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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17506
UST INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 661-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
COMMON STOCK -- $.50 PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
</TABLE>
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 1, 1998, 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 $6,311,690,889.
AS OF FEBRUARY 1, 1998, THERE WERE 185,070,736 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, 1997 AND FILED AS AN EXHIBIT AS REQUIRED BY
ITEM 601 (b)(13) OF REGULATION S-K........................PARTS I & II
CERTAIN PAGES OF UST 1998 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). Registrant
imported and marketed pipe tobacco through December 31, 1997.
WINE: Registrant produces and markets wine and craft beers.
OTHER: Registrant's international operation which markets moist
smokeless tobacco, its cigar operation which manufactures and markets
premium cigars, and its video entertainment business are included in this
segment. Registrant also operates certain commercial agricultural
properties. In November, 1997, Registrant announced its intention to sell
its video entertainment business.
INDUSTRY SEGMENT DATA
Registrant hereby incorporates by reference the Consolidated Industry
Segment Data pertaining to the years 1995 through 1997 set forth on page 31 of
its Annual Report to stockholders for the fiscal year ended December 31, 1997
("Annual Report"), which page is included in Exhibit 13.
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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, COPENHAGEN LONG CUT, SKOAL
BANDITS, RED SEAL
Dry -- BRUTON, CC, RED SEAL
It has been claimed that the use of tobacco products, including smokeless
tobacco, may be harmful to health. Registrant believes that an 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, 1993 and 1997. Also, in recent years,
other 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 in 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 1998. 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, ingredients disclosure requirements,
regulation of environmental tobacco smoke and anti-tobacco advertising
campaigns. Additional state and local legislative and regulatory actions will
likely be considered in 1998. Registrant is unable to assess the future effects
these various actions may have on its smokeless tobacco business.
On August 28, 1996, the Food and Drug Administration (FDA) published
regulations asserting unprecedented jurisdiction over nicotine in tobacco as a
"drug" and purporting to regulate smokeless tobacco products as a "medical
device." The final regulations include severe restrictions on the advertising,
marketing and promotion of smokeless tobacco products and will require
Registrant to comply with a wide range of labeling, reporting and other
requirements. Registrant and other smokeless tobacco manufacturers filed suit
against FDA seeking a judicial declaration that FDA has no authority to regulate
smokeless tobacco products. On April 25, 1997, a federal district court ruled
that FDA, as a matter of law, is not precluded from regulating cigarettes and
smokeless tobacco as "medical devices" and implementing certain labeling and
access restrictions. Further trial proceedings are still required to determine
whether FDA, based on the facts, can prove that smokeless tobacco products fit
the statutory definitions and the restrictions are justified. The court,
granting Registrant's motion for summary judgment, also ruled that FDA has no
authority to implement restrictions on the advertising and promotion of
smokeless tobacco products. The court issued an injunction to prohibit most of
the restrictions (labeling, access and advertising/promotion) set for August 28,
1997 from taking effect, pending resolution of any appeals and subsequent
proceedings; the court also certified the ruling for interlocutory appeal on the
grounds that it involves "controlling questions of law as to which there is
substantial ground for difference of opinion." Certain aspects of this ruling
appealed to the Fourth Circuit Court of Appeals are awaiting decision.
Registrant is not able to predict the outcome of the appeal, or assess the
future effect that these FDA regulations, if implemented, may have on its
smokeless tobacco business.
On June 20, 1997, Registrant, along with other manufacturers in the United
States tobacco industry, executed a Memorandum of Understanding (the
"Memorandum") to support the adoption of federal legislation incorporating the
features described in the proposed resolution attached to the Memorandum. The
proposed resolution, if enacted into law, would achieve a resolution of many of
the regulatory and litigation issues affecting the United States tobacco
industry and, thereby, reduce uncertainties facing the industry and increase
stability in business and capital markets. However, if such legislation were
enacted, the financial obligations to be imposed on Registrant are expected to
be significant although the precise amount of such obligations cannot be
determined at this time. Discussions with other tobacco manufacturers, who were
participants in the negotiations which led to the Memorandum, are continuing
regarding the allocation of both the initial and subsequent payments and
Registrant's obligations related thereto. Depending on the amounts required to
be paid by Registrant, as well as a number of other factors, including (i) the
timing of any
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payments and the means used to finance such payments; (ii) the effect of the
legislation on the pricing and consumption of smokeless tobacco products; and
(iii) the impact of the legislation on Registrant's competitive position in the
smokeless tobacco industry, its financial position could be materially adversely
affected in the year of implementation and the unit volume, operating revenues
and operating income of Registrant could be materially adversely affected in
future years. There can be no assurance that legislation reflecting the proposed
resolution or any legislation will be enacted.
