-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U/CL9+L0ifHBhMJZeuqXeWqwlvcLPiR7pHBFsSv7cJSuXYhTOtcmIjwKJCOMISKK aAgPoHMOT4z1f8rNJZ89lw== 0000931763-98-000770.txt : 19980330 0000931763-98-000770.hdr.sgml : 19980330 ACCESSION NUMBER: 0000931763-98-000770 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED PARCEL SERVICE OF AMERICA INC CENTRAL INDEX KEY: 0000809697 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING & COURIER SERVICES (NO AIR) [4210] IRS NUMBER: 951732075 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-11378 FILM NUMBER: 98575767 BUSINESS ADDRESS: STREET 1: 55 GLENLAKE PARKWAY N E STREET 2: GREENWICH OFFICE PK 5 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 4049136000 MAIL ADDRESS: STREET 1: 400 PERIMEMTER CTR TERRACES N STREET 2: GREENWICH OFFICE PK5 CITY: ATLANTA STATE: GA ZIP: 30346 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. --------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 0-4714 UNITED PARCEL SERVICE OF AMERICA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-1732075 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 GLENLAKE PARKWAY, NE 30328 ATLANTA, GEORGIA (Zip Code) (Address of principal executive offices) (404) 828-6000 (Registrant's telephone number, including area code) --------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH None REGISTERED --------------- None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.10 PER SHARE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of February 28, 1998, the aggregate market value of the common stock held by non-affiliates of the registrant, based on a price per share of $32.00, the price per share at which the registrant expressed its willingness to purchase its shares from shareowners wishing to sell their shares on February 28, 1998, was $16,099,214,656. The number of shares of United Parcel Service of America, Inc. Common Stock outstanding as of February 28, 1998 was 562,000,000. The number of shares of United Parcel Service of America, Inc. Common Stock subject to the UPS Managers Trust and the UPS Employees Stock Trust outstanding, as of February 28, 1998, was 330,307,873. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for its annual meeting of shareowners scheduled for April 30, 1998 are incorporated by reference into Part III of this Report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I 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 1997 generated by the delivery of more than three billion packages and documents. UPS provides a daily pickup service for over 1.6 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. United States domestic business accounted for approximately 86.9%, 86.6%, and 86.7% of the Company's consolidated revenue in 1997, 1996 and 1995, 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 UPS's standard ground delivery product, UPS Hundredweight Service(R) offers discounted 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, shipped on the same day. Customers can realize significant savings on these shipments compared to regular ground or air service rates. UPS Hundredweight Service is available in all 48 contiguous states. Domestic Air Services UPS provides domestic air delivery throughout the United States, with electronic tracking information available for all 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 76% of the United States population, delivery by noon to areas covering an additional 14%, and end-of-day delivery to the remainder. Saturday delivery is offered for UPS Next Day Air shipments for an additional fee. UPS Early A.M.(R) service guarantees next business day delivery of packages and documents by 8:00 a.m. or 8:30 a.m. to approximately 1,400 cities nationwide. UPS Early A.M. service is available from virtually all overnight shipping locations coast to coast. In addition, UPS Next Day Air Saver(R) offers next day delivery by 3:00 or 4:30 p.m. to commercial destinations in the 48 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.(SM) 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 3 Day Select(R) provides guaranteed delivery in three business days. Developed primarily for customers who have time-definite delivery needs, 3 Day Select is priced between traditional ground and air express services. 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 SonicAir service 24 hours a day, 365 days a year. In 1997, UPS continued to invest in new equipment, primarily in the form of additional aircraft and facility expansions. During 1997, UPS took delivery of 10 Boeing 757-200 freighter aircraft and seven Boeing 767-300 freighter aircraft. See "Properties--Aircraft." UPS continues to improve its domestic air service through expansion of its regional air hub network. The Company's domestic regional air hubs are located in Columbia, SC; Dallas, TX; Hartford, CT; Ontario, CA; Philadelphia, PA and Rockford, IL. Louisville, KY is the site of the Company's all-points domestic and international air hub, where most of the Company's air volume is processed. A new automated sorting facility, "Hub 2000," is currently under construction in Louisville, KY, and is expected to commence partial operations in 2000. This new facility is expected to nearly double UPS's hub capability in Louisville. INTERNATIONAL DELIVERY SERVICE UPS delivers international shipments to more than 200 countries and territories worldwide, providing guaranteed overnight delivery to many of the world's most important business centers. International domestic and export business accounted for approximately 13.1%, 13.4%, and 13.3% of consolidated revenues in 1997, 1996 and 1995, respectively. For additional financial information relating to domestic and international operations, see Note 10 to the Consolidated Financial Statements filed herewith. Throughout 1997, UPS continued to develop its global delivery and logistics network. UPS offers a complete portfolio of services across major European countries that are designed to provide a uniform service offering. This portfolio 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, customs-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. For package delivery, UPS Worldwide Express provides guaranteed overnight delivery to major cities in Mexico and Canada, and guaranteed second business day delivery by 10:30 a.m. for packages to over 290 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 guaranteed early morning second business day delivery from the United States to over 150 cities in Europe. UPS also offers UPS Worldwide Expedited service. 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. 2 UPS Standard service is offered between the United States and Canada and between European countries. Standard service is a door-to-door, time-definite ground service offering full tracking capabilities. 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. In February 1998, UPS introduced two new shipment pricing options for UPS Worldwide Express and UPS Worldwide Express Plus, the UPS 10KG Box(TM) and the UPS 25KG Box(TM). These new options offer a simple, convenient door-to-door fixed-rate shipping solution for express shipments up to 10 kilograms and 25 kilograms. Customers using this packaging option receive flat rates based on destination. The Company has a European air hub in Cologne, Germany and an Asian-Pacific air hub in Taipei, Taiwan. OTHER SERVICES UPS offers additional services such as Consignee Billing, Delivery Confirmation and Call Tag Service to those customers who require customized package distribution solutions. Consignee Billing was designed for customers who receive large volumes of merchandise from a number of vendors. UPS bills these consignee customers directly for their shipping charges, enabling the customer to obtain tighter control over inbound transportation costs. Delivery Confirmation provides automatic confirmation and weekly reports of deliveries and is available throughout the United States and Puerto Rico. Immediate confirmation is also available upon request. UPS Call Tag Service provides pick-up and prompt return of packages previously delivered by UPS from any address in the 48 contiguous states. The package is picked up and returned to the original shipper via ground service. UPS also provides a family of electronic shipping and tracking solutions under the UPS OnLine(R) shipping system. UPS OnLine(R) Office is software which helps shippers streamline their shipping activities. It processes shipments, prints address labels and tracks packages from a desktop computer. Office software supports international shipments as easily as domestic and quickly prepares any export documentation. UPS OnLine(R) Professional is designed to support a complex shipping environment with solutions for domestic and international shipping. It combines a powerful shipping and tracking system with sophisticated information management tools. UPS OnLine(R) Tracking software is easily installed on personal computers and provides the user with immediate tracking and delivery information for packages anywhere in the world. Packages can be tracked with a tracking number or the shipper's own reference number. UPS OnLine(R) Host Access is powerful, flexible software that is installed on a shipper's host computer system, linking UPS shipping information directly to all parts of the customer's organization. UPS OnLine Host Access can be used to enhance and streamline the customer's sales, service, distribution and accounting functions by providing direct access to vital transportation planning, shipment status and merchandise delivery information. The UPS Internet site at www.ups.com brings a wide array of information services to customers worldwide. Package tracking, pick-up requests, rate quotes, transit time predictions and supply ordering services are all easily available at the customer's desktop. The site also displays full domestic and international service information and provides an avenue for customers to download UPS software. During the second quarter of 1998, the Company plans to offer UPS Document Exchange(TM), a suite of document delivery and management services. UPS Document Exchange will allow customers to securely send documents over the Internet by providing maximum encryption levels, as well as user authentication, proof of delivery and archiving. RATES During the first quarter of 1998, rates for standard ground shipments were increased an average of 3.6% for commercial deliveries, and the ground residential premium increased from $.80 to $1.00 over the commercial ground rate. In addition, rates for UPS Next Day Air, UPS 2nd Day Air and 3 Day Select each increased approximately 3.3%. Rates for international shipments originating in the United States did not increase for UPS Worldwide Express, UPS Worldwide Expedited and UPS Standard Service to Canada. Rate changes for shipments originating outside the United States have been made throughout the past year and vary by geographic market. 3 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, 3 Day Select and UPS Worldwide Express) as well as for commercial, or "business-to-business" packages. 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 1997 were approximately $17.9 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. Ground transportation of packages by UPS in the United States is subject to the jurisdiction of the DOT, 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 July 10, 1997, the Postal Service filed a request for a general rate increase with the Commission. Shortly before filing this request, the Postal Service withdrew an earlier request involving parcel classifications and incorporated that request with the current rate filing. On July 14, 1997, UPS filed a notice of intervention with 4 the Commission. Proceedings in the current rate case are scheduled to continue through April, 1998, after which the Commission will render its recommended decision. Legislation is pending that would result in significant amendments to the Act. If the pending legislation were to be adopted, it 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 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 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, Mexico, Singapore, Hong Kong, Japan, the Netherlands, Germany, Taiwan, France and the United Kingdom, using state of the art information systems that reduce customers' distribution and capital costs. UPS Truck Leasing, Inc. ("UPS Truck Leasing"), a subsidiary of Logistics Group, rents and leases trucks and tractors to commercial users under full- service rental agreements. In addition, UPS Truck Leasing provides maintenance for other companies' fleets of vehicles on a contract basis. 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 The Clean Air Act Amendments of 1990 require a ten-year phase-in of clean- fuel vehicles by certain fleets in urban areas with the worst air quality problems. UPS began a project in 1989 using clean compressed natural gas ("CNG") as a fuel in some package cars. By the end of 1997, more than 800 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, which include 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, 1998, the Company employed approximately 330,000 employees. Approximately 104,000 full-time and 151,000 part-time employees are represented by various labor unions, primarily the International Brotherhood of Teamsters ("IBT"). UPS and the IBT are parties to a five-year Master Agreement which expires July 31, 2002. In addition, UPS employs approximately 2,000 pilots, represented by the Independent Pilots Association ("IPA"). UPS recently concluded negotiations with the IPA on an eight-year agreement which becomes amendable on December 31, 2003. The Company believes that its relations with its employees are good. 5 EXECUTIVE OFFICERS Listed below is certain information relating to the executive officers and management of UPS.
PRINCIPAL OCCUPATION AND EMPLOYMENT DURING NAME AND OFFICE AGE AT LEAST THE LAST FIVE YEARS --------------- --- ---------------------------- John W. Alden.................... 56 Director (1988 to present), Vice Vice Chairman, Senior Vice Chairman (1996 to present), Senior Vice President and Director President and Business Development Group Manager (1986 to present) Robert J. Clanin................. 54 Director (1996 to present), Senior Vice Senior Vice President, President, Treasurer and Chief Treasurer, Chief Financial Financial Officer (1994 to present), Officer and Director Finance Manager (1990 to 1994) Calvin Darden.................... 48 Senior Vice President and U.S. Senior Vice President Operations Manager (1998 to present), Corporate Quality Manager (1995 to 1998), Region Manager (1993 to 1995), District Manager (1991 to 1993) Michael L. Eskew................. 48 Senior Vice President (1996 to Senior Vice President present), Engineering Group Manager (1996 to present), Corporate Industrial Engineering Manager (1993 to 1996), District Manager (1991 to 1993) James P. Kelly................... 54 Director (1991 to present), Chairman of Chairman of the Board, Chief the Board and Chief Executive Officer Executive Officer and Director (1997 to present), Vice Chairman (1996), Executive Vice President (1994 to 1996), Chief Operating Officer (1992 to 1996), U.S. Operations Manager (1990 to 1992) Kenneth W. Lacy.................. 48 Senior Vice President and Chief Senior Vice President and Chief Information Officer (1996 to present), Information Officer Vice President Information Services (1994 to 1996), Corporate Controller (1992 to 1994), Financial Manager (1989 to 1992) Christopher D. Mahoney........... 50 Senior Vice President and U.S. Senior Vice President Operations Manager (1998 to present), Region Manager (1988 to 1998) Joseph R. Moderow................ 49 Director (1988 to present), Senior Vice Senior Vice President, President and Secretary (1986 to Secretary, General Counsel and present), Legal and Public Affairs Director Group Manager (1989 to present) Joseph M. Pyne................... 50 Senior Vice President and Marketing Senior Vice President Group Manager (1996 to present), Vice President Marketing (1995 to 1996), National Marketing Planning Manager (1989 to 1995) Charles L. Schaffer.............. 52 Director (1992 to present), Chief Senior Vice President, Chief Operating Officer (1998 to present), Operating Officer and Director Senior Vice President (1990 to present), U.S. Operations Manager (1996 to 1998), Engineering Group Manager (1990 to 1996) Lea N. Soupata................... 47 Senior Vice President and Human Senior Vice President Resources Group Manager (1995 to present), Vice President Human Resources (1994 to 1995), District Manager (1990 to 1994)
6
PRINCIPAL OCCUPATION AND EMPLOYMENT DURING NAME AND OFFICE AGE AT LEAST THE LAST FIVE YEARS --------------- --- ---------------------------- Ronald G. Wallace................ 53 Senior Vice President and President, Senior Vice President and International Operations (1998 to President, International present), Region Manager (1994 to Operations 1998), District Manager (1991 to 1994) Thomas H. Weidemeyer............. 50 Senior Vice President (1994 to Senior Vice President and present), President, Air Operations President, Air Operations (1998 to present), Transportation Group Manager (1997 to present), Labor Relations Group Manager (1997 to present), Airline Operations Manager (1990 to 1994)
Each executive officer of UPS has been elected to serve until the next meeting of the directors of UPS following the annual meeting of shareowners of UPS. ITEM 2. PROPERTIES OPERATING FACILITIES UPS's headquarters are owned and located in Atlanta, GA, and consist of approximately 735,000 square feet. The Company's principal operating facilities are owned and located in Dallas, TX; Denver, CO; Earth City, MO; Grand Rapids, MI; Jacksonville, FL; New York, NY; Palatine, IL; and Philadelphia, PA. These operating facilities, having floor spaces which range from approximately 354,000 to 693,000 square feet, have central sorting facilities, operating hubs and service centers for local operations. In addition, UPS has a 1.9 million square foot operating facility near Chicago, IL, designed to streamline shipments between East and West coast destinations. UPS also owns approximately 675 operating facilities and leases approximately 880 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, KY, with regional air hubs in Columbia, SC; Dallas, TX; Hartford, CT; Ontario, CA; Philadelphia, PA and Rockford, IL. These hubs house facilities for the sorting, transfer and delivery of packages. The Louisville, KY hub handles the largest volume of packages for air delivery in the United States. The Company's European air hub is located in Cologne, Germany, and its Asian-Pacific air hub is in Taipei, Taiwan. A new automated sorting facility, "Hub 2000," is currently under construction in Louisville, KY and is expected to commence partial operations in 2000. This new facility is expected to nearly double UPS's hub capacity in Louisville. 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, NJ. 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, GA 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. 7 AIRCRAFT UPS currently operates, either directly or by charter, a fleet of 555 aircraft. UPS's fleet as of December 31, 1997 consisted of the following aircraft:
NUMBER LEASED DESCRIPTION NUMBER OWNED FROM OTHERS ----------- ------------ ------------- McDonnell-Douglas DC-8-71............................ 23 0 McDonnell Douglas DC-8-73............................ 26 0 Boeing 727-100....................................... 51 0 Boeing 727-200....................................... 10 0 Boeing 747-100....................................... 12 0 Boeing 747-200....................................... 2 0 Boeing 757-200....................................... 51 19 Boeing 767-300....................................... 16 6 Other................................................ 0 339 --- --- Total.............................................. 191 364
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 10 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. During 1997, UPS took delivery of 10 Boeing 757-200 and seven Boeing 767-300 aircraft. UPS is currently scheduled to take delivery of three Boeing 757-200 and five Boeing 767-300 aircraft in 1998. In addition, UPS acquired two Boeing 747-200 aircraft in early 1998. UPS has firm commitments to purchase two Boeing 757-200 and three Boeing 767-300 aircraft for delivery during 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 2000 and 2005. VEHICLES UPS operates a fleet of approximately 169,000 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 4,400 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. LEGAL PROCEEDINGS During the second quarter of 1995, the Company received a Notice of Deficiency from the United States Internal Revenue Service ("IRS") asserting that it is liable for additional tax for the 1983 and 1984 tax years. The Notice of Deficiency is based in large part on the theory that UPS is liable for tax on income of Overseas Partners Ltd., a Bermuda company, which has reinsured excess value package insurance purchased by UPS's customers from unrelated insurers. The deficiency sought by the IRS relating to package insurance is based on a number of theories, which the Company believes are inconsistent, and ranges from $8 million to $35 million of tax, plus penalties and interest for 1984. 8 Agents for the IRS have also asserted in reports that UPS is liable for additional tax for the 1985 through 1990 tax years. The additional tax sought by the agents relating to package insurance for these periods range from $89 million to $148 million for the 1985 through 1987 tax years and up to $174 million for the 1988 through 1990 tax years, plus penalties and interest. The IRS has based their assertions on the same theories included in the above described Notice of Deficiency. In addition, the IRS and its agents have raised a number of other issues relating to the timing of deductions; the characterization of expenses as capital rather than ordinary; and the Company's entitlement to the Investment Tax Credit and the Research Tax Credit in the 1983 through 1990 tax years. These issues total $32 million in tax for the 1983 and 1984 tax years, $95 million in tax for the 1985 through 1987 tax years, and $228 million in tax for the 1988 through 1990 tax years. Penalties and interest are in addition to these amounts. The majority of these adjustments would reverse in future years. In August 1995, the Company filed a petition in Tax Court in opposition to the Notice of Deficiency related to the 1983 and 1984 tax years. The matter was tried before the Tax Court in two sessions, from September 15 through September 30, 1997, and from November 6 through November 7, 1997. The Company does not anticipate that the Tax Court will render its decision for at least nine to fifteen months. Management still believes that the eventual resolution of the matters raised by the IRS will not result in a material adverse effect upon the financial condition of the Company. The Company has appealed with the IRS all material issues related to the 1985 through 1990 tax years. The IRS may take positions similar to those in the reports described above for the periods after 1990. The Company is a defendant in various employment-related lawsuits. In two of these actions, which allege employment discrimination by the Company, class action status has been sought by the Plaintiffs. It has been granted in one case and plaintiff's motion for class action status is pending in the other. In addition, the United States Equal Employment Opportunity Commission has moved to intervene in one of the cases. Also, lawsuits have been filed on behalf of more than 300 former contract pilots against the Company, alleging, among other things, that in the late 1980s the Company did not fulfill offers of employment to individuals to serve as pilots of the Company-operated aircraft. These cases generally do not allege specific amounts of damages. However, one of these cases has been tried and resulted in a jury verdict, which was affirmed on appeal. Though the compensatory and punitive damages awarded were substantial, they were not material to the Company. Each of the pending employment-related lawsuits is in its early stages, and the Company is at present unable to estimate its exposure. In addition to the preceding, UPS is a defendant in various other lawsuits that 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II 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 562,000,000 shares were issued (including those shares held by UPS for distribution in connection with its stock plans) as of February 28, 1998. 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 9 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 restrictions. 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"), the UPS 1996 Stock Option Plan (the "1996 Plan"), and effective January 1, 1998, the matching contribution of UPS Common Stock under the UPS Savings Plan (collectively, 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 1997, UPS purchased 22,449,895 shares at an aggregate purchase price of approximately $636.0 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 10 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 1996 are as follows:
