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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17506
UST INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1193986
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 WEST PUTNAM AVENUE, GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 661-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK -- $.50 PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
AS OF FEBRUARY 15, 1995, THE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON
STOCK, $.50 PAR VALUE, HELD BY NON-AFFILIATES OF REGISTRANT (WHICH FOR THIS
PURPOSE DOES NOT INCLUDE DIRECTORS OR OFFICERS) WAS $5,720,449,710.
AS OF FEBRUARY 15, 1995, THERE WERE 195,940,336 SHARES OF REGISTRANT'S
COMMON STOCK, $.50 PAR VALUE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN SECTIONS OF UST ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1994 AND FILED AS AN EXHIBIT AS REQUIRED BY ITEM
601(B)(13) OF REGULATION S-K .............................. PARTS I & II
CERTAIN PAGES OF UST 1995 NOTICE OF ANNUAL MEETING AND PROXY
STATEMENT ................................................. PART III
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PART I
ITEM 1 -- BUSINESS
GENERAL
UST Inc. was formed on December 23, 1986 as a Delaware corporation.
Pursuant to a reorganization approved by stockholders at the 1987 Annual
Meeting, United States Tobacco Company (originally incorporated in 1911) became
a wholly owned subsidiary of UST Inc. on May 5, 1987. UST Inc., through its
subsidiaries (collectively "Registrant" unless the context otherwise requires),
is engaged in manufacturing and marketing consumer products in the following
industry segments:
Tobacco Products: Registrant's primary activities are manufacturing
and marketing smokeless tobacco (snuff and chewing tobacco) and marketing
other tobacco products.
Wine: Registrant produces and markets wine.
Other: The international and video entertainment operations as well as
certain miscellaneous businesses are included in this segment. Registrant
also produces or imports and markets certain other products such as
smokers' accessories and operates certain commercial agricultural
properties.
INDUSTRY SEGMENT DATA
Registrant hereby incorporates by reference the Consolidated Industry
Segment Data pertaining to the years 1992 through 1994 set forth on page 32 of
its Annual Report to stockholders for the fiscal year ended December 31, 1994
("Annual Report"), which page is included as Exhibit 13.1.
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TOBACCO PRODUCTS
PRINCIPAL PRODUCTS
Registrant's principal smokeless tobacco products and brand names are as
follows:
Moist -- COPENHAGEN, SKOAL LONG CUT, SKOAL, SKOAL BANDITS
Dry -- BRUTON, CC, RED SEAL
Chewing -- WB CUT
It has been claimed that the use of tobacco products may be harmful to
health. To the best of Registrant's knowledge, unresolved controversy continues
to exist among scientists concerning the claims made about tobacco and health.
In 1986, federal legislation was enacted regulating smokeless tobacco products
by, inter alia, requiring health warning notices on smokeless tobacco packages
and advertising and prohibiting the advertising of smokeless tobacco products on
electronic media. A federal excise tax was imposed in 1986, which was increased
in 1991 and 1993. The Health Security Act announced by the Clinton
Administration in 1993 sought, inter alia, a significant federal excise tax
increase on moist smokeless and other tobacco products. Also, in recent years,
proposals have been made at the federal level for additional regulation of
tobacco products including, inter alia, the requirement of additional warning
notices, the disallowance of advertising and promotion expenses as deductions
under federal tax law, a significant increase of federal excise taxes, a ban or
further restriction of all advertising and promotion, regulation of
environmental tobacco smoke and increased regulation of the manufacturing and
marketing of tobacco products by new or existing federal agencies. Substantially
similar proposals will likely be considered in 1995. In recent years, various
state and local governments continued the regulation of tobacco products,
including, inter alia, the imposition of significantly higher taxes, sampling
and advertising bans or restrictions, regulation of environmental tobacco smoke
and anti-tobacco advertising campaigns. Additional state and local legislative
and regulatory actions will likely be considered in 1995. Registrant is unable
to assess the future effects these various actions may have on its tobacco
business.
RAW MATERIALS
Except as noted below, raw materials essential to Registrant's business are
generally purchased in domestic markets under competitive conditions.
In 1994, Registrant increased its purchases of dark fired, burley and dark
air cured tobaccos ("tobacco") primarily from domestic sources. In 1994
purchases from foreign suppliers declined, and continued to decline as a
percentage of total tobacco purchased. Such foreign suppliers were located in
Canada and Italy. Various factors, including a failure of domestic tobacco
production to continue to increase, may require Registrant to purchase
additional amounts of tobacco from foreign sources in order to meet future
requirements. Tobaccos used in the manufacture of smokeless tobacco products
must be processed and aged by Registrant for a period of two to four years prior
to their use.
Registrant or its suppliers purchase certain flavoring components used in
Registrant's tobacco products from foreign sources.
At the present time, Registrant has no reason to believe that its future
raw material requirements for its tobacco products will not be satisfied.
However, the continuing availability and the cost of tobacco from both domestic
and foreign sources is dependent upon a variety of factors which cannot be
predicted, including weather, growing conditions, disease, local planting
decisions, overall market demands and other factors.
WORKING CAPITAL
The principal portion of Registrant's operating cash requirements relates
to its need to maintain significant inventories of leaf tobacco, primarily for
manufacturing of smokeless tobacco products, and its need to age and cure
certain of these tobaccos for periods of up to four years prior to use.
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CUSTOMERS
Registrant markets tobacco products throughout the United States
principally to chain stores and tobacco and grocery wholesalers. Approximately
31% of Registrant's gross sales of tobacco products are made to five customers,
one of which accounts for more than 10% of Registrant's consolidated revenue.
Registrant has maintained satisfactory relationships with these customers for
many years.
COMPETITIVE CONDITIONS
The tobacco manufacturing industry in the United States is composed of at
least four domestic companies larger than Registrant and many smaller ones. The
larger companies concentrate on the manufacture and marketing of cigarettes; one
also manufactures and markets smokeless tobacco products. Registrant is a well
established and major factor in the smokeless tobacco sector of the overall
tobacco market. Consequently, Registrant competes actively with both larger and
smaller companies in the marketing of its tobacco products. Registrant's
principal methods of competition in the marketing of its tobacco products
include quality, advertising, promotion, sampling, price, product recognition
and distribution.
WINE
Registrant is an established producer of premium varietal and blended
wines. CHATEAU STE. MICHELLE and COLUMBIA CREST varietal table wines and DOMAINE
STE. MICHELLE sparkling wine are produced by Registrant in the state of
Washington and marketed throughout the United States. Registrant also produces
and markets two California premium wines under the labels of VILLA MT. EDEN and
CONN CREEK. Approximately 49% of Registrant's wine sales are made to nine
distributors, no one of which accounts for more than 22% of total wine sales.
Substantially all wines are sold through state-licensed distributors with whom
Registrant maintains satisfactory relationships.
It has been claimed that the use of alcohol beverages may be harmful to
health. To the best of Registrant's knowledge, unresolved controversy continues
to exist among scientists concerning the claims made about alcohol beverages and
health. In 1988, federal legislation was enacted regulating alcohol beverages by
requiring health warning notices on alcohol beverages. Effective in 1991, the
federal excise tax on wine was increased from $.17 a gallon to $1.07 a gallon
for those manufacturers that produce more than 250,000 gallons a year, such as
Registrant. In recent years at the federal level, proposals were made for
additional regulation of alcohol beverages including, inter alia, an excise tax
increase, modification of the required health warning notices and the regulation
of labeling, advertising and packaging. Substantially similar proposals will
likely be considered in 1995. Also in recent years, increased regulation of
alcohol beverages by various states included, inter alia, the imposition of
higher taxes, the requirement of health warning notices and the regulation of
advertising and packaging. Additional state and local legislative and regulatory
actions affecting the marketing of alcohol beverages will likely be considered
during 1995. Registrant is unable to assess the future effects these regulatory
and other actions may have on the sale of its wines.
Registrant uses grapes harvested from its own vineyards, as well as grapes
purchased from independent growers located primarily in Washington State. Grape
harvest yields experienced by Registrant and throughout Washington State in 1994
continue to be adequate to meet requirements for premium varietal wines. From
time to time adverse weather conditions have significantly affected grape
harvests from Washington State. Should any vineyards be destroyed as a result of
such conditions, new vineyards generally require five to six years to provide
full yields. At the present time, Registrant has no reason to believe that its
future raw material requirements for its wine products will not be satisfied.
Registrant's principal competition comes from many larger, well-established
national companies, as well as many smaller wine producers. Registrant's
principal methods of competition include quality, price, consumer and trade wine
tastings, competitive wine judging and advertising. Registrant is a minor factor
in the total nationwide business of producing wines.
Registrant concentrates its marketing efforts on premium varietal table
wines and sparkling wines. The future of Registrant's wine business will be
dependent on sales, price and volume growth for premium varietal wines, the
success of new products and adequate grape harvest yields from Washington State.
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OTHER
Included in this segment for 1994 are the international operations, video
entertainment business, pipes, smokers' accessories, agricultural properties and
a majority interest in a company that develops and markets equipment used in
filmmaking. None of the above, singly, constitutes a material portion of
Registrant's operations.
ADDITIONAL BUSINESS INFORMATION
CUSTOMERS
In 1994 sales to McLane Co. Inc., a national distributor, exceeded 10% of
Registrant's consolidated revenue.
ENVIRONMENTAL REGULATIONS
Registrant does not believe that compliance with federal, state and local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment will have a material
effect upon the capital expenditures, earnings or competitive position of
Registrant.
NUMBER OF EMPLOYEES
Registrant's average number of employees during 1994 was 3,817.
TRADEMARKS
Registrant markets consumer products under a large number of trademarks.
All of the significant trademarks either have been registered or applications
therefor are pending with the United States Patent and Trademark Office.
SEASONAL BUSINESS
No material portion of the business of any industry segment of Registrant
is seasonal.
ORDERS
Backlog of orders is not a material factor in any industry segment of
Registrant.
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ITEM 2 -- PROPERTIES
Set forth below is information concerning principal facilities and real
properties of Registrant.
<TABLE>
<CAPTION>
BUILDINGS
IN
APPROXIMATE
LOCATION SQUARE FEET ACTIVITIES
-------- ----------- -----------------------------------------
<S> <C> <C>
Headquarters:
Greenwich, Connecticut........ 160,000 Executive, sales and general offices in
several buildings.
Tobacco Facilities:
Nashville, Tennessee.......... 900,000 Office and manufacturing plants for moist
and dry smokeless tobacco products,
plastic injection molding operation for
production of cans and lids,
manufacturing engineering department,
research and development laboratory and
warehouse for distribution of various
products.
Hopkinsville, Kentucky........ 635,000 Office and plants and warehouses for
tobacco leaf handling, processing and
storage and for manufacture of dry flour
for smokeless tobacco products.
Franklin Park, Illinois....... 425,000 Office and manufacturing plant for moist
smokeless tobacco products, fiberboard
can operations and warehouse for
distribution of various products.
Wine Facilities:
Paterson, Washington.......... 410,000 Winery, distribution and storage
facility, office and retail shop.
Woodinville, Washington....... 195,000 Winery, distribution and storage
facility, executive and sales offices and
retail shop.
Roosevelt, Washington......... 70,000 Winery and storage facility.
</TABLE>
<TABLE>
<CAPTION>
LAND
IN
APPROXIMATE
LOCATION ACRES ACTIVITIES
-------- ----------- -----------------------------------------
<S> <C> <C>
Yakima, Benton and Island Counties,
Washington......................... 3,351 Vineyards.
Benton County, Washington............ 18,494 Other, including agricultural properties.
</TABLE>
Such principal properties in Registrant's industry segments were utilized
only in connection with Registrant's business operations. Registrant believes
that the above properties at December 31, 1994 were suitable and adequate for
the purposes for which they were used, and were operated at satisfactory levels
of capacity.
All principal properties are owned in fee by Registrant.
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ITEM 3 -- LEGAL PROCEEDINGS
Registrant has been named in certain litigation against the major cigarette
companies and others seeking damages relating to the usage of cigarettes and, in
certain of the complaints, "tobacco products", one of which contains several
allegations relating to smokeless tobacco products, including:
-- Norma R. Broin, et al. v. Philip Morris Companies, Inc. et al., Case
No.: 91-49738 CA (22), Circuit Court, 11th Judicial Circuit, Dade County,
Florida, served on or about January 17, 1992. Purported class action on behalf
of flight attendants seeking $5 billion in punitive damages and unspecified
compensatory damages as a result of exposure to environmental tobacco smoke on
airplanes; on December 12, 1994, the Circuit Court entered an order granting
certification of the class, which defendants have appealed.