RAW MATERIALS
Except as noted below, raw materials essential to Registrant's business are
generally purchased in domestic markets under competitive conditions.
The major portion of tobacco used in Registrant's products is purchased
from domestic suppliers. Various factors, including the level of domestic
tobacco production, can affect the amount of tobacco purchased by Registrant
from domestic and foreign sources. Tobaccos used in the manufacture of smokeless
tobacco products are processed and aged by Registrant for a period of two to
three 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 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, to ensure a three year aging
process prior to use.
CUSTOMERS
Registrant markets its moist smokeless tobacco products throughout the
United States principally to chain stores and tobacco and grocery wholesalers.
Approximately 32% of Registrant's gross sales of tobacco products are made to
four customers, one of which, McLane Co. Inc., a national distributor, accounts
for more than 10% of Registrant's consolidated revenue. Registrant has
maintained satisfactory relationships with its 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
of which 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, 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 and imports, bottles and markets wine from France under the COLOUR
VOLANT label. Approximately 54% of Registrant's wine sales are made to ten
distributors, no one of which accounts for more than 26% of total wine sales.
Substantially all wines are sold through state-licensed distributors with whom
Registrant maintains satisfactory relationships.
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In addition, Registrant owns and operates a microbrewery located in Yakima,
Washington, which produces and markets craft beers primarily under the brand
name BERT GRANT'S ALE. Registrant is a minor factor in the total nationwide
business of producing craft beers.
It has been claimed that the use of alcohol beverages may be harmful to
health. Registrant believes that an 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 1998. 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 1998. Registrant is unable to assess the future effects these regulatory
and other actions may have on the sale of its wines and craft beers.
Registrant uses grapes harvested from its own vineyards, as well as grapes
purchased from independent growers located primarily in Washington state. Total
grape tonnage harvested and purchased in 1997 was significantly higher than in
1996. Because of the fluctuation in grape harvest yields from year to year as
well as the increasing demand for premium varietal wines, Registrant will, in
1998, continue to experience shortages of Washington state grapes for certain of
its premium varieties and, accordingly, has placed them on allocation. In
addition, Registrant anticipates an increase in California grape production and
is taking steps to secure a supply for use in its California labels.
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.
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OTHER
Included in this segment are the international operation which markets
moist smokeless tobacco; cigar operation which manufactures and markets the
premium cigar brands, DON TOMAS and ASTRAL; video entertainment business; and
agricultural properties. None of the above, singly, constitutes a material
portion of Registrant's operations.
It has been claimed that the use of tobacco products, including cigars, may
be harmful to health. Registrant believes that an unresolved controversy
continues to exist among scientists concerning the claims made about tobacco and
health. The federal excise tax on cigars was last increased in 1993. On August
28, 1996, the Food and Drug Administration (FDA) published regulations asserting
unprecedented jurisdiction over nicotine in tobacco as a "drug" and purports to
regulate cigarettes and smokeless tobacco products as "medical devices." FDA did
not attempt to assert jurisdiction over cigars, and the FDA regulations do not
apply to cigars. On July 25, 1997, a public health group filed a petition with
FDA requesting that the agency initiate proceedings to assert jurisdiction over
cigars as "nicotine delivery systems." In the event FDA attempts to extend its
purported tobacco regulations to cover cigars and the regulations survive a
judicial challenge, those regulations would impose severe restrictions on the
advertising, marketing and promotion of cigar products and would require
Registrant to comply with a wide range of labeling, reporting and other
requirements with respect to its cigar products. Also, in recent years, other
proposals have been made at the federal level for additional regulation of
tobacco products including, inter alia, the requirement of additional warning
notices on cigar products, the disallowance of advertising and promotion
expenses as deductions under federal tax law, a significant increase in 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 1998. In
recent years, various state and local governments continued the regulation of
tobacco products, including, inter alia, proposed warning notices on cigar
products, the imposition of significantly higher taxes, advertising bans and
restrictions, constituent disclosure requirements, regulation of environmental
tobacco smoke and anti-tobacco advertising campaigns. Additional state and local
legislative and regulatory actions will likely be considered in 1998. Registrant
is unable to assess the future effects these various actions may have on its
cigar business.
ADDITIONAL BUSINESS INFORMATION
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 1997 was 4,677.
TRADEMARKS
Registrant markets consumer products under a large number of trademarks.
All of Registrant's 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
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<S> <C> <C>
Headquarters:
Greenwich, Connecticut............ 189,000 Executive, sales and general offices
in 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............ 900,000 Office, 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.............. 560,000 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.
St. Helena, California............ 19,800 Winery and storage facility.