DATES PRICE ----- ------ 1996: January 1 to February 14........................................ $26.25 February 15 to May 22........................................... $27.00 May 23 to August 21............................................. $27.75 August 22 to November 14........................................ $28.25 November 15 to February 12, 1997................................ $29.25 1997: February 13 to May 13........................................... $29.75 May 14 to August 19............................................. $30.50 August 20 to November 12........................................ $30.00 November 13 to February 26, 1998................................ $30.75
On February 27, 1998, UPS expressed its willingness to purchase shares at $32.00 per share which is still the price at the date of this report. In January 1998, UPS distributed an aggregate of 4,653,992 shares of UPS Common Stock, subject to the UPS Managers Stock Trust, under the UPS Managers Incentive Plan to a total of 25,523 employees at a managerial or supervisory level. In January 1997, it distributed an aggregate of 6,271,907 shares of UPS Common Stock under that Plan to a total of 26,428 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 16, 1998, 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 nonetheless registered under the 1933 Act. During 1997, 1,850,570 shares of UPS Common Stock were distributed to 2,394 management employees upon the exercise of stock options granted to them by UPS under the 1991 Plan. On December 31, 1997, 89,448 active employees owned approximately 179.8 million shares of UPS Common Stock. This included 63,100 non-management employees holding over 15.9 million shares. The offering to UPS managers and supervisors has been previously described in a UPS Registration Statement on Form S-8, which became effective in March 1997 and the offering to non-management employees has been previously described in a UPS Registration Statement on Form S-8, which also became effective in March 1997. 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 11 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 1998, UPS paid a cash dividend of $0.35 a share. During the fiscal year ended December 31, 1997, UPS paid cash dividends of $0.35 a share in January 1997 and $0.35 in May 1997. 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. 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, 1997, 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, 1998, there were 3,022 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, 1998, there were 105,852 beneficial owners of shares of Common Stock subject to the Trusts. 12 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data for each of the five years in the period ended December 31, 1997. This financial data should be read in conjunction with the Company's Consolidated Financial Statements, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial data appearing elsewhere in this Report. Selected Income Statement Data
YEARS ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Revenue.......................... $22,458 $22,368 $21,045 $19,576 $17,782 Operating expenses............... (20,760) (20,339) (19,251) (18,020) (16,324) Interest income.................. 70 39 26 13 20 Interest expense................. (187) (95) (77) (29) (34) Miscellaneous, net............... (28) (63) (35) 35 (12) Income taxes..................... (644) (764) (665) (632) (622) ------- ------- ------- ------- ------- Net income....................... $ 909 $ 1,146 $ 1,043 $ 943 $ 810 ======= ======= ======= ======= ======= % of revenue..................... 4.0% 5.1% 5.0% 4.8% 4.6% ======= ======= ======= ======= ======= Per share amounts: Basic earnings per share......... $ 1.65 $ 2.06 $ 1.87 $ 1.68 $ 1.42 Diluted earnings per share....... $ 1.63 $ 2.03 $ 1.84 $ 1.66 $ 1.41 ======= ======= ======= ======= ======= Dividends per share.............. $ 0.70 $ 0.68 $ 0.64 $ 0.55 $ 0.50 ======= ======= ======= ======= =======
Selected Balance Sheet Data
DECEMBER 31, -------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------ (IN MILLIONS) Working capital.......................... $ 1,079 $ 1,097 $ 261 $ 120 $ 4 ======= ======= ======= ======= ====== Long-term debt........................... $ 2,583 $ 2,573 $ 1,729 $ 1,127 $ 852 ======= ======= ======= ======= ====== Total assets............................. $15,912 $14,954 $12,645 $11,182 $9,574 ======= ======= ======= ======= ======
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATIONS 1997 Compared to 1996 As previously reported, the International Brotherhood of Teamsters ("IBT"), which represents approximately 203,000 UPS employees, was on strike from August 4 through August 19, 1997. In addition, the Independent Pilots Association ("IPA"), which represents the majority of the Company's pilots, observed picket lines in support of the IBT strike. The new collective bargaining agreement negotiated in August with the IBT was approved by a vote of the IBT membership and extends through July 31, 2002. Although the work stoppage had a significant effect on operations while it continued, management does not believe the terms of the new agreement will have a material adverse effect on future operating margins. Further, the Company's collective bargaining agreement with the IPA became amendable on January 1, 1996. On March 18, 1998, an eight-year agreement that extends through 2003 was ratified by a vote of the IPA membership. The IBT strike severely limited U.S. domestic air and ground operations during August and also curtailed international export operations, mainly U.S. export volume. This resulted in a net loss of approximately $211 million for the month ended August 31, 1997 (compared to net income of $113 million for the same month of the prior year), which had a significant adverse effect on net income for the year ended December 31, 1997. 13 For the year, revenue increased by $90 million. Domestic revenue totaled $19.524 billion, a slight increase of $148 million over 1996, and international revenue totaled $2.934 billion, a decrease of $58 million over 1996. Domestic revenue increased primarily as a result of higher yields, offset by lower volume, which was down 4.1% primarily due to the downtime as a result of the strike along with volume levels that were slightly lower after the strike compared to the same period in the prior year. The overall decrease in volume is inclusive of a 4.2% volume increase in higher yielding express packages, the growth rate for which was also depressed as a result of the strike. Although ground volume has not returned to pre-strike levels, domestic revenues improved by $161 million, or 3.1%, for the fourth quarter of 1997 in comparison to the same quarter in 1996. This improvement is mainly attributable to increased yields and a 6.3% volume growth in express services. 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, UPS 2nd Day Air, and UPS 3 Day Select each increased approximately 3.9%. 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. The decrease in international revenue was primarily attributable to a $142 million decrease in international domestic revenue, or 13.4%, offset by an $84 million increase in international export revenue, or 4.3%. The decrease in international domestic revenue resulted primarily from a stronger U.S. dollar. Increases in export revenues are primarily a result of higher volume, which was up 11.2%. Such increases were also offset by the strengthened U.S. dollar. International revenue totaled $806 million for the fourth quarter of 1997, an increase of $37 million, or 4.8%, compared to the fourth quarter of 1996. A continued strengthening of the U.S. dollar offset volume increases of 12.6% within the international domestic operations, resulting in a $12 million, or 4.5%, decrease in revenues. International export revenue increased $49 million, or 9.6%, as a result of volume increases of 16.6%, offset by the effects of the stronger U.S. dollar. For the year, operating expenses increased by $421 million, or 2.1%. A combination of increased operating expenses along with decreased revenues from the strike resulted in a deterioration of the operating ratio from 90.9 during 1996 to 92.4 during 1997. The operating ratio for the fourth quarter of 1997 improved to 89.6 as a result of improved revenue yields, productivity gains, and the impact of cost containment efforts. Operating profit for the year decreased $331 million, or 16.3%, primarily as a result of lower revenues due to the strike. However, operating profit increased by $172 million, or 36.8%, for the fourth quarter of 1997 compared to 1996. Interest expense amounted to $187 million, an increase of $92 million over the prior year. This increase is primarily attributable to interest costs incurred on higher debt levels outstanding during 1997. In addition, interest income increased by $31 million as a result of correspondingly higher cash and short-term investment balances. Income before income taxes ("pre-tax income") decreased $357 million, or 18.7%, in comparison to the prior year, while fourth quarter pre-tax income improved by $189 million to $599 million in comparison to the same quarter of the prior year. Domestic pre-tax income amounted to $1.559 billion, a decrease of $552 million, or 26.1%, over the previous year. The decrease was a result of the strike and higher interest costs as discussed above. The international pre-tax loss amounted to $6 million, an improvement of $195 million over the previous year. The international pre-tax loss attributable to the international domestic operations decreased by $54 million, or 28.6%. This improvement resulted largely from cost reductions from the Company's efforts to reduce unprofitable volume as well as related savings in reducing payroll and other costs. The pre-tax income associated with export operations improved by $141 million. The continuation of this favorable trend in export operations 14 resulted primarily from higher volume and improved operating margins on international and U.S. exports. Export volume generated outside the U.S. increased by 16.8%, while U.S. origin export shipments increased by 2.2%. Export volume, primarily U.S. origin, was somewhat depressed as a result of the strike. International pre-tax income was $44 million for the fourth quarter of 1997. This compares to a loss of $80 million for the fourth quarter of 1996, for an improvement of $124 million. The pre-tax loss attributable to the international domestic operations decreased by $32 million, or 52.0%, primarily due to the reduction of unprofitable business. The pre-tax income attributable to export operations increased by $92 million, primarily due to volume increases as discussed above. Net income decreased by $237 million, or 20.7%, over the prior year as a result of the strike during the third quarter. However, substantial improvement was made in the fourth quarter of 1997, with net income totaling $351 million, compared to $247 million for the fourth quarter of 1996. This was primarily the result of volume increases in higher yielding products, productivity gains, and cost reductions in both international and domestic 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%. International domestic revenues decreased by 6.8%, primarily due to volume reductions of 5.0% and changes in currency exchange rates. The decreases in international 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. 15 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 international 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 international 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 international domestic losses. The international pre-tax loss attributable to the international 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. 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. LIQUIDITY AND CAPITAL RESOURCES In order to take advantage of attractive borrowing costs in medium-term debt markets, UPS entered into several financing transactions during 1997. In February 1997, UPS issued 100 million of 6.875% Pound Sterling notes which are due February 2000. At the same time, a cross-currency interest rate swap agreement was entered into in order to eliminate foreign exchange risk associated with the borrowing and to swap the fixed interest rate of the notes to a variable rate linked to commercial paper rates. In April 1997, UPS issued $200 million of 6.625% EuroNotes which are due April 2001. In July 1997, UPS issued $300 million of 6.25% EuroNotes which are due July 2000. Interest rate swap agreements were entered into for both of the EuroNote offerings exchanging the fixed interest payments for variable interest payments which are linked to LIBOR. These EuroNotes were issued through the European medium- term note program established in 1996. In July 1997, this program was amended to increase the borrowing capacity from $500 million to $1.0 billion. Currently, $500 million is available under the program. During 1997, UPS also entered into a series of capital lease transactions which provided $361 million for the acquisition of aircraft at favorable rates. A portion of the lease payments are denominated in Japanese Yen for which currency exchange agreements were entered into, thereby eliminating the foreign exchange risk associated with the lease payments. During the second quarter, UPS increased its commercial paper borrowing limits from $1.5 billion to $2.0 billion. UPS maintains two credit agreements with a consortium of banks which provide revolving credit facilities of $1.25 billion each, with one expiring May 6, 1998, and the other June 8, 2001. 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 long-term needs for the operation of its business, including anticipated capital expenditures of $1.4 billion in 1998, as well as commitments for aircraft purchases through 1999. 16 During the second quarter of 1995, the Company received a Notice of Deficiency from the United States Internal Revenue Service ("IRS") asserting that it is liable for additional tax for the 1983 and 1984 tax years. The Notice of Deficiency is based in large part on the theory that UPS is liable for tax on income of Overseas Partners Ltd., a Bermuda company, which has reinsured excess value package insurance purchased by UPS's customers from unrelated insurers. The deficiency sought by the IRS relating to package insurance is based on a number of theories, which the Company believes are inconsistent, and ranges from $8 million to $35 million of tax, plus penalties and interest for 1984. Agents for the IRS have also asserted in reports that UPS is liable for additional tax for the 1985 through 1990 tax years. The additional tax sought by the agents relating to package insurance for these periods range from $89 million to $148 million for the 1985 through 1987 tax years and up to $174 million for the 1988 through 1990 tax years, plus penalties and interest. The IRS has based their assertions on the same theories included in the above described Notice of Deficiency. In addition, the IRS and its agents have raised a number of other issues relating to the timing of deductions; the characterization of expenses as capital rather than ordinary; and UPS's entitlement to the Investment Tax Credit and the Research Tax Credit in the 1983 through 1990 tax years. These issues total $32 million in tax for the 1983 and 1984 tax years, $95 million in tax for the 1985 through 1987 tax years, and $228 million in tax for the 1988 through 1990 tax years. Penalties and interest are in addition to these amounts. The majority of these adjustments would reverse in future years. In August 1995, the Company filed a petition in Tax Court in opposition to the Notice of Deficiency related to the 1983 and 1984 tax years. The matter was tried before the Tax Court in two sessions, from September 15 through September 30, 1997, and from November 6 through November 7, 1997. The Company does not anticipate that the Tax Court will render its decision for at least nine to fifteen months. Management still believes that the eventual resolution of the matters raised by the IRS will not result in a material adverse effect upon the financial condition of the Company. The Company has appealed with the IRS all material issues related to the 1985 through 1990 tax years. The IRS may take positions similar to those in the reports described above for periods after 1990. The Company is a defendant in various employment-related lawsuits. In two of these actions, which allege employment discrimination by the Company, class action status has been sought by the plaintiffs. It has been granted in one case and plaintiff's motion for class action status is pending in the other. In addition, the United States Equal Employment Opportunity Commission has moved to intervene in one of the cases. Also, lawsuits have been filed on behalf of more than 300 former contract pilots against the Company, alleging, among other things, that in the late 1980's the Company did not fulfill offers of employment to individuals to serve as pilots of Company-operated aircraft. These cases generally do not allege specific amounts of damages. However, one of these cases has been tried and resulted in a jury verdict, which was affirmed on appeal. Though the compensatory and punitive damages awarded were substantial, they were not material to the Company. Each of the pending employment-related lawsuits is in its early stages, and the Company is at present unable to estimate its exposure. In addition to the preceding, UPS is a defendant in various other lawsuits which arose in the normal course of business. In the opinion of management, none of these cases are expected to have a material adverse effect upon the financial condition of the Company. MARKET RISK The Company is exposed to a number of market risks in the ordinary course of business. These risks, which include interest rate risk, foreign currency exchange risk and commodity price risk, arise in the normal course of business rather than from trading. Management has examined the Company's exposures to these risks and has concluded that none of the Company's exposures in these areas is material to fair values, cash flows or earnings. The Company has engaged in several strategies to manage the foregoing market risks. 17 Indebtedness of the Company under its various financing arrangements creates interest rate risk. In connection with each debt issuance and as a result of continual monitoring of interest rates, the Company may enter into interest rate swap agreements to achieve liability management objectives. For all foreign currency denominated borrowing and certain lease transactions, the Company has simultaneously entered into currency exchange agreements to lock in the price of the currency needed to pay the obligations and to hedge the foreign currency exchange risk associated with such transactions. The Company is exposed to other foreign currency exchange risks in the ordinary course of its business operations due to the fact that the Company's services are provided in more than 200 countries and collection of revenues and payment of certain expenses may give rise to currency exposure. The Company consumes significant quantities of gasoline, diesel fuel, and jet fuel in the ordinary course of its business and is therefore exposed to commodity price risk associated with variations in the market price for petroleum products. The Company manages this risk by purchasing commodity options. FUTURE ACCOUNTING CHANGES In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, "Reporting Comprehensive Income" ("FAS 130"), which requires disclosure of comprehensive income and its components within the financial statements. As such, FAS 130 is a disclosure requirement only and will not have an impact on the Company's financial position, annual operating results or cash flow. The statement will be adopted by UPS in 1998. In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), which UPS will adopt in 1998. FAS 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company has not yet completed its analysis of how adoption of this statement will impact segment disclosure. IMPACT OF THE YEAR 2000 ISSUE The Company is working to assess and minimize the potential impact of the "year 2000 issue." The term "year 2000 issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery as the year 2000 is approached and reached. These problems generally arise from the fact that most of the world's computer hardware and software has historically used only two digits to identify the year in a date, often meaning that the computer will fail to distinguish dates in the "2000's" from dates in the "1900's." These problems may also arise from other sources as well, such as the use of special codes and conventions in software that make use of the date field. The Company is not yet in a position to fully estimate the costs that it anticipates incurring in dealing with the year 2000 issue. The Company is currently addressing its exposure to the year 2000 issue and is attempting to complete its assessment during the second quarter of 1998. The Company has determined that it may be required to modify or replace significant portions of its software and may need to replace some of its hardware, so that its data processing systems and machinery will properly function as the year 2000 is approached and reached. The Company has been in communication with many of its suppliers and large customers, and is in the process of designing a broader communications program to reach all its significant third parties, to help assess the extent to which the Company is vulnerable to those third parties' failure to remedy their own year 2000 issues. Expenses associated with the year 2000 issue have been immaterial to date, but may be material in the future. The ultimate cost is subject to a number of uncertainties beyond the Company's control, including, but not limited to, the presence of firmware-related issues, the availability of certain resources, the cooperation and performance of vendors and third parties, the ability to locate and correct all relevant computer codes, and similar uncertainties. 