Item 1. Business.
United Parcel Service of America, Inc., through subsidiaries, provides specialized transportation services, primarily through the delivery of packages. Service is offered throughout the United States and over 200 other countries and territories around the world. In terms of revenue, UPS is the largest package delivery company in the world. During 1994 UPS delivered approximately 3 billion packages. UPS currently has approximately 1.4 million customer locations to which it provides daily pickup services.
With minor exceptions, UPS Common Stock is owned by or held for the benefit of managers and supervisors actively employed by UPS, or their families; or by former employees, their estates or heirs; or by charitable foundations established by UPS founders and their family members; or by other charitable organizations which have acquired their stock by donations from shareowners. UPS stock is not listed on a national securities exchange or traded in the organized over-the-counter markets. When used herein the term "UPS" refers to United Parcel Service of America, Inc., a Delaware corporation, and its subsidiaries.
Delivery Service in the United States
Ground Services
UPS is engaged primarily in the delivery of packages with dimensional limitations of 108 inches in length and 130 inches in length and girth combined. Effective February 1994, UPS increased the weight limit for individual packages from 70 to 150 pounds for interstate and certain intrastate deliveries. As of January 1, 1995, as a result of deregulation, the 150 pound weight limit was made available in all of the 48 contiguous states. UPS provides interstate and intrastate ground service to every address in the 48 contiguous states and between those states and Hawaii and Alaska. In Hawaii, an intra-island service is provided between addresses on Oahu and an inter-island air service is offered between all islands of the state. In Alaska, an intrastate package delivery service is available throughout the state.
Effective January 1, 1995, UPS began providing Hundredweight Service(SM) for ground shipments to all 48 contiguous states. Under this service, contract rates are established for multi-package shipments weighing in the aggregate 200 pounds or more and addressed to one consignee at one location on one day. Customers can realize savings on such shipments compared to regular ground service rates. In 1994, UPS Hundredweight volume grew over 36% from 1993. This growth was primarily due to the increase in new customers as a result of the Teamsters strike of less-than-truckload (LTL) carriers last spring. UPS has managed to retain much of the volume after the strike ended. UPS Hundredweight also offers Weight Break Pricing, which provides rate incentives for shipments of over 500 pounds.
UPS also provides UPS GroundSaver(SM), a contract service, offering special rates and services for business-to-business shipments to specified ZIP Codes. GroundSaver revenue for 1994 increased over 15% from 1993.
UPS's domestic ground revenue increased in 1994 by 5.3% over 1993 as a result of higher volume, which was up 0.5%, favorable changes in rates and higher average weights per package. For a description of the rate increase, see "Item 1 -- Rates."
Domestic Air Services
UPS provides domestic air delivery services known as "UPS Next Day Air(R)" and "UPS 2nd Day Air(R)," which are available throughout the United States and Puerto Rico. UPS also provides UPS Prepaid Letter, which permits customers to purchase UPS Next Day Air and 2nd Day Air Letters in advance at lower prices. For both UPS Next Day Air and UPS 2nd Day Air, packages and documents are either picked up from shippers by UPS or are dropped off by shippers at Air Service Centers or Letter Centers located throughout UPS's service network.
UPS offers guaranteed delivery by 10:30 a.m. for UPS Next Day Air Packages and Letters sent to areas covering over 76% of the U.S. population and noon delivery to areas covering an additional 15% of the U.S. population. In 1994, UPS introduced Early A.M.(SM) service in all of the 48 contiguous states, which provides guaranteed next-day delivery of packages and documents by 8:30 a.m. In 1993, UPS began offering Next Day Air Saver(SM), which is Next Day Air delivery in the afternoon -- by either 3 p.m. or 4:30 p.m., depending on location, at a slightly lower rate than 10:30 a.m. delivery. UPS also guarantees on-schedule delivery of UPS 2nd Day Air packages.
In early 1995, UPS acquired SonicAir, a provider of same-day delivery and third-party logistics services. Through this wholly-owned subsidiary, customers will be offered same-day delivery anywhere in the continental United States, as well as next-flight-out services internationally.
UPS offers Saturday Delivery for UPS Next Day Air shipments to an area covering approximately 76% of all UPS customers. UPS also offers Saturday Pickup service of air shipments in all areas served by UPS Saturday delivery. Further, in 1993, UPS began accepting hazardous materials in its air services, for an additional charge.
UPS offers UPS Next Day Air and UPS 2nd Day Air Hundredweight Service for package shipments totaling at least 100 pounds addressed to one consignee at one location on the same day. UPS Air Cargo Service provides two services designed to fill what would otherwise be unfilled capacity on regular UPS flights: the transportation of containerized and palletized cargo in available space on UPS flights and aircraft charters when UPS planes are not being utilized by UPS.
The volume of UPS's higher margin air services, such as UPS Next Day Air service, continued to grow during 1994. In 1994, UPS's air services' volume increased by 22% and revenues increased by 20%.
To enable UPS to accommodate future demand for air delivery services, UPS, in 1994, completed an expansion of its Dallas, Texas regional air sorting facility and opened a new regional air sorting facility in Rockford, Illinois. UPS also has plans to open an additional new regional air sorting facility in Columbia, South Carolina in 1995. Other regional air sorting facilities are located in Ontario, California and Philadelphia, Pennsylvania. In 1993, UPS ordered thirty new Boeing 767 freighter aircraft and ten more 757 freighter aircraft, in addition to the twenty-one 757 freighter aircraft previously ordered, to meet anticipated future growth in air delivery volume. In 1994, UPS took delivery of twelve more 757 freighter aircraft. For a further description of UPS's properties, see "Item 2
Item 2. Properties.
Operating Facilities
During 1991, UPS moved its corporate office to Atlanta, Georgia. In 1994, UPS completed its new headquarters at a cost of $105 million, and moved all of its staff into the headquarters.
Among UPS's principal operating facilities are those located in Dallas (Texas), Denver (Colorado), Earth City (Missouri), Grand Rapids (Michigan) 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. UPS has recently completed construction of a large hub facility near Chicago, Illinois. This facility has floor space of approximately 1,900,000 square feet and has
recently commenced operations on a limited basis. The estimated cost of this facility, including plant equipment, was approximately $318 million.
UPS also owns approximately 700 and leases approximately 1,000 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 sorting and 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.
