ITEM 1. BUSINESS.
United Parcel Service of America, Inc. ("UPS"), through its subsidiaries, provides specialized transportation and logistics services, primarily through the pickup and delivery of packages and documents. Service is offered throughout the United States and over 200 other countries and territories around the globe. In terms of both revenue and volume, UPS is the largest package distribution company in the world, with revenues of over $22 billion in 1996 generated by the delivery of more than three billion packages and documents. UPS provides a daily pickup service for over 1.4 million customers.
With minor exceptions, UPS Common Stock, $.10 par value per share (the "Common Stock"), is owned by or held for the benefit of its active employees and their families, former employees and their estates or heirs, charitable foundations established by UPS founders and their family members or by other charitable organizations that acquired stock by donations from shareowners or from UPS itself. UPS Common Stock is not listed on a national securities exchange or traded in the organized over-the-counter markets.
UPS was originally organized in the State of Washington in 1907 and was reincorporated in the State of Delaware in 1930. When used herein, the terms "UPS" and the "Company" refer to United Parcel Service of America, Inc., a Delaware corporation and its subsidiaries.
DELIVERY SERVICE IN THE UNITED STATES
UPS offers pickup and delivery of packages by means of ground and air transportation throughout the United States. This business accounted for approximately 86.6%, 86.7% and 88.4% of the Company's consolidated revenue in 1996, 1995 and 1994, respectively. For additional financial information relating to domestic and international operations, see Note 10 to the Consolidated Financial Statements filed herewith.
Ground Services
For most of its history, UPS has been engaged primarily in the delivery of packages traveling by means of ground transportation. This service was expanded gradually and today standard ground service is available for interstate and intrastate destinations, serving every address in the 48 contiguous states and intrastate in Alaska and Hawaii. Service is restricted to packages that weigh no more than 150 pounds and are no larger than 108 inches in length and 130 inches in length and girth combined.
In addition to its standard ground delivery product, UPS provides a variety of ground shipment options. UPS Hundredweight Service(R) offers discounted contract rates to customers sending multiple package shipments having a combined weight of 200 pounds or more, or air shipments totaling 100 pounds or more, addressed to one consignee at one address, with delivery on the same day. Customers can realize significant savings on these shipments compared to regular ground or air service rates. UPS Hundredweight Service reaches all 48 contiguous states. In February 1997 the Company extended the Hundredweight Service to all UPS customers, allowing them to take advantage of the discounted pricing available with UPS Hundredweight Service, but without a contract. UPS GroundSaver(R) is another contract service which offers special rates and services for business-to-business shipments in specified ZIP Codes.
Domestic Air Services
UPS provides domestic air delivery throughout the United States, with electronic tracking information available for all these domestic time definite services. The Company's premium express service is UPS Next Day Air(R), which offers guaranteed next business day delivery by 10:30 a.m. to more than 75% of the United States population, and delivery by noon to areas covering an additional 14%. Saturday delivery is offered for UPS Next Day Air shipments to most areas of the country for an additional fee.
UPS Next Day Air Early A.M.(R) service guarantees next day delivery of packages and documents by 8:00 or 8:30 a.m. to approximately 1,400 cities nationwide. UPS Next Day Air Early A.M. service is available from virtually all overnight shipping locations coast to coast. In addition, UPS Next Day Air SaverSM offers next day delivery by 3:00 or 4:30 p.m. to commercial destinations in the contiguous United States and by the end of the day to residential destinations.
UPS offers three options for customers who desire less expensive guaranteed delivery services. UPS 2nd Day Air A.M.(TM) provides guaranteed delivery of packages and documents by noon of the second business day, UPS 2nd Day Air(R) provides guaranteed delivery of packages and documents in two business days and UPS 3 Day Select(R) provides guaranteed delivery in three business days. Developed primarily for longer distance customers who need time-definite delivery and higher levels of information, UPS 3 Day Select is priced between traditional ground and air express services.
UPS SonicAir(R) service offers same-day or "next flight out" delivery service to virtually any location in the continental United States from delivery pickup locations in the United States, as well as to many international business centers. Same day and logistics services, including critical parts warehousing, are available through UPS SonicAir service 24 hours a day, 365 days a year.
To support its growth, in 1996 UPS continued to invest in new equipment, primarily in the form of additional aircraft and facility expansions. During 1996, UPS took delivery of five Boeing 757-200 freighter aircraft and ten Boeing 767-300 freighter aircraft. UPS also purchased two 747-200 aircraft which will be converted to freighter service and delivered in 1997. See "Properties--Aircraft."
UPS continues to work on improving its domestic air service through better utilization of its regional air hub network. The Company's domestic regional air hubs are located in Columbia, South Carolina, Philadelphia, Pennsylvania, Dallas, Texas, Rockford, Illinois, and Ontario, California. Louisville, Kentucky is the site of the Company's all-points international air hub, where most of the Company's air volume is processed. The regional air hub in Columbia, South Carolina opened in September 1996. A new regional air hub in Hartford, Connecticut is currently under construction and is expected to commence operations in late 1997. This new facility will include UPS Next Day Air and UPS 2nd Day Air sort operations, and it will process much of UPS's air volume originating in New England.
INTERNATIONAL DELIVERY SERVICE
UPS offers guaranteed overnight delivery to more than 200 countries and territories worldwide. Foreign domestic and export business accounted for approximately 13.4%, 13.3%, and 11.6% of consolidated revenues in 1996, 1995 and 1994, respectively. For additional financial information relating to domestic and foreign operations, see Note 10 to the Consolidated Financial Statements filed herewith.
Throughout 1996, UPS continued to develop its global delivery and logistics network. In September 1996, UPS launched a complete portfolio of services across major European countries that was designed to provide a uniform service offering. This new portfolio replaced the variety of services that were previously available in the individual countries and includes guaranteed 8:30 a.m. and 10:30 a.m. next-business day delivery to major cities, as well as scheduled day-definite ground service.
UPS Worldwide Express provides door-to-door custom-cleared delivery to over 200 countries and territories. This service includes guaranteed overnight delivery of documents from major U.S. cities to many international business centers and guaranteed second business day delivery by 10:30 A.M. for packages to over 280 cities in Europe. Shipments to other destinations via UPS Worldwide Express are generally delivered in two business days. UPS Worldwide Express Plus complements the regular express service by providing guaranteed early morning delivery options from international locations to major cities around the world and on March 31, 1997, the Company plans to extend this service by providing guaranteed early morning second day delivery from the United States to over 150 cities in Europe.
UPS also offers UPS Worldwide Expedited. This service is an alternative to traditional air freight and is designed to meet customers' requirements for their routine shipments that do not require overnight or express delivery. Shipments to Mexico and Canada are delivered in three business days and shipments to most major destinations in Europe and Asia are generally delivered in four business days. Both UPS Worldwide Express and Worldwide Expedited services are offered between many international locations and from international locations to the United States, though the time and delivery guarantees provided from the international locations may vary from country to country.
UPS Standard service is offered between the United States and Canada and between European Union countries. Standard service is a door to door, time- definite ground service offering full tracking capabilities. UPS SonicAir service also provides international deliveries with a next-flight-out service for urgent letters and packages. This service generally provides 24 hour delivery service to more than 180 countries.
The Company has a European air hub in Cologne, Germany and has recently established an Asian-Pacific air hub in Taipei, Taiwan. This facility is under construction and is expected to commence operations in 1997.
OTHER SERVICES
UPS offers customized services for certain types of customers or even a single customer, such as Consignee Billing and Delivery Confirmation. Consignee Billing was designed for customers who receive large amounts of merchandise from a number of vendors. UPS bills these consignee customers directly for the shipping charges, enabling the customer to obtain tighter control over inbound transportation costs. Electronic tracking of all Consignee Billing packages is offered, as well as on-demand pick up service for return shipments. Delivery Confirmation provides automatic confirmation and weekly reports of deliveries. Immediate confirmation is provided upon request. Delivery Confirmation is available throughout the United States and Puerto Rico.
