<PAGE>
 
                                                               FILED PURSUANT TO
                                                                  RULE 424(b)(3)
                                                              FILE NO: 333-83349
                   55 Glenlake Parkway, NE, Atlanta, GA 30328
 
                                                              September 22, 1999
 
To our shareowners:
 
   You are cordially invited to a special meeting of shareowners of United
Parcel Service of America, Inc., which will be held at The Corporation Trust
Company, 1209 Orange Street, Wilmington, Delaware 19801, on October 25, 1999,
at 9:00 A.M. At the special meeting, shareowners will vote on a merger of UPS
and our wholly owned subsidiary, UPS Merger Subsidiary, Inc.
 
   The purpose of the proposed merger is to enable us to become a publicly
traded company. In the merger, UPS will become a wholly owned subsidiary of
United Parcel Service, Inc. Your existing UPS shares will convert automatically
into class A shares of this new company, which we call New UPS, and you will
then own the same percentage of New UPS stock that you now own of UPS stock.
Class A shares will be entitled to ten votes each.
 
   After the merger, we intend to offer New UPS class B shares to the public.
Class B shares will have the same economic rights as class A shares, but will
be entitled to one vote each. We have designed New UPS's certificate of
incorporation and bylaws to be appropriate for a public company while helping
us preserve our unique UPS culture. As a publicly traded company, New UPS will
have no right of first refusal on transfers of its common stock and no right to
call any of its shares.
 
   We plan to use the net proceeds of the public offering to purchase some of
the class A shares. We will do this in a cash tender offer to all shareowners,
which we intend to launch within several months after the public offering. Upon
completion of these transactions, we anticipate that current UPS shareowners
will own about 90% of New UPS's total outstanding shares and control about 99%
of the votes.
 
   Our board of directors has carefully considered the merger, the public
offering and the related transactions that are described in the enclosed proxy
statement/prospectus. We believe that implementing this program will position
us for continued success in an increasingly competitive world while preserving
the essence of our employee-owned and owner-managed culture.
 
   In order to proceed with these transactions, our shareowners must approve
the merger. Our board of directors has unanimously determined that the merger
is in the best interests of our shareowners, and unanimously recommends that
you vote FOR the proposals described in the enclosed proxy
statement/prospectus.
 
   You should carefully consider the risk factors relating to the merger, the
related transactions and our business, which are described beginning on page 13
of the enclosed proxy statement/prospectus.
 
   Your vote is very important. We urge you to vote FOR the merger.
 
                                                              /s/ James P. Kelly
                                                      James P. Kelly
                                               Chairman and Chief Executive
                                                         Officer


<PAGE>
 
                   NOTICE OF SPECIAL MEETING OF SHAREOWNERS
 
                        to be held on October 25, 1999
 
To our shareowners:
 
   A special meeting of shareowners of United Parcel Service of America, Inc.
will be held at The Corporation Trust Company, 1209 Orange Street, Wilmington,
Delaware 19801, on October 25, 1999, at 9:00 A.M., for the purpose of voting
on two proposals:
 
  .  to approve an Agreement and Plan of Merger, dated as of September 22,
     1999, among United Parcel Service of America, Inc., United Parcel
     Service, Inc. and UPS Merger Subsidiary, Inc., pursuant to which UPS
     Merger Subsidiary, Inc. will merge with and into United Parcel Service
     of America, Inc. and each share of our currently outstanding stock will
     be converted into two shares of class A common stock of United Parcel
     Service, Inc.; and
 
  .  to approve the United Parcel Service, Inc. Incentive Compensation Plan.
 
   The board of directors has fixed the close of business on August 30, 1999
as the record date for determining holders of our common stock entitled to
notice of and to vote at the special meeting.
 
                                                          /s/ Joseph R. Moderow
                                                     Joseph R. Moderow
                                                         Secretary
 
Atlanta, Georgia
September 22, 1999
 
   Your vote is important. Even if you expect to attend the special meeting,
please complete, sign and date the enclosed proxy card and return it promptly
in the enclosed postage-paid envelope. You have the right to revoke your proxy
at any time before it is voted by giving us written notice of revocation, by
submitting a subsequent proxy or by voting in person at the special meeting.
If you indicate no instructions on your proxy card with respect to a proposal,
we will vote your shares FOR that proposal. It is important that you vote. To
approve these proposals, it is necessary that a majority of our outstanding
shares be voted in favor of the merger, and that a majority of the shares
present at the meeting, in person or by proxy, be voted in favor of the
incentive compensation plan.
 
   Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the class A shares to be distributed as
a result of the merger, or determined if this proxy statement/prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense. This proxy statement/prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any securities in any jurisdiction where
such an offer or solicitation would be illegal.
 
   The date of this proxy statement/prospectus is September 22, 1999. It is
first being mailed to UPS shareowners on September 23, 1999.

<PAGE>
 
                               TABLE OF CONTENTS
 

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Questions and Answers....................................................   1
 
Where You Can Find More Information About UPS............................   6
 
Summary..................................................................   7
 
Risk Factors.............................................................  13
 
Special Note About Forward-Looking Statements............................  17
 
Dividend Policy..........................................................  18
 
Selected Consolidated Financial and Operating Data.......................  19
 
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  21
 
Industry Overview........................................................  33
 
Business.................................................................  35
 
The Merger, the Public Offering and the Tender Offer.....................  51
 
Purposes of the Merger...................................................  55
 
The Special Meeting; Voting Rights and Proxies...........................  56
 
Description of Capital Stock, Certificate of Incorporation and Bylaws....  58
 
Market for Old UPS's Common Equity and Related Shareowner Matters........  64
 
Management and Stock Ownership Information...............................  67
 
Incentive Compensation Plan..............................................  77
 
Relationships with Overseas Partners Ltd.................................  81
 
Federal Income Tax Consequences to Shareowners...........................  83
 
Legal Matters............................................................  85
 
Submission of Shareowner Proposals.......................................  85
 
Experts..................................................................  85
 
Index to Financial Statements............................................ F-1
 
Annex A--Agreement and Plan of Merger.................................... A-1
 
Annex B--Form of Restated Certificate of Incorporation of United Parcel
 Service, Inc............................................................ B-1
 
Annex C--Form of Incentive Compensation Plan............................. C-1
</TABLE>


<PAGE>
 
                             QUESTIONS AND ANSWERS
 
Why are we doing this?
   
   Our goal is to continue to be the pre-eminent global company in our industry
in the 21st century. In order to achieve this goal, we want to have greater
financial flexibility to respond to changes in global market conditions,
including the ability to use a publicly traded security to make strategic
acquisitions in important markets around the world. The proposals will allow us
to achieve this goal in a manner that keeps voting control in the hands of our
current shareowners. Our board of directors has given this question careful
study and unanimously believes that creating a publicly traded security is the
right thing for us to do at this time.     
 
What does this mean for UPS?
 
   UPS is a very special company. For 92 years, spanning almost the entire 20th
century, UPS has been primarily owned by its employees and managed by its
owners. Over that period of time, UPS has become the largest package
distribution company in the world. We owe our success, to a significant degree,
to our ownership structure and to the commitment it inspires in our current and
former employee owners. We believe that these proposals will help preserve the
best aspects of our employee-owned and owner-managed culture. Current
shareowners will retain voting control, and we will be positioned for success
in the 21st century.
 
Will New UPS basically be the same company after we have outside investors?
 
   Yes. The proposals will preserve our corporate culture and structure. Our
commitment to our shareowners, employees and customers is unchanged. New UPS
will have the same directors, officers and employees and the same goals and
visions.
 
What does this mean for me?
 
   If you are a current employee owner:
     
  .  currently, your shares are subject to our right of first refusal and to
     recall when you leave UPS or retire     
     
  .  after the merger, your shares will no longer be subject to this right of
     refusal or to recall     
 
  .  eligibility to participate in stock purchase plans will be unchanged,
     although you will be able to purchase New UPS common stock
      
   If you are a retired or former employee owner or an heir of a retired or
   former employee owner who owns shares subject to one of the trusts set up to
   impose restrictions on our shares:     
     
  .  currently, your shares are subject to our right of first refusal and to
     recall or repurchase     
     
  .  after the merger, your shares will no longer be subject to this right of
     refusal or to recall     
     
  .  after the expiration of the transfer restrictions discussed below, you
     will be able to sell your shares in the public market     
      
   If you are a holder of shares not subject to one of the trusts set up to
   impose restrictions on our shares:     
     
  .  currently, your shares are subject to our right of first refusal; after
     the merger, your shares will no longer be subject to this right of first
     refusal     
     
  .  after the expiration of the transfer restrictions discussed below, you
     will be able to sell your shares in the public market     
   
   Currently, each share you own has one vote per share. If you attempt to sell
your shares, UPS has a right of first refusal. After the merger, your shares
will have ten votes per share for the period that those shares remain class A
shares. During the restricted periods described below, you will be able to
transfer your shares only to the limited class of "permitted transferees."
After the expiration of the restricted periods, you will be able to transfer
your class A shares. Your class A shares will convert into class B shares, with
one vote per share, when transferred to anyone other than "permitted
transferees."     
       

                                       1

<PAGE>
 
How and when will we complete the public offering?
 
   As soon as our board of directors deems advisable after the merger is
approved, we plan to sell shares of New UPS class B common stock to the public
in an underwritten public offering. If the merger is approved, we will
complete it simultaneously with the completion of our public offering. If the
merger is not approved, the public offering will not occur. If the public
offering does not occur, we will not effect the merger.
 
How much stock are we selling to the public?
 
   Our financial advisers tell us that it is advisable to sell about 10% of
our outstanding shares to the public in order to create a satisfactory trading
market in our class B common stock. After the public offering:
 
  .  class A common stock will constitute about 90% of our total outstanding
     common stock and about 99% of our total voting power
 
  .  class B common stock will constitute about 10% of our total outstanding
     common stock and about 1% of our total voting power
 
What do we plan to do with the proceeds of the public offering?
 
   We plan to use the net proceeds of the public offering to offer to purchase
class A common stock from all of our existing shareowners in a cash tender
offer.
 
Why do we plan to make a tender offer for class A common stock?
 
   Because we do not need the proceeds of the public offering for our current
or foreseeable operations, we could have gone public by allowing our
shareowners to sell some of their shares to the public instead of offering new
shares to the public. But we wanted all of our shareowners to have the same
opportunity to sell some of their stock on a voluntary basis, and an offering
that permitted all of our existing 125,000 shareowners to participate would
have been extremely difficult to accomplish. The public offering followed by
the tender offer will produce a result similar to a direct offering by our
shareowners.
 
What effect will there be on voting control?
 
   Voting control of New UPS will remain in the hands of current shareowners
after we complete the public offering.
 
What will I receive in the merger?
 
   In the merger, each share of our outstanding common stock will convert
automatically into two shares of New UPS's class A common stock. Of the UPS
shares you currently own, as nearly as possible:
 
  .  one-third will be converted into class A-1 common stock
 
  .  one-third will be converted into class A-2 common stock
 
  .  one-third will be converted into class A-3 common stock
 
   Except for the transfer restrictions that we describe below, each share of
class A common stock will be identical. Since the class A-1 common stock,
class A-2 common stock and class A-3 common stock are exactly the same except
for the length of these restrictions, we refer to them collectively as the
class A common stock.
 
How will the merger and the public offering affect UPS's corporate structure?
 
   There is a diagram that illustrates the merger and the public offering, and
their effect on UPS's structure, on page 6.
 
 
                                       2

<PAGE>
 
Will I be able to sell or transfer my class A common stock immediately?
 
   No. To facilitate our public offering, New UPS's certificate of
incorporation will restrict you from selling or transferring class A common
stock to anyone other than a "permitted transferee." You also will be
prohibited from buying a put option, selling a call option or entering into
any other hedging or insurance transaction relating to your class A common
stock, or converting class A common stock into class B common stock, for a
period after the public offering. These restrictions will expire:
 
  .  180 days after our public offering for class A-1 common stock
 
  .  360 days after our public offering for class A-2 common stock
 
  .  540 days after our public offering for class A-3 common stock
 
   The shares offered in our public offering will represent only about 10% of
our total common shares outstanding. The transfer restrictions will permit
some period of trading in the market to take place without the potential
introduction of a significant number of additional shares. The three time
periods were created to limit the number of shares that could enter the market
at any one point in time. Our financial advisers tell us that these
restrictions are advisable to promote an orderly initial trading market for
our class B shares for a period following the commencement of trading. It is a
common practice to impose transfer restrictions on existing shares in
connection with an initial public offering. We have staggered the expiration
of the transfer restrictions so that all existing shares do not become freely
tradeable at the same time.
 
   The percentage of your shares that you will be able to sell in the tender
offer will depend on the amount of proceeds we receive in the public offering,
the market price of the class B shares when we make the tender offer and the
level of participation by other shareowners in the tender offer. As a result,
we will not be able to determine the percentage of your shares that you will
be able to sell in the tender offer until the tender offer is complete.
 
   After the expiration of the restricted periods referred to above, you also
will be able to sell your shares in the public market. If you transfer your
class A common stock to anyone other than a "permitted transferee" or sell
your class A common stock in the public market, it will convert automatically
into class B common stock, so that the buyers will acquire only class B common
stock.
 
Does management still think it is important for our people to own shares?
 
   Yes. Management believes that it is important for our managers and
employees to have a significant investment in our company so that they will be
motivated to strive for our continued success. Other than sales in the tender
offer, management expects that, in the future, our people will maintain their
investment in our company until retirement.
 
Who is a "permitted transferee"?
 
   Permitted transferees generally include:
 
  .  your spouse and children
 
  .  trusts for your, your spouse's or your children's benefit
 
  .  your individual retirement account
 
  .  your estate
 
  .  a bank to which you pledge your shares as collateral
 
  .  charitable organizations
 
   Each of these is not a permitted transferee under some circumstances, and
there are other permitted transferees. In particular, if you are not a manager
or an employee, your ability to transfer class A common stock, even to a
permitted transferee, without causing it to convert to class B common stock,
will expire 540 days after the date of the merger. You should read "The
Merger, The Public Offering and The Tender Offer--Transfer Restrictions on
Shares of Class A Common Stock" on page 52 for important details and
conditions of transfers to permitted transferees.
 
 
                                       3

<PAGE>
 
What must I do to get my new class A common stock?
 
   In the merger, your shares will be converted automatically, without any
action on your part, into New UPS class A common stock. Shortly after the
completion of our public offering, we will send you a letter telling you how
you will receive your class A common stock. You should not send us any share
certificates at this time.
 
What will happen to UPS's right of first refusal to repurchase my stock?
 
   When we are a publicly traded company, you will not be required to offer
your shares to us before you can sell them to third parties.
 
What will happen to the right of recall and the UPS Employees Stock Trust and
UPS Managers Stock Trust?
 
   We intend to terminate the UPS Managers Stock Trust, the UPS Employees
Stock Trust and the UPS Stock Trust. Separately, we are seeking the approval
of the terminations of the UPS Managers Stock Trust and the UPS Employees
Stock Trust by a majority of participants in each of these trusts. On
termination of these trusts, our right to recall shares from members of the
trusts will terminate.
 
Will the Managers Incentive Plan be continued?
 
   Yes, but future awards that we historically would have granted under the
Managers Incentive Plan will be awarded under the new incentive compensation
plan. We believe that this type of compensation is an appropriate incentive
for our managers, and we intend to continue it in the future.
 
Will I be able to buy more shares?
 
   Yes. You will be able to buy shares of our class B common stock on a stock
exchange at market-determined prices after the public offering.
 
When will the initial public offering price be determined and what will my
stock be worth after the public offering?
 
   The class B common stock will be listed on a stock exchange and will trade
at prices that depend on a number of factors, including market conditions, our
net income and operating performance, and our performance relative to that of
comparable companies with publicly traded stock. Our stock price may fluctuate
based on these factors. Although we do not expect to determine the initial
public offering price for our class B common stock for several weeks, we
believe that our initial public offering price will be higher than the
repurchase price currently in effect. We expect to announce our financial
results for the third quarter, and a range within which the class B common
stock is expected to be priced in the initial public offering, before the
special meeting. We expect that the market price of our class B common stock
will determine the value of our class A common stock.
 
What will our dividend policy be after the public offering?
 
   We expect to continue to declare dividends on our common stock after the
public offering. The declaration of future dividends is subject to the
discretion of our board of directors in light of all relevant factors,
including earnings, general business conditions and working capital
requirements.
 
If I sell class A common stock, how does it convert into class B common stock?
 
   You will sell your class A common stock through a stockbroker and our
transfer agent will issue new class B common stock to the buyer. You will not
have to do anything more to cause the conversion from class A to class B.
 
 
                                       4

<PAGE>
 
What will my tax consequences be?
 
   The merger, the conversion of your shares into New UPS's class A common
stock and the public offering will not be taxable transactions for you for
U.S. federal income tax purposes. Any sale of your class A common stock, in
the tender offer or otherwise, will be a taxable transaction for you for U.S.
federal income tax purposes.
 
Why are we merging with one of our subsidiaries?
 
   We need the flexibility of New UPS's certificate of incorporation to go
public. To obtain this type of certificate of incorporation, we could amend
our existing certificate of incorporation, which would require the approval of
80% of our outstanding shares, or merge with New UPS, which requires the
approval of only a majority of our outstanding shares. Our board concluded
that pursuing the merger alternative would be a more efficient method of
achieving this goal.
 
How will New UPS's certificate of incorporation be different from our current
certificate of incorporation?
 
   New UPS's certificate of incorporation will:
 
  .  authorize a class of common stock, called class A common stock, that
     will be entitled to ten votes per share and will be issued to you in
     exchange for your current shares of our common stock
 
  .  authorize a class of common stock, called class B common stock, that
     will have the same economic rights as the class A common stock, but will
     be entitled to one vote per share
 
  .  eliminate the existing requirement that you must offer your shares to us
     for purchase before you can sell them to third parties
 
  .  modify our "scaled voting" provision so that it does not reduce the
     voting power of shareowners unless they own more than 25% of our total
     voting power
 
  .  add provisions that restrict the transferability of the class A common
     stock for a period of time to allow us to complete a successful public
     offering
 
   Separately, we are seeking approval to terminate the UPS Managers Stock
Trust and the UPS Employees Stock Trust, and we intend to terminate the UPS
Stock Trust, so that we will not have the right to recall any New UPS common
stock.
 
What do I need to do now?
 
   It is very important that you vote. In order to make sure that your vote is
counted, you must return a completed, signed and dated proxy card. To approve
the merger, it is necessary that a majority of our outstanding shares be voted
in favor of the merger. To approve the incentive compensation plan, it is
necessary that a majority of the shares present at the meeting, in person or
by proxy, be voted in favor of the plan. Please complete, sign and date the
enclosed proxy card and return it promptly in the enclosed postage-paid
envelope. If you indicate no instruction on your proxy card with respect to a
proposal, we will vote your shares FOR that proposal at the special meeting.
 
Who can help answer any questions I have?
 
   If you have any questions, you should contact UPS Shareowner Relations at
(404) 828-6000.
 
                               ----------------
 
 
 
                                       5

<PAGE>
 
   The following diagram illustrates the effect of the merger and the public
offering on UPS:
 
[DIAGRAM OF MERGER AND PUBLIC OFFERING APPEARS HERE]
 
                 WHERE YOU CAN FIND MORE INFORMATION ABOUT UPS
 
   Old UPS files, and after the public offering we will file, annual,
quarterly and special reports, proxy statements and other information with the
SEC. Old UPS's SEC filings are available to the public over the Internet at
the SEC's web site at http://www.sec.gov. You may read and copy any document
we file at the SEC's public reference rooms in Washington, D.C. at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the SEC's
regional offices in New York at 7 World Trade Center, 13th Floor, New York, NY
10048, and in Chicago at Suite 1400, Northwestern Atrium Center, 14th Floor,
500 W. Madison Street, Chicago, IL 60661. Please call the SEC at 1-800-SEC-
0330 for further information about the public reference rooms.
 
   We have filed a registration statement on Form S-4 with the SEC. This proxy
statement/prospectus is part of that registration statement and, as allowed by
SEC rules, does not include all of the information you can find in the
registration statement or the exhibits to the registration statement. We also
have filed a registration statement on Form S-1 relating to our proposed
public offering of shares of class B common stock.
 
                                       6

<PAGE>
 
                                    SUMMARY
 
   This summary highlights selected information in this proxy
statement/prospectus, but it may not contain all of the information that is
important to you. To better understand the merger, and for a more complete
description of the merger and related transactions, you should read this entire
document and the other documents that we refer you to. See "Where You Can Find
More Information About UPS" on page 6.
 
                                      UPS
 
Our Company
 
   We are the world's largest express carrier, the world's largest package
delivery company and a leading global provider of specialized transportation
and logistics services. We deliver over 12 million packages each business day
for 1.7 million shipping customers to six million consignees. In 1998, our
330,000 employees delivered more than three billion packages and documents
worldwide, generating revenues of $24.8 billion and net income of $1.7 billion.
 
   Our primary business is the delivery of packages and documents throughout
the United States and in over 200 other countries and territories. In addition,
we provide logistics services, including comprehensive management of supply
chains, for major companies worldwide. We are the industry leader in the
delivery of goods purchased over the Internet. We seek to position ourselves as
an indispensable branded component of e-commerce and to focus on the movement
of goods, information and funds.
 
   We have the following competitive strengths:
 
  .  Global Reach and Scale. We believe that our integrated worldwide ground
     and air network is the most extensive in the industry. We operate about
     149,000 delivery vehicles and over 500 airplanes, and we estimate that
     our end-to-end delivery system carries goods having a value in excess of
     6% of the U.S. gross domestic product.
 
  .  Distinctive People and Culture. Our people are our most valuable asset.
     We believe that the dedication of our employees results in large part
     from our distinctive "employee-owner" concept. Currently, employees and
     retirees own about two-thirds of our outstanding shares. Every one of
     our executive officers has more than 25 years of service with UPS and
     has accumulated a meaningful ownership stake in our company.
 
  .  Broad, Flexible Range of Distribution Services. We offer to our
     customers as broad and flexible a range of delivery services as any
     provider in the industry. All of our air, international and business-to-
     business ground delivery service offerings are time-definite, which
     means that they arrive at times specified by our customers, and
     guaranteed. Our integrated air and ground network enhances pickup and
     delivery density and provides us with the flexibility to transport
     packages using the most efficient and cost-effective transportation mode
     or combination of modes.
 
  .  Brand Equity. We have built strong brand equity by being a leader in
     quality service and product innovation in our industry. We have been
     rated the second strongest business-to-business brand in the U.S. in a
     recent Image Power(R) survey and have been Fortune magazine's Most
     Admired Transportation Company in the mail, package and freight category
     for 16 consecutive years.
 
  .  Customer Relationships. We focus on building and maintaining long-term
     customer relationships. We serve all of the Fortune 1000 companies.
 
  .  Technology Systems. Over the past decade, we invested extensively in
     technology to capture and move electronic information to serve our
     customers and support our operations. We currently collect electronic
     data on 7.5 million packages each day--more than any of our competitors.
     As a result, we have improved our efficiency and price competitiveness,
     and we provide improved customer solutions.
 
                                       7

<PAGE>
 
 
  .  E-Commerce Capabilities. According to Zona Research, during the 1998
     holiday season we shipped 55% of the goods purchased over the Internet.
     We have teamed with over 100 e-commerce leaders to offer to our existing
     and potential customers Web-based solutions that integrate our delivery
     products and information services into their websites.
 
  .  Financial Strength. Our balance sheet gives us financial strength that
     few companies can match. We are one of the few companies--and the only
     transportation company--with a triple-A credit rating from both Standard
     & Poor's and Moody's.
 
Our Industry
 
   The package delivery business has evolved rapidly over the last two decades,
driven by the integration of world markets, the rationalization of corporate
supply chains and the implementation of enterprise software and Internet-based
information technology solutions. Customers increasingly focus on the timing
and predictability of deliveries rather than the mode of transportation. Time-
definite transportation, which is no longer limited to air express, has become
a critical part of inventory management and improving overall distribution
efficiency, and has grown from 4% of the U.S. parcel delivery market in 1977 to
over 60% today.
 
   The four key industry trends are:
 
  .  globalization
 
  .  increased need for time-definite services
 
  .  significant advances in technology
 
  .  industry consolidation
 
   Individual shipments are generally smaller but more frequent, and a greater
proportion of products is being delivered directly to end-users. Customers
expect high performance levels and broad product offerings as they seek to
optimize supply chain efficiency. Companies, such as UPS, that provide
logistics support to third parties have become extensively involved in the full
range of customer supply chain functions. We believe that these trends will
benefit companies like UPS with global reach, diverse product portfolios,
extensive distribution capabilities and sophisticated tracking and information
technology.
 
Our Growth Strategy
 
   The principal components of our growth strategy are as follows:
 
  .  Expand Our Leadership Position in Our Core Domestic Business. Our
     strategy is to increase core domestic revenues through cross-selling of
     our existing and new services to our large and diverse customer base, to
     limit the rate of expense growth and to employ technology-driven
     efficiencies to increase operating profit. Our core business is also a
     springboard for our growth in all other areas, including international,
     e-commerce, logistics, supply chain management and financial services.
 
  .  Continue International Expansion. We plan to leverage our worldwide
     infrastructure and broad product portfolio to continue to improve our
     international business mix, to grow high margin premium services and to
     continue to implement cost, process and technology improvements. We plan
     to solidify and expand our market position in Europe, where we have
     already created a pan-European network. We intend to continue to seek
     additional air operating authority to enhance our Asian operations. We
     are expanding our market presence in Latin America to enable us to
     enhance our cargo business and pursue additional express package volume.
 
                                       8

<PAGE>
 
 
  .  Provide Comprehensive Logistics and Financial Solutions. We believe that
     we are well positioned to capitalize on the expected strong growth in
     the market for logistics support. We now redesign and operate supply
     chains for major companies in 45 countries where we have improved
     customers' inventory flows while reducing their need for capital assets,
     lowering their costs and enhancing their customer service. To complement
     our existing logistics and supply chain solutions, we plan to design a
     portfolio of financial products and services that capitalizes on our
     financial strength, customer relationships and extensive package-level
     data on our customers' shipments.
 
  .  Leverage Our Leading-Edge Technology and E-Commerce Advantage. A key
     component of our strategy is to expand relationships with technology
     providers in the areas of enterprise resource planning, electronic
     procurement, or "e-procurement," systems integration and others, to
     integrate UPS technologies into their solutions and into the websites
     and systems of their customers.
 
  .  Pursue Strategic Acquisitions and Global Alliances. Our public offering
     will better position us to aggressively pursue strategic acquisitions
     and enter into global alliances that can complement our core business,
     build our global brand, enhance our technological capabilities or
     service offerings, lower our costs and expand our geographic presence
     and managerial expertise.
 
                                       9

<PAGE>
 
                              THE SPECIAL MEETING
 
Date and Time...............     
                              October 25, 1999, at 9:00 A.M.     
 
Location....................  The Corporation Trust Company, 1209 Orange
                              Street, Wilmington, Delaware 19801.
 
Record Date.................  August 30, 1999. Only shareowners of record as of
                              the close of business on the record date will be
                              entitled to vote at the special meeting.
 
Voting Shares Held in the     If you own shares of our common stock that are
Trusts......................  held by First Union National Bank as Trustee
                              under the UPS Managers Stock Trust, the UPS
                              Employees Stock Trust or the UPS Qualified Stock
                              Ownership Plan and Trust, you may direct voting
                              of these shares by executing and returning to
                              First Union voting instructions that are included
                              with this proxy statement/prospectus.
 
Shares Entitled to Vote.....  We had 547,147,474 shares of common stock
                              outstanding and entitled to vote as of the close
                              of business on the record date. These shares are
                              the only securities that may be voted at the
                              special meeting. Each share is entitled to one
                              vote on each proposal, except that the voting
                              rights of any shareowner or shareowners as a
                              group who beneficially own more than 10% of the
                              common stock (except for the UPS Managers Stock
                              Trust, the UPS Employees Stock Trust, the UPS
                              Qualified Stock Ownership Plan and Trust or any
                              of our other employee benefit plans) may cast
                              only 1/100th of a vote on each proposal with
                              respect to each share in excess of 10% of the
                              outstanding shares of common stock. First Union,
                              as trustee, owns 354,005,983 shares, which
                              constitute 64.7% of our outstanding common stock
                              entitled to vote as of the record date.
 
Quorum......................  Holders of a majority of the issued and
                              outstanding shares of our common stock, present
                              in person or by proxy, will constitute a quorum
                              for the transaction of business at the special
                              meeting.
 
Votes Required..............  A majority of all issued and outstanding shares
                              of our common stock entitled to vote is required
                              to approve the merger at the special meeting. A
                              majority of the shares present at the meeting, in
                              person or by proxy, is required to approve the
                              incentive compensation plan.
 
No Appraisal Rights.........  You will not be entitled to appraisal rights
                              under Section 262 of the Delaware General
                              Corporation Law in connection with the merger or
                              the conversion of our outstanding common stock
                              into New UPS class A common stock.
 
                               FINANCIAL ADVISERS
 
   Morgan Stanley & Co. Incorporated and Tanner & Co., Inc. are acting as our
financial advisers in connection with the proposed merger and the related
transactions.
 
                                       10


<PAGE>
 
               SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
 
   The following table sets forth summary consolidated financial and operating
data. The financial data as of and for the periods ended December 31, 1997 and
1998 and June 30, 1999, and for the periods ended December 31, 1996 and June
30, 1998, presented in this table are derived from the consolidated financial
statements and notes thereto which are included elsewhere in this proxy
statement/prospectus. You should read the financial data below in conjunction
with those consolidated financial statements and notes, as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial data appearing elsewhere in this proxy
statement/prospectus. The remaining financial data are derived from
consolidated financial statements that are not contained in this proxy
statement/prospectus.
 
   The financial and operating data as of and for the year ended December 31,
1997 reflect the impact of the Teamsters strike. The strike resulted in a net
loss of $211 million and an operating loss of $349 million for the month of
August 1997, compared to net income of $113 million and operating profit of
$187 million for August 1996. Except as noted, the financial data for the six
months ended June 30, 1999 reflect a tax assessment charge relating to a Tax
Court decision.
 

<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                  Year Ended December 31,                  June 30,
                          -------------------------------------------  ------------------
                           1994     1995     1996     1997     1998      1998      1999
                          -------  -------  -------  -------  -------  --------  --------
                           (financial data in millions, except per share amounts)
<S>                       <C>      <C>      <C>      <C>      <C>      <C>       <C>
Statement of Income
 Data:
Revenue:
 U.S. domestic package..  $16,943  $17,773  $18,881  $18,868  $20,650  $  9,982  $ 10,665
 International package..    2,346    2,886    2,989    2,934    3,237     1,560     1,700
 Non-package............      287      386      498      656      901       424       526
                          -------  -------  -------  -------  -------  --------  --------
Total revenue...........   19,576   21,045   22,368   22,458   24,788    11,966    12,891
Operating expenses:
 Compensation and
  benefits..............   11,727   12,401   13,326   13,289   14,346     7,002     7,377
 Other..................    6,293    6,478    7,013    7,471    7,352     3,519     3,646
 Restructuring charge...       --      372       --       --       --        --        --
                          -------  -------  -------  -------  -------  --------  --------
Total operating
 expenses...............   18,020   19,251   20,339   20,760   21,698    10,521    11,023
Operating profit (loss):
 U.S. domestic package..    1,821    1,937    2,181    1,654    2,899     1,341     1,643
 International package..     (390)    (250)    (281)     (67)      56        34       109
 Non-package............      125      107      129      111      135        70        58
 Corporate..............       --       --       --       --       --        --        58
                          -------  -------  -------  -------  -------  --------  --------
Total operating profit..    1,556    1,794    2,029    1,698    3,090     1,445     1,868
Other income (expense):
 Investment income......       13       26       39       70       84        30        70
 Interest expense.......      (29)     (77)     (95)    (187)    (227)     (115)     (105)
 Tax assessment.........       --       --       --       --       --        --    (1,786)
 Miscellaneous, net.....       35      (35)     (63)     (28)     (45)        6       (22)
                          -------  -------  -------  -------  -------  --------  --------
Income before income
 taxes..................    1,575    1,708    1,910    1,553    2,902     1,366        25
Income taxes............      632      665      764      644    1,161       556       380
                          -------  -------  -------  -------  -------  --------  --------
Net income (loss).......  $   943  $ 1,043  $ 1,146  $   909  $ 1,741  $    810  $   (355)
                          =======  =======  =======  =======  =======  ========  ========
Per share amounts:
 Basic earnings (loss)
  per share.............  $  1.68  $  1.87  $  2.06  $  1.65  $  3.18  $   1.49  $   (.64)
 Diluted earnings (loss)
  per share.............     1.66     1.84     2.03     1.63     3.14      1.47      (.64)
 Dividends declared per
  share.................      .55      .64      .68      .70      .85       .40       .55
As Adjusted Net Income
 Data:
Net income before impact
 of tax assessment in
 1999...................  $   943  $ 1,043  $ 1,146  $   909  $ 1,741  $    810  $  1,087
As a percentage of
 revenue................      4.8%     5.0%     5.1%     4.0%     7.0%      6.8%      8.4%
</TABLE>

 
                                       11

<PAGE>
 

<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                    Year Ended December 31,                June 30,
                          -------------------------------------------- ----------------
                            1994     1995     1996     1997     1998    1998     1999
                          -------- -------- -------- -------- -------- ----------------
                                          (financial data in millions)
<S>                       <C>      <C>      <C>      <C>      <C>      <C>     <C>
Balance Sheet Data
 (at end of period):
Working capital.........  $    120 $    261 $  1,097 $  1,079 $  1,708         $    434
Long-term debt..........     1,127    1,729    2,573    2,583    2,191            2,138
Total assets............    11,182   12,645   14,954   15,912   17,067           18,302
Shareowners' equity.....     4,647    5,151    5,901    6,087    7,173            6,122
 
Operating Data:
Delivery volume (in
 millions of packages)..     3,023    3,094    3,153    3,038    3,137   1,530    1,574
 
Average daily package
 volume (in thousands):
 U.S. domestic:
  Next day air..........       583      668      760      822      938     912      995
  Deferred..............       623      716      763      771      783     752      790
  Ground................     9,868    9,949   10,015    9,521    9,645   9,414    9,639
                          -------- -------- -------- -------- -------- ------- --------
 Total U.S. domestic....    11,074   11,333   11,538   11,114   11,366  11,078   11,424
 International:
  Domestic..............       661      722      683      678      730     723      684
  Export................       166      175      194      217      256     246      286
                          -------- -------- -------- -------- -------- ------- --------
 Total International....       827      897      877      895      986     969      970
 Total average daily
  package volume........    11,901   12,230   12,415   12,009   12,352  12,047   12,394
                          ======== ======== ======== ======== ======== ======= ========
Average revenue per
 piece:
 U.S. domestic:
  Next day air..........  $  19.63 $  19.36 $  19.34 $  19.49 $  19.69 $ 19.48 $  19.71
  Deferred..............     12.18    11.27    11.39    11.87    12.39   12.35    12.45
  Ground................      4.83     4.95     5.09     5.19     5.51    5.47     5.66
 Total U.S. domestic....      6.02     6.20     6.44     6.71     7.15    7.09     7.35
 International:
  Domestic..............      5.87     6.22     6.10     5.35     5.14    5.03     5.26
  Export................     32.35    39.53    39.10    36.70    35.12   35.09    34.21
 Total International....     11.17    12.71    13.42    12.95    12.93   12.67    13.80
 Total average revenue
  per piece.............  $   6.38 $   6.68 $   6.94 $   7.18 $   7.61 $  7.54 $   7.86
Operating weekdays......       254      253      254      253      254     127      127
Employees
 (at September 30)......   320,000  337,000  338,000  331,000  333,000
Shipping customers (in
 millions)..............      1.50     1.61     1.64     1.61     1.69
Aircraft fleet (at end
 of period).............       462      467      529      555      536
Delivery vehicles (at
 end of period).........   134,000  153,000  160,000  149,000  149,000
Capital expenditures (in
 millions)..............  $  1,789 $  2,096 $  2,333 $  1,984 $  1,645 $   504 $    597
</TABLE>

 
                                       12

<PAGE>
 
                                 RISK FACTORS
 
Risks Relating to New UPS's Certificate of Incorporation and Bylaw Provisions
and the Public Offering
 
   The class A common stock that you receive initially will be illiquid
 
   The class A common stock that you receive as a result of the merger will
not be listed on a national securities exchange or traded in an organized
over-the-counter market. In addition, New UPS's certificate of incorporation
will further restrict transferability of your class A shares. Under these
provisions:
 
  .  class A-1 common stock may not be transferred to anyone other than a
     permitted transferee or converted into class B common stock until 180
     days after our public offering
 
  .  class A-2 common stock may not be transferred to anyone other than a
     permitted transferee or converted into class B common stock until 360
     days after our public offering
 
  .  class A-3 common stock may not be transferred to anyone other than a
     permitted transferee or converted into class B common stock until 540
     days after our public offering
 
   You also will be prohibited from buying a put option, selling a call option
or entering into any other hedging or insurance transaction relating to your
class A common stock during these restricted periods.
 
   After the merger and the public offering are completed, we intend to
discontinue purchasing shares of our common stock as a general practice when
those shares are offered to us by shareowners. Therefore, you may not be able
to sell or transfer the class A common stock that you receive for a period of
time.
 
   The market price of our class B common stock may be volatile, which could
   cause the value of your investment in UPS to decline
 
   Because your class A common stock will be converted into class B common
stock if you sell your class A common stock to anyone other than a permitted
transferee, the market price of our class B common stock will determine the
value of our class A common stock. Any of the following factors could affect
the market price of our class B common stock:
 
  .  changes in earnings estimates by financial analysts
 
  .  our failure to meet financial analysts' performance expectations
 
  .  changes in market valuations of other transportation and logistics
     companies
 
  .  the expiration of any of the three restricted periods on class A common
     stock
 
  .  general market and economic conditions
 
   In addition, many of the risks described elsewhere in this "Risk Factors"
section could materially and adversely affect our stock price. The stock
markets have experienced price and volume volatility that has affected many
companies' stock prices. Stock prices for many companies have experienced wide
fluctuations that have often been unrelated to the operating performance of
those companies. Fluctuations such as these may affect the market price of our
class B common stock and the value of your shares.
 
   Our certificate of incorporation and bylaw provisions, and several other
   factors, could limit another party's ability to acquire us and deprive you
   of the opportunity to obtain a takeover premium for your shares
 
   A number of provisions that are in our certificate of incorporation and
bylaws, and will be in New UPS's certificate of incorporation and bylaws after
we effect the merger, will make it difficult for another company to acquire us
and for you to receive any related takeover premium for your shares. For
example, our certificate of incorporation severely reduces the voting power of
any person or group that beneficially owns more than 10% of our shares, allows
our board of directors to issue up to 200,000,000 preferred shares without a
shareowner vote and provides that shareowners may not act by written consent
and may not call a special meeting. New UPS's certificate of incorporation has
similar provisions, although the 10% threshold has been raised to 25%.
 
                                      13

<PAGE>
 
   In addition, New UPS's capital structure may deter a potential change in
control, because our voting power will be concentrated in our class A common
stock. These shares will be held by our current shareowners and, upon any
valid transfer to someone who is not a "permitted transferee," will
automatically convert into class B common stock. This automatic dilution of
voting power in the hands of a potential acquiror may be a deterrent to any
potential acquisition transaction. We anticipate that in the future we will
issue class A common stock to our managers and employees, which may include
managers and employees of companies we acquire. Our managers and employees may
be less inclined to accept a takeover offer for their shares than other
shareowners.
 
   Sales by current shareowners of a large number of our shares could cause
   the value of your shares to decline
 
   As the restricted periods on class A common stock expire, those shares will
be eligible to be sold, including in the public market, upon automatic
conversion into class B common stock. Substantial numbers of our shares are
held by foundations and trusts established by the founders of UPS and by the
heirs and descendants of those founders. These holders have owned their shares
for many years and have not had access to a public market in which to sell
their shares. We cannot assure you that these significant shareowners will not
take advantage of a public market to sell significant amounts of their stock.
Substantial sales could adversely affect the market value of the class B
common stock and the value of your shares.
 
Risks Relating to Our Business
 
   We face aggressive competition
 
   We compete with many companies and services on a local, regional, national
and international basis. Our competitors include the postal services of the
U.S. and other nations, various motor carriers, express companies, freight
forwarders, air couriers and others. Postal services may be able to obtain
government subsidies or to subsidize operating costs through profits from
their monopoly operations. Our industry is undergoing rapid consolidation, and
the combining entities are competing aggressively for business at low rates.
If we are unable to compete on price with these competitors as they attempt to
increase their market share, our business will be materially adversely
affected.
 
   Historically, we competed primarily in the U.S., where our size and
geographic reach have given us a competitive advantage. As our domestic
competitors have grown and consolidated, and as the market for our services
has grown increasingly international, we face more significant competitive
challenges both here and abroad.
 
   Strikes, work stoppages and slowdowns by our employees can negatively
   affect our results of operations
 
   Our business depends to a significant degree on our ability to avoid
strikes and other work stoppages by our employees. As our competitors have
grown in size and strength, we face permanent loss of customers if we are
unable to provide uninterrupted service. In 1997, a labor strike by the
International Brotherhood of Teamsters, and the refusal of the Independent
Pilots Association to cross the picket lines, had a material adverse effect on
our results of operations.
 
   The International Brotherhood of Teamsters represents about 202,000 (62%)
of our employees. The Independent Pilots Association represents all of our
non-management pilots. Our new collective bargaining agreement with the
Teamsters, which was negotiated in August 1997, terminates on July 31, 2002.
We have an eight-year agreement with the Independent Pilots Association that
becomes amendable on January 1, 2004.
 
   A number of our competitors are less unionized than we are, which may
enable them to implement more flexible work rules than we are able to employ.
These more flexible rules could provide our competitors with the ability to
offer services that we are unable to match without concessions from our
unions.
 
                                      14

<PAGE>
 
   We cannot assure you as to the results of negotiations of future collective
bargaining agreements, whether future collective bargaining agreements will be
negotiated without service interruptions or the possible impact of future
collective bargaining agreements on our financial condition and results of
operations. We cannot assure you that strikes will not occur in the future in
connection with labor negotiations or otherwise. Any prolonged strike or work
stoppage could have a material adverse effect on our results of operations and
financial condition.
 
   We have incurred significant costs, and may incur significant additional
   costs, as a result of a recent unfavorable Tax Court decision
 
   On August 9, 1999 the U.S. Tax Court issued an opinion unfavorable to UPS
regarding a Notice of Deficiency asserting that we are liable for additional
tax for the 1983 and 1984 tax years. The Court held that we are liable for tax
on income of Overseas Partners Ltd., a Bermuda company, which has reinsured
excess value package insurance purchased by our customers beginning in 1984.
Excess value package insurance, also called shippers' risk insurance, is
insurance purchased by UPS shippers for packages whose declared value exceeds
$100. UPS arranged primary insurance from unaffiliated insurance companies to
cover possible loss or damage to these packages. OPL historically has
reinsured the primary insurance companies' risk in exchange for substantially
all of the premiums collected.
 
   The Court held that for the 1984 tax year we are liable for taxes of $31
million on income reported by OPL, penalties and penalty interest of $93
million and interest for a total after-tax exposure we estimate at
approximately $246 million.
 
   In addition, during the first quarter of 1999, the IRS issued two Notices
of Deficiency asserting that we are liable for additional tax for the 1985
through 1987 tax years, and the 1988 through 1990 tax years. The primary
assertions by the IRS relate to the reinsurance of excess value package
insurance, the issue raised for the 1984 tax year. The IRS has based its
assertions on the same theories included in the 1983-1984 Notice of
Deficiency.
 
   We anticipate that the IRS will take similar positions for tax years
subsequent to 1990. Based on the Tax Court opinion, we currently estimate that
our total after-tax exposure for the tax years 1984 through 1999 could be as
high as $2.353 billion. We are in the process of analyzing our position in
light of the Tax Court opinion and are evaluating our options, including
appeal of the Tax Court decision, continuance of the litigation or negotiation
of a settlement.
 
   In our second quarter 1999 financial statements, we have recorded a tax
assessment charge of $1.786 billion, which includes an amount for related
state tax liabilities. The charge includes taxes of $915 million and interest
of $871 million. This assessment resulted in a tax benefit of $344 million
related to the interest component of the assessment. As a result, our net
charge to net income for the tax assessment was $1.442 billion, increasing our
total after-tax reserve with respect to these matters to $1.672 billion.
 
   We determined the size of our reserve with respect to these matters in
accordance with generally accepted accounting principles based on our estimate
of our most likely liability. In making this determination, we concluded that
it was more likely that we would be required to pay taxes on income reported
by OPL and interest, but that it was not probable that we would be required to
pay any penalties and penalty interest. If penalties and penalty interest
ultimately are determined to be payable, we would have to record an additional
charge of up to $681 million. We cannot assure you that our ultimate liability
for these matters will not exceed the level of our reserves.
 
   The IRS has proposed adjustments, unrelated to the OPL matters discussed
above, regarding the timing of deductions, the characterization of expenses as
capital rather than ordinary and our entitlement to the investment tax credit
and the research tax credit in the 1985 through 1990 tax years. These proposed
adjustments, if sustained, would result in $88 million in additional tax for
the 1985 through 1987 tax years and $267 million in additional tax for the
1988 through 1990 tax years. Should the IRS prevail on these issues, unpaid
interest on these adjustments through 1999 could aggregate up to $396 million,
after the benefit of related tax deductions. The IRS may take similar
positions with respect to some of these issues for each of the years from 1991
through 1999.
 
                                      15

<PAGE>
 
   We may have conflicts of interest in connection with transactions we enter
   into with Overseas Partners Ltd.
 
   At least a majority of our current shareowners also are shareowners of OPL,
and a majority of OPL's directors and officers are current and former UPS
employees. Our ongoing business relationships with OPL consist of the lease of
our Ramapo Ridge facility and the reinsurance of some of our workers'
compensation insurance. We cannot assure you that transactions between us and
OPL have been made on the most favorable terms that we could obtain in
transactions with unrelated parties. If in the future we engage in other
transactions with OPL, we anticipate that they will be on an arms-length
basis.
 
   Our relationships with OPL are described in greater detail under the
heading "Relationships with Overseas Partners Ltd."
 
   Our failure to comply with, or the costs of complying with, government
   regulation could negatively affect our results of operations
 
   Our operations are subject to a number of complex and stringent aviation,
transportation, environmental, labor, employment and other laws and
regulations. These laws and regulations generally require us to maintain and
comply with a wide variety of certificates, permits, licenses and other
approvals. See "Business--Government Regulation." Our failure to maintain
required certificates, permits or licenses, or to comply with applicable laws,
ordinances or regulations, could result in substantial fines or possible
revocation of our authority to conduct our operations.
 
   We cannot assure you that existing laws or regulations will not be revised
or that new laws or regulations, which could have an adverse impact on our
operations, will not be adopted or become applicable to us. We also cannot
assure you that we will be able to recover any or all increased costs of
compliance from our customers or that our business and financial condition
will not be materially and adversely affected by future changes in applicable
laws and regulations.
 
   Some of our systems, and the systems of third parties we work with, may not
   be year 2000 compliant
 
   Our failure to appropriately address a material year 2000 issue, or the
failure by any third parties who provide goods or services that are critical
to our business activities to appropriately address their year 2000 issues,
could have a material adverse effect on our financial condition, liquidity or
results of operations. Our business is increasingly reliant on sophisticated
computer systems, and we would suffer material adverse consequences if our
systems malfunctioned due to year 2000 issues.
 
   Economic and other conditions in the international markets in which we
   operate can affect demand for our services and our results of operations
 
   A key component of our business, and a major target for our future growth,
is our operations outside of the United States. For the year ended December
31, 1998, we derived approximately 13% of our revenues from international
operations. If we are unable to compete successfully in these markets, our
results of operations will be adversely affected.
 
   In many countries, we face vigorous competition from government-owned or
sponsored postal services that are able to price their services extremely
competitively due to their ability to obtain government subsidies or to
subsidize operating costs through profits from their monopoly operations.
 
   Operations in international markets also present currency exchange and
inflation risks. In some countries where we operate, economic and monetary
conditions could affect our ability to convert our earnings to United States
dollars or to remove funds from those countries. We may experience adverse tax
consequences as we attempt to repatriate funds to the United States from other
countries.
 
                                      16

<PAGE>
 
   Increases in aviation and motor fuel prices can negatively affect our
   results of operations
 
   We require significant quantities of gasoline, diesel fuel and jet fuel for
our aircraft and delivery vehicles. We therefore are exposed to commodity
price risk associated with variations in the market price for petroleum
products. Competitive and other pressures may prevent us from passing these
costs on to our customers. We cannot assure you that our supply of these
products will continue uninterrupted, that rationing will not be imposed or
that the prices of, or taxes on, these products will not increase
significantly in the future. Increases in prices that we are unable to pass on
to our customers will adversely affect our results of operations.
 
   Our operating results are subject to cyclical and seasonal fluctuations
 
   We serve numerous industries and customers that experience significant
fluctuations in demand based on economic conditions and other factors beyond
our control. Demand for our services could be materially adversely affected by
downturns in the businesses of our customers.
 
   Historically, we have experienced our best operating results in the second
and fourth quarters of each year. Shipping activity is generally lowest during
the first quarter, and weather conditions also can adversely affect first
quarter operating results. Shipping activity is generally highest in the
fourth quarter as a result of the holiday season. Our European operations
experience lower volumes in the third quarter due to the general slowdown in
business activity in August.
 
                 SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
 
   We have made forward-looking statements in this document, including the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," that are based on our management's beliefs and
assumptions and on information currently available to our management. Forward-
looking statements include the information concerning our possible or assumed
future results of operations, business strategies, financing plans,
competitive position, potential growth opportunities, benefits resulting from
the merger, the public offering and the tender offer, the effects of future
regulation and the effects of competition. Forward-looking statements include
all statements that are not historical facts and can be identified by the use
of forward-looking terminology such as the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions.
 
   Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these forward-
looking statements. You should not put undue reliance on any forward-looking
statements. We do not have any intention or obligation to update forward-
looking statements after we distribute this proxy statement/prospectus,
consistent with our obligations under Item 512 of Regulation S-K under the
Securities Act.
 
   You should understand that many important factors, in addition to those
discussed elsewhere in this proxy statement/prospectus, could cause our
results to differ materially from those expressed in forward-looking
statements. These factors include our competitive environment, economic and
other conditions in the markets in which we operate, strikes, work stoppages
and slowdowns, governmental regulation, our year 2000 issues, year 2000 issues
of third parties we work with, increases in aviation and motor fuel prices and
cyclical and seasonal fluctuations in our operating results.
 
                                      17

<PAGE>
 
                                DIVIDEND POLICY
 
   The following table sets forth the dividends declared on our common stock
for the periods indicated:
 

<TABLE>
<CAPTION>
                                                               Six Months Ended
                                     Year Ended December 31,       June 30,
                                    -------------------------- ----------------
                                    1994  1995 1996 1997 1998   1998     1999
                                    ----- ---- ---- ---- ----- ----------------
<S>                                 <C>   <C>  <C>  <C>  <C>   <C>     <C>
Dividends per share................ $.55  $.64 $.68 $.70 $.85     $.40    $.55
Dividends per share after giving
 effect to the merger exchange
 ratio of 2-for-1.................. $.275 $.32 $.34 $.35 $.425    $.20    $.275
</TABLE>

 
   Our board of directors' policy is to declare dividends each year out of
current earnings. Our board of directors expects to continue to declare
dividends on our common stock after the public offering. The declaration of
future dividends is subject to the discretion of our board of directors in
light of all relevant factors, including earnings, general business conditions
and working capital requirements.
 
                                      18

<PAGE>
 
              SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
 
   The following table sets forth consolidated financial and operating data.
The financial data as of and for the periods ended December 31, 1997 and 1998
and June 30, 1999, and for the periods ended December 31, 1996 and June 30,
1998, presented in this table are derived from the consolidated financial
statements and notes thereto which are included elsewhere in this proxy
statement/prospectus. You should read the financial data below in conjunction
with those consolidated financial statements and notes, as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial data appearing elsewhere in this proxy
statement/prospectus. The remaining financial data are derived from
consolidated financial statements that are not contained in this proxy
statement/prospectus. The consolidated financial data as of June 30, 1999 and
for the six months ended June 30, 1998 and 1999 have been derived from our
unaudited consolidated financial statements, which are included in this proxy
statement/prospectus and which, in our opinion, reflect all adjustments,
consisting only of adjustments of a normal and recurring nature, necessary for
a fair presentation. Results for the six months ended June 30, 1999 are not
necessarily indicative of results for the full year.
 
   The financial and operating data as of and for the year ended December 31,
1997 reflect the impact of the Teamsters strike. The strike resulted in a net
loss of $211 million and an operating loss of $349 million for the month of
August 1997, compared to net income of $113 million and operating profit of
$187 million for August 1996. Except as noted, the financial data for the six
months ended June 30, 1999 reflect a tax assessment charge relating to the Tax
Court decision.
 

<TABLE>
<CAPTION>
                                                                         Six Months
                                                                            Ended
                                  Year Ended December 31,                 June 30,
                          -------------------------------------------  ----------------
                           1994     1995     1996     1997     1998     1998     1999
                          -------  -------  -------  -------  -------  -------  -------
                          (financial data in millions, except per share amounts)
<S>                       <C>      <C>      <C>      <C>      <C>      <C>      <C>
Statement of Income
 Data:
Revenue:
 U.S. domestic package..  $16,943  $17,773  $18,881  $18,868  $20,650  $ 9,982  $10,665
 International package..    2,346    2,886    2,989    2,934    3,237    1,560    1,700
 Non-package............      287      386      498      656      901      424      526
                          -------  -------  -------  -------  -------  -------  -------
Total revenue...........   19,576   21,045   22,368   22,458   24,788   11,966   12,891
Operating expenses:
 Compensation and
  benefits..............   11,727   12,401   13,326   13,289   14,346    7,002    7,377
 Other..................    6,293    6,478    7,013    7,471    7,352    3,519    3,646
 Restructuring charge...       --      372       --       --       --       --       --
                          -------  -------  -------  -------  -------  -------  -------
Total operating
 expenses...............   18,020   19,251   20,339   20,760   21,698   10,521   11,023
Operating profit (loss):
 U.S. domestic package..    1,821    1,937    2,181    1,654    2,899    1,341    1,643
 International package..     (390)    (250)    (281)     (67)      56       34      109
 Non-package............      125      107      129      111      135       70       58
 Corporate..............       --       --       --       --       --       --       58
                          -------  -------  -------  -------  -------  -------  -------
Total operating profit..    1,556    1,794    2,029    1,698    3,090    1,445    1,868
Other income (expense):
 Investment income......       13       26       39       70       84       30       70
 Interest expense.......      (29)     (77)     (95)    (187)    (227)    (115)    (105)
 Tax assessment.........       --       --       --       --       --       --   (1,786)
 Miscellaneous, net.....       35      (35)     (63)     (28)     (45)       6      (22)
                          -------  -------  -------  -------  -------  -------  -------
Income before income
 taxes..................    1,575    1,708    1,910    1,553    2,902    1,366       25
Income taxes............      632      665      764      644    1,161      556      380
                          -------  -------  -------  -------  -------  -------  -------
Net income (loss).......  $   943  $ 1,043  $ 1,146  $   909  $ 1,741  $   810  $  (355)
                          =======  =======  =======  =======  =======  =======  =======
Per share amounts:
 Basic earnings (loss)
  per share.............  $  1.68  $  1.87  $  2.06  $  1.65  $  3.18  $  1.49  $  (.64)
 Diluted earnings (loss)
  per share.............     1.66     1.84     2.03     1.63     3.14     1.47     (.64)
 Dividends declared per
  share.................      .55      .64      .68      .70      .85      .40      .55
 
As Adjusted Net Income
 Data:
Net income before impact
 of tax assessment in
 1999...................  $   943  $ 1,043  $ 1,146  $   909  $ 1,741  $   810  $ 1,087
As a percentage of
 revenue................      4.8%     5.0%     5.1%     4.0%     7.0%     6.8%     8.4%
</TABLE>

 
                                      19

<PAGE>
 

<TABLE>
<CAPTION>
                                                                            Six
                                                                        Months Ended
                                    Year Ended December 31,               June 30,
                          -------------------------------------------- --------------
                            1994     1995     1996     1997     1998    1998   1999
                          -------- -------- -------- -------- -------- ------ -------
                                         (financial data in millions)
<S>                       <C>      <C>      <C>      <C>      <C>      <C>    <C>
Balance Sheet Data
 (at end of period):
Working capital.........  $    120 $    261 $  1,097 $  1,079 $  1,708        $   434
Long-term debt..........     1,127    1,729    2,573    2,583    2,191          2,138
Total assets............    11,182   12,645   14,954   15,912   17,067         18,302
Shareowners' equity.....     4,647    5,151    5,901    6,087    7,173          6,122
 
Operating Data:
Delivery volume (in
 millions
 of packages)...........     3,023    3,094    3,153    3,038    3,137  1,530   1,574
 
Average daily package
 volume (in thousands):
 U.S. domestic:
  Next day air..........       583      668      760      822      938    912     995
  Deferred..............       623      716      763      771      783    752     790
  Ground................     9,868    9,949   10,015    9,521    9,645  9,414   9,639
                          -------- -------- -------- -------- -------- ------ -------
 Total U.S. domestic....    11,074   11,333   11,538   11,114   11,366 11,078  11,424
 International:
  Domestic..............       661      722      683      678      730    723     684
  Export................       166      175      194      217      256    246     286
                          -------- -------- -------- -------- -------- ------ -------
 Total International....       827      897      877      895      986    969     970
 Total average daily
  package volume........    11,901   12,230   12,415   12,009   12,352 12,047  12,394
                          ======== ======== ======== ======== ======== ====== =======
Average revenue per
 piece:
 U.S. domestic:
  Next day air..........  $  19.63 $  19.36 $  19.34 $  19.49 $  19.69 $19.48 $ 19.71
  Deferred..............     12.18    11.27    11.39    11.87    12.39  12.35   12.45
  Ground................      4.83     4.95     5.09     5.19     5.51   5.47    5.66
 Total U.S. domestic....      6.02     6.20     6.44     6.71     7.15   7.09    7.35
 International:
  Domestic..............      5.87     6.22     6.10     5.35     5.14   5.03    5.26
  Export................     32.35    39.53    39.10    36.70    35.12  35.09   34.21
 Total International....     11.17    12.71    13.42    12.95    12.93  12.67   13.80
 Total average revenue
  per piece.............  $   6.38 $   6.68 $   6.94 $   7.18 $   7.61 $ 7.54 $  7.86
 
Operating weekdays......       254      253      254      253      254    127     127
Employees
 (at September 30)......   320,000  337,000  338,000  331,000  333,000
Shipping customers (in
 millions)..............      1.50     1.61     1.64     1.61     1.69
Aircraft fleet (at end
 of
 period)................       462      467      529      555      536
Delivery vehicles (at
 end of period).........   134,000  153,000  160,000  149,000  149,000
Capital expenditures (in
 millions)..............  $  1,789 $  2,096 $  2,333 $  1,984 $  1,645 $  504 $   597
</TABLE>

 
                                       20

<PAGE>
 

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
Overview
 
   We are one of the leading global providers of specialized transportation
and logistics services. Our primary business is the delivery of time-definite
packages and documents for 1.7 million shipping customers per day throughout
the United States and in over 200 other countries and territories. We also
provide logistics services, including integrated supply chain management, for
major companies worldwide. Since the founding of our company in 1907, we have
successfully established a vast and reliable global transportation
infrastructure, developed a comprehensive, competitive and guaranteed
portfolio of services, and consistently supported them with advanced
technology.
 
   We report our operations in three segments: U.S. domestic package
operations, international package operations and non-package operations.
Package operations represent our core business and are divided into regional
operations around the world. Regional operations managers are responsible for
both domestic and export operations within their geographic region.
International package operations include shipments wholly outside the U.S. as
well as shipments with either origin or distribution outside the U.S. Non-
package operations, including logistics, are distinct from package operations.
Third-party logistics is one of our fastest growing businesses.
 
   E-commerce affects all of our operating segments. We have teamed with over
100 leading providers of e-commerce solutions to offer fully integrated
Internet-based solutions for our customers, and believe that we are well
positioned for growth in this area.
 
Sources of Revenue
 
   We derive our revenue primarily from the delivery of packages and also from
non-package services. Package delivery rates vary depending on weight, size,
distance and level of service. We review rates periodically, and have
increased our rates across most product lines in each of 1997, 1998 and 1999.
We derive our non-package revenue primarily from logistics, warehousing
operations, truck leasing, refrigerated transport services and courier
services.
 
   Over the past two decades, we have been developing our international
business and have become a global company. As our international business has
evolved, we have improved our product mix by focusing on our core express
package business. We are now shipping more time-definite cross-border packages
and fewer lower-yielding intra-country packages. As a result, our
international business achieved profitability in 1998.
 
   The following table sets forth the percentage of our revenue attributable
to each operating segment:
 

<TABLE>
<CAPTION>
                                                                   Six Months
                                                 Year Ended           Ended
                                                December 31,        June 30,
                                              -------------------  ------------
   Operating Segment                          1996   1997   1998   1998   1999
   -----------------                          -----  -----  -----  -----  -----
   <S>                                        <C>    <C>    <C>    <C>    <C>
   U.S. domestic package.....................  84.4%  84.0%  83.3%  83.4%  82.7%
   International package.....................  13.4   13.1   13.1   13.0   13.2
   Non-package...............................   2.2    2.9    3.6    3.6    4.1
                                              -----  -----  -----  -----  -----
                                              100.0% 100.0% 100.0% 100.0% 100.0%
                                              =====  =====  =====  =====  =====
</TABLE>

 
   We are in the process of implementing a new arrangement for providing
excess value package insurance for our customers through UPS subsidiaries.
This new arrangement will result in including in our non-package operating
segment the net operations of the excess value package insurance program
offered to our customers. This revised arrangement, once in place, should
eliminate for future periods the issues considered by the Tax Court and
increase our revenue and net income in future periods as compared to what our
revenue and net income would have been were the arrangement with OPL still in
place. See "Relationships with Overseas Partners Ltd."
 
                                      21

<PAGE>
 
Components of Expenses
 
   The largest components of our costs are compensation and benefits, fuel,
purchased transportation, depreciation and amortization, repairs and
maintenance and other occupancy expenses. Purchased transportation expenses
include rail, contractor compensation and airlift costs. Other occupancy
expenses consist primarily of facility rental and utilities.
 
   Our operating ratio, which measures operating expenses as a percentage of
revenue, improved in 1998 and again in the first six months of 1999. This
improvement reflects our continuing initiative to increase our operating
efficiency and to reduce the rate by which our costs grow across our company.
We will continue to focus on ways to limit the growth of our costs to improve
our competitiveness.
 
Results of Operations
 
   The following table sets forth statement of income data as a percentage of
revenue. Results for 1997 reflect the impact of the Teamsters strike, and
results for the six months ended June 30, 1999 reflect a tax assessment charge
relating to the Tax Court decision:

<TABLE>
<CAPTION>
                                                                 Six Months
                                               Year Ended           Ended
                                              December 31,        June 30,
                                            -------------------  ------------
                                            1996   1997   1998   1998   1999
                                            -----  -----  -----  -----  -----
   <S>                                      <C>    <C>    <C>    <C>    <C>
   Revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0 %
   Operating expenses:
     Compensation and benefits.............  59.6   59.2   57.9   58.5   57.2
     Other.................................  31.4   33.3   29.7   29.4   28.3
                                            -----  -----  -----  -----  -----
   Operating ratio.........................  90.9   92.4   87.5   87.9   85.5
   Operating profit........................   9.1    7.6   12.5   12.1   14.5
   Net income (loss).......................   5.1%   4.0%   7.0%   6.8%  (2.8)%*
</TABLE>

 
   * Net income as adjusted to eliminate the impact of the tax assessment
charge would have been 8.4% of revenue.
 
   Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
 
   The following table shows the change in revenue, both in dollars and in
percentage terms:
 

<TABLE>
<CAPTION>
                                                        Six Months
                                                           Ended
                                                         June 30,      Change
                                                      --------------- ---------
   Operating Segment                                   1998    1999    $    %
   -----------------                                  ------- ------- ---- ----
                                                        (dollars in millions)
   <S>                                                <C>     <C>     <C>  <C>
   U.S. domestic package............................. $ 9,982 $10,665 $683  6.8%
   International package.............................   1,560   1,700  140  9.0
   Non-package.......................................     424     526  102 24.1
                                                      ------- ------- ----
     Consolidated revenue............................ $11,966 $12,891 $925  7.7
                                                      ======= ======= ====
</TABLE>

 
   U.S. domestic package revenue increased primarily due to a 3.1% volume
increase and a shift by our customers to more time-definite services, as well
as an increase in rates. Package volume for our express and ground products
increased 7.3% and 2.4%, respectively.
 
   During the first quarter of 1999, we increased rates for standard ground
shipments an average of 2.5% for commercial deliveries. The ground residential
charge continues to be $1.00 over the commercial ground rate, with an
additional delivery area surcharge added to some less accessible areas. In
addition, we increased rates for UPS Next Day Air, UPS Next Day Air Saver and
UPS 2nd Day Air an average of 2.5%, while we decreased the rate for UPS 2nd
Day Air A.M. by 2.2%. The rate for UPS Next Day Air Early A.M. did not change.
Rates for international shipments originating in the U.S. did not change for
UPS Worldwide Express, UPS Worldwide Express Plus, UPS Worldwide Expedited and
UPS International Standard service. Rate changes for shipments originating
outside the U.S. were made throughout the past year and varied by geographic
market.
 
                                      22

<PAGE>
 
   The increase in international package revenue was primarily due to an
overall improvement in product mix, specifically volume growth for express and
pan-European products. Although overall volume was relatively flat for
international operations, all international operations posted volume increases
for express products, with the largest increases experienced in our Asia
Pacific and European operations.
 
   Operating expenses increased by $502 million, or 4.8%. Compensation and
benefits expenses, which increased 5.4%, accounted for $375 million of this
increase. The operating ratio improved from 87.9 during the first six months
of 1998 to 85.5 during the first six months of 1999. This improvement resulted
primarily from containment of operating expense growth through better
utilization of existing capacity and from continued company-wide cost
containment efforts. Fuel costs during the first six months of 1999 were also
slightly lower.
 
   The following table shows the change in operating profit, both in dollars
and in percentage terms:
 

<TABLE>
<CAPTION>
                                                       Six Months
                                                          Ended
                                                        June 30,      Change
                                                      ------------- -----------
   Operating Segment                                   1998   1999   $      %
   -----------------                                  ------ ------ ----  -----
                                                       (dollars in millions)
   <S>                                                <C>    <C>    <C>   <C>
   U.S. domestic package............................. $1,341 $1,643 $302   22.5%
   International package.............................     34    109   75  220.6
   Non-package.......................................     70     58  (12) (17.1)
   Corporate.........................................     --     58   58      *
                                                      ------ ------ ----
     Consolidated operating profit................... $1,445 $1,868 $423   29.3
                                                      ====== ====== ====
</TABLE>

  * Not meaningful.
 
   U.S. domestic package operating profit improved due to a 3.6% increase in
revenue per piece, combined with the volume increases discussed previously.
Operating expenses increased at a lower rate than revenue, due to the factors
noted above.
 
   International package operating profit more than tripled due to volume
growth in our higher revenue per piece express products. Revenue per piece for
this segment increased 9.0%. The largest contributor to the operating profit
improvement was the Europe region, followed closely by the Asia Pacific
region.
 
   The decrease in non-package operating income reflects, in part, higher
third-party underwriting losses by UPINSCO, our captive insurance company,
lower profits for our UPS Logistics Group, and start-up costs at UPS Capital
Corporation during the first six months of 1999. UPINSCO's third-party
underwriting losses relate primarily to the reinsurance of personal automobile
liability coverage.
 
   Beginning in 1999, we have added a "Corporate" line-item to our segment
reporting. This line-item reflects a new accounting pronouncement that
requires us to capitalize some of our costs to develop or obtain computer
software for internal use. These costs are not allocated to segments. We
discuss this new accounting pronouncement further under the heading "Future
Accounting Changes."
 
   In our financial statements for the six months ended June 30, 1999, we have
recorded a tax assessment charge that reduced our net income by $1.442
billion. Further discussion is included under the heading "Liquidity and
Capital Resources."
 
   1998 Compared to 1997
 
   The following table shows the change in revenue, both in dollars and in
percentage terms:
 

<TABLE>
<CAPTION>
                                                      Year Ended
                                                     December 31,     Change
                                                    --------------- -----------
   Operating Segment                                 1997    1998     $     %
   -----------------                                ------- ------- ------ ----
                                                       (dollars in millions)
   <S>                                              <C>     <C>     <C>    <C>
   U.S. domestic package........................... $18,868 $20,650 $1,782  9.4%
   International package...........................   2,934   3,237    303 10.3
   Non-package.....................................     656     901    245 37.3
                                                    ------- ------- ------
     Consolidated revenue.......................... $22,458 $24,788 $2,330 10.4
                                                    ======= ======= ======
</TABLE>

 
 
                                      23

<PAGE>
 
   The increase in U.S. domestic package revenue in 1998 resulted from
continued improvement in product mix, combined with generally higher revenue
per piece. The 1997 revenues were adversely affected by the 15-day Teamsters
strike. The Teamsters union, which represents about 202,000 of our employees,
was on strike from August 4 through August 19, 1997. In addition, the
Independent Pilots Association, which represents all of our non-management
pilots, observed picket lines in support of the Teamsters strike. Excluding
the period of the strike, average daily domestic volume in 1998 was 2.2% below
1997, reflecting residual lost volume following the strike. Domestic express
volume, however, increased by 4.0%.
 
   During the first quarter of 1998, we increased rates for standard ground
shipments an average of 3.6% for commercial deliveries, and increased the
ground residential premium from $.80 to $1.00 over the commercial ground rate.
In addition, we increased rates for each of UPS Next Day Air, UPS 2nd Day Air
and UPS 3 Day Select about 3.3%. Rates for international shipments originating
in the U.S. did not change for UPS Worldwide Express, UPS Worldwide Expedited
and UPS Standard Service to Canada. Rate changes for shipments originating
outside the U.S. were made throughout 1998 and varied by geographic market.
 
   The increase in international package revenue in 1998 was attributable
primarily to a 10.5% increase in volume and an improvement in product mix. The
revenue increase was partially offset by the stronger U.S. dollar. Europe was
a significant contributor to international revenue growth in 1998 as a result
of a 12.2% volume increase and improved product mix. The increase in non-
package revenue in 1998 was driven mainly by continued growth of the UPS
Logistics Group.
 
   Consolidated operating expenses increased $938 million, or 4.5%, in 1998
over 1997, while the operating ratio improved from 92.4 during 1997 to 87.5
during 1998. Compensation and benefits expenses increased $1.057 billion in
1998, in part due to labor costs not incurred during the Teamsters strike in
August 1997. Other operating expenses decreased $119 million from 1997 to
1998, mainly driven by lower fuel costs and the reduction of overhead costs in
1998.
 
   The following table shows the change in operating profit, both in dollars
and in percentage terms:
 

<TABLE>
<CAPTION>
                                                      Year Ended
                                                     December 31,     Change
                                                     -------------- -----------
   Operating Segment                                  1997    1998    $     %
   -----------------                                 ------  ------ ------ ----
                                                       (dollars in millions)
   <S>                                               <C>     <C>    <C>    <C>
   U.S. domestic package............................ $1,654  $2,899 $1,245 75.3%
   International package............................    (67)     56    123    *
   Non-package......................................    111     135     24 21.6
                                                     ------  ------ ------
     Consolidated operating profit.................. $1,698  $3,090 $1,392 82.0
                                                     ======  ====== ======
</TABLE>

  * Not meaningful.
 
   Approximately $703 million of the U.S. domestic package operating profit
increase resulted from improvements in U.S. domestic revenue per piece,
improved product mix and containment of operating expense growth. The
remaining $542 million of the increase reflects the change between August 1998
and August 1997, the period in which the Teamsters strike occurred.
 
   The favorable trend in international operations resulted primarily from
higher volume, improved product mix and better utilization of existing
capacity. Most of this improvement was due to the Europe region. Despite the
economic problems in Asia, operating results associated with the Asia Pacific
region continued to improve in 1998.
 
   Net income increased by $832 million in 1998 over 1997. Approximately $496
million of this improvement was due primarily to higher revenue per piece on
U.S. domestic products, improved product mix, improved international operating
results and the containment of operating expense growth. The remaining
increase of $336 million resulted from the change in net income for August
1998 as compared to August 1997, the period in which the Teamsters strike
occurred.
 
                                      24

<PAGE>
 
   1997 Compared to 1996
 
   The Teamsters strike severely limited U.S. domestic package operations
during August 1997 and also curtailed international operations. The strike
resulted in a net loss of $211 million and an operating loss of $349 million
for the month of August 1997, compared to net income of $113 million and
operating profit of $187 million for August 1996, causing a significant
adverse effect on net income for 1997.
 
   The following table shows the change in revenue, both in dollars and in
percentage terms:
 

<TABLE>
<CAPTION>
                                                      Year Ended
                                                     December 31,    Change
                                                    --------------- ----------
   Operating Segment                                 1996    1997    $     %
   -----------------                                ------- ------- ----  ----
                                                      (dollars in millions)
   <S>                                              <C>     <C>     <C>   <C>
   U.S. domestic package........................... $18,881 $18,868 $(13) (0.1)%
   International package...........................   2,989   2,934  (55) (1.8)
   Non-package.....................................     498     656  158  31.7
                                                    ------- ------- ----
     Consolidated revenue.......................... $22,368 $22,458 $ 90   0.4
                                                    ======= ======= ====
</TABLE>

 
   U.S. domestic package revenue decreased in 1997 primarily due to lower
volume, which was down 4.1% for the year compared to 1996, due to the downtime
from the strike, along with residual lost volume following the strike. The
decline in volume was offset by higher revenue per piece in 1997. Despite the
strike, volume in higher yielding express packages increased 4.2%. Although
ground volume subsequent to the strike had not returned to pre-strike levels
by year-end, overall U.S. domestic package revenue improved by $137 million,
or 2.7%, for the fourth quarter of 1997 in comparison to the fourth quarter of
1996. This improvement is attributable mainly to higher revenue per piece and
a 6.2% volume growth in express services.
 
   During the first quarter of 1997, we increased rates for standard ground
shipments an average of 3.4% for commercial deliveries and 4.3% for
residential deliveries. We increased rates for each of UPS Next Day Air, UPS
2nd Day Air and UPS 3 Day Select approximately 3.9% during the same time
period. We increased rates for international shipments originating in the U.S.
by 2.6% for UPS Worldwide Express and 4.9% for UPS Worldwide Expedited during
the first quarter of 1997. Rate changes for shipments originating outside the
U.S. were made throughout 1997 and varied by geographic market. Rates for
Standard Service to Canada did not change during 1997.
 
   The decrease in international package revenues was primarily a result of
the strengthening of the U.S. dollar, particularly in the Europe region.
 
   For 1997, operating expenses increased by $421 million, or 2.1%, over 1996.
A combination of increased operating expenses along with decreased revenues
due to the strike resulted in a deterioration of the operating ratio from 90.9
during 1996 to 92.4 during 1997.
 
   The following table shows the change in operating profit, both in dollars
and in percentage terms:
 

<TABLE>
<CAPTION>
                                                   Year Ended
                                                  December 31,      Change
                                                  --------------  ------------
   Operating Segment                               1996    1997     $      %
   -----------------                              ------  ------  -----  -----
                                                    (dollars in millions)
   <S>                                            <C>     <C>     <C>    <C>
   U.S. domestic package......................... $2,181  $1,654  $(527) (24.2)%
   International package.........................   (281)    (67)   214   76.2
   Non-package...................................    129     111    (18) (14.0)
                                                  ------  ------  -----
     Consolidated operating profit............... $2,029  $1,698  $(331) (16.3)
                                                  ======  ======  =====
</TABLE>

 
   The decrease in U.S. domestic package operating profit resulted from lower
revenues in 1997 due to the strike. The international package operating loss
improvement was primarily due to cost reductions associated
 
                                      25

<PAGE>
 
with our efforts to reduce unprofitable volume. While improvements in
operations in 1997 occurred throughout all regions, Europe was the primary
contributor.
 
   Interest expense amounted to $187 million in 1997, an increase of $92
million over 1996. The increase is primarily attributable to interest costs
incurred on higher debt levels outstanding during 1997. In addition,
investment income increased by $31 million in 1997 over 1996 as a result of
correspondingly higher cash and cash equivalent balances.
 
Quarterly Results of Operations
 
   We typically experience our best operating results in the second and fourth
quarters of each year. Shipping activity is generally lowest during the first
quarter and weather conditions also can adversely affect first quarter
operating results. Shipping activity is generally highest in the fourth
quarter as a result of the holiday season. Our European operations experience
lower volumes in the third quarter due to the general slowdown in business
activity in August.
 
   The following table sets forth revenues, operating profit and net income by
fiscal quarter. Results for the third quarter of 1997 reflect the impact of
the Teamsters strike. Following the strike, the fourth quarter of 1997 was our
most profitable quarter to that date. Results for the second quarter of 1999
reflect a tax assessment charge relating to the Tax Court decision.
 

<TABLE>
<CAPTION>
                                                               Three Months Ended
                         ----------------------------------------------------------------------------------------------
                         March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
                           1997      1997     1997      1997     1998      1998     1998      1998     1999      1999
                         --------- -------- --------- -------- --------- -------- --------- -------- --------- --------
                                                                 (in millions)
<S>                      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
Revenue:
 Domestic package......   $4,804    $4,933   $3,977    $5,154   $4,892    $5,090   $5,147    $5,521   $5,231    $5,434
 International
  package..............      709       747      672       806      761       799      782       895      839       861
 Non-package...........      151       166      161       178      206       218      229       248      261       265
                          ------    ------   ------    ------   ------    ------   ------    ------   ------    ------
 Total revenue.........    5,664     5,846    4,810     6,138    5,859     6,107    6,158     6,664    6,331     6,560
Operating profit:
 Domestic package......      464       588       26       576      594       747      757       801      765       878
 International
  package..............      (51)      (10)     (46)       40       11        23      (15)       37       44        65
 Non-package...........       13        40       34        24       35        35       35        30       25        33
 Corporate.............       --        --       --        --       --        --       --        --       32        26
                          ------    ------   ------    ------   ------    ------   ------    ------   ------    ------
 Total operating
  profit...............      426       618       14       640      640       805      777       868      866     1,002
Net income (loss)......   $  228    $  340   $  (10)   $  351   $  352    $  458   $  449    $  482   $  499    $ (854)*
</TABLE>

 
* Net income as adjusted to eliminate the impact of the tax assessment charge
would have been $588 million.
 
Liquidity and Capital Resources
 
   Our primary source of liquidity is our cash flow from operations. We
maintain significant cash, cash equivalents and marketable securities,
amounting to $3.2 billion at June 30, 1999. We maintain a commercial paper
program under which we are authorized to borrow up to $2.0 billion.
Approximately $819 million was outstanding under that program as of June 30,
1999. Since we do not intend to refinance the full commercial paper balance
outstanding at June 30, 1999, $719 million has been classified as a current
liability on our balance sheet. The average interest rate on the amount
outstanding at June 30, 1999 was 5.1%.
 
                                      26

<PAGE>
 
   We maintain two credit agreements with a consortium of banks. These
agreements provide revolving credit facilities of $1.25 billion each, with one
expiring in April 2000 and the other expiring in April 2003. There were no
borrowings under either of these agreements as of June 30, 1999. Interest on
any amounts we borrow under these facilities would be charged at 90-day LIBOR
plus 15 basis points.
 
   We also maintain a European medium-term note program with a borrowing
capacity of $1.0 billion. Under this program, we may issue notes from time to
time denominated in a variety of currencies. At June 30, 1999, $500 million
was available under this program. Of the amount outstanding at June 30, 1999,
$200 million bears interest at 6.625% and $300 million bears interest at
6.25%.
 
   In January 1999, we filed a shelf registration statement with the SEC,
under which we may issue debt of up to $2.0 billion, which may be denominated
in a variety of currencies. There is currently no debt issued under this shelf
registration statement.
 
   On August 9, 1999 the U.S. Tax Court issued an opinion unfavorable to UPS
regarding a Notice of Deficiency asserting that we are liable for additional
tax for the 1983 and 1984 tax years. The Court held that we are liable for tax
on income of Overseas Partners Ltd., a Bermuda company, which has reinsured
excess value package insurance purchased by our customers beginning in 1984.
The Court held that for the 1984 tax year we are liable for taxes of $31
million on income reported by OPL, penalties and penalty interest of $93
million and interest for a total after-tax exposure we estimate at
approximately $246 million.
 
   In addition, during the first quarter of 1999, the IRS issued two Notices
of Deficiency asserting that we are liable for additional tax for the 1985
through 1987 tax years, and the 1988 through 1990 tax years. The primary
assertions by the IRS relate to the reinsurance of excess value package
insurance, the issue raised for the 1984 tax year. The IRS has based its
assertions on the same theories included in the 1983-1984 Notice of
Deficiency.
 
   We anticipate that the IRS will take similar positions for tax years
subsequent to 1990. Based on the Tax Court opinion, we currently estimate that
our total after-tax exposure for the tax years 1984 through 1999 could be as
high as $2.353 billion. We are in the process of analyzing our position in
light of the Tax Court opinion and are evaluating our options, including
appeal of the Tax Court decision, continuance of the litigation or negotiation
of a settlement.
 
   In our second quarter 1999 financial statements, we have recorded a tax
assessment charge of $1.786 billion, which includes an amount for related
state tax liabilities. The charge includes taxes of $915 million and interest
of $871 million. This assessment resulted in a tax benefit of $344 million
related to the interest component of the assessment. As a result, our net
charge to net income for the tax assessment was $1.442 billion, increasing our
total after-tax reserve with respect to these matters to $1.672 billion. The
tax benefit of deductible interest is included in income taxes. Since none of
the income on which this tax assessment is based is our income, however, we
have not classified the tax charge as income taxes.
 
   We determined the size of our reserve with respect to these matters in
accordance with generally accepted accounting principles based on our estimate
of our most likely liability. In making this determination, we concluded that
it was more likely that we would be required to pay taxes on income reported
by OPL and interest, but that it was not probable that we would be required to
pay any penalties and penalty interest. If penalties and penalty interest
ultimately are determined to be payable, we would have to record an additional
charge of up to $681 million. We cannot assure you that our ultimate liability
for these matters will not exceed the level of our reserves.
 
   On September 1, 1999, we deposited $1.349 billion with the IRS related to
these matters, without conceding the IRS's position or giving up our right to
appeal the Tax Court's decision, in order to stop the accrual of interest on
that amount of the IRS's claim. We have sufficient cash, cash equivalents and
marketable securities on hand to deposit with the IRS, if we choose to do so,
the remaining amount necessary to satisfy our maximum estimated after-tax
exposure for these tax matters, without affecting our ability to meet our
foreseeable operating expenses and budgeted capital expenditures.
 
                                      27

<PAGE>
 
   We believe that funds from operations and borrowing programs will provide
adequate sources of liquidity and capital resources to meet our expected long-
term needs for the operation of our business, including anticipated capital
expenditures such as commitments for aircraft purchases, through 2005.
 
   Following is a summary of capital expenditures:

<TABLE>
<CAPTION>
                                                           Year Ended December
                                                                   31,
                                                           --------------------
                                                            1996   1997   1998
                                                           ------ ------ ------
                                                              (in millions)
   <S>                                                     <C>    <C>    <C>
   Building and facilities................................ $  517 $  523 $  408
   Aircraft and parts.....................................  1,124    907    942
   Vehicles...............................................    474    333    141
   Information technology.................................    218    221    154
                                                           ------ ------ ------
                                                           $2,333 $1,984 $1,645
                                                           ====== ====== ======
</TABLE>

 
   Our capital expenditures have declined over the past three years primarily
as a result of better utilization of our existing transportation system and
other assets and our focus on return on invested capital.
 
   We anticipate capital expenditures of approximately $1.5 billion in 1999
and $1.7 billion in 2000. These expenditures will provide for replacement of
existing capacity and anticipated future growth.
 
Market Risk
 
   We are 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. We have examined our exposures to these risks and
concluded that none of our exposures in these areas is material to fair
values, cash flows or earnings. We have engaged in several strategies to
manage these market risks.
 
   Our indebtedness under our various financing arrangements creates interest
rate risk. In connection with each debt issuance and as a result of continual
monitoring of interest rates, we may enter into interest rate swap agreements
for purposes of managing our borrowing costs.
 
   For all foreign currency-denominated borrowing and certain lease
transactions, we 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. We are
exposed to other foreign currency exchange risks in the ordinary course of our
business operations due to the fact that we provide our services in more than
200 countries and collection of revenues and payment of certain expenses may
give rise to currency exposure.
 
   We require significant quantities of gasoline, diesel fuel and jet fuel for
our aircraft and delivery vehicles. We therefore are exposed to commodity
price risk associated with variations in the market price for petroleum
products. We manage this risk, in part, by purchasing commodity forward
contracts on crude oil.
 
Future Accounting Changes
 
   In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which requires that some costs to
develop or obtain computer software for internal use be capitalized. We
adopted the new standard on January 1, 1999. Since we had previously expensed
all such costs, the change will result in lower expenses in the initial year
of adoption and is estimated to increase 1999 net income by approximately $70
million to $90 million.
 
                                      28

<PAGE>
 
   In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The new statement is effective for fiscal years beginning
after June 15, 2000, with earlier adoption encouraged but not required. We
have not yet completed our analysis of the effects of adopting this standard.
 
Impact of the Year 2000 Issue
 
   Introduction
 
   The term "year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software historically have used only two
digits to identify the year in a date, often meaning that the computer will
fail to distinguish dates in the "2000s" from dates in the "1900s." These
problems also may arise from other sources, such as the use of special codes
and conventions in software that make use of the date field.
 
   State of Readiness
 
   In 1995, we created a Year 2000 Committee tasked with evaluating the year
2000 issue and taking appropriate action to address the implications of the
year 2000 issue for us. The Year 2000 Committee has developed and is
implementing a comprehensive initiative to make our business critical
information technology assets, including embedded microprocessor systems
incorporated into computer hardware and related software, and business
critical non-IT assets, such as vehicles, facilities, equipment and their
embedded microprocessor systems, year 2000 ready. The year 2000 initiative
covers the following eight phases:
 
  1. inventory of IT and non-IT assets
 
  2. assessment of repair requirements
 
  3. repair of IT and non-IT assets
 
  4. unit and system integration testing of individual IT and non-IT assets
     to determine correct manipulation of dates and date-related data
 
  5. certification by users that IT and non-IT assets correctly handle dates
     and date-related data
 
  6. selected verification by our internal auditors that phases 1 through 5
     were properly completed for IT and non-IT assets
 
  7. "end-to-end" testing of selected IT and non-IT assets, both internally
     developed and vendor-provided, to determine correct manipulation of
     dates and date-related data
 
  8. creation of contingency plans in the event of year 2000 failures
 
   Since we believe that the majority of our business-critical IT assets are
controlled by our Information Services Group, we began implementation of the
year 2000 initiative with these assets. Generally, we consider an IT asset to
be business critical if its failure would have a material adverse effect on
package movement, customer relations or our financial condition, liquidity or
results of operations, or if other factors, including regulatory requirements,
require the characterization of the IT asset as business critical. This group
includes, for example, package tracking, billing, customer telephone service
centers, and UPS OnLine(R) automation systems.
 
   As of July 31, 1999:
 
  .  The first seven phases of the year 2000 initiative had been completed
     for substantially all of the IT assets which are controlled by our IS
     Group.
 
                                      29

<PAGE>
 
  .  The first six phases of the year 2000 initiative had been completed for
     approximately 91% of the other assets covered by the year 2000
     initiative (non-IT assets and IT assets controlled by all business
     functions other than the IS Group).
 
   We have contacted suppliers who provide both critical IT assets and other
critical goods and services such as vehicles, fuel, packaging materials and
forms to evaluate their year 2000 compliance plans and state of readiness and
to determine whether a year 2000-related event will impede the ability of such
suppliers to continue to provide such goods and services. We have received
assurances from substantially all of our suppliers of critical IT assets
controlled by the IS Group that these assets will correctly manipulate dates
and date-related data. We have reviewed the responses received from these
vendors to evaluate the accuracy and adequacy of the disclosures made by the
vendors as to their year 2000 compliance status. Moreover, the majority of
these assets are subject to evaluation under applicable phases of our year
2000 initiative.
 
   In addition, we have sent letters to all of our suppliers of critical non-
IT and IT assets controlled by business functions other than the IS Group. As
of July 31, 1999:
 
  .  We have received responses from substantially all of these suppliers.
 
  .  We are reviewing these responses to evaluate the assertions from the
     vendors as to their year 2000 compliance status.
 
  .  We are seeking additional information from selected vendors to
     substantiate their claims of year 2000 readiness.
 
  .  We are also conducting interface testing between ourselves and vendors
     who transfer data directly with us.
 
   We have conducted meetings with the majority of business critical
suppliers. We intend to develop appropriate contingency plans for any business
critical supplier that does not provide an adequate response to us on a timely
basis. As a general matter, we are vulnerable to significant suppliers'
inability to remedy their own year 2000 issues.
 
   We also rely, both domestically and internationally, upon government
agencies, particularly the Federal Aviation Administration, telecommunication
service companies, utility companies and other service providers outside of
our control. As part of the year 2000 initiative, we are involved with several
national and international associations to pursue common year 2000 objectives.
For example, we have been and remain involved, through our participation in
the International Air Transport Association and the Air Transport Association
of America, in a global and industry-wide effort to understand the year 2000
compliance status of airports, air traffic systems, customs clearance and
other U.S. and international government agencies, and common vendors and
suppliers. In addition, we continue to monitor publicly available information
describing the year 2000 compliance plans and status of our vendors. But we
cannot assure you that suppliers, governmental agencies or other third parties
will not suffer a year 2000 business disruption. Such failures could have a
material adverse effect on our financial condition, liquidity or results of
operations.
 
   We are aware that the media and other third parties have reported that year
2000 compliance activity is generally considered to be further ahead in the
United States than in other countries. We continue to monitor these reports
and to evaluate the possible impact of year 2000 events outside of the United
States on our operations. Additionally, we have included contingency planning
for international operations in our overall contingency planning process.
 
   We have also retained independent consultants to assess whether the year
2000 initiative, if appropriately implemented, can result in our year 2000
readiness, and our progress on the year 2000 initiative. Based on our
consultants' July 1999 review, the initiative is progressing at a satisfactory
rate to achieve year 2000 readiness. In addition, our consultants are involved
in the contingency planning phase of the year 2000 initiative.
 
                                      30

<PAGE>
 
   Testing
 
   As part of the year 2000 initiative, we maintain a testing program to
determine whether our business-critical IT and non-IT assets are year 2000
ready. Our testing program is conducted in three stages:
 
  .  The initial stage--"unit testing"--consists of testing individual
     systems (units) for year 2000 readiness. Unit testing includes, for
     example, testing a particular application to ensure that it correctly
     manipulates dates and date-related data and properly operates in a year
     2000 ready environment. Following successful completion of unit testing,
     a system will move into stage two.
 
  .  Stage two--"integration testing"--includes testing interfaces between
     systems units to ensure that these interfaces will correctly send and
     receive date-related data. Stages one and two are included in phase four
     of the overall year 2000 initiative. All business critical IT and non-IT
     assets are subject to the first two testing stages. After successful
     completion of phases four and five of the year 2000 initiative, some
     tested assets are subject to independent review and verification by our
     internal auditors in conjunction with phase six of the year 2000
     initiative.
 
  .  Stage three--"end-to-end testing"--involves validating core business
     processes. We perform end-to-end testing on selected core processes. We
     have completed our end-to-end testing program for substantially all
     business critical IT assets related to the selected core processes. We
     plan to complete the majority of end-to-end testing for other assets by
     the end of the third quarter of 1999.
 
  .  In addition, with respect to business critical IT assets, we maintain a
     change management process to reduce the likelihood that remediation
     efforts adversely affect functionality and to retest units or systems
     after changes where appropriate.
 
   We currently are deploying IT and non-IT assets that have completed at
least the fifth phase of the year 2000 initiative and will continue that
process throughout 1999. We have not deferred any major information technology
project as a result of the implementation of the year 2000 initiative,
although we may have incurred an opportunity cost in dedicating resources to
year 2000 compliance activity rather than other endeavors. We have elected to
limit the deployment of new releases, upgrades or implementation of
information technology assets from October 1, 1999 through January 31, 2000,
to facilitate our ability to manage year 2000-related concerns.
 
   Costs to Address the Year 2000 Issue
 
   We estimate that we have spent approximately $78 million through June 30,
1999 on implementation of the year 2000 initiative, with the majority of the
work being performed by our employees. We expect to spend an estimated
additional $24 million to complete the year 2000 initiative.
 
   These costs do not include the costs of developing our year 2000
contingency plans. Currently, we estimate that we will incur approximately $6
million to $10 million in direct costs in connection with developing our
contingency plans.
 
   We also are incurring costs in connection with the assessment and
remediation of IT assets and non-IT assets that are not business critical. Our
management believes that the costs associated with these activities are
significantly less than the costs of our year 2000 initiative.
 
   These are our management's best estimates and may be revised as additional
information becomes available. We intend to fund all costs associated with our
year 2000 efforts from operations.
 
   Risks Presented by the Year 2000 Issue
 
   Our failure to appropriately address a material year 2000 issue, or the
failure by any third parties who provide goods or services that are critical
to our business activities to appropriately address their year 2000 issues,
could have a material adverse effect on our financial condition, liquidity or
results of operations. To date, we have not identified any material IT or non-
IT assets critical to our operations that present a material risk of not being
year 2000 ready, that cannot be replaced with a suitable alternative, or for
which we do not have an acceptable contingency plan.
 
                                      31

<PAGE>
 
   As the year 2000 initiative has proceeded, we have identified our highest
risk third party providers that present a potential risk of a year 2000-
related disruption. We will continue to monitor these suppliers and develop
contingency plans, as necessary. Although there is inherent uncertainty in the
year 2000 problem, we expect that the year 2000 initiative will significantly
reduce our level of uncertainty about our year 2000 issues. At this point, we
believe that our most reasonably likely worst case scenario will result from
challenges presented by year 2000 disruptions experienced by third parties
located both within and outside the United States, such as the following:
 
 
  .  air traffic control systems
 
  .  airports
 
  .  customers
 
  .  customs brokerages
 
  .  railroads
 
  .  utility service providers
 
  .  other government agencies
 
  .  other suppliers
 
A significant disruption in services provided by such a third party could have
a material adverse impact on our financial condition, liquidity or results of
operations.
 
   Contingency Plans
 
   In the normal course of business, we maintain and deploy contingency plans
designed to address potential business interruptions. These plans may be
applicable to address the interruption of support provided by third parties
resulting from their failure to be year 2000 ready. We have also established a
Contingency Plan Committee to monitor and address the development of
additional contingency plans. The year 2000 initiative calls for us to conduct
risk assessment reviews to determine whether an additional contingency plan
should be developed. Under this process, a contingency plan may be required
for reasons other than an expectation of failure, such as the importance of a
business process. The majority of business units have completed risk
assessment reviews. The business units are in the process of developing year
2000 contingency plans required by these reviews. We expect that substantially
all contingency plans will be complete by October 31, 1999. We have also
elected to establish Command and Control Centers at our key operational
locations and at other regional centers of operations, to facilitate
management of year 2000 events.
 
   Our contingency plans call for some of our employees to be involved in such
contingency planning activities as command center staffing and plan
implementation at operating locations, and to validate IT and non-IT assets
before and during the millennium weekend. We will monitor year 2000 events
which may result in additional staffing needs beyond the millennium weekend.
 
                                      32

<PAGE>
 
                               INDUSTRY OVERVIEW
 
   The package delivery business has evolved rapidly over the last two
decades, driven by the integration of world markets, the rationalization of
corporate supply chains and the implementation of enterprise software and
Internet-based information technology solutions. The ability to provide time-
definite delivery options and process and transfer information increasingly
determines success. Customer demands for real-time information processing and
worldwide distribution and logistics capabilities favor large, global
companies with integrated services. These trends are driving increased
consolidation in the industry.
 
   Customers increasingly focus on the timing and predictability of deliveries
rather than the mode of transportation. As customers re-engineer the total
distribution process, which includes order processing, administration,
warehousing, transportation and inventory management, they are attempting to
reduce the most expensive and fastest growing component--inventory carrying
costs. Time-definite transportation, which is no longer limited to air
express, has become a critical part of just-in-time inventory management and
improving overall distribution efficiency.
 
   Technology advances have made it easier for companies to analyze and
compare distribution options. Rapid advances in technology have also helped
move the traditional business model where manufacturers "pushed" products into
the supply chain, often based on incomplete information, toward a model where
end-user demand "pulls" products through the supply chain. This evolution has
placed greater demands on transportation systems for visibility of information
at all stages of the order/delivery process, because time-to-market is
becoming a key component of financial and operating success.
 
   As a result of these changes, individual shipments are generally smaller
but more frequent, and a greater proportion of products is being delivered
directly to end-users. Customers expect high performance levels and broad
product offerings as they seek to optimize supply chain efficiency. We believe
that these trends will benefit companies like UPS with global reach, diverse
product portfolios, extensive distribution capabilities and sophisticated
tracking and information technology.
 
Time-Definite Package Delivery
 
   Delivery of packages to a specific destination at a guaranteed time has
been the growth engine for the package delivery industry over the past decade.
Time-definite service has grown from 4% of the U.S. parcel delivery market in
1977 to over 60% today. Time-definite service has grown from just under 10
billion revenue ton miles in 1989 to over 14 billion revenue ton miles in
1997, for a compound annual growth rate of 4.3%, while charter, scheduled mail
and scheduled freight have remained relatively flat during that period.
Internationally, however, time-definite service represents only 6% of the
parcel delivery market, demonstrating the potential for substantial growth.
 
Logistics, Supply Chain Management and Integrated Services
 
   Many businesses have decided to outsource the management of all or part of
their supply chain. As a result, third-party logistics providers such as UPS
have become extensively involved in the full range of customer supply chain
functions. Third-party services include order fulfillment, freight bill
auditing and payment, cross-docking, product marking, labeling and packaging,
inventory and warehouse management, parts return and repair and the actual
physical movement of goods. The domestic third-party logistics market was
estimated to be between $18 billion and $20 billion in 1998, or about 4% of an
estimated $450 billion in contractible logistics dollars. We believe the
third-party portion of this market will continue to grow significantly over
the next several years. Finally, we believe that the third-party logistics
market is highly fragmented and likely to experience consolidation.
 
Industry Trends
 
   The key industry trends are:
 
   Globalization. The growing demand for global consumer brands, the
increasing number of multinational corporations, global sourcing and the
breaking down of trade barriers have all spurred substantial growth in
 
                                      33

<PAGE>
 
cross-border delivery. As a result, international freight traffic has grown
consistently at a rate three times that of United States domestic freight
traffic.
 
   The use of express services in Europe is estimated to be about half as
prevalent as in the U.S., but further opening of European trade markets is
likely to lead to substantial growth in European cross-border deliveries. In
addition, the European Commission is expected to consider deregulation of
European mail markets by 2003. In Asia and Latin America, growth in package
deliveries continued throughout the recent economic difficulties.
 
   Increased Need for Time-Definite Services. The need for just-in-time and
other time-definite delivery has increased as a result of the globalization of
manufacturing, greater implementation of demand-driven supply chains, the
shortening of product cycles and the increasing value of individual shipments.
It is estimated that 46% of all goods in the U.S. will be shipped just-in-time
by the year 2000, up from 17% in 1994. Companies have also recognized that
increased spending on time-definite delivery services can reduce total
distribution costs by reducing inventory levels and inventory loss, either
through shrinkage, spoilage or obsolescence.
 