-- John G. Allman, et al. v. Philip Morris, Inc., et al., Case No.:
94-0504-IEG (CM), U.S. District Court, Southern District of California, served
on or about April 6, 1994. Purported class action on behalf of persons who have
smoked defendants' cigarettes, became "addicted" and purchased, or would be
purchasing in the future, nicotine patches, seeking unspecified damages for
various alleged violations including allegations of a conspiracy to withhold
information about the claimed effects of cigarette smoking; the court has
dismissed with prejudice the plaintiffs' complaint and the parties to this
action have entered into a stipulation dismissing with prejudice plaintiffs'
appeal of this decision.
-- Diane Castano, et al. v. The American Tobacco Company, Inc., et al.,
Case No.: 94-1044 "B" (3), U.S. District Court, Eastern District of Louisiana,
served on or about May 12, 1994. Purported class action on behalf of "nicotine
dependent" persons who have smoked defendants' cigarettes, seeking unspecified
damages as a result of defendants' alleged manipulation of the levels of
nicotine in their cigarettes for the purpose of "addicting" consumers. On
February 17, 1995, the Court entered an order granting certification of the
class "only in regard to the liability issues of fraud, breach of warranty
(express or implied), intentional tort, negligence, strict liability and
consumer protection and punitive damages issues." The Court denied certification
of the class in regard to the issues of injury-in-fact, proximate cause,
reliance, affirmative defenses, compensatory damages and medical monitoring.
-- McGraw v. The American Tobacco Company, et al., Civil Action No.
94-1707, Circuit Court of Kanawha County, West Virginia, served on or about
November 1, 1994. Action purportedly on behalf of the State of West Virginia
seeking unspecified damages and other relief as reimbursement for amounts
allegedly spent by the state as a result of "tobacco-related injuries, diseases
or sickness"; several allegations relate to smokeless tobacco products.
Except for the Allman action which has been dismissed with prejudice, each
of these actions is in varying stages of pretrial activities.
Registrant believes that these pending litigation matters will not result
in any material liability for a number of reasons, including the fact that
Registrant has had only limited involvement with cigarettes and Registrant's
current percentage of total tobacco industry sales is relatively small. Prior to
1986, Registrant manufactured some cigarette products which had a de minimis
market share. From May 1, 1982 to August 1, 1994, Registrant distributed a small
volume of imported cigarettes and is indemnified against claims relating to
those products.
Registrant also believes that these actions are without merit and intends
to defend them vigorously.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to instruction 3 to Item 401(b) of Regulation S-K, the name,
office, age and business experience of each executive officer of Registrant as
of February 15, 1995 is set forth below:
<TABLE>
<CAPTION>
NAME OFFICE AGE
- ---------------------------------------- ---------------------------------------------- ---
<S> <C> <C>
Robert E. Barrett....................... Executive Vice President 56
John J. Bucchignano..................... Executive Vice President and Chief Financial
Officer 47
Vincent A. Gierer, Jr................... Chairman of the Board, Chief Executive Officer
and President 47
Harry W. Peter III...................... Executive Vice President 55
Joseph R. Taddeo........................ Executive Vice President 50
Richard H. Verheij...................... Senior Vice President and General Counsel 36
</TABLE>
None of the executive officers of Registrant has any family relationship to
any other executive officer or director of Registrant.
After election, all executive officers serve until the next annual
organization meeting of the Board of Directors and until their successors are
elected and qualified.
All of the executive officers of Registrant have been employed continuously
by it for more than five years except for Mr. Barrett.
Mr. Barrett has served as Executive Vice President since October 7, 1991.
He also has served as President of UST Enterprises Inc. since July 1, 1991. Mr.
Barrett served as Senior Vice President from January 1, 1991 to October 6, 1991,
and served as a member of the Board of Directors from July 27, 1989 through
December 13, 1990. Mr. Barrett served as President of Barrett Consultants, a
public and government relations firm which he founded in 1980. Mr. Barrett has
been employed by Registrant since January 1, 1991.
Mr. Bucchignano has served as Executive Vice President and Chief Financial
Officer since October 7, 1991. Mr. Bucchignano served as Senior Vice President
and Controller from September 27, 1990 to October 6, 1991, and as Controller
from August 1, 1987 to September 26, 1990. Mr. Bucchignano has been employed by
Registrant since December 10, 1984.
Mr. Gierer has served as Chairman of the Board and Chief Executive Officer
since December 1, 1993 and has served as President since September 27, 1990. Mr.
Gierer also served as Chief Operating Officer from September 27, 1990 to
November 30, 1993 and as Executive Vice President and Chief Financial Officer
from February 17, 1988 to September 26, 1990. Mr. Gierer has been employed by
Registrant since March 16, 1978.
Mr. Peter has served as Executive Vice President since October 29, 1990. He
also has served as President of UST International Inc. since January 1, 1993.
Mr. Peter served as Senior Vice President from July 27, 1989 to October 28, 1990
and as Vice President from June 23, 1988 to July 26, 1989. Mr. Peter has been
employed by Registrant since February 1, 1988.
Mr. Taddeo has served as Executive Vice President and President of United
States Tobacco Company since September 27, 1990. Mr. Taddeo also served as
Senior Vice President of United States Tobacco Company from June 23, 1988 to
September 26, 1990. Mr. Taddeo has been employed by Registrant since March 29,
1982.
Mr. Verheij has served as Senior Vice President and General Counsel since
December 1, 1994. Mr. Verheij served as Senior Vice President and Associate
General Counsel from April 4, 1994 to November 30, 1994, as Vice President and
Associate General Counsel from December 17, 1992 to April 3, 1994, as Assistant
General Counsel from January 1, 1991 to December 16, 1992 and as Senior
Corporate Counsel from October 1, 1988 to December 31, 1990. Mr. Verheij has
been employed by Registrant since November 24, 1986.
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PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Registrant hereby incorporates by reference the information with respect to
the market for its common stock, $.50 par value ("Common Stock"), and related
security holder matters set forth on pages 30 and 31 of its Annual Report, which
pages are included herein as Exhibit 13.2. Registrant's Common Stock is listed
on the New York Stock Exchange and the Pacific Stock Exchange. As of February
15, 1995, there were approximately 13,065 stockholders of record of its Common
Stock.
ITEM 6 -- SELECTED FINANCIAL DATA
Registrant hereby incorporates by reference the Consolidated Selected
Financial Data set forth on pages 46 and 47 of its Annual Report, which pages
are included herein as Exhibit 13.3.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Registrant hereby incorporates by reference the Management's Discussion and
Analysis of Results of Operations and Financial Condition set forth on pages
24-31 of its Annual Report, which pages are included herein as Exhibit 13.4.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Registrant hereby incorporates by reference the information contained in
the financial statements, including the notes thereto set forth on pages 32-45
of its Annual Report, which pages are included herein as Exhibit 13.5.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Registrant hereby incorporates by reference the information with respect to
the names, ages and business histories of the directors of Registrant which is
contained in Table I and the accompanying text set forth under the caption
"Election of Directors" in its Notice of 1995 Annual Meeting and Proxy
Statement. Information concerning executive officers of Registrant is set forth
above following Item 4 of this Report.
ITEM 11 -- EXECUTIVE COMPENSATION
Registrant hereby incorporates by reference the information with respect to
executive compensation which is contained in Tables II through V (including the
notes thereto) and the accompanying text set forth under the caption
"Compensation of Executive Officers" in its Notice of 1995 Annual Meeting and
Proxy Statement.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Registrant hereby incorporates by reference the information with respect to
the security ownership of management which is contained in Table I and the
accompanying text set forth under the caption "Election of Directors" in its
Notice of 1995 Annual Meeting and Proxy Statement.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Registrant hereby incorporates by reference certain transactions with
directors and information with respect to indebtedness of management which is
contained in Table VI and the accompanying text set forth under the caption
"Compensation of Executive Officers" in its Notice of 1995 Annual Meeting and
Proxy Statement.
8
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PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(3) The following exhibits are filed by Registrant pursuant to Item
601 of Regulation S-K:
<TABLE>
<S> <C>
3.1 -- Restated Certificate of Incorporation dated May 5, 1992, incorporated
by reference to Exhibit 3.1 to Form 10-Q for the quarter ended March
31, 1992.
3.2 -- By-Laws adopted on December 23, 1986, incorporated by reference to
Exhibit 3.2 to Form S-4 Registration Statement filed on March 20,
1987.
10.1* -- Employment Agreement dated October 1, 1990 between UST and Joseph R.
Taddeo, an Executive Officer, incorporated by reference to Exhibit
10.1 to Form 10-Q for the quarter ended September 30, 1990.
10.2* -- Form of Employment Agreement dated October 20, 1986 between United
States Tobacco Company (subsequently assumed by UST) and Vincent A.
Gierer, Jr., an Executive Officer, incorporated by reference to
Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1986.
10.3* -- Employment Agreement dated December 1, 1993 between UST and John J.
Bucchignano, an Executive Officer, incorporated by reference to
Exhibit 10.3 to Form 10-K for the fiscal year ended December 31,
1993.
10.4* -- Form of Severance Agreement dated October 27, 1986 between United
States Tobacco Company (subsequently assumed by UST) and nonexecutive
officers, incorporated by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended September 30, 1990.
10.5* -- 1982 Stock Option Plan restated as of March 22, 1989, incorporated by
reference to Exhibit 4.1 to Form S-8 Registration Statement filed on
April 14, 1989.
10.6* -- 1992 Stock Option Plan, effective as of May 5, 1992, incorporated by
reference to Appendix A to the UST 1992 Notice of Annual Meeting and
Proxy Statement dated March 27, 1992.
10.7* -- Incentive Compensation Plan, as restated as of January 1, 1994,
incorporated by reference to Exhibit 10.7 for Form 10-K for the
fiscal year ended December 31, 1993.
10.8* -- Officers' Supplemental Retirement Plan, as restated as of December 1,
1992, incorporated by reference to Exhibit 10.7 to Form 10-K for the
fiscal year ended December 31, 1992.
10.9 -- Nonemployee Directors' Retirement Plan, effective as of January 1,
1988, incorporated by reference to Exhibit 10.8 to Form 10-K for the
fiscal year ended December 31, 1992.
10.10 -- Directors' Supplemental Medical Plan, amended and restated as of
February 16, 1995.
13.1 -- Industry Segment Data pertaining to the years 1992 through 1994.
13.2 -- Market for Registrant's Common Equity and Related Stockholder
Matters.
13.3 -- Selected Financial Data.
13.4 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.
13.5 -- Financial Statements and Supplementary Data.
</TABLE>
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ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K -- (CONTINUED)
<TABLE>
<S> <C>
21.1 -- Subsidiaries of UST.
23.1 -- Consent of Independent Auditors.
27.1 -- Financial Data Schedule.
</TABLE>
(b) No current reports on Form 8-K were filed during the fourth quarter of
Registrant's most recent fiscal year.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of the rules governing the preparation of
this Report.
10
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SIGNATURE PAGE
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
UST Inc.
Date: February 16, 1995
By: VINCENT A. GIERER, JR.
----------------------------------
VINCENT A. GIERER, JR.
CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE
OFFICER AND PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C> <C>
Chairman of the Board,
Chief Executive Officer
and President (Principal
February 16, 1995 Executive Officer) VINCENT A. GIERER, JR.
-------------------------------------------
VINCENT A. GIERER, JR.
Executive Vice President
and Chief Financial
Officer
(Principal Financial
February 16, 1995 Officer) JOHN J. BUCCHIGNANO
-------------------------------------------
JOHN J. BUCCHIGNANO
Controller
(Principal Accounting
February 16, 1995 Officer) ROBERT T. D'ALESSANDRO
-------------------------------------------
ROBERT T. D'ALESSANDRO
February 16, 1995 Chairman Emeritus LOUIS F. BANTLE
-------------------------------------------
LOUIS F. BANTLE
February 16, 1995 Director JOHN J. BUCCHIGNANO
-------------------------------------------
JOHN J. BUCCHIGNANO
February 16, 1995 Director JAMES W. CHAPIN
-------------------------------------------
JAMES W. CHAPIN
February 16, 1995 Director EDWARD H. DEHORITY, JR.