UPS GroundTracSM service electronically tracks ground packages so that UPS's customers can receive immediate information about the status of their packages while in transit. With the introduction of in-vehicle data transmission capabilities, this service enables customers in the United States, Canada and Germany to receive verification of deliveries within minutes after they are completed. Shippers can also access tracking information 24 hours a day, seven days a week, by telephone or through the UPS OnLine(TM) tracking software, which enables customers to track and trace their own packages via telecommunications links with the Company's electronic data systems. The UPS OnLine shipping system further assists customers in managing their shipping operations by automating a customer's shipping room with features such as automatic zoning, rating and printing of address labels, pickup records and shipping reports. In addition, the UPS Worldwide Web site permits customers to access tracking and shipping information, request pick-up service and locate drop-off locations.
RATES
During the first quarter of 1997, rates for standard ground shipments were increased an average of 3.4% for commercial deliveries and 4.3% for residential deliveries. Rates for UPS Next Day Air and UPS 2nd Day Air each increased approximately 3.9% in 1996. Rates for UPS 3 Day Select also increased approximately 3.9% in 1996. All increases were limited to deliveries within the continental United States.
Rates for international shipments originating in the United States were increased 2.6% for UPS Worldwide Express and 4.9% for UPS Worldwide Expedited. Rate changes for shipments originating outside the United States have been made throughout the past year and vary by geographic market. Rates for UPS Standard service to Canada did not change.
COMPETITION
UPS is the largest package distribution company in the world, in terms of both revenue and volume. UPS also offers a broad array of services in the package delivery industry, and therefore competes with many companies and services on a local, regional, national and international basis. These include the postal services of the United States and other nations, various motor carriers, express companies, freight forwarders, air couriers and others.
Competition is increasingly based on the ability of carriers to offer highly reliable, customized delivery solutions, rich with information, at competitive prices. UPS endeavors to attract customers by offering value-added services such as delivery guarantees, tracking services and performance reports. In recent years, the Company has directed a large portion of its resources to compete for higher revenue, "premium" service packages and documents (such as UPS Next Day Air, UPS 2nd Day Air, UPS 3 Day Select and UPS Worldwide Express) as well as for commercial, or "business-to-business" packages. However, UPS still values and competes intensely for residential delivery volume.
REGULATION
Pursuant to the Federal Aviation Act of 1958, as amended, both the Department of Transportation (the "DOT") and the Federal Aviation Administration (the "FAA") regulate air transportation services.
The DOT's authority relates primarily to economic aspects of air transportation, such as discriminatory pricing, non-competitive practices, interlocking relations or cooperative agreements. The DOT also regulates, subject to the authority of the President of the United States, international routes, fares, rates and practices and is authorized to investigate and take action against discriminatory treatment of United States air carriers abroad.
The FAA's authority relates primarily to safety aspects of air transportation, including aircraft standards and maintenance, personnel and ground facilities. UPS was granted an operating certificate by the FAA in 1988 which remains in effect so long as UPS meets the operational requirements of the Federal Aviation Regulations.
The FAA has issued rules mandating repairs on all Boeing Company and McDonnell Douglas Corporation aircraft which have completed a specified number of flights and has also issued rules requiring a corrosion control program for Boeing Company aircraft. Total expenditures under these programs for 1996 were approximately $14 million. Each of these programs requires that UPS make periodic inspections of its aircraft. These inspections may result in a determination that additional repairs are required under these programs. Hence, the future cost of such repairs pursuant to the programs may fluctuate.
Until January 1, 1995, ground transportation of packages by UPS in the United States was subject to regulation by the Interstate Commerce Commission (the "ICC") and by various state regulatory agencies when such transportation was pursuant to common carrier certificates and contract carrier permits issued by the ICC and state agencies. After January 1, 1995, all state regulation of rates, routes and services was declared preempted by federal legislation, for both integrated intermodal carriers and motor carriers. However, UPS remains subject to the jurisdiction of the DOT, the department into which the ICC was merged in January 1996, with respect to the regulation of rates, routes and services, while the states maintain regulation over such areas as safety, insurance and hazardous materials. UPS is subject to similar regulation in many foreign jurisdictions.
POSTAL RATE PROCEEDINGS
The Postal Reorganization Act of 1970 (the "Act") created the Postal Service as an independent establishment of the executive branch of the Federal Government and vested the power to recommend domestic postal rates in a regulatory body, the Postal Rate Commission (the "Commission"). UPS believes that the Postal Service consistently attempts to set rates for its monopoly services, particularly First Class letter mail, above the cost of providing such services and uses the excess revenues to subsidize its expedited, parcel, international, and other competitive services. Therefore, UPS participates in the postal rate proceedings before the Commission in an attempt to secure fair postal rates for competitive services.
On February 21, 1997, the Postal Service filed a request for a recommended decision on parcel classifications and rates with the Commission. On February 27, UPS filed a notice of intervention with the Commission.
A bill that would result in significant amendments to the Act has been introduced in the United States House of Representatives. If adopted as currently written, the bill would introduce a form of rate-cap regulation of monopoly services, loosen regulation of competitive services and, for certain matters, strengthen the powers of the Commission.
OTHER OPERATIONS
Several of the Company's other operations have been grouped together under a new company, UPS Logistics Group, Inc. ("Logistics Group"), which was formed in early 1996. Logistics Group is the parent company for six subsidiaries that encompass the core of these operations.
UPS Worldwide Logistics, Inc. ("Worldwide Logistics"), a subsidiary of the Logistics Group, is a third-party provider of supply chain management solutions for a number of industries, including high-tech, telecommunications, apparel, automotive, and electronics. Worldwide Logistics designs and operates basic inventory, warehouse, and transportation management services, as well as complex integrated logistics services for its customers' inbound, outbound, and international logistics needs. Worldwide Logistics operates warehouses in the United States and Mexico, Singapore, Hong Kong, Japan, Netherlands and Germany, using state of the art information systems that reduce customers' distribution and capital costs.
UPS Truck Leasing, Inc. ("UPS Truck Leasing"), a subsidiary of the Logistics Group, rents and leases trucks and tractors to commercial users under full- service rental agreements. As of December 31, 1996, UPS Truck Leasing had 43 facilities and a fleet of 4,504 vehicles. The other companies in the Logistics Group include: Roadnet Technologies, Inc., a route scheduling software developer; Diversified Trimodal, Inc., also known as Martrac, which transports produce and other commodities in temperature-controlled trailers over railroads; SonicAir, Inc. which provides same day and next-flight-out delivery services and critical parts warehousing; and Worldwide Dedicated Services, Inc., which provides dedicated contract carrier services.
ENVIRONMENTAL REGULATION
In 1989, regulations were adopted pursuant to the Resource Conservation and Recovery Act, which required owners and operators of underground storage tanks ("USTs") to test, upgrade and/or replace their USTs on a rolling schedule of deadlines through 1998. As of December 1994, UPS substantially completed this project ahead of the mandated Environmental Protection Agency ("EPA") schedule.
The Clean Air Act Amendments of 1990 require a ten-year phase in of alternative fuel vehicles by fleets in the urban areas with the worst air quality problems. UPS began a project in 1989 using clean compressed natural gas ("CNG") as a fuel in the package cars. By the end of 1996, more than 600 package cars were running on CNG in various cities. The EPA's final rules under the Clean Air Act Amendments of 1990 established regulations governing the exemption of clean fuel fleet vehicles from certain transportation control measures ("TCMs"). The regulations exempt clean fuel vehicles, such as UPS's CNG vehicles, from urban TCMs, such as truck bans and time-of-day restrictions. The regulations also permit the CNG vehicles to travel in high occupancy vehicle lanes, provided they meet certain emission criteria.
All of the aircraft owned by UPS meet Stage III federal noise regulations. For additional information regarding compliance with such regulations, see Item 2, "Properties--Aircraft."