Yakima, Washington................ 26,000 Microbrewery, distribution and
storage facility, and office.
Other Facilities:
Tampa, Florida.................... 57,000 Office, warehouse and cigar
distribution center.
Danli, Honduras, C.A.............. 134,000 Office, warehouses, and
manufacturing plant for cigars and
boxes.
Talanga, Honduras, C.A............ 107,000 Office, warehouse and barns.
</TABLE>
<TABLE>
<CAPTION>
LAND
IN
APPROXIMATE
LOCATION ACRES ACTIVITIES
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<S> <C> <C>
Yakima and Benton Counties,
Washington..................... 3,390 Vineyards.
Grant and Benton Counties,
Washington..................... 17,974 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, 1997 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 health care cost reimbursement/third
party recoupment/class action litigation against the major domestic cigarette
companies and others seeking damages and other relief. The complaints in these
cases on their face predominantly relate to the usage of cigarettes; within that
context, certain complaints contain a few allegations relating specifically to
smokeless tobacco products. These actions are 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 has been named in three actions brought by individual
plaintiffs, all of whom are represented by the same Louisiana attorney, against
a number of smokeless tobacco manufacturers, cigarette manufacturers and certain
other organizations seeking damages and other relief in connection with injuries
allegedly sustained as a result of tobacco usage, including smokeless tobacco
products.
Registrant is also named in an action in Illinois seeking damages and other
relief brought by an individual plaintiff and purporting to state a class action
"on behalf of himself and all other persons similarly situated" alleging that
his use of Registrant's smokeless tobacco products "resulted in his addiction to
nicotine, increased use of Defendants' products and gum deterioration."
Registrant believes, and has been so advised by counsel handling these
cases, that it has a number of meritorious defenses to all such pending
litigation. Except as to Registrant's intention to pursue federal legislation
resolving certain regulatory and litigation issues, all such cases are, and will
continue to be, vigorously defended, and Registrant believes that the ultimate
outcome of all such pending litigation will not have a material adverse effect
on the consolidated financial statements of Registrant.
In Cedric Doyle, et al. v. United States Tobacco Company, et al., (Case No.
CV97-1488), United States District Court, Western District of Louisiana, Lake
Charles Division, on October 29, 1997, defendants, including Registrant, filed a
motion to strike plaintiffs' class action allegations. On December 18, 1997, the
court filed a Ruling granting the motion to strike the class action allegations.
On January 26, 1998, plaintiff and defendants, including Registrant, entered
into a Stipulation of Dismissal providing for voluntary dismissal without
prejudice of this action. On January 28, 1998, the court entered an Order
granting the dismissal.
In The State of Texas v. The American Tobacco Company, et al., (Civil
Action No. 5-96CV91), United States District Court for the Eastern District of
Texas, Texarkana Division, on January 22, 1998, the court entered a Final
Judgment pursuant to the Agreed Order Granting Joint Motion to Approve
Settlement Agreement, thereby approving the Settlement Agreement between
plaintiff and certain defendants, including Registrant, and dismissing with
prejudice all counts of the Complaint against certain defendants, including
Registrant. Registrant's portion of the settlement, which relates solely to a
pilot program primarily to reduce youth access to tobacco products, was
approximately $3.4 million (to be paid on an installment basis) plus related
expenses.
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 1, 1998 is set forth below:
<TABLE>
<CAPTION>
NAME OFFICE AGE
---- ------ ---
<S> <C> <C>
Vincent A. Gierer, Jr.................. Chairman of the Board, Chief Executive 50
Officer and President
Robert E. Barrett...................... Executive Vice President and 59
President -- UST Enterprises Inc.
Richard H. Verheij..................... Executive Vice President and General 39
Counsel
Robert H. Lawrence, Jr................. Executive Vice President -- United 55
States Tobacco Company
A. Gary Smith.......................... Executive Vice President -- United 49
States Tobacco Company
Robert T. D'Alessandro................. Senior Vice President and Controller 44
Robert A. Fitzmaurice.................. Senior Vice President -- United States 57
Tobacco Company
Allen C. Shoup......................... President -- International Wine & 54
Spirits Ltd.
</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, except for Mr. Fitzmaurice, have been
continuously employed by Registrant for more than five years.
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. Mr. Gierer has been employed by Registrant since March 16,
1978.
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 has been employed by Registrant since January 1, 1991.
Mr. Verheij has served as Executive Vice President and General Counsel
since May 7, 1996. Mr. Verheij served as Senior Vice President and General
Counsel from December 1, 1994 to May 6, 1996, as Senior Vice President and
Associate General Counsel from April 4, 1994 to November 30, 1994 and as Vice
President and Associate General Counsel from December 17, 1992 to April 3, 1994.