-------------------------------------------
EDWARD H. DEHORITY, JR.
February 16, 1995 Chairman of the Board VINCENT A. GIERER, JR.
-------------------------------------------
VINCENT A. GIERER, JR.
February 16, 1995 Director P.X. KELLEY
-------------------------------------------
P.X. KELLEY
February 16, 1995 Director ALBERT H. LEADER
-------------------------------------------
ALBERT H. LEADER
February 16, 1995 Director RALPH L. ROSSI
-------------------------------------------
RALPH L. ROSSI
February 16, 1995 Director SPENCER R. STUART
-------------------------------------------
SPENCER R. STUART
February 16, 1995 Director JOSEPH R. TADDEO
-------------------------------------------
JOSEPH R. TADDEO
February 16, 1995 Director JOHN P. WARWICK
-------------------------------------------
JOHN P. WARWICK
</TABLE>
11
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
3.1 -- Restated Certificate of Incorporation dated May 5, 1992, incorporated by reference
to Exhibit 3.1 to Form 10-Q for the quarter ended March 31, 1992.
3.2 -- By-Laws adopted on December 23, 1986, incorporated by reference to Exhibit 3.2 to
Form S-4 Registration Statement filed on March 20, 1987.
10.1* -- Employment Agreement dated October 1, 1990 between UST and Joseph R. Taddeo, an
Executive Officer, incorporated by reference to Exhibit 10.1 to Form 10-Q for the
quarter ended September 30, 1990.
10.2* -- Form of Employment Agreement dated October 20, 1986 between United States Tobacco
Company (subsequently assumed by UST) and Vincent A. Gierer, Jr., an Executive
Officer, incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter
ended September 30, 1986.
10.3* -- Employment Agreement dated December 1, 1993 between UST and John J. Bucchignano, an
Executive Officer, incorporated by reference to Exhibit 10.3 to Form 10-K for the
fiscal year ended December 31, 1993.
10.4* -- Form of Severance Agreement dated October 27, 1986 between United States Tobacco
Company (subsequently assumed by UST) and nonexecutive officers, incorporated by
reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1990.
10.5* -- 1982 Stock Option Plan restated as of March 22, 1989, incorporated by reference to
Exhibit 4.1 to Form S-8 Registration Statement filed on April 14, 1989.
10.6* -- 1992 Stock Option Plan, effective as of May 5, 1992, incorporated by reference to
Appendix A to the UST 1992 Notice of Annual Meeting and Proxy Statement dated March
27, 1992.
10.7* -- Incentive Compensation Plan, as restated as of January 1, 1994, incorporated by
reference to Exhibit 10.7 for Form 10-K for the fiscal year ended December 31,
1993.
10.8* -- Officers' Supplemental Retirement Plan, as restated as of December 1, 1992,
incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended
December 31, 1992.
10.9 -- Nonemployee Directors' Retirement Plan, effective as of January 1, 1988,
incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended
December 31, 1992.
10.10 -- Directors' Supplemental Medical Plan amended and restated as of February 16, 1995.
13.1 -- Industry Segment Data pertaining to the years 1992 through 1994.
13.2 -- Market for Registrant's Common Equity and Related Stockholder Matters.
13.3 -- Selected Financial Data.
13.4 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations.
13.5 -- Financial Statements and Supplementary Data.
21.1 -- Subsidiaries of UST.
23.1 -- Consent of Independent Auditors.
27.1 -- Financial Data Schedule.
</TABLE>
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of the rules governing the preparation of
this Report.
<PAGE> 1
EXHIBIT 10.10
UST INC.
DIRECTORS' SUPPLEMENTAL MEDICAL PLAN
1. Purpose; Applicability. The purpose of the Plan is to provide
supplemental medical benefits to nonemployee members of the Board of Directors
of UST Inc. (the "Company"). The Plan was adopted as of January 1, 1994 and
amended and restated to add a new Section 3 as of February 16, 1995. The Plan
shall be applicable to all current or future directors of the Company, other
than directors who are employees or former employees of the Company or its
subsidiaries, whether direct or indirect ("Eligible Directors"). Neither the
spouse of an Eligible Director nor any other member of an Eligible Director's
family shall be eligible for coverage under the Plan.
2. Benefits. The Company, or any third party administrator appointed by
the Company, shall reimburse each Eligible Director for the reasonable,
medically related expenses incurred by such Director for deductibles,
coinsurance, co-pays, prescription drugs, physician charges, medically related
charges, annual physicals, professional nursing care, medically related
transportation and lodging, special health equipment, vision care, eyeglasses,
contact lenses and hearing aids ("Covered Expenses"); provided, however, that
(i) the amount of Covered Expenses incurred in any calendar year for which an
Eligible Director may be reimbursed shall not exceed $7,500, and (ii) Covered
Expenses shall not include cosmetic surgery, insurance premiums, hot tubs
(etc.), care not approved by a physician, act of war, free services, or claims
covered by any other health plan.
3. Continuing Coverage. Coverage under the Plan shall continue after an
Eligible Director's service as a director ceases for any reason, for the same
number of months as the number of full months that the Eligible Director shall
have served as a director; provided, however, that in the event an Eligible
Director dies before the end of the period in which payments are to be made,
coverage shall cease as of the last day of the month in which occurs the death
of such Director.
4. Administration. The Company, or any third party administrator appointed
by the Company, may establish such reasonable rules and conditions for the
submission and reimbursement of claims as it shall in its discretion determine.
5. No Right of Service. Nothing contained in this Plan shall give any
Director the right to remain as a director.
6. Nontransferability. No amounts payable under the Plan shall be
transferable by the Eligible Director.
7. Amendments to Plan. The Board of Directors of the Company may, by its
duly taken action, at any time terminate or from time to time modify or suspend
the Plan, in whole or in part, except that termination, modification or
suspension of the Plan shall not, without the consent of the affected Eligible
Directors, adversely affect any right of any such Director to receive benefits
that have previously accrued.
8. Governing Law. The Plan shall be governed and construed in accordance
with the laws of the State of Delaware.
<PAGE> 1
EXHIBIT 13.1
UST
CONSOLIDATED INDUSTRY SEGMENT DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
Tobacco
Smokeless tobacco.................................... $1,045,546 $ 930,465 $ 832,929
Other tobacco products............................... 12,715 21,124 51,048
---------- ---------- ----------
1,058,261 951,589 883,977
Wine................................................... 89,170 80,205 70,458
Other.................................................. 78,737 81,489 87,603
Elimination of intersegment sales...................... (3,152) (2,880) (2,663)
---------- ---------- ----------
NET SALES.................................... $1,223,016 $1,110,403 $1,039,375
========= ========= =========
OPERATING PROFIT
Tobacco................................................ $653,695 $572,062 $508,775
Wine................................................... 8,832 6,126 4,770
Other.................................................. 1,485 9,228 9,630
---------- ---------- ----------
OPERATING PROFIT............................. 664,012 587,416 523,175
Corporate expenses................................... (23,284) (22,664) (22,412)
Interest (expense) income, net....................... (92) 2,004 1,866
Gain on disposal of product line..................... -- 35,029 --
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES............... $640,636 $601,785 $502,629
========= ========= =========
IDENTIFIABLE ASSETS AT DECEMBER 31
Tobacco.............................................. $414,888 $394,805 $371,560
Wine................................................. 164,950 167,157 150,527
Other................................................ 88,529 95,674 91,620
Corporate............................................ 72,869 48,559 60,258
---------- ---------- ----------
$741,236 $706,195 $673,965
========= ========= =========
CAPITAL EXPENDITURES (DISPOSITIONS), NET
Tobacco.............................................. $14,407 $38,797 $19,438
Wine................................................. 9,253 9,354 8,604
Other................................................ (536) 3,648 732
Corporate............................................ 560 2,711 1,279
---------- ---------- ----------
$23,684 $54,510 $30,053
========= ========= =========
DEPRECIATION
Tobacco.............................................. $18,307 $17,069 $15,158
Wine................................................. 6,562 5,877 5,265
Other................................................ 1,834 2,027 2,287
Corporate............................................ 707 933 855
---------- ---------- ----------
$27,410 $25,906 $23,565
========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 13.2
UST
DIVIDENDS AND STOCK PRICES
CASH DIVIDENDS
The Company increased its 1994 cash dividend by 16.7 percent to an annual
rate of $1.12 per share. Since 1991, the dividend rate has increased 69.7
percent reflecting an average annual increase of 19.3 percent. Total cash
dividends paid by the Company in 1994 were $225.7 million or 58.2 percent of net
earnings. Cash dividends paid to stockholders have exceeded 50 percent of net
earnings in each of the last three years.
In December 1994, the Board of Directors approved a first quarter 1995
dividend of 32 1/2 cents per share. This equates to an indicated annual rate of
$1.30, and represents an increase of 16.1 percent. The Company has paid cash
dividends without interruption since 1912. Future dividends depend on many
factors, including internal estimates of future performance and the Company's
need for funds.
STOCK PRICES
UST shares are traded on the New York Stock Exchange and the Pacific Stock
Exchange, ticker symbol -- UST.
The number of stockholders of record at December 31, 1994 was 13,116. The
following table sets forth dividends paid per share and the high and low market
prices for the year and each quarter of 1994 and 1993.
<TABLE>
<CAPTION>
MARKET PRICE
CASH PER COMMON SHARE
DIVIDENDS ----------------
PAID HIGH LOW
--------- ----- -----
<S> <C> <C> <C>
1st Quarter
1994........................................ $ .28 $29 5/8 $24 3/8
1993........................................ .24 32 3/4 24 3/4
2nd Quarter
1994........................................ .28 28 1/2 23 5/8
1993........................................ .24 30 7/8 25 7/8
3rd Quarter
1994........................................ .28 31 1/2 27 1/4
1993........................................ .24 29 7/8 26 1/4
4th Quarter
1994........................................ .28 29 3/8 26
1993........................................ .24 31 3/8 24 3/8
Year
1994........................................ 1.12 31 1/2 23 5/8
1993........................................ .96 32 3/4 24 3/8
</TABLE>
<PAGE> 1
EXHIBIT 13.3
UST
CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales............................. $1,223,016 $1,110,403 $1,039,375 $904,427 $761,741 $679,322
Cost of products sold................. 251,944 246,445 256,796 227,546 191,824 185,464
Selling, advertising and
administrative expenses............. 330,344 299,206 281,816 253,076 220,927 195,433
---------- ---------- ---------- -------- -------- --------
Operating income...................... 640,728 564,752 500,763 423,805 348,990 298,425
Other (expense) income:
Interest (expense) income, net...... (92) 2,004 1,866 2,279 3,203 3,190
Gain on disposal of product line.... -- 35,029 -- -- -- --
---------- ---------- ---------- -------- -------- --------
Earnings before income taxes and
cumulative effect of accounting
changes............................. 640,636 601,785 502,629 426,084 352,193 301,615
---------- ---------- ---------- -------- -------- --------
Income taxes.......................... 253,110 232,893 190,071 160,179 128,918 111,128
---------- ---------- ---------- -------- -------- --------
Earnings before cumulative effect of
accounting changes.................. 387,526 368,892 312,558 265,905 223,275 190,487
Cumulative effect of accounting
changes (net of income tax
benefit)............................ -- 19,846 -- -- -- --
---------- ---------- ---------- -------- -------- --------
Net earnings.......................... $ 387,526 $ 349,046 $ 312,558 $265,905 $223,275 $190,487
========== ========== ========== ========= ========= =========
PER SHARE DATA
Primary earnings per common share
before cumulative effect of
accounting changes.................. $1.87 $1.71 $1.41 $1.18 $.98 $.82
Primary earnings per common share..... 1.87 1.62 1.41 1.18 .98 .82
Dividends per common share............ 1.12 .96 .80 .66 .55 .46
Market price per common share:
High................................ 31 1/2 32 3/4 35 3/8 33 7/8 18 1/4 15 3/8
Low................................. 23 5/8 24 3/8 25 3/8 16 3/8 12 3/8 9 5/8
FINANCIAL CONDITION
Current assets........................ $381,937 $334,996 $330,208 $305,430 $265,854 $275,954
Current liabilities................... 160,755 106,642 81,208 95,455 68,660 66,643
Working capital....................... 221,182 228,354 249,000 209,975 197,194 209,311
Ratio of current assets to current
liabilities......................... 2.4:1 3.1:1 4.1:1 3.2:1 3.9:1 4.1:1
Total assets.......................... 741,236 706,195 673,965 656,513 622,595 630,155
Long-term debt........................ 125,000 40,000 -- -- 3,060 6,789
Deferred taxes........................ 5,065 7,955 46,358 50,928 53,301 55,108
Stockholders' equity.................. 361,669 462,972 516,606 482,875 473,873 482,254
OTHER DATA
Common stock repurchased.............. $298,843 $236,704 $212,581 $184,424 $151,259 $97,517
Dividends paid on common shares....... $225,715 $199,725 $167,951 $139,670 $118,295 $101,197
Dividends paid as a percentage of net
earnings............................ 58.2% 57.2% 53.7% 52.5% 53.0% 53.1%
Return on net sales................... 31.7% 31.4% 30.1% 29.4% 29.3% 28.0%
Return on average assets.............. 53.5% 50.6% 47.0% 41.6% 35.6% 31.0%
Return on average stockholders'
equity.............................. 94.0% 71.3% 62.5% 55.6% 46.7% 40.7%
Percent of long-term debt to
stockholders' equity................ 34.6% 8.6% -- -- .6% 1.4%
Average number of common shares (in
thousands) -- primary............... 207,504 215,719 222,033 225,130 227,667 233,305
</TABLE>
- ---------------
See Management's Discussion and Analysis.