   Significant Advances in Technology. There has been dramatic growth in the
utilization of e-commerce by both consumers and businesses for the transfer of
goods. Consumers who use the Internet for home shopping and other services
shop across borders and require global delivery capabilities. According to
Forrester Research, $80 billion in goods were purchased globally over the
Internet in 1998, and this figure is expected to reach over $3.2 trillion in
2003. Of this $80 billion, 80% to 85% represented business-to-business sales,
with the remainder representing business-to-residential sales.
 
   Customers are demanding increasingly complex supply chain management
solutions that require more sophisticated information technology systems.
Major manufacturers require increased precision in delivery time, and
customers demand precise tracking and timely information about potential
service disruptions. As a result, third-party providers need increasing
amounts of capital and technological know-how.
 
   Industry Consolidation. The industry has become increasingly dominated by
large integrated carriers that provide seamless services, including pick-up
and delivery, shipment via air and/or road transport and customs clearance.
The pace of consolidation in the package delivery industry has increased on a
global scale, particularly in Europe, due to the following factors:
 
  .  the need for global distribution networks, large vehicle fleets, global
     information technology systems and the resources necessary for their
     development or acquisition
 
  .  customers' desire for integrated services
 
  .  high growth in the international and cross-border delivery segments
 
  .  deregulation of European delivery markets
 
   Industry participants are acquiring, merging with or forming alliances with
partners that can expand global reach, breadth of services or technological
capabilities in order to better enable those participants to compete in a
rapidly changing global environment. In particular, government-run post
offices have made several recent alliances with and acquisitions of private-
sector companies. Post offices, which still maintain numerous advantages over
private-sector companies, create significant challenges for competitors
worldwide.
 
                                      34

<PAGE>
 
 
                                  BUSINESS
 
Overview
 
   We are the world's largest express carrier, the world's largest package
delivery company and a leading global provider of specialized transportation
and logistics services. We deliver over 12 million packages each business day
for 1.7 million shipping customers to six million consignees. In 1998, our
330,000 employees delivered more than three billion packages and documents
worldwide, generating revenues of $24.8 billion and net income of $1.7
billion.
 
   Our primary business is the time-definite delivery of packages and
documents throughout the United States and in over 200 other countries and
territories. In addition, we provide logistics services, including integrated
supply chain management, for major companies worldwide. We are the industry
leader in the delivery of goods purchased over the Internet. We seek to
position ourselves as an indispensable branded component of e-commerce and to
focus on the movement of goods, information and funds.
 
   We were founded in 1907 to provide private messenger and delivery services
in the Seattle, Washington area. Over the past 92 years, we have expanded our
small regional parcel delivery service into a global company. Our founders
fostered the development of our employee ownership culture with the initiation
of employee stock ownership in 1927. Today, we have established a vast and
reliable global transportation infrastructure, developed a comprehensive,
competitive and guaranteed portfolio of services and consistently supported
these services with advanced technology.
 
Competitive Strengths
 
   We have the following competitive strengths:
 
   Global Reach and Scale. We believe that our integrated worldwide ground and
air network is the most extensive in the industry. We operate about 149,000
delivery vehicles and over 500 airplanes. We estimate that our integrated end-
to-end delivery system carries goods having a value in excess of 6% of the
U.S. gross domestic product and covers about 99% of U.S. businesses and
virtually all U.S. residential addresses. We have invested billions of dollars
in information technology, a fleet of airplanes and many other improvements
across our vast global delivery network. Based on number of aircraft operated,
we are now the ninth largest airline in the United States and the tenth
largest airline in the world, with our primary air hub in Louisville,
Kentucky.
 
   We established our first international operation when we entered Canada in
1975, and we first entered Europe in 1976 when we established a domestic
operation in West Germany. In the 1980s and early 1990s, we expanded our
operations throughout Europe, as we identified the opportunities presented by
the development of the single market and responded to the need for pan-
European delivery services. Today, we offer the broadest portfolio of time-
definite services available, ranging from same-day service to logistics
solutions for total supply chain management. We currently have what we believe
is the most comprehensive integrated delivery and information services
portfolio of any carrier in Europe.
 
   In the last decade, we entered into more than two dozen alliances with
various Asian delivery companies and currently serve more than 40 Asia Pacific
countries and territories. Our primary focus has been on the transport of
express packages to and from the region, and volumes remained strong
throughout the recent economic downturn in Asia. We have also established
operations in Latin America and the Caribbean, and are positioned to
capitalize upon the growth potential there. This was most recently exemplified
by our agreement to acquire the assets and air routes of Challenge Air Cargo.
In addition, we have formed alliances with more than 50 service partners in
countries throughout our Americas region.
 
   In 1998, Fortune magazine recognized us as the World's Most Admired Global
Mail, Package and Freight Delivery Company. The Fortune magazine survey also
ranked us as the fourth most admired U.S. company overall.
 
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<PAGE>
 
   Distinctive People and Culture. Our people are our most valuable asset. We
believe that the dedication of our employees results in large part from our
distinctive "employee-owner" concept. Our employee stock ownership tradition
dates from 1927, when our founders, who believed that employee stock ownership
was a vital foundation for successful business, first offered stock to UPS
employees. To facilitate stock ownership by employees, we have maintained
several stock-based compensation plans. Currently, employees and retirees own
about two-thirds of our outstanding shares, and the founders' families and
foundations own the remaining shares. Following the public offering that is
contemplated as part of the proposed change in our capital structure, the
current UPS shareowners will own about 90% of our total outstanding shares and
will control about 99% of the vote.
 
   Complementing our tradition of employee ownership, we also have a long-
standing policy of "promotion from within," and this policy has significantly
reduced our need to hire managers and executive officers from outside UPS. A
majority of the members of our management team began their careers as full-
time or part-time hourly UPS employees, and have since spent their entire
careers with UPS. Every one of our executive officers, including our CEO, has
more than 25 years of service with UPS and has accumulated a meaningful
ownership stake in our company. Therefore, our executive officers have a
strong incentive to provide effective management of UPS, which will benefit
all of our shareowners.
 
   We have a legacy of commitment to the communities in which our employees
live and work. Our many community service activities include:
 
  .  UPS Foundation. Since 1951, our Foundation has provided financial
     support to alleviate social problems--most notably programs that support
     family and workplace literacy, food distribution and nationwide
     volunteerism. Our Foundation also supports high-impact educational and
     urgent human needs programs.
 
  .  Community Internship Program. For the past 30 years, selected managers
     have participated in four weeks of intense community service in
     underprivileged areas. We designed this initiative to educate managers
     about the needs of a diverse work force and customer base and to allow
     these managers to apply their problem solving skills in the community.
 
  .  Neighbor to Neighbor. Through an ongoing company-wide initiative, we
     match our employees' and their families' volunteer efforts with local
     programs. In 1998, about 30,000 volunteers participated in this program.
 
  .  United Way. Since our first campaign in 1982, we and our employees have
     contributed over $355 million to the United Way, making us the United
     Way's second largest corporate giver in the U.S.
 
  .  Welfare to Work. In 1997, we became one of the five founding members of
     the White House-sponsored Welfare-to-Work program, which places people
     on public assistance into private sector jobs. We have developed,
     trained and mentored over 20,000 qualified candidates nationwide for
     positions at UPS.
 
  .  School to Work. We have introduced a school-to-work program, which
     promotes education and real-world work experience for at-risk youth.
 
   Broad, Flexible Range of Distribution Services. We offer to our customers
as broad and flexible a range of delivery services as any provider in the
industry. All of our air, international and business-to-business ground
delivery service offerings are time-definite and guaranteed. Our portfolio of
service offerings enables customers to choose the delivery option that is most
appropriate for their requirements.
 
   Our express air services are complemented by our vast ground delivery
system. Our integrated air and ground network enhances pickup and delivery
density and provides us with the flexibility to transport packages using the
most efficient and cost-effective transportation mode or combination of modes.
Our sophisticated engineering systems allow us to optimize our network
efficiency and asset utilization.
 
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<PAGE>
 
   We make guaranteed international shipments to more than 200 countries and
territories worldwide, including guaranteed overnight delivery of documents to
many of the world's most important business centers. We offer a complete
portfolio of time-definite services for customers in major markets.
 
   We pioneered technologies that allow for secure, encrypted and trackable
digital file deliveries over the Internet, such as UPS OnLine Courier in 1998.
To make our services more easily available and to integrate our presence on
the Web wherever e-commerce is taking place, we have developed a wide range of
Internet tools accessible both from our website and from the websites of many
of our customers. Among these tools are online tracking, rating and service
selection, address validation, time in transit detail, package detail upload,
shipping and handling and service mapping.
 
   Brand Equity. We have built strong brand equity by being a leader in
quality service and product innovation in our industry. A recent survey of
senior business executives, called Image Power(R), rated UPS as the second
strongest business-to-business brand in the U.S., behind Microsoft. Among the
factors that contribute to our brand equity are our:
 
  .  friendly, professional delivery employees and familiar brown delivery
     vehicles
 
  .  long history of service reliability
 
  .  comprehensive service portfolio
 
  .  state-of-the-art technology
 
  .  history of innovation and industry firsts
 
  .  competitive pricing
 
  .  consistent advertising and communications to customers and the public
     about our evolving capabilities
 
  .  longstanding and significant contributions to the communities in which
     we live and work
 
   Our brand has successfully made the transition from a U.S.-based ground
delivery company to a global time-definite service provider with the ability
to launch innovative new products and services around the globe. For example,
we were the first company to offer next day delivery to every address in the
48 contiguous states and guaranteed next business day delivery of packages and
documents by 8:00 a.m. or 8:30 a.m. We were also the first full service
carrier to introduce same-day delivery services in the U.S. and the first
company to provide guaranteed nationwide ground service in the U.S.
Increasingly, our customers recognize that UPS is not just a reliable carrier
of packages, but an innovator of transportation and information-based business
solutions on a broadening global scale.
 
   One of the many ways that we have supported our brand is through
sponsorship arrangements, such as our status as the official package delivery
company of the National Football League in the U.S. and globally as a
Worldwide Olympic Partner. We have been Fortune magazine's Most Admired
Transportation Company in the mail, package and freight category for 16
consecutive years.
 
   Customer Relationships. We serve the ongoing package distribution
requirements of our customers worldwide and provide additional services that
both enhance customer relationships and complement our position as the
foremost provider of package distribution services. Our current volume mix is
about 80% business-to-business, and our customer base includes all of the
Fortune 1000 companies.
 
   We focus on building and maintaining long-term customer relationships. We
provide automatic daily pick-up services at the request of 1.7 million
shipping customers. In addition, thousands of our other customers access us
daily through on-call pick-up for air delivery services, 51,000 letter drop-
boxes and 30,000 independently owned shipping locations. We also have affinity
relationships with 486 professional associations.
 
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<PAGE>
 
   We place significant importance on the quality of our customer
relationships and conduct comprehensive market research to monitor customer
service. Since 1992, we have conducted telephone interviews with shipping
decision makers virtually every business day to determine their satisfaction
with delivery providers and perception of performance on 17 key service
factors. We use the telephone interview data to develop a statistical model
that identifies those service factors that have the greatest impact on
improving customer satisfaction, leading to enhanced profitability. This
proprietary Customer Satisfaction Index allows us to continuously monitor
satisfaction levels and helps us to focus our sales and communications efforts
and new service development. The 1998 CSI showed that our customer
satisfaction level for domestic U.S. service exceeded that of any of our
competitors. One particular area of UPS strength relative to all the
competitors measured was in the area of customer communications. This service
advantage is attributable in large part to our Preferred Customer Loyalty
program, aggressive ongoing communications through customer publications,
direct marketing, teleservicing and personal contact programs through our
drivers, sales force and other management personnel.
 
   Our customer focus is exemplified by the fact that we received the 1998
Platinum Pentastar, the most prestigious award that DaimlerChrysler presents
to its suppliers. This was the third time that we have been named "best in
class" for Chrysler's, and now DaimlerChrysler's, entire supplier base.
 
   Technology Systems. We have expanded our reputation as a leading package
distribution company by developing an equally strong capability as a mover of
electronic information. We currently collect electronic data on 7.5 million
packages each day--more than any of our competitors. As a result, we have
improved our efficiency and price competitiveness, and we provide improved
customer solutions.
 
   We have made significant investments in technology over the past decade.
CIO magazine ranked us 35th in the U.S. for our corporate information systems,
and we have won two Computerworld Smithsonian Awards for our technology. The
state-of-the-art technology that we currently deploy over our network enables
us to serve our customers globally in the most efficient ways. This technology
provides our customers with total order visibility and improves customer
service, receiving, order management and accounting operations. Currently,
about 64% of our volume is with shipping customers that are connected to us
electronically. We have found that customers that are connected to us
electronically on average generate 10-15% higher revenues to us than before
they were connected to our systems.
 
   The following are examples of our technology:
 
  .  We built and maintain the world's largest private DB2 database.
 
  .  We recently introduced DIAD III, which provides the fastest and most
     complete delivery information of any hand-held computer used by any
     delivery company in the world.
 
  .  We are the only company to provide electronic capture and retrieval of
     package recipients' signatures.
 
  .  In selected hubs, we have installed sophisticated, automated sortation
     systems to improve processing speed and operational efficiency.
 
  .  We developed an array of UPS Online Solutions, which are proprietary
     software and hardware packages that we provide to our customers. UPS
     Online Solutions enable our customers to send, manage and track their
     shipments and provide us with electronic package-level detail to support
     these functions.
 
   E-Commerce Capabilities. We are a leading participant in and facilitator of
e-commerce, which we define as the use of networked computer technology to
facilitate the buying and selling of goods and services. We have teamed with
over 100 e-commerce leaders to offer fully integrated Web-enabled solutions
for our customers. According to Zona Research, during the 1998 holiday season
we shipped 55% of the goods purchased over the Internet. Over two-thirds of
ActivMedia, Inc.'s top 50 websites that use transportation services are UPS
customers.
 
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<PAGE>
 
   We have integrated our systems with software produced by leading
manufacturers of enterprise resource planning, Internet transactions,
e-procurement and systems integration solutions. Our e-commerce alliance
partners include AT&T, Harbinger, IBM, Oracle and PeopleSoft. These solutions
give our customers the integration of UPS delivery options into their
websites, including real-time package delivery information. This integration
allows our customers to lower their package tracking costs, to improve their
collections through closed loop billing and to provide better customer
service. At the same time, we gain a competitive advantage as the preferred
transportation solution.
 
   Our website strategy is to provide our customers with the convenience of
all the functions that they would otherwise perform over the phone or at one
of the shipping outlets. Our site, www.ups.com, which receives 350,000
separate user sessions per day, including over one million package tracking
transactions, uses technology to strengthen ties to our customers. Our
customers can easily download our tools onto their own websites for direct use
by their customers, allowing users to access our tools without leaving our
customers' websites. Our Internet tools include enhanced tracking, rate
calculation, service selection, address validation, time-in-transit, service
mapping and electronic manifesting. Matrix Media and The Economist both rated
our website as the top transportation website in the world. Business
Marketing's NetMarketing also named our website one of the top 25 business-to-
business sites.
 
   Financial Strength. Our balance sheet gives us financial strength that few
companies can match. We are one of the few companies--and the only
transportation company--with a triple-A credit rating from both Standard &
Poor's and Moody's. This credit rating reflects the strength of our
competitive position, our consistent earnings and cash flow growth and our
conservative balance sheet. As of June 30, 1999, we had a balance of cash,
cash equivalents and marketable securities of approximately $3.2 billion and
shareowners' equity of $6.1 billion. Long-term debt was $2.1 billion, slightly
lower than at the end of 1998. Our financial strength has given us the
resources to achieve global scale and to make needed investments in technology
and fleet to position us for growth.
 
Growth Strategy
 
   Our growth strategy is designed to take advantage of our competitive
strengths while maintaining our focus on meeting or exceeding our customers'
requirements. The principal components of our growth strategy are as follows:
 
   Expand Our Leadership Position in Our Core Domestic Business. Our U.S.
package operation is the foundation of our business and the primary engine for
our future growth. We believe that our tradition of reliable parcel service,
our experienced and dedicated employees and our unmatched delivery system
provide us with the advantages of reputation, service quality and economies of
scale that differentiate us from our competitors. Our strategy is to increase
core domestic revenues through cross-selling of our existing and new services
to our large and diverse customer base, to limit the rate of expense growth
and to employ technology-driven efficiencies to increase operating profit. Our
core business is also a springboard for our growth in all other areas,
including international, e-commerce, logistics, supply chain management and
financial services.
 
   We plan to focus on maintaining and improving service quality, meeting
customer demands and providing innovative service offerings in order to
continue to grow domestic package revenues. A good example of our
implementation of this plan is last year's introduction of the first
nationwide guaranteed ground package delivery service.
 
   Continue International Expansion. We have built a strong international
presence through significant investments over a number of years. In 1998, our
international package operations generated $3.2 billion of revenue and became
profitable. The international package delivery market has grown, and continues
to grow, at a faster rate than the U.S. market. We plan to leverage our
worldwide infrastructure and broad product portfolio to continue to improve
our international business mix, to grow high margin premium services and to
implement cost, process and technology improvements.
 
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<PAGE>
 
   Europe, which includes our operations in Africa and the Middle East,
remains our largest regional market outside of the U.S., accounting for more
than half of our international revenue. As the European Community evolves into
a single marketplace, with well-established regional standards and
regulations, we believe that our business will benefit from additional growth
within Europe as well as continued growth in imports and exports worldwide. We
plan to solidify and expand our market position in Europe, where we have
already created a pan-European network. We have introduced new aircraft and
additional capacity in Europe to support volume growth and add flexibility to
our European air operations. In addition, we have gained operating rights,
enhanced our European hubs and supported the Express Shuttle, a high-speed
rail project that would facilitate the use of rail transportation of packages
throughout Europe. We believe that we have the strongest portfolio of pan-
European services of any integrated carrier in Europe, combining time-definite
delivery options and related information capabilities. We plan to continue to
expand our service offerings in Eastern Europe and the Middle East.
 
   In Asia, we primarily focus on the movement of express packages to and
from, as opposed to within, that region, and volumes remained strong
throughout the recent economic downturn. We are investing in our Asian air
network to enhance our operations. We recently developed new multi-million
dollar hubs in Hong Kong and Taiwan. We also acquired operating rights to
provide service to points in Asia and beyond from Tokyo, and we are seeking to
acquire additional air operating authority from a number of countries.
 
   We believe that there is significant untapped potential in Latin America
for us to expand our service offerings. To this end, we are introducing
overnight delivery between key cities in the Mercosur and other trade blocs,
introducing 8:00 a.m. delivery to the U.S., Canada and Europe and launching
domestic express service in selected markets. Most importantly, through our
recently announced agreement to acquire the assets and air routes of Challenge
Air Cargo, we will become the largest air cargo carrier in Latin America. This
position will enable us to further develop our cargo business and provide
advantages in pursuit of additional express package volume, a market which is
less developed in the region.
 
   Provide Comprehensive Logistics and Financial Solutions. Many businesses
have decided to outsource the management of all or part of their supply chains
to cut costs and to improve service. The domestic third-party logistics market
was estimated to be between $18 billion and $20 billion in 1998, and this
market is expected to grow at 15% to 20% annually. We believe that this trend,
evident in North America, Asia and Europe, will be closely followed by a
further demand for a service offering that incorporates transportation and
logistics supply chain services with complete financial support and
information services. We believe that we are well positioned to capitalize on
these trends for the following reasons:
 
  .  We now redesign and operate supply chains for major companies in 45
     countries, with about five million square feet of distribution space and
     35 centralized locations worldwide.
 
  .  We focus on technology and management-based solutions for our customers
     rather than the more traditional logistics focus on trucks, warehouses
     and assets.
     
  .  Maintaining long-term relationships with our customers allows us to
     share our expertise in organizing supply chain management, to establish
     an innovative way to speed products to market and to recommend to our
     customers more efficient services for their customers.     
 
   To complement our existing logistics and supply chain solutions, we plan to
design a portfolio of financial products and services that capitalizes on our
financial strength, customer relationships and extensive package-level data on
our customers' shipments. We have recently developed UPS Capital Corporation
to provide customers with funding in a variety of forms.
 
   Leverage Our Leading-Edge Technology and E-Commerce Advantage. Forrester
Research projects that the worldwide e-commerce business will grow from $80
billion in 1998 to over $3.2 trillion in 2003, for a compounded annual growth
rate of 109%. According to Zona Research, we are the preferred shipper for
e-commerce, shipping 55% of the goods purchased over the Internet during the
1998 holiday season.
 

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<PAGE>
 
E-commerce is an important part of our future growth because we believe that
it will drive smaller and more frequent shipments and provide a strong
complement to our core delivery service offerings.
 
   Our goal is to integrate UPS technology into the business processes of our
customers, providing information to assist them in serving their customers and
improving their cash flows. We will also use our technology and our physical
infrastructure to help provide the operational backbone to businesses striving
to create new business models in e-commerce. These new business models will
operate in just-in-time or manufacturer-direct distribution modes, which are
heavily dependent on smaller, more frequent shipments. In the process, we will
gain knowledge of new repeatable business models and market this expertise
elsewhere. A key component of this strategy is to expand relationships with
technology providers in the areas of enterprise resource planning,
e-procurement, systems integration and others, to integrate UPS technologies
into their solutions and into the websites and systems of their customers.
 
   To date, our leading-edge technology has enabled our e-commerce partners to
integrate our shipping functionality into their e-commerce product suites. Our
partners' products are being installed throughout the Internet, and these
integrated systems should provide us with a competitive advantage. In
addition, the UPS technology integrated into our partners' products creates
significant value for our customers through reduced cycle times, lower
operating costs, improved customer service, enhanced collections and the
ability to offer strong delivery commitments.
 
   Pursue Strategic Acquisitions and Global Alliances. In order to remain the
pre-eminent global company in our industry, we will continue to make strategic
acquisitions and enter into global alliances. Our public offering will better
position us to aggressively pursue strategic acquisitions and enter into
global alliances that can:
 
  .  complement our core business
 
  .  build our global brand
 
  .  enhance our technological capabilities or service offerings
 
  .  lower our costs
 
  .  expand our geographic presence and managerial expertise
 
Products and Services
 
   Domestic Ground Services
 
   For most of our history, we have been engaged primarily in the delivery of
packages traveling by ground transportation. We expanded this service
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. We restrict this service to packages that
weigh no more than 150 pounds and are no larger than 108 inches in length and
130 inches in combined length and girth. In 1998, we introduced UPS Guaranteed
GroundSM, which gives guaranteed, time-definite delivery of all commercial
ground packages.
 
   In addition to our 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 recipient at one address and
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.
 
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<PAGE>
 
   Domestic Air Services
 
   We provide domestic air delivery throughout the United States. UPS Next Day
Air(R) offers guaranteed next business day delivery by 10:30 a.m. to more than
75% of the United States population, delivery by noon to areas covering an
additional 13% and end-of-day delivery to the remainder. We offer Saturday
delivery for UPS Next Day Air shipments for an additional fee.
 
   UPS Early A.M.(R) guarantees next business day delivery of packages and
documents by 8:00 a.m. or 8:30 a.m. to more than 55% of the United States
population. UPS Early A.M. 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 and by the end of
the day to residential destinations in the 48 contiguous United States.
 
   UPS SonicAir Best FlightSM provides same-day and next-flight-out delivery
services to virtually any location in the United States.
 
   We offer three options for customers who desire guaranteed delivery
services but do not require overnight delivery:
 
  .  UPS 2nd Day Air A.M.(R) provides guaranteed delivery of packages and
     documents to commercial addresses by noon of the second business day.
 
  .  UPS 2nd Day Air(R) provides guaranteed delivery of packages and
     documents in two business days.
 
  .  UPS 3 Day Select(R) provides guaranteed delivery in three business days.
     3 Day Select is priced between traditional ground and air-express
     services.
 
   In 1998, we introduced the first reusable Next Day Air letter container,
which features a resealable flap and is made from 100% recycled material. We
also expanded our On-Call Air Pickup services to 94% of all businesses.
 
   International Delivery Services
 
   We deliver international shipments to more than 200 countries and
territories worldwide, and we provide guaranteed overnight delivery to many of
the world's most important business centers. Throughout 1998, we continued to
develop our global delivery and logistics network. We offer a complete
portfolio of services that are designed to provide a uniform service offering
across major countries. 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. We offer complete customs clearance service for any
mode of transportation, regardless of carrier, at all UPS Customhouse
Brokerage sites in the U.S. and Canada.
 
   UPS Worldwide ExpressSM 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 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 SM complements our 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. In
February 1998, we 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
 
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<PAGE>
 
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.
 
   We also offer UPS Worldwide Expedited SM service, which is designed to meet
customers' requirements for routine shipments that do not require overnight or
express delivery. From the United States, 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 UPS Worldwide Expedited services are offered between
many international locations and from international locations to the United
States, providing guaranteed service from international locations that vary
from country to country.
 
   UPS International Standard SM service provides scheduled delivery of
shipments within and between the European Union countries, within Canada and
Mexico and between the United States and Canada. This service includes day-
specific delivery of less-than-urgent package shipments. The service offers
delivery typically between one and three days, depending on the distance.
 
   We operate a European air hub in Cologne, Germany and an Asia Pacific air
hub in Taipei, Taiwan.
 
   Non-Package Operations
 
   We provide other services that are distinct from our package operations, a
component of which is UPS Logistics Group, Inc., discussed below. We formed
UPS Logistics Group, Inc. in early 1996. It is the parent company for a number
of operating subsidiaries.
 
   UPS Worldwide Logistics(R), Inc., a subsidiary of UPS Logistics Group,
provides third-party supply chain management solutions for a number of
industries, including high-tech, telecommunications, apparel, automotive and
electronics. It 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. It 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.
 
   Service Parts Logistics. We believe that supply chain management will be a
significant new segment of opportunity. Service Parts Logistics brings
together a number of our competencies to the management of field service
technicians for manufacturers of computers and other office equipment. Our
services include call center and technical service hotline management,
inventory financing, just-in-time inventory stocking and transportation, and
parts repair and return.
 
   Some of the other subsidiaries of UPS Logistics Group are:
 
  .  SonicAir(R), Inc., which provides same-day and next-flight-out delivery
     services and critical parts warehousing to virtually any location in the
     United States and locations in more than 180 countries
 
  .  Roadnet(R) Technologies, Inc., a route scheduling software developer
 
  .  Diversified Trimodal, Inc., also known as Martrac(R), which transports
     produce and other commodities in temperature-controlled trailers over
     railroads
 
  .  Worldwide Dedicated Services, Inc., which provides dedicated contract
     fleet management services
 
  .  UPS Truck Leasing(R), Inc., which rents and leases trucks and tractors
     to commercial users under full-service rental agreement, and provides
     maintenance for other companies' fleets of vehicles on a contract basis.
 
 
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   Electronic Services
 
   We also provide a family of electronic shipping and tracking solutions
under the UPS OnLine(R) shipping system. UPS OnLine Office is software that
helps shippers streamline their shipping activities. It processes shipments,
prints address labels, tracks packages and provides basic management reports
from a desktop computer. Office software supports international shipments as
easily as domestic shipments and quickly prepares any export documentation.
UPS OnLine 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 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 Host Access provides
electronic connectivity between UPS and the 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. UPS OnLine Compatible Solutions offer
similar benefits to customers using shipping systems supplied by third
parties.
 
   Our website, www.ups.com, brings a wide array of information services to
customers worldwide. Package tracking, pick-up requests, rate quotes, service
mapping, drop-off locator, transit times and supply ordering services are all
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.
 
   UPS Document ExchangeSM, featuring UPS OnLine Courier ServiceSM, is a
delivery solution that utilizes the Internet as the mode of transport. This
service offers features not found in traditional e-mail applications, such as
document tracking, version translation, scheduled delivery, delivery
confirmation, security options and the ability to carry any type of digital
file. This gives customers the ability to send any digitally produced material
in a secured environment, which allows them to take advantage of the speed and
efficiencies of electronic delivery.
 
   In April 1998, we established a web site at www.ec.ups.com to support our
commitment to e-commerce. This site promotes the advantages of e-commerce and
spotlights our unique position with regard to the facilitation of commerce.
 
   Delivery Service Options
 
   We offer additional services such as Consignee Billing, Delivery
Confirmation and Call Tag Service to those customers who require customized
package distribution solutions. We designed Consignee Billing for customers
who receive large volumes of merchandise from a number of vendors. We bill
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. Call Tag Service provides prompt
pick-up and return of packages previously delivered by UPS from any address in
the 48 contiguous states.
 
Sales and Marketing
 
   Our sales force consists of about 3,500 account executives worldwide,
spread across our 15 regions. Account executives, except for regional
management account executives, are further allocated to individual operating
districts. We have an organization of regionally based account managers, who
report directly to our corporate office, for our biggest multi-site customers.
 
                                      44

<PAGE>
 
   We recently instituted our new Sales Force 2000 initiative, which realigned
our sales force based on an assessment of customer revenue and potential.
Account responsibilities were rationalized, and account executives' workloads
were distributed based on the size and strategic importance of individual
customers.
 
   We are also in the process of providing each of our account executives with
laptop computers loaded with our proprietary "Link" account management
software. These systems will provide account executives with useful
productivity tools, and we have determined that the systems will increase the
time our account executives are able to spend with customers and potential
customers and improve their overall effectiveness.
 
   In addition to our general sales force, we have overlaid three supplemental
sales forces: International Business, focused on international business out of
major U.S. business centers; UPS HundredWeight ServiceSM business; and e-
commerce. Within these specialty sales forces, the account executives report
to their respective districts. Our logistics operations and other subsidiaries
maintain their own sales forces.
 
   Our marketing organization is generally organized along similar lines. At
the corporate level, the marketing group is engaged in rate-making and revenue
management policy, market and customer research, product development, brand
management, product management, marketing alliances and e-commerce, including
the non-technical aspects of our web presence. Advertising, public relations
and most formal marketing communications are centrally conceived and
controlled.
 
   Individual district and region marketing personnel are engaged in business
planning, bid preparation and other revenue management activities, and in
coordinating alignment with corporate marketing initiatives. Individual
regions and districts may engage in local promotional and public relations
activities pertinent to their locales.
 
Employees
 
   During 1998, we employed over 330,000 employees. We were recently named one
of Fortune magazine's Diversity Elite--one of the 50 best companies for
Asians, Blacks and Hispanics.
 
   Approximately 89,000 full-time and 116,000 part-time employees are
represented by various labor unions, primarily the International Brotherhood
of Teamsters. We and the Teamsters are parties to a five-year master agreement
that expires July 31, 2002, the longest agreement we have ever reached with
the Teamsters. In addition, we employ about 2,100 pilots represented by the
Independent Pilots Association. We and the Independent Pilots Association have
an eight-year agreement that becomes amendable on January 1, 2004.
 
   We believe that our relations with our employees are good.
 
Properties and Facilities
 
   We own our headquarters, which are located in Atlanta, Georgia and consist
of about 735,000 square feet of office space on an office campus.
 
   We also own our 29 principal U.S. package operating facilities, which have
floor spaces that range from about 354,000 to 693,000 square feet. In
addition, we have a 1.9 million square foot operating facility near Chicago,
Illinois, which is designed to streamline shipments between East Coast and
West Coast destinations.
 
   We also own about 730, and lease about 873, smaller operating facilities
throughout the United States for our package operations. 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 our vehicles and
equipment and employ specialized mechanical installations for the sorting and
handling of packages. We also own or lease other facilities that support our
international package and non-package operations. We believe our facilities
are adequate to support our current operations.
 
 
                                      45

<PAGE>
 
   Our aircraft are operated in a hub and spokes pattern in the United States.
Our principal air hub in the United States is located in Louisville, Kentucky,
with regional air hubs in Columbia, South Carolina, Dallas, Texas, Hartford,
Connecticut, Ontario, California, Philadelphia, Pennsylvania and Rockford,
Illinois. These hubs house facilities for the sorting, transfer and delivery
of packages. Our Louisville, Kentucky hub handles the largest volume of
packages for air delivery in the United States. Our European air hub is
located in Cologne, Germany, and our Asia-Pacific air hub is in Taipei,
Taiwan. Regional air hubs in Canada include facilities in Hamilton, Ontario
and Montreal, Quebec. Our new automated sorting facility, "Hub 2000," is
currently under construction in Louisville, Kentucky, and we expect it to
commence partial operations in 2000. We expect this new facility to increase
our hub capacity by over 40% in Louisville.
 
   Our computer operations are consolidated in a 435,000 square foot leased
facility, the Ramapo Ridge facility, which is located on a 39-acre site in
Mahwah, New Jersey. We have leased this facility for an initial term ending in
2019 for use as a data processing, telecommunications and operations facility.
We also own a 160,000 square foot facility located on a 25-acre site in the
Atlanta, Georgia area, which serves as a backup to the main computer
operations facility in New Jersey. This facility provides production functions
and backup capacity in case a power outage or other disaster incapacitates the
main data center. It also helps us to meet communication needs.
 
Fleet
 
   Aircraft
 
   As of December 31, 1998, our fleet consisted of the following 536 aircraft:
 

<TABLE>
<CAPTION>
                                                Leased or
                                                Chartered
   Description                           Owned from Others On Order Under Option
   -----------                           ----- ----------- -------- ------------
   <S>                                   <C>   <C>         <C>      <C>
   McDonnell-Douglas DC-8-71............   23       --        --         --
   McDonnell-Douglas DC-8-73............   26       --        --         --
   Boeing 727-100.......................   51       --        --         --
   Boeing 727-200.......................   10       --        --         --
   Boeing 747-100.......................   12       --        --         --
   Boeing 747-200.......................    4       --        --         --
   Boeing 757-200.......................   64        9         2         31
   Boeing 767-300.......................   21        6         3         30
   Airbus A300-600......................   --       --        30         30
   Other................................   --      310        --         --
                                          ---      ---       ---        ---
     Total..............................  211      325        35         91
                                          ===      ===       ===        ===
</TABLE>

 
   We maintain an inventory of spare engines and parts for each aircraft.
 
   All of the aircraft we own meet Stage III federal noise regulations and can
operate at airports that have aircraft noise restrictions. We became the first
major airline to successfully operate a 100% Stage III fleet more than three
years in advance of the date required by federal regulations.
 
   During 1998, we took delivery of two Boeing 747-200, three Boeing 757-200
and five Boeing 767-300 aircraft. We also exercised options to purchase ten
Boeing 757-200 aircraft that we previously accounted for under operating
leases. During 1999, we have taken delivery of two Boeing 757-200 and three
Boeing 767-200 aircraft. We also have firm commitments to purchase four Airbus
A300-600 aircraft during 2000 and 26 Airbus A300-600 aircraft between 2001 and
2005, and we have options to purchase 30 Airbus A300-600 aircraft between 2002
and 2009.
 
                                      46

<PAGE>
 
   Because of our maintenance schedules, and our fewer daily flight cycles as
compared to commercial passenger airlines, we do not anticipate the need to
retire any currently owned aircraft in the next ten years.
 
   Vehicles
 
   We operate a fleet of about 149,000 delivery vehicles, ranging from panel
delivery vehicles to large tractors and trailers, including about 1,400
temperature-controlled trailers owned by Martrac and about 4,000 vehicles
owned by UPS Truck Leasing.
 
   Our management believes that these aircraft and vehicles are adequate to
support our operations over the next year.
 
Safety
 
   We promote safety throughout our operations.
 
   Our Automotive Fleet Safety Program is built with the following components:
 
  .  Selection. Six out of every seven drivers come from our part-time ranks.
     Therefore, many of our new drivers are familiar with our philosophy,
     policies, practices and training programs.
 
  .  Training. Training is the cornerstone of our Fleet Safety Program. Our
     approach starts with training the trainer. All trainers undergo a
     rigorous training workshop to ensure that they have the skills and
     motivation to effectively train novice drivers. The first 30 days of a
     new driver's employment includes eight hours of classroom "space and
     visibility" training followed by three safety training rides integrated
     into their training cycle.
 
  .  Responsibility. Our operations managers are responsible for their
     drivers' safety records. We investigate every accident. If we determine
     that the accident could have been prevented, we re-train the driver.
 
  .  Preventive Maintenance. An integral part of our Fleet Safety Program is
     a comprehensive Preventive Maintenance Program. Our fleet is tracked by
     computer to ensure that each vehicle is serviced before a breakdown or
     accident can occur.
 
  .  Honor Plan. A well-defined safe driver honor plan recognizes and rewards
     our drivers when they achieve success. We currently have about 2,850
     drivers who have driven for 25 years or more without an avoidable
     accident.
 
   Our workplace safety program consists of a comprehensive health and safety
program that is monitored by our employee-management health and safety
committees. The workplace safety process focuses on employee conditioning and
safety-related habits. We enlist employees' help in designing facilities and
work processes.
 
Competition
 
   We are the largest package distribution company in the world, in terms of
both revenue and volume. We offer a broad array of services in the package
delivery industry and therefore compete with many different companies and
services on a local, regional, national and international basis. These
competitors include the postal services of the United States and other
nations, various motor carriers, express companies, freight forwarders, air
couriers and others. Our major competitors include Federal Express, the United
States Postal Service, RPS, Inc., Airborne Express, DHL Worldwide Express,
Deutsche Post and TNT Post Group.
 
 
                                      47

<PAGE>
 
   Competition is increasingly based on a carrier's ability to integrate its
distribution and information systems with its customers' systems to provide
unique transportation solutions at competitive prices. We rely on our vast
infrastructure and service portfolio to attract and maintain customers. As we
move into the logistics and other non-package areas, we compete with a number
of participants in the logistics, financial services and information
technology industries.
 
Government Regulation
 
   Both the Department of Transportation and the Federal Aviation
Administration 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.
In 1988, the FAA granted us an operating certificate, which remains in effect
so long as we meet the operational requirements of federal aviation
regulations.
 
   The FAA has issued rules mandating repairs on all Boeing Company and
McDonnell-Douglas Corporation aircraft that have completed a specified number
of flights, and has also issued rules requiring a corrosion control program
for Boeing Company aircraft. Our total expenditures under these programs for
1998 were about $16.4 million. The future cost of repairs pursuant to these
programs may fluctuate. All mandated repairs have been completed or are
scheduled to be completed within the timeframes specified by the FAA.
 
   Our ground transportation of packages in the United States is subject to
the DOT's jurisdiction with respect to the regulation of routes, and both the
DOT's and the states' jurisdiction with respect to the regulation of safety,
insurance and hazardous materials.
 
   We are subject to similar regulation in many non-U.S. jurisdictions. In
addition, we are subject to non-U.S. government regulation of aviation rights
to and beyond non-U.S. jurisdictions, and non-U.S. customs regulation.
 
   Postal Rate Proceedings
 
   The Postal Reorganization Act of 1970 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. We believe that the postal service consistently
attempts to set rates for its monopoly services, particularly first class
letter mail, above the cost of providing these services, in order to use the
excess revenues to subsidize its expedited, parcel, international and other
competitive services. Therefore, we participate in the postal rate proceedings
before the Postal Rate Commission in an attempt to secure fair postal rates
for competitive services.
 
   On June 29, 1998, the Postal Service Board of Governors adopted, with minor
exceptions, the Postal Rate Commission's Recommended Decision in the general
rate case filed by the postal service in 1997. On July 13, 1998, we filed a
notice of appeal with the United States Court of Appeals for the District of
Columbia, claiming the Postal Rate Commission erred in the treatment of air
transportation costs associated with the movement of parcel post packages in
the state of Alaska and Priority Mail's contribution to covering institutional
(overhead) costs. The appeal is pending.
 
   Legislation has been proposed that would result in significant amendments
to the Postal Reorganization Act. If adopted, it would introduce a form of
rate-cap regulation of monopoly services, loosen regulation of competitive
services and, for some matters, strengthen the powers of the Postal Rate
Commission.
 
 
                                      48

<PAGE>
 
   Environmental Regulation
 
   The Clean Air Act Amendments of 1990 require a ten-year phase-in of clean-
fuel vehicles by some fleets in urban areas with the worst air quality
problems. We began a project in 1989 using clean compressed natural gas as a
fuel in some package cars. By the end of 1998, more than 850 UPS package cars
were running on compressed natural gas 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 some transportation
control measures. The regulations exempt clean fuel vehicles, such as our
compressed natural gas vehicles, from urban transportation control measures,
which include truck bans and time-of-day restrictions. The regulations also
permit the compressed natural gas vehicles to travel in high occupancy vehicle
lanes, if they meet emission criteria.
 
   All of the aircraft we own meet Stage III federal noise regulations.
 
Litigation
 
   On August 9, 1999 the U.S. Tax Court issued an opinion unfavorable to UPS
regarding a Notice of Deficiency asserting that we are liable for additional
tax for the 1983 and 1984 tax years. The Court held that we are liable for tax
on income of Overseas Partners Ltd., a Bermuda company, which has reinsured
excess value package insurance purchased by our customers beginning in 1984.
The Court held that for the 1984 tax year we are liable for taxes of $31
million on income reported by OPL, penalties and penalty interest of $93
million and interest for a total after-tax exposure we estimate at
approximately $246 million.
 
   In addition, during the first quarter of 1999, the IRS issued two Notices
of Deficiency asserting that we are liable for additional tax for the 1985
through 1987 tax years, and the 1988 through 1990 tax years. The primary
assertions by the IRS relate to the reinsurance of excess value package
insurance, the issue raised for the 1984 tax year. The IRS has based its
assertions on the same theories included in the 1983-1984 Notice of
Deficiency.
 
   We anticipate that the IRS will take similar positions for tax years
subsequent to 1990. Based on the Tax Court opinion, we currently estimate that
our total after-tax exposure for the tax years 1984 through 1999 could be as
high as $2.353 billion. We are in the process of analyzing our position in
light of the Tax Court opinion and are evaluating our options, including
appeal of the Tax Court decision, continuance of the litigation or negotiation
of a settlement.
 
   In our second quarter 1999 financial statements, we have recorded a tax
assessment charge of $1.786 billion, which includes an amount for related
state tax liabilities. The charge includes taxes of $915 million and interest
of $871 million. This assessment resulted in a tax benefit of $344 million
related to the interest component of the assessment. As a result, our net
charge to net income for the tax assessment was $1.442 billion, increasing our
total after-tax reserve with respect to these matters to $1.672 billion.
 
   We determined the size of our reserve with respect to these matters in
accordance with generally accepted accounting principles based on our estimate
of our most likely liability. In making this determination, we concluded that
it was more likely that we would be required to pay taxes on income reported
by OPL and interest, but that it was not probable that we would be required to
pay any penalties and penalty interest. If penalties and penalty interest
ultimately are determined to be payable, we would have to record an additional
charge of up to $681 million. We cannot assure you that our ultimate liability
for these matters will not exceed the level of our reserves.
 
   On September 1, 1999, we deposited $1.349 billion with the IRS related to
these matters, without conceding the IRS's position or giving up our right to
appeal the Tax Court's decision, in order to stop the accrual of interest on
that amount of the IRS's claim. We have sufficient cash, cash equivalents and
marketable securities on hand to deposit with the IRS, if we choose to do so,
the remaining amount necessary to satisfy our maximum estimated after-tax
exposure for these tax matters, without affecting our ability to meet our
foreseeable operating expenses and budgeted capital expenditures.
 
 
                                      49

<PAGE>
 
   The IRS has proposed adjustments, unrelated to the OPL matters discussed
above, regarding the timing of deductions, the characterization of expenses as
capital rather than ordinary and our entitlement to the investment tax credit
and the research tax credit in the 1985 through 1990 tax years. These proposed
adjustments, if sustained, would result in $88 million in additional tax for
the 1985 through 1987 tax years and $267 million in additional tax for the
1988 through 1990 tax years.
 
   We believe that our practice of expensing the items that the IRS alleges
should have been capitalized is consistent with the practices of other
industry participants. We expect that we will prevail on substantially all of
these issues. Should the IRS prevail, however, unpaid interest on these
adjustments through 1999 could aggregate up to $396 million, after the benefit
of related tax deductions. Since the majority of these adjustments propose to
capitalize items for which depreciation deductions would be allowed in
subsequent years, the effect would be to substantially reduce the net impact
of these adjustments and related interest. The IRS's proposed adjustments
include penalties and penalty interest. We believe that the possibility that
such penalties and penalty interest will be sustained is remote. The IRS may
take similar positions with respect to some of these issues for each of the
years from 1991 through 1999. We believe the eventual resolution of these
issues will not result in a material adverse effect on our financial
condition, results of operations or liquidity.
 
   We are a defendant in various employment-related lawsuits. In one of these
actions, which alleges employment discrimination by UPS, class action status
has been granted, and the United States Equal Employment Opportunity
Commission has been granted the right to intervene. We are also a defendant in
various other lawsuits that arose in the normal course of business. In our
opinion, none of these cases is expected to have a material adverse effect
upon our financial condition, results of operations or liquidity.
 
                                      50

<PAGE>
 
                      THE MERGER, THE PUBLIC OFFERING AND
                               THE TENDER OFFER
 
The Merger
 
   How It Will Work
 
   Old UPS currently owns all of New UPS's (United Parcel Service, Inc.)
common stock, and New UPS currently owns all of UPS Merger Subsidiary, Inc.'s
common stock. When Old UPS merges with UPS Merger Subsidiary, Inc.:
 
  .  Old UPS will survive the merger, and UPS Merger Subsidiary, Inc. will
     cease to exist
 
  .  each share of Old UPS's outstanding common stock will automatically
     convert into two shares of New UPS's class A common stock, and Old UPS's
     current shareowners will own all of New UPS's class A common stock
 
  .  New UPS will own all of Old UPS's common stock
 
   The result will be that our current shareowner-owned company, Old UPS, will
become a subsidiary of New UPS, and you will own New UPS class A common stock
instead of Old UPS common stock. The new shareowner-owned company, New UPS,
will have a new certificate of incorporation and bylaws, while Old UPS's
certificate of incorporation will remain unchanged. A copy of the merger
agreement is included as Annex A to this proxy statement/prospectus.
 
   We believe that New UPS's capital structure will help preserve the best
aspects of our employee-owned and owner-managed culture while providing us
with a publicly traded equity security that we could use for strategic
alliances and acquisitions in important markets around the world. You no
longer will be required to offer your shares to us before you can sell them to
third parties. We also are seeking to terminate the right of recall by
terminating the UPS Managers Stock Trust, the UPS Employees Stock Trust and
the UPS Stock Trust. See "Purposes of the Merger."
 
   New UPS's Certificate of Incorporation
 
   New UPS's certificate of incorporation will be different from our current
certificate of incorporation in the following principal ways:
 
  .  it will replace the current common stock with class A-1 common stock,
     class A-2 common stock, class A-3 common stock and class B common stock
 
  .  it will eliminate the requirement that you must offer your shares to us
     for purchase before you can sell them to third parties
 
  .  it will modify our "scaled voting" provision so that it does not reduce
     the voting power of shareowners unless they own more than 25% of our
     total voting power
 
  .  it will add provisions that restrict the transferability of the class A
     common stock for a period of time to allow us to complete a successful
     public offering
 
   There are additional changes in New UPS's certificate of incorporation. You
should read "Description of Capital Stock, Certificate of Incorporation and
Bylaws" and New UPS's certificate of incorporation, which is included as Annex
B to this proxy statement/prospectus.
 
   Voting Rights
 
   Holders of class A common stock will be entitled to ten votes per share on
all matters voted upon by our shareowners. Holders of class B common stock
will have the same economic rights as holders of class A common stock, but
will be entitled to one vote per share on all matters voted upon by our
shareowners. Any person or group that beneficially owns more than 25% of our
total voting power will be allowed only 1/100th of a vote with respect to each
vote in excess of 25% of our total voting power. Old UPS's certificate of
incorporation contains a similar provision, but it applies to any person or
group that owns more than 10% of our total voting power.
 
                                      51

<PAGE>
 
   What You Will Receive
 
   When we effect the merger, each share of our outstanding common stock will
convert automatically into two shares of New UPS's class A common stock. Of
the Old UPS shares you currently own, as nearly as possible:
 
  .  one-third will be converted into class A-1 common stock
 
  .  one-third will be converted into class A-2 common stock
 
  .  one-third will be converted into class A-3 common stock
 
   If the number of shares you own is not a multiple of three, you will
receive either one more share of class A-3 common stock than of class A-2 and
A-1 or, if necessary, the same number of shares of class A-3 and A-2, and one
fewer share of class A-1. Except for the applicable restricted period, which
we describe below, each share of class A common stock will be identical.
 
   Separately, we are seeking approval to terminate the UPS Managers Stock
Trust and the UPS Employees Stock Trust, and we intend to terminate the UPS
Stock Trust. The shares of class A common stock you receive as a result of the
merger will not be subject to these trusts and may not be recalled by us.
 
   Transfer Restrictions on Shares of Class A Common Stock
 
   You will not be able to sell or transfer shares of class A common stock to
anyone other than a permitted transferee, or convert shares of class A common
stock into class B shares, until the relevant restricted period expires. This
restricted period will expire:
 
  .  180 days after our public offering for class A-1 common stock
 
  .  360 days after our public offering for class A-2 common stock
 
  .  540 days after our public offering for class A-3 common stock
 
   You also will be prohibited from buying a put option, selling a call option
or entering into any other hedging or insurance transaction relating to your
class A common stock during these restricted periods.
 
   Subject to restrictions on persons deemed to be our affiliates, you will be
able to transfer shares of class A common stock freely after the applicable
restricted period expires. Management thinks that it is important for our
people to have a significant investment in our common stock in order to be
truly motivated to strive for our continued success. Other than sales in the
tender offer, management expects that, in the future, our people will maintain
their investment in the company until retirement.
 
   If you validly transfer any shares of class A common stock to someone who
is not a permitted transferee, those shares automatically will convert into
shares of class B common stock.
 