Mr. Verheij has been employed by Registrant since November 24, 1986.
Dr. Lawrence has served as Executive Vice President of United States
Tobacco Company since April 4, 1994. He served as Senior Vice President of
United States Tobacco Company from June 23, 1988 to April 3, 1994. Dr. Lawrence
has been employed by Registrant since March 1, 1987.
Mr. Smith has served as Executive Vice President of United States Tobacco
Company since January 1, 1998. He served as Senior Vice President of United
States Tobacco Company from December 17, 1992 to December 31, 1997. Mr. Smith
has been employed by Registrant since September 18, 1972.
Mr. D'Alessandro has served as Senior Vice President and Controller since
January 1, 1996. He has served as Controller since December 19, 1991. Mr.
D'Alessandro has been employed by Registrant since May 4, 1981.
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Mr. Fitzmaurice has served as Senior Vice President of United States
Tobacco Company since May 7, 1996. He served as Managing Partner of Fitzmaurice,
Lewis & Partners, an advertising & marketing firm from November 1994 to May 1,
1996 and had also served as Senior Vice President -- Marketing and Sales of
Brown & Williamson Tobacco Corp. from 1990 to January 1994. Mr. Fitzmaurice has
been employed by Registrant since May 7, 1996.
Mr. Shoup has served as President of International Wine & Spirits Ltd.
since February 19, 1987. He has been employed by Registrant since December 3,
1980.
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 page 46 of its Annual Report, which pages
are included in Exhibit 13. Registrant's Common Stock is listed on the New York
Stock Exchange and the Pacific Stock Exchange. As of February 1, 1998, there
were approximately 10,650 stockholders of record of its Common Stock.
ITEM 6 -- SELECTED FINANCIAL DATA
Registrant hereby incorporates by reference the Consolidated Selected
Financial Data -- 11 Years set forth on pages 50 and 51 of its Annual Report,
which pages are included in Exhibit 13.
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
23-30 of its Annual Report, which pages are included in Exhibit 13.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Registrant hereby incorporates by reference the report of independent
auditors and the information contained in the consolidated financial statements,
including the notes thereto set forth on pages 31-49 of its Annual Report, which
pages are included in Exhibit 13.
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 1998 Annual Meeting and Proxy
Statement. Information concerning executive officers of Registrant is set forth
herein 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 1998 Annual Meeting and
Proxy Statement.
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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 1998 Annual Meeting and Proxy Statement.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Registrant hereby incorporates by reference information with respect to
indebtedness of management which is contained in Table VI and the accompanying
text set forth under the caption "Indebtedness of Management" in its Notice of
1998 Annual Meeting and Proxy Statement.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) The following consolidated financial statements of Registrant included
in the Annual Report are incorporated by reference in Item 8 and included in
Exhibit 13:
Consolidated Statement of Earnings -- Years ended December 31, 1997,
1996 and 1995
Consolidated Statement of Financial Position -- December 31, 1997 and
1996
Consolidated Statement of Cash Flows -- Years ended December 31, 1997,
1996 and 1995
Consolidated Statement of Changes in Stockholders' Equity -- Years
ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(3) The following exhibits are filed by Registrant pursuant to Item 601 of
Regulation S-K:
<TABLE>
<C> <C> <S>
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* -- Form of Employment Agreement entered into on July 23, 1987
between Registrant 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.
10.2* -- Form of Severance Agreement dated October 27, 1986 between
Registrant and certain officers, incorporated by reference
to Exhibit 10.2 to Form 10-Q for the quarter ended September
30, 1986.
10.3* -- 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.
10.4* -- 1992 Stock Option Plan, as amended and restated as of
December 12, 1996, incorporated by reference to Exhibit 10.6
to Form 10-K for the fiscal year ended December 31, 1996.
10.5* -- Incentive Compensation Plan, as amended and restated as of
January 1, 1996, incorporated by reference to Exhibit 10.7
to Form 10-K for the fiscal year ended December 31, 1996.
10.6* -- Amendment to Incentive Compensation Plan, effective
September 25, 1997.
10.7* -- 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.
10.8* -- Nonemployee Directors' Retirement Plan, as amended and
restated as of January 1, 1998.
</TABLE>
10
<PAGE> 12
<TABLE>
<C> <C> <S>
10.9 -- Directors' Supplemental Medical Plan, as amended and
restated as of February 16, 1995, incorporated by reference
to Exhibit 10.10 to Form 10-K for the fiscal year ended
December 31, 1994.