All share data have been adjusted to reflect the two-for-one stock splits
distributed on January 27, 1992, 1989 and 1987.
<PAGE> 2
UST
CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1988 1987 1986 1985 1984
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales........................................... $615,614 $573,298 $516,031 $478,347 $442,367
Cost of products sold............................... 174,560 168,942 158,719 156,783 156,000
Selling, advertising and administrative
expenses.......................................... 180,839 166,957 157,038 144,442 121,314
-------- -------- -------- -------- --------
Operating income.................................... 260,215 237,399 200,274 177,122 165,053
Other (expense) income:
Interest (expense) income, net.................... 1,068 (2,768) (5,534) (5,898) (5,147)
Gain on disposal of product line.................. -- -- -- -- --
-------- -------- -------- -------- --------
Earnings before income taxes and
cumulative effect of accounting changes........... 261,283 234,631 194,740 171,224 159,906
-------- -------- -------- -------- --------
Income taxes........................................ 99,133 103,760 90,802 77,695 76,179
-------- -------- -------- -------- --------
Earnings before cumulative effect of
accounting changes................................ 162,150 130,871 103,938 93,529 83,727
Cumulative effect of accounting changes
(net of income tax benefit)....................... -- -- -- -- --
-------- -------- -------- -------- --------
Net earnings........................................ $162,150 $130,871 $103,938 $ 93,529 $ 83,727
========= ========= ========= ========= =========
PER SHARE DATA
Primary earnings per common share before
cumulative effect of accounting changes........... $.70 $.56 $.46 $.41 $.36
Primary earnings per common share................... .70 .56 .46 .41 .36
Dividends per common share.......................... .37 .30 .24 1/4 .21 1/2 .18
Market price per common share:
High.............................................. 10 1/2 8 5 5/8 4 7/8 5 3/8
Low............................................... 6 4 7/8 3 3/4 3 5/8 3 7/8
FINANCIAL CONDITION
Current assets...................................... $291,006 $260,530 $250,460 $222,378 $183,927
Current liabilities................................. 69,935 63,242 60,895 55,732 65,077
Working capital..................................... 221,071 197,288 189,565 166,646 118,850
Ratio of current assets to current liabilities...... 4.2:1 4.1:1 4.1:1 4.0:1 2.8:1
Total assets........................................ 597,955 548,951 523,927 468,125 408,465
Long-term debt...................................... 21,828 37,131 47,061 57,039 35,999
Deferred taxes...................................... 52,939 47,465 44,412 31,978 26,298
Stockholders' equity................................ 453,253 401,113 371,559 323,376 281,091
OTHER DATA
Common stock repurchased............................ $67,356 $50,865 $9,907 $16,288 $30,310
Dividends paid on common shares..................... $81,672 $66,789 $54,744 $47,835 $40,494
Dividends paid as a percentage of net
earnings.......................................... 50.4% 51.0% 52.7% 51.1% 48.4%
Return on net sales................................. 26.3% 22.8% 20.1% 19.6% 18.9%
Return on average assets............................ 28.3% 24.4% 21.0% 21.3% 21.4%
Return on average stockholders' equity.............. 38.0% 33.9% 29.9% 30.9% 30.9%
Percent of long-term debt to stockholders'
equity............................................ 4.8% 9.3% 12.7% 17.6% 12.8%
Average number of common shares (in
thousands) -- primary............................. 230,417 232,370 227,142 228,350 234,140
</TABLE>
<PAGE> 1
EXHIBIT 13.4
UST
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
1994 compared with 1993
Consolidated net sales rose to $1.22 billion, a 10.1 percent increase over
1993.
Tobacco segment sales increased 11.2 percent, and accounted for 94.7
percent of the $112.6 million sales increase. The Wine segment also contributed
to the overall sales gain, posting an 11.2 percent increase. Other segment sales
were lower due to the absence of Zig-Zag cigarette papers and related products
resulting from the sale of its distribution rights on March 31, 1993, partially
offset by increased sales in the entertainment business.
Over the last three years, net sales have increased 35.2 percent at an
average annual rate of 10.6 percent.
Cost of products sold increased 2.2 percent to $251.9 million. Cost of
products sold for the Tobacco segment was slightly higher, as higher unit costs
and increased unit volume for moist smokeless tobacco were offset by lower costs
for other tobacco products resulting from significant volume declines. Wine
segment costs were higher due to volume gains which were partially offset by
lower unit costs. Costs for the Other segment were lower primarily due to the
absence of cigarette papers and lower Canadian excise taxes, partially offset by
increased costs due to volume gains for the entertainment business.
Gross profit increased $107.1 million, or 12.4 percent over 1993 primarily
due to higher selling prices and increased unit volume for moist smokeless
tobacco.
The gross profit percentage rose to 79.4 percent mainly due to the
favorable results for moist smokeless tobacco and volume declines for lower
margin products. The gross profit percentage has increased 4.6 percentage points
over the last three years.
Selling, advertising and administrative expenses rose 10.4 percent to
$330.3 million. Selling and advertising expenses increased for the Tobacco and
Other segments and remained stable in the Wine segment. Administrative and other
expenses were generally higher due to increases in salary and related costs,
increased spending associated with addressing legal and regulatory issues, the
early adoption of Statement of Financial Accounting Standards (SFAS) No. 116,
"Accounting for Contributions Received and Contributions Made" and reserves
recorded for nonstrategic assets.
The Company incurred net interest expense as a result of interest expense
on short-term borrowings and long-term debt exceeding income from cash
equivalent investments.
The comparison of earnings per share for the year 1994 as compared to 1993,
was adversely affected by 3 cents due to several events which occurred in 1993.
On March 31, 1993, the Company sold its distribution rights for Zig-Zag
cigarette papers and related products which resulted in an after-tax gain of $22
million or 10 cents per share. In addition, operating results for the year of
1994 do not include Zig-Zag and related products amounting to 2 cents per share.
Also in 1993, the Company adopted SFAS No. 106 and SFAS No. 109, which reduced
primary earnings per share by 9 cents.
Pretax profit margins decreased slightly to 52.4 percent on earnings before
income taxes of $640.6 million. Over the last three years, earnings before
income taxes have increased 50.4 percent at an average annual rate of 14.7
percent, while pretax margins have averaged 51.7 percent.
The overall tax rate for 1994 increased slightly.
Net earnings increased for the 34th consecutive year rising 11 percent to
$387.5 million. Primary earnings per share rose to $1.87, a 15.4 percent
increase over 1993. Primary earnings per share have increased 58.5 percent over
the last three years at an average annual rate of 16.6 percent.
1993 compared with 1992
Consolidated net sales rose 6.8 percent to $1.11 billion.
<PAGE> 2
The Tobacco segment accounted for 95.2 percent of the $71 million sales
increase. The Wine segment also contributed to the overall sales gain, posting a
13.8 percent increase. Other segment sales were lower due to the absence of
Zig-Zag cigarette papers and related products resulting from the sale of its
distribution rights on March 31, 1993.
Cost of products sold decreased 4 percent to $246.4 million. Cost of
products sold for the Tobacco segment was lower due to significant volume
declines for other tobacco products which was partially offset by higher unit
costs and increased unit volume for moist smokeless tobacco. Costs for the Other
segment were lower primarily due to the absence of cigarette papers, while Wine
segment unit costs were higher.
Gross profit increased $81.4 million, or 10.4 percent over 1992, primarily
due to higher selling prices and increased unit volume for moist smokeless
tobacco.
The gross profit percentage rose to 77.8 percent, mainly due to favorable
results for moist smokeless tobacco and volume declines for lower margin
products.
Selling, advertising and administrative expenses rose 6.2 percent to $299.2
million. Selling and advertising expenses increased for all segments.
Administrative and other expenses were generally lower, with increases in salary
and related costs being offset by lower spending in other areas and gains
recorded on the sale of corporate investments.
Operating income increased 12.8 percent in 1993 to $564.8 million.
Net interest income resulted as income from cash equivalent investments
exceeded interest expense.
Results for 1993, as compared to 1992, were affected by several events. The
Company sold its distribution rights for Zig-Zag cigarette papers and related
products on March 31, 1993 for $39 million in cash and additional consideration
based on future earnings for the next ten years. This transaction resulted in an
after-tax gain of $22 million, amounting to 10 cents per share. The absence of
these products in operating results for the remainder of 1993 reduced primary
earnings per share by 2 cents. In addition, the "Omnibus Budget Reconciliation
Act," which increased the statutory corporate federal income tax rate to 35
percent retroactive to January 1, 1993, reduced primary earnings per share by 3
cents for the year. Also in 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 109,
"Accounting for Income Taxes." As a result of adopting SFAS No. 106 the Company
recorded a one-time charge to net earnings of $32.7 million. The adoption of
SFAS No. 109 resulted in an increase in net earnings of $12.8 million. The
cumulative effect of these accounting changes reduced primary earnings per share
by 9 cents.
Profit margins rose to 54.2 percent on earnings before income taxes and the
cumulative effect of accounting changes of $601.8 million.
The overall tax rate for 1993 increased due to the higher statutory
corporate federal income tax rate.
Net earnings increased 11.7 percent to $349 million. Primary earnings per
share before the cumulative effect of accounting changes rose to $1.71, a 21.3
percent increase over 1992. Primary earnings per share, after the cumulative
effect of accounting changes, rose to $1.62, a 14.9 percent increase over 1992.
TOBACCO SEGMENT
1994 compared with 1993
Tobacco segment sales increased 11.2 percent to $1.06 billion and accounted
for 86.5 percent of consolidated revenues. Smokeless tobacco sales increased
12.4 percent to $1.05 billion, representing 85.5 percent of consolidated sales.
Other tobacco product sales decreased significantly due to volume declines.
The increase in smokeless tobacco sales resulted from higher selling prices
and unit volume gains for moist smokeless tobacco. Domestic unit volume for
moist smokeless tobacco products increased 2.6 percent in 1994 to 627.4 million
cans, as compared with the similar period for 1993. Fourth quarter unit volume
increased 4.1 percent to 158.2 million cans, compared with the similar 1993
period. The unit volume
<PAGE> 3
comparison for the fourth quarter of 1994 to the similar period in the prior
year was favorably affected by distributor inventory build-up in December.
Cost of sales for the Tobacco segment was slightly higher, as higher unit
costs and increased unit volume for moist smokeless tobacco were offset by lower
costs due to significant volume declines for other tobacco products. Moist
smokeless tobacco unit costs increased slightly due to higher leaf tobacco costs
and overhead expenses.
Gross profit for the segment rose substantially during 1994. Higher selling
prices and unit volume gains for moist smokeless tobacco were the primary
reasons for the increase.
Selling expenses increased 7.5 percent, primarily due to higher costs
associated with promotional activities as well as higher salaries for the sales
force and support personnel.
Advertising costs increased slightly as compared with the prior year.
Selling and advertising expenses were directed at the promotion and support of
our moist smokeless tobacco products. Administrative expenses were significantly
higher primarily due to expenses incurred to address legal and regulatory issues
and increased salary and related costs.
