notes to consolidated financial statements
note 1. summary of accounting policies
Initial Public Offering of Common Stock
In November 1999, we became a publicly traded company by issuing 109.4 million shares of Class B common stock of United Parcel Service, Inc., a newly formed corporation with a new capital structure, which became the parent of United Parcel Service of America, Inc. Class A shares of United Parcel Service, Inc. are entitled to ten votes each, whereas Class B shares are entitled to one vote each. The Class A shares initially issued by United Parcel Service, Inc. were equally allocated among Class A-1, A-2, and A-3 common stock. The different types of Class A common stock are identical except for applicable transfer restriction periods. The transfer restriction periods applicable to Class A-1 and Class A-2 shares have lapsed; approximately 365 million Class A-3 shares are subject to transfer restrictions until May 3, 2001. The new capital structure has been given retroactive effect in our financial statements with no changes to previously reported net income. All of the net proceeds of the IPO of $5.266 billion have subsequently been used for a tender offer and other repurchases of our Class A and Class B shares.
Basis of Financial Statements and Business Activities
The accompanying consolidated financial statements include the accounts of United Parcel Service, 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 letter and package delivery. Revenue is recognized upon delivery of a letter or package.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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, 2000, we had approximately 214,000 employees (60% of total employees) employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). These agreements run through July 31, 2002. The majority of our pilots are employed under a collective bargaining agreement with the Independent Pilots Association (“IPA”), which becomes amendable January 1, 2004. Our airline mechanics are covered by a collective bargaining agreement with Teamster Local 2727, which becomes amendable on July 31, 2001. In addition, the majority of our ground mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers. These agreements have various expiration dates between July 31, 2002 and May 31, 2003.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments (including investments in debt and auction rate securities of $714 million and $3.933 billion at December 31, 2000 and 1999, respectively) that are readily convertible into cash. The carrying amount approximates fair value because of the short-term maturity of these instruments.
Marketable Securities
Marketable securities are classified as available-for-sale and are carried at fair value, with related unrealized gains and losses reported as other comprehensive income and as a separate component of shareowners’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income, along with interest and dividends. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in investment income.
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 – five to 8 1/3 years.
The costs of major airframe and engine overhauls, as well as other routine maintenance and repairs, are charged to expense as incurred.
Costs in Excess of Net Assets Acquired
Costs of purchased businesses in excess of net assets acquired are amortized over either a 10-year or 20-year period using the straight-line method.
Impairment of Long-Lived Assets
We review long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded.
Income Taxes
Income taxes are accounted for under Financial Accounting Standards Board (“FASB”) 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 our financial statements or tax returns. In estimating future tax consequences, FAS 109 generally considers all expected future events other than proposed 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-line, over the estimated useful lives of the related assets. Capitalized interest was $26, $20, and $27 million for 2000, 1999, and 1998, respectively.
Stock Option Plans
We have adopted the disclosure provisions of FASB Statement No. 123 (“FAS 123”), “Accounting for Stock-Based Compensation.” Under FAS 123, companies have the option to measure compensation costs for stock option plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” 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 our employee stock options are granted on this basis and we have chosen to use the intrinsic value method, we do not recognize compensation expense for grants under our plans. We do, however, include in Note 6 pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied.
Capitalized Software
Effective January 1, 1999, we adopted the Accounting Standards Executive Committee Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” which requires that certain costs to develop or obtain computer software for internal use be capitalized. Prior to the adoption of SOP 98-1, we expensed all internal use software costs as incurred. The effect of adopting the SOP was to increase net income for 2000 and 1999 by $100 and $89 million, or $0.09 and $0.08 per share on a basic and diluted basis, respectively. Capitalized costs for this software are amortized using the straight-line method over periods ranging from three to five years.
SAB 101
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), which provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. We adopted SAB 101, as required, in the fourth quarter of 2000 without a material impact on our financial position or results of operations.
New Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), as amended by Statements No. 137 and No. 138, which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. After adoption on January 1, 2001, all derivative instruments will be recognized on the balance sheet at fair value, and changes in the fair values of such instruments will be recognized currently in earnings unless specific hedge accounting criteria are met. We will record a one-time cumulative effect, after-tax charge totaling $14 million in the income statement, as well as an unrealized accumulated transition adjustment gain of $23 million to accumulated other comprehensive loss for the initial adoption of FAS 133 in the quarter ended March 31, 2001.
Changes in Presentation
Certain prior year amounts have been reclassified to conform to the current year presentation.