UPS's aircraft are operated in a hub and spokes pattern in the United States. UPS's principal air hub in the United States is located in Louisville, Kentucky, with regional air hubs in Philadelphia, Pennsylvania and Ontario, California. These hubs house facilities for sorting, transfer and delivery of packages. The Louisville hub handles the largest volume of packages for air delivery in the United States. In 1994, UPS finished construction of a regional air hub in Rockford, Illinois and completed the hub expansion in Dallas, Texas. UPS has plans to construct its last regional air hub in Columbia, South Carolina. UPS's European air hub is located in Cologne, Germany.
UPS's computer operations have been consolidated in a 400,000 square foot leased facility located on a 39 acre site in Mahwah, New Jersey. The construction of a 27,000 square foot addition to the facility commenced in 1994 and should be completed by the fourth quarter of 1995. The addition will accommodate further expansions of up to 54,000 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 has also begun construction of a 160,000 square foot facility located on a 25 acre site in the Atlanta, Georgia area, which will serve as a backup to the main facility in New Jersey. The new facility, to be completed in July 1995, will provide backup capacity in case a power outage or other disaster incapacitates the main data center, and it will also help meet future communication needs.
Aircraft
UPS operates a fleet of 462 aircraft. UPS's fleet at December 31, 1994 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, B757PF's and 747-100's meet Stage III federal noise regulations. UPS is replacing the three engines on all but seven B727-100 aircraft with new, quieter engines. These re-engined B727-100's will meet Stage III federal noise regulations and will allow UPS to operate into airports with aircraft noise restrictions that exclude B727-100's that have not been re-engined. UPS will accomplish engine modifications for each of its eight 727-200 aircraft to achieve Stage III noise compliance.
The current noise regulations do not impact the valuation of these aircraft as their depreciable lives all end before the final phase-in date for Stage III compliance in 1999. All other aircraft operated by UPS are not subject to Stage III noise regulations.
In 1994, UPS completed a cockpit modernization program of all but seven aircraft in the B727-100 fleet. This modernization program consisted of replacing many of the original cockpit instruments with modern cathode ray tube (CRT) instrumentation. In addition, the layout and positioning of instruments in these B727-100 cockpits has been standardized to a common configuration. A similar cockpit modernization program is also underway for all the UPS DC8-71 and DC8-73 aircraft. At this time, UPS has not committed seven B727-100's purchased in 1994 to either the re-engining program or the cockpit modernization program.
During 1994, UPS ordered 30 new Boeing 767 freight aircraft (B767-300F) with options to buy 30 more. The delivery of the first 767 is scheduled for October 1995. UPS also accelerated the delivery of two B757-200 aircraft from 1995 to 1994. A total of 12 B757-200's were delivered to UPS in 1994. Eight B757-200's will be delivered to UPS in 1995, along with 5 B767-300F's. In addition, UPS has options for the purchase of 31 additional B757-200 aircraft and 30 B767-300F aircraft for delivery between 1997 and 2008, if additional aircraft are required.
Vehicles
UPS owns and operates a fleet of approximately 132,000 vehicles and leases 2,400 vehicles, ranging in size from panel delivery cars to large tractors and trailers, including 1,483 temperature-controlled trailers owned by Martrac and 3,917 vehicles owned by UPS Truck Leasing. During 1994, approximately 4,245 package cars, tractors and trailers were purchased and approximately 3,764 older vehicles were retired.
Item 3.
Item 3. Legal Proceedings.
While UPS is routinely involved in litigation relating to the conduct of its business, there are no pending legal proceedings which, individually or in the aggregate, are material to the business of UPS. UPS was subject to tax audits by the United States Internal Revenue Service for the 1983 through 1987 tax years. Information regarding the tax audit is incorporated herein by reference from Note 4 to the Consolidated Financial Statements filed herewith.
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, par value $.10 per share, of which 580,000,000 shares were issued and outstanding (including those shares held by UPS for distribution in connection with its stock plans) as of February 28, 1995. UPS is also authorized to issue 200,000,000 shares of preferred stock, without par value. No shares of preferred stock have been issued or are 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 percent of the voting stock are entitled to only one one-hundredth of a vote with respect to each vote in excess of 10 percent 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 UPS's exercise of the preferential right of purchase mentioned below and, in the case of stock subject to the UPS Managers Stock Trust, UPS's right of purchase in the circumstances described herein.
Shareowners are entitled to such dividends as are declared by the Board of Directors. The policy of the UPS Board 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 UPS's earnings, general business conditions and capital requirements.
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 which 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 its right of first refusal to purchase its shares in order to permit managers and supervisors to purchase shares at the same price as UPS was willing to pay. The grant of waivers in these cases has been effected after considering the needs of UPS for purposes of the UPS Managers Incentive Plan and UPS's 1986 and 1991 Stock Option Plans ("Plans") and other corporate purposes and has been subject to those needs. Persons who purchase shares in this manner are required to deposit them in the UPS Managers 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 1994, UPS purchased 29,290,052 shares at an aggregate purchase price of approximately $632 million.
In determining the prices, 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 outlook of UPS and general economic conditions, as well as opinions furnished from time to time by two firms of investment counselors, each acting independently, as to the value of UPS shares. 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 Direc-
tors as to the long-range prospects of UPS rather than what the Board considers to be the short-term trends relating to UPS or 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 for UPS's securities. 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 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 considerations of supply and demand in determining the price to be paid by UPS for its shares. UPS has had a need for many of its shares for purposes of awards under the Plans, and eligible managers and supervisors have purchased many 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 constructively retired and treated 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 may 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 may 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 substantially 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 1993 have been as follows:
On February 16, 1995, UPS expressed its willingness to purchase shares at $23.75 per share, which is still the price at the date of this report.
In February 1995, UPS distributed an aggregate of 6,487,408 shares of UPS Common Stock, subject to the UPS Managers Stock Trust, under the UPS Managers Incentive Plan to a total of 29,462 employees at a managerial or supervisory level. In February 1994, it distributed an aggregate of 6,325,902 shares of UPS Common Stock under that Plan to a total of 28,096 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 February 1, 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 consistent with the interpretations of the Securities and Exchange Commission under Rule 144 adopted under the 1933 Act.