Operating profit increased 14.3 percent to $653.7 million.
1993 compared with 1992
Tobacco segment sales rose to $951.6 million for an increase of 7.6 percent
and accounted for 85.7 percent of consolidated revenues. Smokeless tobacco sales
increased 11.7 percent to $930.5 million, and represented 83.8 percent of
consolidated sales. Other tobacco product sales decreased significantly due to
lower unit volume.
The increase in smokeless tobacco sales resulted from higher selling prices
and unit volume gains for moist smokeless tobacco. Domestic unit volume for
moist smokeless tobacco products increased 2.3 percent in 1993, to 611.6 million
cans, which included one less shipping day as compared to 1992. On an equivalent
shipping day basis unit volume for domestic moist smokeless tobacco would have
increased 3.1 percent.
Moist smokeless tobacco unit costs increased slightly due to higher leaf
tobacco costs and increased excise taxes imposed January 1, 1993. Cost of sales
for the Tobacco segment was significantly lower due to decreased unit volume for
other tobacco products which have higher unit costs as compared to moist
smokeless tobacco.
Gross profit for the segment rose substantially during 1993 as a result of
higher selling prices and unit volume gains for moist smokeless tobacco.
Selling expenses increased 12.9 percent, primarily due to higher costs
associated with promotional activities and higher salaries and increased
expenses for the sales force.
Advertising costs increased significantly as compared with the prior year.
Selling and advertising expenses were directed at the promotion and support of
our moist smokeless tobacco products, including two new flavors which were
introduced during 1993. Administrative expenses were lower as increased salary
and related costs were offset by lower spending in other areas.
Operating profit increased 12.4 percent to $572.1 million.
WINE SEGMENT
1994 compared with 1993
Wine segment revenue increased 11.2 percent to $89.2 million and accounted
for 7.3 percent of consolidated sales. Higher case volume for premium wine
accounted for the increase. Case volume for premium wine increased 13.2 percent.
Overall case volume for the Wine segment increased 9.2 percent. Chateau Ste.
Michelle and Columbia Crest, our two leading brands of premium wine, accounted
for approximately 70 percent of total wine revenue.
<PAGE> 4
Unit costs decreased slightly primarily due to excellent harvest yields in
1992 and 1993.
The Company uses grapes both harvested from its own vineyards and purchased
from regional growers in its wine production. Total grape tonnage harvested and
purchased in 1994 was significantly lower than the exceptional harvest
experienced in 1993. As a result of lower harvest yields, the cost for grapes
was slightly higher which will affect future unit costs. However, the 1994
harvest level was adequate to enable the Company to meet its requirements for
premium wine.
Gross profit for the Wine segment increased 13.1 percent primarily as a
result of an increase in premium wine case volume and slightly lower unit costs.
Selling, advertising and administrative expenses remained stable in 1994.
Selling and advertising expenses were directed toward expanding the brand
awareness of premium wines, primarily Columbia Crest and Domaine Ste. Michelle.
Administrative and other expenses, primarily salary and related expenses,
were slightly higher.
The Wine segment recorded an operating profit of $8.8 million in 1994, an
increase of 44.2 percent over 1993.
1993 compared with 1992
Wine segment revenue increased 13.8 percent to $80.2 million and accounted
for 7.2 percent of consolidated sales. Higher case volume for premium wine
accounted for the increase. Overall case volume for the Wine segment increased
7.6 percent, while case volume for premium wine increased 14.4 percent.
Overall, unit costs increased primarily due to higher grape costs resulting
from low harvest yields in prior years.
Total grape tonnage harvested and purchased in 1993 was significantly
higher than in 1992, resulting in increased inventory levels, which will have a
favorable effect on future unit costs.
Gross profit for the Wine segment increased 10.7 percent primarily as a
result of an increase in premium wine case volume partially offset by higher
unit costs.
Selling, advertising and administrative expenses increased in 1993. Selling
expenses increased primarily to support higher volume levels of premium brands.
Advertising expenses were higher and were aimed at supporting and expanding
national brand awareness of our existing premium wines and new products.
Administrative and other expenses were slightly lower as higher salary and
related costs were offset by lower spending in other areas.
The Wine segment recorded an operating profit of $6.1 million in 1993.
OTHER SEGMENT
1994 compared with 1993
Other segment sales were $78.7 million, a 3.4 percent decrease from 1993,
and accounted for 6.4 percent of consolidated sales. Other segment sales were
lower due to the sale of the distribution rights for Zig-Zag cigarette papers
and related products on March 31, 1993, partially offset by higher revenues for
the entertainment business.
The absence of the cigarette paper operations for the entire year, higher
spending associated with developing international markets and reserves recorded
for nonstrategic assets more than offset favorable results for the entertainment
business. Overall, the Other segment recorded an operating profit of $1.5
million in 1994.
<PAGE> 5
1993 compared with 1992
Other segment sales decreased 7 percent to $81.5 million and accounted for
7.3 percent of consolidated sales. Other segment sales were lower due to the
sale of the distribution rights for Zig-Zag cigarette papers and related
products on March 31, 1993. The absence of these products for the remainder of
1993 had an adverse effect on the operating results for the Other segment.
Operating profit was significantly lower for tobacco-related products due
to the sale of the cigarette paper business, but was partially offset by
favorable results for other businesses. The Other segment recorded an operating
profit of $9.2 million in 1993.
HEALTH CARE REFORM
As introduced by the Clinton Administration during the 103rd Congress, The
Health Security Act proposed, among other things, a significant federal excise
tax increase on all tobacco products, including moist snuff. This proposal
failed last year. We expect some form of health care debate during the 104th
Congress and we will vigorously oppose any proposed increase in the federal
excise tax on our tobacco products. Accordingly, the Company is not able to
predict the amount, if any, by which the federal excise tax rate may increase,
or assess the future effect that any such increase may have on its tobacco
business.
FINANCIAL CONDITION
SOURCES AND USES OF CASH -- OPERATIONS
Cash provided by operating activities is the major source of funds
available to the Company. Cash from operations increased to $453.2 million in
1994, as compared to $367.6 million in 1993 and $288.8 million in 1992. The
primary reason for the increase was higher earnings generated by the Tobacco
segment.
Significant inventories of leaf tobacco are required primarily in
connection with our smokeless tobacco products. During the last three years,
$175.4 million was used for the purchase of leaf tobacco and related costs. In
addition, the cost of grapes harvested and purchased totaled $64.7 million over
the last three years.
INVESTING ACTIVITIES
Net cash used in investing activities was $21.5 million in 1994. Purchases
of property, plant and equipment over the last three years totaled $119.9
million.
Major areas of capital spending from 1992 through 1994 were:
Tobacco segment
- - Manufacturing, processing and packaging equipment
- - Automobiles for the sales force
- - Building renovations
Wine segment
- - Storage capacity and processing equipment
- - New facilities and building renovations
- - Irrigation and vineyard development
Other segment
- - Equipment
- - Building additions and renovations
<PAGE> 6
Shared assets
- - Transportation equipment -- primarily aircraft
- - Headquarters, conference and training facility renovations
In 1995, the Company's capital program is expected to approximate $52
million, and will primarily include improvements to the tobacco processing and
manufacturing operations and the expansion of wine processing and storage
facilities.
In 1993 the Company sold its distribution rights for Zig-Zag cigarette
papers and related products for $39 million in cash and additional consideration
based on future earnings.
FINANCING ACTIVITIES
Other significant sources and uses of cash over the last three years have
included long-term borrowings, the issuance of common stock, stock repurchases
and cash dividends. During 1994, the Company entered into a $200 million
revolving credit and term loan agreement with several banks replacing the
similar $50 million credit facility. The Company has borrowed $125 million under
this credit facility since 1993 and used the funds for its share repurchase
program. The remaining $75 million is available and may be used for the stock
repurchase program depending on market conditions. (See Revolving Credit and
Term Loan Agreement and Short-Term Lines of Credit Note.)
Common stock was issued upon the exercise of options granted under the
Company's stock option plans. Options are granted to employees who have made or
who are expected to make contributions to the growth of the Company. The Company
receives income tax benefits upon the exercise of certain of these options.
Since 1991, funds received from the exercise of options, together with these tax
benefits, totaled $168.7 million.
During 1994, the Company continued its program to repurchase shares of its
common stock as authorized by the Board of Directors. In 1994, the Board of
Directors approved a new stock repurchase program, authorizing the Company to
repurchase up to 20 million shares of its common stock from time to time in open
market or negotiated transactions to be used in connection with employee benefit
programs and other corporate purposes. The new program commenced during the
fourth quarter of 1994, upon completion of the prior program, which provided for
the repurchase of up to 40 million shares.
During 1994, the Company repurchased 10.6 million shares at a cost of
$298.8 million. As of December 31, 1994, 15.8 million shares remained to be
repurchased under the new program.
It is the Company's philosophy that its stockholders should benefit
directly from increases in net earnings. Accordingly, the Company has regularly
increased dividend payments as earnings have risen. During the last three years,
cash dividends distributed to stockholders amounted to $593.4 million, totaling
56.6 percent of net earnings for the period.
LIQUIDITY
Sources of cash exceeded uses of cash by $25.4 million in 1994. The Company
anticipates that cash generated from operating activities will meet most of its
requirements in 1995. Seasonal purchases of leaf tobacco occasionally require
the Company to use short-term borrowings in the form of commercial paper, when
necessary, to augment cash generated by operating activities. In 1994 sufficient
cash was generated to meet these requirements and short-term borrowings were
limited. The Company anticipates that leaf tobacco purchases and related costs
in 1995 will increase to approximately $82 million as compared to $70 million
for 1994. Increased spending in 1995 reflects the Company's plan to maintain a
higher level of leaf tobacco inventory.
The ratio of current assets to current liabilities (current ratio) at
December 31, 1994 was 2.4 to 1 and has averaged 3.2 to 1 over the last three
years. Increases in accrued expenses and income taxes payable reduced the
current ratio from prior years. However, the Company continues to maintain a
strong liquidity position. Further enhancing this position is the fact that
certain inventories are carried at costs computed under the
<PAGE> 7
LIFO method. The average costs of these inventories was $41.8 million more than
the amount at which they are carried in the Consolidated Statement of Financial
Position at December 31, 1994.
The Company believes that adequate credit facilities are available through
committed short-term credit lines. The Company has available short-term lines of
credit with domestic and foreign banks totaling $100 million at December 31,
1994. The lines of credit are generally committed for a one-year period expiring
at various times during 1995 and provide for borrowing at prime rates. These
arrangements require commitment fees which are not significant. These facilities
can be used as bank financing or as support for commercial paper borrowing. The
commercial paper market is expected to continue as an attractive source of
funds. The Company has the highest ratings available on its commercial paper.
The Company intends to maintain appropriate facilities to ensure access to
credit markets providing sufficient financial resources and operational
flexibility.
CAPITAL RESOURCES
Over the last two years the Company has taken advantage of its strong
capital structure and relatively low interest rates in the marketplace and has
borrowed $125 million under its $200 million credit facility. This amount was
classified as long-term debt at December 31, 1994. These borrowings were used
for the stock repurchase program. Depending on market conditions the Company may
borrow the additional $75 million available under this credit facility in 1995
and use the proceeds for the stock repurchase program. (See Revolving Credit and
Term Loan Agreement and Short-Term Lines of Credit Note.)
The percentage of long-term debt outstanding to stockholders' equity is
34.6 percent. The Company had no short-term debt outstanding at December 31,
1994.
Stockholders' equity decreased in 1994, as the effects of the stock
repurchase program and dividend payments exceeded the effects of net earnings
and common stock issued under the Company's stock option plans.
The return on average stockholders' equity has increased by 38.4 percentage
points to 94 percent over the last three years.
<PAGE> 8
DIVIDENDS AND STOCK PRICES
CASH DIVIDENDS
The Company increased its 1994 cash dividend by 16.7 percent to an annual
rate of $1.12 per share. Since 1991, the dividend rate has increased 69.7
percent reflecting an average annual increase of 19.3 percent. Total cash
dividends paid by the Company in 1994 were $225.7 million or 58.2 percent of net
earnings. Cash dividends paid to stockholders have exceeded 50 percent of net
earnings in each of the last three years.
In December 1994, the Board of Directors approved a first quarter 1995
dividend of 32 1/2 cents per share. This equates to an indicated annual rate of
$1.30, and represents an increase of 16.1 percent. The Company has paid cash
dividends without interruption since 1912. Future dividends depend on many
factors, including internal estimates of future performance and the Company's
need for funds.