18 This Management's Discussion and Analysis of Financial Condition and Results of Operations and Liquidity and Capital Resources, and other parts of this Report, contain a number of forward-looking statements about matters that are inherently difficult to predict. For example, future package volumes, revenues, costs, competitive and rate environments, margins and profitability are inherently difficult to predict, as are labor relations, the impacts of past and possible future work stoppages and the outcome of litigation and government claims against the Company. Some of the important factors which affect these uncertainties have been described above and as each subject is discussed. Other important risks and uncertainties that may affect future developments include, for example, the effect of market risk on the Company's fair values, cash flows or earnings; the effect of labor agreements on future operating margins; the ability to deal with the year 2000 issue, including problems that may arise on the part of third parties; and, as to international operations, such matters as future operating losses. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. See Item 7. 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 F-1 for a list of the Financial Statements filed herewith. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III 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 April 30, 1998, which was filed with the Securities and Exchange Commission (the "SEC") on March 16, 1998, 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. EXECUTIVE COMPENSATION Information in answer to 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 April 30, 1998, which was filed with the SEC on March 16, 1998, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in answer to 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 April 30, 1998, which was filed with the SEC on March 16, 1998, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in answer to 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 April 30, 1998, which was filed with the SEC on March 16, 1998, and is incorporated herein by reference. 19 PART IV 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 F-1 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. 20 UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ITEM 8 -- FINANCIAL STATEMENTS
PAGE NUMBER ------ Independent Auditors' Report....................................... F-2 Consolidated balance sheets -- December 31, 1997 and 1996..................................... F-3 Statements of consolidated income -- Years ended December 31, 1997, 1996 and 1995................... F-4 Statements of consolidated shareowners' equity -- Years ended December 31, 1997, 1996 and 1995................... F-5 Statements of consolidated cash flows -- Years ended December 31, 1997, 1996 and 1995................... F-6 Notes to consolidated financial statements......................... F-7
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. F-1 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, 1997 and 1996, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Atlanta, Georgia February 9, 1998 (March 18, 1998, as to Note 1) F-2 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS EXCEPT SHARE AMOUNTS)
DECEMBER 31, ---------------- 1997 1996 ------- ------- ASSETS Current Assets: Cash and short-term investments............................. $ 460 $ 392 Accounts receivable......................................... 2,405 2,341 Prepaid employee benefit costs.............................. 669 401 Materials, supplies and other prepaid expenses.............. 417 581 Common stock held for stock plans........................... 526 540 ------- ------- Total Current Assets...................................... 4,477 4,255 ------- ------- Property, Plant and Equipment: Vehicles.................................................... 3,519 3,427 Aircraft (including aircraft under capitalized leases)...... 6,771 5,651 Land........................................................ 654 647 Buildings................................................... 1,433 1,415 Leasehold improvements...................................... 1,734 1,668 Plant equipment............................................. 4,063 3,670 Construction-in-progress.................................... 328 530 ------- ------- 18,502 17,008 Less accumulated depreciation and amortization.............. 7,495 6,778 ------- ------- 11,007 10,230 Other Assets................................................ 428 469 ------- ------- $15,912 $14,954 ======= ======= LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Accounts payable............................................ $ 1,207 $ 1,155 Accrued wages and withholdings.............................. 1,194 1,201 Dividends payable........................................... 191 194 Deferred income taxes....................................... 140 149 Other current liabilities................................... 666 459 ------- ------- Total Current Liabilities................................. 3,398 3,158 ------- ------- Long-Term Debt (including capitalized lease obligations).... 2,583 2,573 ------- ------- Accumulated Postretirement Benefit Obligation, Net.......... 911 841 ------- ------- Deferred Taxes, Credits and Other Liabilities............... 2,933 2,481 ------- ------- Shareowners' Equity: Preferred stock, no par value, authorized 200,000,000 shares, none issued......................................... -- -- Common stock, par value $.10 per share, authorized 900,000,000 shares, issued 562,000,000 and 570,000,000, net of 18,000,000 and 10,000,000 in treasury, in 1997 and 1996............................................... 56 57 Additional paid-in capital.................................. -- 95 Retained earnings........................................... 6,112 5,728 Cumulative foreign currency adjustments..................... (81) 21 ------- ------- 6,087 5,901 ------- ------- $15,912 $14,954 ======= ======= Shareowners' Equity Per Share............................... $ 10.83 $ 10.35 ======= =======
See notes to consolidated financial statements. F-3 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (IN MILLIONS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- Revenue......................................... $ 22,458 $ 22,368 $ 21,045 -------- -------- -------- Operating Expenses: Compensation and benefits....................... 13,289 13,326 12,401 Other........................................... 7,471 7,013 6,478 Restructuring charge............................ -- -- 372 -------- -------- -------- 20,760 20,339 19,251 -------- -------- -------- Operating profit................................ 1,698 2,029 1,794 -------- -------- -------- Other Income and (Expense): Interest income................................. 70 39 26 Interest expense................................ (187) (95) (77) Miscellaneous, net.............................. (28) (63) (35) -------- -------- -------- (145) (119) (86) -------- -------- -------- Income Before Income Taxes...................... 1,553 1,910 1,708 Income Taxes.................................... 644 764 665 -------- -------- -------- Net Income...................................... $ 909 $ 1,146 $ 1,043 ======== ======== ======== Basic Earnings Per Share........................ $ 1.65 $ 2.06 $ 1.87 ======== ======== ======== Diluted Earnings Per Share...................... $ 1.63 $ 2.03 $ 1.84 ======== ======== ========
See notes to consolidated financial statements. F-4 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREOWNERS' EQUITY (IN MILLIONS EXCEPT PER SHARE AMOUNTS)
CUMULATIVE COMMON STOCK ADDITIONAL FOREIGN TOTAL ------------- PAID-IN RETAINED CURRENCY SHAREOWNERS' SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS EQUITY ------ ------ ---------- -------- ----------- ------------ Balance, January 1, 1995................... 580 $58 $295 $4,277 $ 17 $4,647 Net income............ -- -- -- 1,043 -- 1,043 Dividends ($.64 per share)............... -- -- -- (359) -- (359) Gain on issuance of common stock held for stock plans.......... -- -- 27 -- -- 27 Exercise of stock op- tions................ -- -- (9) -- -- (9) Foreign currency adjustments.......... -- -- -- -- 40 40 Reclassification of common stock......... (10) (1) (237) -- -- (238) --- --- ---- ------ ---- ------ Balance, December 31, 1995................... 570 57 76 4,961 57 5,151 Net income............ -- -- -- 1,146 -- 1,146 Dividends ($.68 per share)............... -- -- -- (379) -- (379) Gain on issuance of common stock held for stock plans.......... -- -- 33 -- -- 33 Exercise of stock options.............. -- -- (14) -- -- (14) Foreign currency adjustments.......... -- -- -- -- (36) (36) --- --- ---- ------ ---- ------ Balance, December 31, 1996................... 570 57 95 5,728 21 5,901 Net income............ -- -- -- 909 -- 909 Dividends ($.70 per share)............... -- -- -- (385) -- (385) Gain on issuance of common stock held for stock plans.......... -- -- 27 -- -- 27 Exercise of stock op- tions............... -- -- (26) -- -- (26) Foreign currency adjustments.......... -- -- -- -- (102) (102) Reclassification of common stock......... (8) (1) (96) (140) -- (237) --- --- ---- ------ ---- ------ Balance, December 31, 1997................... 562 $56 $ -- $6,112 $(81) $6,087 === === ==== ====== ==== ======
See notes to consolidated financial statements. F-5 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (IN MILLIONS)
YEARS ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- Cash flows from operating activities: Net income...................................... $ 909 $ 1,146 $ 1,043 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization.................. 1,021 936 866 Postretirement benefits........................ 70 78 59 Deferred taxes, credits and other.............. 397 488 28 Non-cash restructuring charge.................. -- -- 338 Changes in assets and liabilities: Accounts receivable........................... (64) (416) (332) Prepaid employee benefit costs................ (268) (116) (57) Materials, supplies and other prepaid ex- penses........................................ 164 (196) (40) Common stock held for stock plans............. 14 (127) (64) Accounts payable.............................. 52 18 55 Accrued wages and withholdings................ (7) 74 46 Dividends payable............................. (3) 16 8 Other current liabilities..................... 184 4 3 -------- -------- -------- Net cash from operating activities........... 2,469 1,905 1,953 -------- -------- -------- Cash flows from investing activities: Capital expenditures............................ (1,984) (2,333) (2,096) Disposals of property, plant and equipment...... 153 155 76 Other asset receipts (payments)................. 46 (60) (25) -------- -------- -------- Net cash (used in) investing activities...... (1,785) (2,238) (2,045) -------- -------- -------- Cash flows from financing activities: Proceeds from borrowings........................ 2,097 1,345 875 Repayment of borrowings......................... (2,065) (484) (273) Reclassification of common stock................ (237) -- (238) Dividends....................................... (385) (379) (359) Other transactions.............................. 1 19 18 -------- -------- -------- Net cash from (used in) financing activi- ties......................................... (589) 501 23 -------- -------- -------- Effect of exchange rate changes on cash.......... (27) 13 19 -------- -------- -------- Net increase (decrease) in cash and short-term investments...................................... 68 181 (50) Cash and short-term investments: Beginning of year............................... 392 211 261 -------- -------- -------- End of year..................................... $ 460 $ 392 $ 211 ======== ======== ======== Cash paid during the period for: Interest, net of amount capitalized............. $ 130 $ 50 $ 49 ======== ======== ======== Income taxes.................................... $ 319 $ 484 $ 718 ======== ======== ========
See notes to consolidated financial statements. F-6 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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" or the "Company"). 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. 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. As of December 31, 1997, the Company had approximately 203,000 employees (61% of total employees) employed under collective bargaining agreements with various locals of the International Brotherhood of Teamsters. These agreements expire on July 31, 2002. In addition, the majority of the Company's pilots are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which became amendable January 1, 1996. On March 18, 1998 an eight-year agreement that extends through 2003 was ratified by a vote of the IPA membership. 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 Financial Accounting Standards Board Statement 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. 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- F-7 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) line, over the estimated useful lives of the related assets. Capitalized interest was $43, $53 and $49 million for 1997, 1996 and 1995, respectively. Derivative Instruments UPS has entered into interest rate swap agreements, cross-currency interest rate swap agreements and forward currency contracts. All of these agreements relate to the Company's long-term debt and are specifically matched to the underlying cash flows. They 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. The Company does not utilize derivatives for trading or other speculative purposes. 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. 2. LONG-TERM DEBT AND COMMITMENTS Long-term debt, as of December 31, consists of the following (in millions):
1997 1996 ------ ------ 8 3/8% debentures, due April 1, 2020 (i)...................... $ 700 $ 700 Commercial paper (ii)......................................... 98 1,071 Industrial development bonds, Philadelphia Airport facilities, due December 1, 2015 (iii).................................... 100 100 Capitalized lease obligations (iv)............................ 633 286 5.5% Eurobond notes, due January 4, 1999...................... 201 200 3.25% 200 million Swiss Franc notes, due October 22, 1999..... 166 166 6.875% 100 million Pound Sterling notes, due February 25, 2000.......................................................... 166 -- 6.625% EuroNotes, due April 25, 2001.......................... 200 -- 6.25% EuroNotes, due July 7, 2000............................. 298 -- Installment notes, mortgages and bonds at various rates from 6.0% to 8.6%.................................................. 62 68 ------ ------ 2,624 2,591 Less current maturities....................................... (41) (18) ------ ------ $2,583 $2,573 ====== ======
F-8 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (i) On January 22, 1998, the Company exchanged $276 million of the debentures for new debentures of equal principal with a maturity of April 1, 2030. The new debentures will have the same interest rate as the 8 3/8% debentures due 2020 until April 1, 2020, and, thereafter, the interest rate will be 7.62% for the final 10 years. The new 2030 debentures are redeemable in whole or in part at the option of the Company at any time. The redemption price is equal to the greater of 100% of the principal amount and accrued interest or the sum of the present values of the remaining scheduled payouts of principal and interest thereon discounted to the date of redemption at a benchmark treasury yield plus five basis points plus accrued interest. The remaining $424 million of 2020 debentures are not subject to redemption prior to maturity. Interest is payable semiannually on the first of April and October for both debentures and neither debenture is subject to sinking fund requirements. (ii) The weighted average interest rate on the commercial paper outstanding as of December 31, 1997 and 1996, was 5.7% and 5.6%, 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 1998 is expected to fluctuate. UPS is authorized to borrow up to $2.0 billion under this program as of December 31, 1997. (iii) The industrial development bonds bear interest at either a daily, variable or fixed rate. The average interest rates for 1997 and 1996 were 3.5% and 3.3%, respectively. (iv) During 1997 and 1996, UPS entered into capitalized lease obligations for certain aircraft which are included in Property, Plant and Equipment at December 31 as follows (in millions):
1997 1996 ---- ---- Aircraft...................................................... $614 $287 Accumulated amortization...................................... (16) (2) ---- ---- $598 $285 ==== ====
The aggregate annual principal payments for the next five years, excluding commercial paper and capitalized leases, are (in millions): 1998--$5; 1999-- $372; 2000--$467; 2001--$203; and 2002--$2. 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 $2.8 billion as of December 31, 1997. UPS leases certain aircraft, facilities, equipment and vehicles under operating leases which expire at various dates through 2034. Total aggregate minimum lease payments under capitalized leases and under operating leases are as follows (in millions):
CAPITALIZED OPERATING YEAR LEASES LEASES ---- ----------- --------- 1998.............................................. $ 66 $ 217 1999.............................................. 67 150 2000.............................................. 67 114 2001.............................................. 67 94 2002.............................................. 67 83 After 2002........................................ 592 611 ----- ------ Total minimum lease payments...................... 926 $1,269 ----- ====== Less imputed interest............................. (293) ----- Present value of minimum capitalized lease pay- ments............................................. 633 Less current portion.............................. (36) ----- Long-term capitalized lease obligations........... $ 597 =====
F-9 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) As of December 31, 1997, UPS has outstanding letters of credit totaling approximately $1.0 billion issued in connection with routine business requirements. As of December 31, 1997, UPS had commitments outstanding for capital expenditures under purchase orders and contracts of approximately $1.1 billion, of which approximately $655 million is expected to be spent in 1998. UPS maintains two credit agreements with a consortium of banks which provide revolving credit facilities of $1.25 billion each, with one expiring May 6, 1998, and the other June 8, 2001. At December 31, 1997, there were no outstanding borrowings under these facilities. In July 1997, the European medium-term note program was amended to increase the borrowing capacity from $500 million to $1.0 billion. Under this program, UPS may, from time to time, issue notes denominated in a variety of currencies. There was $500 million available under this program at December 31, 1997. 3. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("FAS 128"), which establishes new standards for computing and presenting earnings per share ("EPS"). FAS 128 is effective for annual financial statements for periods ending after December 15, 1997, and requires UPS to change the method previously used to compute EPS and restate all prior periods. The new rules require dual presentation of basic and diluted EPS on the face of the statements of consolidated income. The following table sets forth the computation of basic and diluted earnings per share (in millions except per share amounts):
1997 1996 1995 ------ ------- ------- NUMERATOR: Numerator for basic and diluted earnings per share-- net income........................................... $ 909 $ 1,146 $ 1,043 ====== ======= ======= DENOMINATOR: Weighted-average shares.............................. 551 555 557 Contingent shares--managers incentive plan........... 1 2 2 ------ ------- ------- Denominator for basic earnings per share............. 552 557 559 Effect of dilutive securities: Additional contingent shares--managers incentive plan................................................. 4 4 4 Stock option plans................................... 2 3 3 ------ ------- ------- Denominator for diluted earnings per share........... 558 564 566 ====== ======= ======= Basic earnings per share............................. $ 1.65 $ 2.06 $ 1.87 ====== ======= ======= Diluted earnings per share........................... $ 1.63 $ 2.03 $ 1.84 ====== ======= =======