10.10* -- Nonemployee Directors' Stock Option Plan effective May 2,
1995, incorporated by reference to Exhibit A to 1995 Notice
of Annual Meeting and Proxy Statement dated March 24, 1995.
13 -- Pages 23-51 of the Annual Report, but only to the extent set
forth in Items 1, 5, 6, 7 and 8 hereof.
21 -- Subsidiaries of UST.
23 -- Consent of Independent Auditors.
27 -- 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.
11
<PAGE> 13
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 18, 1998
By: /s/ 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 18, 1998 Executive Officer) /s/ VINCENT A. GIERER, JR.
--------------------------------------------------------
VINCENT A. GIERER, JR.
Senior Vice President
and Controller
(Principal Accounting
Officer and Principal
February 18, 1998 Financial Officer) /s/ ROBERT T. D'ALESSANDRO
--------------------------------------------------------
ROBERT T. D'ALESSANDRO
February 18, 1998 Director /s/ JAMES W. CHAPIN
--------------------------------------------------------
JAMES W. CHAPIN
February 18, 1998 Director /s/ JOHN P. CLANCEY
--------------------------------------------------------
JOHN P. CLANCEY
February 18, 1998 Director /s/ EDWARD H. DEHORITY, JR.
--------------------------------------------------------
EDWARD H. DEHORITY, JR.
February 18, 1998 Director /s/ ELAINE J. EISENMAN
--------------------------------------------------------
ELAINE J. EISENMAN
February 18, 1998 Director /s/ EDWARD T. FOGARTY
--------------------------------------------------------
EDWARD T. FOGARTY
February 18, 1998 Chairman of the Board /s/ VINCENT A. GIERER, JR.
--------------------------------------------------------
VINCENT A. GIERER, JR.
February 18, 1998 Director /s/ P.X. KELLEY
--------------------------------------------------------
P.X. KELLEY
February 18, 1998 Director /s/ PETER J. NEFF
--------------------------------------------------------
PETER J. NEFF
February 18, 1998 Director /s/ RALPH L. ROSSI
--------------------------------------------------------
RALPH L. ROSSI
February 18, 1998 Director /s/ JOHN P. WARWICK
--------------------------------------------------------
JOHN P. WARWICK
February 18, 1998 Director /s/ LOWELL P. WEICKER, JR.
--------------------------------------------------------
LOWELL P. WEICKER, JR.
</TABLE>
12
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<C> <C> <S>
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* -- Form of Employment Agreement entered into on July 23, 1987
between Registrant 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.
10.2* -- Form of Severance Agreement dated October 27, 1986 between
Registrant and certain officers, incorporated by reference
to Exhibit 10.2 to Form 10-Q for the quarter ended September
30, 1986.
10.3* -- 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.
10.4* -- 1992 Stock Option Plan, as amended and restated as of
December 12, 1996, incorporated by reference to Exhibit 10.6
to Form 10-K for the fiscal year ended December 31, 1996.
10.5* -- Incentive Compensation Plan, as amended and restated as of
January 1, 1996, incorporated by reference to Exhibit 10.7
to Form 10-K for the fiscal year ended December 31, 1996.
10.6* -- Amendment to Incentive Compensation Plan, effective
September 25, 1997.
10.7* -- 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.
10.8* -- Nonemployee Directors' Retirement Plan, as amended and
restated as of January 1, 1998.
10.9 -- Directors' Supplemental Medical Plan, as amended and
restated as of February 16, 1995, incorporated by reference
to Exhibit 10.10 to Form 10-K for the fiscal year ended
December 31, 1994.
10.10* -- Nonemployee Directors' Stock Option Plan effective May 2,
1995, incorporated by reference to Exhibit A to 1995 Notice
of Annual Meeting and Proxy Statement dated March 24, 1995.
13 -- Pages 23-51 of the Annual Report, but only to the extent set
forth in Items 1, 5, 6, 7 and 8 hereof.
21 -- Subsidiaries of UST.
23 -- Consent of Independent Auditors.
27 -- 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 10.6
AMENDMENT
TO
UST INC.
INCENTIVE COMPENSATION PLAN
The UST Inc. Incentive Compensation Plan (the "Plan"), as restated as of
January 1, 1990, December 1, 1992, January 1, 1994 and January 1, 1996, is
hereby amended as set forth below, effective as of September 25, 1997:
1. Section 5.1 of the Plan is hereby restated to read as follows:
"5.1 The Incentive Compensation Plan shall be administered by a
Committee of three (3) to six (6) members, as determined from time to
time by the Board, subject to the provisions of Section 3.3 and
applicable provisions of Section 4 hereof. Such members shall be
appointed from time to time by the Board, upon recommendation by the
Chief Executive Officer of the Parent Company. The Chairman of the
Committee shall be a member of the Board."