   A "permitted transferee" means:
 
  .  the transferor's spouse or child if:
 
    .  the transferor was a holder on the date of the merger of the shares
       being transferred and the transfer occurs within 540 days of that
       date, or
 
    .  the transferor is an employee of New UPS or one of its subsidiaries
 
  .  a trust for the sole benefit of the transferor or the transferor's
     spouse or child, if
 
    .  the transferor was a holder on the date of the merger of the shares
       being transferred and the transfer occurs within 540 days of that
       date, or
 
    .  the transferor is an employee of New UPS or one of its subsidiaries
 
  .  an individual retirement account if the transferor is:
 
    .  any employee benefit plan sponsored by New UPS or any of its
       subsidiaries
 
                                      52

<PAGE>
 
    .  any distributee of such an employee benefit plan, or
 
    .  another individual retirement account for the benefit of such a
       distributee
 
  .  the beneficial owner of an individual retirement account if the
     transferor is the individual retirement account
 
  .  the estate of a deceased holder of shares, if
 
    .  the deceased holder was a holder on the date of the merger of the
       shares being transferred and the transfer occurs within 540 days of
       that date, or
 
    .  the deceased holder was an employee of New UPS or one of its
       subsidiaries on the date of death,
 
    and the transfer was made pursuant to the deceased holder's will or the
    laws of distribution
 
  .  the beneficiary of an estate referred to in the preceding item, if that
     beneficiary is the spouse or child of the deceased holder or a trust for
     the sole benefit of the spouse or child of the deceased holder
 
  .  an employee benefit plan sponsored by New UPS or any of its subsidiaries
 
  .  a bank or trust company in connection with a pledge of shares by a
     person who either was:
 
    .  a holder on the date of the merger of the shares being pledged, or
 
    .  an employee of New UPS or one of its subsidiaries on the date of the
       pledge,
 
    as bona fide collateral for a loan to that person, if the lending
    institution agrees in writing to immediately sell the shares to New UPS
    in the event that the lending institution forecloses on the shares
 
  .  a charitable organization that agrees in writing to sell the shares to
     New UPS immediately following the transfer
 
  .  New UPS or any of its subsidiaries
 
  .  any distributee of any employee benefit plan sponsored by New UPS or any
     of its subsidiaries if the transferor is the plan, and
 
  .  any employee of New UPS or any of its subsidiaries if the transferor is
     New UPS or any of its subsidiaries
 
   Listing
 
   The class A common stock will not be listed on a national securities
exchange or traded in the organized over-the-counter market. We have applied
to list the class B common stock on a stock exchange. Listing is subject to
fulfilling all applicable listing requirements.
 
The Public Offering
 
   Soon after the merger is approved, subject to market conditions, we plan to
make a public offering of New UPS's class B common stock.
 
   After the public offering:
 
  .  class A common stock will constitute about 90% of our total outstanding
     common stock and about 99% of our total voting power
 
  .  class B common stock will constitute about 10% of our total outstanding
     common stock and about 1% of our total voting power
 
   Although we do not expect to determine the initial public offering price
for our class B common stock for several weeks, we believe that our initial
public offering price will be higher than the repurchase price currently in
effect. We expect to announce our financial results for the third quarter, and
a range within which the class B common stock is expected to be priced in the
initial public offering, before the special meeting.
 
 
                                      53

<PAGE>
 
   We have applied to the securities regulatory authorities in certain
Canadian provinces for rulings that the distribution of class A shares and
class B shares is not subject to local securities dealer registration and
prospectus requirements. We expect this ruling to be granted on the condition
that all material relating to the merger that is sent to persons outside
Canada be sent to persons in Canada and that the first trade in the class B
shares received by persons in the applicable provinces will be subject to
local prospectus requirements (or prospectus exemptions), unless the first
trade is made through the facilities of a stock exchange outside of Canada in
accordance with the rules of that stock exchange and applicable laws. Persons
in Canada should take note of this resale restriction.
 
The Tender Offer
 
   After the public offering, we intend to use the net proceeds of the public
offering to fund a cash tender offer for some of the class A-1 common stock.
This will give you an opportunity to sell a portion of your class A-1 common
stock before the restricted periods expire.
 
   The percentage of your shares that you will be able to sell in the tender
offer will depend on the amount of proceeds we receive in the public offering,
the market price of the class B shares when we make the tender offer and the
level of participation by other shareowners in the tender offer. As a result,
we will not be able to determine the percentage of your shares that you will
be able to sell in the tender offer until the tender offer is complete.
 
   We will purchase shares in the tender offer pursuant to an offer to
purchase and related materials, which we will distribute to you when we
commence the tender offer. We will also file a Schedule 13E-4 with the SEC in
connection with the tender offer.
 
How We Will Effect the Merger and the Public Offering
 
   If approved, we will effect the merger immediately prior to the closing of
the public offering. At that time, we will file a certificate of merger with
the Secretary of State of the State of Delaware. We currently expect that this
will occur by the end of 1999.
 
   Your shares will be converted automatically, without any action on your
part, into New UPS's class A common stock. Shortly after the completion of our
public offering, we will send you a letter telling you how you will receive
certificates for your class A common stock.
 
          You should not send any share certificates to us at this time.
 
Conditions to the Merger
 
   We will cause the merger to become effective only if each of the following
conditions is satisfied or waived:
 
  .  A majority of the outstanding shares of our common stock entitled to
     vote at the special meeting approve the merger agreement
 
  .  We simultaneously consummate the initial public offering of our class B
     shares
 
  .  Certain of our employee benefit plans receive an exemption or opinion
     from the Department of Labor to the effect that the exchange of Old UPS
     common stock for New UPS class A common stock is not a "prohibited
     transaction" under ERISA
 
Federal Income Tax Consequences of the Merger
 
   The merger, the conversion of your shares into New UPS's class A common
stock and the public offering will not be taxable transactions for you for
U.S. federal income tax purposes. Any sale of your class A common stock, in
the tender offer or otherwise, will be a taxable transaction for you for U.S.
federal income tax purposes. You should read the section of this proxy
statement/prospectus entitled "Federal Income Tax Consequences to
Shareowners."
 
 
                                      54

<PAGE>
 
                            PURPOSES OF THE MERGER
 
   The purposes of the merger are:
 
  .  to put in place a capital structure that will give us greater financial
     flexibility to respond to changes in global market conditions
 
  .  to give us a publicly traded equity security that we could use when
     appropriate for strategic alliances and acquisitions in important
     markets around the world, and simultaneously to preserve the best
     aspects of our employee-owned and owner-managed culture
 
   Our current capital structure and certificate of incorporation have
functioned well for us over the past century as a private company. The
transfer restrictions that apply to all of our voting stock have ensured that
we remained owned and controlled by our managers and employees and their heirs
and descendants. We have provided limited liquidity to our shareowners by
offering to purchase shares at prices set by our board of directors.
 
   But as we enter the 21st century, we face a rapidly changing competitive
and operating environment. The package delivery industry is globalizing and
consolidating at an unprecedented rate. We face new competitive challenges
from postal monopolies, which have considerable resources and infrastructures.
We believe that we should have a publicly traded equity security that we could
use when appropriate for strategic alliances and acquisitions in order to
maintain our pre-eminent position.
 
   We have determined that we and our shareowners would benefit from having a
publicly traded equity security. We also have determined that employee
ownership and owner management are important facets of our corporate identity
that should not be sacrificed. Therefore, we have designed the merger and
related transactions and New UPS's certificate of incorporation to continue
our historical culture of employee ownership and owner management, while
allowing us to simultaneously issue our stock to the public.
 
   New UPS's certificate of incorporation accomplishes these goals by
concentrating both our equity ownership and voting power in our newly created
class A common stock, while offering our newly created class B common stock,
which has the same economic rights but has less voting power and represents
less of our total equity, to the public. Because we initially will issue our
class A common stock only to our current shareowners, and because we intend to
issue our class A common stock primarily to our managers and employees in the
future, this structure will maintain and enhance our historical ownership
profile. Simultaneously, our class B common stock will be publicly traded,
providing us with a market pricing mechanism for all of our stock and a
publicly traded equity security that we could use when appropriate for
strategic alliances and acquisitions in the future.
 
                                      55

<PAGE>
 
                THE SPECIAL MEETING; VOTING RIGHTS AND PROXIES
 
   We are furnishing this proxy statement/prospectus to you in connection with
our solicitation of proxies at the special meeting. We are first mailing this
proxy statement/prospectus and the accompanying form of proxy on or about
September 23, 1999. We also are furnishing this proxy statement/prospectus as
a prospectus in connection with New UPS's issuance of class A common stock as
a result of the merger.
 
Time, Place and Purposes
 
   We will hold the special meeting at The Corporation Trust Company, 1209
Orange Street, Wilmington, Delaware 19801, on October 25, 1999, at 9:00 A.M.
At the special meeting, we will ask you to vote upon two proposals:
 
  .  to approve an Agreement and Plan of Merger, dated as of September 22,
     1999, among Old UPS, New UPS and UPS Merger Subsidiary, Inc., pursuant
     to which UPS Merger Subsidiary, Inc. will merge with and into Old UPS
     and each share of our currently outstanding stock will be converted into
     two shares of New UPS's class A common stock; and
 
  .  to approve the United Parcel Service, Inc. Incentive Compensation Plan.
 
Record Date; Voting Rights; Votes Required for Approval
 
   Our board has fixed the close of business on August 30, 1999 as the record
date for determining shareowners entitled to receive notice of and to vote at
the special meeting. Only shareowners of record as of the close of business on
the record date will be entitled to vote at the special meeting.
 
   We had 547,147,474 shares of common stock outstanding and entitled to vote
as of the close of business on the record date. These shares are the only
securities that may be voted at the special meeting. Each share is entitled to
one vote. First Union, as trustee under the Managers Stock Trust, the
Employees Stock Trust and the Qualified Stock Ownership Plan and Trust, owns
354,005,983 shares, which constitute 64.7% of our outstanding common stock
entitled to vote as of the record date.
 
   Holders of a majority of the issued and outstanding shares of our common
stock, present in person or by proxy, will constitute a quorum for the
transaction of business at the special meeting.
 
   A majority of all outstanding shares of our common stock entitled to vote
is required to approve the merger. A majority of the shares present at the
meeting, in person or by proxy, is required to approve the incentive
compensation plan.
 
Voting and Revocation of Proxies
 
   All shares represented by valid proxies that we receive before the special
meeting will be voted at the special meeting as specified in the proxy, unless
the proxy has been previously revoked. If no specification is made on a proxy
with respect to a proposal, the related shares will be voted FOR that
proposal.
 
   Unless you indicate otherwise, your proxy card also will confer
discretionary authority on the board-appointed proxies to vote the shares
represented by the proxy on any matter that is properly presented for action
at the special meeting.
 
   You have the right to revoke your proxy at any time before it is voted by
giving written notice of revocation to our Secretary, by submitting a
subsequent later-dated proxy or by voting in person at the special meeting.
 
   If you own shares of our common stock that are held by First Union as
trustee under the UPS Managers Stock Trust, the UPS Employees Stock Trust or
the UPS Qualified Stock Ownership Plan and Trust, you may direct voting of
these shares by executing and returning to First Union voting instructions
that are included with
 
                                      56

<PAGE>
 
this proxy statement/prospectus. If you do not return voting instructions to
First Union, First Union may execute a proxy that will enable a member of our
management to vote your shares in his or her discretion at the special meeting
with respect to shares held under the UPS Managers Stock Trust of the UPS
Employees Stock Trust. If this occurs, your shares would be voted FOR the
merger and FOR the incentive compensation plan. If you do not return
instructions to First Union with respect to shares held under the UPS
Qualified Stock Ownership Plan and Trust, First Union will vote your shares in
the same proportion as other allocated shares are voted.
 
Costs of Solicitation
 
   We will pay the expenses of printing, assembling and mailing this proxy
statement/prospectus. In addition to the use of the mails, our directors,
officers or regular employees may solicit proxies without additional
compensation, except for reimbursement of actual expenses. They may do so
using the mails, in person, by telephone, by facsimile transmission or by
other means of electronic communication.
 
   We will reimburse brokers, fiduciaries, custodians and other nominees for
out-of-pocket expenses incurred in sending these proxy materials to, and
obtaining instructions from, beneficial owners.
 
No Appraisal Rights
 
   You will not be entitled to appraisal rights under Section 262 of the
Delaware General Corporation Law in connection with the merger or the
conversion of our outstanding common stock into New UPS's class A common
stock.
 
                                      57

<PAGE>
 
     DESCRIPTION OF CAPITAL STOCK, CERTIFICATE OF INCORPORATION AND BYLAWS
 
Authorized Capitalization
 
   New UPS's capital structure will consist of 1,533,333,333 authorized class
A-1 shares, 1,533,333,333 authorized class A-2 shares, 1,533,333,334
authorized class A-3 shares, 5,600,000,000 authorized class B shares and
200,000,000 authorized preferred shares. After the merger and the public
offering, there will be about 364,764,983 class A-1, 364,764,983 class A-2,
364,764,983 class A-3 and 122,000,000 class B shares outstanding. This assumes
that the underwriters do not exercise their over-allotment option in
connection with the public offering. Class A shares that are converted into
class B shares will resume the status of authorized but unissued class A
shares.
 
   Old UPS's capital structure consists of 900,000,000 authorized shares of
common stock and 200,000,000 authorized shares of preferred stock. As of the
record date, 547,147,474 shares of Old UPS's common stock and no shares of
preferred stock were outstanding.
 
Description of New UPS's Certificate of Incorporation
 
   This section describes other key provisions of New UPS's certificate of
incorporation, which is included as Annex B to this proxy
statement/prospectus.
 
  .  Right of First Refusal. New UPS's certificate of incorporation will not
     include the right of first refusal that is contained in our current
     certificate of incorporation.
 
  .  Scaled Voting. New UPS's certificate of incorporation will provide that
     any person or group that owns more than 25% of New UPS's total voting
     power will be entitled to only 1/100th of a vote for each vote in excess
     of 25% of New UPS's voting power. Old UPS's certificate of incorporation
     contains a similar provision, but it applies to any person or group that
     owns more than 10% of our total voting power.
 
  .  No Shareowner Action by Written Consent. New UPS's certificate of
     incorporation prohibits shareowner action by written consent. This does
     not differ from our current certificate of incorporation and bylaws.
 
  .  No Shareowner Ability to Call a Special Meeting. New UPS's certificate
     of incorporation will provide that special meetings of our shareowners
     may be called only by our board of directors or the chairman of our
     board of directors. This does not differ from our current certificate of
     incorporation.
 
  .  Limitation of Director Liability. New UPS's certificate of incorporation
     will provide that our directors are not liable to our shareowners for
     monetary damages for breach of fiduciary duty, except for liability:
 
    .for breach of duty of loyalty;
 
    .for acts or omissions not in good faith or involving intentional
       misconduct or knowing violation of law;
 
    .under Section 174 of the Delaware General Corporation Law (unlawful
       dividends); and
 
    .for transactions from which the director derived improper personal
       benefit.
 
       These director liability provisions do not differ from our current
    certificate of incorporation.
 
  .  Indemnification of Directors and Officers. New UPS's certificate of
     incorporation will not provide for indemnification of our directors and
     officers, but New UPS's bylaws will provide that we must indemnify our
     directors and officers to the fullest extent authorized by the Delaware
     General Corporation Law, subject to very limited exceptions. This does
     not differ materially from our current certificate of incorporation and
     bylaws.
 
  .  No Classified Board of Directors. New UPS's certificate of incorporation
     will not provide for a classified board of directors. This does not
     differ from our current certificate of incorporation.
 
  .  No Cumulative Voting. New UPS's certificate of incorporation will
     provide that our shareowners are not entitled to cumulative voting in
     the election of our directors. This does not differ from our current
     certificate of incorporation.
 
                                      58

<PAGE>
 
  .  No Preemptive Rights. New UPS's certificate of incorporation will
     provide that our shareowners are not entitled to preemptive rights to
     subscribe to any class of our stock. This does not differ from our
     current certificate of incorporation.
 
Comparison of Our Currently Outstanding Common Stock to New UPS's Class A
Common Stock and Class B Common Stock
 
   The following table compares our currently outstanding common stock and New
UPS's class A common stock and class B common stock.
 

<TABLE>
<CAPTION>
                               Old UPS's                  New UPS's                  New UPS's
                              Common Stock              Class A Shares             Class B Shares
                              ------------              --------------             --------------
<S>                    <C>                        <C>                        <C>
Public Market          None.                      None.                      Application has been made
                                                                             for listing on a stock
                                                                             exchange. Listing is
                                                                             subject to fulfilling all
                                                                             applicable listing
                                                                             requirements.
 
Voting Rights          One vote per share on all  Ten votes per share on all One vote per share on all
                       matters voted upon by      matters voted upon by      matters voted upon by
                       shareowners.               shareowners.               shareowners.
 
                       Any shareowner or          Any shareowner or          Any shareowner or
                       shareowners as a group who shareowners as a group who shareowners as a group who
                       beneficially own more than beneficially own more than beneficially own more than
                       10% of the common stock    25% of the total voting    25% of the total voting
                       (except for the UPS        power (except for any of   power (except for any of
                       Managers Stock Trust, the  our employee benefit       our employee benefit
                       UPS Employees Stock Trust, plans) may cast only       plans) may cast only
                       the UPS Qualified Stock    1/100th of a vote with     1/100th of a vote with
                       Ownership Plan and Trust   respect to each vote in    respect to each vote in
                       or any of our employee     excess of 25% of the total excess of 25% of the total
                       benefit plans) may cast    voting power.              voting power.
                       only 1/100th of a vote
                       with respect to each share
                       in excess of 10% of the
                       outstanding shares of
                       common stock.
 
                       No cumulative voting in    No cumulative voting in    No cumulative voting in
                       the election of our        the election of our        the election of our
                       directors.                 directors.                 directors.
 
Transfer Restrictions  Subject to right of first  Not subject to right of    Not subject to right of
                       refusal by UPS.            first refusal.             first refusal.
 
                       If held in the UPS         Will not be subject to the Will not be subject to the
                       Managers Stock Trust, the  UPS Managers Stock Trust   UPS Managers Stock Trust
                       UPS Employees Stock Trust  or the UPS Employees Stock or the UPS Employees Stock
                       or the UPS Qualified Stock Trust. Shares held in the  Trust. Shares held in the
                       Ownership Plan and Trust,  UPS Qualified Stock        UPS Qualified Stock
                       subject to our right to    Ownership Plan and Trust   Ownership Plan and Trust
                       purchase shares at fair    will not be subject to     will not be subject to
                       market value, as defined,  transfer restrictions that transfer restrictions that
                       when you retire, die or    currently are part of the  currently are part of the
                       cease to be our employee,  UPS Managers Stock Trust   UPS Managers Stock Trust
                       or when you request the    and the UPS Employees      and the UPS Employees
                       withdrawal of shares from  Stock Trust.               Stock Trust.
                       the trust. Also subject to
                       purchase by us after we
                       receive a request from you
                       to release the shares from
                       the trust and upon
                       occurrence of several
                       other enumerated events.
 
                                                  Class A-1 shares may not
                                                  be transferred to anyone
                                                  other than a permitted
                                                  transferee or converted
                                                  into class B shares until
                                                  180 days after our public
                                                  offering; Class A-2 shares
                                                  may not be transferred to
                                                  anyone other than a
                                                  permitted transferee or
                                                  converted into class B
                                                  shares until 360 days
                                                  after our public offering;
                                                  Class A-3 shares may not
                                                  be transferred to anyone
                                                  other than a permitted
                                                  transferee or converted
                                                  into class B shares until
                                                  540 days after our public
                                                  offering. You also will be
                                                  prohibited from buying a
                                                  put option, selling a call
                                                  option or entering into
                                                  any other hedging or
                                                  insurance transaction
                                                  relating to your class A
                                                  common stock during these
                                                  restricted periods.
</TABLE>

 
 
                                      59

<PAGE>
 
 

<TABLE>
<CAPTION>
                             Old UPS's                  New UPS's                  New UPS's
                            Common Stock              Class A Shares             Class B Shares
                            ------------              --------------             --------------
<S>                  <C>                        <C>                        <C>
                                                If you validly transfer
                                                any class A shares to
                                                someone who is not a
                                                "permitted transferee,"
                                                those shares automatically
                                                will convert into class B
                                                shares.
 
Conversion           Not convertible.           If you validly transfer    Not convertible.
                                                any class A shares to
                                                someone who is not a
                                                "permitted transferee,"
                                                those shares automatically
                                                will convert into class B
                                                shares.
 
Rights upon Merger,  None specified.            In the event that we       In the event that we
 Consolidation or                               reorganize, merge or       reorganize, merge or
 Reorganization                                 consolidate with one or    consolidate with one or
                                                more other corporations,   more other corporations,
                                                holders of class A shares  holders of class B shares
                                                will be entitled to        will be entitled to
                                                receive the same kind and  receive the same kind and
                                                amount of securities or    amount of securities or
                                                property that is           property that is
                                                receivable by holders of   receivable by holders of
                                                class B shares.            class A shares.
</TABLE>

 
   New UPS's board of directors has approved an amendment to New UPS's
charter, which, when it becomes effective, will combine the class A-1 common
stock, class A-2 common stock and class A-3 common stock into a single class
of common stock. Old UPS, as New UPS's sole shareowner, will approve this
amendment before the merger. This single class of common stock will have all
of the rights, including voting rights, of the class A common stock. The
amendment will become effective after the transfer restrictions on the class
A-3 common stock expire.
 
Dividends; Subdivision and Combinations
 
   Subject to the rights of the holders of preferred stock, holders of class A
shares and class B shares will be entitled to receive dividends and other
distributions in cash, stock of any corporation (other than our common stock)
or our property as our board of directors may declare from time to time out of
our legally available assets or funds, and will share equally on a per share
basis in all such dividends and other distributions. If dividends or other
distributions are payable in New UPS's common stock, including distributions
pursuant to stock splits or divisions of our common stock, only class A shares
will be paid or distributed with respect to class A shares and only class B
shares will be paid or distributed with respect to class B shares. The number
of class A shares and class B shares so distributed will be equal on a per
share basis.
 
   Except pursuant to the amendment described above, neither our class A
shares nor our class B shares may be reclassified, subdivided or combined
unless the reclassification, subdivision or combination occurs simultaneously
and in the same proportion for each class.
 
   When the merger becomes effective, all the outstanding class A shares will
be validly issued, fully paid and nonassessable. When our public offering is
completed, all the outstanding class B shares will be validly issued, fully
paid and nonassessable.
 
Preferred Stock
 
   New UPS's board of directors has the authority to issue shares of preferred
stock from time to time on terms that it may determine, to divide preferred
stock into one or more classes or series, and to fix the designations, voting
powers, preferences and relative participating, optional or other special
rights of each class or series, and the qualifications, limitations or
 
                                      60

<PAGE>
 
restrictions of each class or series, to the fullest extent permitted by
Delaware law. The issuance of preferred stock could have the effect of
decreasing the market price of our common stock, impeding or delaying a
possible takeover and adversely affecting the voting and other rights of the
holders of common stock. This does not differ from our current certificate of
incorporation.
 
Anti-Takeover Effects of Various Provisions of Delaware Law and New UPS's
Certificate of Incorporation and Bylaws
 
   Our current certificate of incorporation and bylaws, and New UPS's
certificate of incorporation and bylaws, contain provisions that may have some
anti-takeover effects. Provisions of Delaware law may have similar effects
under both our current certificate of incorporation and New UPS's certificate
of incorporation.
 
   Delaware Anti-Takeover Statute
 
   We are now, and New UPS will be, subject to Section 203 of the Delaware
General Corporation Law. Subject to specific exceptions, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless:
 
  .  the "business combination," or the transaction in which the stockholder
     became an "interested stockholder" is approved by the board of directors
     prior to the date the "interested stockholder" attained that status;
 
  .  upon consummation of the transaction that resulted in the stockholder
     becoming an "interested stockholder," the "interested stockholder" owned
     at least 85% of the voting stock of the corporation outstanding at the
     time the transaction commenced (excluding those shares owned by persons
     who are directors and also officers, and employee stock plans in which
     employee participants do not have the right to determine confidentially
     whether shares held subject to the plan will be tendered in a tender or
     exchange offer); or
 
  .  on or subsequent to the date a person became an "interested
     stockholder," the "business combination" is approved by the board of
     directors and authorized at an annual or special meeting of shareowners
     by the affirmative vote of at least two-thirds of the outstanding voting
     stock that is not owned by the "interested stockholder."
 
   "Business combinations" include mergers, asset sales and other transactions
resulting in a financial benefit to the "interested stockholder." Subject to
various exceptions, an "interested stockholder" is a person who, together with
his or her affiliates and associates, owns, or within three years did own, 15%
or more of the corporation's outstanding voting stock. These restrictions
could prohibit or delay the accomplishment of mergers or other takeover or
change-in-control attempts with respect to us and, therefore, may discourage
attempts to acquire us.
 
   In addition, various provisions of our certificate of incorporation and
bylaws and New UPS's certificate of incorporation and bylaws, which are
summarized in the following paragraphs, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that
a shareowner might consider in its best interest, including those attempts
that might result in a premium over the market price for the shares held by
shareowners.
 
   No Cumulative Voting
 
   Our certificate of incorporation and New UPS's certificate of incorporation
expressly deny you the right to cumulate votes in the election of directors.
 
   No Shareowner Action by Written Consent; Calling of Special Meetings of
   Shareowners
 
   Our certificate of incorporation and New UPS's certificate of incorporation
prohibit shareowner action by written consent. They also provide that special
meetings of our shareowners may be called only by the board of directors or
the chairman of our board of directors.
 
 
                                      61

<PAGE>
 
   Advance Notice Requirements for Shareowner Proposals
 
   Our bylaws and New UPS's bylaws provide that shareowners seeking to bring
business before an annual meeting of shareowners must provide timely notice of
their proposal in writing to the corporate secretary. To be timely, a
shareowner's notice must be delivered or mailed and received at our principal
executive offices not less than 120 days in advance of the anniversary date of
our proxy statement in connection with our previous year's annual meeting. Our
bylaws and New UPS's bylaws also specify requirements as to the form and
content of a shareowner's notice. These provisions may impede shareowners'
ability to bring matters before an annual meeting of shareowners or make
nominations for directors at an annual meeting of shareowners.
 
   Limitations on Liability and Indemnification of Officers and Directors
 
   The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
shareowners for monetary damages for breaches of directors' fiduciary duties.
Our certificate of incorporation and New UPS's certificate of incorporation
include a provision that eliminates the personal liability of directors for
monetary damages for actions taken as a director, except for liability:
 
  .  for breach of duty of loyalty
 
  .  for acts or omissions not in good faith or involving intentional
     misconduct or knowing violation of law
 
  .  under Section 174 of the Delaware General Corporation Law (unlawful
     dividends)
 
  .  for transactions from which the director derived improper personal
     benefit.
 
   Our certificate of incorporation and New UPS's bylaws provide that we must
indemnify our directors and officers to the fullest extent authorized by the
Delaware General Corporation Law, subject to very limited exceptions. We are
also expressly authorized to carry directors' and officers' insurance
providing indemnification for our directors, officers and certain employees
for some liabilities. We believe that these indemnification provisions and
insurance are necessary to attract and retain qualified directors and
executive officers.
 
   The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage shareowners from
bringing a lawsuit against directors for breach of their fiduciary duty. These
provisions may also have the effect of reducing the likelihood of derivative
litigation against directors and officers, even though such an action, if
successful, might otherwise benefit us and our shareowners. In addition, your
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers pursuant to these
indemnification provisions.
 
   There is currently no pending litigation or proceeding involving any of our
directors, officers or employees for which indemnification is sought. We are
unaware of any threatened litigation that may result in claims for
indemnification.
 
   Authorized But Unissued Shares
 
   New UPS's authorized but unissued shares of common stock and preferred
stock will be available for future issuance without your approval. We may use
these additional shares for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
 
Supermajority Provisions
 
   The Delaware General Corporation Law provides generally that the
affirmative vote of a majority in interest of the shares entitled to vote on
any matter is required to amend a corporation's certificate of incorporation
or
 
                                      62

<PAGE>
 
bylaws, unless the certificate of incorporation requires a greater percentage.
Our current certificate of incorporation provides that the following
provisions may be amended only by a vote of 80% or more of all of the
outstanding shares of our stock entitled to vote:
 
  .  the requirement that you must offer your shares to us before you can
     sell them to third parties
 
  .  the reduction in voting power of shares held by beneficial owners of
     more than 10% of our stock
 
  .  the prohibition on shareowner action by written consent
 
  .  the ability to call a special meeting of shareowners being vested solely
     in our board of directors and the chairman of our board
 
   New UPS's certificate of incorporation will also provide that each of these
provisions may be amended only by an 80% vote, except that the reduction in
voting power will apply only to beneficial owners of more than 25% of New
UPS's stock, and New UPS's certificate of incorporation will not include any
requirement that you must offer your shares to us before you can sell them to
third parties.
 
Transfer Agent and Registrar
 
   First Union is the Transfer Agent and Registrar for Old UPS's common stock
and will be the Transfer Agent and Registrar for New UPS's class A common
stock and class B common stock.
 
                                      63

<PAGE>
 
                    MARKET FOR OLD UPS'S COMMON EQUITY AND
                          RELATED SHAREOWNER MATTERS
 
   The following description relates to Old UPS's common stock.
 
   Each share of Old UPS common stock is entitled to one vote in the election
of directors and other matters. Any shareowner, or shareowners acting as a
group, however, who beneficially own Old UPS 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, shareowners are entitled
to share ratably in the assets available after payment of all obligations. The
shares are not redeemable by us except through our exercise of the
preferential right of purchase mentioned below and, in the case of stock
subject to the UPS Managers Stock Trust, the UPS Employees Stock Trust and the
UPS Qualified Stock Ownership Plan and Trust, our right of purchase in the
circumstances described therein. Old UPS common stock is not listed on a
national securities exchange or traded in the organized over-the-counter
market.
 
   Our certificate of incorporation provides that no outstanding shares of our
common 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 first shall have been offered, by written notice, for sale
to us at the same price and on the same terms upon which they are to be
offered to the proposed transferee.
 
   We have 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 we fail
to exercise or waive 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 we 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 us at the
price and on the terms and conditions bid by the purchaser at the foreclosure.
 
   We have been the principal purchaser of our common stock, which we have
used primarily for awards under the UPS Managers Incentive Plan, the UPS 1991
Stock Option Plan, the UPS 1996 Stock Option Plan and the matching
contribution of our stock under the UPS Qualified Stock Ownership Plan, and
for sales under the UPS 1997 Managers Stock Purchase Plan and the UPS 1997
Employee Stock Purchase Plan. We sell shares to the UPS Qualified Stock
Ownership Plan so that the matching contribution can be invested in common
stock as called for under the terms of the plan and we purchase shares from
the plan to provide liquidity for distributions and transfers. We have
notified our shareowners periodically of our willingness to purchase a limited
number of shares at specified prices determined by our board of directors.
 
   In determining the share price, our board has considered a variety of
factors, including past and current earnings, earnings estimates, the ratio of
our common stock to our debt, other factors affecting our business and long-
range prospects and general economic conditions, as well as opinions furnished
from time to time by investment counselors acting as independent appraisers.
 
   In its determination of the prices to be paid for our stock, our 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 publicly
held companies, but its decisions have been based primarily on its judgment as
to our long-range prospects rather than what it considers to be short-range
trends relating to us 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 we have offered to purchase our shares. But our board's
decision as to price has taken into account factors generally affecting the
market prices of publicly traded securities.
 
 
                                      64

<PAGE>
 
   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
shares being sold. Our board of directors has not given significant weight to
supply-demand considerations in determining the prices to be paid by us for
our shares. In the past, we have needed some of the shares that we have been
able to acquire for purposes of awards under the plans mentioned above, and
eligible employees have purchased some of the other available shares.
 
   After the merger and the public offering are completed, we intend to
discontinue our policy of purchasing shares when offered by shareowners.
 
   The prices at which we have published notices of our willingness to
purchase shares since January 1997 are as follows:

<TABLE>
<CAPTION>
                                                             After giving effect
                                                                to the merger
                                                               exchange ratio
                                                      Actual     of 2-for-1
                                                      ------ -------------------
<S>                                                   <C>    <C>
January 1, 1997...................................... $29.25       $14.625
February 13, 1997....................................  29.75        14.875
May 14, 1997.........................................  30.50        15.25
August 20, 1997......................................  30.00        15.00
November 13, 1997....................................  30.75        15.375
February 27, 1998....................................  32.00        16.00
May 22, 1998.........................................  34.00        17.00
August 20, 1998......................................  37.00        18.50
November 19, 1998....................................  40.00        20.00
February 18, 1999....................................  43.00        21.50
May 20, 1999.........................................  47.00        23.50
August 19, 1999......................................  51.00        25.50
</TABLE>

 
   On August 19, 1999, we expressed our willingness to purchase shares at
$51.00 per share, which is still the applicable price at the date of this
proxy statement/prospectus. Because the merger will have the effect of a 2-
for-1 stock split, this price would be equivalent to $25.50 per post-merger
share.
 
   In each case, the price was applicable until the date of the next published
notice. From time to time, we have waived our right of first refusal to
purchase our shares in order to permit eligible employees to purchase shares
at the same price we were willing to pay. Persons who purchased shares in this
manner were required to deposit them in the UPS Managers Stock Trust or the
UPS Employees Stock Trust.
 
   Most of the shares of Old UPS common stock owned by our employees currently
are held subject to the UPS Managers Stock Trust, the UPS Employees Stock
Trust or the UPS Qualified Stock Ownership Plan and Trust. First Union serves
as trustee under these trusts. The trust agreements for the UPS Managers Stock
Trust and the UPS Employees Stock Trust have given us the right to purchase a
member's shares of our common stock that have been deposited in the trusts at
their fair market value, as defined, when the member retires, dies or ceases
to be our employee, or when the member requests the withdrawal of shares from
the trust. Fair market value has been defined under these trust agreements 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 our common stock sold during the 12 months preceding the sale
involved. We also are entitled to purchase shares of our 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.
If we did not elect to purchase the shares and did not pay for the shares
within the prescribed periods, the member would have become entitled, upon
request, to the delivery of the shares of our common stock free and clear of
the trusts, unless the purchase period had been extended by agreement of us
and the member.
 
   Members of the UPS Managers Stock Trust and UPS Employee Stock Trust are
entitled to the dividends on shares of Old UPS common stock held for their
accounts (except that stock dividends are added to the shares
 
                                      65

<PAGE>
 
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.
Members of the UPS Qualified Stock Ownership Plan are entitled to dividends on
shares of Old UPS common stock held for their accounts (stock dividends are
credited to members' accounts and cash dividends may be credited to members'
accounts or paid to members) and to direct the trustee as to how the shares
held for their benefit are to be voted. If a member does not return
instructions to First Union with respect to shares held under the UPS
Qualified Stock Ownership Plan and Trust, First Union will vote that member's
shares in the same proportion as other allocated shares are voted.
 
   As of February 28, 1999, there were about 3,200 record holders of our
equity securities. First Union, as trustee, owns all the shares of our common
stock subject to the trusts. As of February 28, 1999, there were about 115,000
beneficial owners of shares of common stock subject to the trusts.
 
                                      66

<PAGE>
 
                   MANAGEMENT AND STOCK OWNERSHIP INFORMATION
 
Directors and Executive Officers
 
   John W. Alden, Age 57. Director since 1988. UPS Vice Chairman of the Board,
   Senior Vice President and Business Development Group Manager
 
   In 1986, John joined the Management Committee and was elected Senior Vice
President of Business Development. He has served on the board of directors
since 1988 and in November 1996 became Vice Chairman of the Board. He currently
oversees marketing, sales, advertising, public relations and the UPS Logistics
Group and its subsidiaries. John, who majored in history while attending Boston
University, started with UPS as an operations report clerk in Watertown,
Massachusetts in 1965. Two years later, he was promoted into supervision. After
several staff and hub assignments, he became the East New England District
Customer Service Office Manager in 1971. The following year, John was named to
manage the Customer Service function for the district. In 1977, John was
promoted to Midwest Region Customer Service Manager, and in 1978 he joined the
UPS corporate office as Customer Development Manager. John is also a director
of Browning-Ferris Industries, Inc. and serves on its compensation committee.
On August 19, 1999, John announced his retirement as Director and Senior Vice
President and Business Development Group Manager. John's retirement will become
effective in early 2000.
 
   William H. Brown, III, Age 71. Director since 1983. Partner in the law firm
   of Schnader Harrison Segal & Lewis LLP in Philadelphia, Pennsylvania
 
   Bill received a bachelor's degree from Temple University in 1952 and
graduated from the University of Pennsylvania School of Law in 1955. From 1955
to 1968, Bill practiced in a small law firm from which four of seven partners
became federal judges, and three others became state judges. In 1968, he became
a Deputy District Attorney in Philadelphia. Bill was appointed to the U.S.
Equal Employment Opportunity Commission by President Johnson in 1968 and was
selected as its Chairman by President Nixon in 1969. While with the EEOC, he
won nationwide attention for his work in negotiating a consent decree in the
EEOC complaint against AT&T. Bill joined his current firm after leaving his
EEOC post in 1973. Since then, his broad experience in litigation and other
matters includes handling a number of legal matters on behalf of UPS.
 
   Robert J. Clanin, Age 55. Director since 1996. UPS Senior Vice President,
   Treasurer and Chief Financial Officer
 
   Bob joined UPS in 1971 as a part-time accounting clerk in the Metro Chicago
District. Two years later he was promoted to Accounting Manager. In 1979 he was
named Wisconsin District Controller and worked in Corporate Finance and
Accounting before accepting the position of Southwest Region Controller in
1987. Bob returned to corporate in 1989 as Treasury Manager and then Finance
Manager prior to assuming responsibilities for his current position. Bob
received a bachelor's degree from Bradley University in Business
Administration. Bob is also a director of the Georgia Council on Economic
Education and Overseas Partners Ltd.
 
   Michael L. Eskew, Age 49. Director since 1998. UPS Executive Vice President
   and Group Manager for Corporate Development, Engineering, Information
   Systems, Logistics and Strategy
 
   Mike joined UPS in 1972, after he received a Bachelor of Science Degree in
Industrial Engineering from Purdue University. He also attended graduate school
at Butler University and completed the Advanced Management Program at the
Wharton School of the University of Pennsylvania. Mike was responsible for all
industrial engineering activities in Germany when the Company began its
international expansion into Germany. In 1982, he was named Industrial
Engineering ("I.E.") Manager of our Northwest Region. He was in charge of I.E.
for the Air Group from 1984 to 1991. Mike was a District Manager in the Central
Jersey District from 1991 to 1993, and was promoted to Corporate I.E. Manager
in 1993. He became Manager of our Engineering Group in 1996. Mike serves on the
Georgia Institute of Technology's Advisory Board and is a member of the
University of Michigan Trucking Industry Program.
 
                                       67

<PAGE>
 
   James P. Kelly, Age 55. Director since 1991. UPS Chairman of the Board and
   Chief Executive Officer
 
   Jim joined UPS in 1964 as a package car driver in the Metro Jersey
District. He entered supervision two years later and was promoted to Center
Manager in 1968. Subsequent assignments included Package Division Manager and
Labor Relations Manager in the Metro Jersey District. By attending night
school during that period, he earned a degree in Management from Rutgers
University. Jim was named Atlantic District Manager in 1979 and later served
as Pacific Region Labor Relations Manager before being promoted to North
Central Region Manager in 1985. In 1988, he was assigned as a Corporate Labor
Relations Manager and became U.S. Operations Manager in 1990. In June 1992,
Jim became Chief Operating Officer and in February 1994, he became Executive
Vice President. From May through December 1996, Jim was Vice Chairman of the
Board. In January 1997, he was elected the Chief Executive Officer and
Chairman of the Board of the Company. Jim is a director of Georgia-Pacific
Corporation.
 
   Ann M. Livermore, Age 40. Director since 1997. Vice President of Hewlett-
   Packard Company
 
   Ann is vice president of Hewlett-Packard Company ("HP") and general manager
of its Enterprise Computing Solutions Organization. Ann joined HP in 1982, was
named marketing services manager for the Application Support Division in 1985,
and was promoted to marketing manager of that division in 1989. Ann became the
marketing manager of the Professional Services Division in 1991 and was named
sales and marketing manager of the former Worldwide Customer Support
Organization. Ann was elected a vice president of HP in 1995 and was promoted
to general manager of Worldwide Customer Support Operations in 1996. In 1997,
she took on responsibility for HP's software businesses as general manager of
the newly formed Software and Services Group. In 1998, she was named general
manager of the new Enterprise Computing Solutions Organization. Born in
Greensboro, N.C., Ann holds a bachelor's degree in Economics from the
University of North Carolina at Chapel Hill and an M.B.A. from Stanford
University. Ann is also on the board of visitors of the Kenan-Flagler Business
School at the University of North Carolina at Chapel Hill.
 
   Gary E. MacDougal, Age 62. Director since 1973. Former Chairman of the
   Board and Chief Executive Officer of Mark Controls Corporation
 
   From 1963 to 1968, Gary was with McKinsey & Co., an international
management consulting firm, where he became a partner. From 1969 to 1987, Gary
was Chairman and Chief Executive Officer of Mark Controls Corporation, a flow
control products manufacturer. In 1988, he became honorary Chairman. Also in
1988, Gary was assistant campaign manager in the Bush presidential campaign,
and in 1989 was appointed by President Bush as a delegate and alternate
representative in the U.S. delegation to the United Nations. He is a director
of the Bulgarian American Enterprise Fund and a trustee of the Annie E. Casey
Foundation. From 1993 to 1997, he was Chairman of the Governor's Task Force on
Human Service Reform for the State of Illinois. Gary received his bachelor's
degree from the University of California at Los Angeles in Engineering in
1958. After receiving his degree, he spent three years as a U.S. Navy officer.
Following service, Gary attended Harvard Business School where he received his
M.B.A. degree. He is a director and Chairman of the public policy committee
and a member of the compensation and nominating committee of Union Camp
Corporation, a forest products producer. He also serves as an advisory
director of Saratoga Partners, a New York-based venture capital fund.
 
   Joseph R. Moderow, Age 50. Director since 1988. UPS Senior Vice President,
   Secretary and Legal & Public Affairs Group Manager
 
   In 1986, Joe was named Legal & Regulatory Group Manager and elected Senior
Vice President and Secretary. He assumed additional responsibility for Public
Affairs in 1989. Joe began his UPS career in 1968 as a sorter and unloader in
the South California District while an undergraduate student. He earned a
bachelor's degree in Economics from California State University and a law
degree from Western State University. He is a member of the State Bar of
California. Joe was promoted into supervision in 1973 and later served as the
Arizona District Industrial Engineering Manager. In 1977, he was assigned to
the National Legal & Regulatory Group. In 1981, Joe participated in the
President's Commission on Executive Exchange in Washington, DC where he
 
                                      68

<PAGE>
 
served in the U.S. Department of Labor. In 1982, Joe became the West Virginia
District Manager. He was then assigned to the national Labor Relations group
and later headed the operations team during the start-up of international air
service.
 
   Kent C. ("Oz") Nelson, Age 61. Director since 1983. Former UPS Chairman of
   the Board and Chief Executive Officer
 
   Oz graduated from Ball State University in 1959 with a bachelor's degree in
Business Administration. Two days later he began his UPS career as a Sales and
Customer Service Representative in Kokomo, Indiana. He served as Customer
Service Manager in the Indiana, North Illinois and Metro Chicago Districts as
well as the North Central Region. In 1973, Oz assumed national customer
development responsibilities. He served first on the study team and then on
the team that implemented our service in Germany in 1976. In 1978, he was
named National Customer Service Manager and also was assigned to develop our
Marketing Department. Oz was elected Senior Vice President in 1983 and was our
Finance Group Manager and Chief Financial Officer from 1984 to 1987. He became
Executive Vice President in 1986 and Vice Chairman of the Board in February
1989. In November 1989, Oz succeeded Jack Rogers as Chief Executive Officer
and Chairman of the Board. In January 1997, Oz retired as Chief Executive
Officer and Chairman of the Board of the Company. He also is a director of
Columbia/HCA Healthcare Corporation.
 
   Victor A. Pelson, Age 61. Director since 1990. Senior Advisor, Warburg
   Dillon Read, LLC
 
   Vic is a Senior Advisor to Warburg Dillon Read LLC, investment bankers, a
position he has held since 1996. He was associated with AT&T from 1959 to
March 1996, and at the time of his retirement was Chairman of Global
Operations and a member of the Board of Directors. He is a director of Eaton
Corp., Dun & Bradstreet and Carrier 1 International, S.A. He is also Chairman
of the Board of Trustees of New Jersey Institute of Technology.
 
   John W. Rogers, Age 65. Director since 1979. Former UPS Chairman of the
   Board and Chief Executive Officer
 
   Jack was elected a director and Vice President in November 1979. In January
1979, he was given responsibility for our national operations. Jack graduated
from Miami University in Ohio with a degree in Business Administration in
1957. He began his career with UPS that same year as a trainee in Cincinnati.
His first UPS assignments involved night loading and delivering. He next
worked in industrial engineering and personnel before entering hub and
delivery operations. Jack then was promoted to Division Manager in Chicago and
later Operations Manager in the Wisconsin District. He became the first
Georgia District Manager in 1966. In 1972, he was appointed West Region
Manager. Two years later, he was named the Northeast Region Manager. In 1976,
Jack was assigned to national operations with coordinating responsibilities
for four regions. He was elected Senior Vice President and then Vice Chairman
in 1983 and became Chief Executive Officer and Chairman of the Board of the
Company in May 1984. He stepped down as Chairman of the Board in November 1989
and retired from active employment at the end of that year.
 
   Charles L. Schaffer, Age 53. Director since 1992. UPS Senior Vice President
   and Chief Operating Officer
 
   Chuck joined UPS in 1970 as a part-time loader/unloader in the Metro
Chicago District. He was later promoted to hub supervisor, and became a full-
time personnel supervisor in 1973 after graduation from the University of
Illinois, where he earned a bachelor's degree in Quantitative Methods. He was
assigned to I.E. in 1974, and became a member of the West Region I.E. staff in
1977. Chuck was promoted to Missouri District I.E. Manager in 1978. Chuck then
held a variety of package and hub operations assignments before being named
North Illinois I.E. Manager in 1981. He was promoted to Midwest Region I.E.
Manager in 1984. In 1986, Chuck was named Arizona District Manager. In 1988,
he became the Technology Task Group Coordinator in Strategic Planning, and was
promoted to Corporate Plant Engineering Manager in 1989. Chuck became our
Engineering
 
                                      69

<PAGE>
 
Group Manager in 1990 and in 1996 was promoted to U.S. Operations Manager. In
1997, Chuck became our Chief Operating Officer. Chuck is also Chairman of the
Board of Trustees for Kettering University.
 
   Lea N. Soupata, Age 48. Director since 1998. UPS Senior Vice President and
   Human Resources Group Manager
 
   A native of New York City, Lea joined UPS in 1969 and is now responsible
for the human resources function for approximately 330,000 employees
worldwide. Following several assignments with UPS in Human Resources, Sales
and Operations, Lea became the Human Resources Manager in our North New
England and Metro New York Districts. Lea also served as Regional Human
Resources Manager for the East and East Central Regions. In 1990, Lea became
the District Manager of the Central New York District. She was transferred in
1994 to the Company's corporate office as Vice President of Human Resources
prior to being named to her current position. Lea serves as chair of The UPS
Foundation, our charitable arm, and has been active in a number of community
services programs, including United Way. She also is a trustee of the Annie E.
Casey Foundation, the world's largest philanthropic foundation dedicated to
helping disadvantaged children.
 
   Robert M. Teeter, Age 60. Director since 1990. President of Coldwater
   Corporation
 
   Bob is a graduate of Albion College and holds a master's degree from
Michigan State University. He is president of Coldwater Corporation, a
Michigan consulting and research firm that specializes in the areas of
strategic planning, policy development and public opinion analysis. For more
than 20 years he held several management positions, including President of
Market Opinion Research Company, one of the nation's largest marketing
research firms. Bob is also a director of Browning-Ferris Industries, Inc.,
Optical Imaging Systems and Durakon Industries.
 
   Thomas H. Weidemeyer, Age 51. Director since 1998. UPS Senior Vice
   President and Transportation Group Manager
 
   Tom joined UPS in 1972 in National Personnel after receiving his Law Degree
from the University of North Carolina Law School and his Bachelor's Degree
from Colgate University. In 1974, he moved to the Metro Detroit District and
worked in various operations assignments. In 1978, he joined our Legal
Department. In 1986, he was promoted to District Manager of Arkansas and later
helped set up our Northwest Ohio District. Tom became Manager of the Americas
Region in 1989, and in that capacity established the delivery network
throughout Central and South America. In 1990, Tom became Vice President and
Airline Manager of UPS Airlines and in 1994 was elected President and Chief
Operating Officer of that subsidiary. Tom became Manager of the Air Group and
a member of the Management Committee that same year. He serves on the Board of
Directors of the Air Transport Association of America and is a member of the
Military Airlift Committee. He also serves on the Board of the National Center
for Family Literacy.
 