4. LEGAL PROCEEDINGS During the second quarter of 1995, the Company received a Notice of Deficiency from the United States Internal Revenue Service ("IRS") asserting that it is liable for additional tax for the 1983 and 1984 tax years. The Notice of Deficiency is based in large part on the theory that UPS is liable for tax on income of Overseas Partners Ltd., a Bermuda company, which has reinsured excess value package insurance purchased by UPS's customers from unrelated insurers. The deficiency sought by the IRS relating to package insurance is based on a number of theories, which the Company believes are inconsistent, and ranges from $8 million to $35 million of tax, plus penalties and interest for 1984. F-10 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Agents for the IRS have also asserted in reports that UPS is liable for additional tax for the 1985 through 1990 tax years. The additional tax sought by the agents relating to package insurance for these periods range from $89 million to $148 million for the 1985 through 1987 tax years and up to $174 million for the 1988 through 1990 tax years, plus penalties and interest. The IRS has based their assertions on the same theories included in the above described Notice of Deficiency. In addition, the IRS and its agents have raised a number of other issues relating to the timing of deductions; the characterization of expenses as capital rather than ordinary; and UPS's entitlement to the Investment Tax Credit and the Research Tax Credit in the 1983 through 1990 tax years. These issues total $32 million in tax for the 1983 and 1984 tax years, $95 million in tax for the 1985 through 1987 tax years, and $228 million in tax for the 1988 through 1990 tax years. Penalties and interest are in addition to these amounts. The majority of these adjustments would reverse in future years. In August 1995, the Company filed a petition in Tax Court in opposition to the Notice of Deficiency related to the 1983 and 1984 tax years. The matter was tried before the Tax Court in two sessions, from September 15 through September 30, 1997, and from November 6 through November 7, 1997. The Company does not anticipate that the Tax Court will render its decision for at least nine to fifteen months. Management still believes that the eventual resolution of the matters raised by the IRS will not result in a material adverse effect upon the financial condition of the Company. The Company has appealed with the IRS all material issues related to the 1985 through 1990 tax years. The IRS may take positions similar to those in the reports described above for periods after 1990. The Company is a defendant in various employment-related lawsuits. In two of these actions, which allege employment discrimination by the Company, class action status has been sought by the plaintiffs. It has been granted in one case and plaintiff's motion for class action status is pending in the other. In addition, the United States Equal Employment Opportunity Commission has moved to intervene in one of the cases. Also, lawsuits have been filed on behalf of more than 300 former contract pilots against the Company, alleging, among other things, that in the late 1980's the Company did not fulfill offers of employment to individuals to serve as pilots of Company-operated aircraft. These cases generally do not allege specific amounts of damages. However, one of these cases has been tried and resulted in a jury verdict, which was affirmed on appeal. Though the compensatory and punitive damages awarded were substantial, they were not material to the Company. Each of the pending employment-related lawsuits is in its early stages, and the Company is at present unable to estimate its exposure. In addition to the preceding, UPS is a defendant in various other lawsuits which arose in the normal course of business. In the opinion of management, none of these cases are expected to have a material adverse effect upon the financial condition of the Company. 5. 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 and include approximately 13.3 million and 10.4 million shares of UPS common stock at December 31, 1997 and 1996, respectively. The actual earnings on the Plans' assets were $838, $381 and $390 million in 1997, 1996 F-11 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and 1995, 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):
1997 1996 1995 ---- ---- ---- Current year's earned benefit.............................. $129 $117 $ 92 Interest on projected benefit obligation................... 239 195 158 Expected earnings on pension plan assets................... (265) (202) (189) Amortization of unrecognized benefit obligation: Net obligation at transition date.......................... 13 4 4 Effect of plan benefit amendments.......................... 11 11 12 Net amortization of unrecognized investment (gains) losses and changes in actuarial assumptions and experience........ -- 2 (7) ---- ---- ---- Provision for pension expense.............................. $127 $127 $ 70 ==== ==== ====
Assumptions, reflecting weighted averages across all plans, are as follows:
1997 1996 1995 ---- ---- ---- Expected long-term rate of earnings on plan assets............ 9.5% 9.5% 9.5% Weighted average discount rate................................ 7.5% 8.0% 7.75% Rate of increase in future compensation levels................ 4.0% 4.0% 4.25%
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):
PLAN WHOSE PLANS WHOSE ACCUMULATED ASSETS EXCEED BENEFITS ACCUMULATED EXCEED ASSETS BENEFITS -------------- -------------- 1997 1996 1997 1996 ------ ------ ------ ------ Projected benefit obligation: Accumulated benefits computed using present salary levels: Vested...................................... $ 406 $ 368 $2,328 $1,918 Nonvested................................... 6 4 590 441 ------ ------ ------ ------ 412 372 2,918 2,359 Additional benefits computed using projected salary levels................................ -- -- 393 320 ------ ------ ------ ------ Total projected benefit obligation......... 412 372 3,311 2,679 Pension plan assets.......................... 338 281 3,856 2,768 ------ ------ ------ ------ Difference................................... (74) (91) 545 89 Unrecognized net investment gains and changes in assumptions used to compute projected benefits..................................... (13) -- (495) (217) Unrecognized net benefit obligation at transition date.............................. 78 86 71 28 Unrecognized projected benefit obligation arising from amendments to the retirement plan......................................... -- -- 224 138 Post-September 30 contributions.............. 5 5 -- -- ------ ------ ------ ------ Prepaid (accrued) pension cost............... $ (4) $ -- $ 345 $ 38 ====== ====== ====== ======
F-12 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 $577, $651 and $574 million during 1997, 1996 and 1995, 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 as follows (in millions):
1997 1996 ------ ------ Accumulated postretirement benefit obligation: Retirees....................................................... $ 447 $ 450 Fully eligible active plan participants........................ 93 70 Other active participants...................................... 599 576 ------ ------ 1,139 1,096 Plan assets at fair value...................................... 291 237 ------ ------ Accumulated postretirement benefit obligation in excess of plan assets......................................................... 848 859 Unrecognized net investment (gains) losses and changes in assumptions used to compute projected benefits................. 63 (18) ------ ------ Accumulated postretirement benefit obligation, net............. $ 911 $ 841 ====== ======
Net periodic postretirement benefit cost for the years ended December 31 included the following components (in millions):
1997 1996 1995 ---- ---- ---- Service cost-benefits attributed to service during the period...................................................... $ 41 $ 37 $ 37 Interest cost on accumulated postretirement benefit obligation.................................................. 89 82 75 Expected earnings on plan assets............................ (21) (18) (16) Amortization of unrecognized amounts........................ 3 4 4 ---- ---- ---- Net periodic postretirement benefit cost.................... $112 $105 $100 ==== ==== ====
The significant assumptions used in determining postretirement benefit cost and the accumulated postretirement benefit obligation were as follows:
1997 1996 1995 ---- ---- ---- Expected long-term rate of return on plan assets.............. 9.5% 9.5% 9.5% Weighted average discount rate................................ 7.5% 8.0% 7.75%
Future benefit costs were forecasted assuming an initial annual increase of 7.25% for pre-65 medical costs and an increase of 6.25% for post-65 medical costs, decreasing to 5.75% for pre-65 and 4.75% for post-65 by the year 2000 and with consistent annual increases at those ultimate levels thereafter. A one percentage point F-13 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) increase in the annual trend rate would have increased the total accumulated postretirement benefit obligation at December 31, 1997, by $90 million and the aggregate of the service and interest components of the net periodic postretirement benefit costs for 1997 by $11 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 $448, $441 and $395 million during 1997, 1996 and 1995, respectively. As part of UPS's overall effort to lower operating expenses, 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 twelve-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 $244, $324 and $277 million during 1997, 1996 and 1995, 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 1997, 1996 or 1995. 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 1997, 1996 and 1995 is amortized to expense over the vesting period of the options. The pro forma information is as follows (in millions except per share amounts):
1997 1996 1995 ----- ------ ------ Net income................................ As reported $ 909 $1,146 $1,043 Pro forma $ 904 $1,143 $1,042 Basic earnings per share.................. As reported $1.65 $ 2.06 $ 1.87 Pro forma $1.64 $ 2.05 $ 1.86 Diluted earnings per share................ As reported $1.63 $ 2.03 $ 1.84 Pro forma $1.62 $ 2.03 $ 1.84
F-14 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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:
1997 1996 1995 ----- ----- ----- Semiannual dividend per share.............................. $0.35 $0.35 $0.32 Risk-free interest rate.................................... 6.73% 6.05% 6.98% Expected life in years..................................... 5 5 5
Persons earning the right to receive stock options are determined each year by either the Officer Compensation Committee or the 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. 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:
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE (IN THOUSANDS) -------------- -------------- Outstanding at January 1, 1995.................... $17.44 18,929 Exercised......................................... $14.50 (3,077) Granted........................................... $23.75 3,916 Canceled.......................................... $18.47 (435) ------ Outstanding at December 31, 1995.................. $19.16 19,333 Exercised......................................... $15.25 (3,474) Granted........................................... $27.00 3,322 Canceled.......................................... $21.64 (225) ------ Outstanding at December 31, 1996.................. $21.21 18,956 Exercised......................................... $16.50 (3,956) Granted........................................... $29.75 3,262 Canceled.......................................... $22.72 (313) ------ Outstanding at December 31, 1997.................. $23.77 17,949 ======
The weighted average fair value of options granted during 1997 and 1996 was $29.75 and $27.00 respectively. No options were exercisable at December 31, 1997. The following table summarizes information about stock options outstanding at December 31, 1997:
NUMBER OF WEIGHTED AVERAGE WEIGHTED SHARES REMAINING LIFE AVERAGE (IN THOUSANDS) (IN YEARS) EXERCISE PRICE -------------- ---------------- -------------- 3,940 0.3 $18.75 3,853 1.3 $21.25 3,757 2.3 $23.75 3,192 3.3 $27.00 3,207 4.3 $29.75 ------ --- ------ 17,949 2.2 $23.77 ====== === ======
F-15 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. INCOME TAXES The provision for income taxes for the years ended December 31 consists of the following (in millions):
1997 1996 1995 ---- ---- ---- Current: Federal........................................................ $455 $333 $656 State.......................................................... 76 71 67 ---- ---- ---- Total Current................................................. 531 404 723 ---- ---- ---- Deferred: Federal........................................................ 100 324 (49) State.......................................................... 13 36 (9) ---- ---- ---- Total Deferred................................................ 113 360 (58) ---- ---- ---- Total......................................................... $644 $764 $665 ==== ==== ====
Income before income taxes includes losses of foreign subsidiaries of $70, $160 and $98 million for 1997, 1996 and 1995, 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:
1997 1996 1995 ---- ---- ---- Statutory federal income tax rate............................. 35.0% 35.0% 35.0% State income taxes (net of federal benefit)................... 3.7 3.8 2.6 Other......................................................... 2.8 1.2 1.3 ---- ---- ---- Effective income tax rate..................................... 41.5% 40.0% 38.9% ==== ==== ====
Deferred tax liabilities and assets are comprised of the following at December 31 (in millions):
1997 1996 ------ ------ Excess of tax over book depreciation............................ $1,727 $1,483 Leveraged leases................................................ 87 111 Pension plans................................................... 300 302 Prepaid health & welfare........................................ 131 127 Other........................................................... 402 371 ------ ------ Gross deferred tax liabilities.................................. 2,647 2,394 ------ ------ Other postretirement benefits................................... 377 342 Loss carryforwards (international).............................. 322 365 Other........................................................... 303 179 ------ ------ Gross deferred tax assets....................................... 1,002 886 Deferred tax assets valuation allowance......................... (322) (365) ------ ------ Net deferred tax assets......................................... 680 521 ------ ------ Net deferred tax liability...................................... $1,967 $1,873 ====== ======
The valuation allowance decreased approximately $43 million and increased approximately $42 million during the years ended December 31, 1997 and 1996, respectively. F-16 UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) UPS has international loss carryforwards of approximately $726 million as of December 31, 1997. Of this amount, $372 million expires in varying amounts through 2007. The remaining $354 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 has 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):
1997 1996 ------ ------ Deferred federal and state income taxes.......................... $1,829 $1,727 Insurance reserves............................................... 606 497 Other credits and noncurrent liabilities......................... 498 257 ------ ------ $2,933 $2,481 ====== ======
9. OTHER OPERATING EXPENSES The major components of other operating expenses for the years ended December 31 are as follows (in millions):
1997 1996 1995 ------ ------ ------ Repairs and maintenance................................... $ 804 $ 823 $ 809 Depreciation and amortization............................. 1,021 936 866 Purchased transportation.................................. 1,374 1,306 1,144 Fuel...................................................... 736 685 621 Other occupancy........................................... 395 388 359 Other expenses............................................ 3,141 2,875 2,679 ------ ------ ------ $7,471 $7,013 $6,478 ====== ====== ======
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):
1997 1996 1995 ------- ------- ------- Domestic: Revenue............................................ $19,524 $19,376 $18,243 Income before income taxes......................... $ 1,559 $ 2,111 $ 1,920 Identifiable assets................................ $14,305 $13,191 $11,157 International: Revenue............................................ $ 2,934 $ 2,992 $ 2,802 Loss before income taxes........................... $ (6) $ (201) $ (212) Identifiable assets................................ $ 1,607 $ 1,763 $ 1,488 Consolidated: Revenue............................................ $22,458 $22,368 $21,045 Income before income taxes......................... $ 1,553 $ 1,910 $ 1,708 Identifiable assets................................ $15,912 $14,954 $12,645
International operations include shipments which either originate in or are destined to international (non-U.S.) locations. International revenues attributable to shipments which originated in the U.S. totaled $772, $750 and $616 million in 1997, 1996 and 1995, respectively. F-17 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) By: /s/ James P. Kelly ------------------------------------- James P. Kelly Chairman of the Board and Chief Executive Officer Date: March 27, 1998 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 Board, March 27, 1998 _________________________________ Senior Vice President and JOHN W. ALDEN Director /s/ William H. Brown, III Director March 27, 1998 _________________________________ WILLIAM H. BROWN, III /s/ Robert J. Clanin Senior Vice President, Chief March 27, 1998 _________________________________ Financial Officer, Treasurer and ROBERT J. CLANIN Director Director _________________________________ CARL KAYSEN /s/ James P. Kelly Chairman of the Board, Chief March 27, 1998 _________________________________ Executive Officer and Director JAMES P. KELLY Director _________________________________ ANN M. LIVERMORE Director _________________________________ GARY E. MACDOUGAL /s/ Joseph R. Moderow Senior Vice President, Secretary, March 27, 1998 _________________________________ General Counsel and Director JOSEPH R. MODEROW /s/ Kent C. Nelson Director March 27, 1998 _________________________________ KENT C. NELSON Director _________________________________ VICTOR A. PELSON Director _________________________________ JOHN W. ROGERS /s/ Charles L. Schaffer Senior Vice President and March 27, 1998 _________________________________ Director CHARLES L. SCHAFFER Director _________________________________ ROBERT M. TEETER
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- EXHIBITS TO FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 ---------------- UNITED PARCEL SERVICE OF AMERICA, INC. EXHIBIT INDEX
(3)ARTICLES OF INCORPORATION AND BY-LAWS (a) Restated Certificate of Incorporation of UPS. Incorporated by Reference to Exhibit 4(iv) to Form S-8 Registration Statement (No. 33- 19622). (b) By-laws of UPS, as amended through Incorporated by February 26, 1998. Reference to Current Report on Form 8-K filed March 4, 1998. (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES (a) Specimen Certificate of Capital Stock of UPS. Incorporated by Reference to Exhibit 3(a) to Form 10, as filed April 29, 1970. (b) UPS Managers Stock Trust Agreement, as Incorporated by amended and restated. Reference to Exhibit 4(b) to Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (No. 33- 54297). (c) Specimen Certificate of 8 3/8% Debentures Incorporated by due April 1, 2020. Reference to Exhibit 4(c) to Registration Statement No. 33-32481, filed December 7, 1989. (d) Indenture relating to 8 3/8% Debentures Incorporated by due April 1, 2020. Reference to Exhibit 4(c) to Registration Statement No. 33-32481, filed December 7, 1989. (e) UPS Employees Stock Trust Agreement. Incorporated by Reference to Exhibit 4(iv) to Registration Statement on Form S-8 (No. 33-62169) as filed August 28, 1995. (f) Specimen Certificate of $200,000,000 of 5.5% Available to the Eurobond Notes due January 4, 1999. Commission upon request. (g) Indenture relating to $200,000,000 of 5.5% Available to the Eurobond Notes due January 4, 1999. Commission upon request. (h) Specimen Certificate of $166,000,000 of 3.25% Available to the Swiss Franc Notes due October 22, 1999. Commission upon request. (i) Indenture relating to $166,000,000 of 3.25% Available to the Swiss Franc Notes due October 22, 1999. Commission upon request. (j) Specimen Certificate of Sterling 100 million of Available to the 6.875% Notes due 2000. Commission upon request. (k) Indenture relating to Sterling 100 million of Available to the 6.875% Note due 2000. Commission upon request. (l) Specimen Certificate of $500,000,000 of Temporary Available to the and Permanent Global Notes in connection with the Commission upon request. European medium term note program. (m) Indenture relating to the $500,000,000 European Available to the Medium term note program. Commission upon request. (n) Specimen Certificate of Exchange Offer Incorporated by Notes Due 2030. Reference to Exhibit T- 3C to Form T-3 filed December 18, 1997. (o) Indenture relating to Exchange Offer Incorporated by Notes Due 2030. Reference to Exhibit T- 3C to Form T-3 filed December 18, 1997.
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(p) Specimen Certificate of $200,000,000 of 6.625% Available to the Euro Notes due April 25, 2001. Commission upon request. (q) Indenture relating to $200,000,000 of 6.625% Available to the Euro Notes Due April 25, 2001. Commission upon request. (r) Specimen Certificate of $300,000,000 of 6.25% Available to the Euro Notes due July 7, 2000. Commission upon request. (s) Indenture relating to $300,000,000 of 6.25% Available to the Euro Notes due July 7, 2000. Commission upon request. (t) Specimen Certificate of $1,000,000,000 of Available to the Temporary and Permanent Global Notes in connection Commission upon request. with the European medium term note program. (u) Indenture relating to the $1,000,000,000 European Available to the medium term note program. Commission upon request. (10) MATERIAL CONTRACTS (a) UPS Thrift Plan, as Amended and Restated January 1, 1976, including Amendments Nos. 1 and 2. (1) Amendment No. 3 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 20(b) to 1980 Annual Report on Form 10-K. (2) Amendment No. 4 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 20(b) to 1981 Annual Report on Form 10-K. (3) Amendment No. 5 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 19(b) to 1983 Annual Report on Form 10-K. (4) Amendment No. 6 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(4) to 1985 Annual Report on Form 10-K. (5) Amendment No. 7 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(5) to 1985 Annual Report on Form 10-K. (6) Amendment No. 8 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(6) to 1987 Annual Report on Form 10-K. (7) Amendment No. 9 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(7) to 1987 Annual Report on Form 10-K. (8) Amendment No. 10 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(8) to 1990 Annual Report on Form 10-K. (9) Amendment No. 11 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(9) to 1991 Annual Report on Form 10-K. (10) Amendment No. 12 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(10) to 1991 Annual Report on Form 10-K. (11) Amendment No. 13 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(11) to 1991 Annual Report on Form 10-K. (12) Amendment No. 14 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(12) to 1991 Annual Report on Form 10-K. (13) Amendment No. 15 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(13) to 1992 Annual Report on Form 10-K. (14) Amendment No. 16 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(14) to 1993 Annual Report on Form 10-K. (15) Amendment No. 17 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(15) to 1993 Annual Report on Form 10-K.