During 1994, 1,215,680 shares of UPS Common Stock were distributed to 1,881 employees upon the exercise of stock options granted to them by UPS under the 1986 Stock Option Plan. In addition, a total of 5,433,772 shares of UPS Common Stock were sold, pursuant to a stock offering by UPS, to 13,373 UPS managers and supervisors. The offering has been previously described in the UPS Registration Statement on Form S-3 (No. 33-54297), which became effective in August 1994. The shares issued upon exercise of the options and the shares purchased pursuant to the offering are subject to the UPS Managers Stock Trust. During 1994, UPS also sold 15 million shares of UPS Common Stock to the UPS Thrift Plan at a price of $330 million.
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 (the "Trust"). First Fidelity Bank ("Fidelity") serves as trustee under the Trust. The Trust agreement gives UPS the right to purchase the shares of UPS Common Stock of members deposited in the Trust 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 the 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 sold during the 12 months preceding the sale involved. UPS becomes entitled to purchase shares of UPS Common Stock held under the Trust within 60 days of a request from the member to release the shares from the Trust and upon occurrence of the other enumerated events. The time during which UPS may purchase shares of UPS Common Stock following the cessation of employment varies from three years to thirteen years, depending upon the number of shares held by the employee and the date of the applicable trust agreement. In the event UPS fails to exercise its option within the prescribed periods, the employee would become entitled, upon request, to the delivery of the shares of
UPS Common Stock free and clear of the Trust, unless the purchase period has been extended by agreement of UPS and the shareowner. UPS has consistently exercised its purchase rights.
Members of the Trust 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 1995, UPS paid a cash dividend of $.30 a share. For the fiscal year ended December 31, 1994, UPS paid cash dividends of $.25 a share in January 1994 and $.25 in June 1994. For the fiscal year ended December 31, 1993, UPS paid a cash dividend of $.25 a share in June 1993.
UPS intends to continue its policy of paying dividends to its shareowners. 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, 1994 UPS had approximately $979 million not subject to these restrictions. These limits do not materially restrict the declaration of dividends.
Set forth below is the approximate number of record holders of equity securities of UPS as of February 28, 1995.
________________________________________________________________________________
1. Refers to beneficial owners. The record holder of the shares of Common Stock subject to the Trust is Saul & Co., as nominee for First Fidelity Bank, N.A., Newark, New Jersey, as Trustee.
Item 6.
Item 6. Selected Financial Data.
___________________________ (1) All per share amounts have been restated to reflect the 4-for-1 stock split effective September 6, 1991.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Operations
1994 Compared to 1993
Revenue increased $1.793 billion, or 10.1%, during 1994 compared to 1993. For 1994, domestic revenue totaled $17.298 billion, an increase of $1.475 billion, or 9.3%, over 1993 and international revenue totaled $2.278 billion, an increase of $318 million, or 16.2%, over 1993.
Domestic revenue increased as a result of higher volume which was up 2.3%, favorable changes in rates and a continuing shift toward higher yielding packages. During the first quarter of 1994, published rates for domestic ground services for commercial and residential deliveries were increased by 3.8% and 4.3%, respectively. 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 2.4% and 4.5%, respectively.
The increase in international revenue was primarily attributable to higher volume, which was up 8.0%. The majority of the increased volume related to higher yielding, export packages.
Operating expenses increased by $1.695 billion, or 10.4%, which was commensurate with the increase in revenues. Higher wages and employee benefits accounted for the majority of the increase. Other operating expenses were up in a variety of categories with the largest increases relating to depreciation and purchased transportation. As part of UPS's overall effort to lower operating expenses, it is considering a possible reduction in the number of managers it employs from the current level of approximately 35,000. However, no decisions have been made as to the size of a possible reduction. UPS is considering the extent to which its objectives can be met through attrition, early retirement and possible layoffs. Therefore, the projected savings or expenses associated with a possible reduction in the number of managers cannot be determined.
Operating profit for 1994 increased by $98 million, or 6.7%. This increase resulted primarily from higher revenue discussed above.
Income before income taxes and cumulative effect of a change in accounting principle ("pre-tax income") increased by $144 million, or 10.0%. Domestic pre-tax income amounted to $1.902 billion, an increase of $204 million, or 12.0%, over 1993. This increase was a result of higher operating profit and the sale of an investment property in January at a gain of approximately $46 million. The
international pre-tax loss increased by $60 million, or 22.6%, bringing the total international pre-tax loss to $327 million for 1994.
The international pre-tax loss attributable to the foreign domestic operations increased by $56 million, or 31.8%, primarily as a result of competitive factors. The pre-tax loss associated with export operations increased by $4 million, or 4.8%. Export volume increased by 48.0% and 16.3% for international and U.S. origin, export shipments, respectively. UPS expects the cost of operating its international business will continue to exceed revenue in the near future.
Net income increased by $134 million, or 16.5%. This increase resulted primarily from the higher operating profit, a gain on a long-term investment property described above and a deferred tax adjustment recorded in 1993 to reflect the effect of the increase in the maximum U.S. federal income tax rate for corporations from 34% to 35%. See also Note 7 to the consolidated Financial Statements.
1993 Compared to 1992
Revenue increased $1.264 billion, or 7.7%, during 1993 compared to 1992. For 1993, domestic revenue totaled $15.823 billion, an increase of $1.101 billion, or 7.5%, over 1992, and international revenue totalled $1.960 billion, an increase of $163 million, or 9.1%, over 1992. Domestic revenue increased as a result of favorable changes in rates and a shift toward higher yielding packages. Increases in published rates during the first quarter of 1993 ranged from 4.9% to 5.9% for domestic air shipments and averaged approximately 4.5% for domestic ground shipments. These increases offset a 0.6% decline in domestic volume during 1993. The increase in international revenue was attributable to higher volume, which was up 11.8%. However, the effect of the international volume increase on revenue was partially offset by a decrease in revenue per piece. This decrease resulted from competitive pressures and poor economic conditions in certain foreign markets along with currency exchange rate fluctuations with respect to the U.S. dollar and discounting in connection with efforts to build volume.