EMPLOYEES
As of January 31, 1997, the Company employed approximately 336,000 employees. Approximately 104,000 full-time and 159,000 part-time employees are represented by various labor unions, primarily the International Brotherhood of Teamsters ("IBT"). UPS and the IBT are parties to a Master Agreement. The current agreement
with the IBT expires on July 31, 1997 and will be renegotiated later this year. The Company believes that its relations with its employees are good.
EXECUTIVE OFFICERS
Listed below is certain information relating to the executive officers and management of UPS.
Each executive officer of UPS has been elected to serve until the next organizational meeting of the directors of UPS following the annual meeting of shareowners of UPS.
ITEM 2.
ITEM 2. PROPERTIES
OPERATING FACILITIES
UPS's headquarters are owned and located in Atlanta, Georgia and consist of approximately 735,000 square feet.
The Company's principal operating facilities are owned and located in New York, New York, Dallas, Texas, Jacksonville, Florida, Denver, Colorado, Earth City, Missouri, Grand Rapids, Michigan, Philadelphia, Pennsylvania and Palatine, Illinois. These operating facilities, having floor spaces which range from 350,000 to 1,000,000 square feet, have central sorting facilities, operating hubs and service centers for local operations. In addition, UPS has constructed a 1.9 million square foot operating facility near Chicago, Illinois, which became operational in 1996 and which is designed to streamline shipments between east and west coast destinations.
UPS also owns approximately 650 operating facilities and leases approximately 900 other operating facilities throughout the territories it serves. The smaller of these facilities have vehicles and drivers stationed for the pickup of packages and facilities for the sorting, transfer and delivery of packages. The larger of these facilities have additional facilities for servicing UPS vehicles and equipment and employ specialized mechanical installations for the sorting and handling of packages.
The Company's aircraft are operated in a hub and spokes pattern in the United States. The Company's principal air hub in the United States is located in Louisville, Kentucky, with regional air hubs in Columbia, South Carolina, Philadelphia, Pennsylvania, Dallas, Texas, Rockford, Illinois and Ontario, California. These hubs house facilities for the sorting, transfer and delivery of packages. The Louisville, Kentucky hub handles the largest volume of packages for air delivery in the United States. The regional air hub in Columbia, South Carolina commenced operations in September 1996. A new regional air hub in Hartford, Connecticut is currently under construction and is expected to commence operations in late 1997. The Company's European air hub is located in Cologne, Germany, and has recently established an Asian- Pacific air hub in Taipei, Taiwan. This facility is under construction and is expected to commence operations in 1997.
UPS's computer operations are consolidated in an approximately 435,000 square foot leased facility, the Ramapo Ridge facility, which is located on a 39 acre site in Mahwah, New Jersey. The facility can accommodate
further expansions of up to 27,000 square feet. UPS has leased this facility for an initial term ending in 2019 for use as a data processing, telecommunications and operations facility. UPS also owns a 160,000 square foot facility located on a 25 acre site in the Atlanta, Georgia area, which serves as a backup to the main computer operations facility in New Jersey. This facility provides certain production functions and backup capacity in case a power outage or other disaster incapacitates the main data center. It also helps the Company to meet certain communication needs.
AIRCRAFT
UPS currently operates, either directly or by charter, a fleet of 529 aircraft. UPS's fleet as of December 31, 1996 consisted of the following aircraft:
An inventory of spare engines and parts is maintained for each aircraft.
All of UPS's DC-8-71's, DC-8-73's, Boeing 727's, Boeing 747's, Boeing 757- 200's and Boeing 767-300's meet Stage III federal noise regulations. UPS replaced the three engines on all Boeing 727-100 aircraft with new, quieter engines. These re-engined Boeing 727-100's meet Stage III federal noise regulations and allow UPS to operate at airports with aircraft noise restrictions. UPS has also completed engine modifications for each of its eight Boeing 727-200 aircraft to achieve Stage III noise compliance. UPS became the first major airline to operate a 100% Stage III fleet more than three years in advance of federal regulations.
UPS has purchased two Boeing 747-200 passenger aircraft which are currently being modified to a cargo configuration. The conversion of these two aircraft should be completed and the aircraft will begin revenue operations in the first half of 1997. By way of a like kind exchange, UPS disposed of eleven expediter aircraft in exchange for two Boeing 727-200's. These two aircraft were subsequently leased to a third party operator.
During 1996, UPS began modification of two Boeing 727-100 aircraft from freighter to quick change configuration. This quick change system allows UPS to operate the modified aircraft as freighters during the week and as passenger aircraft over the weekend. Certification of the modification was received in early 1997 and passenger charter operations began during the first quarter of 1997. These charters will be evaluated and additional Boeing 727- 100 aircraft may be modified to this quick change configuration.
During 1996, UPS took delivery of five Boeing 757-200 and ten Boeing 767-300 aircraft. UPS is currently scheduled to take delivery of ten Boeing 757-200 and seven Boeing 767-300 aircraft in 1997. In addition, UPS has firm commitments to purchase five Boeing 757-200 and eight Boeing 767-300 aircraft for delivery during 1998 and 1999. If additional aircraft are required, UPS has options for the purchase of 31 Boeing 757-200 and 30 Boeing 767-300 aircraft for delivery between 1999 and 2008.
VEHICLES
UPS owns and operates a fleet of approximately 156,000 vehicles and leases approximately 3,500 vehicles, ranging in size from panel delivery cars to large tractors and trailers, including approximately 1,400 temperature- controlled trailers owned by Martrac and approximately 4,500 vehicles owned by UPS Truck Leasing.
UPS management believes that the above facilities, aircraft and vehicles are adequate to support the Company's operations over the next year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
UPS is a defendant in various lawsuits that arise in the normal course of business. In the opinion of management, none of these cases are expected to have a material effect on the financial condition of UPS.
During the second quarter of 1995, the Company received a Notice of Deficiency from the United States Internal Revenue Service ("IRS") asserting that it is liable for additional tax for the 1983 and 1984 tax years. The Notice of Deficiency is based in large part on the theory that UPS is liable for tax on income of Overseas Partners Ltd., a Bermuda company, which reinsures excess value package insurance purchased by UPS's customers from unrelated insurers. The deficiency sought by the IRS relating to package insurance is based on a number of inconsistent theories and ranges from $8 million to $35 million of tax, plus penalties and interest, for 1984.
Agents for the IRS have also asserted in reports that UPS is liable for additional tax for the 1985 through 1987 tax years. The additional tax sought by the agents relating to package insurance for this period ranges from $89 million to $148 million, plus penalties and interest, and is based on the same theories as the above-described Notice of Deficiency.
In addition, the IRS and its agents have raised a number of other issues relating to the timing of deductions, the characterization of expenses as capital rather than ordinary, and the Company's entitlement to the Investment Tax Credit in the 1983 through 1987 tax years. These issues total $32 million in tax for the 1983 and 1984 tax years and $95 million in tax for the 1985 through 1987 tax years. Penalties and interest are in addition to these amounts. The majority of these adjustments would reverse in future years.
In August 1995, the Company filed a petition in Tax Court in opposition to the Notice of Deficiency related to the 1983 and 1984 tax years. The trial date is set for September 8, 1997. After consultation with tax legal experts, management believes there is no merit to any material issues raised by the IRS and that the eventual resolution of these matters will not have a material impact on the Company. The Company has appealed with the IRS all material issues related to the 1985 through 1987 tax years. The IRS may take positions similar to those in the reports described above for the periods after 1987.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
UPS is authorized to issue 900,000,000 shares of common stock, $.10 par value per share, of which 570,000,000 shares were issued (including those shares held by UPS for distribution in connection with its stock plans) as of February 28, 1997. UPS is also authorized to issue 200,000,000 shares of preferred stock, without par value. No shares of preferred stock are issued or outstanding.