Except as set forth above, the Plan is hereby ratified and confirmed in
all respects.
<PAGE> 1
EXHIBIT 10.8
EFFECTIVE AS OF JANUARY 1, 1988;
AMENDED AND RESTATED AS OF JANUARY 1, 1998
UST
NONEMPLOYEE DIRECTORS' RETIREMENT PLAN
1. Purpose; Applicability. The purpose of the UST Nonemployee Directors'
Retirement Plan (the "Plan") is to provide retirement benefits to nonemployee
members of the Board of Directors ("Directors") of UST Inc. (the "Company"). The
Plan shall be effective for 1988 and each succeeding year. The Plan shall be
applicable to all current or future Directors of the Company whose service as a
Director equals or exceeds thirty-six months (whether or not consecutive), other
than directors who are employees or former employees of the Company or its
subsidiaries (whether direct or indirect).
2. Benefits. The Company shall establish on its books the necessary
account to accurately reflect its liability as a credited amount payable to each
Director entitled to benefits under the Plan. The Company's liability to each
such Director shall be a monthly amount (the "Monthly Payment") that is equal to
one-twelfth ( 1/12th) of 75% of the Director's Highest Annual Compensation (as
hereinafter defined), payable for a period (the "Payment Period") that is equal
to the same number of full months as the Director shall have served as a
Director; provided, however, that effective January 1, 1998, the Payment Period
shall not exceed 120 months. "Highest Annual Compensation" shall mean the
average Compensation (as hereinafter defined) of a Director during the twelve
(12) consecutive calendar months in the last thirty-six (36) calendar months of
a Director's service affording the highest such average. "Compensation" shall
mean payments which the Director receives from the Company for services solely
in his capacity as a Director, including directors' fees, retainers, meeting
fees and fees for chairing committees, but shall exclude consulting fees and
direct reimbursement of expenses. The Monthly Payments to a Director shall begin
on the last day of the later of the calendar month in which the Director attains
the age of 65 or the calendar month in which the Director ceases to serve as a
Director, and shall continue to be made on the last day of each succeeding month
for a period that is equal to the same number of full months as the Director
shall have served as a Director; provided, however, that the Payment Period
shall not exceed 120 months. In the event of death of a Director whose
retirement commenced on or after January 1, 1998, prior to the end of the
Payment Period, a lump sum payment, equal to the total Monthly Payments
remaining to be made to the Director had the Director survived, shall be made to
the deceased Director's spouse.
Effective January 1, 1998, in the event of death of a Director prior to the
Director's retirement from the Board, and provided that the Director's service
as a Director equals or exceeds thirty-six (36) months, a lump sum payment,
equal to the total Monthly Payments to which the Director would have been
entitled had the Director retired immediately before death, will be made to the
deceased Director's spouse, such payment to be made on the last day of the later
of the calendar month in which the Director would have attained the age of 65 or
the calendar month in which the Director's death occurred.
Directors shall not be entitled to any early retirement or other benefits.
3. No Right of Service. Nothing contained in this Plan shall give any
Director the right to remain as a Director.
4. Nontransferability. No amounts payable under the Plan shall be
transferable by the Director or former Director.
5. Amendments to the Plan. The Board of Directors of the Company may 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 Directors, adversely affect any right
of any such Director to receive benefits that have previously vested.
6. Governing Law. The Plan shall be governed and construed in accordance
with the laws of the State of Delaware.