Operating expenses increased by $1.084 billion, or 7.1%. The increase was primarily the result of increases in average pay rates and employee benefits. In November 1993, UPS entered into a new, four-year labor agreement with the International Brotherhood of Teamsters ("Teamsters"). The new agreement resulted in hourly increases in wages and employee benefits for senior drivers of $2.25 and $1.80, respectively, over the four-year term. The agreement will result in similar increases in wages and employee benefits for the Company's other Teamsters employees. Terms of the agreement were effective August 1, 1993.
Operating profit for 1993 increased by $180 million, or 14.1%. This increase resulted primarily from higher revenue.
Income before income taxes and cumulative effect of a change in accounting principle ("pre-tax income") increased by $162 million, or 12.8%. Domestic pre-tax income amounted to $1.698 billion, an increase of $153 million, or 9.9%, over 1992 as a result of higher operating profit. The international pre-tax loss decreased by $10 million, or 3.5% bringing the international pre-tax loss to $267 million for 1993. This change resulted from improved export operations and favorable swings in currency exchange rates offset by declines in foreign domestic operations.
The international pre-tax loss attributable to the foreign domestic operations increased by $71 million, or 68.2%, primarily as a result of weak economic conditions and tough competition. The pre-tax loss associated with export operations decreased by $81 million, or 47.1%, as a result of increased volume and the achievement of greater cost efficiencies in the international network. Export volume increased by 36.1% and 35.7% for international and U.S. origin, export shipments, respectively.
The provision for income taxes increased by approximately $118 million, or 23.4%. This increase is a result of higher pre-tax income as well as an increase in the U.S. federal income tax rate, as described more fully in Note 7 to the Consolidated Financial Statements.
Income before cumulative effect of a change in accounting principle increased by $45 million, or 5.8%. This increase resulted from the increase in pre-tax income, partially offset by the increase in the U.S. federal income tax rate.
Liquidity and Capital Resources
UPS believes that its internally generated funds, revolving credit facilities and commercial paper program (discussed below) 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 $2.2 billion for land, buildings, equipment and aircraft in 1995, as well as commitments for aircraft purchases through 2000.
During the fourth quarter of 1993, UPS established a commercial paper program under which it may borrow up to $500 million on a short-term, unsecured basis at favorable rates. The amount which UPS can borrow under this program was increased to $1 billion in 1995.
Agents for the United States Internal Revenue Service ("IRS") have asserted in reports that UPS is liable for additional tax for the 1984 through 1987 tax years. The assertions are based in large part on the theory that UPS is liable for tax on income of Overseas Partners Ltd. ("OPL"), a Bermuda company, which has reinsured excess value package insurance purchased by UPS's customers from unrelated insurers. The adjustments sought by the agent relating to package insurance are based on a number of inconsistent theories and range from $97 million to $183 million of tax, plus penalties and interest, for the period stated above.
In addition, the 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. The adjustments sought on these issues aggregate $127 million in tax, the majority of which would reverse in future years, plus penalties and interest.
After consultation with 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. Although no assessment has yet been made by the IRS with respect to the years 1983 through 1987, it is likely the IRS will issue a Notice of Deficiency for the years 1983 and 1984 which the Company will contest through litigation. The IRS has not proposed adjustments for years subsequent to 1987, although 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 Index to Financial Statements, page, which is incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
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 11, 1995, which will be filed with the Securities and Exchange Commission (the "SEC") by March 31, 1995, is incorporated herein by reference.
Information concerning UPS'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 UPS's definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 11, 1995, which will be filed with the SEC by March 31, 1995, 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 UPS's definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 11, 1995, which will be filed with the SEC by March 31, 1995, 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 UPS's definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 11, 1995, which will be filed with the SEC by March 31, 1995, 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 Index to Financial Statements and Financial Statement Schedules at page, which is incorporated herein by reference.
2. Financial Statement Schedules - Not applicable
3. List of Exhibits. - See Exhibit Index at page E-1, which is incorporated herein by reference.
(b) Reports on Form 8-K. - No reports on Form 8-K were filed during the quarter ended December 31, 1994
(c) Exhibits required by Item 601 of Regulation S-K. - See Exhibit Index at page E-1, which is incorporated herein by reference.
SIGNATURES
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)
Date: March 29, 1995 By: /s/ Kent C. Nelson --------------------------------- Kent C.Nelson Chairman of the Board
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.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
COMPRISING ITEMS 8 AND 14(a) (2) OF ANNUAL REPORT ON FORM 10-K
TO SECURITIES AND EXCHANGE COMMISSION
THREE YEARS ENDED DECEMBER 31, 1994
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND 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, 1994 and 1993, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 5 to the consolidated financial statements, in 1992 the Company changed its method of accounting for postretirement benefits other than pensions to conform with Statement of Financial Accounting Standards No. 106.
DELOITTE & TOUCHE LLP
Atlanta, Georgia February 8, 1995
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 1994 and 1993 (000's omitted except share amounts)
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 1994 and 1993 (000's omitted except share amounts)
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME Years Ended December 31, 1994, 1993 and 1992 (000's omitted except per share amounts)
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY Years Ended December 31, 1994, 1993 and 1992 (000's omitted except per share amounts)
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS Years Ended December 31, 1994, 1993 and 1992 (000's omitted)
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
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.
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 distribution pursuant to awards under the UPS Managers Incentive Plan and the UPS Stock Option Plan as a current asset. The liability for the amount of the annual managers incentive award is included in accrued wages and withholdings. 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 - 10 to 40 years; Leasehold Improvements - lives of leases; Plant Equipment - 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.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
Income Taxes
Deferred income taxes result primarily from the use of accelerated depreciation methods allowable for income tax purposes, certain differences in asset lives adopted for income tax purposes, temporary differences between the accrual and payment of employee compensation and investments in leveraged leases. UPS adopted Statement of Financial Accounting Standards ("FAS") No. 96, "Accounting for Income Taxes," in 1987, and FAS 109, "Accounting for Income Taxes," in 1993.
The benefit of investment tax credits is amortized over seven years except investment tax credits from the investment in leveraged leases, which is amortized over the life of the lease.
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 $45,400,000, $27,800,000, and $26,500,000 for 1994, 1993 and 1992, respectively.
Derivative Instruments
UPS has entered into interest rate swap agreements to lower the effective interest rate on its debentures. These agreements have an average remaining life of two years. The 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 the Company's interest rate swap 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.