Each share of UPS Common Stock is entitled to one vote in the election of directors and other matters, except that, generally, any shareowner, or shareowners acting as a group, who beneficially own more than 10% of the voting stock are entitled to only one one-hundredth of a vote with respect to each vote in excess of 10% of the voting power of the then outstanding shares of voting stock. Holders have no preemptive or other right to subscribe to additional shares. In the event of liquidation or dissolution, they are entitled to share ratably in the assets available after payment of all obligations. The shares are not redeemable by UPS except through the Company's exercise of the preferential right of purchase mentioned below and, in the case of stock subject to the UPS Managers Stock Trust, as amended, and the UPS Employees Stock Trust, the Company's right of purchase in the circumstances described therein.
UPS Common Stock is not listed on a national securities exchange or traded in the organized over-the-counter market. The UPS Certificate of Incorporation provides that no outstanding shares of UPS capital stock entitled to vote generally in the election of directors may be transferred to any other person, except by bona fide gift or inheritance, unless the shares shall have first been offered, by written notice, for sale to UPS at the same price and on the same terms upon which they are to be offered to the proposed transferee.
UPS has the right, within 30 days after receipt of the notice, to purchase all or a part of the shares at the price and on the terms offered. If it fails to exercise or waives the right, the shareowner may, within a period of 20 days thereafter, sell to the proposed transferee all, but not part, of the shares that UPS elected not to purchase, for the price and on the terms described in the offer. All transferees of shares hold their shares subject to the same restriction. Shares previously offered but not transferred within the 20 day period remain subject to the initial restrictions. Shares may be pledged or otherwise used for security purposes, but no transfer may be made upon a foreclosure of the pledge until the shares have been offered to UPS at the price and on the terms and conditions bid by the purchaser at the foreclosure.
UPS, from time to time, has waived and may in the future waive its right of first refusal to purchase its shares in order to permit eligible employees to purchase shares at the same price as UPS was willing to pay. The grant of waivers has been and will continue to be affected by the Company's needs for purposes of the UPS Managers Incentive Plan, the UPS 1991 Stock Option Plan (the "1991 Plan") and the UPS 1996 Stock Option Plan (the "1996 Plan" and, together with the 1991 Plan, the "Plans") and other corporate purposes. Persons who purchase shares in this manner are required to deposit them in the UPS Managers Stock Trust or the UPS Employees Stock Trust.
UPS notifies its shareowners periodically of its willingness to purchase shares at specified prices determined by the Board of Directors, in the event that shareowners wish to sell their shares. During 1996, UPS purchased 22,169,448 shares at an aggregate purchase price of approximately $615 million.
In determining the prices at which UPS is willing to purchase shares, the Board considers a variety of factors, including past and current earnings, earnings estimates, the ratio of UPS Common Stock to debt of UPS, other factors affecting the business and long-range prospects of UPS, and general economic conditions, as well as opinions furnished from time to time by investment counselors, each acting independently, as to the value of the UPS shares.
In its determination of the prices to be paid for UPS stock, the Board has not followed any predetermined formula. It has considered a number of formulas commonly used in the evaluation of securities of closely held and of publicly held companies, but its decisions have been based primarily on the judgment of the Board of Directors as to the long-range prospects of UPS rather than what the Board considers to be the short-range trends relating to UPS or to the values of securities generally. Thus, for example, the Board has not given substantial weight to short-term variations in average price-earnings ratios of publicly traded securities, which at times have been considerably higher, and at other times considerably lower, than those at which UPS has offered to purchase its shares. However, the Board's decision as to prices does take into account factors affecting generally the market prices of publicly traded securities, and prolonged changes in those prices could have an effect on the prices offered by UPS.
One factor in determining the prices at which securities trade in the organized securities markets is that of supply and demand. When demand is high in relation to the shares which investors seek to sell, prices tend to increase, while prices tend to decrease when demand is low in relation to the shares being sold.
To date, the UPS Board of Directors has not given significant weight to supply and demand considerations in determining the price to be paid by UPS for its shares. UPS has a need for some of its shares which it has been able to acquire for purposes of awards under the Plans, and eligible employees have purchased some of the other available shares. When the number of shares acquired by UPS exceeds the number needed for these purposes within a reasonable period, the excess shares are reclassified as authorized and unissued shares by UPS.
UPS intends to continue its policy of purchasing a limited number of shares when offered by shareowners. However, there can be no assurance of continuation of that policy. The feasibility of purchases by UPS and the prices at which shares can be purchased are both subject to the continued maintenance by UPS of satisfactory earnings and financial condition. Hence, both the salability of UPS shares and the prices at which they can be sold would be adversely affected by a continuous decline of UPS's earnings or by unfavorable changes in its financial position and might be adversely affected by decisions of shareowners to sell considerably more shares than the Board considers necessary for the ultimate purpose of making awards under the Plans.
The prices at which UPS has published notices of its willingness to purchase shares of Common Stock since January 1995 are as follows:
On February 13, 1997, UPS expressed its willingness to purchase shares at $29.75 per share, which is still the price at the date of this report.
In January 1997, UPS distributed an aggregate of 6,271,907 shares of UPS Common Stock, subject to the UPS Managers Stock Trust, under the UPS Managers Incentive Plan to a total of 26,428 employees at a managerial or supervisory level. In January 1996, it distributed an aggregate of 6,301,427 shares of UPS Common Stock under that Plan to a total of 27,223 managerial or supervisory employees. The UPS Managers Stock Trust and the Managers Incentive Plan have been previously described in the UPS Registration Statement on Form 10 and in the UPS Prospectus, dated January 24, 1995, relating to the UPS Managers Incentive Plan awards. Such distributions do not represent "sales" as defined under the Securities Act of 1933, as amended (the "1933 Act"). However, the shares awarded were registered under the 1933 Act to permit resales of the shares.
During 1996, 1,573,462 shares of UPS Common Stock were distributed to 2,222 management employees upon the exercise of stock options granted to them by UPS under the 1991 Plan. On December 31, 1996, 86,744 active employees owned approximately 180 million shares of UPS Common Stock. This included 59,874 non-management employees holding over 15.2 million shares. The offering to UPS managers and supervisors has been previously described in a UPS Registration Statement on Form S-3, which became effective in August 1994
and the offering to non-management employees has been previously described in a UPS Registration Statement on Form S-8, which became effective on August 28, 1995. The shares issued upon exercise of the options and the shares purchased pursuant to these offerings are subject to the UPS Managers Stock Trust, as amended and restated, or the UPS Employees Stock Trust.
Shares of UPS Common Stock issued to employees under the Plans and most other shares of UPS Common Stock owned by UPS employees are held subject to the UPS Managers Stock Trust, as amended and restated, or the UPS Employees Stock Trust (the "Trusts"). First Union National Bank ("First Union"), serves as trustee under the Trusts. The Trust agreements give UPS the right to purchase the shares of UPS Common Stock of members deposited in the Trusts at their fair market value, as defined, when the member retires, dies or ceases to be an employee of UPS, or when the member requests the withdrawal of shares from a Trust. Fair market value is defined as the fair market value of the shares at the time of the sale, or in the event of differences of opinion as to value, the average price per share of all shares of UPS Common Stock sold during the 12 months preceding the sale involved. If at the time a member ceases to be an employee of UPS, and 1,000 or more shares are held for the benefit of such member and his or her transferees under the Trusts, UPS may, beginning in June of the calendar year next succeeding the year of termination of employment, purchase at any time and from time to time a cumulative annual amount of up to 10% of the 1,000 or more shares held for the benefit of the member and his or her transferees, unless the member requests withdrawal of the shares from the Trust, whereupon UPS may elect whether or not to purchase the shares within 60 days of the request. If less than 1,000 shares are held for the benefit of a member and his or her transferees under the Trusts, UPS may purchase all or part of the shares beneficially owned at any time, subject to the member's right to request withdrawal of the shares from the Trust, whereupon UPS may elect whether or not to purchase the shares within 60 days of the request. UPS is also entitled to purchase shares of UPS Common Stock held under the Trusts after receipt of a request from the member to release the shares from the Trust and upon occurrence of several other enumerated events. In the event UPS fails to elect to purchase the shares and to deliver the purchase price therefor within the prescribed periods, the member would become entitled, upon request, to the delivery of the shares of UPS Common Stock free and clear of the Trusts, unless the purchase period has been extended by agreement of UPS and such member.