STOCK PRICES
UST shares are traded on the New York Stock Exchange and the Pacific Stock
Exchange, ticker
symbol -- UST.
The number of stockholders of record at December 31, 1994 was 13,116. The
following table sets foth dividends paid per share and the high and low market
prices for the year and each quarter of 1994 and 1993.
<TABLE>
<CAPTION>
MARKET PRICE
CASH PER COMMON SHARE
DIVIDENDS ----------------
PAID HIGH LOW
--------- ----- -----
<S> <C> <C> <C>
1st Quarter
1994........................................ $ .28 $29 5/8 $24 3/8
1993........................................ .24 32 3/4 24 3/4
2nd Quarter
1994........................................ .28 28 1/2 23 5/8
1993........................................ .24 30 7/8 25 7/8
3rd Quarter
1994........................................ .28 31 1/2 27 1/4
1993........................................ .24 29 7/8 26 1/4
4th Quarter
1994........................................ .28 29 3/8 26
1993........................................ .24 31 3/8 24 3/8
Year
1994........................................ 1.12 31 1/2 23 5/8
1993........................................ .96 32 3/4 24 3/8
</TABLE>
<PAGE> 9
GRAPHICAL INFORMATION INCLUDED IN EXHIBIT 13.4 IS DESCRIBED BELOW.
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS AND PERCENTAGES)
The following are bar graphs:
Consolidated Net Sales: 1992 - $1,039, 1993 - $1,110 and 1994 - $1,223.
Consolidated Gross Profit: 1992 - $783, 1993 - $864 and 1994 - $971.
Pretax Margins: 1992 - 48.4%, 1993 - 54.2% and 1994 - 52.4%.
Earnings Per Share: 1992 - $1.41, 1993 - $1.62 and 1994 - $1.87.
Tobacco Sales: 1992 - $884, 1993 - $952 and 1994 - $1,058.
Wine Sales: 1992 - $70, 1993 - $80 and 1994 - $89.
Other Sales: 1992 - $88, 1993 - $81 and 1994 - $79.
Net Cash Provided By Operating Activities: 1992 - $289, 1993 - $368 and
1994 - $453.
Return On Average Stockholders' Equity: 1992 - 62.5%, 1993 - 71.3% and 1994
- - 94.0%.
Dividends Per Share: 1992 - $.80, 1993 - $.96 and 1994 - $1.12.
The following bar graph illustrates the relationship between net earnings and
dividends paid:
Net Earnings: 1992 - $313, 1993 - $349 and 1994 - $388.
Dividends Paid: 1992 - $168, 1993 - $200 and 1994 - $226.
A pie chart illustrating the percentage of capital expenditures by segment for
1992 - 1994:
Tobacco 67%, Wine 25%, Other 4% and Corporate 4%.
<PAGE> 1
EXHIBIT 13.5
UST
CONSOLIDATED INDUSTRY SEGMENT DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
Tobacco
Smokeless tobacco.................................... $1,045,546 $ 930,465 $ 832,929
Other tobacco products............................... 12,715 21,124 51,048
---------- ---------- ----------
1,058,261 951,589 883,977
Wine................................................... 89,170 80,205 70,458
Other.................................................. 78,737 81,489 87,603
Elimination of intersegment sales...................... (3,152) (2,880) (2,663)
---------- ---------- ----------
NET SALES.................................... $1,223,016 $1,110,403 $1,039,375
========= ========= =========
OPERATING PROFIT
Tobacco................................................ $653,695 $572,062 $508,775
Wine................................................... 8,832 6,126 4,770
Other.................................................. 1,485 9,228 9,630
---------- ---------- ----------
OPERATING PROFIT............................. 664,012 587,416 523,175
Corporate expenses................................... (23,284) (22,664) (22,412)
Interest (expense) income, net....................... (92) 2,004 1,866
Gain on disposal of product line..................... -- 35,029 --
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES............... $640,636 $601,785 $502,629
========= ========= =========
IDENTIFIABLE ASSETS AT DECEMBER 31
Tobacco.............................................. $414,888 $394,805 $371,560
Wine................................................. 164,950 167,157 150,527
Other................................................ 88,529 95,674 91,620
Corporate............................................ 72,869 48,559 60,258
---------- ---------- ----------
$741,236 $706,195 $673,965
========= ========= =========
CAPITAL EXPENDITURES (DISPOSITIONS), NET
Tobacco.............................................. $14,407 $38,797 $19,438
Wine................................................. 9,253 9,354 8,604
Other................................................ (536) 3,648 732
Corporate............................................ 560 2,711 1,279
---------- ---------- ----------
$23,684 $54,510 $30,053
========= ========= =========
DEPRECIATION
Tobacco.............................................. $18,307 $17,069 $15,158
Wine................................................. 6,562 5,877 5,265
Other................................................ 1,834 2,027 2,287
Corporate............................................ 707 933 855
---------- ---------- ----------
$27,410 $25,906 $23,565
========= ========= =========
</TABLE>
<PAGE> 2
UST
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.............................................. $1,223,016 $1,110,403 $1,039,375
COSTS AND EXPENSES
Cost of products sold................................ 251,944 246,445 256,796
Selling, advertising and administrative.............. 330,344 299,206 281,816
---------- ---------- ----------
TOTAL COSTS AND EXPENSES............................... 582,288 545,651 538,612
---------- ---------- ----------
OPERATING INCOME....................................... 640,728 564,752 500,763
---------- ---------- ----------
OTHER (EXPENSE) INCOME
Interest (expense) income, net....................... (92) 2,004 1,866
Gain on disposal of product line..................... -- 35,029 --
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES................................... 640,636 601,785 502,629
---------- ---------- ----------
INCOME TAXES........................................... 253,110 232,893 190,071
---------- ---------- ----------
EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES.............................................. 387,526 368,892 312,558
---------- ---------- ----------
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Postretirement benefits other than pensions (net of
income tax benefit of $18,115).................... -- (32,690) --
Income taxes......................................... -- 12,844 --
---------- ---------- ----------
NET EARNINGS........................................... $ 387,526 $ 349,046 $ 312,558
========= ========= =========
EARNINGS PER SHARE
Primary earnings before cumulative effect of
accounting changes................................ $1.87 $1.71 $1.41
Cumulative effect of accounting changes.............. -- (.09) --
NET EARNINGS PER SHARE
Primary.............................................. $1.87 $1.62 $1.41
Fully diluted........................................ $1.87 $1.62 $1.41
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Primary.............................................. 207,504 215,719 222,033
Fully diluted........................................ 207,576 215,779 222,423
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 3
UST
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1993
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................ $ 50,718 $ 25,327
Accounts receivable.................................................. 65,883 64,376
Inventories.......................................................... 237,720 215,635
Prepaid expenses and other current assets............................ 27,616 29,658
--------- ---------
Total current assets......................................... 381,937 334,996
--------- ---------
Property, plant and equipment, net..................................... 305,885 309,611
Other assets........................................................... 53,414 61,588
--------- ---------
$ 741,236 $ 706,195
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses................................ $ 104,558 $ 62,445
Income taxes......................................................... 56,197 44,197
--------- ---------
Total current liabilities.................................... 160,755 106,642
--------- ---------
Long-term debt......................................................... 125,000 40,000
Deferred income taxes.................................................. 5,065 7,955
Postretirement benefits other than pensions............................ 61,286 56,782
Other liabilities...................................................... 27,461 31,844
--------- ---------
Total liabilities............................................ 379,567 243,223
--------- ---------
Stockholders' equity
Capital stock........................................................ 100,172 106,612
Additional paid-in capital........................................... 343,390 337,842
Retained earnings.................................................... 33,713 255,222
--------- ---------
477,275 699,676
Less cost of shares in treasury...................................... 115,606 236,704
--------- ---------
Total stockholders' equity................................... 361,669 462,972
--------- ---------
$ 741,236 $ 706,195
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
UST
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings............................................. $387,526 $349,046 $312,558
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization......................... 28,169 26,674 24,467
Deferred income taxes................................. (4,257) (24,783) (5,212)
Cumulative effect of accounting changes............... -- 37,961 --
Gain on disposal of product line...................... -- (35,029) --
Changes in operating assets and liabilities:
Increase in accounts receivable..................... (1,507) (10,557) (3,743)
Increase in inventories............................. (22,085) (4,866) (19,751)
Decrease (increase) in prepaid expenses
and other assets................................. 6,038 (1,590) (10,979)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities................... 47,338 8,719 (5,057)
Increase (decrease) in income taxes payable......... 12,000 22,052 (3,458)
-------- -------- --------
Net cash provided by operating activities........ 453,222 367,627 288,825
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment............... (27,659) (58,199) (33,998)
Dispositions of property, plant and equipment............ 3,975 3,689 3,945
Proceeds received from sales of businesses............... 2,221 37,218 100
Other, principally long-term investments................. -- -- 17,288
-------- -------- --------
Net cash used in investing activities............ (21,463) (17,292) (12,665)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from long-term debt............................. 85,000 40,000 --
Proceeds from the issuance of common stock............... 33,190 35,051 100,458
Reduction of long-term debt.............................. -- -- (1,250)
Dividends paid........................................... (225,715) (199,725) (167,951)
Common stock repurchased................................. (298,843) (236,704) (212,581)
-------- -------- --------
Net cash used in financing activities............ (406,368) (361,378) (281,324)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents.................................... 25,391 (11,043) (5,164)
Cash and cash equivalents at beginning of year... 25,327 36,370 41,534
-------- -------- --------
Cash and cash equivalents at end of year......... $ 50,718 $ 25,327 $ 36,370
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes.......................................... $232,615 $201,082 $147,784
Interest.............................................. 4,708 1,150 756
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
UST
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
-------- ---------- -------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991..... $105,490 $ 217,418 $159,967 $ -- $ 482,875
Net earnings for the year........ -- -- 312,558 -- 312,558
Cash dividends -- $.80 per
share.......................... -- -- (167,951) -- (167,951)
Exercise of stock
options -- 6,964,400 shares.... 3,482 49,171 -- -- 52,653
Income tax benefits net of
increase in receivables from
exercise of stock options...... -- 47,805 -- -- 47,805
Common stock repurchased for
treasury and
retired -- 6,907,000 shares.... (3,454) (10,509) (198,618) -- (212,581)
Adjustment for additional minimum
pension liability, net of
taxes.......................... -- -- 1,247 -- 1,247
-------- ---------- -------- --------- -------------
Balance at December 31, 1992..... 105,518 303,885 107,203 -- 516,606
Net earnings for the year........ -- -- 349,046 -- 349,046
Cash dividends -- $.96 per
share.......................... -- -- (199,725) -- (199,725)
Exercise of stock
options -- 2,186,700 shares.... 1,094 18,745 -- -- 19,839
Income tax benefits net of
increase in receivables from
exercise of stock options...... -- 15,212 -- -- 15,212
Common stock repurchased for
treasury -- 8,467,000 shares... -- -- -- (236,704) (236,704)
Adjustment for additional minimum
pension liability, net of
taxes.......................... -- -- (1,302) -- (1,302)
-------- ---------- -------- --------- -------------
Balance at December 31, 1993..... 106,612 337,842 255,222 (236,704) 462,972
Net earnings for the year........ -- -- 387,526 -- 387,526
Cash dividends -- $1.12 per
share.......................... -- -- (225,715) -- (225,715)
Exercise of stock
options -- 2,001,800 shares.... 1,001 16,514 -- -- 17,515
Income tax benefits and decrease
in receivables from exercise of
stock options.................. -- 15,675 -- -- 15,675
Common stock repurchased for
treasury -- 10,648,000
shares......................... -- -- -- (298,843) (298,843)
Retirement of treasury stock --
14,881,800 shares.............. (7,441) (26,641) (385,859) 419,941 --
Adjustment for additional minimum
pension liability, net of
taxes.......................... -- -- 2,539 -- 2,539
-------- ---------- -------- --------- -------------
Balance at December 31, 1994..... $100,172 $ 343,390 $ 33,713 $(115,606) $ 361,669
======== ======== ======== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 6
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries after the elimination of intercompany accounts and
transactions. Investments in a limited partnership and 50 percent or less owned
companies, accounted for by the equity method, are carried at amounts equal to
the Company's equity in the underlying assets of such entities.