Changes in Presentation
Certain prior year amounts have been reclassified to conform to the current year presentation.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
2. LONG-TERM DEBT
Long-term debt, as of December 31, consists of the following (000's omitted):
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. The average interest rate on the commercial paper outstanding as of December 31, 1994, was 6.0%. 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 1995 is expected to fluctuate and may be reduced from time to time. The industrial development bonds bear interest at either a daily, variable, or fixed rate. The average interest rates for 1994 and 1993 were 2.7% and 2.2%, respectively. The installment notes, mortgages and bonds bear interest at rates of 6.0% to 11.5%.
The aggregate annual principal payments for the next five years, excluding commercial paper, are: 1995- $1,675,000; 1996- $3,720,000; 1997- $3,105,000; 1998- $3,293,000; and 1999- $2,514,000.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
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 $1,127,000,000 as of December 31, 1994.
3. COMMON STOCK PER SHARE DATA
Per share amounts related to income are based on 580,000,000 shares in 1994 and 1993 and 595,000,000 shares in 1992 and include Common Stock Held for Stock Plans.
4. LEGAL PROCEEDINGS AND COMMITMENTS
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.
Agents for the United States Internal Revenue Service ("IRS") have asserted in reports that UPS is liable for additional tax for the 1984 through 1987 tax years. The assertions are based in large part on the theory that UPS is liable for tax on income of Overseas Partners Ltd. ("OPL"), a Bermuda company, which has reinsured excess value package insurance purchased by UPS's customers from unrelated insurers. The adjustments sought by the agents relating to package insurance are based on a number of inconsistent theories and range from $97 million to $183 million of tax, plus penalties and interest, for the period stated above.
In addition, the 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. The adjustments sought on these issues aggregate $127 million in tax, the majority of which would reverse in future years, plus penalties and interest.
After consultation with 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. Although no assessment has yet been made by the IRS with respect to the years 1983 through 1987, it is likely the IRS will issue a Notice of Deficiency for the years 1983 and 1984 which the company will contest through litigation. The IRS has not proposed adjustments for years subsequent to 1987, although the IRS may take positions similar to those in the reports described above for periods after 1987.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
UPS leases certain operating facilities and aircraft, the majority of which are from related parties, including various UPS employee benefit plans. These leases expire at various dates through 2030. Total aggregate minimum lease commitments are as follows (000's omitted):
UPS maintains two credit agreements with a consortium of banks which provide revolving credit facilities of $500,000,000 each, with one expiring June 12, 1995 and the other June 14, 1996. At December 31, 1994, there were no outstanding borrowings under these facilities. As of December 31, 1994, UPS has outstanding letters of credit totaling approximately $783,732,000 issued in connection with routine business requirements.
At December 31, 1994, UPS had commitments outstanding for capital expenditures under purchase orders and contracts of approximately $3.4 billion, of which approximately $1.2 billion is expected to be spent in 1995.
5. EMPLOYEE BENEFIT PLANS
UPS maintains the UPS Retirement Plan (the "Plan"). The Plan is a defined benefit plan which provides employees annual defined retirement benefits. The Plan is 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 Plan provides for retirement benefits based on average compensation levels earned by employees during certain years of service preceding retirement. The Plan's assets consist primarily of publicly traded stocks and bonds. In addition, the Plan's assets include 8,052,840 shares of UPS common stock at both December 31, 1994 and 1993. The actual earnings on the Plan's assets were $88,944,000, $224,405,000, and $124,661,000, in 1994, 1993 and 1992, respectively. UPS's funding policy is consistent with relevant federal tax regulations. Accordingly, UPS contributes amounts deductible for federal income tax purposes.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
Pension expense, consisting of various component parts, and certain assumptions used during the years ended December 31, are as follows (000's omitted):
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
The following schedule reconciles the funded status of the Plan with certain amounts included in the balance sheet as of December 31 (000's omitted):
UPS also contributes to several multi-employer pension plans for which the above information is not determinable. Amounts charged to operations for contributions to pension plans other than the Plan described above were $506,215,000, $455,842,000, and $407,879,000 during 1994, 1993 and 1992, respectively.
UPS sponsors defined benefit postretirement medical plans that provide health care benefits to its retirees who meet certain eligibility requirements and who are not covered by multi-employer retirement plans. Generally, this includes employees with at least 10 years of service who have reached age 55 and will be receiving benefits from one of the Company's retirement plans. 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, effective January 1, 1992, the Company made modifications which will likely result in cost sharing in the future for certain of its retirees.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
Prior to 1992, UPS had generally expensed the costs of these benefits on a current, "pay as you go" basis. During 1992, UPS adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement requires accrual of postretirement benefits, which include health care benefits, during the years an employee provides service.
The effect of adoption resulted in a one-time "catch-up" charge during 1992 of approximately $248.9 million, after tax, representing the cumulative effect of the change as of January 1, 1992. In addition to the cumulative effect, adoption of this Statement resulted in additional charges to income in 1994, 1993 and 1992 of approximately $64,300,000, $47,500,000, and $40,300,000, respectively, after tax ($0.11, $0.08, and $0.07 per share, respectively). Overall, net income for 1994, 1993 and 1992 was reduced $64,300,000, $47,500,000, and $289,200,000, respectively, as a result of adoption ($0.11, $0.08, and $0.49 per share, respectively).
The accumulated postretirement benefit obligation at December 31, is detailed as follows (000's omitted):
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
Net periodic postretirement benefit cost for the years ended December 31, included the following components (000's omitted):
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 10.25% for pre-65 medical costs and an increase of 9.25% for post-65 medical costs, decreasing to 7.25% for pre-65 and 6.25% for post-65 by the year 2000 and with consistent annual increases at those ultimate levels thereafter. A one percentage point increase in the annual trend rate would have increased the total accumulated postretirement benefit obligation at December 31, 1994, by $71.8 million and the aggregate of the service and interest components of the net periodic postretirement benefit costs for 1994 by $11.5 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.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
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 federal 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. In addition, the cumulative effect of a change in accounting principle was specifically excluded from the 1992 award calculation in accordance with a vote of shareowners. Amounts charged to operations were $255,482,000, $217,784,000, and $198,943,000, during 1994, 1993 and 1992, respectively.
