44 17.9
------- ------ -----
Total International package 976 959 17 1.8
-------- ------- -----
Consolidated 12,487 11,989 498 4.2
Operating days in period 191 192
$
Average Revenue Per Piece:
U.S. domestic package:
Next Day Air $19.84 $19.66 $ .18 .9%
Deferred 12.57 12.49 .08 .6
Ground 5.67 5.51 .16 2.9
Total U.S. domestic package 7.39 7.14 .25 3.5
International package:
Domestic 5.17 5.05 .12 2.4
Export 34.01 34.93 (.92) (2.6)
Total International package 13.74 12.72 1.02 8.0
Consolidated $ 7.88 $ 7.59 $ .29 3.8%
<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 revenue increased over $1.1 billion primarily due to
a 4.4% volume increase combined with a 3.5% improvement in revenue per piece.
Package volume growth occurred in all products, with average volume for our Next
Day Air product growing by 11.0%. The substantial improvement in our Ground
revenue, which comprises 65% of our U.S. domestic package revenue, also was a
major factor in the overall revenue improvement.
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 our
export products. All international operations posted volume increases for
express products, with the largest increases experienced in our Asia Pacific and
European operations. Due to the strong growth of our international export
products, our total average revenue per piece for international increased $1.02
per package, or 8.0%.
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 $846 million, or 5.3%. Compensation and
benefit expenses accounted for $639 million of this increase and purchased
transportation costs increased by $105 million. The operating ratio improved
from 87.7 during 1998 to 85.4 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 nine months of 1999 were $24 million, or 5.4%, higher
than in 1998.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The following table sets forth information showing the change in operating
profit, both in dollars and in percentage terms:
Operating Segment Nine Months Ended
September 30, Change
1999 1998 $ %
(dollars in millions)
U.S. domestic package $2,522 $2,098 $424 20.2%
International package 147 19 128 673.7
Non-package 85 105 (20) (19.0)
Corporate 104 - 104 n/a
----- ----- ------
Consolidated operating profit $2,858 $2,222 $636 28.6
====== ====== =====
U.S. domestic package operating profit improved due to the volume and
revenue improvements discussed previously, combined with the containment of
operating expense growth.
International package operating profit grew almost seven-fold due to
volume growth in our higher revenue per piece export products. 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 profit reflects, in part, higher
third-party underwriting losses for UPINSCO, our captive insurance company,
lower earnings for our UPS Logistics Group and start-up costs at UPS Capital
Corporation during the first nine months of 1999. The decline in operating
profit for the UPS Logistics Group resulted primarily from higher third-party
transportation costs for its SonicAir subsidiary and higher fuel costs for its
UPS Truck Leasing subsidiary. These decreases were offset somewhat by higher
operating profits for the group's Worldwide Logistics subsidiary. As discussed
in the Liquidity and Capital Resources section, we have implemented a new
arrangement for providing excess value package insurance for our customers
through UPS subsidiaries. This new arrangement will result in including in our
non-package operating segment the net operations of the excess value package
insurance program offered to our customers. We expect this arrangement will
increase our operating profit for the non-package segment by approximately $60
million to $70 million in the fourth quarter of 1999.
Beginning in 1999, we have added a "Corporate" line-item to our segment
reporting. This line-item reflects a new accounting pronouncement that requires
us to capitalize some of our costs to develop or obtain computer software for
internal use. These costs are not allocated to segments.
The increase in investment income of $59 million for the period is due to
large cash, cash equivalents and marketable securities balances we have had
available throughout 1999.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net income for the nine months ended September 30, 1999, decreased $1.037
billion from the prior year. This is the result of a charge we recorded during
the second quarter of 1999 for a tax assessment, which reduced our net income by
$1.442 billion. Further discussion regarding the nature of this charge 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 $2.643 billion at September 30, 1999. We maintain a commercial paper program
under which we are authorized to borrow up to $2.0 billion. Approximately $1.577
billion was outstanding under this program as of September 30, 1999. Since we do
not intend to refinance the full commercial paper balance outstanding at
September 30, 1999, $1.477 billion has been classified as a current liability in
our balance sheet. The average interest rate on the amount outstanding at
September 30, 1999 was 5.3%.
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 September 30, 1999. Interest
on any amounts we borrow under these facilities would be charged at 90-day LIBOR
plus 15 basis points.
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 September 30, 1999, $500 million
was available under this program. Of the amount outstanding at September 30,
1999, $200 million bears interest at a stated interest rate of 6.625% and $300
million bears interest at a stated interest rate of 6.25%.
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 at a special shareowners meeting to be held on October 25,
1999. 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 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, penalties and penalty interest of $93 million and interest for
a total after-tax exposure estimated at approximately $246 million.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
In addition, 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 IRS has based its
assertions on the same theories included in the 1983-1984 Notice of Deficiency.
