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financial review
Part I

Item 1. Business

General Development of Business

During 2004, we began to prepare interim financial reports on a calendar month basis. Previously, our interim reporting was based on a 28-day, 13 accounting period calendar that had been used since before postal reorganization. As a result, 2003 interim data are management's representation of results for the same periods last year.

Financial Information about Segments

We operate in one segment throughout the United States and internationally. Our international operations are not financially significant.

Narrative Description of Business


The United States Postal Service (we) commenced operations on July 1, 1971, as an independent entity of the executive branch of the United States government. Under the Postal Reorganization Act, we have a legal mandate to offer a "fundamental service" to the American people on a "fair and equitable basis." We fulfill this legal mandate to offer universal services at a fair and uniform price by offering a variety of classes of mail services without undue discrimination among our many customers. This means that within each class of mail our price does not unreasonably vary by customer for the levels of service we provide.

We serve individual and commercial customers throughout the nation. Our services compete for business in the communications, distribution and delivery, advertising and retail markets. The rates and fees for postal services are subject to a regulatory review process controlled by the independent Postal Rate Commission (PRC).

Our products are distributed through our more than 37,000 Post Offices, stations and branches, contract postal units, our website and a large network of consignees. We deliver mail to 142 million city, rural, Post Office box, and highway delivery points. We conduct our significant operations primarily in the domestic market, with international operations representing less than 3% of our total revenue.

Our labor force is primarily represented by the American Postal Workers Union, National Association of Letter Carriers, National Postal Mail Handlers Union and National Rural Letter Carriers Association. Approximately 90% of our career employees are covered by collective bargaining agreements. By law, we consult with management organizations representing most of the employees not covered by collective bargaining agreements.

These consultations provide an opportunity to participate directly in the planning, development, and implementation of programs and policies affecting managerial employees in the field. The management organizations include the National Association of Postal Supervisors, the National League of Postmasters, and the National Association of Postmasters of the United States. We participate in federal employee benefit programs covering retirement, health benefits and workers' compensation.

We are not subject to regulation by the Securities and Exchange Commission (SEC). However, we comply voluntarily with the financial reporting requirements of the SEC to the extent that these requirements may be reasonably applied to a non-publicly traded, government-owned entity with a mandate to break even over time. Therefore, this report excludes certain SEC reporting elements normally included in a Form 10-K. Specifically, we have excluded: Item 4, Submission of Matters to a Vote of Security Holders; Item 5, Market for Registrant's Common Equity and Related Stockholder Matters; and Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Postal Reform

In May 2004, Representative John McHugh, Chairman of the Government Reform Committee's Special Panel on the Postal Service, introduced H.R. 4341, Postal Accountability and Enhancement Act. The bill was reported favorably to the full House on the date of introduction.

Also in May, Governmental Affairs Committee Chairman Susan Collins introduced S. 2468, Postal Accountability and Enhancement Act. In August, the Committee placed the bill on the legislative calendar for action in the abbreviated Congressional session following the Labor Day recess. While there were some differences in the two bills, both provided for a number of changes designed to reform the outdated Postal Reorganization Act of 1970.

Both the Senate and House legislation reaffirmed the importance of universal service and significantly strengthened the role of the PRC granting it the authority to create a new system of rates and service standards, among other powers. Both bills granted us some pricing flexibility. The Senate bill introduced price caps to assure future affordability, while the House bill would have allowed the PRC to choose the pricing system. However, only the Senate version gave the PRC flexibility in crafting a price cap that took into account a variety of cost drivers. The House bill mandated the use of the Consumer Price Index. Neither bill provided the opportunity for relief from our major cost drivers, wages and benefits.