UPS maintains stock option plans. Originally, these plans were established to issue Book Value Shares. Book Value Shares were shares of UPS common stock with a stated value equal to the UPS book value per share as of the year end immediately preceding the date of option grant. Voting, dividends and liquidation rights for the Book Value Shares were the same as for other UPS common stock. UPS repurchased all Book Value Shares immediately after their issuance except for certain repurchases from officers and directors which were deferred for up to six months.
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. The number of options and option prices for Book Value Shares exercised under the Plans were 4,611,372 and $5.68 in 1992. There were no Book Value Shares exercised during 1994 or 1993. Compensation expense charged to operations related to exercise of these options was not material. No further shares may be issued under the 1986 plan.
Prior to issuing options for any Book Value Shares, the 1991 Plan was amended during 1992 to change it to a Current Price Plan. Under a Current Price Plan, 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. Unlike Book Value Shares, the optionee may continue to hold the shares of common stock received on exercise, subject to the terms of the UPS Managers Stock Trust. Persons earning the right to receive stock options under the 1991 plan are determined each year by either the Officer Compensation Committee or Salary Committee of the UPS Board of Directors. Options covering a total of 30,000,000 common shares may be granted during the five-year period ending in 1996.
Also during 1992, an amendment was made to the 1986 plan to allow options on Book Value Shares issued during the period 1988 through 1991 to be converted to Current Price options in the
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
ratio of three common shares for five Book Value Shares. Substantially all holders of unexpired options for Book Value Shares elected to convert to options for common stock as of December 31, 1992. Following is an analysis of options for shares of common stock issued and outstanding:
Current Price options converted from Book Value options were issued with exercise prices equal to the published price of UPS common stock as of the year end immediately preceding the original date of grant. Compensation expense charged to operations related to these options was not material. Options granted during 1994, 1993 and 1992 have an exercise price equal to the current price of a share of UPS common stock at the date of grant.
7. INCOME TAXES
Effective January 1, 1993, UPS adopted 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. Previously, the Company used the FAS 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts.
The effects of adopting FAS 109 were not material to the Company's financial position or results of operations.
During the third quarter of 1993, the maximum U.S. federal income tax rate for corporations was increased from 34% to 35%
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
effective January 1, 1993. In addition to increasing the Company's income tax accruals for its 1993 current and deferred taxable income, the Company made a $31.8 million adjustment to reflect the effect of the rate change on its net deferred tax liabilities on January 1, 1993.
The provision for income taxes for the years ended December 31, consists of the following (000's omitted):
Income before income taxes and cumulative effect of a change in accounting principle includes losses of foreign subsidiaries of $172,311,000, $169,689,000 and $114,941,000 for 1994, 1993 and 1992, 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:
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
Deferred tax liabilities and assets are comprised of the following at December 31 (000's omitted):
The valuation allowance increased approximately $64,000,000 and $90,000,000 during the years ended December 31, 1994 and 1993, respectively.
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
The tax effects of items included in the deferred tax provision for 1992, consist of the following (000's omitted):
UPS has international loss carryforwards of approximately $598,000,000 as of December 31, 1994. Of this amount, $337,000,000 expires in varying amounts through 2000. The remaining $261,000,000 may be carried forward indefinitely.
8. OTHER ASSETS
Other assets, as of December 31, consist of the following (000's omitted):
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
Leveraged Leases
The net investment in leveraged leases, as of December 31, consists of the following (000's omitted):
Unearned income on each leveraged lease is amortized to provide an approximate level rate of return when compared to UPS's unrecovered net investment.
9. DEFERRED TAXES, CREDITS AND OTHER LIABILITIES
Deferred taxes, credits and other liabilities, as of December 31, consist of the following (000's omitted):
UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992
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 (000's omitted):
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 $495,957,000, $390,984,000, and $323,732,000 in 1994, 1993 and 1992, respectively.
11. OTHER OPERATING EXPENSES
The major components of other operating expenses for the years ended December 31, are as follows (000's omitted):
________________________________________________________________________________ ________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
_______________________
UNITED PARCEL SERVICE OF AMERICA, INC.
________________________________________________________________________________ _______________________________________________________________________________
EXHIBIT INDEX
(3) Articles of Incorporation and By-laws.
(a) Restated Certif- Incorporated by Reference to icate of Incorpo- Exhibit 4(iv) to Form S-8 ration of UPS. Registration Statement (No. 33-19622).
(b) By-laws of UPS as Incorporated by Reference amended through to Exhibit 3(b) to 1991 February 21, 1992. Annual Report on Form 10-K.
(4) Instruments defining the rights of security holders, including indentures.
(a) Specimen Certif- Incorporated by Reference to icate of Capital Exhibit 3(a) to Form 10, as Stock of UPS. filed April 29, 1970.
(b) UPS Managers Stock Incorporated by Reference to Trust Agreement. Exhibit 2 to Registration Statement No. 2-46382.
(c) Specimen Certificate Incorporated by Reference to of 8 3/8% Debentures Exhibit 4(c) to Registration due April 1, 2020. Statement No. 33-32481.
(d) Indenture relating to Incorporated by Reference to 8 3/8% Debentures Exhibit 4(c) to Registration due April 1, 2020. Statement No. 33-32481.
(10) Material Contracts.
(a) UPS Thrift Plan, as Amended and Restated January 1, 1976, in- cluding Amendments Nos. 1 and 2.
(1) Amendment Incorporated by Reference to No. 3 to the Exhibit 20(b) to 1980 Annual UPS Thrift Plan. Report on Form 10-K.
(2) Amendment Incorporated by Reference to No. 4 to the Exhibit 20(b) to 1981 Annual UPS Thrift Plan. Report on Form 10-K.
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(3) Amendment Incorporated by Reference to No. 5 to the Exhibit 19(b) to 1983 Annual UPS Thrift Plan. Report on Form 10-K.
(4) Amendment Incorporated by Reference to No. 6 to the Exhibit 10(a)(4) to 1985 UPS Thrift Plan. Annual Report on Form 10-K.
(5) Amendment Incorporated by Reference to No. 7 to the Exhibit 10(a)(5) to 1985 UPS Thrift Plan. Annual Report on Form 10-K.
(6) Amendment Incorporated by Reference to No. 8 to the Exhibit 10(a)(6) to 1987 UPS Thrift Plan. Annual Report on Form 10-K.