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(16) Amendment No. 18 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(16) to 1994 Annual Report on Form 10-K. (17) Amendment No. 19 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(17) to 1994 Annual Report on Form 10-K. (18) Amendment No. 20 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(18) to the 1995 Annual Report on Form 10-K. (19) Amendment No. 21 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(19) to the 1995 Annual Report on Form 10-K. (20) Amendment No. 22 to the UPS Thrift Plan. Incorporated by Reference to Exhibit 10(a)(20) to the 19965 Annual Report on Form 10-K. (21) Amendment No. 23 to the UPS Thrift Plan. Incorporated by reference to Exhibit 10(a)(21) to the 1996 Annual Report on Form 10-K. (b) UPS Retirement Plan (including amendments Incorporated by 1 through 4). Reference to Exhibit 9 to 1979 Annual Report on Form 10-K. (1) Amendment No. 5 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 20(a) to 1980 Annual Report on Form 10-K. (2) Amendment No. 6 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 19(a) to 1983 Annual Report on Form 10-K. (3) Amendment No. 7 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(3) to 1984 Annual Report on Form 10-K. (4) Amendment No. 8 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(4) to 1985 Annual Report on Form 10-K. (5) Amendment No. 9 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(5) to 1985 Annual Report on Form 10-K. (6) Amendment No. 10 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 19(a) to 1988 Annual Report on Form 10-K. (7) Amendment No. 11 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 19(b) to 1988 Annual Report on Form 10-K. (8) Amendment No. 12 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(8) to 1989 Annual Report on Form 10-K. (9) Amendment No. 13 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(9) to 1989 Annual Report on Form 10-K. (10) Amendment No. 14 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(10) to 1990 Annual Report on Form 10-K. (11) Amendment No. 15 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(11) to 1992 Annual Report on Form 10-K. (12) Amendment No. 16 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(12) to 1994 Annual Report on Form 10-K. (13) Amendment No. 17 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(13) to 1994 Annual Report on Form 10-K. (14) Amendment No. 18 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(14) to the 1995 Annual Report on Form 10-K. (15) Amendment No. 19 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(15) to the 1995 Annual Report on Form 10-K. (16) Amendment No. 20 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(16) to the 1995 Annual Report on Form 10-K. (17) Amendment No. 21 to the UPS Retirement Plan. Incorporated by Reference to Exhibit 10(b)(17) to the 1996 Annual Report on Form 10-K. (18) Amendment No. 22 to the UPS Retirement Plan. Filed herewith as Exhibit 10(b)(18).
E-3 (c) UPS Managers Incentive Plan (as amended). Incorporated by Reference to Definitive Proxy Statement for 1992 Special Meeting of Shareholders. (d) Indemnification Contracts or Arrangements. Incorporated by Reference to Item 8 of Form 10, as filed April 29, 1970. (e) Agreement of Sale between Delaware County Incorporated by Reference Industrial Development Authority and Penallen to Exhibit 10(m) to 1985 Corporation, dated as of December 1, 1985; Annual Report on Form 10-K. 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 Parcel Service of America, Inc. and Irving Trust Company; Guarantee by United Parcel Service of America, Inc. to Delaware County Industrial Development Authority, dated as of December 1, 1985. (f) Receivables Purchase and Sale Agreement, dated Incorporated by Reference as of November 24, 1987, among United Parcel to Exhibit 10(l) to 1987 Service, Inc., an Ohio corporation, United Annual Report on Form 10-K. Parcel Service, Inc., a New York corporation, United Parcel Service of America, Inc., Cooperative Receivables Corporation and Citicorp North America, Inc. (g) Receivables Purchase and Sale Agreement, Incorporated by Reference dated as of November 24, 1987, among United to Exhibit 10(m) to 1987 Parcel Service, Inc., an Ohio corporation, Annual Report on Form 10-K. United Parcel Service, Inc., a New York corporation, United Parcel Service of America, Inc., Citibank, N.A., and Citicorp North America, Inc. (h) Membership Agreement, dated as of November 24, Incorporated by Reference 1987, by and between Cooperative Receivables to Exhibit 10(n) to 1987 Corporation and United Parcel Service of Annual Report on Form 10-K. America, Inc. (i) Amended and Restated Facility Lease Agreement, Incorporated by Reference dated as of November 6,1990, among Overseas to Exhibit 10(r) to 1990 Partners Leasing, Inc., United Parcel Service Annual Report on Form 10-K. General Services Co. and United Parcel Service of America, Inc. (j) Amended and Restated Facility Lease Agreement, Incorporated by Reference dated as of November 6, 1990, among Overseas to Exhibit 10(s) to 1990 Partners Leasing, Inc., United Parcel Annual Report on Form 10-K. Service Co. and United Parcel Service of America, Inc. (k) Agreement of Sale, dated as of December 28, Incorporated by Reference 1989, between Edison Corporation and Overseas to Exhibit 10(t) to 1989 Partners Leasing, Inc. Annual Report on Form 10-K. (l) Assignment and Assumption Agreement, dated Incorporated by Reference as of December 28, 1989, between and among to Exhibit 10(u) to 1989 Edison Corporation, Overseas Partners Leasing, Annual Report on Form 10-K. Inc., McBride Enterprises, Inc. and Ramapo Ridge-McBride Office Park.
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(m) UPS Deferred Compensation Plan for Non- Incorporated by Reference Employee Directors. to Exhibit 10(v) to 1990 Annual Report on Form 10-K. (n) UPS Retirement Plan for Outside Directors. Incorporated by Reference to Exhibit 10(w) to 1990 Annual Report on Form 10-K. (o) UPS Savings Plan, as Amended and Restated, Incorporated by Reference including Amendments No. 1-5. to Exhibit 10(x) to 1990 Annual Report on Form 10-K. (1) Amendment No. 6 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(1) to 1990 Annual Report on Form 10-K. (2) Amendment No. 7 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(2) to 1991 Annual Report on Form 10-K. (3) Amendment No. 8 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(3) to 1992 Annual Report on Form 10-K. (4) Amendment No. 9 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(4) to 1992 Annual Report on Form 10-K. (5) Amendment No. 10 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(5) to 1992 Annual Report on Form 10-K. (6) Amendment No. 11 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(6) to 1994 Annual Report on Form 10-K. (7) Amendment No. 12 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(7) to 1994 Annual Report on Form 10-K. (8) Amendment No. 13 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(8) to 1994 Annual Report on Form 10-K. (9) Amendment No. 14 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(9) to 1994 Annual Report on Form 10-K. (10) Amendment No. 15 to the UPS Savings Plan. Incorporated by Reference to Exhibit 10(x)(10) to 1994 Annual Report on Form 10-K. (11) Restatement Amendment No. 1 to the UPS Incorporated by Reference Savings Plan. to Exhibit 10(x)(11) to the 1996 Annual Report on Form 10-K. (12) Restatement Amendment No. 2 to the UPS Incorporated by Reference Savings Plan. to Exhibit 10(x)(12) to the 1995 Annual Report on Form 10-K. (13) Restatement Amendment No. 3 to the UPS Incorporated by Reference Savings Plan. to Exhibit 10(o)(13) to the 1996 Annual Report on Form 10-K. (14) Restatement Amendment No. 4 to the UPS Incorporated by Reference Savings Plan. to Exhibit 10(o)(14) to the 1996 Annual Report on Form 10-K. (15) Restatement Amendment No. 5 to the UPS Incorporated by Reference Savings Plan. to Exhibit 10(o)(15) to the 1996 Annual Report on Form 10-K. (16) Restatement Amendment No. 6 to the UPS Filed herewith as Exhibit Savings Plan. 10(o)(16).
E-5 (p) Credit Agreement (364- Incorporated by Reference to Exhibit 10(a) to Day Facility) dated Quarterly Report on Form 10-Q for the Quarter May 7, 1997 among United Ended March 30, 1997. Parcel Service of America, Inc., the initial lenders named therein, CitiCorp Securities, Inc. As Co-Arranger and Nations Banc Capital Mar- kets, Inc. As Co-Arranger and NationsBank of Georgia, N.A., as Agent, and Citibank, N.A., as Agent. (q) Credit Agreement (Five- Incorporated by Reference to Exhibit 10(b) to Year Facility) the Quarterly Report on Form 10-Q for the Quarter dated June 10, 1996 among ended June 30, 1996. United Parcel Service of America, Inc., the ini- tial lenders named therein, NationsBank of Georgia, N.A., as Agent, and Citibank, N.A., as Agent. (r) UPS 1991 Stock Option Incorporated by Reference to Appendix A to Plan (Amended and Definitive Proxy Statement for 1995 Annual Restated as of February 20, Meeting of Shareholders. 1992). (s) UPS Excess Coordinating Filed herewith as Exhibit 10(s). Benefit Plan. (t) UPS 1997 Employees Incorporated by Reference to Exhibit 99 to the Stock Purchase Plan. Form S-8 Registration Statement No. 333-23971, as filed on March 26, 1997. (u) UPS 1997 Managers Stock Incorporated by Reference to Exhibit 99 to the Purchase Plan. Form S-8 Registration Statement No. 333-23971, as filed on March 26, 1997. (v) UPS 1996 Stock Option Incorporated by Reference to Exhibit (10)(a) to Plan, as Quarterly Report on Form 10-Q for the Quarter amended and restated. ended September 30, 1997. (21)SUBSIDIARIES OF THE REG- ISTRANT. Filed herewith as Exhibit 21. (23)CONSENT OF DELOITTE & TOUCHE LLP. Filed herewith as Exhibit 23. (27)FINANCIAL DATA SCHEDULES Filed with EDGAR version of this 1997 Annual Report on Form 10-K.
E-6 EX-10.B18 2 AMENDMENT NO. 22 TO UPS RETIREMENT PLAN EXHIBIT 10(b)(18) AMENDMENT NO. 22 TO THE UPS RETIREMENT PLAN (AS AMENDED AND RESTATED JANUARY 1, 1976) WHEREAS, United Parcel Service of America, Inc. and its affiliated corporations established the UPS Retirement Plan ("Plan") for the benefit of their eligible employees, in order to provide benefits to those employees upon their retirement, disability, or death, effective as of September 1, 1961; and WHEREAS, the UPS Retirement Plan was amended and restated in its entirety, replacing all of the provisions of the Plan then in effect, effective as of January 1, 1976, to comply with the Employee Retirement Income Security Act of 1974 ("ERISA"); and WHEREAS, the Plan has been amended on a number of occasions since January 1, 1976; and WHEREAS, it is desired to amend the Plan further to provide certain participants with qualified benefits in lieu of benefits that would otherwise be paid from the UPS Coordinating Plan. NOW THEREFORE, pursuant to the authority vested in the Board of Directors by Section 7.1 of the Plan, the UPS Retirement Plan is hereby amended as follows, effective January 1, 1996: 1. The first paragraph of subsection 5.2(a) is amended to read as follows: Normal Retirement Benefit. For a Participant who retires on or after his or her Normal Retirement Date, the sum of A and B where A equals the larger of the benefit described in paragraph 5.2(a)(1) or paragraph 5.2(a)(2) below, and B equals the Additional Monthly Retirement Benefit, if any, applicable to such Participant as contained in Exhibit D of the Plan. 2. Subsection 5.2(b)(3) is amended to read as follows: For a Participant with at least one Hour of Service as an Employee on or after January 1, 1992, the amount of the Early Retirement Benefit payable to such Participant shall be an amount equal to the benefit determined under subsection 5.2(a), above, reduced by one-quarter of one percent (0.25%) for each month, including a partial month, by which the Participant's Annuity Starting Date precedes his or her 65th birthday. Notwithstanding the foregoing, if the Participant has earned, as of his or her Annuity Starting Date, at least 25 years of Benefit Service: (A) The reduction described above shall apply to his or her benefit determined under paragraph (1) of subsection 5.2(a) only with respect to each month, including a partial month, by which the Participant's Annuity Starting Date precedes his or her 60th birthday; and (B) The reduction described above shall not apply to his or her benefit determined under subparagraph (2)(B) of subsection 5.2(a). 3. Subsection 5.2(c)(2) is amended to read as follows: For a Participant with at least one Hour of Service as an Employee on or after January 1, 1992, the amount of the Deferred Vested Benefit payable to such Participant shall be equal to the benefit determined under subsection 5.2(a), above, reduced by one-half of one percent (0.5%) for each month, including a partial month, by which the Participant's Annuity Starting Date precedes his or her 65th birthday. Notwithstanding the foregoing, the amount of a Participant's Deferred Vested Benefit shall not be less than the Deferred E-7 Vested Benefit, if any, the Participant would have earned under the provisions of this Plan immediately prior to January 1, 1992, taking into account for this purpose Compensation earned by the Participant through December 31, 1991 and Benefit Service earned by him or her through December 31, 1992. IN WITNESS WHEREOF, United Parcel Service of America, Inc. based upon action by its Board of Directors, has caused this Amendment No. 22 to be executed this 10th day of March, 1997. ATTEST: UNITED PARCEL SERVICE OF AMERICA, INC. /s/ Joseph R. Moderow /s/ James C. Kelly - ------------------------------ ---------------------------------------- Secretary Chairman E-8 EX-10.O6 3 RESTATEMENT AMENDMENT NO.6 TO THE UPS SAVINGS PLAN EXHIBIT 10(O)(16) RESTATEMENT AMENDMENT NO. 6 TO THE UPS SAVINGS PLAN (RESTATED AS OF MARCH 31, 1995) WHEREAS, United Parcel Service of America, Inc. ("UPS") and its affiliated corporations established, effective July 1, 1988, the UPS Savings Plan (the "Plan") in order to permit their eligible employees to put money aside on a tax deferred basis to supplement that which they will receive under Social Security and other pension and retirement plans; and WHEREAS, the Plan has been restated to incorporate Amendments No. 1 through 15, and has been submitted to the Internal Revenue Service on March 31, 1995, for purposes of receiving a favorable determination letter that considers the requirements of the Tax Reform Act of 1986, and the regulations promulgated thereunder (the "Restated Plan"); WHEREAS, the Restated Plan has been heretofore amended on four previous occasions, the most recent being Restatement Amendment No. 5, effective January 1, 1989; and WHEREAS, it is desired to further amend the Restated Plan to conform the Restated Plan to legislative changes under the Small Business Jobs Protection Act of 1996, to increase the maximum percentage of before-tax compensation that may be contributed to the Plan on behalf of a Participant and to clarify the nondiscrimination rules applicable to Voluntary Contributions; NOW THEREFORE, pursuant to the authority vested in the Board of Directors by Section 9.1, the Plan is hereby amended in the following respect, with the following sections being effective as of the following dates: 1. Effective January 1, 1997, Section 1.1(b) is revised to read as follows: "(b) "Actual Deferral Percentage" means, for a specified group of Employees for a Plan Year, the average of the ratios (calculated separately for each Eligible Employee in the group) of the compensation deferred by each such Employee under this Plan for such Plan Year to such Employee's compensation for such Plan Year (as defined in Section 3.2(c)), calculated in accordance with Section 401(k)(3)(B) of the Code." 2. Effective January 1, 1997, Section 1.1(p) is revised to read as follows: "(p) "Highly Compensated Participant" means any Participant or Eligible Employee who is a highly compensated employee as defined in Code Section 414(q) and the regulations thereunder. Generally, any Participant or Eligible Employee is considered a Highly Compensated Participant if (i) during the Plan Year or the preceding Plan Year ("the "look-back year"), he or she was a "five percent owner" (as defined in Section 6.5(f)); or (ii) for the look-back year such Participant or Eligible Employee received "415 Compensation" from the Employer Company in excess of $80,000. In determining whether an individual had "415 Compensation" of more than $80,000, "415 Compensation" from each employer required to be aggregated under Code Section 414(b), (c) and (m) shall be taken into account and solely for the Plan Year beginning January 1, 1997, "415 Compensation" shall be determined without regard to Sections 125 and 402(e)(3) of the Code. The dollar amount set forth above shall be adjusted as permitted or required by the Secretary of the Treasury or by statute. Notwithstanding the foregoing, only for purposes of Puerto Rico law and solely to comply therewith, a "Highly Compensated Participant" shall mean any Participant employed in Puerto Rico who is among the one-third of all Participants employed in Puerto Rico receiving the highest aggregate compensation from an Employer Company." E-9 3. Effective July 29, 1996, Section 1.1 is revised to add the following new Section 1.1(ff): "(ff) "Actual Contribution Percentage" means, for a specified group of Employees for a Plan Year, the average of the ratios (calculated separately for each Eligible Employee in the group) of the Voluntary Contributions made by each such Employee under this Plan for such Plan Year to such Employee's compensation for such Plan Year, calculated in accordance with Section 401(m)(3) of the Code. For purposes of the foregoing, compensation shall mean any of the following, as determined by the Committee in a uniform manner with respect to all Eligible Employees for the Plan Year: (1) Compensation within the meaning of Section 1.1(dd) (which includes amounts contributed as Elective Deferrals to this Plan); (2) The Eligible Employee's taxable compensation from the Employer Company reported on Form W-2 for the Plan Year; or (3) Such other nondiscriminatory definition of compensation which satisfies the requirements of Section 414(s) of the Code and the regulations thereunder. In no event, however, shall an Eligible Employee's annual compensation for purposes of this Section 1.1(ff) exceed the applicable dollar limit set forth in Section 1.1(h)." 4. Effective January 1, 1997, Section 1.1(ff) is amended as follows: "(ff) "Actual Contribution Percentage" means, for a specified group of Employees for a Plan Year, the average of the ratios (calculated separately for each Eligible Employee in the group) of the compensation deferred by each such Employee under this Plan for such Plan Year to such Employee's compensation for such Plan Year (as defined in Section 3.8(c)), calculated in accordance with Section 401(m)(3) of the Code." 5. Effective June 1, 1997, Section 3.1(a) is revised to read as follows: "(a) Each Eligible Employee may elect to reduce his or her Eligible Compensation by a whole percentages up to but not exceeding seventeen (17%) percent of such Eligible Employee's Eligible Compensation earned during the Plan Year (or, with respect to Eligible Employees employed in Puerto Rico, such lower percentage as may be permitted under the laws of Puerto Rico) and to have such amount contributed to the Plan on his or her behalf as an Elective Deferral. An election to make an Elective Deferral shall state (in whole percentages) the portion of the Eligible Employee's Eligible Compensation to be deferred hereunder and shall be communicated to the Plan Administrator via the telephone response unit ("VRU") or in accordance with such other procedures adopted by the Committee or its designee from time to time. With respect to each Eligible Employee for whom there is in effect an Elective Deferral and who is receiving Eligible Compensation from an Employer Company, there shall be contributed to the Trust an amount equal to the amount by which such Eligible Employee's Eligible Compensation was reduced pursuant to the Eligible Employee's Elective Deferral. Elective Deferrals shall be paid to the Trust by the Employer Company as soon as practical following the date on which the deferred amount would have (but for the Eligible Employee's Elective Deferral) been paid to the Eligible Employee (but no later than the date required by law) and shall be credited to the Eligible Employee's Elective Deferral Account upon receipt by the Plan of the Eligible Employee's Elective Deferral. The Elective Deferral percentage selected by the Eligible Employee shall remain in effect until changed by the Eligible Employee in accordance with Section 3.4 or until reduced by the Committee or its designee in accordance with Section 3.2." 