<PAGE> 1
EXHIBIT 13
(ITEMS 1 AND 8)
UST
CONSOLIDATED INDUSTRY SEGMENT DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
Tobacco
Smokeless tobacco................................. $1,180,535 $1,170,014 $1,119,828
Other tobacco products............................ 7,588 8,413 8,792
---------- ---------- ----------
1,188,123 1,178,427 1,128,620
Wine................................................. 145,048 122,458 109,453
Other................................................ 72,534 74,508 70,742
Elimination of intersegment sales.................... (3,987) (3,688) (3,019)
---------- ---------- ----------
NET SALES.................................... $1,401,718 $1,371,705 $1,305,796
========== ========== ==========
OPERATING PROFIT (LOSS)
Tobacco.............................................. $712,204 $751,115 $720,965
Wine................................................. 29,178 19,875 13,493
Other................................................ (5,680) (500) (5,384)
---------- ---------- ----------
OPERATING PROFIT............................. 735,702 770,490 729,074
Corporate expenses................................... (24,394) (19,600) (21,305)
Interest, net........................................ (7,451) (6,364) (3,179)
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES................. $703,857 $744,526 $704,590
========== ========== ==========
IDENTIFIABLE ASSETS AT DECEMBER 31
Tobacco.............................................. $457,559 $453,228 $431,424
Wine................................................. 220,881 186,611 176,565
Other................................................ 110,609 93,875 88,847
Corporate............................................ 37,665 73,678 87,916
---------- ---------- ----------
$826,714 $807,392 $784,752
========== ========== ==========
CAPITAL EXPENDITURES (DISPOSITIONS), NET
Tobacco.............................................. $28,627 $22,606 $ 2,266
Wine................................................. 19,478 11,551 10,762
Other................................................ 7,134 3,037 2,447
Corporate............................................ 511 (445) (1,473)
---------- ---------- ----------
$55,750 $36,749 $14,002
========== ========== ==========
DEPRECIATION
Tobacco.............................................. $17,128 $16,746 $17,642
Wine................................................. 10,465 8,949 7,693
Other................................................ 2,096 1,911 2,386
Corporate............................................ 447 537 633
---------- ---------- ----------
$30,136 $28,143 $28,354
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 2
EXHIBIT 13 -- (CONTINUED)
(ITEM 6)
UST
CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS for the year ended December
31
Net sales......................................... $1,401,718 $1,371,705 $1,305,796 $1,203,951 $1,097,533 $1,032,172
Cost of products sold (includes excise taxes)..... 291,942 272,756 262,203 251,944 246,445 256,796
Selling, advertising and administrative
expenses........................................ 398,468 348,059 335,824 311,279 286,336 274,613
---------- ---------- ---------- ---------- ---------- ----------
Operating income.................................. 711,308 750,890 707,769 640,728 564,752 500,763
Other expense (income):
Interest expense (income), net.................. 7,451 6,364 3,179 92 (2,004) (1,866)
Gain on disposal of product line................ -- -- -- -- (35,029) --
---------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes and cumulative effect
of accounting changes........................... 703,857 744,526 704,590 640,636 601,785 502,629
---------- ---------- ---------- ---------- ---------- ----------
Income taxes...................................... 264,719 280,527 274,830 253,110 232,893 190,071
---------- ---------- ---------- ---------- ---------- ----------
Earnings before cumulative effect of accounting
changes......................................... 439,138 463,999 429,760 387,526 368,892 312,558
Cumulative effect of accounting changes (net of
income tax benefit)............................. -- -- -- -- 19,846 --
---------- ---------- ---------- ---------- ---------- ----------
Net earnings...................................... $ 439,138 $ 463,999 $ 429,760 $ 387,526 $ 349,046 $ 312,558
========== ========== ========== ========== ========== ==========
PER SHARE DATA
Basic earnings per share before cumulative effect
of accounting changes........................... $2.39 $2.48 $2.21 $1.92 $1.77 $1.49
Basic earnings per share.......................... 2.39 2.48 2.21 1.92 1.67 1.49
Diluted earnings per share before cumulative
effect of accounting changes.................... 2.37 2.44 2.17 1.88 1.73 1.43
Diluted earnings per share........................ 2.37 2.44 2.17 1.88 1.64 1.43
Dividends per share............................... 1.62 1.48 1.30 1.12 .96 .80
Market price per share:
High............................................ 36 15/16 35 7/8 36 31 1/2 32 3/4 35 3/8
Low............................................. 25 1/2 28 1/4 26 5/8 23 5/8 24 3/8 25 3/8
FINANCIAL CONDITION AT DECEMBER 31
Current assets.................................... $441,844 $450,570 $425,555 $381,937 $334,996 $330,208
Current liabilities............................... 166,519 306,553 280,723 160,755 106,642 81,208
Working capital................................... 275,325 144,017 144,832 221,182 228,354 249,000
Ratio of current assets to current liabilities.... 2.7:1 1.5:1 1.5:1 2.4:1 3.1:1 4.1:1
Total assets...................................... 826,714 807,392 784,752 741,236 706,195 673,965
Long-term debt.................................... 100,000 100,000 100,000 125,000 40,000 --
Total debt........................................ 110,000 250,000 200,000 125,000 40,000 --
Stockholders' equity.............................. 437,931 282,020 293,557 361,669 462,972 516,606
OTHER DATA
Stock repurchased................................. $ 45,719 $237,759 $274,783 $298,843 $236,704 $212,581
Dividends paid on shares.......................... $298,059 $277,302 $252,388 $225,715 $199,725 $167,951
Dividends paid as a percentage of net earnings.... 67.9% 59.8% 58.7% 58.2% 57.2% 53.7%
Return on net sales............................... 31.3% 33.8% 32.9% 32.2% 31.8% 30.3%
Return on average assets.......................... 53.7% 58.3% 56.3% 53.5% 50.6% 47.0%
Return on average stockholders' equity............ 122.0% 161.2% 131.2% 94.0% 71.3% 62.5%
Percentage of long-term debt to stockholders'
equity.......................................... 22.8% 35.5% 34.1% 34.6% 8.6% --
Percentage of total debt to stockholders'
equity.......................................... 25.1% 88.6% 68.1% 34.6% 8.6% --
Average number of shares (in
thousands) -- basic............................. 183,931 187,386 194,374 201,995 208,469 209,803
Average number of shares (in
thousands) -- diluted........................... 185,602 190,067 197,613 205,699 213,412 218,674
</TABLE>
- ---------------
See Management's Discussion and Analysis.