(7) Amendment Incorporated by Reference to No. 9 to the Exhibit 10(a)(7) to 1987 UPS Thrift Plan. Annual Report on Form 10-K.
(8) Amendment Incorporated by Reference to No. 10 to the Exhibit 10(a)(8) to 1990 UPS Thrift Plan. Annual Report on Form 10-K.
(9) Amendment Incorporated by Reference to No. 11 to the Exhibit 10(a)(9) to 1991 UPS Thrift Plan. Annual Report on Form 10-K.
(10) Amendment Incorporated by Reference to No. 12 to the Exhibit 10(a)(10) to 1991 UPS Thrift Plan. Annual Report on Form 10-K.
(11) Amendment Incorporated by Reference to No. 13 to the Exhibit 10(a)(11) to 1991 UPS Thrift Plan. Annual Report on Form 10-K.
(12) Amendment Incorporated by Reference to No. 14 to the Exhibit 10(a)(12) to 1991 UPS Thrift Plan. Annual Report on Form 10-K.
(13) Amendment Incorporated by Reference to No. 15 to the Exhibit 10(a)(13) to 1992 UPS Thrift Plan. Annual Report on Form 10-K.
(14) Amendment No. 16 Incorporated by Reference to to the UPS Thrift Exhibit 10(a)(14) to 1993 Plan Annual Report on Form 10-K
(15) Amendment Incorporated by Reference to No. 17 to the UPS Exhibit 10(a)(15) to 1994 Thrift Plan Annual Report on Form 10-K
(16) Amendment No. 18 to Filed herewith. the UPS Thrift Plan
(17) Amendment No. 19 to Filed herewith. the UPS Thrift Plan
(b) UPS Retirement Plan Incorporated by Reference to (including amend- Exhibit 9 to 1979 Annual ments 1 through 4). Report on Form 10-K.
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(1) Amendment No. 5 Incorporated by Reference to to the UPS Re- Exhibit 20(a) to 1980 Annual tirement Plan. Report on Form 10-K.
(2) Amendment No. 6 Incorporated by Reference to to the UPS Re- Exhibit 19(a) to 1983 Annual tirement Plan. Report on Form 10-K.
(3) Amendment No. 7 Incorporated by Reference to to the UPS Re- Exhibit 10(b)(3) to 1984 tirement Plan. Annual Report on Form 10-K.
(4) Amendment No. 8 Incorporated by Reference to to the UPS Re- Exhibit 10(b)(4) to 1985 tirement Plan. Annual Report on Form 10-K.
(5) Amendment No. 9 Incorporated by Reference to to the UPS Re- Exhibit 10(b)(5) to 1986 tirement Plan. Annual Report on Form 10-K.
(6) Amendment No. 10 Incorporated by Reference to to the UPS Re- Exhibit 19(a) to 1988 Annual tirement Plan. Report on Form 10-K.
(7) Amendment No. 11 Incorporated by Reference to to the UPS Re- Exhibit 19(b) to 1988 Annual tirement Plan. Report on Form 10-K.
(8) Amendment No. 12 Incorporated by Reference to to the UPS Re- Exhibit 10(b)(8) to 1989 tirement Plan. Annual Report on Form 10-K.
(9) Amendment No. 13 Incorporated by Reference to to the UPS Re- Exhibit 10(b)(9) to 1989 tirement Plan. Annual Report on Form 10-K.
(10) Amendment No. 14 Incorporated by Reference to to the UPS Re- Exhibit 10(b)(10) to 1990 tirement Plan. Annual Report on Form 10-K.
(11) Amendment No. 15 Incorporated by Reference to the UPS Re- to Exhibit 10(b)(11) to tirement Plan. 1992 Annual Report on Form 10-K.
(12) Amendment No. 16 Filed herewith. to the UPS Retirement Plan
(13) Amendment No. 17 Filed herewith. to the UPS Retirement Plan
(c) UPS Managers Incorporated by Reference to Incentive Plan definitive Proxy Statement (as amended). for 1992 Special Meeting of Shareowners.
(d) 1986 UPS Stock Option Incorporated by Reference to Plan, as amended Exhibit 4(iv) to Form S-8 through March 5, 1987. Registration Statement (No. 33-12576).
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(1) Amendment to UPS Incorporated by Reference to 1986 Stock Option Exhibit 10(e)(1) to 1987 Plan adopted Annual Report on Form 10-K. November 30, 1987.
(2) Amendment to UPS Incorporated by Reference 1986 Stock Option Exhibit 10(e)(2) to 1992 Plan adopted Annual Report on Form October 30, 1992. 10-K.
(e) Intentionally omitted.
(f) Agreement and Plan of Incorporated by Reference Reorganization, dated to Exhibit l(a) to Amend- December 4, 1979, by ment No. 1 to Form S-14, and between United Registration No. 2-65859. Parcel Service of America, Inc. and Parmac Corporation.
(g) Agreement and Plan of Incorporated by Reference Reorganization, dated to Exhibit l(b) to Amend- December 4, 1979, by ment No. 1 to Form S-14, and between United Registration No. 2-65859. Parcel Service of America, Inc. and Nuparmac Corporation.
(h) Agreement and Plan of Incorporated by Reference Reorganization, dated to Exhibit l(c) to Amend- December 4, 1979, by ment No. 1 to Form S-14, and between United Registration No. 2-65859. Parcel Service of America, Inc. and Parco Managers Corporation.
(i) Indemnification Con- Incorporated by Reference to tracts or Arrangements. Item 8 of Form 10, as filed April 29, 1970.
(j) Agreement of Sale be- Incorporated by Reference to tween Delaware County Exhibit 10(m) to 1985 Annual Industrial Development Report on Form 10-K. Authority and Penallen Corporation, dated as of December 1, 1985; Remarketing Agreement, dated as of December 1, 1985, among United Parcel Service of America, Inc., Penallen Corporation and Salomon Brothers Inc.; Guarantee Agreement, dated as of December 1, 1985, between United Par- cel Service of America, Inc. and Irving Trust Company; Guarantee by United Parcel Service of America, Inc. to Dela- ware County Industrial Development Authority,
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dated as of December 1, 1985.