 
                                      70

<PAGE>
 
Stock Ownership
 
   Set forth below is information relating to the beneficial ownership of our
common stock as of January 31, 1999 by each person known by us to own
beneficially more than 5% of our outstanding common stock, each of our
directors, our Chief Executive Officer and each of our four highest paid
executive officers and all directors and executive officers as a group:
 

<TABLE>
<CAPTION>
                            Number of Shares as to    Additional Shares in which
                          which the Beneficial Owner  the Beneficial Owner has or  Total Shares and
                           Exercises Sole Voting or  Participates in the Voting or    Percent of
Name of Beneficial Owner       Investment Power           Investment Power(4)          Class(6)
------------------------  -------------------------- ----------------------------- --------------------
<S>                       <C>                        <C>                           <C>         <C>
John W. Alden...........            196,651(1)(2)             21,834,274(a)         22,030,925  4.01%
William H. Brown, III...             31,640                            0                31,640  0.01
Robert J. Clanin........            210,009(1)(2)             22,882,923(a)(c)      23,092,932  4.20
Michael L. Eskew........            110,535(1)(2)              1,048,649(c)          1,159,184  0.21
James P. Kelly..........            207,172(1)(2)             22,882,923(a)(c)      23,090,095  4.20
Ann M. Livermore........              2,229                            0                 2,229  0.00
Gary E. MacDougal.......             35,991(1)                21,834,274(a)         21,870,265  3.98
Joseph R. Moderow.......            154,243(1)(2)             24,183,821(a)(b)      24,338,064  4.42
Kent C. Nelson..........            270,448(1)(2)             24,183,821(a)(b)      24,454,269  4.45
Victor A. Pelson........             12,344                            0                12,344  0.00
John W. Rogers..........            450,971(1)                         0               450,971  0.08
Charles L. Schaffer.....            177,838(1)(2)              1,168,900(e)          1,346,738  0.24
Lea N. Soupata..........            103,060(2)                24,240,923(a)(c)(d)   24,343,983  4.43
Robert M. Teeter........             30,000                            0                30,000  0.01
Thomas H. Weidemeyer....            169,309(1)(2)              1,048,649(c)          1,217,958  0.22
Shares held by all
 directors and executive
 officers as a group
 (including the above)..          2,853,893(3)                27,759,370(5)         30,613,263  5.56
</TABLE>

--------
(1) Includes shares owned by family members as follows: Alden--15,104;
    Clanin--92,347; Eskew--20,900; Kelly--29,800; MacDougal--1,000; Moderow--
    21,648; Nelson--21,324; Rogers--87,842; Schaffer--21,500; Weidemeyer--
    4,000; and five other executive officers--50,706. Each named individual
    disclaims all beneficial ownership of such shares.
(2) Includes shares which may be acquired within 60 days of January 31, 1999,
    upon the exercise of outstanding stock options as follows: Alden--17,707;
    Clanin--4,293; Eskew--3,606; Kelly--21,249; Moderow--16,420; Nelson--
    33,483; Schaffer--15,776; Soupata--3,022; and Weidemeyer--9,337.
(3) Shares owned by executive officers as a group include 163,620 shares which
    may be acquired within 60 days of January 31, 1999, upon the exercise of
    outstanding stock options.
(4) None of the directors and the officers listed in the table above, nor
    members of their families, have any ownership rights in the shares listed
    in this column. Of the shares: (a) 21,834,274 shares are owned by the
    Annie E. Casey Foundation, Inc., of which Messrs. Alden, Clanin, Kelly,
    MacDougal, Moderow and Nelson, Ms. Soupata, and other non-UPS persons
    constitute the corporate Board of Trustees; (b) 2,349,547 shares are held
    by various trusts of which Messrs. Moderow and Nelson are co-fiduciaries;
    (c) 1,048,649 shares are held by the UPS Foundation, Inc., a Company-
    sponsored charitable foundation of which Messrs. Clanin, Eskew, Kelly and
    Weidemeyer, Ms. Soupata and an executive officer not listed above, are
    trustees; (d) 1,358,000 shares are held by two Voluntary Employee
    Beneficiary Associations ("VEBAs") of which Ms. Soupata is a fiduciary;
    and (e) 1,168,900 shares that are held by an employee benefit plan of
    which Mr. Schaffer is a trustee.
(5) This number includes shares held by the foundations, VEBAs, employee
    benefit plans and trusts of which directors and executive officers listed
    above are trustees or fiduciaries. This number eliminates duplications in
    the reported number of shares arising from the fact that several directors
    and executive officers share in the voting power with respect to these
    shares.
(6) The percentages are calculated on the basis of the amount of outstanding
    shares plus the shares which may be acquired by the named individual and
    the group, as applicable, within 60 days of January 31, 1999, upon
    exercise of outstanding stock options.
 
                                      71

<PAGE>
 
   These holdings are reported in accordance with the SEC's regulations
requiring disclosure of shares as to which directors and "Named Executive
Officers" hold voting or dispositive power, notwithstanding that they are held
in a fiduciary rather than a personal capacity, and that such power is shared
among a number of fiduciaries including, in several cases, corporate trustees,
directors or other persons who are neither executive officers nor directors of
UPS.
 
Meetings of the Board of Directors
 
   The UPS board of directors held four meetings during 1998. During 1998,
each director of UPS attended at least 75% of the total number of meetings of
the board and any committees of which he or she was a member.
 
Committees of the Board of Directors
 
   The UPS board of directors has an Executive Committee, an Audit Committee,
an Officer Compensation Committee, a Salary Committee and a Nominating
Committee.
 
   Messrs. Alden, Clanin, Kelly, Moderow and Schaffer served as members of the
Executive Committee throughout 1998. Calvin Tyler, a former director and
officer, served as a member of the Executive Committee until his retirement on
January 15, 1998, and Messrs. Eskew and Weidemeyer and Ms. Soupata have served
as members of the Committee since their appointments in May 1998. This
Committee may exercise all powers of the board of directors in the management
of the business and affairs of UPS except for those powers expressly reserved
to the board under Delaware law, such as amendment of the certificate of
incorporation or bylaws, declaration of dividends, issuance of stock, mergers,
consolidations, a sale of substantially all of the assets of UPS and a
dissolution. In 1998, this Committee held 13 meetings.
 
   Mr. Brown served as a member of the Audit Committee throughout 1998, Carl
Kaysen, a former director, served as a member of the Committee until he
retired from the board in April 1998 and Ms. Livermore has served as a member
of the Committee since her appointment in February 1998. The primary
responsibilities of the Audit Committee are to:
 
  .  recommend annually the independent public accountants for appointment by
     the board as auditors for UPS and its subsidiaries;
 
  .  review the scope of the audit to be made by the accountants;
 
  .  review the audit reports submitted by the accountants;
 
  .  review the annual program for the internal audit of records and
     procedures;
 
  .  review audit reports submitted by the internal auditing staff; conduct
     such other reviews as the Audit Committee deems appropriate and make
     reports and recommendations to the board within the scope of its
     functions.
 
   In 1998, this Committee held three meetings.
 
   Messrs. Pelson, MacDougal and Rogers served as members of the Officer
Compensation Committee throughout 1998. The primary responsibility of this
Committee is to set the proper and appropriate compensation of the Chairman
and Chief Executive Officer and to set the proper and appropriate compensation
of executive officers based upon the recommendation of the Chief Executive
Officer. The Committee also is responsible for making awards to the executive
officers under the UPS 1996 Stock Option Plan and the UPS Managers Incentive
Plan. The UPS 1996 Stock Option Plan also provides for grants of options to
non-employee directors. In 1998, the Officer Compensation Committee held two
meetings. See "Compensation of Directors." New UPS will have a similar
committee called the Compensation Committee.
 
   Messrs. Clanin and Kelly served as members of the Salary Committee
throughout 1998, and Ms. Soupata served as administrator of the Committee
until April 1998 and has since served as a member of the Committee.
 
                                      72

<PAGE>
 
This Committee determines the compensation for all management employees other
than executive officers and is responsible for the administration of the UPS
Managers Incentive Plan, the UPS 1991 Stock Option Plan and the UPS 1996 Stock
Option Plan for these employees. In 1998, the Salary Committee held 12
meetings.
 
   Messrs. Nelson, Rogers and Teeter served as members of the Nominating
Committee throughout 1998. Mr. Kaysen served as a member of the Committee
until he retired in April 1998. This Committee recommends nominees for
election to the board. In 1998, this Committee held one meeting.
 
Compliance with Section 16(a) of the Securities Exchange Act of 1934
 
   Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and persons who own beneficially more than 10%
of our common stock to file reports of ownership and changes in ownership of
such stock with the SEC. Directors, executive officers and greater than 10%
shareowners are required by SEC regulations to furnish us with copies of all
such forms they file. To our knowledge, our directors and executive officers
complied during 1998 with all applicable Section 16(a) filing requirements.
 
Compensation of Executive Officers and Other Information
 
   The following table shows the cash compensation paid or to be paid by us or
any of our subsidiaries, as well as certain other compensation paid or
accrued, during the fiscal years indicated to our Chief Executive Officer and
our "Named Executive Officers" (our other four highest paid executive
officers), in all capacities in which they served:
 
                          SUMMARY COMPENSATION TABLE
 

<TABLE>
<CAPTION>
                                                     Long Term
                                                   Compensation
                             Annual Compensation      Awards
                            ---------------------- -------------
                                                    Securities
Name and Principal                                  Underlying      All Other
Position                    Year  Salary  Bonus(1) Stock Options Compensation(2)
------------------          ---- -------- -------- ------------- ---------------
<S>                         <C>  <C>      <C>      <C>           <C>
James P. Kelly............  1998 $771,500 $319,277    50,468         $4,800
 Chairman and Chief         1997  717,500  169,647    21,621              0
 Executive Officer          1996  575,500  182,260    22,298              0
 
John W. Alden.............
 Vice Chairman, Senior
 Vice President and         1998  588,000  252,480    38,493          4,800
 Business Development       1997  550,500  134,726    19,321              0
 Group Manager              1996  470,000  148,748    17,737              0
 
Robert J. Clanin..........
 Senior Vice President,     1998  450,500  194,620    29,084          4,800
 Treasurer and Chief        1997  409,000  102,629    13,801              0
 Financial Officer          1996  363,000  120,635    13,683              0
 
Joseph R. Moderow.........
 Senior Vice President,
 Secretary and Legal &      1998  442,000  189,360    29,084          4,800
 Public Affairs Group       1997  417,000  110,160    14,721              0
 Manager                    1996  392,000  134,769    15,203              0
 
Charles L. Schaffer.......  1998  492,000  210,400    29,939          4,800
 Senior Vice President and  1997  427,500  113,400    14,951              0
 Chief Operating Officer    1996  396,250  137,150    15,203              0
</TABLE>

--------
(1) Reflects the value of awards accrued and paid under the UPS Managers
    Incentive Plan for the respective fiscal years.
(2) Reflects the value of common stock contributed by us to the accounts of
    the named individuals pursuant to the UPS SavingsPLUS plan.
 
 
                                      73

<PAGE>
 
Stock Option Grants
 
   The following table sets forth information concerning option grants to our
Chief Executive Officer and the Named Executive Officers in 1998.

<TABLE>
<CAPTION>
                                                                      Potential Realized Value at
                         Number of   % of Total                         Assumed Annual Rates of
                         Securities   Options                          Stock Price Appreciation
                         Underlying  Granted to  Exercise                   for Option Term
                          Options   Employees in Price per Expiration ----------------------------
      Name                Granted       1998     Share(1)   Date(2)        5%            10%
      ----               ---------- ------------ --------- ---------- ------------- --------------
<S>                      <C>        <C>          <C>       <C>        <C>           <C>
James P. Kelly..........   50,468       1.23%     $32.00      2003    $     446,188 $     985,959
John W. Alden...........   38,493       0.94       32.00      2003          340,317       752,012
Robert J. Clanin........   29,084       0.71       32.00      2003          257,132       568,194
Joseph R. Moderow.......   29,084       0.71       32.00      2003          257,132       568,194
Charles L. Schaffer.....   29,939       0.73       32.00      2003          264,691       584,898
</TABLE>

--------
(1) Represents the current price on the date of grant. The exercise price may
    be paid by the delivery of already owned shares, subject to certain
    conditions.
(2) Generally, options may not be exercised until the expiration of five years
    from the date of grant, and then from April 1 through April 30 of the year
    of exercise.
 
Stock Option Exercises and Holdings
 
   The following table sets forth information on stock option exercises in
1998 by our Chief Executive Officer and the Named Executive Officers and the
value of such officers' unexercised options on December 31, 1998:
 

<TABLE>
<CAPTION>
                                                                        Value of
                                               Number of Securities   Unexercised
                                              Underlying Unexercised  In-the-Money
                                                Options at End of      Options at
                           Shares                    1998(2)          End of 1998
                         Acquired on  Value        Exercisable/       Exercisable/
      Name               Exercise(1) Realized     Unexercisable      Unexercisable
      ----               ----------- -------- ---------------------- --------------
<S>                      <C>         <C>      <C>                    <C>
James P. Kelly..........   21,175    $280,569      None/137,533      n/a/$1,669,478
John W. Alden...........   18,254     241,866      None/110,545       n/a/1,349,485
Robert J. Clanin........    3,895      51,609       None/71,233         n/a/801,050
Joseph R. Moderow.......   17,159     227,357       None/91,274       n/a/1,146,574
Charles L. Schaffer.....   15,333     203,162       None/91,139       n/a/1,134,337
</TABLE>

--------
(1) Represents gross number of common shares underlying the options exercised
    under the 1991 Plan.
(2) Represents common shares subject to options granted under the 1991 and
    1996 Plans.
 
 
                                      74

<PAGE>
 
Retirement Plans
 
   The following table shows the estimated annual retirement benefit payable
on a single life only annuity basis to participating employees, including our
Chief Executive Officer and the Named Executive Officers, under the UPS
Retirement Plan and UPS Excess Coordinating Benefit Plan for years of service
rendered upon retirement, which is assumed to occur at age 65. Participating
employees also are entitled to receive $16,008 per year, the maximum currently
payable, in primary Social Security benefits:
 

<TABLE>
<CAPTION>
     Average
      Final
     Earnings                      15 Years 20 Years 25 Years 30 Years 35 Years
     --------                      -------- -------- -------- -------- --------
     <S>                           <C>      <C>      <C>      <C>      <C>
     $  200,000................... $ 45,998 $ 61,325 $ 76,669 $ 91,996 $107,341
        250,000...................   58,498   77,990   97,504  116,996  136,511
        300,000...................   70,998   94,655  118,339  141,996  165,681
        350,000...................   83,498  111,320  139,174  166,996  194,851
        400,000...................   95,998  127,985  160,009  191,996  224,021
        450,000...................  108,498  144,650  180,884  216,996  253,191
        500,000...................  120,998  161,315  201,679  241,996  282,361
        600,000...................  145,998  194,645  243,349  291,996  340,701
        700,000...................  170,998  227,975  285,019  341,996  399,041
        800,000...................  195,998  261,305  326,689  391,996  457,381
        900,000...................  220,998  294,635  368,359  441,996  515,721
      1,000,000...................  245,998  327,965  410,029  491,996  574,061
      1,100,000...................  270,998  361,295  451,699  541,996  632,401
      1,200,000...................  295,998  394,625  493,369  591,996  690,741
</TABLE>

 
   Amounts exceeding $120,000, which is adjusted from time to time by the
Internal Revenue Service, would be paid under the UPS Excess Coordinating
Benefit Plan. Pursuant to this plan, participants may choose to receive the
benefit in the form of a life annuity, cash lump sum or life insurance with a
cash value up to 100% of the present value of the benefit. Beginning with
1994, no more than $150,000, which is adjusted from time to time by the
Internal Revenue Service, of cash compensation could be taken into account in
calculating benefits payable under the UPS Retirement Plan. Participants who
elect forms of payment with survivor options will receive lesser amounts than
those shown in the above table.
 
   The compensation upon which the benefits are summarized in the table above
includes salary and bonuses awarded under the UPS Managers Incentive Plan. The
average final compensation for each participant in the plans is the average
covered compensation of the participant during the five highest consecutive
years out of the last ten full calendar years of service.
 
   As of December 31, 1998, estimated or actual credited years of service
under the plans to our Chief Executive Officer and the Named Executive
Officers was as follows: Kelly--34, Alden--34, Schaffer--29, Clanin--28 and
Moderow--28.
 
   The plans permit participants with 25 or more years of benefit service to
retire as early as age 55 with no or only a limited reduction in the amount of
their monthly benefits.
 
Compensation of Directors
 
   In 1998, directors who were not employees of UPS received an annual
director's fee of $50,000. Members of the Audit, Officer Compensation and
Nominating Committees who were not employees of UPS received an additional
annual fee of $2,500 for each committee on which they served, except that
committee chairmen received an additional annual fee of $4,000. Mr. Rogers has
declined to accept any fees for his services as a director.
 
   UPS established a retirement plan in February 1991, which provided
retirement and disability benefits for directors who were neither employees
nor former employees of UPS. Effective January 1, 1997, the board agreed
 
                                      75

<PAGE>
 
to discontinue this plan and, in conjunction therewith, increase the options
for which outside directors are eligible under the 1996 Plan. In satisfaction
of the obligations previously accrued under the retirement plan, the board
agreed to allocate to each director certain amounts. The amounts so allocated
to each director will appreciate or depreciate in tandem with the changes in
the share price of our common stock inclusive of dividends. At the time each
director ceases to be a director of UPS, the then-current value of the account
will be payable to him, or his designated beneficiary, either in cash or
common stock. The value of these accounts at December 31, 1998, was: Mr.
Brown, $458,029; Mr. MacDougal, $458,029; Mr. Pelson, $229,014; and Mr.
Teeter, $229,014. The value of Mr. Kaysen's account at the time of his
retirement was $429,632.
 
   In addition to permitting grants of options to eligible employees, the 1996
Plan provides for grants of non-qualified options to the outside directors.
These non-qualified options are granted on the first day in each year on which
any option is granted to an employee optionee and allow a director to purchase
a number of shares equal to 109.5% of such outside director's annual
director's fee divided by the Current Price of the common stock as defined in
the 1996 Plan. Each of Messrs. Brown, MacDougal, Pelson and Teeter and Ms.
Livermore were granted options under the 1996 Plan during 1998.
 
   Outside directors also have the option of deferring some or all of the fees
and/or retainer payable in connection with their services on the board into
the UPS Deferred Compensation Plan for Non-Employee Directors. Amounts
deferred under such plan are treated as invested in certain mutual funds
selected by each director. At the time a participating director ceases to be a
director, the total value of the director's account will be payable to him or
her, or his or her designated beneficiary, in 40 quarterly installments.
 
Compensation Committee Interlocks and Insider Participation
 
   The following non-employee directors are the members of the Officer
Compensation Committee of the board of directors: Victor A. Pelson, Gary E.
MacDougal and John W. Rogers. None of the members of the Compensation
Committee has any direct or indirect material interest in or relationship with
UPS outside of his position as director and other than his benefits accrued
while serving as an employee of UPS. Mr. Rogers is a former Chairman of the
Board and Chief Executive Officer of UPS. He retired from active employment
with UPS in 1989. To UPS's knowledge, there were no interlocks involving
members of the Compensation Committee or other directors of UPS requiring
disclosure in this proxy statement/prospectus.
 
Certain Business Relationships
 
   William H. Brown, III, a director of UPS, is a partner of Schnader Harrison
Segal & Lewis LLP, a law firm that provides legal services from time to time
to us and our subsidiaries.
 
   Some of our executive officers are trustees of the UPS Retirement Plan. The
UPS Retirement Plan, through wholly owned subsidiaries, owns real property
that is leased to our subsidiaries for operating purposes at rental rates
determined by independent firms of real estate appraisers. The rentals charged
to our subsidiaries for the leased real estate during 1998 by this Plan
aggregated $282,437.
 
                                      76

<PAGE>
 
                          INCENTIVE COMPENSATION PLAN
 
   Old UPS's board of directors will adopt, and will recommend that the
shareowners approve, the United Parcel Service, Inc. Incentive Compensation
Plan, pursuant to which employees and directors of New UPS and its
subsidiaries, and certain other key persons as defined in the plan, would be
eligible to receive options to purchase class A common stock and other awards.
Immediately after the merger and the public offering, you, as holders of New
UPS class A common stock, will collectively hold about 90% of New UPS's total
common stock and about 99% of New UPS's total voting power. Assuming approval
and consummation of the merger, we are soliciting approval of the plan in your
capacity as holders of Old UPS common stock. If the merger and the public
offering do not occur, the plan will not go into effect.
 
   The following summary describes all material elements of the plan, but does
not purport to be complete and is subject to and qualified in its entirety by
reference to the plan. A copy of the plan is attached to this proxy
statement/prospectus as Annex C.
 
General
 
   Purpose of the Plan. One purpose of the plan is to optimize our
profitability and growth through annual and long-term incentives that are
consistent with our goals and link the personal interests of participants to
those of our shareowners. A further but equal purpose of the plan is to enable
New UPS and its subsidiaries to attract, retain and motivate their employees
and directors.
 
   Effective Date of the Plan. The plan will take effect as soon as
practicable.
 
   Administration of the Plan. The plan generally will be administered by the
Compensation Committee of the board. The board may take on the powers of the
Compensation Committee under the plan, and will have the power of the
Compensation Committee with respect to the granting and interpretation of
awards to outside directors. We refer to the body administering the plan,
whether it is the board or a committee of the board, as the plan
administrator.
 
   The plan provides that if a committee of the board is the plan
administrator, the members of the committee will consist solely of two or more
"outside directors," as defined by Section 162(m) of the Internal Revenue
Code, if awards are intended to comply with the provisions of Section 162(m).
The plan administrator will have full and final authority to select the
individuals to receive awards and to grant awards and will have a wide degree
of flexibility in determining the terms and conditions of awards.
 
   Eligibility Under the Plan. All employees and directors of New UPS and its
subsidiaries, as well as other key persons as defined in the plan, are
eligible to participate in the plan. We estimate that about 28,000 employees
and directors of New UPS and its subsidiaries will participate in the plan.
Because the plan is a discretionary plan, we currently cannot determine the
amount or form of any award that will be allocated to any individual during
the term of the plan.
 
   Shares Subject to the Plan. The shares issuable pursuant to awards granted
under the plan will be shares of class A common stock. The maximum number of
shares of class A common stock that may be issued pursuant to awards granted
under the plan equals 112,000,000 shares. The total number of shares reserved
for issuance as restricted stock will be limited to 34,000,000.
 
   The plan also contains customary anti-dilution provisions.
 
   Types of Awards. Awards under the plan are not restricted to any specified
form or structure and may include:
 
  .  stock options (both incentive stock options and non-qualified stock
     options, as discussed in greater detail below)
 
  .  restricted stock
 
                                      77

<PAGE>
 
  .  stock appreciation rights
 
  .  performance units
 
  .  performance shares
 
  .  management incentive awards through bonuses of cash and/or stock (as
     discussed in greater detail below).
 
   An award to a participant may consist of one security or benefit or two or
more of them in tandem or in the alternative. An award granted under the plan
to a participant will generally include a provision that conditions or
accelerates the receipt of benefits upon the occurrence of specified events,
such as a change of control of New UPS or a dissolution, liquidation, sale of
substantially all of the property and assets of New UPS or other significant
corporate transaction.
 
   The exercise price for options granted under the plan will be at least
equal to 100% of the fair market value of a share of class A common stock on
the date of grant. The exercise price of an incentive stock option granted to
a person who owns more than 10% of the total combined voting power of all
classes of New UPS stock may not be less than 110% of the fair market value of
a share of class A common stock on the date of grant.
 
   Management Incentive Awards. Based upon recommendations of district,
regional and corporate group managers, the plan administrator will select
those participants who are to receive management incentive awards each year.
Management incentive awards may consist of shares of class A common stock plus
cash equal to the amount required to be withheld for taxes for the award, or
exclusively of cash, as determined by the plan administrator. Generally, cash-
only management incentive awards will be granted to employees of international
subsidiaries and participants who are no longer employees on the date of
distribution of the award.
 
   In addition, those recipients of shares who elect to deposit the shares
with a custodian selected by the plan administrator may also receive an amount
equal to the lesser of:
 
    .  one month's salary or
 
    .  2.5% of the cost of shares previously deposited with the custodian,
       less the proceeds from the sale of the shares.
 
   Maximum Awards Issuable to Individuals. In general, the plan administrator
may not, within any calendar year:
 
  .  grant options to purchase more than 600,000 shares of class A common
     stock to a participant
 
  .  grant stock appreciation rights to purchase more than 600,000 shares of
     class A common stock to a participant
 
  .  grant awards of restricted stock in excess of 600,000 shares of class A
     common stock to a participant
 
  .  grant a performance share or performance unit with a payout greater than
     the value of 600,000 shares of class A common stock to a participant
 
  .  grant a management incentive award with a payout greater than the value
     of 600,000 shares of class A common stock to a participant
 
   Amendments to and Termination of the Plan. Subject to limitations imposed
by law and the plan, New UPS's board of directors may amend or terminate the
plan at any time and in any manner. No amendment or termination may deprive
the recipient of an award previously granted under the plan of any rights
under the award without his or her consent.
 
 
                                      78

<PAGE>
 
   Duration of the Plan and of Options. The plan will remain in effect until
all shares subject to the plan have been purchased or acquired pursuant to the
plan. We may not grant awards under the plan on or after the tenth anniversary
of the plan's adoption. We may not grant any option under the plan that is
exercisable after the 10th anniversary of the date of grant.
 
   Compliance with Section 16(b). Pursuant to Section 16(b) of the Exchange
Act, directors, executive officers and 10% shareowners of New UPS will be
generally liable to New UPS for repayment of any profits realized from any
non-exempt purchase and sale of common stock occurring within a six-month
period. Rule 16b-3 provides an exemption from Section 16(b) liability for some
transactions by an officer or director made pursuant to approval by the board
of directors, a committee composed of outside directors or shareholders. It is
intended that all grants made under the plan would meet the requirements of
the Rule 16b-3 exemption.
 
Federal Income Tax Consequences
 
   The following is a brief description of the federal income tax treatment
that will generally apply to awards made under the plan, based on federal
income tax laws in effect on the date of this proxy statement/prospectus. The
exact federal income tax treatment of awards will depend on the specific
nature of any award.
 
   Incentive Stock Options. Plan participants who are employees may be granted
options that we intend to qualify as ISOs under Section 422 of the Internal
Revenue Code. Generally, the optionee is not taxed, and New UPS is not
entitled to a deduction, on the grant or exercise of an ISO. But if the
optionee sells the shares acquired upon the exercise of an ISO at any time
within:
 
    .  one year after the transfer of these shares to the optionee pursuant
       to the exercise of the ISO or
 
    .  two years from the date of grant of the ISO,
 
then the optionee will recognize ordinary income in an amount equal to the
excess, if any, of:
 
    .  the lesser of the sale price or the fair market value of the shares
       on the date of exercise, over
 
    .  the exercise price of the ISO.
 
In that event, New UPS will generally be entitled to a deduction equal to the
amount of ordinary income recognized by the optionee. If the optionee sells
the shares at any time after the optionee has held the shares for at least:
 
    .  one year after the date of transfer of the shares to the optionee
       pursuant to the exercise of the ISO and
 
    .  two years from the date of grant of the ISO,
 
then the optionee will recognize capital gain or loss equal to the difference
between the sale price and the exercise price of the ISO, and New UPS will not
be entitled to any deduction.
 
   The amount by which the fair market value of the shares received upon
exercise of an ISO exceeds the exercise price will be included as a positive
adjustment in the calculation of an optionee's alternative minimum taxable
income in the year of exercise. The "alternative minimum tax" imposed on
individual taxpayers is generally equal to the amount by which 28% (26% of
alternative minimum taxable income below specified amounts) of the
individual's alternative maximum taxable income (reduced by specified
exemption amounts) exceeds his or her regular income tax liability for the
year.
 
   Non-Qualified Stock Options. The grant of an option or other similar right
to acquire stock that does not qualify for treatment as an ISO (which we call
a "non-qualified stock option") is generally not a taxable event for the
optionee. Upon exercise of the option, the optionee will generally recognize
ordinary income in an amount equal to the excess of the fair market value of
the shares acquired upon exercise (determined as of the date of exercise) over
the exercise price of the option, and New UPS generally will be entitled to a
deduction equal to that amount.
 
                                      79

<PAGE>
 
   Restricted Stock. Awards under the plan may also include stock sales, stock
bonuses or other grants of stock that include provisions for the delayed
vesting of the recipient's rights to the stock. Unless the recipient makes an
election under Internal Revenue Code section 83(b) within 30 days after the
receipt of the restricted shares, he or she generally will not be taxed on the
receipt of restricted shares until the restrictions on the shares expire or
are removed. When the restrictions expire or are removed, the recipient will
recognize ordinary income (and New UPS generally will be entitled to a
deduction) in an amount equal to the excess of the fair market value of the
shares at that time over the purchase price. If the recipient makes an 83(b)
election within 30 days of the receipt of restricted shares, however, he or
she will recognize ordinary income (and New UPS will be entitled to a
deduction) equal to the excess of the fair market value of the shares on the
date of receipt (determined without regard to vesting restrictions) over the
purchase price.
 
   Other Awards. We may grant awards under the plan that do not fall clearly
into the categories described above. The federal income tax treatment of these
awards will depend upon the specific terms of the awards. Generally, New UPS
will be required to make arrangements for withholding taxes with respect to
any ordinary income recognized by a recipient in connection with awards made
under the plan.
 
   Special rules will apply in cases where a recipient of an award pays the
exercise or purchase price of the award or applicable withholding tax
obligations under the plan by delivering previously owned shares of class A
common stock or by reducing the amount of shares otherwise issuable pursuant
to the award. This surrender or withholding of shares will in some
circumstances result in the recognition of income with respect to these shares
or a carryover basis in the shares acquired.
 
   The terms of specific award agreements may provide for accelerated vesting
or payment of an award in connection with a change of control of New UPS. In
that event, and depending upon the individual circumstances of the recipient,
some amounts with respect to the award may be "excess parachute payments"
under the "golden parachute" provisions of the Internal Revenue Code. Pursuant
to these provisions, a recipient will be subject to a 20% excise tax on any
"excess parachute payments" and New UPS will be denied any deduction with
respect to such a payment.
 
   In some circumstances, New UPS may be denied a deduction for compensation
(including compensation attributable to the ordinary income recognized with
respect to awards made under the plan) to some officers of New UPS to the
extent that the compensation to that officer exceeds $1,000,000 in a given
year.
 
Vote Required and Recommendation
 
   The board of directors has directed that the plan be submitted for
shareowner approval. The affirmative vote of a majority of the shares
represented at the special meeting, in person or by proxy, will be required
for approval. In the absence of approval, the plan will be without effect, and
no grants of awards will be made under the plan.
 
   The board of directors unanimously recommends that you vote FOR approval of
the plan.
 
                                      80


<PAGE>
 
                   RELATIONSHIPS WITH OVERSEAS PARTNERS LTD.
 
   UPS has significant historical and current relationships with Overseas
Partners Ltd., a Bermuda-based company that is engaged in reinsurance and
other businesses. At least a majority of the current shareowners of UPS also
are shareowners of OPL, and a majority of the directors and officers of OPL
are current or former employees of UPS. In 1998, OPL derived approximately 30%
of its revenues from reinsurance business related to UPS. UPS regularly
reviews its relationships with its primary insurers and may make changes in
such relationships.
 
   In 1983, UPS spun off OPL by paying a special dividend to its shareowners
of one share of OPL common stock for each share of UPS common stock. In
addition, UPS has offered its employees the opportunity periodically to
purchase OPL shares under UPS's various employee stock purchase plans.
 
   Members of OPL's board of directors who are current or former officers of
UPS are: Robert J. Clanin, UPS's Chief Financial Officer and a director of
UPS; Joseph M. Pyne, UPS's Senior Vice President, Corporate Marketing; and
Edwin H. Reitman, the retired former Vice President, Corporate Marketing of
UPS. D. Scott Davis, formerly Vice President, Finance and Accounting for UPS,
is the current Chief Executive Officer and a director of OPL.
 
   OPL was organized to reinsure shippers' risks relating to packages carried
by UPS, as well as to underwrite other reinsurance for insureds unaffiliated
with UPS. Since commencing operations in 1984, OPL's primary reinsurance
business has been reinsuring insurance by United States-based insurance
companies unaffiliated with UPS or OPL. This reinsurance covered the risk of
loss or damage to shippers' packages carried by UPS and unaffiliated foreign
common carriers whose declared value exceeds $100 or the equivalent in foreign
currency. The reinsurance of shippers' risk insurance does not involve
transactions conducted directly between UPS and OPL. Various subsidiaries of
American International Group, Inc., an insurance company unaffiliated with OPL
or UPS, insure customer packages in return for premiums paid by the customers.
OPL reinsures these primary insurers, whose premium payments constitute OPL's
largest source of revenues and profits. Reinsurance premiums earned by OPL for
reinsuring these risks during 1998 were $371.8 million or 29.6% of OPL's 1998
revenues, a reduction from 32.3% in 1997. OPL's reinsurance business also has
included reinsurance of workers' compensation insurance issued by another
unaffiliated United States-based insurance company covering risks of a UPS
subsidiary in the State of California. A new arrangement, which is described
below, relating to reinsurance of shippers' risk insurance provided to UPS
customers is being implemented.
 
   OPL and its subsidiaries also are engaged in the leasing of the Ramapo
Ridge facility to subsidiaries of UPS. Until July 1998, OPL also leased
aircraft to subsidiaries of UPS.
 
   In December 1989, an OPL subsidiary acquired from UPS the Ramapo Ridge
facility. In July 1990, the OPL subsidiary leased the facility to UPS for an
initial term ending in 2019. UPS uses the facility as a data processing,
telecommunications and operations center. Lease payments have fixed and
variable components. The fixed component provides for aggregate lease payments
of approximately $216 million over the initial term of the lease. The variable
component of the lease payments is based on the number of customer accounts
maintained by UPS. At the conclusion of the lease, UPS has the right to
purchase the Ramapo Ridge facility at fair market value. UPS has an option to
purchase the land on which the facility is located, but not the buildings,
from an OPL subsidiary in 2050 for approximately $63.7 million, subject to
certain adjustments for increases in the fair market value of the land. In
1998, OPL received rental payments of approximately $27.1 million from UPS
pursuant to these leases.
 
   OPL has assigned the right to receive the fixed rentals on the Ramapo Ridge
facility lease to a subsidiary, and the subsidiary pledged its interest in
these payments to secure bonds issued to finance the acquisition of the leased
assets. UPS's obligation to pay the fixed rental is unconditional during the
initial lease term, and continues after an early lease termination unless UPS
pays an amount sufficient to defease the remaining interest payments on the
OPL subsidiary's bonds.
 
                                      81

<PAGE>
 
   In December 1989, an OPL subsidiary acquired from UPS rights to purchase
five Boeing 757 aircraft for approximately $67.9 million. The manufacturer
delivered the aircraft to OPL in 1990 and OPL leased them to UPS until July
1998. At that time, OPL sold the aircraft to UPS for approximately $202
million, yielding a gain on sale to OPL before income taxes of approximately
$12 million.
 
   In considering which risks related to UPS's business to insure or reinsure,
or which leasing or other arrangements to enter into between OPL and UPS,
UPS's and OPL's directors and officers consider the impact of their business
decisions on each of the two companies and prevailing market conditions. We
cannot assure you that transactions between us and OPL have been made on the
most favorable terms that we could obtain in transactions with unrelated
parties. If in the future we engage in other transactions with OPL, we
anticipate that they will be on an arms-length basis.
 
   UPS and OPL do not have any formal conflict of interest resolution
procedures. Nevertheless, in connection with OPL's reinsurance of risks
related to UPS's business, UPS believes the rates charged by the primary
insurers reinsured by OPL are competitive with those charged to shippers
utilizing other carriers. In connection with other major transactions in which
UPS and OPL have been involved, primarily leasing transactions, UPS generally
has obtained fairness or valuation opinions from investment banking firms or
other organizations with significant expertise in the evaluation of the
interests involved.
 
   As a result of the Tax Court decision released on August 9, 1999, National
Union Fire Insurance Company, a subsidiary of American International Group,
Inc., has notified OPL that effective September 30, 1999 it will terminate the
five underlying policies that provide shippers' risk insurance for UPS
customers. The termination of these policies triggers the immediate
termination of the reinsurance agreement between National Union and OPL.
 
   UPS, on behalf of its customers, and National Union have agreed on a
restructuring of this program, which will become effective on October 1, 1999.
Commencing on October 1, 1999, National Union will issue five new policies
covering UPS customers. Glenlake Financial Corporation, a wholly owned
subsidiary of UPS Capital Corporation and a licensed insurance agency formed
in 1998, will offer excess value package insurance to be issued under the five
new policies to UPS customers.
 
   UPINSCO, Inc., a wholly owned subsidiary of UPS, has entered into a
reinsurance agreement under which it will reinsure substantially all of the
risks underwritten by National Union in exchange for substantially all of the
premiums collected. UPINSCO is a licensed reinsurance company formed in 1994
to reinsure risks, both related and unrelated to UPS and its subsidiaries.
UPINSCO, which is domiciled in the U.S. Virgin Islands, has elected to be
taxed on its income as part of UPS's consolidated income tax return for
federal income tax purposes.
 
                                      82

<PAGE>
 
                FEDERAL INCOME TAX CONSEQUENCES TO SHAREOWNERS
 
   The following is a discussion of the material federal income tax
considerations of the merger that are generally applicable to holders of UPS
shares. Statements of law and conclusions of law in this discussion are the
opinions of Gibson, Dunn & Crutcher LLP, counsel to UPS.
 
   This discussion does not deal with all income tax considerations that may
be relevant to particular UPS shareowners in light of their particular
circumstances, such as shareowners who are dealers in securities, foreign
persons, banks, insurance companies or tax-exempt entities, shareowners who
hold their shares as part of a hedging, straddle, conversion or other risk
reduction transaction or shareowners who acquired their shares in connection
with stock option or stock purchase plans or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of transactions effectuated prior to or after the merger other
than the tender offer (whether or not these transactions are in connection
with the merger), including transactions in which UPS shares were or are
acquired or in which New UPS class A shares were or are disposed of.
Furthermore, no foreign, state or local tax considerations are addressed in
this proxy statement/prospectus. The discussion is based on federal income tax
law in effect as of the date of this proxy statement/prospectus, which could
change at any time, possibly with retroactive effect. Accordingly, UPS
shareowners are urged to consult their own tax advisers as to the specific tax
consequences of the merger, including the applicable federal, state, local and
foreign tax consequences to them of the merger and applicable tax return
reporting requirements.
 
   The following federal income tax consequences will result from the merger:
 
  .  No gain or loss will be recognized by holders of UPS shares solely as a
     result of their receipt of New UPS class A shares in the merger;
 
  .  The aggregate tax basis of the New UPS class A shares received in the
     merger by a UPS shareowner will be the same as the aggregate tax basis
     of the UPS shares surrendered in exchange for such New UPS class A
     shares;
 
  .  The holding period of the New UPS class A shares received in the merger
     by a UPS shareowner will include the period during which the shareowner
     held the UPS shares surrendered in exchange for such New UPS class A
     shares, so long as the UPS shares are held as a capital asset at the
     time of the merger; and
 
  .  None of New UPS, UPS Merger Subsidiary, Inc. or UPS will recognize gain
     or loss solely as a result of the merger.
 
   The opinion of counsel assumes:
 
  .  the accuracy of the statements and facts concerning the merger set forth
     in the merger agreement and in this proxy statement/prospectus;
 
  .  that the merger is consummated in the manner contemplated by, and in
     accordance with, the terms of the merger agreement and this proxy
     statement/prospectus; and
 
  .  the accuracy of representations made by UPS and New UPS set forth in
     certificates delivered to counsel.
 
   The parties are not requesting a ruling from the Internal Revenue Service
in connection with the merger. The opinion of counsel referred to above does
not bind the IRS or prevent the IRS from adopting a contrary position.
 
   Under the applicable regulations, the aggregate tax basis of the UPS shares
surrendered by a holder in the merger may be allocated among the class A-1,
class A-2 and class A-3 common stock in proportion to the fair market value of
the stock in each such class. Holders may wish to consult their own tax
advisers about the possibility of treating the class A shares as a single
class, in which case a holder may be permitted to carry over to any of the
class A-1, class A-2 and class A-3 shares the specific basis of each lot of
surrendered UPS shares that the holder is able to identify therewith under
applicable rules.
 
                                      83

<PAGE>
 
   It is conceivable, although unlikely, that the contemplated cash tender
offer and the merger will be treated as part of the same transaction for
federal income tax purposes. In this event, if you tender shares, cash
received by you in the tender offer could be treated as "boot" for federal
income tax purposes. As a result, you would be required to recognize any gain
realized in the merger with respect to all of your UPS shares up to the full
amount of the cash received in the tender offer. In contrast, if the tender
offer were not treated as part of the same transaction as the merger, you
would be required to recognize gain only with respect to those New UPS shares
actually tendered.
 
   The different tax consequences of treating the merger and the tender offer
as separate transactions or as a single transaction may be illustrated by the
following example. Assume that, immediately after the merger, you own 100
shares of class A common stock with a value of $5 per share, or $500 in the
aggregate, and an adjusted tax basis of $2 per share, or $200 in the
aggregate. Assume further that you tender ten shares in the tender offer,
which UPS purchases for a total price of $50. If the tender offer and the
merger are treated as separate transactions, you would recognize a gain of
$30, which is equal to the amount that you received ($50) reduced by your
basis in the shares sold ($20). The aggregate basis in your remaining shares
would be $180. In contrast, if the merger and the tender offer were treated as
part of the same transaction, you would recognize gain equal to $50, which is
equal to the lower of the total gain realized in the merger on all of your
shares ($300) and the amount of cash that you received in the tender offer
($50), and the aggregate basis in your remaining shares would be $200. In that
case, it is unclear whether you would be required to recognize this gain at
the time of the merger or at the time you sold your shares in the tender
offer. Depending on your individual circumstances, you could have different
tax consequences.
 
 
                                      84

<PAGE>
 
                                 LEGAL MATTERS
 
   The validity of the shares of our class A common stock issued as a result
of the merger, and certain tax consequences of the merger, will be passed upon
for us, as a condition to the merger becoming effective, by Gibson, Dunn &
Crutcher LLP. Morris, Manning & Martin LLP has acted as our special counsel in
connection with the merger and related transactions, and has passed upon
certain legal matters for us.
 
                      SUBMISSION OF SHAREOWNER PROPOSALS
 
   UPS expects to hold its 2000 Annual Meeting in May 2000. If you intend to
submit a proposal for inclusion in our proxy materials for UPS's 2000 Annual
Meeting, you must submit the proposal to our Secretary by November 15, 1999.
 
   SEC rules set forth standards as to what shareowner proposals we are
required to include in our proxy statement for an annual meeting.
 
                                    EXPERTS
 
   The financial statements of United Parcel Service of America, Inc. as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998 included in this proxy statement/prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
 
   The balance sheet of United Parcel Service, Inc. as of July 19, 1999
included in this proxy statement/prospectus has been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and is included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
 
                                      85

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
                         INDEX TO FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                                          Page
                                                                         Number
                                                                         ------
<S>                                                                      <C>
Audited Consolidated Financial Statements
  Independent Auditors' Report..........................................   F-2
  Consolidated Balance Sheets as of December 31, 1997 and 1998..........   F-3
  Statements of Consolidated Income for the Years ended December 31,
   1996, 1997 and 1998..................................................   F-4
  Statements of Consolidated Shareowners' Equity for the Years ended
   December 31, 1996, 1997 and 1998.....................................   F-5
  Statements of Consolidated Cash Flows for the Years ended December 31,
   1996, 1997 and 1998..................................................   F-6
  Notes to Audited Consolidated Financial Statements....................   F-7
 
Unaudited Consolidated Financial Statements
  Consolidated Balance Sheets as of December 31, 1998 and June 30,
   1999.................................................................  F-21
  Statements of Consolidated Income (Loss) for the Six Months Ended June
   30, 1998 and 1999....................................................  F-22
  Statement of Consolidated Shareowners' Equity for the Six Months Ended
   June 30, 1999........................................................  F-23
  Statements of Consolidated Cash Flows for the Six Months Ended June
   30, 1998 and 1999....................................................  F-24
  Notes to Unaudited Consolidated Financial Statements..................  F-25
 
                          UNITED PARCEL SERVICE, INC.
 
                          INDEX TO FINANCIAL STATEMENT
 
Audited Financial Statement
  Independent Auditors' Report..........................................  F-28
  Balance Sheet as of July 19, 1999.....................................  F-29
  Notes to Balance Sheet................................................  F-29
</TABLE>

 
                                      F-1

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 

                         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 1998, and the related consolidated statements of income, shareowners'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. 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 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
 
/s/ Deloitte & Touche LLP
 
Atlanta, Georgia
February 8, 1999 (August 16, 1999 as to Note 4)

 
                                      F-2

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
                           December 31, 1997 and 1998
                (In millions except share and per share amounts)
 

<TABLE>
<CAPTION>
                                                               December 31,
                                                              ----------------
                                                               1997     1998
                                                              -------  -------
<S>                                                           <C>      <C>
                           ASSETS
Current Assets:
  Cash and cash equivalents.................................. $   460  $ 1,240
  Marketable securities......................................      --      389
  Accounts receivable........................................   2,405    2,713
  Prepaid employee benefit costs.............................     669      703
  Materials, supplies and other prepaid expenses.............     417      380
  Common stock held for stock plans..........................     526       --
                                                              -------  -------
    Total Current Assets.....................................   4,477    5,425
                                                              -------  -------
Property, Plant and Equipment:
  Vehicles...................................................   3,519    3,482
  Aircraft (including aircraft under capitalized leases).....   6,771    7,739
  Land.......................................................     654      651
  Buildings..................................................   1,433    1,478
  Leasehold improvements.....................................   1,734    1,803
  Plant equipment............................................   4,063    4,144
  Construction-in-progress...................................     328      257
                                                              -------  -------
                                                               18,502   19,554
  Less accumulated depreciation and amortization.............   7,495    8,170
                                                              -------  -------
                                                               11,007   11,384
Other Assets.................................................     428      258
                                                              -------  -------
                                                              $15,912  $17,067
                                                              =======  =======
             LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
  Accounts payable........................................... $ 1,207  $ 1,322
  Accrued wages and withholdings.............................   1,194    1,092
  Dividends payable..........................................     191      247
  Deferred income taxes......................................     140      114
  Current maturities of long-term debt.......................      41      410
  Other current liabilities..................................     625      532
                                                              -------  -------
    Total Current Liabilities................................   3,398    3,717
                                                              -------  -------
Long-Term Debt (including capitalized lease obligations).....   2,583    2,191
                                                              -------  -------
Accumulated Postretirement Benefit Obligation, Net...........     911      969
                                                              -------  -------
Deferred Taxes, Credits and Other Liabilities................   2,933    3,017
                                                              -------  -------
Shareowners' Equity:
  Preferred stock, no par value, authorized 200,000,000
   shares, none issued.......................................      --       --
  Common stock, par value $.10 per share, authorized
   900,000,000 shares, issued 562,000,000 and 559,000,000 in
   1997 and 1998.............................................      56       56
  Additional paid-in capital.................................      --      325
  Retained earnings..........................................   6,112    7,280
  Cumulative foreign currency adjustments....................     (81)     (62)
  Unrealized loss on marketable securities...................      --       (1)
                                                              -------  -------
                                                                6,087    7,598
                                                              -------  -------
  Treasury stock, at cost (11,605,952 shares)................      --     (425)
                                                              -------  -------
                                                                6,087    7,173
                                                              -------  -------
                                                              $15,912  $17,067
                                                              =======  =======
</TABLE>

            See notes to audited consolidated financial statements.
 
                                      F-3

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
                       STATEMENTS OF CONSOLIDATED INCOME
 
                  Years Ended December 31, 1996, 1997 and 1998
                     (In millions except per share amounts)
 

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -------------------------
                                                       1996     1997     1998
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Revenue.............................................. $22,368  $22,458  $24,788
                                                      -------  -------  -------
Operating Expenses:
  Compensation and benefits..........................  13,326   13,289   14,346
  Other..............................................   7,013    7,471    7,352
                                                      -------  -------  -------
                                                       20,339   20,760   21,698
                                                      -------  -------  -------
  Operating Profit...................................   2,029    1,698    3,090
                                                      -------  -------  -------
Other Income and (Expense):
  Investment income..................................      39       70       84
  Interest expense...................................     (95)    (187)    (227)
  Miscellaneous, net.................................     (63)     (28)     (45)
                                                      -------  -------  -------
                                                         (119)    (145)    (188)
                                                      -------  -------  -------
Income Before Income Taxes...........................   1,910    1,553    2,902
Income Taxes.........................................     764      644    1,161
                                                      -------  -------  -------
  Net Income......................................... $ 1,146  $   909  $ 1,741
                                                      =======  =======  =======
  Basic Earnings Per Share........................... $  2.06  $  1.65  $  3.18
                                                      =======  =======  =======
  Diluted Earnings Per Share......................... $  2.03  $  1.63  $  3.14
                                                      =======  =======  =======
</TABLE>

 
 
            See notes to audited consolidated financial statements.
 