Members of the Trusts are entitled to the dividends on shares of UPS Common Stock held for their accounts (except that stock dividends are added to the shares held by the Trustee for the benefit of the individual members), to direct the Trustee as to how the shares held for their benefit are to be voted and to request proxies from the Trustee to vote shares held for their accounts.
In January 1997, UPS paid a cash dividend of $0.35 a share. During the fiscal year ended December 31, 1996, UPS paid cash dividends of $0.32 a share in January 1996 and $0.33 in June 1996. During the fiscal year ended December 31, 1995, UPS paid a cash dividend of $.30 a share in January 1995 and $.32 in June 1995.
Shareowners are entitled to such dividends as are declared by the Board of Directors. The policy of the UPS Board of Directors is to declare dividends each year out of current earnings. However, the declaration of future dividends is subject to the discretion of the Board of Directors in light of all relevant facts, including earnings, general business conditions and working capital requirements. Loan agreements, to which UPS is a party, limit the amount which UPS may declare as dividends and use for the repurchase of its Common Stock. The most restrictive of these agreements limits the declaration of dividends, other than stock dividends, and payments for the purchase of Common Stock to the extent that such declarations and payments, together with all other payments made subsequent to January 1, 1985 would exceed, in the aggregate, (i) $250,000,000, (ii) 66 2/3% of net income, as defined in the agreement, and (iii) the net proceeds from the issuance, sale or disposition of any shares of stock of UPS or any warrants or other rights to purchase such stock subsequent to January 1, 1985. As of December 31, 1996, UPS had approximately $1.3 billion not subject to these restrictions. These limits do not materially restrict the declaration of dividends.
As of February 28, 1997, there were 2,872 record holders of equity securities of UPS. Saul & Co. is the record holder of all the shares of Common Stock subject to the UPS Managers Stock Trust and the UPS Employees Stock Trust (the "Trusts"). As of February 28, 1997, there were 126,247 beneficial owners of shares of common stock subject to the Trusts.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS
1996 Compared to 1995
Revenue increased $1.323 billion, or 6.3%, during 1996 compared to 1995. For 1996, domestic revenue totaled $19.376 billion, an increase of $1.133 billion, or 6.2%, over 1995 and international revenue totaled $2.992 billion, an increase of $190 million, or 6.8%, over 1995.
Domestic revenue increased as a result of first quarter rate increases and higher volume, which was up 1.9%, and includes a 9.5% increase in higher yielding express packages. During the first quarter of 1996, the Company implemented distance-based pricing for its domestic air express services. This new pricing structure is based on both weight and distance of packages shipped. Under the revised structure, air express rates are geographically defined by ZIP Code. The continental United States is divided into the same seven zones used for UPS standard ground services. Previously, express shipments were priced by weight only, the standard method in the industry. The new structure means that prices for UPS Next Day Air have been reduced by as much as 40% in shorter-distance zones, while prices in longer-distance zones have increased up to 28%.
In addition, rates for standard ground shipments were increased an average of 2.9% for commercial deliveries and 3.9% for residential deliveries. Rates for the newly zoned UPS Next Day Air and UPS 2nd Day Air services increased approximately 4.9%. Rates for UPS 3-Day Select, already zoned, increased approximately 3.9%. Rates for international shipments originating in the United States were increased 4.9% for UPS Worldwide Express, 6.9% for UPS Worldwide Expedited and 3.9% for UPS Standard Service to Canada. Rate changes for shipments originating outside the United States have been made throughout the past year and vary by geographic market.
The increase in international revenue was primarily attributable to a 16.1% revenue growth in export operations over the corresponding year. Export revenues increased primarily as a result of higher volume, which was up 20.1%. Foreign domestic revenues decreased by 6.8% primarily due to volume reductions of 5% and changes in currency exchange rates. The decreases in foreign domestic volume are a result of the Company's efforts to improve profitability by increasing revenue yields on these products.
Operating expenses increased by $1.088 billion, or 5.7%. In 1995, operating expenses included a one-time charge of $372 million for a voluntary early retirement and severance program for certain, primarily management, employees ("restructuring charge"). Excluding this restructuring charge, operating expenses increased 7.7% resulting in a deterioration in the operating ratio from 89.7 during 1995 to 90.9 during 1996. The deterioration of the operating ratio resulted primarily from increases in depreciation and amortization, labor costs, fuel costs, advertising costs, purchased transportation and customer supplies, as well as severe weather conditions during the first quarter of 1996, which disrupted both air and ground operations. This is in contrast to the mild weather conditions experienced in the comparable quarter in 1995. The Company's labor agreement with the Teamsters Union expires in mid-1997 and will be renegotiated during the year.
Operating profit for 1996 increased by $235 million, or 13.1%, as a result of the 1995 restructuring charge. Exclusive of the charge, operating profit for the year decreased by $137 million, or 6.3%, as a result of the proportionally higher operating costs.
Income before income taxes ("pre-tax income") increased by $202 million, or 11.8%. Domestic pre-tax income amounted to $2.111 billion, an increase of $191 million, or 10.0%, over 1995, inclusive of the restructuring charge. The international pre-tax loss decreased by $11 million, or 5.2%, to $201 million for 1996. International operations were affected by several major business initiatives during 1996. First, the Company implemented a pan-European product relaunch, in September 1996, that affected both export and foreign domestic operations. This relaunch was designed to provide a uniform portfolio of pan- European services including guaranteed next-day delivery for domestic and transborder shipments as well as comprehensive package tracking capabilities for all levels of service.
In order to meet the strategic objectives of the pan-European product relaunch, the Company decided to combine the Europe and Central Europe regional headquarters from the United Kingdom and Germany,
respectively, to Belgium. Finally, as noted above, the Company redirected certain foreign domestic operations toward higher yielding volume while shedding less profitable freight business. This created a situation where the volume reductions occurred faster than the related cost reductions, resulting in higher foreign domestic losses.
The international pre-tax loss attributable to the foreign domestic operations increased by $33 million, or 21.1%, primarily due to the issues discussed above and costs of related staffing reductions.
The pre-tax loss associated with export operations improved by $44 million, or 78.4%, over 1995. The continuation of this favorable trend in export operations resulted primarily from higher volume and improved operating margins on European and U.S. exports despite the increased costs previously discussed.
Export volume increased by 18.0% and 24.2% for international and U.S. origin export shipments, respectively. Despite the continued improvement of the export operations, UPS expects that the cost of operating its international business will continue to exceed revenue in the near future.
Net income increased by $103 million, or 9.9%. This increase resulted primarily from the restructuring charge incurred during 1995, offset by proportionately higher operating costs in 1996.
1995 Compared to 1994
Revenue increased $1.469 billion, or 7.5%, during 1995 compared to 1994. For 1995, domestic revenue totaled $18.243 billion, an increase of $945 million, or 5.5%, over 1994 and international revenue totaled $2.802 billion, an increase of $524 million, or 23.0%, over 1994.
Domestic revenue increased as a result of higher volume which was up 1.8%, favorable changes in rates and a continuing shift toward higher yielding packages. The volume increase was mainly a result of lower volume during the first quarter of 1994, which was affected by severe weather conditions which disrupted both air and ground operations and a one-day strike in February 1994. During the first quarter of 1995, published rates for domestic ground services for commercial and residential deliveries were increased by 3.9%. Additionally, the published rates for Next Day Air and 2nd Day Air packages each increased by 3.9% and the published rates for Next Day Air and 2nd Day Air letters increased by 4.7% and 4.3%, respectively.