(k) Participation Agree- Incorporated by Reference to ment, dated November 17, Exhibit 10(k) to 1989 Annual 1986, among United Report on Form 10-K. Parcel Service Co. ("UPS Co."), Bankers Trust Company, as Trustee under a Master Trust Agreement for the bene- fit of the participants and the beneficiaries of the UPS Thrift Plan and the UPS Retirement Plan, Overseas Partners Ltd., Wilmington Trust Company and The Connecticut National Bank ("Owner Trustee").
(l) Aircraft Purchase Incorporated by Reference to Agreement, dated Exhibit 10(l) to 1989 Annual November 5, 1986, Report on Form 10-K. between UPS Co. and the Owner Trustee.
(m) Lease Agreement, Incorporated by Reference to dated November 17, Exhibit 10(m) to 1989 Annual 1986, between UPS Report on Form 10-K. Co. and the Owner Trustee
(n) Guarantee Agree- Incorporated by Reference to ment between United Exhibit 10(n) to 1989 Annual Parcel Service of Report on Form 10-K. America, Inc., as Guarantor and the Owner Trustee.
(o) Receivables Purchase Incorporated by Reference to and Sale Agreement, Exhibit 10(l) to 1987 Annual dated as of Novem- Report on Form 10-K. ber 24, 1987, among United Parcel Service, Inc., an Ohio corpora- tion, United Parcel Service, Inc., a New York corporation, United Parcel Service of America, Inc., Coop- erative Receivables Corporation and Citicorp North America, Inc.
(p) Receivables Purchase Incorporated by Reference to and Sale Agreement, Exhibit 10(m) to 1987 Annual dated as of November 24, Report on Form 10-K. 1987, among United Parcel Service, Inc., an Ohio corporation, United Parcel Service,
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Inc., a New York cor- poration, United Parcel Service of America, Inc., Citibank, N.A., and Citicorp North America, Inc.
(q) Membership Agreement, Incorporated by Reference to dated as of November 24, Exhibit 10(n) to 1987 Annual 1987, by and between on Form 10-K. Cooperative Receivables Corporation and United Parcel Service of America, Inc.
(r) Amended and Restated Incorporated by Reference to Facility Lease Agree- Exhibit 10(r) to 1990 Annual ment, dated as of Report on Form 10-K. November 6, 1990, among Overseas Part- ners Leasing, Inc., United Parcel Service General Services Co. and United Parcel Service of America, Inc.
(s) Amended and Restated Incorporated by Reference to Aircraft Lease Agree- Exhibit 10(s) to 1990 Annual ment, dated as of Report on Form 10-K. November 6, 1990, among Overseas Part- ners Leasing, Inc., United Parcel Service Co. and United Parcel Service of America, Inc.
(t) Agreement of Sale, Incorporated by Reference to dated as of December 28, Exhibit 10(t) to 1989 Annual 1989, between Edison Report on Form 10-K. Corporation and Over- seas Partners Leasing, Inc.
(u) Assignment and Assump- Incorporated by Reference to tion Agreement, dated Exhibit 10(u) to 1989 Annual as of December 28, 1989, Report on Form 10-K. between and among Edison Corporation, Overseas Partners Leasing, Inc., McBride Enterprises, Inc. and Ramapo Ridge-McBride Office Park.
(v) UPS Deferred Compensation Incorporated by Reference to Plan for Non-Employee Exhibit 10(v) to 1990 Annual Directors Report on Form 10-K.
(w) UPS Retirement Plan for Incorporated by Reference to Outside Directors Exhibit 10(w) to 1990 Annual Report on Form 10-K.
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(x) UPS Savings Plan, as Incorporated by Reference to Amended and Restated, Exhibit 10(x) to 1990 Annual including Amendments Report on Form 10-K. No. 1-5.
(1) Amendment No. 6 to Incorporated by Reference to the UPS Savings Plan Exhibit 10(x)(1) to 1990 Annual Report on Form 10-K.
(2) Amendment No. 7 to Incorporated by Reference to the UPS Savings Plan Exhibit 10(x)(2) to 1991 Annual Report on Form 10-K.
(3) Amendment No. 8 to Incorporated by Reference the UPS Savings Plan to Exhibit 10(x)(3) to 1992 Annual Report on Form 10-K.
(4) Amendment No. 9 to Incorporated by Reference the UPS Savings Plan to Exhibit 10(x)(4) to 1992 Annual Report on Form 10-K.
(5) Amendment No. 10 to Incorporated by Reference the UPS Savings Plan to Exhibit 10(x)(5) to 1992 Annual Report on Form 10-K.
(6) Amendment No. 11 to Filed herewith. the UPS Savings Plan
(7) Amendment No. 12 to Filed herewith. the UPS Savings Plan
(8) Amendment No. 13 to Filed herewith. the UPS Savings Plan
(9) Amendment No. 14 to Filed herewith. the UPS Savings Plan
(10) Amendment No. 15 to Filed herewith. the UPS Savings Plan
(y) Competitive Advance and Incorporated by Reference to Revolving Credit Facility Exhibit 10(y) to 1990 Annual Agreement, dated as of Report on Form 10-K. May 7, 1990 among UPS, named banks and Chemical Bank, as Agent.
(1) Letter, dated Nov- Incorporated by Reference to ember 13, 1990 re- Exhibit 10(y)(1) to 1990 ducing commitment Annual Report on Form 10-K. under Competitive Advance and Revolving Credit Facility Agreement.
(z) UPS 1991 Stock Option Incorporated by Reference to Plan (Amended and Exhibit 10(z) to 1991 Annual. Restated as of Report on Form 10-K. February 20, 1992).
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(aa) UPS Coordinating Benefit Incorporated by Reference to Plan. Exhibit 10(aa) to 1991 Annual Report on Form 10-K.
(1) Amendment No. 1 to Incorporated by Reference UPS Coordinating to Exhibit 10(aa)(1) to Benefit Plan. 1992 Annual Report on Form 10-K.
(2) Amendment No. 2 to Incorporated by Reference UPS Coordinating to Exhibit 10(aa)(2) to Benefit Plan. 1992 Annual Report on Form 10-K.
(21) Subsidiaries of the Filed herewith as Exhibit Registrant. 21.
(23) Consent of Deloitte & Touche LLP. Filed herewith as Exhibit 23.
(27) Financial Data Schedule Filed herewith as Exhibit 27 (for SEC use only).
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