                                      F-4

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
                 STATEMENTS OF CONSOLIDATED SHAREOWNERS' EQUITY
 
                  Years Ended December 31, 1996, 1997 and 1998
                     (In millions except per share amounts)
 

<TABLE>
<CAPTION>
                                                            Cumulative  Unrealized
                          Common Stock  Additional            Foreign    Loss on   Treasury    Total
                          -------------  Paid-In   Retained  Currency   Marketable  Stock   Shareowners'
                          Shares Amount  Capital   Earnings Adjustments Securities at Cost     Equity
                          ------ ------ ---------- -------- ----------- ---------- -------- ------------
<S>                       <C>    <C>    <C>        <C>      <C>         <C>        <C>      <C>
Balance, January 1,
 1996...................   570    $57      $ 76     $4,961     $ 57        $--      $  --      $5,151
 Comprehensive income:
 Net income.............    --     --        --      1,146       --         --         --       1,146
 Foreign currency
  adjustments...........    --     --        --         --      (36)        --         --         (36)
                                                                                               ------
 Comprehensive income...                                                                        1,110
                                                                                               ------
 Dividends ($.68 per
  share)................    --     --        --       (379)      --         --         --        (379)
 Gain on issuance of
  common stock held for
  stock plans...........    --     --        33         --       --         --         --          33
 Exercise of stock
  options...............    --     --       (14)        --       --         --         --         (14)
                           ---    ---      ----     ------     ----        ---      -----      ------
Balance, December 31,
 1996...................   570     57        95      5,728       21         --         --       5,901
 Comprehensive income:
 Net income.............    --     --        --        909       --         --         --         909
 Foreign currency
  adjustments...........    --     --        --         --     (102)        --         --        (102)
                                                                                               ------
 Comprehensive income...                                                                          807
                                                                                               ------
 Dividends ($.70 per
  share)................    --     --        --       (385)      --         --         --        (385)
 Gain on issuance of
  common stock held for
  stock plans...........    --     --        27         --       --         --         --          27
 Exercise of stock
  options...............    --     --       (26)        --       --         --         --         (26)
 Constructive retirement
  of common stock.......    (8)    (1)      (96)      (140)      --         --         --        (237)
                           ---    ---      ----     ------     ----        ---      -----      ------
Balance, December 31,
 1997...................   562     56        --      6,112      (81)        --         --       6,087
 Comprehensive income:
 Net income.............    --     --        --      1,741       --         --         --       1,741
 Foreign currency
  adjustments...........    --     --        --         --       19         --         --          19
 Unrealized loss on
  marketable
  securities............    --     --        --         --       --         (1)        --          (1)
                                                                                               ------
 Comprehensive income...                                                                        1,759
                                                                                               ------
 Dividends ($.85 per
  share)................    --     --        --       (466)      --         --         --        (466)
 Gain on issuance of
  common stock held for
  stock plans...........    --     --        70         --       --         --         --          70
 Exercise of stock
  options...............    --     --        (8)       (17)      --         --         --         (25)
 Retirement of common
  stock.................    (3)    --        --        (90)      --         --         --         (90)
 Reclassification of
  common stock held for
  stock plans...........    --     --        --         --       --         --       (425)       (425)
 Managers Incentive Plan
  award to be
  distributed in common
  stock.................    --     --       263         --       --         --         --         263
                           ---    ---      ----     ------     ----        ---      -----      ------
Balance, December 31,
 1998...................   559    $56      $325     $7,280     $(62)       $(1)     $(425)     $7,173
                           ===    ===      ====     ======     ====        ===      =====      ======
</TABLE>

 
            See notes to audited consolidated financial statements.
 
                                      F-5

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
 
                  Years Ended December 31, 1996, 1997 and 1998
                                 (In millions)
 

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     -------------------------
                                                      1996     1997     1998
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Cash flows from operating activities:
 Net income......................................... $ 1,146  $   909  $ 1,741
 Adjustments to reconcile net income to net cash
  from operating activities:
  Depreciation and amortization.....................     964    1,063    1,112
  Postretirement benefits...........................      78       70       58
  Deferred taxes, credits and other.................     479      406       23
  Changes in assets and liabilities:
   Accounts receivable..............................    (416)     (64)    (308)
   Prepaid employee benefit costs...................    (116)    (268)     (34)
   Materials, supplies and other prepaid expenses...    (196)     164       37
   Accounts payable.................................      18       52      115
   Accrued wages and withholdings...................      74       (7)     161
   Dividends payable................................      16       (3)      56
   Other current liabilities........................       4      184      (93)
                                                     -------  -------  -------
    Net cash from operating activities..............   2,051    2,506    2,868
                                                     -------  -------  -------
Cash flows from investing activities:
 Capital expenditures...............................  (2,333)  (1,984)  (1,645)
 Disposals of property, plant and equipment.........     127      111      216
 Purchases of marketable securities.................      --       --     (390)
 Other asset receipts (payments)....................     (60)      46      164
                                                     -------  -------  -------
    Net cash used in investing activities...........  (2,266)  (1,827)  (1,655)
                                                     -------  -------  -------
Cash flows from financing activities:
 Proceeds from borrowings...........................   1,345    2,097      287
 Repayments of borrowings...........................    (484)  (2,065)    (310)
 Purchases of common stock..........................    (650)    (719)    (774)
 Issuances of common stock pursuant to stock awards
  and employee stock purchase plans.................     532      487      785
 Dividends..........................................    (379)    (385)    (466)
 Other transactions.................................      19        1       45
                                                     -------  -------  -------
    Net cash from (used in) financing activities....     383     (584)    (433)
                                                     -------  -------  -------
Effect of exchange rate changes on cash.............      13      (27)      --
                                                     -------  -------  -------
Net increase in cash and cash equivalents...........     181       68      780
Cash and cash equivalents:
 Beginning of year..................................     211      392      460
                                                     -------  -------  -------
 End of year........................................ $   392  $   460  $ 1,240
                                                     =======  =======  =======
Cash paid during the period for:
 Interest, net of amount capitalized................ $    50  $   130  $   298
                                                     =======  =======  =======
 Income taxes....................................... $   484  $   319  $ 1,181
                                                     =======  =======  =======
</TABLE>

 
            See notes to audited consolidated financial statements.
 
 
                                      F-6

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
              NOTES TO AUDITED 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 letter and package delivery. Revenue is
recognized upon delivery of a letter or 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, 1998, the Company had approximately 202,000 employees
(62% 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 becomes amendable January 1, 2004.
 
   Cash and Cash Equivalents
 
   Cash and cash equivalents consist of highly liquid investments (including
investments in debt and auction rate securities of $207 and $936 million at
December 31, 1997 and 1998, respectively, with maturities or auction dates of
90 days or less when purchased) 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 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.
 
   Common Stock Held for Stock Plans
 
   Prior to December 31, 1998, UPS accounted 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 was
constructively retired and accounted for as a reduction in Shareowners'
Equity.
 
   As a result of a change in position by the Securities and Exchange
Commission ("SEC") as well as a change by the Financial Accounting Standards
Board ("FASB"), UPS has reclassified its Common Stock Held for Stock Plans
from current assets to Treasury Stock, a separate component of Shareowners'
Equity. In 1998, 3 million shares in excess of current requirements were
retired and 18 million shares previously constructively retired were also
retired.
 
 
                                      F-7

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   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.
 
   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 a 10-year period using the straight-line method.
 
   Income Taxes
 
   Income taxes are accounted for under 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 the
Company's 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 $53, $43 and $27 million for 1996, 1997 and 1998,
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
Company has determined that the fair value of these agreements is not material
to its financial statements.
 
   The Company also purchases options to reduce the impact of changes in
foreign currency rates on its foreign currency purchases and purchases options
and forward contracts to moderate the impact of price increases in the cost of
crude oil on fuel expense. The forward contracts and 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 fuel
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
 
                                      F-8

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
employee stock options are granted on this basis, the Company does not
recognize compensation expense for grants under its plans.
 
   Segment Information
 
   Effective January 1, 1998, the Company adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"), which changes the method used by the Company to report information
about its operating segments. Information for 1997 and 1996 has been restated
in order to conform to the 1998 presentation. FAS 131 establishes standards to
be used by enterprises to identify and report information about operating
segments and for related disclosures about products and services, geographic
areas and major customers. The adoption of FAS 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information contained in Note 10.
 
   Changes in Presentation
 
   Certain prior year amounts have been reclassified to conform to the current
year presentation.
 
2. LONG-TERM DEBT AND COMMITMENTS
 
   Long-term debt, as of December 31, consists of the following (in millions):
 

<TABLE>
<CAPTION>
                                                                 1997    1998
                                                                ------  ------
   <S>                                                          <C>     <C>
   8 3/8% debentures, due April 1, 2020(i)....................  $  700  $  424
   8 3/8% debentures, due April 1, 2030(i)....................      --     276
   Commercial paper(ii).......................................      98     112
   Industrial development bonds, Philadelphia Airport
    facilities, due December 1, 2015(iii).....................     100     100
   Capitalized lease obligations(iv)..........................     633     598
   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     166
   6.625% EuroNotes, due April 25, 2001.......................     200     200
   6.25% EuroNotes, due July 7, 2000..........................     298     301
   Installment notes, mortgages and bonds at various rates
    from 6.0% to 8.6%.........................................      62      58
                                                                ------  ------
                                                                 2,624   2,601
   Less current maturities....................................     (41)   (410)
                                                                ------  ------
                                                                $2,583  $2,191
                                                                ======  ======
</TABLE>

--------
(i)  On January 22, 1998, the Company exchanged $276 million of the original
     $700 million debentures for new debentures of equal principal with a
     maturity of April 1, 2030. The new debentures 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 1998, was 5.7% and 5.1%, respectively. The
     commercial paper has been classified as long-term debt in accordance
 
                                      F-9

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
       with the Company's intention and ability to refinance such obligations
       on a long-term basis under its revolving credit facilities. However,
       the amount of commercial paper outstanding in 1999 is expected to
       fluctuate. UPS is authorized to borrow up to $2.0 billion under this
       program as of December 31, 1998.
(iii)  The industrial development bonds bear interest at either a daily,
       variable or fixed rate. The average interest rates for 1997 and 1998
       were 3.5% and 3.3%, respectively.
(iv)   UPS has capitalized lease obligations for certain aircraft which are
       included in Property, Plant and Equipment at December 31 as follows (in
       millions):
 

<TABLE>
<CAPTION>
                                                                     1997  1998
                                                                     ----  ----
   <S>                                                               <C>   <C>
   Aircraft......................................................... $614  $614
   Accumulated amortization.........................................  (16)  (38)
                                                                     ----  ----
                                                                     $598  $576
                                                                     ====  ====
</TABLE>

 
   The aggregate annual principal payments for the next five years, excluding
commercial paper and capitalized leases, are (in millions): 1999--$371; 2000--
$471; 2001--$203; 2002--$2; and 2003--$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,
including current maturities, is approximately $2.8 billion as of December 31,
1997 and 1998.
 
   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):
 

<TABLE>
<CAPTION>
                                                          Capitalized Operating
   Year                                                     Leases     Leases
   ----                                                   ----------- ---------
   <S>                                                    <C>         <C>
   1999..................................................    $  67     $  211
   2000..................................................       67        146
   2001..................................................       67        115
   2002..................................................       67         94
   2003..................................................       67         77
   After 2003............................................      526        477
                                                             -----     ------
   Total minimum lease payments..........................      861     $1,120
                                                                       ======
   Less imputed interest.................................     (263)
                                                             -----
   Present value of minimum capitalized lease payments...      598
   Less current portion..................................      (39)
                                                             -----
   Long-term capitalized lease obligations...............    $ 559
                                                             =====
</TABLE>

 
   As of December 31, 1998, UPS has outstanding letters of credit totaling
approximately $1.2 billion issued in connection with routine business
requirements.
 
   As of December 31, 1998, UPS has commitments outstanding for capital
expenditures under purchase orders and contracts of approximately $2.6
billion, with the following amounts expected to be spent during the next five
years (in millions): 1999--$649; 2000--$295; 2001--$436; 2002--$383; and
2003--$393.
 
   UPS maintains two credit agreements with a consortium of banks which
provide revolving credit facilities of $1.25 billion each, with one expiring
April 29, 1999, and the other April 30, 2003. At December 31, 1998, there were
no outstanding borrowings under these facilities.
 
                                     F-10


<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   UPS also maintains a European medium-term note program with a borrowing
capacity of $1.0 billion. Under this program, UPS may, from time to time,
issue notes denominated in a variety of currencies. There is currently $500
million available under this program.
 
   In January 1999, UPS filed a shelf registration with the SEC, under which
UPS may issue debt in the U.S. marketplace of up to $2.0 billion. There is
currently no debt issued under this shelf registration.
 
3. EARNINGS PER SHARE
 
   The following table sets forth the computation of basic and diluted
earnings per share (in millions except per share amounts):
 

<TABLE>
<CAPTION>
                                                            1996  1997   1998
                                                           ------ ----- ------
   <S>                                                     <C>    <C>   <C>
   Numerator:
     Numerator for basic and diluted earnings per share--
      net income.......................................... $1,146 $ 909 $1,741
                                                           ====== ===== ======
   Denominator:
     Weighted-average shares..............................    555   551    545
     Contingent shares--Managers Incentive Plan...........      2     1      2
                                                           ------ ----- ------
   Denominator for basic earnings per share...............    557   552    547
   Effect of dilutive securities:
     Additional contingent shares--Managers Incentive
      Plan................................................      4     4      4
     Stock option plans...................................      3     2      3
                                                           ------ ----- ------
   Denominator for diluted earnings per share.............    564   558    554
                                                           ====== ===== ======
   Basic earnings per share............................... $ 2.06 $1.65 $ 3.18
                                                           ====== ===== ======
   Diluted earnings per share............................. $ 2.03 $1.63 $ 3.14
                                                           ====== ===== ======
</TABLE>

 
4. LEGAL PROCEEDINGS
 
   On August 9, 1999 the U.S. Tax Court issued an opinion unfavorable to UPS
regarding a Notice of Deficiency asserting that UPS is liable for additional
tax for the 1983 and 1984 tax years. The Court held 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 customers beginning in 1984.
The Court held that for the 1984 tax year UPS is liable for taxes of $31
million on income reported by OPL, penalties and penalty interest of $93
million and interest for a total after-tax exposure estimated at approximately
$246 million.
 
   In addition, during the first quarter of 1999, the IRS issued two Notices
of Deficiency asserting that UPS is liable for additional tax for the 1985
through 1987 tax years, and the 1988 through 1990 tax years. The primary
assertions by the IRS relate to the reinsurance of excess value package
insurance, the issue raised for the 1984 tax year. The IRS has based its
assertions on the same theories included in the 1983-1984 Notice of
Deficiency.
 
   UPS anticipates that the IRS will take similar positions for tax years
subsequent to 1990. Based on the Tax Court opinion, management currently
estimates that the Company's total after-tax exposure for the tax years 1984
through 1999 could be as high as $2.353 billion. UPS is in the process of
analyzing its position in light of the Tax Court opinion and is evaluating its
options, including appeal of the Tax Court decision, continuance of the
litigation or negotiation of a settlement.
 
   In the second quarter 1999 financial statements, the Company has recorded a
tax assessment charge of $1.786 billion, which includes an amount for related
state tax liabilities. The charge includes taxes of $915
 
                                     F-11

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
million and interest of $871 million. This assessment resulted in a tax
benefit of $344 million related to the interest component of the assessment.
As a result, the net charge to net income for the tax assessment was $1.442
billion, increasing our total after-tax reserve with respect to these matters
to $1.672 billion.
 
   The Company determined the size of its reserve with respect to these
matters in accordance with generally accepted accounting principles based on
its estimate of its most likely liability. In making this determination, the
Company concluded that it was more likely that it would be required to pay
taxes on income reported by OPL and interest, but that it was not probable
that it would be required to pay any penalties and penalty interest. If
penalties and penalty interest ultimately are determined to be payable, the
Company would have to record an additional charge of up to $681 million.
 
   The Company is in the process of implementing a new arrangement for
providing excess value package insurance for its customers through UPS
subsidiaries. This new arrangement will result in including in the Company's
non-package operating segment the net operations of the excess value insurance
program offered to its customers. This revised arrangement, once in place,
should eliminate for future periods the issues considered by the Tax Court in
the Notices of Deficiency relating to OPL.
 
   The IRS has proposed adjustments, unrelated to the OPL matters discussed
above, regarding the timing of deductions, the characterization of expenses as
capital rather than ordinary and the Company's entitlement to the investment
tax credit and the research tax credit in the 1985 through 1990 tax years.
These proposed adjustments, if sustained, would result in $88 million in
additional tax for the 1985 through 1987 tax years and $267 million in
additional tax for the 1988 through 1990 tax years.
 
   Management believes that the Company's practice of expensing the items that
the IRS alleges should have been capitalized is consistent with the practices
of other industry participants. Management expects that the Company will
prevail on substantially all of these issues. Should the IRS prevail, however,
unpaid interest on these adjustments through 1999 could aggregate up to $396
million, after the benefit of related tax deductions. Since the majority of
these adjustments propose to capitalize items for which depreciation
deductions would be allowed in subsequent years, the effect would be to
substantially reduce the net impact of these adjustments and related interest.
The IRS's proposed adjustments include penalties and penalty interest.
Management believes that the possibility that such penalties and penalty
interest will be sustained is remote. The IRS may take similar positions with
respect to some of these issues for each of the years from 1991 through 1999.
Management believes the eventual resolution of these issues will not result in
a material adverse effect upon the Company's financial condition, results of
operations or liquidity.
 
   UPS is a defendant in various employment-related lawsuits. In one of these
actions, which alleges employment discrimination by UPS, class action status
has been granted, and the United States Equal Employment Opportunity
Commission has been granted the right to intervene. UPS is also a defendant in
various other lawsuits that arose in the normal course of business. In
management's opinion, none of these cases is expected to have a material
effect upon our financial condition, results of operations or liquidity.
 
5. EMPLOYEE BENEFIT PLANS
 
   UPS maintains several defined benefit plans (the "Plans"). The Plans are
noncontributory and include all employees who meet certain minimum age and
years of service requirements, except those employees 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 13.5 million shares of UPS common stock
at December 31, 1997 and 1998, respectively. UPS's funding policy is
consistent with relevant federal tax regulations. Accordingly, UPS contributes
amounts deductible for federal income tax purposes.
 
                                     F-12

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   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. In many cases, 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 following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets, and a statement of funded status
as of September 30, with certain amounts included in the balance sheet as of
December 31 (in millions):
 

<TABLE>
<CAPTION>
                                                            Postretirement
                                       Pension Benefits    Medical Benefits
                                       ------------------  ------------------
                                         1997      1998      1997      1998
                                       --------  --------  --------  --------
   <S>                                 <C>       <C>       <C>       <C>
   Change in Benefit Obligation
     Net benefit obligation at
      beginning of year............... $  2,678  $  3,311  $  1,096  $  1,139
     Service cost.....................      108       147        41        39
     Interest cost....................      220       260        89        86
     Plan amendments..................       98        60       (29)      (24)
     Actuarial (gain) loss............      296       518       (17)       18
     Gross benefits paid..............      (89)      (93)      (41)      (46)
                                       --------  --------  --------  --------
   Net benefit obligation at end of
    year..............................    3,311     4,203     1,139     1,212
                                       --------  --------  --------  --------
   Change in Plan Assets
     Fair value of plan assets at
      October 1, 1997.................    2,768     3,856       237       291
     Actual return on plan assets.....      768        53        53         3
     Employer contributions...........      409       114        42        42
     Gross benefits paid..............      (89)      (93)      (41)      (46)
                                       --------  --------  --------  --------
   Fair value of plan assets at
    September 30, 1998................    3,856     3,930       291       290
                                       --------  --------  --------  --------
   Funded status at end of year.......      545      (273)     (848)     (922)
   Unrecognized net actuarial (gain)
    loss..............................     (495)      280       (65)      (24)
   Unrecognized prior service cost....      224       305         2       (23)
   Unrecognized net transition
    obligation........................       71        19        --        --
                                       --------  --------  --------  --------
   Net asset (liability) recorded at
    end of year....................... $    345  $    331  $   (911) $   (969)
                                       ========  ========  ========  ========
</TABLE>

 
   Net periodic benefit cost for the years ended December 31 included the
following components (in millions):
 

<TABLE>
<CAPTION>
                                                             Postretirement
                                       Pension Benefits     Medical Benefits
                                       -------------------  -------------------
                                       1996   1997   1998   1996   1997   1998
                                       -----  -----  -----  -----  -----  -----
   <S>                                 <C>    <C>    <C>    <C>    <C>    <C>
   Service cost....................... $ 109  $ 108  $ 147  $  37  $  41  $  39
   Interest cost......................   203    220    260     82     89     86
   Expected return on assets..........  (202)  (240)  (310)   (18)   (21)   (26)
   Amortization of:
     Transition obligation............     4      4      8     --     --     --
     Prior service cost...............    11     11     23      3      3      1
     Actuarial loss...................     2     --     --      1     --     --
                                       -----  -----  -----  -----  -----  -----
   Net periodic benefit cost.......... $ 127  $ 103  $ 128  $ 105  $ 112  $ 100
                                       =====  =====  =====  =====  =====  =====
</TABLE>

 
                                     F-13

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The significant assumptions used in the measurement of the Company's
benefit obligations are as follows:
 

<TABLE>
<CAPTION>
                                                             1996  1997  1998
                                                             ----  ----  ----
   <S>                                                       <C>   <C>   <C>
   Expected long-term rate of earnings on plan assets....... 9.5%  9.5%   9.5%
   Discount rate............................................ 8.0%  7.5%  6.75%
   Rate of increase in future compensation levels for pen-
    sion benefits........................................... 4.0%  4.0%   4.0%
</TABLE>

 
   Future postretirement medical benefit costs were forecasted assuming an
initial annual increase of 6.0% for pre-65 medical costs and an increase of
5.0% for post-65 medical costs, decreasing to 5.0% for pre-65 and 4.0% for
post-65 by the year 2000 and with consistent annual increases at those
ultimate levels thereafter.
 
   Assumed health care cost trends have a significant effect on the amounts
reported for the health care plans. A one-percent change in assumed health
care cost trend rates would have the following effects (in millions):
 

<TABLE>
<CAPTION>
                                                      1% Increase 1% Decrease
                                                      ----------- -----------
   <S>                                                <C>         <C>
   Effect on total of service and interest cost com-
    ponents..........................................     $10        $(10)
   Effect on post retirement benefit obligation......     $94        $(94)
</TABLE>

 
   UPS also contributes to several multi-employer pension plans for which the
above information is not determinable. Amounts charged to operations for
pension contributions to these multi-employer plans were $652, $597 and $757
million during 1996, 1997 and 1998, respectively.
 
   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 multi-
employer health and welfare plans were $441, $448 and $458 million during
1996, 1997 and 1998, respectively.
 
   UPS also sponsors a defined contribution plan for all employees not covered
under collective bargaining agreements. Beginning January 1, 1998, the Company
matched, in shares of UPS common stock, a portion of the participating
employees' contributions. Matching contributions charged to expense were $49
million for 1998.
 
6. MANAGEMENT INCENTIVE PLANS
 
   UPS maintains the UPS Managers Incentive Plan. Persons earning the right to
receive awards are determined annually by either the Officer Compensation
Committee or the Salary Committee of the UPS Board of Directors. Awards
consist primarily of UPS common stock and cash equivalent to the tax
withholdings on such awards. The total of all such awards is limited to 15% of
consolidated income before income taxes for the 12-month period ending each
September 30, exclusive of gains and losses from the sale of real estate and
stock of subsidiaries and the effect of certain other nonrecurring
transactions or accounting changes. Amounts charged to operations were $324,
$244 and $448 million during 1996, 1997 and 1998, respectively.
 
   As a result of the reclassification of Common Stock Held for Stock Plans
discussed in Note 1, the Company recorded $263 million of the $448 million
1998 Managers Incentive Plan award, that was distributed in UPS common stock
in February 1999, as Additional Paid-In Capital.
 
                                     F-14

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   UPS maintains fixed stock option plans under which options are granted to
purchase shares of UPS common stock at the current price of UPS shares as
determined by the Board of Directors on the date of option grant. UPS applies
APB Opinion 25 and related Interpretations in accounting for these plans.
Accordingly, no compensation expense has been recorded for the grant of stock
options during 1996, 1997 or 1998. Pro forma information regarding net income
and earnings per share is required by Statement of Financial Accounting
Standards No. 123 ("FAS 123") and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. For purposes of pro forma disclosures, the estimated fair value of
the options granted in 1996, 1997 and 1998 is amortized to expense over the
vesting period of the options.
 
   The pro forma information is as follows (in millions except per share
amounts):
 

<TABLE>
<CAPTION>
                                                             1996  1997   1998
                                                            ------ ----- ------
   <S>                                        <C>           <C>    <C>   <C>
   Net income................................ As reported.. $1,146 $ 909 $1,741
                                              Pro forma.... $1,143 $ 904 $1,734
   Basic earnings per share.................. As reported.. $ 2.06 $1.65 $ 3.18
                                              Pro forma.... $ 2.05 $1.64 $ 3.17
   Diluted earnings per share................ As reported.. $ 2.03 $1.63 $ 3.14
                                              Pro forma.... $ 2.03 $1.62 $ 3.13
</TABLE>

 
   The weighted average fair value of options granted during 1996, 1997 and
1998 was $3.80, $5.24 and $3.60, respectively, using the minimum value method
for nonpublic entities specified by FAS 123. The assumptions used, by year,
are as follows:
 

<TABLE>
<CAPTION>
                                                            1996   1997   1998
                                                            -----  -----  -----
   <S>                                                      <C>    <C>    <C>
   Semiannual dividend per share........................... $0.35  $0.35  $0.45
   Risk-free interest rate.................................  6.05%  6.73%  5.56%
   Expected life in years..................................     5      5      5
</TABLE>

 
   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 UPS 1996
Stock Option 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.
 
                                     F-15

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Following is an analysis of options for shares of common stock issued and
outstanding:
 

<TABLE>
<CAPTION>
                                                                    Number of
                                                 Weighted Average     Shares
                                                  Exercise Price  (in thousands)
                                                 ---------------- --------------
   <S>                                           <C>              <C>
   Outstanding at January 1, 1996...............      $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
   Exercised....................................      $18.75          (3,894)
   Granted......................................      $32.00           4,150
   Canceled.....................................      $24.75            (220)
                                                                      ------
   Outstanding at December 31, 1998.............      $26.74          17,985
                                                                      ======
</TABLE>

 
   No options were exercisable at December 31, 1996, 1997 or 1998. The
following table summarizes information about stock options outstanding at
December 31, 1998:
 

<TABLE>
<CAPTION>
               Number of             Weighted Average
                 Shares               Remaining Life                Weighted Average
             (in thousands)             (in years)                   Exercise Price
             --------------          ----------------               ----------------
             <S>                     <C>                            <C>
                  3,823                    0.3                           $21.25
                  3,721                    1.3                           $23.75
                  3,154                    2.3                           $27.00
                  3,168                    3.3                           $29.75
                  4,119                    4.3                           $32.00
                 ------
                 17,985                    2.3                           $26.74
                 ======
</TABLE>

 
7. INCOME TAXES
 
   The provision for income taxes for the years ended December 31 consists of
the following (in millions):
 

<TABLE>
<CAPTION>
                                                                1996 1997  1998
                                                                ---- ---- ------
   <S>                                                          <C>  <C>  <C>
   Current:
     Federal................................................... $333 $455 $  917
     State.....................................................   71   76    127
                                                                ---- ---- ------
       Total Current...........................................  404  531  1,044
                                                                ---- ---- ------
   Deferred:
     Federal...................................................  324  100    104
     State.....................................................   36   13     13
                                                                ---- ---- ------
       Total Deferred..........................................  360  113    117
                                                                ---- ---- ------
       Total................................................... $764 $644 $1,161
                                                                ==== ==== ======
</TABLE>

 
   Income before income taxes includes losses of international subsidiaries of
$160, $70 and $20 million for 1996, 1997 and 1998, respectively.
 
                                     F-16

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   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:
 

<TABLE>
<CAPTION>
                                                               1996  1997  1998
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Statutory federal income tax rate.......................... 35.0% 35.0% 35.0%
   State income taxes (net of federal benefit)................  3.8   3.7   3.1
   Other......................................................  1.2   2.8   1.9
                                                               ----  ----  ----
   Effective income tax rate.................................. 40.0% 41.5% 40.0%
                                                               ====  ====  ====
</TABLE>

 
   Deferred tax liabilities and assets are comprised of the following at
December 31 (in millions):
 

<TABLE>
<CAPTION>
                                                                  1997    1998
                                                                 ------  ------
   <S>                                                           <C>     <C>
   Excess of tax over book depreciation......................... $1,727  $1,957
   Pension plans................................................    300     265
   Prepaid health and welfare...................................    131     124
   Leveraged leases.............................................     87      62
   Other........................................................    402     400
                                                                 ------  ------
   Gross deferred tax liabilities...............................  2,647   2,808
                                                                 ------  ------
   Other postretirement benefits................................    377     407
   Loss carryforwards (international)...........................    322     308
   Insurance reserves...........................................     74     104
   Other........................................................    229     229
                                                                 ------  ------
   Gross deferred tax assets....................................  1,002   1,048
   Deferred tax assets valuation allowance......................   (322)   (308)
                                                                 ------  ------
   Net deferred tax assets......................................    680     740
                                                                 ------  ------
   Net deferred tax liability................................... $1,967  $2,068
                                                                 ======  ======
</TABLE>

 
   The valuation allowance decreased $43 million and $14 million during the
years ended December 31, 1997 and 1998, respectively.
 
   UPS has international loss carryforwards of approximately $698 million as
of December 31, 1998. Of this amount, $324 million expires in varying amounts
through 2008. The remaining $374 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 within certain international
tax jurisdictions. 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):
 

<TABLE>
<CAPTION>
                                                                   1997   1998
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Deferred federal and state income taxes....................... $1,829 $1,954
   Insurance reserves............................................    606    704
   Other credits and noncurrent liabilities......................    498    359
                                                                  ------ ------
                                                                  $2,933 $3,017
                                                                  ====== ======
</TABLE>

 
                                     F-17

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
9. OTHER OPERATING EXPENSES
 
   The major components of other operating expenses for the years ended
December 31 are as follows (in millions):
 

<TABLE>
<CAPTION>
                                                            1996   1997   1998
                                                           ------ ------ ------
<S>                                                        <C>    <C>    <C>
  Repairs and maintenance................................. $  823 $  804 $  864
  Depreciation and amortization...........................    964  1,063  1,112
  Purchased transportation................................  1,306  1,374  1,519
  Fuel....................................................    685    736    604
  Other occupancy.........................................    388    395    375
  Other expenses..........................................  2,847  3,099  2,878
                                                           ------ ------ ------
                                                           $7,013 $7,471 $7,352
                                                           ====== ====== ======
</TABLE>

 
10. SEGMENT AND GEOGRAPHIC INFORMATION
 
   The Company is managed based on two primary segments of operation: package
and non-package. Package operations represent the core business of the Company
and are broken down into regional levels worldwide. Regional operations
managers are responsible for both domestic and export operations within their
geographic region with the exception of the U.S., which is further divided
between U.S. domestic and U.S. export operations. International package
operations include U.S. export operations as a separate geographic region.
Non-package operations, which include the UPS Logistics Group, are distinct
from package operations and are thus managed and reported separately. Based on
the requirements of FAS 131, reportable segments include U.S. domestic package
operations, international package operations and non-package operations.
 
   In evaluating financial performance, management focuses on operating profit
as a segment's measure of profit or loss. Operating profit is before interest
expense, interest income, other non-operating gains and losses and income
taxes. The accounting policies of the reportable segments are the same as
those described in the summary of accounting policies (Note 1), with certain
expenses allocated between the segments using activity-based costing methods.
 
   Segment information as of, and for the years ended December 31, is as
follows (in millions):
 

<TABLE>
<CAPTION>
                                                       1996     1997     1998
                                                      -------  -------  -------
   <S>                                                <C>      <C>      <C>
   U.S. Domestic Package:
     Revenue......................................... $18,881  $18,868  $20,650
     Operating profit................................ $ 2,181  $ 1,654  $ 2,899
     Assets.......................................... $ 9,958  $10,985  $11,225
   International Package:
     Revenue......................................... $ 2,989  $ 2,934  $ 3,237
     Operating profit/(loss)......................... $  (281) $   (67) $    56
     Assets.......................................... $ 2,053  $ 2,051  $ 2,325
   Non-Package:
     Revenue......................................... $   498  $   656  $   901
     Operating profit................................ $   129  $   111  $   135
     Assets.......................................... $ 1,861  $ 1,858  $ 1,824
   Consolidated:
     Revenue......................................... $22,368  $22,458  $24,788
     Operating profit................................ $ 2,029  $ 1,698  $ 3,090
     Assets.......................................... $14,954  $15,912  $17,067
</TABLE>

 
                                     F-18

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Non-package operating profit included $129, $111 and $102 million for 1996,
1997 and 1998, respectively, of intersegment profit with a corresponding
amount of operating expense included in the U.S. domestic package segment.
Consolidated assets include $1.082, $1.018 and $1.693 billion for 1996, 1997
and 1998, respectively, which are not allocated to individual segments.
 
   Revenue by product type for the years ended December 31, is as follows (in
millions):
 

<TABLE>
<CAPTION>
                                                          1996    1997    1998
                                                         ------- ------- -------
   <S>                                                   <C>     <C>     <C>
   Letters and packages................................. $21,870 $21,802 $23,887
   Other................................................     498     656     901
                                                         ------- ------- -------
                                                         $22,368 $22,458 $24,788
                                                         ======= ======= =======
 
   Geographic information as of, and for the years ended December 31, is as
follows (in millions):
 
<CAPTION>
                                                          1996    1997    1998
                                                         ------- ------- -------
   <S>                                                   <C>     <C>     <C>
   U.S.:
     Revenue............................................ $20,108 $20,238 $22,252
     Long-lived assets.................................. $ 9,376 $10,063 $ 9,832
   International:
     Revenue............................................ $ 2,260 $ 2,220 $ 2,536
     Long-lived assets.................................. $ 1,323 $ 1,372 $ 1,810
   Consolidated:
     Revenue............................................ $22,368 $22,458 $24,788
     Long-lived assets.................................. $10,699 $11,435 $11,642
</TABLE>

 
   Revenue, for geographic disclosure, is based on the location in which
service originates. Long-lived assets include property, plant and equipment,
long-term investments and goodwill.
 
11. MARKETABLE SECURITIES
 
   The following is a summary of marketable securities at December 31, 1998
(in millions):
 

<TABLE>
<CAPTION>
                                                  Gross      Gross
                                                Unrealized Unrealized Estimated
                                           Cost   Gains      Losses   Fair Value
                                           ---- ---------- ---------- ----------
   <S>                                     <C>  <C>        <C>        <C>
   U.S. government securities............. $194    $ 2        $--        $196
   U.S. corporate securities..............  188      2         --         190
   Other debt securities..................    2     --         --           2
                                           ----    ---        ---        ----
     Total debt securities................  384      4         --         388
   Equity securities......................    6     --          5           1
                                           ----    ---        ---        ----
                                           $390    $ 4        $ 5        $389
                                           ====    ===        ===        ====
</TABLE>

 
 
                                     F-19

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
        NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   The gross realized gains on sales of marketable securities totaled $6
million, and the gross realized losses totaled $1 million. The net adjustment
to unrealized holding losses on marketable securities included in other
comprehensive income, and as a separate component of shareowners' equity,
totaled $1 million.
 
   The amortized cost and estimated fair value of marketable securities at
December 31, 1998, by contractual maturity, are shown below (in millions).
Expected maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
 

<TABLE>
<CAPTION>
                                                                      Estimated
                                                                 Cost Fair Value
                                                                 ---- ----------
   <S>                                                           <C>  <C>
   Due in one year or less...................................... $ 44    $ 44
   Due after one year through three years.......................   66      67
   Due after three years through five years.....................  156     159
   Due after five years.........................................  118     118
                                                                 ----    ----
                                                                  384     388
   Equity securities............................................    6       1
                                                                 ----    ----
                                                                 $390    $389
                                                                 ====    ====
</TABLE>

 
                                     F-20

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                December 31, 1998 and June 30, 1999 (unaudited)
                (In millions except share and per share amounts)
 

<TABLE>
<CAPTION>
                                                                        June
                                                          December 31,   30,
                                                              1998      1999
                                                          ------------ -------
<S>                                                       <C>          <C>
                         ASSETS
Current Assets:
  Cash and cash equivalents..............................   $ 1,240    $ 1,778
  Marketable securities..................................       389      1,465
  Accounts receivable....................................     2,713      2,628
  Prepaid employee benefit costs.........................       703        291
  Materials, supplies and other prepaid expenses.........       380        442
                                                            -------    -------
    Total Current Assets.................................     5,425      6,604
Property, Plant and Equipment (including aircraft under
 capitalized lease obligations)--at cost, net of
 accumulated depreciation and amortization of $8,170 in
 1998 and $8,588 in 1999.................................    11,384     11,466
Other Assets.............................................       258        232
                                                            -------    -------
                                                            $17,067    $18,302
                                                            =======    =======
           LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
  Commercial paper.......................................   $    --    $   719
  Accounts payable.......................................     1,322      1,282
  Accrued wages and withholdings.........................     1,092      1,232
  Dividends payable......................................       247         --
  Tax assessment.........................................        --      1,672
  Income taxes payable...................................        12        226
  Deferred income taxes..................................       114         94
  Current maturities of long-term debt...................       410        376
  Other current liabilities..............................       520        569
                                                            -------    -------
    Total Current Liabilities............................     3,717      6,170
Long-term Debt (including capitalized lease
 obligations)............................................     2,191      2,138
                                                            -------    -------
Accumulated Postretirement Benefit Obligation, Net.......       969      1,017
                                                            -------    -------
Deferred Taxes, Credits and Other Liabilities............     3,017      2,855
                                                            -------    -------
Shareowners' Equity:
  Preferred stock, no par value, authorized 200,000,000
   shares, none issued...................................        --         --
  Common stock, par value $.10 per share, authorized
   900,000,000 shares, issued 559,000,000................        56         56
  Additional paid-in capital.............................       325        189
  Retained earnings......................................     7,280      6,614
  Accumulated other comprehensive loss...................       (63)      (147)
                                                            -------    -------
                                                              7,598      6,712
                                                            -------    -------
  Treasury stock, at cost (11,605,952 and 12,547,559
   shares in 1998 and 1999)..............................      (425)      (590)
                                                            -------    -------
                                                              7,173      6,122
                                                            -------    -------
                                                            $17,067    $18,302
                                                            =======    =======
</TABLE>

 
           See notes to unaudited consolidated financial statements.
 
                                      F-21

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
                    STATEMENTS OF CONSOLIDATED INCOME (LOSS)
 
                    Six Months Ended June 30, 1998 and 1999
                     (In millions except per share amounts)
                                  (unaudited)
 

<TABLE>
<CAPTION>
                                                            Six Months Ended
                                                                June 30,
                                                            ------------------
                                                              1998      1999
                                                            --------  --------
<S>                                                         <C>       <C>
Revenue.................................................... $ 11,966  $ 12,891
                                                            --------  --------
Operating Expenses:
  Compensation and benefits................................    7,002     7,377
  Other....................................................    3,519     3,646
                                                            --------  --------
                                                              10,521    11,023
                                                            --------  --------
Operating Profit...........................................    1,445     1,868
                                                            --------  --------
Other Income and (Expense):
  Investment income........................................       30        70
  Interest expense.........................................     (115)     (105)
  Tax assessment...........................................       --    (1,786)
  Miscellaneous, net.......................................        6       (22)
                                                            --------  --------
                                                                 (79)   (1,843)
                                                            --------  --------
Income Before Income Taxes.................................    1,366        25
Income Taxes...............................................      556       380
                                                            --------  --------
Net Income (Loss).......................................... $    810  $   (355)
                                                            ========  ========
Basic Earnings (Loss) Per Share............................ $   1.49  $  (0.64)
                                                            ========  ========
Diluted Earnings (Loss) Per Share.......................... $   1.47  $  (0.64)
                                                            ========  ========
</TABLE>

 
 
           See notes to unaudited consolidated financial statements.
 
                                      F-22

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
                 STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY
                         Six Months Ended June 30, 1999
                     (In millions except per share amounts)
                                  (unaudited)
 

<TABLE>
<CAPTION>
                                                             Accumulated  Treasury Stock,
                          Common Stock  Additional              Other         At Cost             Total
                          -------------  Paid-In   Retained Comprehensive -------------------  Shareowners'
                          Shares Amount  Capital   Earnings     Loss      Shares    Amount        Equity
                          ------ ------ ---------- -------- ------------- -------   ---------  ------------
<S>                       <C>    <C>    <C>        <C>      <C>           <C>       <C>        <C>
Balance, January 1,
 1999...................   559    $56     $ 325     $7,280      $ (63)        (12)  $    (425)    $7,173
 Comprehensive loss:
 Net loss...............    --     --        --       (355)        --          --          --       (355)
 Foreign currency
  adjustments...........    --     --        --         --        (81)         --          --        (81)
 Unrealized loss on
  marketable
  securities............    --     --        --         --         (3)         --          --         (3)
                                                                                                  ------
 Comprehensive loss.....                                                                          $ (439)
                                                                                                  ------
 Dividends ($.55 per
  share)................    --     --        --       (311)        --          --          --       (311)
 Gain on issuance of
  treasury stock........    --     --         5         --         --          --          --          5
 Stock award plans......    --     --      (141)        --         --          10         406        265
 Treasury stock
  purchases.............    --     --        --         --         --         (25)     (1,140)    (1,140)
 Treasury stock
  issuances.............    --     --        --         --         --          14         569        569
                           ---    ---     -----     ------      -----      ------   ---------     ------
Balance, June 30, 1999..   559    $56     $ 189     $6,614      $(147)        (13)  $    (590)    $6,122
                           ===    ===     =====     ======      =====      ======   =========     ======
</TABLE>

 
 
             See notes to unaudited consolidated financial statements.
 
                                      F-23

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
 
                    Six Months Ended June 30, 1998 and 1999
                                 (In millions)
                                  (unaudited)
 

<TABLE>
<CAPTION>
                                                                1998    1999
                                                               ------  -------
<S>                                                            <C>     <C>
Cash flows from operating activities:
 Net income (loss)............................................ $  810  $  (355)
 Adjustments to reconcile net income (loss) to net cash from
  operating activities:
  Depreciation and amortization...............................    547      563
  Postretirement benefits.....................................     50       48
  Deferred taxes, credits, and other..........................     (1)      38
  Stock award plans...........................................     --      (95)
  Changes in assets and liabilities:
   Accounts receivable........................................     58       85
   Prepaid employee benefit costs.............................     69      412
   Materials, supplies and other prepaid expenses.............    (62)     (62)
   Accounts payable...........................................   (113)     (40)
   Accrued wages and withholdings.............................     74      140
   Dividends payable..........................................   (191)    (247)
   Tax assessment.............................................     --    1,442
   Income taxes payable.......................................    (73)     214
   Other current liabilities..................................    110       49
                                                               ------  -------
    Net cash from operating activities........................  1,278    2,192
                                                               ------  -------
Cash flows from investing activities:
 Capital expenditures.........................................   (504)    (597)
 Disposals of property, plant and equipment...................    120       50
 Purchases of marketable securities...........................     --   (1,753)
 Sales and maturities of marketable securities................     --      674
 Construction funds in escrow.................................     --     (140)
 Other asset receipts.........................................     82       17
                                                               ------  -------
    Net cash used in investing activities.....................   (302)  (1,749)
                                                               ------  -------
Cash flows from financing activities:
 Proceeds from borrowings.....................................    166      999
 Repayments of borrowings.....................................   (173)    (367)
 Purchases of treasury stock..................................   (418)  (1,140)
 Issuances of treasury stock pursuant to stock awards and
  employee stock purchase plans...............................    340      975
 Dividends....................................................   (219)    (311)
 Other transactions...........................................    (17)     (41)
                                                               ------  -------
    Net cash from (used in) financing activities..............   (321)     115
                                                               ------  -------
Effect of exchange rate changes on cash.......................    (12)     (20)
                                                               ------  -------
Net increase in cash and cash equivalents.....................    643      538
Cash and cash equivalents:
 Beginning of period..........................................    460    1,240
                                                               ------  -------
 End of period................................................ $1,103  $ 1,778
                                                               ======  =======
Cash paid during the period for:
 Interest (net of amount capitalized)......................... $  205  $    85
                                                               ======  =======
 Income taxes................................................. $  560  $   423
                                                               ======  =======
</TABLE>

 
           See notes to unaudited consolidated financial statements.
 
                                      F-24

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
             NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
   1. For interim consolidated financial statement purposes, we compute our
tax provision on the basis of our estimated annual effective income tax rate,
and provide for accruals under our various employee benefit plans for each
three month period based on one quarter of the estimated annual expense.
 
   In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which requires that certain
costs to develop or obtain computer software for internal use be capitalized.
We adopted the new standard on January 1, 1999. Prior to adoption of SOP 98-1,
we expensed all internal use software costs as incurred. The effect of
adopting the SOP was to decrease the net loss for the six months ended June
30, 1999 by $35 million or $.06 per share on a basic and diluted basis.
 
   2. In our opinion, the accompanying interim, unaudited, consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position as of June 30,
1999, the results of operations for the six months ended June 30, 1998 and
1999, and cash flows for the six months ended June 30, 1998 and 1999.
 
   3. The following table sets forth the computation of basic and diluted
earnings (loss) per share (in millions except per share amounts):
 

<TABLE>
<CAPTION>
                                                                  1998   1999
                                                                  ----- ------
<S>                                                               <C>   <C>
Numerator:
  Numerator for basic and diluted earnings (loss) per share--net
   income (loss)................................................. $ 810 $ (355)
                                                                  ===== ======
Denominator:
  Weighted-average shares--denominator for basic earnings (loss)
   per share.....................................................   545    557
Effect of dilutive securities:
  Contingent shares--Managers Incentive Plan.....................     5     --
  Stock option plans.............................................     2     --
                                                                  ----- ------
Denominator for diluted earnings (loss) per share................   552    557
                                                                  ===== ======
Basic earnings (loss) per share.................................. $1.49 $(0.64)
                                                                  ===== ======
Diluted earnings (loss) per share................................ $1.47 $(0.64)
                                                                  ===== ======
</TABLE>

 
   4. On August 9, 1999 the U.S. Tax Court issued an opinion unfavorable to
UPS regarding a Notice of Deficiency asserting that we are liable for
additional tax for the 1983 and 1984 tax years. The Court held that we are
liable for tax on income of Overseas Partners Ltd., a Bermuda company, which
has reinsured excess value package insurance purchased by our customers
beginning in 1984. The Court held that for the 1984 tax year we are liable for
taxes of $31 million on income reported by OPL, penalties and penalty interest
of $93 million and interest for a total after-tax exposure we estimate at
approximately $246 million.
 
   In addition, during the first quarter of 1999, the IRS issued two Notices
of Deficiency asserting that we are liable for additional tax for the 1985
through 1987 tax years, and the 1988 through 1990 tax years. The primary
assertions by the IRS relate to the reinsurance of excess value package
insurance, the issue raised for the 1984 tax year. The IRS has based its
assertions on the same theories included in the 1983-1984 Notice of
Deficiency.
 
   We anticipate that the IRS will take similar positions for tax years
subsequent to 1990. Based on the Tax Court opinion, we currently estimate that
our total after-tax exposure for the tax years 1984 through 1999 could be as
high as $2.353 billion. We are in the process of analyzing our position in
light of the Tax Court opinion and are evaluating our options, including
appeal of the Tax Court decision, continuance of the litigation or negotiation
of a settlement.
 
                                     F-25

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   In our second quarter 1999 financial statements, we have recorded a tax
assessment charge of $1.786 billion, which includes an amount for related
state tax liabilities. The charge includes taxes of $915 million and interest
of $871 million. This assessment resulted in a tax benefit of $344 million
related to the interest component of the assessment. As a result, our net
charge to net income for the tax assessment was $1.442 billion, increasing our
total after-tax reserve with respect to these matters to $1.672 billion. The
tax benefit of deductible interest is included in income taxes; however, since
none of the income on which this tax assessment is based is our income, we
have not classified the tax charge as income taxes.
 
   We determined the size of our reserve with respect to these matters in
accordance with generally accepted accounting principles based on our estimate
of our most likely liability. In making this determination, we concluded that
it was more likely that we would be required to pay taxes on income reported
by OPL and interest, but that it was not probable that we would be required to
pay any penalties and penalty interest. If penalties and penalty interest
ultimately are determined to be payable, we would have to record an additional
charge of up to $681 million.
 
   On September 1, 1999, we deposited $1.349 billion with the IRS related to
these matters, without conceding the IRS's position or giving up our right to
appeal the Tax Court's decision, in order to stop the accrual of interest on
that amount of the IRS's claim. We have sufficient cash, cash equivalents and
marketable securities on hand to deposit with the IRS, if we choose to do so,
the remaining amount necessary to satisfy our maximum estimated after-tax
exposure for these tax matters, without affecting our ability to meet our
foreseeable operating expenses and budgeted capital expenditures.
 
   We are in the process of implementing a new arrangement for providing
excess value package insurance for our customers through UPS subsidiaries.
This new arrangement will result in including in our non-package operating
segment the net operations of the excess value package insurance program
offered to our customers. This revised arrangement, once in place, should
eliminate for future periods the issues considered by the Tax Court in the
Notices of Deficiency relating to OPL.
 
   The IRS has proposed adjustments, unrelated to the OPL matters discussed
above, regarding the timing of deductions, the characterization of expenses as
capital rather than ordinary and our entitlement to the investment tax credit
and the research tax credit in the 1985 through 1990 tax years. These proposed
adjustments, if sustained, would result in $88 million in additional tax for
the 1985 through 1987 tax years and $267 million in additional tax for the
1988 through 1990 tax years.
 
   We believe that our practice of expensing the items that the IRS alleges
should have been capitalized is consistent with the practices of other
industry participants. We expect that we will prevail on substantially all of
these issues. Should the IRS prevail, however, unpaid interest on these
adjustments through 1999 could aggregate up to $396 million, after the benefit
of related tax deductions. Since the majority of these adjustments propose to
capitalize items for which depreciation deductions would be allowed in
subsequent years, the effect would be to substantially reduce the net impact
of these adjustments and related interest. The IRS's proposed adjustments
include penalties and penalty interest. We believe that the possibility that
such penalties and penalty interest will be sustained is remote. The IRS may
take similar positions with respect to some of these issues for each of the
years from 1991 through 1999. We believe the eventual resolution of these
issues will not result in a material adverse effect on our financial
condition, results of operations or liquidity.
 
                                     F-26

<PAGE>
 
            UNITED PARCEL SERVICE OF AMERICA, INC. AND SUBSIDIARIES
 
       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   We are a defendant in various employment-related lawsuits. In one of these
actions, which alleges employment discrimination by UPS, class action status
has been granted, and the United States Equal Employment Opportunity
Commission has been granted the right to intervene. We are also a defendant in
various other lawsuits that arose in the normal course of business. In our
opinion, none of these cases is expected to have a material adverse effect
upon our financial condition, results of operations or liquidity.
 
   5. We report our operations in three segments: U.S. domestic package
operations, international package operations and non-package operations.
Package operations represent our core business and are divided into regional
operations around the world. Regional operations managers are responsible for
both domestic and export operations within their geographic region.
International package operations include shipments wholly outside the U.S. as
well as shipments with either origin or distribution outside the U.S. Non-
package operations, including logistics, are distinct from package operations.
 