The increase in international revenue was primarily attributable to higher volume, which was up 11.8% and the effect of stronger foreign currencies. The majority of the increased volume related to higher yielding, export packages.
Operating expenses increased by $1.231 billion, or 6.8%. Included in this increase is a one-time charge of $372 million for a voluntary early retirement and severance program for certain, primarily management, employees which concluded August 15, 1995 ("restructuring charge"). Excluding this restructuring charge, operating expenses increased only 4.8% resulting in an improvement in the operating ratio, from 92.1 during 1994 to 89.7 during 1995. The improvement in the operating ratio, excluding the restructuring charge, is a function of cost control efforts during 1995 and adverse factors affecting results for the first quarter of 1994, as discussed above. These factors not only affected first quarter 1994 volume, but increased first quarter 1994 operating costs as well. The effect of cost control efforts should be further enhanced as a result of the restructuring.
Operating profit for 1995 increased by $238 million, or 15.3%, as a result of higher revenue and the improved operating ratio offset by the restructuring charge of $372 million.
Income before income taxes ("pre-tax income") increased by $133 million, or 8.4%. Domestic pre-tax income amounted to $1.92 billion, an increase of $18 million, or 0.9%, over 1994. Results for the period were reduced by the restructuring charge of $372 million.
Ignoring the effect of this one-time charge, domestic pre-tax income would have been up $390 million, or 20.5%, primarily due to higher operating profits. In 1994, domestic pre-tax income included a nonrecurring $46 million gain from the sale of an investment property. The international pre-tax loss decreased by $115 million, or 35.2%, to $212 million for 1995.
The international pre-tax loss attributable to the foreign domestic operations decreased by $76 million, or 32.7%. The pre-tax loss associated with export operations decreased by $39 million, or 41.4%. The improvement noted in both foreign domestic and export operations is primarily a result of higher volume and improved operating margins. Export volume increased by 34.5% and 17.8% for international and U.S. origin, export shipments, respectively.
Net income increased by $100 million, or 10.6%. This increase resulted primarily from the improved operating profit.
LIQUIDITY AND CAPITAL RESOURCES
In March 1996, the Board of Directors authorized an increase in the Commercial Paper borrowing limits from $1.0 to $1.5 billion. In June 1996, UPS renegotiated and extended two credit agreements with a consortium of banks. These agreements provide revolving credit facilities of $1.25 billion each, with one expiring June 9, 1997 and the other June 8, 2001.
In recognition of a continuing need for borrowing over the near term, and to take advantage of attractive borrowing costs in medium-term debt markets, UPS has entered into several financing transactions during 1996 and is continuing to examine other favorable alternatives. In January 1996, UPS issued $200 million of 5.5% Eurobond notes which are due in January 1999. In April 1996, UPS issued $166 million of 3.25% Swiss Franc notes which are due in October 1999. During 1996, UPS entered into a series of capital lease transactions which provided $286 million for the acquisition of aircraft at favorable rates.
In June 1996, UPS established a $500 million European medium-term note program. Under this program, UPS may, from time to time, issue notes denominated in a variety of currencies. In addition, the Company filed a shelf registration in July 1996, which will enable UPS to issue notes up to $300 million in the United States. Under the combined programs, the Company currently does not plan to exceed $500 million in borrowings. There were no borrowings outstanding under either program at December 31, 1996. In February 1997, UPS issued $165 million of 6.875% Pound Sterling notes which are due in February 2000.
Management believes that these funds and borrowing programs, combined with the Company's internally generated resources and other credit facilities, will provide adequate sources of liquidity and capital resources to meet its expected future short-term and long-term needs for the operation of its business, including anticipated capital expenditures of $2.4 billion for land, buildings, equipment and aircraft in 1997, as well as commitments for aircraft purchases through 1999.
During the second quarter of 1995, the Company received a Notice of Deficiency from the United States Internal Revenue Service ("IRS") asserting that it is liable for additional tax for the 1983 and 1984 tax years. The Notice of Deficiency is based in large part on the theory that UPS is liable for tax on income of Overseas Partners Ltd., a Bermuda company, which has reinsured excess value package insurance purchased by UPS's customers from unrelated insurers. The deficiency sought by the IRS relating to package insurance is based on a number of inconsistent theories and ranges from $8 million to $35 million of tax, plus penalties and interest for 1984.
Agents for the IRS have also asserted in reports that UPS is liable for additional tax for the 1985 through 1987 tax years. The additional tax sought by the agents relating to package insurance for this period ranges from $89 million to $148 million, plus penalties and interest, and are based on the same theories included in the above described Notice of Deficiency.
In addition, the IRS and its agents have raised a number of other issues relating to the timing of deductions; the characterization of expenses as capital rather than ordinary; and UPS's entitlement to the Investment Tax Credit in the 1983 through 1987 tax years. These issues total $32 million in tax for the 1983 and 1984 tax years and $95 million in tax for the 1985 through 1987 tax years. Penalties and interest are in addition to these amounts. The majority of these adjustments would reverse in future years.
In August 1995, the Company filed a petition in Tax Court in opposition to the Notice of Deficiency related to the 1983 and 1984 tax years. The trial date is set for September 8, 1997. After consultation with tax legal experts, management believes there is no merit to any material issues raised by the IRS and that the eventual resolution of these matters will not have a material impact on the Company. The Company has appealed with the IRS all material issues related to the 1985 through 1987 tax years. The IRS may take positions similar to those in the reports described above for periods after 1987.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The Financial Statements of UPS are filed together with this Report. See the Index to Financial Statements on page for a list of the Financial Statements filed herewith.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of UPS is presented under the caption "Election of Directors" in UPS's definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 8, 1997, which will be filed with the Securities and Exchange Commission (the "SEC") before April 30, 1997, and is incorporated herein by reference.
Information concerning the Company's executive officers can be found in Part I, Item 1, of this Form 10-K under the caption "Executive Officers" in accordance with Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information in answer to this Item 11 is presented under the caption "Compensation of Executive Officers and Other Information" excluding the information under the captions "Report of the Officer Compensation Committee on Executive Compensation" and "Shareowner Return Performance Graph" in the Company's definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 8, 1997, which will be filed with the SEC before April 30, 1997, and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in answer to this Item 12 is presented under the caption "Stock Ownership" in the Company's definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 8, 1997, which will be filed with the SEC before April 30, 1997, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in answer to this Item 13 is presented under the captions "Certain Business Relationships" and "Common Relationships with Overseas Partners Ltd." in the Company's definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 8, 1997, which will be filed with the SEC before April 30, 1997, and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
See the Index to Financial Statements and Financial Statement Schedules on page for a list of the Financial Statements filed herewith.
2. Financial Statement Schedules.
Not Applicable.
3. List of Exhibits.
See the Exhibit Index on page E-1 for a list of the Exhibits incorporated by reference herein or filed herewith.
(b) Reports on Form 8-K.
None.
(c) Exhibits required by Item 601 of Regulation S-K.
See the Exhibit Index beginning on page E-1 for a list of the Exhibits incorporated by reference herein or filed herewith.