6. Effective January 1, 1997, Section 3.2 is revised to read as follows: "Section 3.2 Reduction of Elective Deferrals. (a) All Elective Deferrals contributed pursuant to Section 3.1 are subject to the nondiscrimination limits established in Section 401(k) of the Code. Pursuant to the transition relief available under Internal Revenue E-10 Service Notice 97-2 ("IRS Notice 97-2"), the Actual Deferral Percentage for the group of Highly Compensated Participants for the Plan Year beginning January 1, 1997, shall not exceed the greater of (1) or (2) as follows: (1) the Actual Deferral Percentage for the Plan Year for all other Eligible Employees times 1.25; or (2) the Actual Deferral Percentage for the Plan Year for all other Eligible Employees, times 2.0; provided, however, that the Actual Deferral Percentage for the group of Highly Compensated Participants for the Plan Year does not exceed the Plan Year's Actual Deferral Percentage for all other Eligible Employees by more than two percentage points. For the purpose of the foregoing test and subsection (b), those Employees who were not eligible to have Elective Deferrals made for them at any time during the Plan Year (other than as a result of a suspension pursuant to Section 6.2(c)(3)) shall be disregarded. Notwithstanding the foregoing, at the Committee's discretion, the Actual Deferral Percentage for Plan Years beginning after January 1, 1997, may be determined based on prior year data in accordance with the relief provided under IRS Notice 97-2. (b) Excess Elective Deferrals. The Committee or its designee shall have the responsibility of determining the extent, if any, to which either of the nondiscrimination tests described in subsection (a) are not met. If it is determined that the Elective Deferrals made pursuant to Section 3.1 do not satisfy one of the tests in subsection (a), then the Committee shall take action in accordance with one or both of the options set forth below. (1) Elective Deferrals with respect to Participants who are Highly Compensated Participants will be reduced and refunded in uniform dollar increments, commencing with Elective Deferrals of the group of affected Participants with the highest dollar amounts of Elective Deferral and then the next highest dollar amounts of Elective Deferrals, and so on, until it is determined by the Committee or its designee that the Plan will satisfy one of the nondiscrimination tests set forth in subsection (a). Each reduction at a stated dollar level will apply to all Highly Compensated Participants' Elective Deferrals at that level regardless of whether their Elective Deferrals have been reduced from higher amounts. If the refund of Elective Deferrals previously made is required, the Committee or its designee shall accomplish the reductions as described above by distributing to each affected Highly Compensated Participant that portion of his or her Elective Deferrals (plus any income and minus any loss allocable thereto determined in accordance with procedures established by the Committee in a manner consistent with Treasury regulations, and adjusted to reflect the return or withdrawal of Elective Deferrals, if any, in excess of the dollar limit (as adjusted) described in Section 3.1(c)) necessary to meet the requirements of one of the nondiscrimination tests no later than the close of the following Plan Year. (2) Alternatively, or in addition to the reduction of Elective Deferrals described above, the Committee may, in its discretion, elect to eliminate or reduce the level of Elective Deferrals made by Highly Compensated Participants or by groups of Highly Compensated Participants. Any reduction effected pursuant to this Section 3.2 shall remain in effect for the remainder of the Plan Year in which the reduction is made. (c) Compensation for Testing Purposes. For purposes of determining the Actual Deferral Percentage with respect to a group of Eligible Employees, the compensation of each such Employee taken into account shall be any of the following, as determined by the Committee or its designee in a uniform manner with respect to all Eligible Employees for the Plan Year: (A) The Eligible Employee's taxable compensation from the Employer Company reported on Form W-2 for the Plan Year with or without elective contributions made by an Employer Company on behalf of the Eligible Employee that are not includible in gross income under Sections 125 and 402(e)(3) of the Code; or (B) Such other nondiscriminatory definition of compensation which satisfies the requirements of Section 414(s) of the Code and regulations thereunder. E-11 In no event, however, shall an Eligible Employee's annual compensation for purposes of this subsection exceed the dollar limit set forth in Section 1.1(h). 7. Effective July 29, 1996, Section 3.6, Multiple Use, shall become Section 3.9 and is amended to read as follows: "Section 3.9 Multiple Use. (a) If one or more Highly Compensated Employees participate in this Plan and a plan maintained by the Employer or a Related Employer subject to the actual contribution percentage test, as defined in Section 401(m)(2) of the Code, and the sum of the Actual Deferral Percentage and Actual Contribution Percentage of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the Actual Contribution Percentage of those Highly Compensated Employees will be reduced (beginning with such Highly Compensated Employees whose contribution percentage is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's contribution percentage amount is reduced shall be treated as an excess Voluntary Contribution under Section 3.8. The Actual Deferral Percentage and Actual Contribution Percentage of the Highly Compensated Employees are determined after any corrections required to meet the Actual Deferral Percentage and the Actual Contribution Percentage tests under this Plan. Multiple use does not occur if either the Actual Deferral Percentage or Actual Contribution Percentage of the Highly Compensated Employees does not exceed 1.25 multiplied by the Actual Deferral Percentage and Actual Contribution Percentage of the Non-highly Compensated Employees. If a Highly Compensated Employee participates in two or more cash or deferred arrangements ("CODAs") that have different plan years, all CODAs ending with or within the same calendar year shall be treated as a single arrangement. (b) For purposes of this Section 3.9, the term "Aggregate Limit' shall mean the sum of (i) 125 percent of the greater of the Actual Deferral Percentage of the Eligible Employees other than Highly Compensated Employees ("Non-Highly Compensated Employees") for the Plan Year or the Actual Contribution Percentage of Non-highly Compensated Employees for the Plan Year and (ii) the lesser of 200% or two plus the lesser of such Actual Deferral Percentage or Actual Contribution Percentage. "Lesser' is substituted for "greater' in "(i)', above, and "greater' is substituted for "lesser' after two plus "the' in "(ii)' if it would result in a larger Aggregate Limit." 8. Effective July 29, 1996, Section 3.8 is added to read as follows: "Section 3.8 Reduction to Voluntary Contributions. All Voluntary Contributions are subject to the nondiscrimination limits established in Section 401(m) of the Code. Under these tests, either: (a) the Actual Contribution Percentage for the group of Highly Compensated Participants cannot be more than the Actual Contribution Percentage of all other Eligible Employees multiplied by 1.25; or (b) The Actual Contribution Percentage for the group of Highly Compensated Participants cannot be more than the Actual Contribution Percentage of all other Eligible Employees multiplied by 2, provided, however, that the excess of the Actual Contribution Percentage for the group of Highly Compensated Employees over that of all other Eligible Employees is not more than two (2) percentage points. The Committee shall have the responsibility of determining the extent, if any, to which these nondiscrimination limits may not be met. If in the absolute discretion of the Committee or its designee, it is determined that a reduction or refund of the Voluntary Contributions by such Highly Compensated Participants will be required in order to comply with the nondiscrimination limits, Voluntary Contributions with respect to the Highly Compensated Participants will be reduced in one percent (1%) increments, commencing with Voluntary Contributions of Participants which represent the highest integral percentage of Compensation [rounding off nonintegral percentages to the nearest one-hundredth percent (.01%)], and then the next highest integral percentage, and so on, until it is determined by the Committee or its designee that the Plan will satisfy the requirements of the nondiscrimination limits for the particular Plan Year. Each reduction at a stated E-12 percentage level will apply to all Highly Compensated Participants at that level regardless of whether their Voluntary Contribution percentage has been reduced from higher levels. Alternatively, or in addition to the percentage reduction of Voluntary Contributions described above, the Committee may, in its discretion, elect to eliminate or reduce the level of Voluntary Contributions made by Highly Compensated Participants or by groups of Highly Compensated Participants. If the refund of Voluntary Contributions previously made is required, the Committee shall accomplish the reductions as described above by distributing to each affected Highly Compensated Participant that portion of his or her Voluntary Contributions (plus any income and minus any loss allocable thereto), necessary to meet the requirements of the nondiscrimination limits on or before the close of the following Plan Year. Any reduction effected pursuant to this Section 3.8 shall remain in effect for the remainder of the Plan Year in which the reduction is made. If any Participant is a participant under two or more plans of the Employer Company subject to Section 401(m) of the Code, for purposes of determining the contribution percentage with respect to such Participant, all such plans shall be treated as one cash or deferred arrangement. The Actual Contribution Percentages shall be calculated, and reductions or refunds of Voluntary Contributions shall be determined, by applying the family aggregation rules of Section 414(q)(6) of the Code." 9. Effective January 1, 1997, Section 3.8 is amended to read as follows: "Section 3.8 Reduction of Voluntary Contributions. (a) All Voluntary Contributions pursuant to Section 3.7 are subject to the nondiscrimination limits established in Section 401(m) of the Code. Pursuant to the transition relief available under Internal Revenue Service Notice 97-2 ("IRS Notice 97-2"), the Actual Contribution Percentage for the group of Highly Compensated Participants for the Plan Year beginning January 1, 1997, shall not exceed the greater of (1) or (2) as follows: (1) the Actual Contribution Percentage for the Plan Year for all other Eligible Employees times 1.25; or (2) the Actual Contribution Percentage for the Plan Year for all other Eligible Employees, times 2.0; provided, however, that the Actual Contribution Percentage for the group of Highly Compensated Participants for the Plan Year does not exceed the Plan Year's Actual Contribution Percentage for all other Eligible Employees by more than two percentage points. For the purpose of the foregoing test and subsection (b), those Employees who were not eligible to have Voluntary Contributions made for them at any time during the Plan Year (other than as a result of a suspension pursuant to Section 6.2(c)(3)) shall be disregarded. Notwithstanding the foregoing, at the Committee's discretion, the Actual Contribution Percentage for Plan Years beginning after January 1, 1997, may be determined based on prior year data in accordance with the relief provided under IRS Notice 97-2. (b) Excess Voluntary Contributions. The Committee or its designee shall have the responsibility of determining the extent, if any, to which either of the nondiscrimination tests described in subsection (a) are not met. If it is determined that the Voluntary Contributions made pursuant to Section 3.7 do not satisfy one of the tests in subsection (a), then the Committee shall take action in accordance with one or both of the options set forth below. (1) Voluntary Contributions with respect to Participants who are Highly Compensated Participants will be reduced and refunded in uniform dollar increments, commencing with Voluntary Contributions of the group of affected Participants with the highest dollar amounts of Voluntary Contributions and then the next highest dollar amounts of Voluntary Contributions, and so on, until it is determined by the Committee or its designee that the Plan will satisfy one of the nondiscrimination tests set forth in subsection (a). Each reduction at a stated dollar level will apply to all Highly Compensated Participants' Voluntary Contributions at that level regardless of whether their Voluntary Contributions have been reduced from higher amounts. If the refund of Voluntary Contributions previously made is required, the Committee or its designee shall E-13 accomplish the reductions as described above by distributing to each affected Highly Compensated Participant that portion of his or her Voluntary Contribution (plus any income and minus any loss allocable thereto determined in accordance with procedures established by the Committee in a manner consistent with Treasury regulations) necessary to meet the requirements of one of the nondiscrimination tests no later than the close of the following Plan Year. (2) Alternatively, or in addition to the reduction of Voluntary Contributions described above, the Committee may, in its discretion, elect to eliminate or reduce the level of Voluntary Contributions made by Highly Compensated Participants or by groups of Highly Compensated Participants. Any reduction effected pursuant to this Section 3.8 shall remain in effect for the remainder of the Plan Year in which the reduction is made. (c) Compensation for Testing Purposes. For purposes of determining the Actual Contribution Percentage with respect to a group of Eligible Employees, the compensation of each such Employee taken into account shall be any of the following, as determined by the Committee or its designee in a uniform manner with respect to all Eligible Employees for the Plan Year: (A) The Eligible Employee's taxable compensation from the Employer Company reported on Form W-2 for the Plan Year with or without elective contributions made by an Employer Company on behalf of the Eligible Employee that are not includible in gross income under Sections 125 and 402(e)(3) of the Code; or (B) Such other nondiscriminatory definition of compensation which satisfies the requirements of Code Section 414(s) of the Code and regulations thereunder. In no event, however, shall an Eligible Employee's annual compensation for purposes of this subsection exceed the dollar limit set forth in Section 1.1(h). 10. Effective January 1, 1997, Section 6.5(b) is amended by adding a new sentence to read as follows: "In the event a Participant's Individual Account at the time of his or her distribution and at the time of any prior distribution is Thirty Five Hundred Dollars ($3,500) or less, a lump sum distribution shall be made to the Participant no later than the last day of the eighth month following the Separation from Service." 11. Effective January 1, 1997, Section 6.5(d) is revised to read as follows: "(d) Notwithstanding the foregoing paragraph (c), (1) except as provided in subparagraph (2), below, the entire interest of a Participant shall be distributed no later than April 1 of the calendar year following the later of: (i) the calendar year in which he or she attains age 70 1/2; or (ii) the calendar year in which he or she retires. (2) the entire interest of a Participant who is a Five Percent Owner with respect to the Plan Year ending in the calendar year in which he or she attains age 70 1/2 shall be distributed no later than April 1 of the calendar year following the calendar year in which he or she attains age 70 1/2." 12. Effective January 1, 1998, Section 10.1 is revised to read as follows: "Section 10.1 Maximum Permissible Amount of a Participant's Annual Addition. Notwithstanding any other provision of this Plan, the Maximum Permissible Amount of a Participant's Annual Addition under this Plan means the lesser of $30,000 (or such larger amount determined by the Secretary of the Treasury or by statute) or twenty-five percent (25%) of the Participant's compensation for the calendar year ("Limitation Year"). For purposes of this Article X, the term compensation ("415 Compensation") shall mean the Participant's wages, salaries, and other amounts received for personal services actually rendered in the course of E-14 employment with one Employer Company (excluding, to the extent not inconsistent with Subsection 10.1 (a) or (b), below, all items listed in subparagraph (3) of Paragraph (d) of 26 CFR (S) 1.415-2), and shall include (but not be limited to): (a) bonuses; (b) any employer contribution on behalf of the Participant under this Plan or any other qualified cash or deferred arrangement (as defined in Code Section 401(k)) sponsored by an Employer Company; and (c) any amount which is contributed or deferred by the employer at the election of the Participant and which is not includable in the gross income of the Participant by reason of Code Section 125. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive-month period, the Maximum Permissible Amount for the short Limitation Year will be the lesser of (1) $30,000 (or such larger amount determined by the Secretary of the Treasury or by statute) multiplied by the following fraction: number of months in the short Limitation Year ----------------- 12 or (2) twenty-five percent (25%) of the Participant's compensation for the short Limitation Year." 13. Effective July 29, 1996, Section 10.2 is revised to read as follows: "Section 10.2 Coordination of Annual Additions. Notwithstanding any other provision of this Plan, if any Annual Additions (as defined in Section 10.4) are allocated under other qualified defined contribution plans maintained by an Employer Company with respect to a Participant of this Plan, and the Participant's Elective Deferrals or Voluntary Contributions that would otherwise be contributed or allocated to the Participant's Account under this Plan would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount specified in Section 10.1, the amount contributed or allocated under this Plan will be reduced as necessary (first, from Voluntary Contributions, if any, allocated to the Participant; second, to the extent of the Employee's Elective Deferrals, if any) and such excess contributions (plus any income attributable to such contributions) will be paid to the Participant so that the Annual Additions under all such plans for the Limitation Year will equal said Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other qualified defined contribution plans in the aggregate are equal to or greater than the Maximum Permissible Amount, as specified in Section 10.1, any amount contributed or allocated to the Participant's Account for the Limitation Year will be treated as an excess amount and shall be paid to the Participant as provided in Article III hereof." 14. Effective June 23, 1997, Section 13.1(c) is amended by adding new subsections 13.1(c)(5) and (6) to read as follows: "(5) The payment of funeral expenses for a family member (defined with reference to Section 152 of the Code). (6) The payment of adoption expenses incurred for adoption of a dependent (as defined in Section 152 of the Code) not eligible for reimbursement under Section 137 of the Code." IN WITNESS WHEREOF, the undersigned have caused this Restatement Amendment No. 6 to the Restated Plan to be executed this 18th day of December, 1997. IN WITNESS WHEREOF, the undersigned have caused this Restatement Amendment No. 6 to the Restated Plan to be executed this 18th day of December, 1997. ATTEST: UNITED PARCEL SERVICE OF AMERICA, INC. BY: /s/ Joseph R. Moderow By: /s/ James P. Kelly Secretary Chairman