   Segment information for the six months ended June 30, is as follows (in
millions):
 

<TABLE>
<CAPTION>
                                                                   Six Months
                                                                      Ended
                                                                    June 30,
                                                                 ---------------
                                                                  1998    1999
                                                                 ------- -------
<S>                                                              <C>     <C>
Revenue:
  U.S. domestic package......................................... $ 9,982 $10,665
  International package.........................................   1,560   1,700
  Non-package...................................................     424     526
                                                                 ------- -------
   Consolidated................................................. $11,966 $12,891
                                                                 ======= =======
Operating profit:
  U.S. domestic package......................................... $ 1,341 $ 1,643
  International package.........................................      34     109
  Non-package...................................................      70      58
  Corporate.....................................................      --      58
                                                                 ------- -------
   Consolidated................................................. $ 1,445 $ 1,868
                                                                 ======= =======
</TABLE>

 
   Non-package operating profit included $53 and $58 million for the six
months ended June 30, 1998 and 1999, respectively, of intersegment profit with
a corresponding amount of operating expense included in the U.S. domestic
package segment. Consolidated operating profit for the six months ended June
30, 1999 included $58 million of capitalized software costs that were not
allocated to individual segments.
 
   6. Certain prior period amounts have been reclassified to conform to the
current period presentation.
 
                                     F-27

<PAGE>
 

                         INDEPENDENT AUDITORS' REPORT
 
Board of Directors and Shareowner
United Parcel Service, Inc.
Atlanta, Georgia
 
   We have audited the accompanying balance sheet of United Parcel Service,
Inc. as of July 19, 1999. This financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
 
   We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
 
   In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of United Parcel Service, Inc. at July 19,
1999 in conformity with generally accepted accounting principles.
 
/s/ Deloitte & Touche LLP
 
Atlanta, Georgia
July 20, 1999

 
                                     F-28

<PAGE>
 
                          UNITED PARCEL SERVICE, INC.
 
                                 BALANCE SHEET
                                 July 19, 1999
 

<TABLE>
<S>                                                                        <C>
ASSETS--Cash.............................................................. $100
                                                                           ====
SHAREOWNER'S EQUITY--Common stock subscribed.............................. $100
                                                                           ====
</TABLE>

 
                            NOTES TO BALANCE SHEET
 
   1. ORGANIZATION AND PURPOSE--United Parcel Service, Inc. (the "Company")
was incorporated in Delaware on July 15, 1999 to become a wholly-owned
subsidiary of United Parcel Service of America, Inc. ("UPS"). Subject to the
approval of the shareowners of UPS, a wholly-owned subsidiary of the Company
will merge with UPS, and all of the outstanding common stock of UPS will be
exchanged for new Class A common stock of the Company.
 
   2. SHAREOWNER'S EQUITY--The Company is authorized to issue 1,000 shares of
$.01 par value common stock. UPS has subscribed for 100 shares in exchange for
$100.
 
                                     F-29

<PAGE>
 
                                                                        ANNEX A
 
                         AGREEMENT AND PLAN OF MERGER
 
   This AGREEMENT AND PLAN OF MERGER is dated as of September 22, 1999 (this
"Agreement") among United Parcel Service of America, Inc. ("UPS"), United
Parcel Service, Inc. ("New UPS") and UPS Merger Subsidiary, Inc. ("UPS
MergerSub"), each a Delaware corporation.
 
                                   RECITALS
 
   A. UPS is a corporation duly organized and existing under the laws of the
State of Delaware. New UPS is a corporation duly organized and existing under
the laws of the State of Delaware and a wholly owned subsidiary of UPS. UPS
MergerSub is a corporation duly organized and existing under the laws of the
State of Delaware and a wholly owned subsidiary of New UPS.
 
   B. The respective boards of directors of UPS, New UPS and UPS MergerSub
have determined that it is advisable and in the best interests of each
corporation that UPS MergerSub merge with and into UPS (the "Merger") upon the
terms and subject to the conditions of this Agreement. As a result of the
Merger, UPS will become a wholly owned subsidiary of New UPS and the separate
existence of UPS MergerSub will cease.
 
   C. The respective boards of directors of UPS, New UPS and UPS MergerSub
have been duly advised of the terms and conditions of the Merger and, by
resolutions duly adopted, have authorized, approved and adopted this
Agreement. The stockholders of UPS will approve and adopt this Agreement at a
special meeting of stockholders on October 25, 1999. The stockholder of UPS
MergerSub will approve and adopt this Agreement by written consent without a
meeting.
 
   D. The parties intend by this Agreement to effect a "reorganization" under
Section 368 of the Internal Revenue Code of 1986, as amended.
 
   NOW, THEREFORE, UPS, New UPS and UPS MergerSub hereby agree as follows.
 
                                   ARTICLE I
                                  THE MERGER
 
   Section 1.01 The Merger. Upon the terms and subject to the conditions of
this Agreement, and in accordance with the relevant provisions of the Delaware
General Corporation Law (the "DGCL"), UPS MergerSub will merge with and into
UPS upon the Effective Time, as defined in this Agreement. UPS will be the
surviving corporation in the Merger (the "Surviving Corporation"). Upon the
Effective Time, the separate existence of UPS MergerSub will cease, and the
Surviving Corporation will succeed, without other transfer, to all of the
rights and property of UPS MergerSub, and will be subject to all of the debts
and liabilities of UPS MergerSub, as provided for in Section 259 of the DGCL.
On and after the Effective Time, the Surviving Corporation will carry on its
business with the assets of UPS MergerSub, as well as with the assets of the
Surviving Corporation.
 
   Section 1.02 Effective Time. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article II, the Merger
will be consummated by filing a certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware in accordance
with the DGCL. The Merger will become effective when the Certificate of Merger
is filed or such later time as is set forth in the Certificate of Merger. The
time when the Merger becomes effective is called the "Effective Time".
 
   Section 1.03 Certificate of Incorporation and By-Laws. The Certificate of
Incorporation and the By-Laws of UPS in effect at the Effective Time will be
the Certificate of Incorporation and By-Laws of the Surviving Corporation and
will remain in effect until changed or amended as provided therein or by
applicable law. The name of the Surviving Corporation will be United Parcel
Service of America, Inc.

<PAGE>
 
   Section 1.04 Directors and Officers. The directors and officers of UPS
immediately after the Effective Time will be as set forth on Schedule A to
this Agreement until the earlier of their resignation or removal or until
their respective successors are duly elected and qualified.
 
   Section 1.05 Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any capital
stock of UPS:
 
  (a) Each share of common stock, par value $0.10 per share, of UPS issued
      and outstanding immediately before the Effective Time will convert into
      the right to receive in the aggregate two shares of New UPS common
      stock. The shares of New UPS common stock receivable by each holder as
      a result of this conversion will be divided among shares of validly
      issued, fully paid and non-assessable class A-1 common stock, par value
      $.01 per share, of New UPS, validly issued, fully paid and non-
      assessable class A-2 common stock, par value $.01 per share, of New
      UPS, and validly issued, fully paid and non-assessable class A-3 common
      stock, par value $.01 per share, of New UPS, as follows:
 
    (1) First, the shares of New UPS common stock receivable by each holder
        will be divided evenly among shares of New UPS's class A-1 common
        stock, class A-2 common stock and class A-3 common stock.
 
    (2) Second, any fractional shares allocated to New UPS's class A-1
        common stock, class A-2 common stock and class A-3 common stock as a
        result of the division in (1) above will be aggregated and
        reallocated as described in (3) below.
 
    (3) Third, if the total of the number of shares aggregated as a result
        of (2) above is one, that share will be allocated to New UPS's class
        A-3 common stock; if the total number of shares aggregated as a
        result of (2) above is two, then one of those shares will be
        allocated to New UPS's class A-3 common stock and one of those
        shares will be allocated to New UPS's class A-2 common stock.
 
     As of the Effective Time, all such shares of UPS common stock will no
     longer be outstanding and will automatically be canceled and retired and
     will cease to exist, and each holder of a certificate representing any
     such shares of UPS common stock will cease to have any rights with
     respect thereto, except the right to receive the shares of class A-1
     common stock, class A-2 common stock and class A-3 common stock of New
     UPS to be issued in consideration therefor upon surrender of such
     certificate.
 
  (b) Each share of UPS MergerSub common stock outstanding immediately before
      the Effective Time will convert into one validly issued, fully paid and
      nonassessable share of common stock, par value $.10 per share, of the
      Surviving Corporation.
 
  (c) After the Effective Time, the exercise price of each option or other
      right to purchase or otherwise acquire shares of UPS common stock
      pursuant to UPS's stock option or other stock-based plans granted and
      outstanding immediately before the Effective Time, by virtue of the
      Merger and without any action on the part of the holder of the option
      or right, will be the exercise price of that option or right
      immediately before the Effective Time, divided by the number of shares
      of class A common stock subject to the option or right. The parties
      will take all action necessary to implement the provisions of this
      Section 1.05(c), including, if necessary, to amend any agreement or
      plan providing an option or other right to acquire shares of UPS common
      stock, to ensure that after giving effect to the foregoing no such
      option or right will be exercisable for UPS common stock following the
      Effective Time.
 
                                      A-2

<PAGE>
 
                                  ARTICLE II
                   CONDITIONS TO CONSUMMATION OF THE MERGER
 
   Section 2.01 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger are
subject to the satisfaction or waiver, where permissible, prior to the
Effective Time, of the following conditions:
 
  (a) more than 50% of the outstanding shares of UPS common stock entitled to
      vote have voted to adopt this Agreement;
 
  (b) New UPS simultaneously has consummated an initial public offering of
      shares of its class B common stock;
 
  (c) no statute, rule, regulation, executive order, decree, injunction or
      other order has been enacted, entered, promulgated or enforced by any
      court or governmental authority that is in effect and has the effect of
      prohibiting the consummation of the Merger; and
 
  (d) all approvals and consents necessary or desirable, if any, in
      connection with consummation of the Merger have been obtained.
 
                                  ARTICLE III
                        COVENANT TO CONTRIBUTE CAPITAL
 
   Upon the Effective Time, each issued and outstanding share of common stock
of New UPS that is owned by UPS immediately prior to the Effective Time will
be returned to New UPS as a contribution to capital.
 
                                  ARTICLE IV
                                 MISCELLANEOUS
 
   Section 4.01 Amendment; Waiver. At any time before the Effective Time, UPS
and UPS MergerSub may, to the extent permitted by the DGCL, by written
agreement amend, modify or supplement any provision of this Agreement.
 
   Section 4.02 Entire Agreement; Assignment. This Agreement constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
Neither this Agreement nor any right, interest or obligation under this
Agreement may be assigned, in whole or in part, by operation of law or
otherwise, without the prior written consent of the other parties.
 
   Section 4.03 Governing Law. This Agreement will be governed by and
construed in accordance with the substantive laws of the State of Delaware
regardless of the laws that might otherwise govern under principles of
conflicts of laws applicable thereto.
 
   Section 4.04 Parties in Interest. Nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights or remedies of
any nature whatsoever under or by reason of this Agreement.
 
   Section 4.05 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original, but all of which
will constitute one and the same agreement, and will become effective when one
or more counterparts have been signed by each of the parties and delivered to
the other parties.
 
   Section 4.06 Abandonment. At any time before the Effective Time, this
Agreement may be terminated and the Merger may be abandoned by the board of
directors of UPS or UPS MergerSub.
 
                                      A-3

<PAGE>
 
   IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its respective officers thereunto duly authorized,
all as of the day and year first above written.
 
                                       UNITED PARCEL SERVICE OF AMERICA,
                                       INC.,
                                       a Delaware corporation
 
                                       By: /s/ Allen E. Hill
                                           ------------------------------------
                                           Name: Allen E. Hill
                                           Title: Assistant Secretary
 
                                       UNITED PARCEL SERVICE, INC.,
                                       a Delaware corporation
 
                                       By: /s/ Allen E. Hill
                                           /s/ Allen E. Hill
                                           ------------------------------------
                                           Name: Allen E. Hill
                                           Title: Assistant Secretary
 
 
                                       UPS MERGER SUBSIDIARY, INC.,
                                       a Delaware corporation
 
                                       By: /s/ Allen E. Hill
                                           ------------------------------------
                                           Name: Allen E. Hill
                                           Title: Assistant Secretary
 
                                      A-4

<PAGE>
 
                                   SCHEDULE A
 

<TABLE>
<S>                                  <C>
James P. Kelly...................... Director and President
Robert J. Clanin.................... Director, Treasurer and Assistant Secretary
Joseph R. Moderow................... Director, Secretary and Assistant Treasurer
Maurice M. Agresta.................. Assistant Treasurer and Assistant Secretary
Elizabeth W. Calvert................ Assistant Secretary
Allen E. Hill....................... Assistant Secretary
</TABLE>

 
                                      A-5

<PAGE>
 
                                                                        ANNEX B
 
                                    FORM OF

                                   RESTATED
                         CERTIFICATE OF INCORPORATION
                                      OF
                          UNITED PARCEL SERVICE, INC.
                  (ORIGINALLY INCORPORATED ON JULY 15, 1999)
 
   United Parcel Service, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
 
   FIRST: The name of the Corporation is United Parcel Service, Inc.
 
   SECOND: The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at this
address is The Corporation Trust Company.
 
   THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
 
   FOURTH: (a) The total number of shares of stock that the Corporation has
authority to issue is 10,400,000,000, of which:
 
    (i) 1,533,333,333 shares shall be shares of Class A-1 Common Stock, par
        value $.01 per share (the "Class A-1 Common Stock");
 
    (ii) 1,533,333,333 shares shall be shares of Class A-2 Common Stock, par
         value $.01 per share (the "Class A-2 Common Stock");
 
    (iii) 1,533,333,334 shares shall be shares of Class A-3 Common Stock,
          par value $.01 per share (the "Class A-3 Common Stock");
 
    (iv) 5,600,000,000 shares shall be shares of Class B Common Stock, par
         value $.01 per share (the "Class B Common Stock"); and
 
    (v) 200,000,000 shares shall be shares of Preferred Stock, par value
        $.01 per share (the "Preferred Stock").
 
The Class A-1 Common Stock, the Class A-2 Common Stock, the Class A-3 Common
Stock and the Class B Common Stock are referred to collectively as the "Common
Stock".
 
   (b) The number of authorized shares of any class or classes of stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the votes
entitled to be cast by the holders of the Common Stock, voting together as a
single class, irrespective of the provisions of Section 242(b)(2) of the
Delaware General Corporation Law or any corresponding provision hereinafter
enacted.
 
   (c) The following is a statement of the relative powers, preferences and
participating, optional or other special rights, and the qualifications,
limitations and restrictions of the classes of Common Stock:
 
    (1) Except as otherwise set forth in this Article Fourth, the relative
        powers, preferences and participating, optional or other special
        rights, and the qualifications, limitations or restrictions of each
        class of Common Stock shall be identical in all respects.
 
    (2) Subject to the rights of the holders of Preferred Stock, holders of
        each class of Common Stock shall be entitled to receive such
        dividends and other distributions in cash, stock of any corporation
        (other than Common Stock) or property of the Corporation as may be
        declared thereon by the Board of Directors from time to time out of
        assets or funds of the Corporation legally available

<PAGE>
 
         therefor, and shall share equally on a per share basis in all such
         dividends and other distributions. In the case of dividends or
         other distributions payable in Common Stock, including
         distributions pursuant to stock splits or divisions of Common
         Stock: (i) only shares of Class A-1 Common Stock shall be paid or
         distributed with respect to Class A-1 Common Stock; (ii) only
         shares of Class A-2 Common Stock shall be paid or distributed with
         respect to Class A-2 Common Stock; (iii) only shares of Class A-3
         Common Stock shall be paid or distributed with respect to Class A-
         3 Common Stock; and (iv) only shares of Class B Common Stock shall
         be paid or distributed with respect to Class B Common Stock. No
         class of Common Stock may be reclassified, subdivided or combined
         unless the reclassification, subdivision or combination occurs
         simultaneously and in the same proportion for each class of Common
         Stock, except that Class A-1 Common Stock, Class A-2 Common Stock
         and Class A-3 Common Stock may be reclassified as a single class
         of common stock at any time after 540 days after     (the "Public
         Offering Date") without any reclassification of Class B Common
         Stock.
 
    (3)(A) At every meeting of the stockholders of the Corporation in
           connection with the election of directors and all other matters
           submitted to a vote of stockholders: (i) every holder of Class A-
           1 Common Stock, Class A-2 Common Stock or Class A-3 Common Stock
           shall be entitled to ten votes in person or by proxy for each
           share of Class A-1 Common Stock, Class A-2 Common Stock and Class
           A-3 Common Stock registered in his or her name on the transfer
           books of the Corporation; and (ii) every holder of Class B Common
           Stock shall be entitled to one vote in person or by proxy for
           each share of Class B Common Stock registered in his or her name
           on the transfer books of the Corporation. Except as otherwise
           required by law or by this Article Fourth, the holders of each
           class of Common Stock shall vote together as a single class,
           subject to any right that may be conferred upon holders of
           Preferred Stock to vote together with holders of Common Stock on
           all matters submitted to a vote of stockholders of the
           Corporation.
 
    (B)   Except as otherwise provided by law, the provisions of this
          Restated Certificate of Incorporation shall not be modified,
          revised, altered or amended, repealed or rescinded, in whole or in
          part, without the approval of the holders of a majority of the
          votes entitled to be cast by the holders of each class of Common
          Stock, voting together as a single class; provided, however, that
          any proposal to modify, revise, alter or amend this Restated
          Certificate of Incorporation in any manner that would alter or
          change the powers, preferences or special rights of the shares of
          any class of Common Stock so as to affect them adversely also will
          require the approval of the holders of a majority of the votes
          entitled to be cast by the holders of the shares of the class so
          affected by the proposed amendment, voting separately as a class.
          An increase in the authorized number of shares of any class or
          classes of stock of the Corporation or creation, authorization or
          issuance of any securities convertible into, or warrants, options
          or similar rights to purchase, acquire or receive, shares of any
          such class or classes of stock, shall be deemed not to affect
          adversely the powers, preferences or special rights of the shares
          of any class of Common Stock.
 
    (4) In the event of any dissolution, liquidation or winding up of the
        affairs of the Corporation, whether voluntary or involuntary, after
        payment in full of the amounts required to be paid to the holders of
        Preferred Stock, the remaining assets and funds of the Corporation
        shall be distributed pro rata to the holders of shares of Common
        Stock. For purposes of this paragraph (c)(4), the voluntary sale,
        conveyance, lease, exchange or transfer (for cash, shares of stock,
        securities or other consideration) of all or substantially all of
        the assets of the Corporation or a consolidation or merger of the
        Corporation with one or more other corporations (whether or not the
        Corporation is the corporation surviving the consolidation or
        merger) shall not be deemed to be a liquidation, dissolution or
        winding up, voluntary or involuntary.
 
    (5) In case of any reorganization or any consolidation of the
        Corporation with one or more other corporations or a merger of the
        Corporation with another corporation, each holder of a share of
 
                                      B-2

<PAGE>
 
       Common Stock of any class shall be entitled to receive with respect
       to that share the same kind and amount of shares of stock and other
       securities and property (including cash) receivable upon the
       reorganization, consolidation or merger by a holder of a share of any
       other class of Common Stock.
 
    (6) Each record holder of shares of Class A-1 Common Stock, Class A-2
        Common Stock or Class A-3 Common Stock may convert any or all of
        those shares into an equal number of shares of Class B Common Stock;
        provided, however, that: (i) no share of Class A-1 Common Stock may
        be converted into a share of Class B Common Stock before 180 days
        after the Public Offering Date; (ii) no share of Class A-2 Common
        Stock may be converted into a share of Class B Common Stock before
        360 days after the Public Offering Date; and (iii) no share of Class
        A-3 Common Stock may be converted into a share of Class B Common
        Stock before 540 days after the Public Offering Date. A record
        holder of shares of Class A-1 Common Stock, Class A-2 Common Stock
        or Class A-3 Common Stock may effect a voluntary conversion of any
        or all of those shares in accordance with this paragraph (c)(6) by
        surrendering the certificates for the number of shares to be
        converted, accompanied by any required tax transfer stamps and by a
        written notice by the record holder to the Corporation stating that
        such record holder desires to convert such shares into the same
        number of shares of Class B Common Stock and requesting that the
        Corporation issue such shares of Class B Common Stock to persons
        named therein, setting forth the number of shares of Class B Common
        Stock to be issued to each such person and the denominations in
        which the certificates therefor are to be issued. To the extent
        permitted by law, such a voluntary conversion shall be deemed to
        have been effected at the close of business on the date of
        surrender. Shares of Class B Common Stock may not be converted into
        shares of Class A-1 Common Stock, Class A-2 Common Stock or
        Class A-3 Common Stock.
 
    (7) Shares of Class A-1 Common Stock may not be transferred to anyone
        other than a permitted transferee prior to 180 days after the Public
        Offering Date. Shares of Class A-2 Common Stock may not be
        transferred to anyone other than a permitted transferee prior to 360
        days after the Public Offering Date. Shares of Class A-3 Common
        Stock may not be transferred to anyone other than a permitted
        transferee prior to 540 days after the Public Offering Date. For
        purposes of this paragraph (c)(7), the terms "transferred" and
        "permitted transferee" have the meanings set forth in paragraph
        (c)(16). Except as provided in this paragraph (c)(7), any purported
        transfer of shares of Class A-1 Common Stock, Class A-2 Common Stock
        or Class A-3 Common Stock prior to the applicable date referred to
        in this paragraph (c)(7) shall be void. Shares of Class A-1 Common
        Stock, Class A-2 Common Stock and Class A-3 Common Stock may be
        transferred to a permitted transferee prior to the applicable date
        referred to in this paragraph (c)(7), and such permitted transferee
        will take such shares subject to the provisions of this paragraph
        (c)(7).
 
    (8) Each share of Class A-1 Common Stock, Class A-2 Common Stock and
        Class A-3 Common Stock shall automatically convert into one share of
        Class B Common Stock upon the transfer of that share if (i) the
        transfer is permitted by paragraph (c)(7) of this Article Fourth and
        (ii) after the transfer, the share is not owned by a permitted
        transferee. For purposes of this paragraph (c)(8), the terms
        "transferred" and "permitted transferee" have the meanings set forth
        in paragraph (c)(16).
 
    (9) Shares of Class A-1 Common Stock, Class A-2 Common Stock and Class
        A-3 Common Stock shall be transferred on the books of the
        Corporation, and a new certificate therefor issued, upon
        presentation at the office of the Secretary of the Corporation (or
        at such additional place or places as may from time to time be
        designated by the Secretary of the Corporation) of the certificate
        for the shares, in proper form for transfer and accompanied by all
        requisite stock transfer tax stamps, only if the certificate when so
        presented is accompanied by an affidavit from the record holder
        stating that the certificate is being presented to effect a transfer
        of the shares to a permitted transferee. The affidavit of a record
        holder furnished pursuant to this paragraph (c)(9) shall be verified
        as of a date not earlier than five days prior to the date of
        delivery of the affidavit, and, where the record holder is a
        corporation or partnership, shall be verified by an officer of the
        corporation or by a general partner of the partnership, as the case
        may be.
 
                                      B-3

<PAGE>
 
    (10) Any person (other than a permitted transferee) who takes shares of
         Class A-1 Common Stock, Class A-2 Common Stock and Class A-3 Common
         Stock in a transfer that complies with the provisions of this
         paragraph (c) may treat the endorsement on the certificate
         representing such shares, or the instrument of transfer
         accompanying such shares, as authorizing such person on behalf of
         the transferor to convert the shares in the manner provided in
         paragraph (c)(6) for the purpose of registering the transfer to
         such person of the shares of Class B Common Stock issuable upon
         conversion, and to give on behalf of the transferor the written
         notice of conversion above required, and may convert such shares of
         Class A-1 Common Stock, Class A-2 Common Stock and Class A-3 Common
         Stock accordingly.
 
    (11) Every certificate for shares of Class A-1 Common Stock, Class A-2
         Common Stock and Class A-3 Common Stock shall bear a legend on its
         face reading as follows:
 
         "The shares of Common Stock represented by this certificate may
      not be transferred (which term includes, without limitation, buying a
      put option, selling a call option or entering into any other hedging
      or insurance transaction relating to the shares) to any person in
      connection with a transfer that does not meet the qualifications set
      forth in paragraphs (c)(7) and (c)(8) of Article Fourth of the
      Restated Certificate of Incorporation of this Corporation, and no
      person who receives the shares represented by this certificate in
      connection with a transfer that does not meet the qualifications
      prescribed by paragraphs (c)(7) and (c)(8) of Article Fourth is
      entitled to own or to be registered as the record holder of the
      shares of Common Stock represented by this certificate, but the
      record holder of this certificate may at any time (except as provided
      in paragraph (c)(6) of Article Fourth) convert the shares of Common
      Stock represented by this certificate into the same number of shares
      of Class B Common Stock for purposes of effecting the sale or other
      disposition of the shares of Class B Common Stock to any person. Each
      holder of this certificate, by accepting the certificate, accepts and
      agrees to all of the foregoing."
 
    (12) Upon any conversion of shares of Class A-1 Common Stock, Class A-2
         Common Stock and Class A-3 Common Stock into shares of Class B
         Common Stock pursuant to the provisions of paragraph (c)(6), any
         dividend, for which the record date or payment date is subsequent
         to the conversion, that has been declared on the shares of Class A-
         1 Common Stock, Class A-2 Common Stock or Class A-3 Common Stock so
         converted shall be deemed to have been declared, and shall be
         payable, with respect to the shares of Class B Common Stock into or
         for which the shares of Class A-1 Common Stock, Class A-2 Common
         Stock or Class A-3 Common Stock are so converted, and any such
         dividend that is declared on the shares of Class A-1 Common Stock,
         Class A-2 Common Stock and Class A-3 Common Stock payable in shares
         of Class A-1 Common Stock, Class A-2 Common Stock and Class A-3
         Common Stock shall be deemed to have been declared, and shall be
         payable, in shares of Class B Common Stock.
 
    (13) Any shares of Class A-1 Common Stock, Class A-2 Common Stock or
         Class A-3 Common Stock that have been converted into shares of
         Class B Common Stock will be retired with no further action by the
         Corporation, and will resume the status of authorized and unissued
         Class A-1 Common Stock, Class A-2 Common Stock or Class A-3 Common
         Stock, respectively.
 
    (14) The Corporation at all times shall reserve and keep available, out
         of its authorized but unissued Class B Common Stock, at least the
         number of shares of Class B Common Stock that would become issuable
         upon the conversion of all shares of Class A-1 Common Stock, Class
         A-2 Common Stock and Class A-3 Common Stock then outstanding.
 
    (15) In connection with any transfer or conversion of any shares of any
         class of Common Stock pursuant to or as permitted by the provisions
         of this paragraph (c), or in connection with the making of any
         determination referred to in this paragraph (c), neither the
         Corporation nor any director, officer, employee or agent of the
         Corporation shall be liable in any manner for any action taken or
         omitted in good faith.
 
                                      B-4

<PAGE>
 
    (16) For purposes of this Article Fourth, the following terms have the
         following meanings:
 
      (i) A "permitted transferee" means:
 
             (A) the transferor's spouse or child, provided that (1) the
                 transferor was a holder on the Public Offering Date of the
                 shares being transferred and the transfer occurs within 540
                 days of such date; or (2) the transferor is an employee of
                 the corporation or one of its subsidiaries;
 
             (B) a trust for the sole benefit of the transferor or the
                 transferor's spouse or child, provided that (1) the
                 transferor was a holder on the Public Offering Date of the
                 shares being transferred and the transfer occurs within 540
                 days of such date; or (2) the transferor is an employee of
                 the corporation or one of its subsidiaries;
 
             (C) an individual retirement account that receives shares of
                 Class A-1 Common Stock, Class A-2 Common Stock or Class A-3
                 Common Stock, provided that (1) the transferor is an employee
                 benefit plan sponsored by the Corporation or any of its
                 subsidiaries, (2) the transferor is a distributee of an
                 employee benefit plan described in subclause (1) or (3) the
                 transferor is an individual retirement account for the
                 benefit of a distributee described in subclause (2);
 
             (D) the beneficial owner of an individual retirement account,
                 provided that the transferor is such individual retirement
                 account;
 
             (E) the estate of a deceased holder of shares provided that
                 either (1) the deceased holder was a holder on the Public
                 Offering Date of the shares being transferred and the
                 transfer occurs within 540 days of such date; or (2) the
                 deceased holder was an employee of the Corporation or one of
                 its subsidiaries on the date of death; and such transfer was
                 pursuant to the deceased holder's will or the laws of
                 distribution;
 
             (F) the beneficiary of an estate referred to in clause (E) above,
                 provided that the transferor is such estate and such
                 beneficiary is the spouse or child of the deceased holder or
                 a trust for the sole benefit of such spouse or child;
 
             (G) an employee benefit plan sponsored by the Corporation or any
                 of its subsidiaries;
 
             (H) a bank or trust company in connection with a pledge of shares
                 by a person who either (1) was a holder on the Public
                 Offering Date of the shares being pledged or (2) was an
                 employee of the Corporation or one if its subsidiaries on the
                 date of the pledge of such shares; and such shares are
                 pledged as bona fide collateral for a loan to such person
                 provided such lending institution agrees in writing to
                 immediately sell such shares to the Corporation in the event
                 such lending institution forecloses on such shares;
 
             (I) a charitable organization that agrees in writing to sell such
                 shares to the Corporation immediately following the transfer;
 
             (J) the Corporation or any of its subsidiaries;
 
             (K) any distributee of an employee benefit plan sponsored by the
                 Corporation or any of its subsidiaries pursuant to the terms
                 of such plan, provided that the transferor is such employee
                 benefit plan; and
 
             (L) an employee of the Corporation or any of its subsidiaries,
                 provided that the transferor is the Corporation or any of its
                 subsidiaries.
 
                                      B-5

<PAGE>
 
      (ii) A "transfer" (and the related term "transferred") means any
           sale, pledge, gift, assignment or other transfer of any
           ownership or voting interest in any share of Class A-1 Common
           Stock, Class A-2 Common Stock or Class A-3 Common Stock,
           including:
 
            (A) any offer, pledge, sale, contract to sell, sale of any option
                or contract to purchase, purchase of any option or contract to
                sell, grant of any option, right or warrant to purchase, loan
                or other direct or indirect transfer or disposal of: (1) any
                shares of Class A-1 Common Stock, Class A-2 Common Stock or
                Class A-3 Common Stock; (2) any securities convertible into or
                exercisable or exchangeable for Class A-1 Common Stock, Class
                A-2 Common Stock or Class A-3 Common Stock; or (3) any shares
                of Class B Common Stock into which the shares of Class A-1
                Common Stock, Class A-2 Common Stock or Class A-3 Common Stock
                are convertible; or
 
            (B) entry into any swap or other arrangement (including by way of
                insurance) that transfers to another, in whole or in part, any
                of the economic consequences of ownership of any shares of
                Class A-1 Common Stock, Class A-2 Common Stock or Class A-3
                Common Stock or any shares of Class B Common Stock into which
                the shares of Class A-1 Common Stock, Class A-2 Common Stock
                or Class A-3 Common Stock are convertible;
 
         whether any transaction described in clause (A) or (B) above is to
         be settled by delivery of Class A-1 Common Stock, Class A-2 Common
         Stock or Class A-3 Common Stock, Class B Common Stock or other
         securities, in cash or otherwise.
 
   (d) All rights to vote and all voting power shall be vested exclusively in
the holders of Common Stock, except as otherwise expressly provided by the
Board of Directors in connection with the issuance of any shares of Preferred
Stock pursuant to Article Fifth of this Restated Certificate of Incorporation
or as otherwise expressly required by the law of the State of Delaware. At
every meeting of stockholders duly called and held at which a quorum is
present (i) in all matters other than the election of directors, a majority of
the votes that could be cast at the meeting upon a given question and (ii) in
the case of the election of directors, a plurality of the votes that could be
cast at the meeting upon the election, by the holders who are present in
person or by proxy, shall be necessary, in addition to any vote or other
action that may be expressly required by the provisions of this Restated
Certificate of Incorporation or by the law of the State of Delaware, to decide
the question or election.
 
   FIFTH: The Board of Directors shall have authority to issue shares of
Preferred Stock from time to time on such terms as it may determine, and to
divide the Preferred Stock into one or more series. In connection with the
creation of any such series, the Board of Directors shall have authority to
fix by the resolution or resolutions providing for the issue of shares thereof
the designations, voting powers, preferences and relative participating,
optional or other special rights of such series, and the qualifications,
limitations or restrictions thereof, to the full extent now or hereafter
permitted by law.
 
   SIXTH: The number of directors of the Corporation constituting the whole
Board shall be fixed in the manner provided in the by-laws. The election of
directors need not be by ballot unless the by-laws so require.
 
   SEVENTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized to make, alter, amend and repeal the by-laws of the Corporation, in
any manner not inconsistent with the laws of the State of Delaware or this
Restated Certificate of Incorporation.
 
   EIGHTH: No holder of stock of any class of the Corporation shall have any
preemptive or preferential right of subscription to any shares of any class of
stock of the Corporation whether now or hereafter authorized, or to any
obligation convertible into stock of the Corporation, or any right of
subscription therefor, other than such rights, if any, as the Board of
Directors in its discretion may from time to time determine.
 
                                      B-6

<PAGE>
 
   NINTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
an improper personal benefit. Any repeal or modification of this Article Ninth
shall be prospective only, and shall not adversely affect any elimination or
limitation of the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
 
   TENTH: Subject to the rights of the holders of any series of Preferred
Stock, any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
such holders and may not be effected by any consent in writing by such
holders. Subject to the rights of the holders of any series of Preferred
Stock, special meetings of stockholders of the Corporation may be called only
by the Chairman of the Board or by the Board of Directors pursuant to a
resolution. Business transacted at any special meeting of stockholders shall
be confined to the purpose or purposes of the meeting as stated in the notice
of the meeting. Notwithstanding anything contained in this Restated
Certificate of Incorporation to the contrary, any amendment to or deletion of
this Article Tenth shall require the affirmative vote of the holders of at
least 80% of the voting power of all outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors.
 
   ELEVENTH: (a) So long as any person (as defined in this Article Eleventh)
is the beneficial owner (as defined in this Article Eleventh) of more than 25%
of the voting power, determined without giving effect to the provisions of
this Article Eleventh, of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of directors (the
"Voting Stock"), the record holders of such shares so beneficially owned by
such person (hereinafter a "Substantial Stockholder") shall have limited
voting rights on any matter requiring their vote or consent as set forth in
this Article Eleventh; provided, however, that the voting restrictions of this
Article Eleventh shall not apply to any employee benefit plan of the
Corporation or any Subsidiary, any person holding Voting Stock for or pursuant
to the terms of such plan or to any person who is a fiduciary, participant,
beneficiary or alternate payee under the terms of such plan, and such plan or
person shall not be deemed to be a Substantial Stockholder as defined herein
with respect to such shares held pursuant to such plan. With respect to each
vote in excess of 25% of the voting power of the then outstanding shares of
Voting Stock which such record holders would be entitled to cast without
giving effect to this Article Eleventh, the record holders in the aggregate
shall be entitled to cast only 1/100 of a vote and the aggregate voting power
of such record holders, so limited, for all shares of Voting Stock
beneficially owned by the Substantial Stockholder shall be allocated
proportionately among such record holders. For each such record holder, this
allocation shall be accomplished by multiplying the aggregate voting power, as
so limited, of the outstanding shares of Voting Stock beneficially owned by
the Substantial Stockholder by a fraction whose numerator is the number of
votes represented by the shares of Voting Stock owned of record by such record
holder (and which are beneficially owned by the Substantial Stockholder) and
whose denominator is the total number of votes represented by the shares of
Voting Stock beneficially owned by the Substantial Stockholder, in each case
before giving effect to the limitation on voting power provided by this
Article Eleventh. A person who is a record holder of shares of Voting Stock
that are beneficially owned simultaneously by more than one person shall have,
with respect to such shares, the right to cast the least number of votes that
such person would be entitled to cast under this Article Eleventh by virtue of
such shares being so beneficially owned by any of such persons.
 
   (b) The Board of Directors shall have the power to construe and apply the
provisions of this Article Eleventh and to make all determinations necessary
or desirable to implement such provisions, including but not limited to
matters with respect to (i) the number of shares of Voting Stock beneficially
owned by any person, (ii) whether a person is an Affiliate or Associate of
another, (iii) whether a person has an agreement, arrangement or understanding
with another as to the matters referred to in the definition of beneficial
ownership, (iv) the application of any other definition or operative provision
of this Article Eleventh to the given facts or (v) any other matter relating
to the applicability or effect of this Article Eleventh.
 
 
                                      B-7

<PAGE>
 
   (c) The Board of Directors shall have the right to demand that any person
who after reasonable inquiry is believed to be a Substantial Stockholder
supply the Corporation with complete information as to (i) the record
holder(s) of all shares beneficially owned by such person who is so believed
to be a Substantial Stockholder, (ii) the number of, and class or series of,
shares beneficially owned by such person who is so believed to be a
Substantial Stockholder and held of record by each record holder and the
number(s) of the stock certificate(s) evidencing such shares and (iii) any
other factual matter relating to the applicability or effect of this Article
Eleventh, as may reasonably be requested of such person. Such person shall
furnish such information within ten days after the receipt of such demand. If
the Board of Directors reasonably believes the shares of Voting Stock held of
record by any person or represented by a proxy holder are beneficially owned
by a Substantial Stockholder, it may demand that the record holder of such
shares, or the proxy holder thereof, provide to the Corporation a list of (i)
names and addresses of the beneficial owners of all shares of Voting Stock
held by such record holder or represented by such proxy holder; (ii) the
number of, and class or series of, shares of Voting Stock held by such record
holder or represented by such proxy holder on behalf of each beneficial owner
and (iii) any other factual matter relating to the applicability or effect of
this Article Eleventh. Such record holder or proxy holder shall furnish such
information within ten days (or such longer period as is required by law or
regulation) after the receipt of such demand; provided, however, that any such
request shall be made in accordance with the requirements of applicable law
and regulation. If as of the date of any stockholder vote or consent, a demand
made pursuant to this paragraph has not been timely responded to, the
Corporation, to the extent permitted by law, shall treat such votes as are
reasonably believed by the Board of Directors to have been cast with respect
to the shares of Voting Stock beneficially owned by a Substantial Stockholder
as subject to the limitation provided by this Article Eleventh.
 
   (d) Except as otherwise provided by law or expressly provided in this
paragraph (d), the presence, in person or by proxy, of the holders of record
of shares of capital stock of the Corporation entitling the holders thereof to
cast a majority of the votes (after giving effect, if applicable, to the
provisions of this Article Eleventh) entitled to be cast by the holders of
shares of capital stock of the Corporation entitled to vote shall constitute a
quorum at all meetings of the stockholders, and every reference in this
Restated Certificate of Incorporation to a majority or other proportion of
capital stock (or the holders thereof) for the purposes of determining any
quorum requirement or any requirement for stockholder consent or approval
shall be deemed to refer to such majority or other proportion of the votes (or
the holders thereof) then entitled to be cast in respect of such capital
stock.
 
   (e) Any construction, application or determination made by the Board of
Directors pursuant to this Article Eleventh in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Corporation and its
stockholders including any Substantial Stockholder.
 
   (f) Nothing contained in this Article Eleventh shall be construed to
relieve any Substantial Stockholder from any fiduciary obligation imposed by
law.
 
   (g) Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock required by law, this Restated
Certificate of Incorporation or any resolution of the Board of Directors
referred to in Article Fifth, the affirmative vote of the holders of at least
80% of the voting power of all of the then-outstanding shares of the Voting
Stock (after giving effect to the provisions of paragraph (a) of this Article
Eleventh), voting together as a single class, shall be required to alter,
amend or repeal this Article Eleventh.
 
   (h) In the event any provision (or portion thereof) of this Article
Eleventh shall be found to be invalid, prohibited or unenforceable for any
reason, the remaining provisions (or portions thereof) of this Article
Eleventh shall remain in full force and effect, and shall be construed as if
such invalid, prohibited or unenforceable provision had been stricken herefrom
or otherwise rendered inapplicable, it being the intent of this Corporation
and its stockholders that each such remaining provision (or portion thereof)
of this Article Eleventh remain, to
 
                                      B-8

<PAGE>
 
the fullest extent permitted by law, applicable and enforceable as to all
stockholders, including any Substantial Stockholder, notwithstanding any such
finding.
 
    (i) For the purposes of this Article Eleventh:
 
    (1) A "person" means any individual, limited partnership, general
        partnership, corporation or other firm or entity.
 
    (2) Except as expressly provided by this Article Eleventh, a person
        shall be a "beneficial owner" of all of the outstanding shares of
        Voting Stock, other than shares held in the Corporation's treasury:
 
      (i) which such person or any of its Affiliates or Associates (as
          hereinafter defined) beneficially owns, directly or indirectly;
          or
 
      (ii) which such person or any of its Affiliates or Associates has
           (A) the right to acquire (whether such right is exercisable
           immediately or only after the passage of time), pursuant to any
           agreement, arrangement or understanding or upon the exercise of
           conversion rights, exchange rights, warrants or options or
           otherwise or (B) the right to vote pursuant to any agreement,
           arrangement or understanding (but shall not be deemed to be the
           beneficial owner of any shares of Voting Stock solely by reason
           of a revocable proxy granted for a particular meeting of
           stockholders, pursuant to a public solicitation of proxies for
           such meeting, and with respect to which shares neither such
           person nor any such Affiliate or Associate is otherwise deemed
           the beneficial owner); and
 
      (iii) which are beneficially owned, directly or indirectly, by any
            other person with which such person or any of its Affiliates
            or Associates has any agreement, arrangement or understanding
            for the purpose of acquiring, holding, voting or disposing of
            any shares of Voting Stock.
 
    Notwithstanding the foregoing: (x) no director, officer or employee of
    the Corporation or any Subsidiary (nor any Affiliate or Associate of
    any such director, officer or employee) shall, solely by reason of his
    capacity as such or by reason of the Board of Director's determination
    to oppose any proxy solicitation or any other offer or attempt to cause
    a change in control of the Corporation or the public disclosure of such
    determination by the Board of Directors, be deemed, for any purpose
    hereof, to be the beneficial owner of any Voting Stock beneficially
    owned by any other director, officer or employee (or any Affiliate or
    Associate thereof); (y) no director, trustee or officer of The Annie E.
    Casey Foundation, Inc. or any corporate successor thereto (the
    "Foundation") shall be deemed for any purpose hereof to be the
    beneficial owner of shares of Voting Stock beneficially owned by the
    Foundation, nor shall the Foundation be deemed for any purposes hereof
    to be the beneficial owner of any Voting Stock beneficially owned by
    its directors, trustees or officers; and (z) in the case of any
    employee stock ownership or similar employee benefit plan of the
    Corporation or of any Subsidiary, no such plan nor any trustee or any
    member of an administrative committee or other representative with
    respect thereto (nor any Affiliate or Associate of such trustee or
    other representative), solely by reason of such capacity of such
    trustee or other representative shall be deemed, for any purposes
    hereof, to beneficially own any shares of Voting Stock held under any
    such plan.
 
    (3) "Affiliate" or "Associate" shall have the respective meanings
        ascribed to such terms in Rule 12b-2 of the General Rules and
        Regulations under the Securities Exchange Act of 1934, as in effect
        on the date of this Restated Certificate of Incorporation.
 
    (4) "Subsidiary" means any corporation of which a majority of any class
        of equity security is owned, directly or indirectly, by the
        Corporation.
 
                                      B-9

<PAGE>
 
   TWELFTH: Subject to the provisions hereof, the Corporation reserves the
right to amend, alter, change or repeal any provision contained in this
Restated Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
 
                                    *  *  *
 
   IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which
restates and integrates and further amends the provisions of the Certificate
of Incorporation of this Corporation, and which has been duly adopted in
accordance with Sections 242 and 245 of the Delaware General Corporation Law,
has been executed by a duly authorized officer on this      day of
             , 1999.
 
                                          UNITED PARCEL SERVICE, INC.
 
                                          By:
                                             ---------------------------
                                             James P. Kelly
                                             Chairman and Chief Executive
                                             Officer
 
                                     B-10


<PAGE>
 

                                                                        ANNEX C
                                    FORM OF
                          UNITED PARCEL SERVICE, INC.
                          INCENTIVE COMPENSATION PLAN
 
Article 1. Establishment, Objectives, and Duration
 
   1.1. Establishment of the Plan. United Parcel Service, Inc. ("UPS"), a
Delaware corporation (hereinafter referred to as the "Company"), hereby
establishes an incentive compensation plan to be known as the "United Parcel
Service, Inc. Incentive Compensation Plan" (hereinafter referred to as the
"Plan"), as set forth in this document. The Plan permits the grant of
Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation
Rights, Restricted Stock, Performance Shares, Performance Units, and
Management Incentive Awards.
 
   Subject to approval by the Company's stockholders, the Plan shall become
effective as of the Effective Date and shall remain in effect as provided in
Section 1.3 hereof.
 
   1.2. Objectives of the Plan. The objectives of the Plan are to optimize the
profitability and growth of the Company through annual and long-term
incentives which are consistent with the Company's goals and which link the
compensation of Participants to the value of the Company's Stock and thereby
align the interests of Participants more closely with those of the Company's
stockholders; to provide Participants with an incentive for excellence in
individual performance; and to promote teamwork among Participants.
 
   The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Participants who make
significant contributions to the Company's success and to allow Participants
to share in the success of the Company.
 
   1.3. Duration of the Plan. The Plan shall commence on the Effective Date,
as described in Section 2.12 hereof, and shall remain in effect, subject to
the right of the Committee to amend or terminate the Plan at any time pursuant
to Article 15 hereof, until all Shares subject to the Plan shall have been
purchased or acquired according to the Plan's provisions. However, in no event
may an Award be granted under the Plan on or after the tenth anniversary of
the Effective Date.
 
Article 2. Definitions
 
   Whenever used in the Plan, the following terms shall have the meanings set
forth below, and when the meaning is intended, the initial letter of the word
shall be capitalized:
 
  2.1. "Affiliate" means any corporation, partnership, joint venture or other
       entity in which the Company either directly or indirectly controls at
       least 25% of the voting interest or owns at least 25% or more of the
       value or capital or profits interest of such entity.
 
  2.2. "Award" means, individually or collectively, a grant under this Plan
       of Nonqualified Stock Options, Incentive Stock Options, Stock
       Appreciation Rights, Restricted Stock, Performance Shares, Performance
       Units, or Management Incentive Awards.
 
  2.3. "Award Agreement" means an agreement entered into by the Company and a
       Participant setting forth the terms and provisions applicable to an
       Award.
 
  2.4. "Beneficial Owner" or "Beneficial Ownership" shall have the meaning
       ascribed to such term in Rule 13d-3 of the General Rules and
       Regulations under the Exchange Act.
 
  2.5. "Board" or "Board of Directors" means the Board of Directors of the
       Company.

<PAGE>
 
  2.6. "Change in Control" of the Company shall be deemed to have occurred as
       of the first day that any one or more of the following conditions
       shall have been satisfied:
 
    (a) 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 the sale of substantially all of UPS's assets; or
 
    (b) Individuals who, as of the Effective Date, 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 Exchange Act) shall be considered as though such person were a
        member of the Incumbent Board; or
 
    (c) A change (other than due to Retirement) of 50% or more of the
        executive officers of UPS at the level of Senior Vice President and
        above within a consecutive 12 month period.
 
  2.7. "Code" means the Internal Revenue Code of 1986, as amended from time
       to time.
 
  2.8. "Committee" means the Compensation Committee of the Board.
 
  2.9 "Company" means UPS.
 
  2.10. "Director" means any individual who is a member of the Board of
        Directors.
 
  2.11. "Disability" shall have the meaning ascribed to such term in the
        Company's long-term disability plan, or if no such plan exists, as
        determined by the Committee in its discretion.
 
  2.12. "Effective Date" means        .
 
  2.13 "Employee" means any employee of the Company or its Subsidiaries or
       Affiliates. Under no circumstances shall an individual who performs
       services for the Company or its Subsidiaries or Affiliates, but who is
       not classified on the payroll of such entity as an employee (for
       example, an individual performing services for the Company or its
       Subsidiaries or Affiliates pursuant to a leasing agreement), be
       treated as an Employee even if such individual qualifies as an
       "employee" of the Company or its Subsidiaries or Affiliates by virtue
       of common law principles or the leased employee rules under Code
       (S)414(n). Further, if an individual performing services for the
       Company or its Subsidiaries or Affiliates is retroactively
       reclassified as an employee of the Company or its Subsidiaries or
       Affiliates for any reason, such reclassified individual shall not be
       treated as an Employee for purposes of this Plan for any period prior
       to the actual date (and not the effective date) of such
       reclassification. Directors who are employed by the Company or its
       Subsidiaries or Affiliates shall be considered Employees under this
       Plan.
 
                                      C-2

<PAGE>
 
  2.14. "ERISA" means the Employee Retirement Income Security Act of 1974, as
        amended from time to time.
 
  2.15. "Exchange Act" means the Securities Exchange Act of 1934, as amended
        from time to time, or any successor act thereto.
 
  2.16. "Fair Market Value of a Share" means, as of any date, the value of a
        Share determined as follows:
 
    (a) The value of a Share shall be equal to the value of a share of the
        Class B common stock of the Company, as determined in accordance
        with the following provisions:
 
           (1) If shares of Class B common stock are listed on any established
               stock exchange or a national market system, the closing price
               for a share of Class B common stock as reported in The Wall
               Street Journal or such other source as the Committee deems
               reliable.
 
           (2) If shares of Class B common stock are not listed on any
               established stock exchange or a national market system, the
               value of a Share shall be determined by the Committee in its
               sole and absolute discretion.
 
    (b) If, for any reason, the value of a Share (as described in (a))
        cannot be ascertained or is unavailable for the date in question,
        the value of a Share may, in the sole and absolute discretion of
        the Committee, be determined as of the nearest preceding date on
        which such value can be ascertained under the appropriate method
        indicated above.
 