SIGNATURES
PURSUANT TO PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, UNITED PARCEL SERVICE OF AMERICA, INC. HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
United Parcel Service of America, Inc. (Registrant)
/s/ James P. Kelly By: _________________________________ James P. Kelly Chairman of the Board and Chief Executive Officer
Date: March 27, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ John W. Alden Vice Chairman of the March 27, 1997 - ------------------------------------- Board, Senior Vice JOHN W. ALDEN President and Director
Director - ------------------------------------- WILLIAM H. BROWN, III
/s/ Robert J. Clanin Senior Vice March 27, 1997 - ------------------------------------- President, Chief ROBERT J. CLANIN Financial Officer, Treasurer and Director
Director - ------------------------------------- CARL KAYSEN
/s/ James P. Kelly Chairman of the March 27, 1997 - ------------------------------------- Board, Chief JAMES P. KELLY Executive Officer and Director
Director - ------------------------------------- GARY E. MACDOUGAL
SIGNATURE TITLE DATE
/s/ Joseph R. Moderow Senior Vice March 27, 1997 - ------------------------------------- President, JOSEPH R. MODEROW Secretary, General Counsel and Director
/s/ Kent C. Nelson Director March 27, 1997 - ------------------------------------- KENT C. NELSON
Director - ------------------------------------- VICTOR A. PELSON
Director - ------------------------------------- JOHN W. ROGERS
/s/ Charles L. Schaffer Senior Vice March 27, 1997 - ------------------------------------- President and CHARLES L. SCHAFFER Director
Director - ------------------------------------- ROBERT M. TEETER
/s/ Calvin E. Tyler, Jr. Senior Vice March 27, 1997 - ------------------------------------- President and CALVIN E. TYLER, JR. Director
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
ITEM 8 -- FINANCIAL STATEMENTS
ITEM 14(A)(2) -- FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners United Parcel Service of America, Inc. Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of United Parcel Service of America, Inc., and its subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of United Parcel Service of America, Inc., and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE AND TOUCHE LLP
Atlanta, Georgia February 10, 1997
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN MILLIONS EXCEPT SHARE AMOUNTS)
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN MILLIONS EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREOWNERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN MILLIONS EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN MILLIONS)
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF ACCOUNTING POLICIES
Basis of Financial Statements and Business Activities
The accompanying consolidated financial statements include the accounts of United Parcel Service of America, Inc., and all of its subsidiaries (collectively "UPS"). All material intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
UPS concentrates its operations in the field of transportation services, primarily domestic and international package delivery. Revenue is recognized upon delivery of a package.
Cash Equivalents
Cash equivalents (short-term investments) consist of highly liquid investments which are readily convertible into cash. The carrying amount approximates fair value because of the short-term maturity of these instruments.
Common Stock Held for Stock Plans
UPS accounts for its common stock held for awards and distributions under various UPS stock and benefit plans as a current asset. Common stock held in excess of current requirements is accounted for as a reduction in Shareowners' Equity.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation (including amortization) is provided by the straight-line method over the estimated useful lives of the assets, which are as follows: Vehicles -- 9 years; Aircraft -- 12 to 20 years; Buildings -- 20 to 40 years; Leasehold Improvements -- lives of leases; Plant Equipment -- 5 to 8 1/3 years.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired are amortized over a 10-year period using the straight-line method.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). FAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, FAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. The benefit of investment tax credits from the investment in leveraged leases is amortized over the life of the lease.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Capitalized Interest
Interest incurred during the construction period of certain property, plant and equipment is capitalized until the underlying assets are placed in service, at which time amortization of the capitalized interest begins, straight-line, over the estimated useful lives of the related assets. Capitalized interest was $53, $49 and $45 million for 1996, 1995 and 1994, respectively.
Derivative Instruments
UPS has entered into interest rate swap agreements, a cross-currency interest exchange agreement and forward currency contracts. All of these agreements relate to the Company's long-term debt and have been entered into for the purposes of reducing UPS's borrowing costs and to protect UPS against adverse changes in foreign currency exchange rates. Any periodic settlement payments are accrued monthly, as either a charge or credit to expense, and are not material to net income. Based on estimates provided by third party investment bankers, the fair value of these agreements is not material to the Company's financial statements.
The Company also purchases options to reduce the impact of changes in foreign currency rates on its foreign currency purchases and to moderate the impact of major increases in the cost of crude oil on fuel expense. The options are adjusted to fair value at period end based on market quotes and are not material to the Company's financial statements.
UPS is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, UPS does not anticipate nonperformance by the counterparties. UPS is exposed to market risk based upon changes in interest rates, foreign currency exchange rates and crude oil prices.
Stock Option Plans
UPS has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options. Under APB 25, compensation expense is generally not recognized when both the exercise price is the same as the market price and the number of shares to be issued is set on the date the employee stock option is granted. Since UPS employee stock options are granted on this basis, the Company does not recognize compensation expense for grants under its plans.
Changes in Presentation
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. LONG-TERM DEBT AND COMMITMENTS
Long-term debt, as of December 31, consists of the following (in millions):
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(i) The debentures are not subject to redemption prior to maturity and are not subject to sinking fund requirements. Interest is payable semi-annually on the first of April and October.
(ii) The weighted average interest rate on the commercial paper outstanding as of December 31, 1996 and 1995, was 5.6% and 5.7%, respectively. The commercial paper has been classified as long-term debt in accordance with the Company's intention and ability to refinance such obligations on a long-term basis. However, the amount of commercial paper outstanding in 1997 is expected to fluctuate. UPS is authorized to borrow up to $1.5 billion under this commercial paper program as of December 31, 1996.
(iii) The industrial development bonds bear interest at either a daily, variable or fixed rate. The average interest rates for 1996 and 1995 were 3.3% and 3.7%, respectively.
(iv) During 1996, UPS entered into capitalized lease obligations for certain aircraft which are included in Property, Plant and Equipment at December 31, 1996 as follows (in millions):
The aggregate annual principal payments for the next five years, excluding commercial paper and capitalized leases, are (in millions): 1997 -- $5; 1998 - -- $5; 1999 -- $371; 2000 -- $3; and 2001 -- $3.
Based on the borrowing rates currently available to the Company for long- term debt with similar terms and maturities, the fair value of long-term debt is approximately $2.661 billion as of December 31, 1996.
UPS leases certain aircraft, facilities, equipment and vehicles, under operating leases which expire at various dates through 2035. Total aggregate minimum lease payments under capitalized leases and under operating leases are as follows (in millions):
As of December 31, 1996, UPS has outstanding letters of credit totaling approximately $933 million issued in connection with routine business requirements.
At December 31, 1996, UPS has commitments outstanding for capital expenditures under purchase orders and contracts of approximately $2.3 billion, of which approximately $1.4 billion is expected to be spent in 1997.
UPS maintains two credit agreements with a consortium of banks which provide revolving credit facilities of $1.25 billion each, with one expiring June 9, 1997 and the other June 8, 2001. At December 31, 1996, there were no outstanding borrowings under these facilities.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
In June 1996, UPS established a $500 million European medium-term note program. Under this program, UPS may, from time to time, issue notes denominated in a variety of currencies. In addition, the Company filed a shelf registration in July 1996, which will enable UPS to issue notes up to $300 million in the United States. There are no borrowings outstanding under either program at December 31, 1996. In February 1997, UPS issued $165 million of 6.875% Pound Sterling notes which are due in February 2000.
3. COMMON STOCK PER SHARE DATA
Per share amounts related to income are based on 570,000,000 shares in 1996 and 1995 and 580,000,000 shares in 1994 and include Common Stock Held for Stock Plans.
4. LEGAL PROCEEDINGS
UPS is a defendant in various lawsuits which arose in the normal course of business. In the opinion of management, none of these cases are expected to have a material effect on the financial condition of UPS.
During the second quarter of 1995, the Company received a Notice of Deficiency from the United States Internal Revenue Service ("IRS") asserting that it is liable for additional tax for the 1983 and 1984 tax years. The Notice of Deficiency is based in large part on the theory that UPS is liable for tax on income of Overseas Partners Ltd., a Bermuda company, which has reinsured excess value package insurance purchased by UPS's customers from unrelated insurers. The deficiency sought by the IRS relating to package insurance is based on a number of inconsistent theories and ranges from $8 million to $35 million of tax, plus penalties and interest for 1984.
Agents for the IRS have also asserted in reports that UPS is liable for additional tax for the 1985 through 1987 tax years. The additional tax sought by the agents relating to package insurance for this period ranges from $89 million to $148 million, plus penalties and interest, and are based on the same theories included in the above described Notice of Deficiency.