E-15 EX-10.S 4 UPS EXCESS COORDINATING BENEFIT PLAN EXHIBIT 10(S) UPS EXCESS COORDINATING BENEFIT PLAN E-16 TABLE OF CONTENTS ARTICLE I -- DEFINITIONS Section 1.1 Definitions................................................ 1 (a) "Board of Directors"....................................... 1 (b) "Change in Control"........................................ 1 (c) "Code"..................................................... 2 (d) "Committee"................................................ 2 (e) "Coordinating Retirement Benefit".......................... 3 (f) "Coordinating Surviving Spouse Benefit".................... 3 (g) "Effective Date"........................................... 3 (h) "Eligible Employee"........................................ 3 (i) "Employer Company"......................................... 3 (j) "ERISA".................................................... 3 (k) "Participant".............................................. 3 (l) "Plan"..................................................... 3 (m) "Prior Plan"............................................... 3 (n) "Retirement Date".......................................... 3 (o) "Retirement Plan".......................................... 4 ARTICLE II -- ELIGIBILITY 4 Section 2.1 Eligible Employees......................................... 4 Section 2.2 Prior Plan................................................. 4 Section 2.3 Change in Control.......................................... 4 Section 2.4 Period of Participation.................................... 4 ARTICLE III -- BENEFITS 5 Section 3.1 Coordinating Retirement Benefit............................ 5 Section 3.2 Timing..................................................... 5 Section 3.3 Lump Sum Option............................................ 6 Section 3.4 Reduced Lump Sum........................................... 6 ARTICLE IV -- COORDINATING SURVIVING SPOUSE BENEFIT 7 Section 4.1 Coordinating Surviving Spouse Benefit...................... 7 Section 4.2 Timing and Form............................................ 8 ARTICLE V -- FORFEITURE OF BENEFITS 9 ARTICLE VI -- COMMITTEE 9 Section 6.1 Establishment of Committee................................. 9 Section 6.2 Delegation of Specific Responsibilities.................... 10 Section 6.3 Power to Establish Regulations............................. 10 Section 6.4 Liability of the Committee................................. 11 Section 6.5 Reliance by Committee...................................... 11 Section 6.6 Books and Records.......................................... 11 ARTICLE VII -- AMENDMENT AND TERMINATION 11 Section 7.1 Right of Amendment......................................... 11 Section 7.2 Right to Terminate......................................... 12 ARTICLE VIII -- NO FUNDING OBLIGATION 12 ARTICLE IX -- MISCELLANEOUS 12 Section 9.1 Claims Procedure........................................... 12 Section 9.2 No Guarantee of Employment................................. 13 Section 9.3 Nonalienation of Benefits.................................. 13 Section 9.4 ERISA...................................................... 13 Section 9.5 Construction............................................... 14
E-17 UPS EXCESS COORDINATING BENEFIT PLAN United Parcel Service of America, Inc. ("UPS") hereby establishes, effective as of January 29, 1998, this UPS Excess Coordinating Benefit Plan to provide to certain highly compensated and management employees of UPS or its affiliated companies who are participants in the Retirement Plan those retirement benefits that cannot be paid from the Retirement Plan as a result of the limitations imposed by Sections 401(a)(17) and 415 of the Code. This Plan amends, restates and replaces the Prior Plan to the extent that plan provided for "coordinating retirement benefits" as described in Section 3.1 of the Prior Plan or death benefits as described in Section 5.1 of the Prior Plan. ARTICLE I--DEFINITIONS Section 1.1 Definitions. Whenever used herein, the following words shall have the meaning set forth below unless otherwise clearly required by the context: (a) "Board of Directors" means the Board of Directors and/or Executive Committee of UPS. (b) "Change in Control" means (1) the approval by the shareholders of UPS of a reorganization, merger, share exchange or consolidation, in each case, where persons who were shareholders of UPS immediately prior to such reorganization, merger, share exchange or consolidation do not, immediately thereafter, own more than 50% of the combined voting power of the reorganized, merged, surviving or consolidated company's then outstanding securities entitled to vote generally in the election of directors; or a liquidation or dissolution of UPS or of the sale of all or substantially all of UPS's assets; (2) consummation of a business combination between UPS and any entity which has a market capitalization equal to or greater than 80% of the market capitalization of UPS; (3) individuals who, as of the effective date of this Plan, constitute the Board of Directors (the "Incumbent Board") and who cease for any reason to constitute at least an 80% majority of the Board of Directors, provided that any person becoming a director subsequent to the effective date whose election, or nomination for election by UPS's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of UPS, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934) shall be considered as though such person were a member of the Incumbent Board; or (4) a change (other than due to retirement in the normal course) of 50% or more of the executive officers of UPS at the level of Senior Vice President and above within a consecutive twelve month period. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the administrative committee of the Plan, the establishment and responsibilities of which are set forth in Article VII. (e) "Coordinating Retirement Benefit" means the benefit described in Section 3.1. (f) "Coordinating Surviving Spouse Benefit" means the benefit described in Section 4.1. (g) "Effective Date" means January 29, 1998. . (h) "Eligible Employee" means each full-time manager and supervisor of an Employer Company (as so designated on the payroll records for such Employer Company) who has reached age 55 and completed as least 10 "years of service" as described in the Retirement Plan. E-18 (i)"Employer Company" means an Employer Company for purposes of the Retirement Plan. (j)"ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (k)"Participant" means an Eligible Employee and any other employee or former employee of an Employer Company or surviving spouse who becomes a participant in this Plan in accordance with Article II. (l)"Plan" means the UPS Excess Coordinating Benefit Plan as set forth in this document and as hereafter amended by the Board of Directors from time to time. (m)"Prior Plan" means the UPS Coordinating Benefit Plan, as established as of January 1, 1986 and as thereafter amended. (n)"Retirement Date" means the Participant's early, normal or postponed retirement date for purposes of the Retirement Plan. (o)"Retirement Plan" means the UPS Retirement Plan, as amended. ARTICLE II--ELIGIBILITY AND PARTICIPATION Section 2.1 Eligible Employees. The Committee shall designate those Eligible Employees who shall be entitled to participate in this Plan and each Eligible Employee so designated shall become a Participant upon the completion of such application or other procedures established by the Committee to commence participation. Section 2.2 Prior Plan. Each former employee of an Employer Company who was receiving a "coordinating retirement benefit" as described in Section 3.1 of the Prior Plan and each surviving spouse who was receiving a death benefit as described in Section 5.1 of the Prior Plan immediately before the Effective Date automatically shall become a Participant in this Plan on the Effective Date to the extent of his/her coordinating retirement benefit or death benefit under the Prior Plan. Section 2.3 Change in Control. Each employee of an Employer Company who is employed as a full-time manager or supervisor at the time of a Change in Control (as designated on the payroll records for such Employer Company) whose benefit under the Retirement Plan is limited at any date on or after the Change in Control by Section 401(a)(17) or Section 415 of the Code automatically will become a participant in this Plan as of the latest to occur of the date his/her Retirement Plan benefit first becomes limited or the date of the Change in Control. Section 2.4 Period of Participation. Each person who becomes a Participant in this Plan shall remain a Participant until the earlier of a) his/her benefits under the Retirement Plan are no longer limited by Section 401(a)(17) or Section 415 of the Code or b) all benefits are paid to or on behalf of such Participant in accordance with Article III or forfeited in accordance with Article V. ARTICLE III--BENEFITS Section 3.1 Coordinating Retirement Benefit. Upon attainment of his/her Retirement Date and retirement from service with all Employer Companies with a benefit payable from the Retirement Plan, a Participant (other than a Participant who was receiving a benefit under the Prior Plan) shall be entitled to an annual Coordinating Retirement Benefit, equal to (a) minus (b) below: (a) The Participant's benefit from the Retirement Plan (in the same form payable to the Participant under the Retirement Plan) taking into account any reduction applicable under the Retirement Plan for benefit payments under other plans or programs, but without taking into account the additional benefits described in Exhibit D of the Retirement Plan or the limitations of Sections 401(a)(17) and 415 of the Code. E-19 (b)The Participant's actual benefit from the Retirement Plan. Each Participant who was receiving a coordinating retirement benefit described in Section 3.1 of the Prior Plan immediately before the Effective Date shall receive a Coordinating Retirement Benefit equal to the amount of that Prior Plan benefit. Section 3.2 Timing. Except as provided in Sections 3.3 and 3.4, the Coordinating Retirement Benefit shall commence on the same date as payment of the Participant's benefit under the Retirement Plan, be paid thereafter on the same date as payments are made to the Participant or his/her surviving spouse or beneficiary by the Retirement Plan, and shall cease to be paid upon cessation of the payment of benefits to the Participant or his/her surviving spouse or beneficiary from the Retirement Plan. Section 3.3 Lump Sum Option. A Participant in salary grade 25 or higher retiring after the Effective Date but on or before March 1, 1998, may make a written election in accordance with procedures established by the Committee to have the present value of all or a portion of the benefit payable to such Participant under Section 3.1 paid to him/her in a lump sum as soon as practicable following his/her retirement from service with all Employer Companies in lieu of any benefit that would have been payable to such Participant under Section 3.1. Present value shall be calculated using the "applicable interest rate" and the "applicable mortality table" as defined in Section 417 of the Code and such additional assumptions as the Committee deems appropriate to reflect the possibility that the Participant's Retirement Plan benefit will be increased when the limitations under Section 415 of the Code are increased. The applicable interest rate for any Plan Year shall be determined for the entire Plan Year based on the rate in effect for October preceding the beginning of such Plan Year. A lump sum option must be elected before the Effective Date of this Plan and shall be irrevocable. No Coordinating Surviving Spouse Benefit shall be payable on behalf of a Participant to the extent such Participant receives a lump sum payment under this Section 3.3. A Participant who receives a lump sum in lieu of his/her entire benefit payable under Section 3.1 thereafter shall cease to be a Participant in this Plan. I. Section 3.4 Reduced Lump Sum. Notwithstanding the foregoing, if the rating assigned to UPS senior debt securities by Standard & Poor's Rating Group becomes BBB- and the rating assigned to such securities by Moody's Investors Services, Inc. becomes Baa3 (or, if either, but not both ratings services cease to rate UPS senior debt securities, the rating of the remaining service shall control) and such ratings remain in effect for a period of 90 days, a Participant who is an employee or former employee may at any time while such ratings are in effect elect to receive a reduced benefit in lieu of the benefit that otherwise would be payable to such Participant under Section 3.1 or 3.3. Such reduced benefit shall be equal to the present value of (a)(i) the benefit remaining to be paid to him/her if the Participant has begun to receive benefits under this Plan or (ii) if the Participant has not retired, the benefit that would have been payable to him/her if he/she had terminated employment at the end of the month in which such request is made less (b) 10%. Present value shall be calculated in accordance with Section 3.3. Such reduced benefit shall be paid to such Participant in a lump sum no later than 60 days after the written request for such benefit is received by the Committee. An election of a reduced benefit under this Section 3.4 shall be irrevocable. If a Participant elects a benefit under this Section 3.4, no Coordinating Surviving Spouse Benefit shall be payable on his/her behalf and such Participant thereafter shall cease to be an eligible Participant in this Plan. ARTICLE IV--COORDINATING SURVIVING SPOUSE BENEFIT Section 4.1 Coordinating Surviving Spouse Benefit. Upon the death of a Participant (other than a Participant who was receiving a death benefit under the Prior Plan) before commencement of a Coordinating Retirement Benefit , such Participant's surviving spouse, if he/she is entitled to receive a Qualified Joint and Survivor (Husband and Wife) Preretirement Survivor Benefit under the Retirement Plan, shall be entitled to receive an annual Coordinating Surviving Spouse Benefit from this Plan equal to (a) minus (b) minus (c) below: (a)The survivor benefit that would be payable to such spouse from the Retirement Plan without taking into account the additional benefits described in Exhibit D of the Retirement Plan or the limitations of Sections 401(a)(17) and 415 of the Code. E-20 (b)The actual benefit payable to such surviving spouse from the Retirement Plan. (c)An amount that bears the same proportion to the excess of (a) over (b) as the portion of the Participant's benefit that was paid in a lump sum under Section 3.3 bears to what would have been the Participant's entire benefit under Section 3.1 of this Plan. Notwithstanding the foregoing, if a Participant receives his/her entire benefit in a lump sum under Section 3.3 or 3.4, no Coordinating Survivor Spouse Benefit shall be payable to his/her surviving Spouse. Each Participant who was receiving a death benefit under Section 5.1 of the Prior Plan immediately before the Effective Date shall receive a Coordinating Survivor Spouse Benefit equal to the amount of that Prior Plan benefit. Section 4.2 Timing and Form. Except as provided below, the Coordinating Surviving Spouse Benefit shall commence on the same date as payment of the survivor benefit under the Retirement Plan begins, be paid thereafter on the same date as payments are made to the surviving spouse by the Retirement Plan, and shall cease to be paid upon cessation of the payment of benefits to the surviving spouse from the Retirement Plan. If a Participant makes an election under Section 3.3 to have all or a portion of the benefit payable to such Participant paid to him/her in a lump sum, but dies before receiving such benefit, then all or a portion of the Coordinating Surviving Spouse Benefit payable to his/her Spouse shall be paid to such Spouse in a lump sum (calculated using the same assumptions described in Section 3.3) as soon as practicable following the Participant's death. The portion of the Coordinating Surviving Spouse Benefit payable in a lump sum shall be the same percentage of the benefit elected by the Participant to be paid to him/her in a lump sum. ARTICLE V--FORFEITURE OF BENEFITS Anything herein to the contrary notwithstanding, if a Participant who is receiving, or may be entitled to receive, a benefit hereunder engages in competition with UPS or any Employer Company (without prior written authorization given by the Board of Directors) or is discharged for cause, or performs acts of willful malfeasance or gross negligence in a matter of material importance to the Employer Company, payments thereafter payable hereunder to such Participant or such Participant's spouse or beneficiary will, at the sole discretion of the Board of Directors, be forfeited and neither UPS nor this Plan will have any further obligation hereunder to such Participant or his/her spouse or designated Beneficiary. ARTICLE VI--COMMITTEE Section 6.1 Establishment of Committee. Authority to control and manage the operation and administration of the Plan shall be vested in the Committee consisting of not less than three (3) members, who shall be appointed by the Board of Directors. The Committee shall be the agent for service of process on or with respect to the Plan. Committee members may be removed at any time by the Board of Directors and may resign at any time, such resignation to be effective when accepted by the Board of Directors. All vacancies shall be filled by the Board of Directors. The Committee may appoint from their number such committees, which may include individuals not members of the Committee, with such powers as they shall determine; may authorize one or more of their number, or any agent, to execute or deliver any instrument, or to make any payment in their behalf; and may employ legal counsel (who may be counsel to UPS), agents, and such clerical, accounting and other services as they may require in carrying out the provisions of the Plan. A majority of the members of the Committee at the time in office shall constitute a quorum for the transaction of business. All resolutions or other action taken by the Committee at a meeting shall be by the vote of the majority of the Committee at any meeting; or without a meeting, by instrument in writing signed by all of the members of the Committee. Section 6.2 Delegation of Specific Responsibilities. The members of the Committee may agree in a writing signed by each member to allocate to any one of their number or to other persons any of the E-21 responsibilities with which they are charged pursuant hereto, provided the responsibilities and duties so delegated are definitively set forth so that the person to whom the delegation is made is clearly aware of such duties and responsibilities. If such delegation is made to a person not a member of the Committee, that person or, in the case of a corporation, its responsible officer, shall acknowledge the acceptance and understanding of such duties and responsibilities. Section 6.3 Power to Establish Regulations. The Committee shall establish rules and regulations for the administration of the Plan and the Committee. Except as otherwise herein expressly provided, the Committee shall have the exclusive right to interpret the Plan and decide any matters arising in the administration and operation of the Plan, and any interpretations or decisions so made shall be conclusive and binding on all persons; provided, however, that all such interpretations and decisions shall be applied in a uniform manner to all employees and Participants similarly situated. Section 6.4 Liability of the Committee. The Committee and members thereof, to the extent of the exercise of their authority, shall discharge their duties with respect to the Plan with care, skill, prudence and