We anticipate that the IRS will take similar positions for tax years
subsequent to 1990. Based on the Tax Court opinion, we currently estimate that
our total after-tax exposure for the tax years 1984 through 1999 could be as
high as $2.353 billion. We are in the process of analyzing our position in light
of the Tax Court opinion and are evaluating our options, including appeal of the
Tax Court decision, continuance of the litigation or negotiation of a
settlement.
In the second quarter 1999 financial statements, we recorded a tax
assessment charge of $1.786 billion, which included an amount for related state
tax liabilities. The charge included taxes of $915 million and interest of $871
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 at that time 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
classified the tax charge as income taxes.
We determined the size of our reserve with respect to these matters in
accordance with generally accepted accounting principles based on our estimate
of our most likely liability. In making this determination, we concluded that it
was more likely that we would be required to pay taxes on income reported by OPL
and interest, but that it was not probable that we would be required to pay any
penalties and penalty interest. If penalties and penalty interest ultimately are
determined to be payable, we would have to record an additional charge of up to
$681 million. We cannot assure you that our ultimate liability for these matters
will not exceed the level of our reserves.
On August 31, 1999, we deposited $1.349 billion with the IRS related to
these matters, without conceding the IRS's position or giving up our right to
appeal the Tax Court's decision, in order to stop the accrual of interest on
that amount of the IRS's claim. A portion of the funds used to make this deposit
can be attributed to the $758 million increase in our commercial paper liability
balance during the third quarter. We have sufficient cash, cash equivalents and
marketable securities on hand to deposit with the IRS, if we choose to do so,
the remaining amount necessary to satisfy our maximum estimated 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
We have implemented a new arrangement for providing excess value package
insurance for our customers through UPS subsidiaries. This new arrangement will
result in including in our non-package operating segment the net operations of
the excess value package insurance program offered to our customers. This
revised arrangement should eliminate for future periods the issues considered by
the Tax Court in the Notices of Deficiency relating to OPL.
<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 microprocessor 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
6. 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
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, 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 September 30, 1999 the first seven phases of the year 2000
initiative have been completed for substantially all of the assets which are
covered by the year 2000 initiative.
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. 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 have
been evaluated under applicable phases of our year 2000 initiative.
In addition, we have communicated with all of our suppliers of critical
non-IT and IT assets controlled by business functions other than the IS Group.
As of September 30, 1999:
We have received and reviewed responses from substantially all of
these suppliers. We have conducted interface testing between ourselves
and selected vendors who transfer data directly with us. We are
seeking additional information from certain vendors to substantiate
their claims of year 2000 readiness.
We have conducted meetings with substantially all of our business critical
suppliers. We are developing appropriate contingency plans for any business
critical supplier that has not provided an adequate response to us on a timely
basis. As a general matter, we are vulnerable to significant suppliers'
inability to remedy their own year 2000 issues.
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 our 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 effect on our financial condition, liquidity or results of
operations.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
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 have been subject to the first two testing stages. After successful
completion of phases four and five of the year 2000 initiative, some
tested assets were subjected 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 assets related to the selected core processes.
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.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 readiness
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 $89 million through September
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 $12 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 $7
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.
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.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 brokerages
- 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 failure 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. Substantially all business units have completed risk assessment
reviews. The business units are in the process of developing year 2000
contingency plans required by these reviews. We expect that substantially all
contingency plans will be complete by October 31, 1999. We are establishing
Command and Control Centers at our key operational locations and at other
regional centers of operations, to facilitate management of year 2000 events.
Additionally, we plan to implement a further validation process for business
critical assets to be executed over the millennium weekend.
Our contingency plans call for some of our employees to be involved in
such contingency planning activities as command center staffing and plan
implementation at operating locations, and to validate IT and non-IT assets
before and during the millennium weekend. We will monitor year 2000 events which
may result in additional staffing needs beyond the millennium weekend.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 operating profit for excess
value package insurance and 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 1 - Legal Proceedings
On September 28, 1999, Linda Dee Starkman, a UPS shareowner, filed a
purported class action complaint against us and each member of our board of
directors. The action, which was filed in the Court of Chancery for the State of
Delaware in and for New Castle County, seeks to enjoin our proposed public
offering and its related transactions and to recover unspecified damages,
attorneys' fees and experts' fees. The complaint alleges that the proposed
transactions violate our certificate of incorporation and that our directors
breached their fiduciary duties in approving and recommending the proposed
transactions. A hearing is scheduled for October 18, 1999, at which the Court
will consider plaintiff's motion for a preliminary injunction to prevent the
proposed transactions. We anticipate that the Court will rule promptly on
plaintiff's motion.
We believe that this action has no merit, and we are defending it
vigorously. We do not expect that this action will have a material effect upon
our financial condition, results of operations or liquidity.
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(a) Form of Agreement and Plan of Merger
Incorporated by Reference to Annex A to the Prospectus (No.
333-83349) filed pursuant to Rule 424 on September 23, 1999.
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: October 15, 1999
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