In addition, the IRS and its agents have raised a number of other issues relating to the timing of deductions; the characterization of expenses as capital rather than ordinary; and UPS's entitlement to the Investment Tax Credit in the 1983 through 1987 tax years. These issues total $32 million in tax for the 1983 and 1984 tax years and $95 million in tax for the 1985 through 1987 tax years. Penalties and interest are in addition to these amounts. The majority of these adjustments would reverse in future years.
In August 1995, the Company filed a petition in Tax Court in opposition to the Notice of Deficiency related to the 1983 and 1984 tax years. The trial date is set for September 8, 1997. After consultation with tax legal experts, management believes there is no merit to any material issues raised by the IRS and that the eventual resolution of these matters will not have a material impact on the Company. The Company has appealed with the IRS all material issues related to the 1985 through 1987 tax years. The IRS may take positions similar to those in the reports described above for periods after 1987.
5. EMPLOYEE BENEFIT PLANS
UPS maintains several defined benefit plans (the "Plans"). The Plans are noncontributory and all employees who meet certain minimum age and years of service are eligible, except those covered by certain multi-employer plans provided for under collective bargaining agreements.
The Plans provide for retirement benefits based on either service credits or average compensation levels earned by employees prior to retirement. The Plans' assets consist primarily of publicly traded stocks and bonds. In addition, the Plans' assets include approximately 10.4 million and 8.6 million shares of UPS common stock at December 31, 1996 and 1995, respectively. The actual earnings on the Plans' assets were $381, $390 and
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 $94 million in 1996, 1995 and 1994, respectively. UPS's funding policy is consistent with relevant federal tax regulations. Accordingly, UPS contributes amounts deductible for federal income tax purposes.
Pension expense, consisting of various component parts, and certain assumptions used during the years ended December 31, are as follows (in millions):
Assumptions, reflecting weighted averages across all plans, are as follows:
The following schedule reconciles the funded status of the Plans as of September 30, with certain amounts included in the balance sheet as of December 31 (in millions):
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
UPS also contributes to several multi-employer pension plans for which the above information is not determinable. Amounts charged to operations for contributions to these plans described above were $651, $574 and $506 million during 1996, 1995 and 1994, respectively.
UPS sponsors postretirement medical plans that provide health care benefits to its retirees who meet certain eligibility requirements and who are not otherwise covered by multi-employer plans. Generally, this includes employees with at least 10 years of service who have reached age 55 and employees who are eligible for postretirement medical benefits from a Company sponsored plan pursuant to collective bargaining. The Company has the right to modify or terminate certain of these plans. Historically, these benefits have been provided to retirees on a noncontributory basis; however, in certain cases, employees are required to contribute towards the cost of the coverage.
The accumulated postretirement benefit obligation at December 31, is detailed as follows (in millions):
Net periodic postretirement benefit cost for the years ended December 31, included the following components (in millions):
The significant assumptions used in determining postretirement benefit cost and the accumulated postretirement benefit obligation were as follows:
Future benefit costs were forecasted assuming an initial annual increase of 8.25% for pre-65 medical costs and an increase of 7.25% for post-65 medical costs, decreasing to 6.25% for pre-65 and 5.25% for post-65 by the year 2000 and with consistent annual increases at those ultimate levels thereafter. A one percentage point
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 increase in the annual trend rate would have increased the total accumulated postretirement benefit obligation at December 31, 1996, by $99 million and the aggregate of the service and interest components of the net periodic postretirement benefit costs for 1996 by $12 million.
Plan assets consist primarily of publicly traded stocks and bonds. The Trust holding the plan assets is not subject to income taxes. UPS's funding policy is consistent with relevant federal tax regulations. Accordingly, UPS contributes amounts deductible for federal income tax purposes.
UPS also contributes to several multi-employer health and welfare plans which cover both active and retired employees for which the above information is not determinable. Amounts charged to operations for contributions to health and welfare plans other than the plan described above were $441, $395 and $356 million during 1996, 1995 and 1994, respectively.
As part of UPS's overall effort to lower operating expense, the Company implemented a program of voluntary early retirement and severance for certain, primarily management, employees in 1995. As a result, UPS recognized net additional pension and postretirement costs of $223 million and $115 million, respectively. These costs resulted from the net increase in UPS's obligation for pension and postretirement benefits for certain employees participating in the program. Other costs associated with the program totaled $34 million. The total cost for the program of $372 million was recorded as a one-time restructuring charge against 1995 operations.
6. MANAGEMENT INCENTIVE PLANS
UPS maintains the UPS Managers Incentive Plan. Persons earning the right to receive awards are determined annually by either the Officer Compensation Committee or the Salary Committee of the UPS Board of Directors. Awards consist primarily of UPS common stock and cash equivalent to the tax withholdings on such awards. The total of all such awards is limited to 15% of consolidated income before income taxes for the 12-month period ending each September 30, exclusive of gains and losses from the sale of real estate and stock of subsidiaries and the effect of certain other nonrecurring transactions or accounting changes. Amounts charged to operations were $324, $277 and $255 million during 1996, 1995 and 1994, respectively.
UPS maintains fixed stock option plans under which options are granted to purchase shares of UPS common stock at the current price of UPS shares as determined by the Board of Directors on the date of option grant. UPS applies APB Opinion 25 and related Interpretations in accounting for these plans. Accordingly, no compensation expense has been recorded for the grant of stock options during 1996, 1995 or 1994. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123 ("FAS 123") and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options granted in 1996 and 1995 is amortized to expense over the options' vesting period. The pro forma information follows (in millions except for earnings per share information):
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The fair value of each option grant is estimated on the date of grant using the minimum value method for nonpublic entities specified by FAS 123. The assumptions used, by year, are as follows:
Persons earning the right to receive stock options are determined each year by either the Officer Compensation Committee or Salary Committee of the UPS Board of Directors. Options covering a total of 30 million common shares may be granted during the five-year period ending in 2001 under the 1996 plan. No further options may be granted under the 1991 plan. Except in the case of death, disability or retirement, options are exercisable only during a limited period after the expiration of five years from the date of grant but are subject to earlier cancellation or exercise under certain conditions.
Following is an analysis of options for shares of common stock issued and outstanding:
The weighted average fair value of options granted during 1996 and 1995 was $27.00 and $23.75, respectively. No shares were exercisable at December 31, 1996. The following table summarizes information about stock options outstanding at December 31, 1996:
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. INCOME TAXES
The provision for income taxes for the years ended December 31, consists of the following (in millions):
Income before income taxes includes losses of foreign subsidiaries of $160, $98 and $172 million for 1996, 1995 and 1994, respectively.
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, consists of the following:
Deferred tax liabilities and assets are comprised of the following at December 31 (in millions):
The valuation allowance increased approximately $42 and $60 million during the years ended December 31, 1996 and 1995, respectively.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
UPS has international loss carryforwards of approximately $801 million as of December 31, 1996. Of this amount, $431 million expires in varying amounts through 2006. The remaining $370 million may be carried forward indefinitely. These international loss carryforwards have been fully reserved in the deferred tax assets valuation allowance due to the uncertainty resulting from a lack of previous international taxable income. In addition, a portion of these losses have been deducted on the U.S. tax return, which could affect the amount of any future benefit.
8. DEFERRED TAXES, CREDITS AND OTHER LIABILITIES
Deferred taxes, credits and other liabilities, as of December 31, consist of the following (in millions):
9. OTHER OPERATING EXPENSES
The major components of other operating expenses for the years ended December 31, are as follows (in millions):
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. SEGMENT AND GEOGRAPHIC INFORMATION
UPS operates primarily in one industry segment, transportation services, which is comprised principally of domestic and international package delivery. Information about operations in different geographic segments for the years ended December 31, is shown below (in millions):
Foreign operations include shipments which either originate in or are destined to foreign (non-U.S.) locations. Foreign revenues attributable to shipments which originated in the U.S. totaled $750, $616 and $496 million in 1996, 1995 and 1994, respectively.
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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
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EXHIBITS
TO
FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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UNITED PARCEL SERVICE OF AMERICA, INC.
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EXHIBIT INDEX
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