Fair Value of Financial Instruments
The estimated fair value of amounts reported in the consolidated financial
statements have been determined by using available market information and
appropriate valuation methodologies. All current assets and current liabilities
are carried at their fair value, which approximates market value, because of
their short-term nature. The fair value of long-term investments and long-term
debt approximate their carrying value.
Inventories
Inventories are stated at lower of cost or market. The major portion of
leaf tobacco and briar inventory costs is determined by the last-in, first-out
(LIFO) method. The cost of the remaining inventories is determined by the
first-in, first-out (FIFO) and average cost methods. Leaf tobacco and wine
inventories are included in current assets as a standard industry practice,
notwithstanding the fact that such inventories are carried for several years for
the purpose of curing and aging.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less allowances for
depreciation computed by the straight line method.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired. Unamortized goodwill is included in other assets and is
being amortized ratably over periods from ten to forty years ending in 2026.
Income Taxes
Income taxes are provided on all revenue and expense items included in the
Consolidated Statement of Earnings, regardless of the period in which such items
are recognized for income tax purposes, except for items representing permanent
differences between pretax accounting income and taxable income. Deferred income
taxes are provided on temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Earnings Per Share
Primary earnings per share are calculated by dividing net earnings by the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares are shares which would be issuable
upon the exercise of outstanding stock options, reduced by the number of shares
which are assumed to be purchased by the Company from the resulting proceeds at
the average market price during the period. For the fully diluted earnings per
share calculation, shares are assumed to be purchased by the Company at the
higher of the average or period-end price and may include additional dilutive
options.
<PAGE> 7
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Dollars in thousands, except per share amounts)
CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
------- -------
<S> <C> <C>
Cash........................................................... $ 9,718 $11,327
Commercial paper............................................... 41,000 14,000
------- -------
$50,718 $25,327
======= =======
</TABLE>
Cash equivalents are all highly liquid investments generally with
maturities of three months or less when acquired.
INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
-------- --------
<S> <C> <C>
Leaf tobacco................................................... $104,313 $ 90,742
Products in process and finished goods......................... 115,261 108,117
Other materials and supplies................................... 18,146 16,776
-------- --------
$237,720 $215,635
======== ========
</TABLE>
At December 31, 1994 and 1993, $103.2 million and $88.4 million,
respectively, of inventories were valued using the LIFO method. The average
costs of these inventories are greater than the amounts at which these
inventories are carried in the Consolidated Statement of Financial Position by
$41.8 million and $39.6 million, respectively.
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
-------- --------
<S> <C> <C>
Land........................................................... $ 27,259 $ 27,318
Buildings...................................................... 188,872 184,147
Machinery and equipment........................................ 273,160 261,388
-------- --------
489,291 472,853
Less allowances for depreciation............................... 183,406 163,242
-------- --------
Net property, plant and equipment.............................. $305,885 $309,611
======== ========
</TABLE>
OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
------- -------
<S> <C> <C>
Prepaid pension costs.......................................... $22,083 $23,517
Investments in unconsolidated companies........................ 12,683 12,910
Goodwill....................................................... 6,822 7,756
Long-term investments.......................................... 3,690 3,691
Intangible pension asset....................................... 3,065 4,263
Other.......................................................... 5,071 9,451
------- -------
$53,414 $61,588
======= =======
</TABLE>
The investments in unconsolidated companies consist principally of a
limited partnership that owns and leases a cogeneration facility.
<PAGE> 8
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1993
-------- -------
<S> <C> <C>
Trade accounts payable.......................................... $ 20,544 $21,285
Employee compensation and benefits.............................. 49,059 18,349
Taxes, other than income........................................ 7,358 6,050
Other accrued expenses.......................................... 27,597 16,761
-------- -------
$104,558 $62,445
======== =======
</TABLE>
REVOLVING CREDIT AND TERM LOAN AGREEMENT AND SHORT-TERM LINES OF CREDIT
In 1994, the Company entered into a $200 million revolving credit and term
loan agreement with several banks. This agreement replaced the $50 million
revolving credit and term loan agreement which had been in effect since 1993.
At December 31, 1994 the Company had $125 million outstanding under this
agreement at interest rates ranging from 5.9 percent to 6.5 percent. At December
31, 1994 this amount was classified as long-term debt in the Consolidated
Statement of Financial Position.
Under the terms of the agreement, the Company may borrow funds and elect to
pay interest under the "Base Rate," "Competitive Bid" or "Eurodollar" interest
rate provisions. The terms of the agreement provide for a three-year revolving
line of credit. At the Company's option, any balance outstanding thereafter may
be converted into a three-year term loan. Principal repayments are optional
during the revolving credit period, while 36 equal monthly installments are
required during the term loan period. The Company is required to pay a facility
fee of 1/10 of 1 percent per annum during the revolving credit period.
Certain provisions of this agreement require the maintenance of tangible
net worth levels as well as certain financial ratios. The agreement expires in
August of 2000.
In addition, the Company has available short-term lines of credit with
domestic and foreign banks totaling $100 million at December 31, 1994 and 1993.
The lines of credit are generally committed for a one-year period expiring at
various times during 1995, and provide for borrowing at prime rates. These
arrangements require commitment fees which are not significant.
OTHER LIABILITIES
Other liabilities include the non-current portion of the net pension
liabilities for 1994 and 1993 of $27.1 million and $30.9 million, respectively.
(See Employee Benefit and Compensation Plans Note.)
CAPITAL STOCK
The Company has two classes of capital stock, preferred stock and common
stock. Preferred stock carries a par value of $.10 and no shares have been
issued. Common stock carries a $.50 par value. Authorized preferred stock is 10
million shares and authorized common stock is 600 million shares.
In 1994, the Board of Directors approved a new stock repurchase program,
authorizing the Company to repurchase up to 20 million shares of its common
stock from time to time in open market or in negotiated transactions for use in
connection with employee benefit programs and other corporate purposes. The new
program began upon the completion of the prior program which provided for the
repurchase of up to 40 million shares of the Company's common stock and had been
in effect since 1990. In 1994, the Company repurchased a total of 10.6 million
shares of its common stock pursuant to its stock repurchase programs of which
4.2 million shares related to the new program.
<PAGE> 9
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common stock issued and outstanding at December 31, 1994 and 1993 was
196,110,436 shares and 204,756,636 shares, respectively.
Events causing changes in the issued and outstanding shares are described
in the Consolidated Statement of Changes in Stockholders' Equity.
STOCK OPTIONS
The Company maintains two stock option plans, the 1992 and 1982 Stock
Option Plans. At December 31, 1994, 7,502,700 shares were available for grant
under the 1992 plan, while no shares were available under the 1982 plan. Under
the plans, options may be granted at not less than the fair market value on the
date of grant.
Under the 1992 Stock Option Plan, options first become exercisable, in
ratable installments or otherwise, over a period of one to five years from the
date of grant and may be exercised up to a maximum of ten years from the date of
grant using various payment methods.
Receivables from the exercise of options in the amount of $15.3 million in
1994, $17.4 million in 1993 and $17.2 million in 1992 have been deducted from
stockholders' equity.
Changes in outstanding options were as follows:
<TABLE>
<CAPTION>
PRICE RANGE SHARES
------------- ----------
<S> <C> <C>
Outstanding
Dec. 31, 1991.......................................... $ 2.16-$24.19 21,234,000
Options granted........................................ 30.81 3,798,400
Options exercised...................................... 2.16- 30.81 (6,964,400)
Options expired........................................ 2.16 (2,400)
----------
Outstanding
Dec. 31, 1992.......................................... 4.05- 30.81 18,065,600
Options granted........................................ 25.50 1,198,800
Options exercised...................................... 4.05- 30.81 (2,186,700)
Options forfeited...................................... 25.50 (4,200)
----------
Outstanding
Dec. 31, 1993.......................................... 4.05- 30.81 17,073,500
Options granted........................................ 27.81- 27.88 1,706,400
Options exercised...................................... 4.05- 30.81 (2,001,800)
Options forfeited...................................... 25.50- 27.81 (3,700)
----------
Outstanding
Dec. 31, 1994.......................................... 4.05- 30.81 16,774,400
==========
</TABLE>
Under the 1982 Stock Option Plan, incentive and nonqualified options to
purchase a total of 13,894,400 shares were outstanding and exercisable as of
December 31, 1994. The average price per share is $18.97, with expiration dates
ranging from February 11, 1995 to February 6, 2002.
Under the 1992 Stock Option Plan, incentive and nonqualified options to
purchase a total of 2,880,000 shares were outstanding, of which 807,900 shares
were exercisable at December 31, 1994 due to vesting requirements. The average
price per share is $26.88, with expiration dates ranging from February 22, 2003
to November 16, 2004.
<PAGE> 10
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE BENEFIT AND COMPENSATION PLANS
The Company and its subsidiaries maintain a number of noncontributory
defined benefit pension plans covering substantially all employees over age 21
with at least one year of service. The Company's plan for salaried employees
provides pension benefits based on their highest three-year average
compensation. The Company's funding policy for this plan is to contribute an
amount sufficient to meet or exceed ERISA minimum requirements. All other funded
plans base benefits on the employee's compensation in each year of employment.
The Company's funding policy for these plans is generally to contribute the
annual normal cost plus the amount required to amortize unfunded liabilities
over 20 years from the date established. The Company also maintains unfunded
plans providing pension and additional benefits for certain employees. The
assumptions used to determine expense for 1994, 1993 and 1992 were:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Discount rate.................................................. 7% 8% 8%
Average rate of increase in compensation levels................ 5% 6% 6%
Expected long-term rate of return on plan assets............... 9% 10% 10%
</TABLE>
Net periodic pension cost for 1994, 1993 and 1992 include the following
components (in millions):
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ -----
<S> <C> <C> <C>
Service cost -- benefits earned during period................. $ 8.2 $ 7.1 $ 6.5
Interest cost on projected benefit obligation................. 14.2 13.9 13.1
Actual return on plan assets.................................. 4.3 (18.7) (8.3)
Net amortization and deferral................................. (20.2) 1.6 (9.0)
------ ------ -----
Net periodic pension cost..................................... $ 6.5 $ 3.9 $ 2.3
====== ====== =====
</TABLE>
<PAGE> 11
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents a reconciliation of the funded status of the
plans (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
PLANS PLANS PLANS PLANS
WHOSE WHOSE WHOSE WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits...................... $(109.3) $ (28.0) $(125.6) $ (31.1)
Nonvested benefits................... (12.5) (2.3) (14.0) (3.8)
------------- ------------- ------------- -------------
Accumulated benefits................. (121.8) (30.3) (139.6) (34.9)
Effect of future pay increases....... (15.9) (5.9) (23.8) (6.5)
------------- ------------- ------------- -------------
Projected benefit obligation......... (137.7) (36.2) (163.4) (41.4)
Plan assets at fair value.............. 185.7 -- 195.8 1.6
Unrecognized net (gain) loss........... (17.9) 6.8 (2.3) 14.1
Prior service cost not yet recognized
in net periodic pension cost......... (2.7) .8 (.5) (1.5)
Unrecognized portion of initial net
obligation (asset)................... (5.3) 4.4 (6.1) 4.9
Adjustment to recognize additional
minimum liability.................... -- (6.1) -- (11.5)
------------- ------------- ------------- -------------
Net pension asset (liability).......... $ 22.1 $ (30.3) $ 23.5 $ (33.8)
========== ========== ========== ==========
</TABLE>
For 1994 and 1993, the net pension assets of $22.1 million and $23.5
million, respectively, consist of prepaid pension costs and are included in
other assets. The noncurrent portion of the net liabilities for 1994 and 1993 of
$30.3 million and $33.8 million, respectively, are included in other
liabilities.
For pension plans whose accumulated benefits exceed assets at December 31,
1994, the Consolidated Statement of Financial Position reflects an additional
minimum liability of $6.1 million: an intangible asset of $3.1 million included
in other assets and a reduction of retained earnings of $2 million, which is net
of deferred tax benefits of $1 million. At December 31, 1993, the Consolidated
Statement of Financial Position included an additional minimum liability of
$11.5 million: an intangible asset of $4.3 million and a reduction of retained
earnings of $4.8 million, which is net of deferred tax benefits of $2.4 million.
Plan assets include marketable equity securities (including common stock of
the Company having a market value of $35.7 million as of December 31, 1994 and
$35.5 million as of December 31, 1993) and corporate and government debt
securities.