  2.17. "Freestanding SAR" means an SAR that is granted independently of any
        Options, as described in Article 7 herein.
 
  2.18. "Incentive Stock Option" or "ISO" means an option to purchase Shares
        granted under Article 6 herein and which is designated as an
        Incentive Stock Option and which is intended to meet the requirements
        of Code (S)422.
 
  2.19. "Insider" means an individual who is, on the relevant date, an
        officer, Director or ten percent (10%) beneficial owner of any class
        of the Company's equity securities that is registered pursuant to
        Section 12 of the Exchange Act, all as defined under Section 16 of
        the Exchange Act.
 
  2.20. "Key Person" means a consultant, distributor or other person who has
        rendered or will render valuable services to the Company or a
        Subsidiary or Affiliate.
 
  2.21. "Management Incentive Award" means an Award granted to a Participant,
        as described in Article 10 herein.
 
  2.22. "Nonqualified Stock Option" or "NQSO" means an option to purchase
        Shares granted under Article 6 herein and which is not intended to be
        treated as an ISO under Code (S)422.
 
  2.23. "Option" means an Incentive Stock Option or a Nonqualified Stock
        Option, as described in Article 6 herein.
 
                                      C-3

<PAGE>
 
  2.24. "Option Price" means the price at which a Share may be purchased by a
        Participant pursuant to an Option.
 
  2.25. "Outside Director" means a member of the Board who is not an employee
        of the Company or any Subsidiary or Affiliate thereof and who
        qualifies as (1) a "non-employee director" under Rule 16b-3(b)(3) of
        the General Rules and Regulations of the Exchange Act, as amended
        from time to time, and (2) an "outside director" under Code (S)162(m)
        and the regulations promulgated thereunder.
 
  2.26. "Participant" means an Employee or Director or Key Person who has
        been selected to receive an Award or who has outstanding an Award
        granted under the Plan.
 
  2.27. "Performance-Based Exception" means the performance-based exception
        from the deduction limitations of Code (S)162(m).
 
  2.28. "Performance Share" means an Award granted to a Participant, as
        described in Article 9 herein.
 
  2.29. "Performance Unit" means an Award granted to a Participant, as
        described in Article 9 herein.
 
  2.30. "Period of Restriction" means the period during which the transfer of
        Shares of Restricted Stock is subject to a substantial risk of
        forfeiture, as provided in Article 8 herein.
 
  2.31. "Person" shall have the meaning ascribed to such term in Section
        3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
        thereof, including a "group" as defined in Section 13(d) thereof.
 
  2.32. "Restricted Stock" means an Award granted to a Participant pursuant
        to Article 8 herein. Such term shall also include awards of units
        tied to the value of Shares, but not in the form of actual Shares
        during the Period of Restriction.
 
  2.33. "Retirement" means (1) with respect to Participants who participate
        in the Company's tax-qualified retirement plan, the attainment of
        "early retirement age" (as defined in the Company's tax-qualified
        defined benefit retirement plan) accompanied by a cessation of
        employment with the Company and all Subsidiaries and an election by
        the employee to receive (or commence receiving) retirement benefits
        under the Company's tax-qualified retirement plan, and (2) with
        respect to all other Participants, "retirement" as determined by the
        Committee in its sole discretion.
 
  2.34. "Shares" means shares of the Class A, Class A-1, Class A-2 or Class
        A-3 common stock of the Company.
 
  2.35. "Stock Appreciation Right" or "SAR" means an Award, granted alone or
        in connection with a related Option, designated as an SAR, pursuant
        to the terms of Article 7 herein.
 
  2.36. "Subsidiary" means any corporation, partnership, joint venture, or
        other entity in which the Company either directly or indirectly
        controls at least 50% of the voting interest or owns at least 50% of
        the value or capital or profits interest.
 
  2.37. "Tandem SAR" means an SAR that is granted in connection with a
        related Option pursuant to Article 7 herein, the exercise of which
        shall require forfeiture of the right to purchase a Share under the
        related Option (and when a Share is purchased under the Option, the
        Tandem SAR shall similarly be canceled).
 
Article 3. Administration
 
   3.1. General. The Plan shall be administered by the Committee; provided,
however, (1) the Board may at any time take on the powers, authority and
duties of the Committee hereunder, and (2) the Board shall have the powers,
authority and duties of the Committee with respect to the granting and
interpretation of Awards to Directors who are not Employees. The members of
the Committee shall be appointed from time to time by, and shall serve at the
discretion of, the Board of Directors. The Committee shall have the authority
to delegate
 
                                      C-4

<PAGE>
 
administrative duties to officers or Directors of the Company. With respect to
Committee appointments and composition, while the Board has complete
discretion with respect to such matters, it should be noted that only a
Committee (or a sub-committee thereof) comprised solely of two or more Outside
Directors may grant Awards which will meet the Performance-Based Exception.
 
   3.2. Authority of the Committee. Except as limited by law or by the
Certificate of Incorporation or Bylaws of the Company, and subject to the
provisions herein, the Committee shall have full power to select Employees and
Directors and Key Persons who shall participate in the Plan; determine the
sizes and types of Awards; determine the terms and conditions of Awards in a
manner consistent with the Plan; construe and interpret the Plan and any
agreement or instrument entered into under the Plan; establish, amend, or
waive rules and regulations for the Plan's administration; and (subject to the
provisions of Article 14 and Article 15 herein) amend the terms and conditions
of any outstanding Award. Further, the Committee shall make all other
determinations which may be necessary or advisable for the administration of
the Plan. As permitted by law (and subject to Section 3.1 herein), the
Committee may delegate its authority as identified herein.
 
   3.3. Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Committee shall be final, conclusive and binding on all
persons, including the Company, its stockholders, Directors, Employees, Key
Persons, Participants, and their estates and beneficiaries.
 
Article 4. Shares Subject to the Plan and Maximum Awards
 
   4.1. Number of Shares Available for Grants. Subject to adjustment as
provided in Section 4.2 and Section 15.2 herein, the number of Shares hereby
reserved for issuance to Participants under the Plan shall be one-hundred
twelve million (112,000,000). The total number of shares reserved for issuance
as Restricted Stock shall be limited to thirty-four million (34,000,000). The
Committee shall determine the appropriate methodology for calculating the
number of Shares actually issued pursuant to the Plan. Unless and until the
Committee determines that an Award shall not be designed to comply with the
Performance-Based Exception, the following rules shall apply to grants of such
Awards under the Plan:
 
  (a) Stock Options: The maximum aggregate number of Shares that may be
      granted in the form of Stock Options in any one calendar year to any
      one single Participant shall be six hundred thousand (600,000).
 
  (b) SAR's: The maximum aggregate number of Shares that may be granted in
      the form of Stock Appreciation Rights in any one calendar year to any
      one single Participant shall be six hundred thousand (600,000).
 
  (c) Restricted Stock. The maximum aggregate number of Shares that may be
      granted in the form of Restricted Stock in any one calendar year to any
      one Participant shall be six hundred thousand (600,000).
 
  (d) Performance Shares/Units. The maximum aggregate payout (determined as
      of the end of the applicable performance period) with respect to Awards
      of Performance Shares/Units granted in any one calendar year to any one
      Participant shall be equal to the value of six hundred thousand
      (600,000) Shares.
 
  (e) Management Incentive Awards. The maximum aggregate payout with respect
      to Management Incentive Awards granted in any one calendar year to any
      one Participant shall be equal to the value of six hundred thousand
      (600,000) Shares.
 
   4.2. Adjustments in Authorized Shares. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether
or not such reorganization comes within the definition of such term in Code
(S)368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number and class of Shares which may be delivered under
Section 4.1, in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, and in the
 
                                      C-5

<PAGE>
 
Award limits set forth in Section 4.1, as may be determined to be appropriate
and equitable by the Committee, in its sole discretion, to prevent dilution or
enlargement of rights; provided, however, that the number of Shares subject to
any Award shall always be a whole number.
 
   4.3 Reissuance of Shares. If any Shares subject to an Award hereunder are
forfeited or any such Award otherwise terminates without the issuance of such
Shares to a Participant, or if any Shares are surrendered by a Participant in
full or partial payment of the price of an Option, such Shares, to the extent
of any such forfeiture, termination or surrender, shall again be available for
grant under the Plan.
 
Article 5. Eligibility and Participation
 
   5.1. Eligibility. Persons eligible to participate in this Plan include all
Employees and Directors and Key Persons.
 
   5.2. Actual Participation. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees and
Directors and Key Persons, those to whom Awards shall be granted and shall
determine the nature and amount of each Award.
 
Article 6. Stock Options
 
   6.1. Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Participants in such number, and upon such terms,
and at any time and from time to time as shall be determined by the Committee;
provided, however, that ISOs may only be granted to Participants who are
Employees of the Company or a "subsidiary" of the Company (within the meaning
of Code (S)424(f)).
 
   6.2. Award Agreement. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as
the Committee shall determine. The Award Agreement also shall specify whether
the Option is intended to be an ISO or an NQSO.
 
   6.3. Option Price. The Option Price for each grant of an Option under the
Plan shall be at least equal to one hundred percent (100%) of the Fair Market
Value of a Share on the date as of which the Option is granted. With respect
to granting Awards of ISOs, the Option Price of any ISO may not be less than
one hundred percent  (100%) of the Fair Market Value of a Share on the date as
of which the Option is granted, and the Option Price of any ISO which is
granted to an individual who owns more than 10% of the voting power of all
classes of stock of the Company or any "parent" or "subsidiary" corporation of
the Company (within the meaning of Code (S)424(e) and (f)) may not be less
than one hundred ten percent (110%) of the Fair Market Value of a Share on the
date the Option is granted.
 
   6.4. Duration of Options. Each Option granted to a Participant shall expire
at such time as the Committee shall determine at the time of grant; provided,
however, that no Option shall be exercisable later than the tenth (10th)
anniversary date of its grant.
 
   6.5. Exercise of Options. Options granted under this Article 6 shall be
exercisable at such times and be subject to such restrictions and conditions
as the Committee shall in each instance approve, which need not be the same
for each grant or for each Participant.
 
   6.6. Payment. Options granted under this Article 6 shall be exercised by
the delivery of notice of exercise to the Company (in accordance with the
procedures established by the Committee), setting forth the number of Shares
with respect to which the Option is to be exercised, accompanied by full
payment for the Shares.
 
   The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, (b) by tendering
previously acquired Shares having an aggregate value at the time of exercise
 
                                      C-6

<PAGE>
 
equal to the total Option Price, or (c) by a combination of (a) and (b);
provided, however, that Shares tendered must have been held by the Participant
for at least six (6) months prior to their tender to satisfy the Option Price.
Further, with respect to any Participant who is an Insider, such tendering
transaction (1) must have met the requirements of an exemption under Rule 16b-
3 of the General Rules and Regulations of the Exchange Act, or (2) be a
subsequent transaction the terms of which were provided for in a transaction
initially meeting the requirements of an exemption under Rule 16b-3 of the
General Rules and Regulations of the Exchange Act.
 
   Subject to any governing rules or regulations, as soon as practicable after
receipt of notification of exercise and full payment, the Company shall
deliver to the Participant, in the Participant's name, Share certificates in
an appropriate amount based upon the number of Shares purchased under the
Option(s).
 
   6.7. Restrictions on Share Transferability. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option
granted under this Article 6 as it may deem advisable, including, without
limitation, restrictions under applicable federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws
applicable to such Shares.
 
   6.8. Termination of Employment/Directorship/Other Relationship. Each
Participant's Option Award Agreement shall set forth the extent to which the
Participant shall have the right to exercise the Option following termination
of the Participant's employment or directorship or other relationship with the
Company and its Subsidiaries and Affiliates. Such provisions shall be
determined in the sole discretion of the Committee, shall be included in the
Award Agreement entered into with each Participant, need not be uniform among
all Options issued pursuant to this Article 6, and may reflect distinctions
based on the reasons for termination.
 
   6.9. Nontransferability of Options.
 
    (a) Incentive Stock Options. No ISO granted under the Plan may be sold,
        transferred, pledged, assigned, or otherwise alienated or
        hypothecated, other than by will or by the laws of descent and
        distribution. Further, all ISOs granted to a Participant under the
        Plan shall be exercisable during his or her lifetime only by such
        Participant; provided, however, that in the event the Participant
        is incapacitated and unable to exercise his or her ISO, such ISO
        may be exercised by such Participant's legal guardian, legal
        representative, or other representative whom the Committee deems
        appropriate based on applicable facts and circumstances. The
        determination of incapacity of a Participant and the determination
        of the appropriate representative of the Participant who shall be
        able to exercise the ISO if the Participant is incapacitated shall
        be determined by the Committee in its sole and absolute discretion.
 
    (b) Nonqualified Stock Options. Except as otherwise provided in a
        Participant's Award Agreement, no NQSO granted under this Article 6
        may be sold, transferred, pledged, assigned, or otherwise alienated
        or hypothecated, other than by will or by the laws of descent and
        distribution. Further, except as otherwise provided in a
        Participant's Award Agreement, all NQSOs granted to a Participant
        under this Article 6 shall be exercisable during his or her
        lifetime only by such Participant; provided, however, that in the
        event the Participant is incapacitated and unable to exercise his
        or her NQSO, such NQSO may be exercised by such Participant's legal
        guardian, legal representative, or other representative whom the
        Committee deems appropriate based on applicable facts and
        circumstances. The determination of incapacity of a Participant and
        the determination of the appropriate representative of the
        Participant who shall be able to exercise the NQSO if the
        Participant is incapacitated shall be determined by the Committee
        in its sole and absolute discretion.
 
Article 7. Stock Appreciation Rights
 
   7.1. Grant of SARs. Subject to the terms and conditions of the Plan, SARs
may be granted to Participants at any time and from time to time as shall be
determined by the Committee. The Committee may grant Freestanding SARs, Tandem
SARs, or any combination of these forms of SAR.
 
                                      C-7

<PAGE>
 
   The Committee shall have complete discretion in determining the number of
SARs granted to each Participant (subject to Article 4 herein) and, consistent
with the provisions of the Plan, in determining the terms and conditions
pertaining to such SARs.
 
   The grant price of a Freestanding SAR shall equal the Fair Market Value of
a Share on the date of grant of the SAR. The grant price of a Tandem SAR shall
equal the Option Price of the related Option.
 
   7.2. Exercise of Tandem SAR's. Tandem SARs may be exercised for all or part
of the Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable. Upon exercise of a Tandem SAR as to all or some of the Shares
subject to such Award, the related Option shall be automatically canceled to
the extent of the number of Shares subject to the exercise. Conversely, if the
related Option is exercised as to some or all of the Shares subject to such
Award, the Tandem SAR shall automatically be canceled to the extent of the
number of Shares subject to the exercise.
 
   Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (a) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (b) the value
of the payout with respect to the Tandem SAR may be for no more than one
hundred percent (100%) of the difference between the Option Price of the
underlying ISO and the Fair Market Value of the Shares subject to the
underlying ISO at the time the Tandem SAR is exercised; and (c) the Tandem SAR
may be exercised only when the Fair Market Value of the Shares subject to the
ISO exceeds the Option Price of the ISO.
 
   7.3. Exercise of Freestanding SARs. Freestanding SARs may be exercised upon
whatever terms and conditions the Committee, in its sole discretion, imposes
upon them.
 
   7.4. SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement
that shall specify the grant price, the term of the SAR, and such other
provisions as the Committee shall determine.
 
   7.5. Term of SARs. The term of an SAR granted under the Plan shall be
determined by the Committee, in its sole discretion; provided, however, that
such term shall not exceed ten (10) years.
 
   7.6. Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be
entitled to receive payment from the Company in an amount determined by
multiplying:
 
    (a) The difference between the Fair Market Value of a Share on the date
        of exercise over the grant price; by
 
    (b) The number of Shares with respect to which the SAR is exercised.
 
   At the discretion of the Committee, the payment upon SAR exercise may be in
cash, in Shares of equivalent value, or in some combination thereof. The
Committee's determination regarding the form of SAR payout shall be set forth
in the Award Agreement pertaining to the grant of the SAR.
 
   7.7. Termination of Employment/Directorship/Other Relationship. Each SAR
Award Agreement shall set forth the extent to which the Participant shall have
the right to exercise the SAR following termination of the Participant's
employment or directorship or other relationship with the Company and its
Subsidiaries and Affiliates. Such provisions shall be determined in the sole
discretion of the Committee, shall be included in the Award Agreement entered
into with Participants, need not be uniform among all SARs issued pursuant to
the Plan, and may reflect distinctions based on the reasons for termination.
 
   7.8. Nontransferability of SARs. Except as otherwise provided in a
Participant's Award Agreement, no SAR granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, except as
otherwise provided in a Participant's Award Agreement, all SARs granted to a
Participant under the Plan shall be exercisable during his
 
                                      C-8

<PAGE>
 
or her lifetime only by such Participant; provided, however, that in the event
the Participant is incapacitated and unable to exercise his or her SAR, such
SAR may be exercised by such Participant's legal guardian, legal
representative, or other representative whom the Committee deems appropriate
based on applicable facts and circumstances. The determination of incapacity
of a Participant and the determination of the appropriate representative of
the Participant who shall be able to exercise the SAR if the Participant is
incapacitated shall be determined by the Committee in its sole and absolute
discretion.
 
Article 8. Restricted Stock
 
   8.1. Grant of Restricted Stock. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted Stock to Participants in such amounts as the Committee shall
determine.
 
   8.2. Restricted Stock Agreement. Each Restricted Stock grant shall be
evidenced by a Restricted Stock Award Agreement that shall specify the
Period(s) of Restriction, the number of Shares of Restricted Stock granted,
and such other provisions as the Committee shall determine.
 
   8.3. Transferability. Except as otherwise provided in a Participant's Award
Agreement, the Shares of Restricted Stock granted herein may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated until
the end of the applicable Period of Restriction established by the Committee
and specified in the Restricted Stock Award Agreement, or upon earlier
satisfaction of any other conditions, as specified by the Committee in its
sole discretion and set forth in the Restricted Stock Award Agreement, other
than by will or by the laws of descent and distribution.
 
   8.4. Other Restrictions. The Committee shall impose such other conditions
and/or restrictions on any Shares of Restricted Stock granted pursuant to the
Plan as it may deem advisable including, without limitation, a requirement
that Participants pay a stipulated purchase price for each Share of Restricted
Stock, restrictions based upon the achievement of specific performance goals,
time-based restrictions on vesting following the attainment of the performance
goals, and/or restrictions under applicable federal or state securities laws,
and such restrictions may apply after the Period of Restriction specified in
the Restricted Stock Award Agreement or earlier satisfaction of any other
conditions set forth in the Restricted Stock Award Agreement. Shares of
Restricted Stock shall be forfeited to the extent that a Participant fails to
satisfy the applicable conditions or restrictions during the Period of
Restriction.
 
   The Company may retain the certificates representing Shares of Restricted
Stock in the Company's possession until such time as all conditions and/or
restrictions applicable to such Shares have been satisfied.
 
   Except as otherwise provided in this Article 8 or as otherwise provided in
the Restricted Stock Award Agreement, Shares of Restricted Stock covered by
each Restricted Stock grant made under the Plan shall become freely
transferable by the Participant after the last day of the applicable Period of
Restriction.
 
   8.5. Voting Rights. Participants holding Shares of Restricted Stock granted
hereunder shall be granted the right to exercise full voting rights with
respect to those Shares during the Period of Restriction, unless otherwise
provided in the Restricted Stock Award Agreement.
 
   8.6. Dividends. Unless otherwise provided in the Award Agreement, during
the Period of Restriction, Participants holding Shares of Restricted Stock
granted hereunder shall be credited with and shall be paid regular cash
dividends paid with respect to the underlying Shares while they are so held,
but shall not be entitled to stock dividends or other non-cash distributions.
The Committee may apply any additional restrictions to dividends that the
Committee deems appropriate. Without limiting the generality of the preceding
sentence, if the grant or vesting of Shares of Restricted Stock is intended to
comply with the requirements of the Performance-Based Exception, the Committee
may apply any restrictions it deems appropriate to the payment of dividends
declared with respect to such Shares of Restricted Stock, such that the
dividends and/or the Shares of Restricted Stock maintain eligibility for the
Performance-Based Exception.
 
                                      C-9

<PAGE>
 
   8.7. Termination of Employment/Directorship/Other Relationship. Each
Restricted Stock Award Agreement shall set forth the extent to which the
Participant shall have the right to receive unvested Restricted Shares
following termination of the Participant's employment or directorship or other
relationship with the Company and its Subsidiaries and Affiliates prior to the
end of the Period of Restriction. Such provisions shall be determined in the
sole discretion of the Committee, shall be included in the Award Agreement
entered into with each Participant, need not be uniform among all Shares of
Restricted Stock issued pursuant to the Plan, and may reflect distinctions
based on the reasons for termination.
 
Article 9. Performance Units and Performance Shares
 
   9.1. Grant of Performance Units/Shares. Subject to the terms of the Plan,
Performance Units and Performance Shares may be granted to Participants in
such amounts and upon such terms, and at any time and from time to time, as
shall be determined by the Committee.
 
   9.2. Value of Performance Units/Shares. Each Performance Unit shall have an
initial value that is established by the Committee at the time of grant. Each
Performance Share shall have an initial value equal to the Fair Market Value
of a Share on the date of grant. The Committee shall set performance goals in
its discretion which, depending on the extent to which they are met, will
determine the number and/or value of Performance Units/Shares that will be
paid out to the Participant. For purposes of this Article 9, the time period
during which the performance goals must be met shall be called a "Performance
Period."
 
   9.3. Earning of Performance Units/Shares. Subject to the terms of this
Plan, after the applicable Performance Period has ended, the holder of
Performance Units/Shares shall be entitled to receive payout on the number and
value of Performance Units/Shares earned by the Participant over the
Performance Period, to be determined as a function of the extent to which the
corresponding performance goals have been achieved. Performance Units/Shares
shall be forfeited to the extent that a Participant fails to satisfy the
applicable performance goals during the Performance Period.
 
   9.4. Form and Timing of Payment of Performance Units/Shares. Payment of
earned Performance Units/Shares shall be made in a single lump sum following
the close of the applicable Performance Period. Subject to the terms of this
Plan, the Committee, in its sole discretion, may pay earned Performance
Units/Shares in the form of cash or in Shares (or in a combination thereof)
which have an aggregate Fair Market Value equal to the value of the earned
Performance Units/Shares at the close of the applicable Performance Period.
Such Shares may be granted subject to any restrictions deemed appropriate by
the Committee. The determination of the Committee with respect to the form of
payout of such Awards shall be set forth in the Award Agreement pertaining to
the grant of the Award.
 
   At the discretion of the Committee and as provided in the Award Agreement,
Participants may be entitled to receive any dividends declared with respect to
Shares payable with respect to Performance Units/Shares not yet distributed to
Participants. In addition, Participants may, at the discretion of the
Committee and as provided in the Award Agreement, be entitled to exercise
their voting rights with respect to such Shares.
 
   9.5. Termination of Employment/Directorship/Other Relationship. Each
Performance Unit/Share Award Agreement shall set forth the extent to which the
Participant shall have the right to receive payment with respect to
Performance Unit/Shares following termination of the Participant's employment
or directorship or other relationship with the Company and its Subsidiaries
and Affiliates prior to the last day of the Performance Period. Such
provisions shall be determined in the sole discretion of the Committee, shall
be included in the Award Agreement entered into with each Participant, need
not be uniform among all Performance Units/Shares issued pursuant to this
Plan, and may reflect distinctions based on the reasons for termination.
 
 
                                     C-10

<PAGE>
 
   9.6. Nontransferability. Except as otherwise provided in a Participant's
Award Agreement, Performance Units/Shares may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated, other than by will
or by the laws of descent and distribution.
 
Article 10. Management Incentive Awards
 
   10.1. Grant of Management Incentive Awards. Subject to the terms and
provisions of the Plan, Management Incentive Awards may be granted to
Participants who are Employees of the Company or a Subsidiary at such times
and in such amount and upon such terms as shall be determined by the Committee
consistent with this Article. The Committee (or a committee thereof which has
been delegated such authority) shall select those Participants who shall
receive Awards under the Plan for a given calendar year, and shall base its
decision upon the recommendations of district, regional and corporate group
managers. The Committee shall have full discretion and authority to decide
which Participants should receive Management Incentive Awards and how such
Participants should be determined.
 
   10.2. Form of Awards. Each Management Incentive Award shall consist of
either Shares or cash, at the discretion of the Committee.
 
   10.3. Amount of Awards. The aggregate amount of the Management Incentive
Awards granted at the end of a calendar year shall be determined by the Board
(or a committee thereof which has been delegated such authority) in its sole
discretion. The aggregate amount determined for Management Incentive Awards
for a given calendar year shall be divided among those Participants who have
been selected to receive Management Incentive Awards for such calendar year in
such manner and amount as the Committee in its discretion shall determine.
 
   10.4. Custody of Management Incentive Awards Paid in Shares. Upon issuance
to a Participant, Shares shall be held by a custodian chosen by the Committee.
Each recipient of Shares may elect to have the custodian continue to hold the
Shares as custodian without cost or may elect to have the Shares delivered to
him or her. The custodian shall register Shares held by it for a Participant
in the custodian's name and shall sell or otherwise dispose of the Shares only
pursuant to the Participant's instructions. Dividends and other distributions
on Shares held by the custodian shall be promptly remitted by the custodian to
Participants owning such Shares. Participants owning Shares held by the
custodian shall receive periodic statements of the number of Shares held for
their account and of dividends paid on such Shares. Notice of any regular or
special meeting of Company shareholders shall be forwarded to Participants
owning Shares held in custody by the custodian, which shall furnish such
Participants a proxy permitting the Participant to vote the number of Shares
held for him or her by the custodian.
 
   10.5. Additional Management Incentive Award for Custodial Shares. In
addition to the remuneration that a Participant receives pursuant to Section
10.3 above, a Participant receiving a Management Incentive Award for a
calendar year may (in the discretion of the Committee) also receive, as a part
of such Award, an amount equal to the lesser of (1) one month's salary of the
Participant determined as of a date established by the Committee, or (2) 2.5%
of the cost of Shares previously deposited with the custodian for such
Participant, less the proceeds from the sale of any such Shares (other than
proceeds derived from such Participant's participation in any Company
sponsored issuer tender offer), determined as of a date established by the
Committee.
 
   10.6. Timing of Awards. Generally, Management Incentive Awards for a given
calendar year shall be announced prior to the end of such calendar year, but
shall actually be paid on or before March 15th of the following calendar year.
Once a determination has been made as to which Participants shall receive
Management Incentive Awards for a given calendar year, such Participants shall
be notified, and the Participant's right to a Management Incentive Award vests
immediately upon notification.
 
 
                                     C-11

<PAGE>
 
Article 11. Performance Measures
 
   Unless and until the Committee proposes for shareholder vote and
shareholders approve a change in the general performance measures set forth in
this Article, the attainment of which may determine the degree of payout
and/or vesting with respect to Awards which are intended to qualify for the
Performance-Based Exception, the performance measure(s) to be used for
purposes of such grants shall be chosen from among:
 
    (a) Earnings per share;
 
    (b) Net income (before or after taxes);
 
    (c) Return measures (including, but not limited to, return on assets,
        equity, or sales);
 
    (d) Cash flow return on investments which equals net cash flows divided
        by owners equity;
 
    (e) Earnings before or after taxes;
 
    (f) Gross revenues;
 
    (g) Share price (including, but not limited to, growth measures and
        total shareholder return);
 
    (h) Pretax profit; and/or
 
    (i)  Economic Value Added
 
   The Committee shall have the discretion to adjust the determinations of the
degree of attainment of the pre-established performance goals; provided,
however, that Awards which are intended to qualify for the Performance-Based
Exception may not be adjusted upward (the Committee shall retain the
discretion to adjust such Awards downward).
 
   In the event that applicable tax and/or securities laws change to permit
Committee discretion to alter the governing performance measures without
obtaining shareholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining shareholder approval. In
addition, in the event that the Committee determines that it is advisable to
grant Awards which shall not qualify for the Performance-Based Exception, the
Committee may make such grants without satisfying the requirements of Code
(S)162(m).
 
Article 12. Deferrals
 
   The Committee may permit or require a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option or SAR, the lapse or waiver of restrictions with respect to Restricted
Stock, or the satisfaction of any requirements or goals with respect to
Performance Units/Shares. If any such deferral election is required or
permitted, the Committee shall, in its sole discretion, establish rules and
procedures for such payment deferrals. However, notwithstanding the preceding
provisions of this Article and notwithstanding any other provision of this
Plan to the contrary, the Committee shall not, (1) in establishing the terms
and provisions of any Award, or (2) in exercising its powers under this
Article, create any arrangement which would constitute an employee pension
benefit plan as defined in ERISA (S)3(2) unless the arrangement provides
benefits solely to one or more individuals who constitute members of a select
group of management or highly compensated employees (within the meaning of
ERISA (S)(S)201(2), 301(a)(3), 401(a)(1) and 4021(b)(6)).
 
Article 13. Rights of Employees/Directors/Key Persons
 
   13.1. Employment and Performance of Services. Nothing in the Plan shall
interfere with or limit in any way the right of the Company to terminate any
Participant's employment at any time, nor confer upon any Participant any
right to continue in the employ of the Company. Nothing in this Plan shall
interfere with or limit in any way the right of the Company to terminate any
Participant's services at any time, nor confer upon any Participant any right
to continue performing services for the Company.
 
 
                                     C-12

<PAGE>
 
   13.2. Participation. No Employee, Director or Key Person shall have the
right to be selected to receive an Award under this Plan, or, having been so
selected, to be selected to receive a future Award.
 
Article 14. Change in Control
 
   14.1. Treatment of Outstanding Awards. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited under applicable laws, or by
the rules and regulations of any governing governmental agencies or national
securities exchanges:
 
    (a) Vesting of Options and SARs. Any and all Options and SARs granted
        hereunder shall become immediately exercisable, and shall remain
        exercisable throughout their entire term;
 
    (b) Lapse of Restricted Share Restrictions. Any restriction periods and
        restrictions imposed on Shares of Restricted Stock which are not
        performance-based shall lapse; and
 
    (c) Vesting, Payment and Achievement of Performance Criteria on Other
        Awards. The target payout opportunities attainable under all
        outstanding Awards of performance-based Restricted Stock,
        Performance Units and Performance Shares shall be deemed to have
        been fully earned for the entire Performance Period(s) as of the
        effective date of the Change in Control. The vesting of all Awards
        denominated in Shares shall be accelerated as of the effective date
        of the Change in Control, and there shall be paid out to
        Participants within thirty (30) days following the effective date
        of the Change in Control a pro rata number of shares based upon an
        assumed achievement of all relevant targeted performance goals and
        upon the length of time within the Performance Period which has
        elapsed prior to the Change in Control. Awards denominated in cash
        shall be paid pro rata to participants in cash within thirty (30)
        days following the effective date of the Change in Control, with
        the proration determined as a function of the length of time within
        the Performance Period which has elapsed prior to the Change in
        Control, and based on an assumed achievement of all relevant
        targeted performance goals.
 
   14.2. Special Gross-Up Payment for Excise Tax Imposed.
 
    (a) Upon a Change In Control, the Company shall appoint an independent
        tax consultant (herein the "ITC") who shall be a lawyer, certified
        public accountant or a compensation consultant with expertise in
        the area of executive compensation tax law, who shall be selected
        by the Company and whose fees and disbursements shall be paid by
        the Company.
 
    (b) Upon a Change in Control, each Participant who believes that he or
        she might be required to pay any Code (S)4999 excise tax shall be
        entitled to request the calculation and payment of a Gross-Up
        Payment (as defined below); provided, however, that any Participant
        requesting the calculation and payment of a Gross-Up Payment must
        provide the ITC with all information necessary for the ITC to
        determine the proper amount of Gross-Up Payment which should be
        made to requesting Participant, and must agree with the release of
        such information by the Company to the ITC.
 
    (c) The ITC shall, with respect to each Participant making a request
        for the calculation and payment of a Gross-Up Payment (a
        "Requesting Participant"), make a determination as to whether
        (1) the amounts paid to such Participant under Awards issued under
        this Plan and (2) other payments otherwise paid to such
        Participant, which constitute "parachute payments" (as defined in
        Code (S)280G) (hereinafter referred to as "Parachute Payments")
        would be subject to the Code (S)4999 excise tax. If the ITC
        determines that the Parachute Payments to a Requesting Participant
        would be subject to the Code (S)4999 excise tax, then such
        Participant shall receive an additional lump sum cash payment
        (herein the "Gross-Up Payment") in an amount such that after
        payment by the Requesting Participant of all federal and state
        taxes (including the Code (S)4999 excise tax) imposed upon the
        Gross-Up Payment, the Requesting Participant retains from the
        Gross-Up Payment an amount equal to the Code (S)4999 excise tax
        imposed upon the Parachute Payments.
 
 
                                     C-13

<PAGE>
 
    (d) If the ITC shall determine that no Code (S)4999 excise tax is
        payable by a Requesting Participant, the ITC shall furnish the
        Requesting Participant with a written opinion that the Requesting
        Participant has substantial authority not to report any Code
        (S)4999 excise tax due on the Requesting Participant's income tax
        returns. A Requesting Participant shall notify the Company in
        writing within 15 days of any claim by the Internal Revenue Service
        ("IRS") that, if successful, would require the payment by the
        Company of a Gross-Up Payment. If the Requesting Participant is
        subsequently required to make a payment of any Code (S)4999 excise
        tax by the IRS, then the Company shall make a payment (the "Gross-
        Up Underpayment") to the Requesting Participant equal to the amount
        assessed as a Code (S)4999 excise tax by the IRS; provided,
        however, the Company may, in lieu of making such Gross-Up
        Underpayment to the Requesting Participant, notify the Requesting
        Participant in writing that it desires that the Requesting
        Participant contest the IRS claim, in which case the Requesting
        Participant and the Company shall cooperate, and the Company shall
        bear all costs and expenses (including payment of any resulting
        Code (S)4999 excise tax ultimately determined to be due, additional
        interest and penalties) incurred in connection with contesting such
        claim.
 
   14.3. Termination, Amendment, and Modifications of Change-in-Control
Provisions. Notwithstanding any other provision of this Plan or any Award
Agreement provision to the contrary, the provisions of this Article 14 may not
be terminated, amended, or modified on or after the date of a Change in
Control to affect adversely any Award theretofore granted under the Plan
without the prior written consent of the Participant with respect to said
Participant's outstanding Awards; provided, however, that the Committee shall
retain the power to amend any provision of the Plan to comply with changes in
the Code, the Exchange Act or other applicable law or stock exchange rule
after the date of a Change in Control and further provided that the Committee
may terminate, amend, or modify this Article 14 and Section 2.6 hereof at any
time and from time to time prior to the date of a Change in Control.
 
Article 15. Amendment, Modification, and Termination
 
   15.1. Amendment, Modification, and Termination. Subject to the terms of the
Plan, the Committee may at any time and from time to time, alter, amend,
suspend or terminate the Plan in whole or in part.
 
   15.2. Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events. Subject to Article 14 and this Article 15, the Committee
may make adjustments in the terms and conditions of, and the criteria included
in, Awards in recognition of unusual or nonrecurring events (including,
without limitation, the events described in Section 4.2 hereof) affecting the
Company or the financial statements of the Company or of changes in applicable
laws, regulations, or accounting principles, whenever the Committee determines
that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made
available under the Plan; provided that, unless the Committee determines
otherwise at the time such adjustment is considered, no such adjustment shall
be authorized to the extent that such authority would be inconsistent with the
requirements of Code (S)162(m), as from time to time amended, to the extent
the Award is intended to satisfy the Performance-Based Exception.
 
   15.3. Awards Previously Granted. Notwithstanding any other provision of the
Plan to the contrary, no termination, amendment, or modification of the Plan
shall adversely affect in any material way any Award previously granted under
the Plan, without the written consent of the Participant holding such Award.
 
   15.4. Compliance with Code (S)162(m). The Committee shall have full and
absolute discretion to determine whether an Award granted under this Plan is
intended to comply with the requirements of Code (S)162(m) and the regulations
thereunder. In addition, in the event that changes are made to Code (S)162(m)
to permit greater flexibility with respect to any Award or Awards made
available under the Plan, the Committee may make any adjustments it deems
appropriate.
 
 
                                     C-14

<PAGE>
 
Article 16. Withholding
 
   16.1. Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company as a
condition precedent for the fulfillment of any Award, an amount sufficient to
satisfy federal, state, and local taxes, domestic or foreign, required by law
or regulation to be withheld with respect to any taxable event arising as a
result of this Plan.
 
   16.2. Share Withholding. Whenever Shares are to be issued or cash paid to a
Participant upon exercise of an Option, the Company shall have the right to
require the Participant to remit to the Company, as a condition of exercise of
the Option, an amount sufficient to satisfy federal, state and local
withholding tax requirements at the time of exercise. However, notwithstanding
the foregoing, to the extent that a Participant is an Insider, satisfaction
withholding requirements by having the Company withhold Shares may only be
made to the extent that such withholding of Shares (1) has met the
requirements of an exemption under Rule 16b-3 of the General Rules and
Regulations of the Exchange Act, or (2) is a subsequent transaction the terms
of which were provided for in a transaction initially meeting the requirements
of an exemption under Rule 16b-3 of the General Rules and Regulations of the
Exchange Act. Shares withheld by the Company for taxes for any award under
this plan shall be limited to the number sufficient to satisfy federal, state
and local tax withholding requirements at the time of exercise.
 
Article 17. Indemnification
 
   Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit, or proceeding to which he or she may be a party or in which he or she
may be involved by reason of any action taken or failure to act under the Plan
and against and from any and all amounts paid by him or her in settlement
thereof, with the Company's approval, or paid by him or her in satisfaction of
any judgement in any such action, suit, or proceeding against him or her,
provided he or she shall give the Company an opportunity, at its own expense,
to handle and defend the same before he or she undertakes to handle and defend
it on his or her own behalf. The foregoing right of indemnification shall not
be exclusive of any other rights of indemnification to which such persons may
be entitled under the Company's Articles of Incorporation of Bylaws, as a
matter of law, or otherwise, or any power that the Company may have to
indemnify them or hold them harmless.
 
Article 18. Successors
 
   All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company.
 
Article 19. Miscellaneous
 
   19.1. Number. Except where otherwise indicated by the context, the plural
shall include the singular and the singular shall include the plural.
 
   19.2. Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
 
   19.3. Requirements of Law. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
 
   19.4. Securities Law Compliance. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions or Rule
16b-3(b)(3) of the General Rules and Regulations of the Exchange
 
                                     C-15

<PAGE>
 
Act or its successors. To the extent any provision of the plan or action by
the Committee fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
 
   19.5. Governing Law. To the extent not preempted by federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and
governed by the internal laws of the state of Georgia.
 
   19.6. Plan Document Controls. In the event of any conflict between the
provisions of an Award Agreement and the Plan, the Plan shall control, and the
conflicting provisions of the Award Agreement shall be null and void ab
initio.
 
   19.7. Unfunded Arrangement. The Plan shall not be funded, and except for
reserving a sufficient number of authorized Shares to the extent required by
law to meet the requirements of the Plan, the Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any grant under the Plan.
 
   19.8. Awards Granted in Substitution. Notwithstanding any contrary
provision, in the event the Company engages in a recapitalization,
reorganization, merger, consolidation, combination, exchange of shares, spin-
off, acquisition or other business transaction with another organization, the
Committee in its absolute discretion may grant Awards under the Plan in
substitution and cancellation of options, stock appreciation rights,
restricted stock, performance shares or performance units awarded to an
individual by such other organization. Awards made under this Section 19.8 in
substitution for awards canceled as a result of such business transaction may
have an Option Price or grant price less than one hundred percent (100%) of
the Fair Market Value of a Share on the date such award is granted.
 
                                     C-16

<PAGE>
 
                            f FOLD AND DETACH HERE f
 ------------------------------------------------------------------------------
                             ----------------------
                  UPS QUALIFIED STOCK OWNERSHIP PLAN AND TRUST
 Letter of Instructions to Execute Proxy for Special Meeting of Shareowners of
                     UNITED PARCEL SERVICE OF AMERICA, INC.
                 Solicited on Behalf of the Board of Directors
 
FIRST UNION NATIONAL BANK
P.O. Box 41784
Philadelphia, PA 19101-1784
 
Ladies and Gentlemen:
 
  In connection with the special meeting of shareowners of United Parcel
Service of America, Inc. to be held in Wilmington, Delaware, on October 25,
1999, you are hereby instructed and directed to deliver a proxy to James P.
Kelly, John W. Alden and Joseph R. Moderow, or any of them, with power of
substitution, instructing and authorizing them to vote all shares that you are
holding for the benefit of the undersigned in the UPS Qualified Stock Ownership
Plan and Trust as of August 30, 1999, as follows:
 
  The Board of Directors recommends a vote FOR Proposals 1 and 2.
 
1. FOR [_]    AGAINST [_]    ABSTAIN [_]
                               the Agreement and Plan of Merger, dated as of
                               September 22, 1999, among United Parcel Service
                               of America, Inc., United Parcel Service, Inc.
                               and UPS Merger Subsidiary, Inc.
 
2. FOR [_]    AGAINST [_]    ABSTAIN [_]
                               the United Parcel Service, Inc. Incentive
                               Compensation Plan
 
  In their discretion upon such other matters as may properly come before the
meeting or any adjournment or postponement thereof.
 
                                     (OVER)

<PAGE>
 
 
 
                            f FOLD AND DETACH HERE f
 ------------------------------------------------------------------------------
                             ----------------------
 
This Letter of Instructions to Execute Proxy, when properly executed, will be
voted in the manner directed herein by the undersigned plan participant. If no
direction is made, the Proxy will be voted in the same proportion as the stock
allocated under the UPS Qualified Stock Ownership Plan and Trust for which
Letters of Instruction to Execute Proxy are received and voted. Your vote is
important. Please return this card.
 
---------------------------------
SIGNATURE (sign exactly as name
appears hereon)
                                           ---------------------------------
                                           SIGNATURE OF CO-OWNER IF ANY
                                           For joint accounts, all co-
                                           owners must sign. Executors,
                                           administrators, custodians,
                                           trustees, etc. should so
                                           indicate when signing.
 
  Dated this   day of , 1999.
 
           Return this card in the enclosed Business Reply Envelope.

<PAGE>
 
                            f FOLD AND DETACH HERE f
 ------------------------------------------------------------------------------
                             ----------------------
                     UNITED PARCEL SERVICE OF AMERICA, INC.
          This Proxy is Solicited on Behalf of the Board of Directors
           Proxy for Special Meeting of Shareowners--October 25, 1999
 
United Parcel Service of America, Inc.
ATTN: Secretary
55 Glenlake Parkway, N.E.
Atlanta, Georgia 30328
 
  The undersigned hereby appoints JAMES P. KELLY, JOHN W. ALDEN and JOSEPH R.
MODEROW, or any of them, with power of substitution, as attorneys and proxies
to vote all of the shares of stock outstanding in the name of the undersigned
as of August 30, 1999 at the special meeting of shareowners of United Parcel
Service of America, Inc. to be held at The Corporation Trust Company, 1209
Orange Street, Wilmington, Delaware 19801 on October 25, 1999, and at any or
all adjournments thereof; and the undersigned hereby instructs and authorizes
said attorneys to vote as follows:
 
  The Board of Directors recommends a vote FOR Proposals 1 and 2.
 
1. FOR [_]    AGAINST [_]    ABSTAIN [_]
                               the Agreement and Plan of Merger, dated as of
                               September 22, 1999, among United Parcel Service
                               of America, Inc., United Parcel Service, Inc.
                               and UPS Merger Subsidiary, Inc.
 
2. FOR [_]    AGAINST [_]    ABSTAIN [_]
                               the United Parcel Service, Inc. Incentive
                               Compensation Plan
 
  In their discretion upon such other matters as may properly come before the
meeting or any adjournment or postponement thereof.
 
                                     (OVER)

<PAGE>
 
 
 
                            f FOLD AND DETACH HERE f
 ------------------------------------------------------------------------------
                             ----------------------
 
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareowner. If no direction is made, this Proxy will be
voted FOR Proposals 1 and 2. Your vote is important. Please return this card.
IF YOU HAVE ANY QUESTIONS, YOU SHOULD CONTACT UPS SHAREOWNER RELATIONS AT (800)
785-1480.
 
---------------------------------
SIGNATURE (sign exactly as name
appears hereon)
                                           ---------------------------------
                                           SIGNATURE OF CO-OWNER IF ANY
                                           For joint accounts, all co-
                                           owners must sign. Executors,
                                           administrators, custodians,
                                           trustees, etc. should so
                                           indicate when signing.
 
  Dated this   day of , 1999.
 
           Return this card in the enclosed Business Reply Envelope.

<PAGE>
 
                            f FOLD AND DETACH HERE f
 ------------------------------------------------------------------------------
                             ----------------------
                                UPS STOCK TRUSTS
 Which include the following: The UPS Stock Trust, UPS Managers Stock Trust and
                         the UPS Employees Stock Trust
 Letter of Instructions to Execute Proxy for Special Meeting of Shareowners of
                     UNITED PARCEL SERVICE OF AMERICA, INC.
                 Solicited on Behalf of the Board of Directors
 
FIRST UNION NATIONAL BANK
P.O. Box 41784
Philadelphia, PA 19101-1784
Ladies and Gentlemen:
  In connection with the special meeting of shareowners of United Parcel
Service of America, Inc. to be held in Wilmington, Delaware, on October 25,
1999, you are hereby instructed and directed to deliver a proxy to James P.
Kelly, John W. Alden and Joseph R. Moderow, or any of them, with power of
substitution, instructing and authorizing them to vote all shares that you are
holding for the benefit of the undersigned in the various UPS Stock Trusts as
of August 30, 1999, as follows:
  The Board of Directors recommends a vote FOR Proposals 1, 2 and 3.
1. FOR [_]  AGAINST [_]  ABSTAIN [_]
                        the Agreement and Plan of Merger, dated as of
                        September 22, 1999, among United Parcel Service of
                        America, Inc., United Parcel Service, Inc. and UPS
                        Merger Subsidiary, Inc.
2. FOR [_]  AGAINST [_]  ABSTAIN [_]
                        the United Parcel Service, Inc. Incentive Compensation
                        Plan
3. FOR [_]  AGAINST [_]  ABSTAIN [_]
                        with regard to the termination of the UPS Managers
                        Stock Trust and the UPS Employees Stock Trust, the
                        undersigned hereby votes all shares you are holding
                        for the benefit of the undersigned under the UPS
                        Managers Stock Trust and the UPS Employees Stock Trust
                        as of August 30, 1999 as indicated.
  In their discretion upon such other matters as may properly come before the
meeting or any adjournment or postponement thereof.
                                     (OVER)

<PAGE>
 
 
 
                            f FOLD AND DETACH HERE f
 ------------------------------------------------------------------------------
                             ----------------------
 
This Letter of Instructions to Execute Proxy, when properly executed, will be
voted in the manner directed herein by the undersigned member. If this Letter
of Instructions is returned but no direction is made, the Proxy will be voted
FOR Proposals 1, 2 and 3. If you do not return this Letter of Instructions, the
Proxy will be voted FOR Proposals 1 and 2, but will not be voted on Proposal 3,
which will have the same effect as a vote against Proposal 3. Your vote is
important. Please return this card.
 
---------------------------------
SIGNATURE (sign exactly as name
appears hereon)
                                           ---------------------------------
                                           SIGNATURE OF CO-OWNER IF ANY
                                           For joint accounts, all co-
                                           owners must sign. Executors,
                                           administrators, custodians,
                                           trustees, etc. should so
                                           indicate when signing.
 
  Dated this   day of , 1999.
 
           Return this card in the enclosed Business Reply Envelope.

<PAGE>
 
                            f FOLD AND DETACH HERE f
 ------------------------------------------------------------------------------
                             ----------------------
                           ANNIE E. CASEY FOUNDATION
                            STOCK COMPENSATION PLAN
 Letter of Instructions to Execute Proxy for Special Meeting of Shareowners of
                     UNITED PARCEL SERVICE OF AMERICA, INC.
                 Solicited on Behalf of the Board of Directors
 
FIRST UNION NATIONAL BANK
P.O. Box 41784
Philadelphia, PA 19101-1784
 
Ladies and Gentlemen:
 
  In connection with the special meeting of shareowners of United Parcel
Service of America, Inc. to be held in Wilmington, Delaware, on October 25,
1999, you are hereby instructed and directed to deliver a proxy to James P.
Kelly, John W. Alden and Joseph R. Moderow, or any of them, with power of
substitution, instructing and authorizing them to vote all shares that you are
holding for the benefit of the undersigned as of August 30, 1999, as follows:
 
  The Board of Directors recommends a vote FOR Proposals 1 and 2.
 
1. FOR [_]    AGAINST [_]    ABSTAIN [_]
                               the Agreement and Plan of Merger, dated as of
                               September 22, 1999, among United Parcel Service
                               of America, Inc., United Parcel Service, Inc.
                               and UPS Merger Subsidiary, Inc.
 
2. FOR [_]    AGAINST [_]    ABSTAIN [_]
                               the United Parcel Service, Inc. Incentive
                               Compensation Plan
 
  In their discretion upon such other matters as may properly come before the
meeting or any adjournment or postponement thereof.
 
                                     (OVER)

<PAGE>
 
 
 
                            f FOLD AND DETACH HERE f
 ------------------------------------------------------------------------------
                             ----------------------
 
This Letter of Instructions to Execute Proxy, when properly executed, will be
voted in the manner directed herein by the undersigned plan participant. If no
direction is made, the Proxy will be voted FOR Proposals 1 and 2. Your vote is
important. Please return this card.
 
---------------------------------
SIGNATURE (sign exactly as name
appears hereon)
                                           ---------------------------------
                                           SIGNATURE OF CO-OWNER IF ANY
                                           For joint accounts, all co-
                                           owners must sign. Executors,
                                           administrators, custodians,
                                           trustees, etc. should so
                                           indicate when signing.
 
  Dated this   day of , 1999.
 
           Return this card in the enclosed Business Reply Envelope.