diligence; provided, however, that no Committee member shall be responsible for the actions or omissions of a member or any other person, other than himself/herself, which are not in conformity hereto, unless such member knowingly participates in or knowingly conceals such conduct which he/she knows to be in breach of this standard, his/her own conduct has enabled the other member or other person to be in breach of this standard, or he/she has knowledge of such breach by another member or other person and fails to make reasonable efforts under the circumstances to remedy such breach. Section 6.5 Reliance by Committee. Board of Directors and Committee members shall be fully protected with respect to any action taken or suffered by them in good faith in reliance upon the advice or opinion of any insurance carrier, accountant, legal counsel or physician, and all action so taken or suffered shall be conclusive upon all Participants and any other person claiming under the Plan. Section 6.6 Books and Records. The Committee shall keep appropriate books and records. ARTICLE VII--AMENDMENT AND TERMINATION Section 7.1 Right of Amendment. UPS reserves the right to make any amendment or amendments to this Plan by resolutions of its Board of Directors, provided, however, that no amendment shall reduce UPS's liability to provide any benefits earned to date of amendment hereunder to employees who are Participants on the date of amendment, except as provided in Article V hereof. Section 7.2 Right to Terminate. UPS, by action of its Board of Directors, may terminate this Plan at any time in whole or in part. No termination of this Plan shall reduce UPS's liability to provide any benefits earned to date of termination hereunder to employees who are Participants on the date of termination based on the provisions of this Plan in effect immediately prior to the date of termination, or the amount of benefits payable to a Participant who has retired under the provisions of this Plan or the spouse or other Beneficiary of any Participant receiving benefits under this Plan, except as provided in Article V hereof. Upon termination of this Plan, no additional employees may become Participants hereunder. ARTICLE VIII--NO FUNDING OBLIGATION The obligation of UPS to pay any benefits under this Plan shall be unfunded and unsecured; and any payments under this Plan shall be made from the general assets of UPS. Notwithstanding the foregoing, UPS may, in its discretion, establish an irrevocable grantor trust for the purpose of funding all or part of its obligations under this plan; provided however, that the terms of such trust require that the assets thereof remain subject to the claims of UPS's judgment creditors and are non-assignable and non-alienable by any Participant or Beneficiary prior to distribution thereof. E-22 ARTICLE IX--MISCELLANEOUS Section 9.1 Claims Procedure. Any claim for a benefit under this Plan shall be filed and resolved in accordance with the claims procedure provided under the Retirement Plan which is hereby incorporated in this Plan by reference, except that the Committee of this Plan shall be the entity with whom a claim for review should be filed under this Plan. Section 9.2 No Guarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Employer Company and any employee or Participant, as a right of any employee or Participant to be continued in the employment of the Employer Company, or as a limitation of the right of the Employer Company to discharge the employee or Participant with or without cause. Section 9.3 Nonalienation of Benefits. No benefit or payment under this Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber, levy upon or charge the same shall be void except that benefits may be paid to an alternate payee under a domestic relations order that is treated as a qualified domestic relations order under the Retirement Plan. Notwithstanding this statement, if the Participant is indebted to UPS at any time when payments are required to be made under the provisions of this Plan, UPS shall have the right to reduce the amount of payments remaining to be made to the Participant or his/her spouse or beneficiary under the Plan to the extent of such indebtedness. An election by UPS not to reduce such payment shall not constitute a waiver of its claim for such indebtedness. Section 9.4 ERISA. UPS intends that this Plan constitute an "excess benefit plan" as defined in Section 3(36) of ERISA and, therefore, be exempt from coverage under ERISA. However, to the extent this Plan does not constitute an "excess benefit plan," UPS intends that this Plan come within the various exceptions and exemptions to ERISA for a plan maintained for a "select group of management or highly compensated employees" as described in Sections 201(2), 301(a) (3), and 401(a) (1) of ERISA. Any ambiguities in this Plan shall be construed to effect the intent as described in this Section. Section 9.5 Construction. The headings and subheadings set forth in this Plan are intended for convenience only and have no substantive meaning whatsoever. In the construction of this Plan, the singular shall include the plural. This Plan shall be construed in accordance with the laws of the State of Georgia. E-23 Executed this 29th day of January, 1998. ATTEST: UNITED PARCEL SERVICE OF AMERICA, INC. /s/ Joseph R. Moderow - ------------------------------------- /s/ James P. Kelly Joseph R. Moderow ------------------------------------- Secretary James P. Kelly Chairman E-24 EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF UNITED PARCEL SERVICE OF AMERICA, INC. AS OF DECEMBER 31, 1997 WHOLLY-OWNED SUBSIDIARIES
DATE OF SUBSIDIARIES STATE OF INCORPORATION INCORPORATION ------------ ---------------------- ------------- United Parcel Service Co............ Delaware January 22, 1953 UPS (Germany) Inc. ................. Delaware September 10, 1980 United Parcel Service General Services Co. ...................... Delaware November 4, 1957 United Parcel Service, Inc. ........ New York June 27, 1930 United Parcel Service, Inc. ........ Ohio March 19, 1934 United Parcel Service, Inc. (Virginia) ........................ Virginia September 21, 1970 United Parcel Service Oasis Supply Corporation........................ Delaware September 9, 1997 UPS Procurement Services Corporation........................ Delaware September 9, 1997 UPS Internet Services, Inc.......... Delaware August 8, 1997 UPS Professional Services, Inc...... Delaware December 8, 1997 UPS Deutschland Management L.L.C.... Georgia November 21, 1997 UPS Customhouse Brokerage, Inc...... Delaware April 1, 1985 UPS International General Services Co. ............................... Delaware August 12, 1988 UPS International, Inc. ............ Delaware July 5, 1988 UPS International Forwarding, Inc. ................................. Delaware August 13, 1990 UPS of Ireland, Inc............... Delaware January 9, 1992 UPS of Argentina, Inc. ........... Delaware March 17, 1992 UPS of Brazil, Inc................ Delaware November 12, 1993 UPS of Greece, Inc................ Delaware May 10, 1996 UPS of Portugal, Inc.............. Delaware June 30, 1992 UPS of Norway, Inc. .............. Delaware September 25, 1992 United Parcel Service Espana Ltd.............................. Delaware December 4, 1992 United Parcel Service Italia, S.R.L. .......................... Delaware January 11, 1993 UPS of China, Inc................. Delaware April 25, 1995 UPS Logistics Group, Inc. .......... Delaware May 24, 1996 UPS Truck Leasing, Inc............ Delaware September 11, 1991 UPS Worldwide Logistics, Inc. .... Delaware December 18, 1992 Worldwide Dedicated Services, Inc.............................. Delaware June 9, 1995 Diversified Trimodal, Inc. ....... Delaware July 25, 1979 Roadnet Technologies, Inc......... Delaware May 12, 1986 SonicAir, Inc..................... Arizona February 16, 1995 UPS Worldwide Forwarding, Inc....... Delaware August 12, 1988 UPICO Corporation .................. Delaware December 26, 1974 UPS Aviation Services, Inc.......... Delaware February 7, 1989 The Orly Company L.L.C.............. Delaware March 25, 1994 Merchants Parcel Delivery........... Washington April 5, 1909 Trailer Conditioners, Inc. ......... Delaware March 22, 1982 II Morrow, Inc...................... Oregon March 9, 1982 UPS Air Leasing, Inc. .............. Delaware October 12, 1989 Avenair Corporation............... Nevada November 14, 1994 Nevair Corporation ............... Nevada November 10, 1994 UPS Telecommunications, Inc......... Delaware April 25, 1990 Crossroads Distribution Center Property Owners Association Corporation........................ Illinois May 4, 1989 UPS Properties, Inc. ............... Delaware May 9, 1990 El Paso Distribution Center, Inc. (One)............................. Texas September 17, 1990
E-25
DATE OF SUBSIDIARIES STATE OF INCORPORATION INCORPORATION ------------ ---------------------- ------------- El Paso Distribution Center, Inc. (Two)............................. Texas September 17, 1990 Tri-State Distribution, Inc. (One)............................. Illinois September 14, 1990 Tri-State Distribution, Inc. (Two)............................. Illinois September 14, 1990 Tri-State Distribution, Inc. (Three)........................... Illinois September 14, 1990 Tri-State Distribution, Inc. (Four)............................ Illinois September 14, 1990 Tri-State Distribution, Inc. (Five)............................ Illinois September 14, 1990 Vista Distribution Center, Inc. (One)............................. Nevada September 14, 1990 Vista Distribution Center, Inc. (Two)............................. Nevada September 14, 1990 Vista Distribution Center, Inc. (Three)........................... Nevada September 14, 1990 Vista Distribution Center, Inc. (Four)............................ Nevada September 14, 1990. Vista Distribution Center, Inc. (Five)............................ Nevada September 14, 1990 Upinsco, Inc. ...................... U.S. Virgin Islands December 1, 1994 Velleb, Inc......................... Washington October 30, 1995 Adi Realty Company ................. Idaho March 30, 1979 Alko Corporation.................... Oklahoma December 7, 1976 Bardale Company .................... Illinois July 1, 1965 Basplaz Corporation................. Delaware January 16, 1987 Brastock Corporation ............... Nebraska April 15, 1974 Brookind Corporation................ Illinois January 26, 1970 Buckroe Corporation ................ Alabama September 17, 1984 Burdence Corporation................ Rhode Island September 26, 1969 Chasreal, Inc. ..................... West Virginia January 20, 1965 Cleve Company....................... Ohio December 19, 1958 Cova Corporation ................... Virginia March 13, 1978 Dakkel Corporation.................. South Dakota February 11, 1971 Dalho Corporation .................. Texas January 29, 1970 Darico, Inc......................... Connecticut May 26, 1969 Daven Corporation .................. Iowa June 14, 1976 Deerfield Corporation............... Illinois June 20, 1986 Denado Corporation ................. Colorado March 1, 1971 Dullesport Corporation.............. Virginia September 2, 1987 Edison Corporation ................. New Jersey April 21, 1970 Elsil Corporation................... Illinois July 3, 1986 Evind Corporation .................. Indiana November 6, 1969 Fardak Corporation.................. North Dakota February 11, 1971 Galanta Company .................... Georgia July 15, 1968 Kylou, Inc.......................... Kentucky May 24, 1982 Labar Corporation .................. Louisiana October 12, 1983 Lakefair Corporation................ Virginia September 1, 1987 Mascester Company, Inc. ............ Massachusetts June 13, 1969 Masreal Company, Inc................ Massachusetts November 8, 1962 Mexalb Corporation ................. New Mexico September 15, 1975 Minneagen Real Estate Company....... Minnesota January 28, 1985 Missjack Company ................... Mississippi January 4, 1971 Montbill Corporation................ Montana July 22, 1976 Moroc Corporation .................. Missouri October 6, 1972 Newbany Corporation................. New York September 23, 1969 Nubee, Inc. ........................ New York December 9, 1943 Oshcon Corporation.................. Wisconsin April 16, 1974 Parkprop, Inc. ..................... Kansas March 7, 1989
E-26
DATE OF SUBSIDIARIES STATE OF INCORPORATION INCORPORATION ------------ ---------------------- ------------- Penallen Corporation ............... Pennsylvania July 7, 1969 Ralcar Corporation.................. North Carolina April 20, 1970 Rockapar Corporation ............... Arkansas April 30, 1973 Royoak, Incorporated................ Michigan July 10, 1969 Sallad Corporation.................. Texas February 26, 1982 Saluta Corporation.................. Utah February 22, 1977 Saskan Corporation.................. Kansas June 16, 1969 Kacika Corporation................ Kansas November 13, 1984 Socol Company, Inc.................. South Carolin July 2, 1969. Solacal Company..................... California February 16, 1966 Lacalos Corporation............... Nevada January 29, 1986 Sophil Company ..................... Pennsylvania August 22, 1962 South Seventh Corporation........... Washington June 11, 1969 Stadiana, Inc. ..................... Indiana April 1, 1959 Swanpor Corporation................. Oregon May 13, 1970 Temphis Corporation ................ Tennessee September 10, 1969 Valacal Company..................... California July 7, 1966 Verbal Corporation ................. Maryland September 18, 1969 Verlas Corporation.................. Nevada March 24, 1971 Willmanch Corporation .............. New Hampshire October 30, 1973 Wycas Corporation................... Wyoming June 10, 1976 Wyld, Inc........................... Delaware September 5, 1980 INTERNATIONAL SUBSIDIARIES - -------------------------- DATE OF SUBSIDIARIES COUNTRY INCORPORATION ------------ ------- ------------- United Parcel Service Pty. Ltd...... Australia December 7, 1990 UPS Pty. Ltd........................ Australia January 19, 1990 United Parcel Service Speditionsgesellschaft m.b.H. ..... Austria September 2, 1986 UPS Transport GmbH.................. Austria November 5, 1986 United Parcel Service (Bahrain) WLL ................................... Bahrain February 19, 1983 United Parcel Service Belgium N.V... Belgium December 22, 1988 UPS Europe N.V./S.A................. Belgium September 24, 1996 United Parcel Service (Bermuda) Ltd. ................................... Bermuda June 25, 1985 UPS DO Brasil & Cia................. Brazil January 24, 1994 2855-8278 Quebec Inc. .............. Canada April 24, 1991 724352 Ontario Inc.................. Canada June 19, 1987 United Parcel Service Canada Ltd. .. Canada September 19, 1974 United Parcel Service Cayman Islands Limited............................ Cayman Islands June 5, 1992 United Parcel Service Chile Limitada........................... Chile January 14, 1997 UPS De San Jose, S.A. .............. Costa Rica July 27, 1995 UPS Denmark A/S..................... Denmark January 1, 1989 UPS Dominicana S.A. ................ Dominican Republic June 18, 1997 United Parcel Services Finland OY .. Finland January 28, 1987 United Parcel Service France S.N.C.............................. France March 31, 1994 Prost-Transports S.A. Speditionsgesellschaft gmbH ....... Germany 1989 UPS Air Cargo Service GmbH.......... Germany January 12, 1988 UPS Grundstuecksverwaltungs GmbH ... Germany February 25, 1985 UPS Transport GmbH.................. Germany August 5, 1976 UPS Transport GmbH II .............. Germany July 23, 1990 UPS Worldwide Logistics GmbH........ Germany August 17, 1993 UPS Parcel Delivery Service Limited ................................... Hong Kong November 6, 1987
E-27
DATE OF SUBSIDIARIES COUNTRY INCORPORATION ------------ ------- ------------- United Parcel Service CSTC Ireland Limited.. Ireland June 8, 1995 United Parcel Service of Ireland Limited ... Ireland March 25, 1986 United Parcel Service Italia, S.R.L......... Italy July 30, 1986 UPS Japan Limited .......................... Japan October 14, 1986 United Parcel Service Jersey Limited........ Jersey October 23, 1973 United Parcel Service (M)Sdn. Bhd. ......... Malaysia August 17, 1988 United Parcel Service (Transport) Sdn. Bhd. ........................................... Malaysia October 2, 1989 United Parcel Service De Mexico S.A. De C.V........................................ Mexico November 22, 1989 UPS Worldwide Logistics de Mexico........... Mexico June 3, 1996 Prost-Transports Nederland B.V. ............ Netherlands July 20, 1988 United Parcel Service Nederland B.V......... Netherlands December 19, 1985 UPS Norge A/S .............................. Norway August 8, 1986 United Parcel Service Singapore PTE Lted.... Singapore June 15, 1988 UPS Worldwide Logistics Asia Pte., Inc...... Singapore November 17, 1995 Sociedad Iversora Sanrelman, S.A. .......... Spain November 17, 1988 United Parcel Service Espana Ltd. Y Compa- nia, S.R.C................................. Spain January 1, 1993 UPS Spain, S.L. ............................ Spain March 9, 1988 United Parcel Service Sweden AB............. Sweden January 1, 1966 United Parcel Service (Switzerland) ........ Switzerland August 28, 1986 UPS Parcel Delivery Service Limited......... Thailand September 28, 1988 Atexco (1991) Limited ...................... United Kingdom March 6, 1985 Atlasair Limited............................ United Kingdom July 24, 1947 Carryfast Limited .......................... United Kingdom August 4, 1941 IML Air Services Group Limited.............. United Kingdom February 11, 1969 United Parcel Service of America ........... United Kingdom October 28, 1991 UPS (UK) Limited............................ United Kingdom October 2, 1984 UPS Limited ................................ United Kingdom July 24, 1985 UPS of America Limited...................... United Kingdom March 5, 1985
E-28 EX-23 6 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-46840, 333-23971, 333-23969, 333-44391 and 333-24805 (on Form S-8) of United Parcel Service of America, Inc. of our report dated February 9, 1998 (March 18, 1998, as to Note 1), appearing in this Annual Report on Form 10-K of United Parcel Service of America, Inc. for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Atlanta, Georgia March 27, 1998 E-29 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 460 0 2,405 0 0 4,477 18,502 7,495 15,912 3,398 2,583 0 0 56 6,031 15,912 22,458 22,458 0 20,760 28 0 187 1,553 644 909 0 0 0 909 1.65 1.63 Before netting accumulated depreciation Long term debt Add'l paid in capital + retained earnings + fx adj Operating expense Miscellaneous, net
EX-27.2 8 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 211 392 355 225 376 0 0 0 0 0 1,925 2,341 2,054 2,162 2,186 0 0 0 0 0 0 0 0 0 0 3,227 4,255 3,695 3,612 3,630 15,058 17,008 15,293 15,640 16,354 6,060 6,778 6,234 6,428 6,641 12,645 14,954 13,155 13,219 13,732 2,966 3,158 2,902 3,017 3,013 1,729 2,573 1,966 1,744 1,803 0 0 0 0 0 0 0 0 0 0 57 57 57 57 57 5,094 5,844 5,327 5,446 5,795 12,645 14,954 13,155 13,219 13,732 21,045 22,368 5,335 10,843 16,428 21,045 22,368 5,335 10,843 16,428 0 0 0 0 0 19,251 20,339 4,910 9,864 14,867 35 63 9 20 25 0 0 0 0 0 77 95 23 44 64 1,708 1,910 402 934 1,500 665 764 161 374 600 1,043 1,146 241 560 900 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,043 1,146 241 560 900 1.87 2.06 0.43 1.00 1.62 1.84 2.03 0.43 0.99 1.59 Before netting accumulated depreciation Long term debt Add'l paid in capital + retained earnings + fx adj Operating expense Miscellaneous, net
EX-27.3 9 FINANCIAL DATA SCHEDULE
5 1,000,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 479 671 1,663 0 0 0 2,352 2,249 2,269 0 0 0 0 0 0 4,570 4,294 5,565 17,183 17,512 18,143 6,944 7,130 7,337 15,261 15,127 16,783 2,900 3,007 4,107 2,766 2,358 2,885 0 0 0 0 0 0 57 57 57 6,040 6,144 6,126 15,261 15,127 16,783 5,664 11,510 16,320 5,664 11,510 16,320 0 0 0 5,238 10,466 15,262 7 15 16 0 0 0 41 78 135 388 970 954 160 402 396 228 568 558 0 0 0 0 0 0 0 0 0 228 568 558 0.41 1.03 1.01 0.41 1.01 1.00 Before netting accumulated depreciation Long term debt Add'l paid in capital + retained earnings + fx adj Operating expense Miscellaneous, net
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