The discount rate used in determining the present value of benefit
obligations was 9 percent for 1994 and 7 percent for 1993.
The Company sponsors a defined contribution plan (Employees' Savings Plan)
covering substantially all of its employees. The Plan requires one year of
service prior to eligibility for participation. Company contributions are based
upon participant contributions. The expense was $3.7 million in 1994, $3.6
million in 1993 and $3.4 million in 1992.
The Company has an Incentive Compensation Plan which provides for incentive
payments to designated employees based on stated percentages of net income as
defined in the Plan. Expenses under the Plan amounted to $33.5 million for 1994,
$28.8 million for 1993 and $26.3 million for 1992.
<PAGE> 12
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and certain of its subsidiaries maintain a number of
postretirement welfare benefit plans which provide certain medical and life
insurance benefits to substantially all full-time employees who have attained
certain age and service requirements upon retirement. The health care benefits
are subject to deductibles, co-insurance and in some cases flat dollar
contributions which vary by plan, age and service at retirement. All life
insurance coverage is noncontributory. The welfare plans are not funded.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires the
Company to accrue the expected cost of providing postretirement benefits as an
employee renders service.
In 1993 the Company elected to immediately recognize the accumulated
postretirement benefit obligation of $50.8 million through a one-time cumulative
effect adjustment to earnings of $32.7 million, net of income taxes. The
liability is stated separately in the Consolidated Statement of Financial
Position.
The following table sets forth the combined status of the plans at December
31:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees....................................................... $15,153 $15,599
Fully eligible active plan participants........................ 7,719 8,076
Other active plan participants................................. 22,400 24,886
------- -------
45,272 48,561
Unrecognized net gain............................................ 16,014 8,221
------- -------
Accrued postretirement benefit obligation........................ $61,286 $56,782
======= =======
</TABLE>
Postretirement benefit expense was $6 million in 1994, $7.3 million in 1993
and $1.6 million in 1992. The expense for 1992 was recorded on a pay-as-you-go
(cash) basis. The net periodic postretirement benefit cost for 1994 and 1993
included the following components:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Service cost..................................................... $2,835 $3,311
Interest cost.................................................... 3,342 4,009
Amortization of unrecognized gain................................ (226) --
------ ------
Net periodic postretirement benefit cost......................... $5,951 $7,320
====== ======
</TABLE>
The discount rate used in determining the net periodic postretirement
benefit cost was 7 percent for 1994 and 8 percent for 1993.
The rate of increase in per capita costs of covered health care benefits is
assumed to be 11.1 percent for 1995 and to decrease gradually to 6.5 percent by
the year 2008 and remain at that level thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by 1 percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1994 by approximately $7 million and the 1994 net periodic
postretirement benefit cost by approximately $1.2 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 9 percent at December 31, 1994 and 7
percent at December 31, 1993.
<PAGE> 13
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes," which required a change in the method of accounting for
income taxes from the deferred method to the liability method. The Company
reflected this change through a cumulative effect adjustment which increased net
earnings and reduced deferred tax liabilities reported in the Consolidated
Statement of Financial Position by $12.8 million.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation................................................... $40,883 $38,452
Investment in limited partnerships............................. 10,269 11,198
Prepaid pension assets......................................... 8,230 8,360
------- -------
Total deferred tax liabilities......................... 59,382 58,010
------- -------
Deferred tax assets:
Postretirement benefits other than pensions.................... 21,450 19,927
Other accrued liabilities...................................... 19,608 16,773
Accrued pension liabilities.................................... 9,674 9,920
All other, net................................................. 3,585 3,435
------- -------
Total deferred tax assets.............................. 54,317 50,055
------- -------
Net deferred tax liabilities..................................... $ 5,065 $ 7,955
======= =======
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
--------------------- --------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $223,407 $208,059 $168,357
State and local...................................... 33,960 31,502 26,926
-------- -------- --------
Total current................................ 257,367 239,561 195,283
-------- -------- --------
Deferred:
Federal.............................................. (4,257) (23,261) (5,164)
State and local...................................... -- (1,522) (48)
-------- -------- --------
Total deferred............................... (4,257) (24,783) (5,212)
-------- -------- --------
$253,110 $214,778 $190,071
======== ======== ========
</TABLE>
The current tax provisions do not reflect $13.5 million, $15.4 million and
$52.5 million for 1994, 1993 and 1992, respectively, of tax benefits arising
from the exercise of stock options. These amounts were credited directly to
additional paid-in capital.
The deferred tax provision for 1993 includes the benefit of $18.1 million
resulting from the adoption of SFAS No. 106. In addition, the deferred tax
provisions for 1994, 1993 and 1992 do not reflect the respective tax effects of
$(1.4) million, $.8 million and $(.6) million resulting from the minimum pension
liability adjustment required by SFAS No. 87, "Employers' Accounting for
Pensions."
<PAGE> 14
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1993 "Omnibus Budget Reconciliation Act" increased the statutory
corporate federal income tax rate to 35 percent effective January 1, 1993.
Differences between the effective tax rate and the statutory U.S. federal
income tax rate are explained as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate......................... 35.0% 35.0% 34.0%
State and local taxes, net of federal benefit.................. 3.4 3.5 3.5
Other, net..................................................... 1.1 .5 .3
---- ---- ----
39.5% 39.0% 37.8%
==== ==== ====
</TABLE>
EXCISE TAXES
Net sales and cost of products sold include excise taxes of $25.3 million
in 1994, $30 million in 1993 and $31.7 million in 1992.
INTEREST
Interest (expense) income, net, is comprised of expense associated with
short-term and long-term obligations and income from cash equivalent
investments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1994 1993 1992
------- ------- ------
<S> <C> <C> <C>
Short-term obligations................................. $(1,660) $(1,091) $(700)
Long-term obligations.................................. (2,956) (152) (33)
------- ------- ------
(4,616) (1,243) (733)
------- ------- ------
Income from cash equivalents........................... 4,524 3,247 2,599
------- ------- ------
$ (92) $ 2,004 $1,866
======= ======= ======
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994 FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net sales.................................. $280,379 $310,203 $310,366 $322,068 $1,223,016
Gross profit............................... 225,978 246,803 246,383 251,908 971,072
Net earnings............................... 88,758 99,486 100,330 98,952 387,526
Primary earnings per share................. $.42 $.48 $.48 $.49 $1.87
------------------------------------------------------
1993
Net sales.................................. $265,019 $279,707 $278,978 $286,699 $1,110,403
Gross profit............................... 201,866 219,230 220,464 222,398 863,958
Earnings before cumulative effect of
accounting changes....................... 103,555 89,836 88,703 86,798 368,892
Net earnings............................... 83,709 89,836 88,703 86,798 349,046
Primary earnings per share before
cumulative effect of accounting
changes.................................. $.47 $.41 $.41 $.41 $1.71
Primary earnings per share................. $.38 $.41 $.41 $.41 $1.62
</TABLE>
The first quarter of 1993 includes a pretax gain of $35 million, amounting
to 10 cents per share, from the sale of a tobacco-related business. This gain
was offset by the cumulative effect of accounting changes as a result of the
adoption of SFAS No. 106 and SFAS No. 109, which resulted in a decrease in net
earnings of $19.8 million, or 9 cents per share.
<PAGE> 15
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INDUSTRY SEGMENT DATA
The Company's industry segments are Tobacco, Wine and Other. The Company
operates primarily in the tobacco industry and also produces and markets a
number of nontobacco products. Tobacco segment sales are principally to a large
number of wholesalers and chain stores which are widely dispersed. In 1994,
sales to one wholesale customer accounted for approximately 19 percent of
Tobacco segment sales.
The Company operates primarily in the United States; foreign operations and
export sales are not significant. Intersegment sales are accounted for at cost.
Operating profit is total revenue less operating expenses excluding
corporate expenses and interest, net, and in 1993, the gain on disposal of a
product line. Identifiable assets by segment include assets directly identified
with those operations and an allocable share of jointly used assets. Corporate
assets consist primarily of cash and cash equivalents, other long-term
investments and an allocation of property, plant and equipment associated with
nonsegment activities.
OTHER MATTERS
The Company has been named in certain litigation against the major
cigarette companies and others seeking damages relating to the usage of
cigarettes and, in certain of the complaints, "tobacco products," one of which
contains several allegations relating to smokeless tobacco products.
The Company believes that these pending litigation matters will not result
in any material liability for a number of reasons, including the fact that the
Company has had only limited involvement with cigarettes and the Company's
current percentage of total tobacco industry sales is relatively small. Prior to
1986, the Company manufactured some cigarette products which had a de minimis
market share. From May 1, 1982 to August 1, 1994, the Company distributed a
small volume of imported cigarettes and is indemnified against claims relating
to those products.
The Company also believes that these actions are without merit and intends
to defend them vigorously.
On March 31, 1993, the Company sold its distribution rights for Zig-Zag
cigarette papers and related products for $39 million in cash and additional
consideration for the next ten years. The transaction resulted in a pretax gain
of $35 million, amounting to 10 cents per share.
<PAGE> 16
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Directors and Stockholders UST Inc.
We have audited the accompanying consolidated statement of financial
position of UST Inc. as of December 31, 1994 and 1993, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of UST Inc. at
December 31, 1994 and 1993, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1994
in conformity with generally accepted accounting principles.
As discussed in the notes to the financial statements, in 1993 the Company
changed its methods of accounting for Income Taxes and Postretirement Benefits
Other Than Pensions.
ERNST & YOUNG LLP
Stamford, Connecticut
February 1, 1995
<PAGE> 1
EXHIBIT 21.1
PARENT AND SUBSIDIARIES
UST is an independent corporation without parent. It had the following
significant subsidiaries as of December 31, 1994:
<TABLE>
<CAPTION>
PERCENTAGE
OF
OWNERSHIP BY
UST OR ITS
JURISDICTION OF WHOLLY OWNED
NAME OF SUBSIDIARY OR AFFILIATE INCORPORATION SUBSIDIARIES
- --------------------------------------------------------------- --------------- ------------
<S> <C> <C>
International Wine & Spirits Ltd. ............................. Delaware 100%
Stimson Lane Ltd. >.......................................... Washington 100%
United States Tobacco Company.................................. Delaware 100%
United States Tobacco Manufacturing Company Inc. ............ Delaware 100%
United States Tobacco Sales and Marketing Company Inc. ...... Delaware 100%
UST Enterprises Inc. .......................................... Delaware 100%
UST International Inc. ........................................ Delaware 100%
</TABLE>
- ---------------
Certain subsidiaries have been omitted since, if considered in the aggregate as
a single subsidiary, they would not constitute a significant subsidiary.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of UST Inc. of our report dated February 1, 1995, included in the 1994
Annual Report to stockholders of UST Inc.
We also consent to the incorporation by reference in Post-Effective
Amendment No. 4 to the Registration Statement (Form S-8 No. 2-72410) pertaining
to the UST Inc. Employees' Savings Plan, the Registration Statement (Form S-8
No. 33-28137) pertaining to the 1982 Stock Option Plan, and the Registration
Statement (Form S-8 No. 33-48828) pertaining to the 1992 Stock Option Plan, of
our report dated February 1, 1995, with respect to the consolidated financial
statements of UST Inc. incorporated by reference in this Annual Report (Form
10-K) for the year ended December 31, 1994.
ERNST & YOUNG LLP
Stamford, Connecticut
March 3, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Registrant's
condensed consolidated statement of financial position and condensed
consolidated statement of earnings and is qualified in its entirety by reference
to such financial statements. (In thousands except per share amounts).
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 50,718
<SECURITIES> 0
<RECEIVABLES> 65,883
<ALLOWANCES> 0
<INVENTORY> 237,720
<CURRENT-ASSETS> 381,937
<PP&E> 489,291
<DEPRECIATION> 183,406
<TOTAL-ASSETS> 741,236
<CURRENT-LIABILITIES> 160,755
<BONDS> 125,000
<COMMON> 100,172
0
0
<OTHER-SE> 261,497
<TOTAL-LIABILITY-AND-EQUITY> 741,236
<SALES> 1,223,016
<TOTAL-REVENUES> 1,223,016
<CGS> 251,944
<TOTAL-COSTS> 251,944
<OTHER-EXPENSES> 330,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 640,636
<INCOME-TAX> 253,110
<INCOME-CONTINUING> 387,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 387,526
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.87
</TABLE>