Net sales and selling, advertising and administrative expenses have been
reclassified to conform to the 1997 presentation.
All share data have been adjusted to reflect the two-for-one stock splits
distributed on January 27, 1992, 1989 and 1987.
<PAGE> 3
UST
CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS for the year ended December 31
Net sales............................................ $898,436 $756,435 $673,852 $611,878 $570,816
Cost of products sold (includes excise taxes)........ 227,546 191,824 185,464 174,560 168,942
Selling, advertising and administrative expenses..... 247,085 215,621 189,963 177,103 164,475
-------- -------- -------- -------- --------
Operating income..................................... 423,805 348,990 298,425 260,215 237,399
Other expense (income):
Interest expense (income), net..................... (2,279) (3,203) (3,190) (1,068) 2,768
Gain on disposal of product line................... -- -- -- -- --
-------- -------- -------- -------- --------
Earnings before income taxes and cumulative effect of
accounting changes................................. 426,084 352,193 301,615 261,283 234,631
-------- -------- -------- -------- --------
Income taxes......................................... 160,179 128,918 111,128 99,133 103,760
-------- -------- -------- -------- --------
Earnings before cumulative effect of accounting
changes............................................ 265,905 223,275 190,487 162,150 130,871
Cumulative effect of accounting changes (net of
income tax benefit)................................ -- -- -- -- --
-------- -------- -------- -------- --------
Net earnings......................................... $265,905 $223,275 $190,487 $162,150 $130,871
======== ======== ======== ======== ========
PER SHARE DATA
Basic earnings per share before cumulative effect of
accounting changes................................. $1.26 $1.04 $.87 $.74 $.59
Basic earnings per share............................. 1.26 1.04 .87 .74 .59
Diluted earnings per share before cumulative effect
of accounting changes.............................. 1.20 .99 .83 .71 .57
Diluted earnings per share........................... 1.20 .99 .83 .71 .57
Dividends per share.................................. .66 .55 .46 .37 .30
Market price per share:
High............................................... 33 7/8 18 1/4 15 3/8 10 1/2 8
Low................................................ 16 3/8 12 3/8 9 5/8 6 4 7/8
FINANCIAL CONDITION at December 31
Current assets....................................... $305,430 $265,854 $275,954 $291,006 $260,530
Current liabilities.................................. 95,455 68,660 66,643 69,935 63,242
Working capital...................................... 209,975 197,194 209,311 221,071 197,288
Ratio of current assets to current liabilities....... 3.2:1 3.9:1 4.1:1 4.2:1 4.1:1
Total assets......................................... 656,513 622,595 630,155 597,955 548,951
Long-term debt....................................... -- 3,060 6,789 21,828 37,131
Total debt........................................... 1,250 4,849 14,469 30,763 48,292
Stockholders' equity................................. 482,875 473,873 482,254 453,253 401,113
OTHER DATA
Stock repurchased.................................... $184,424 $151,259 $ 97,517 $ 67,356 $ 50,865
Dividends paid on shares............................. $139,670 $118,295 $101,197 $ 81,672 $ 66,789
Dividends paid as a percentage of net earnings....... 52.5% 53.0% 53.1% 50.4% 51.0%
Return on net sales.................................. 29.6% 29.5% 28.3% 26.5% 22.9%
Return on average assets............................. 41.6% 35.6% 31.0% 28.3% 24.4%
Return on average stockholders' equity............... 55.6% 46.7% 40.7% 38.0% 33.9%
Percentage of long-term debt to stockholders'
equity............................................. -- .6% 1.4% 4.8% 9.3%
Percentage of total debt to stockholders' equity..... .3% 1.0% 3.0% 6.8% 12.0%
Average number of shares (in thousands) -- basic..... 211,603 215,156 219,820 220,550 222,492
Average number of shares (in thousands) -- diluted... 221,458 224,522 230,164 228,579 230,224
</TABLE>
<PAGE> 4
EXHIBIT 13 -- (CONTINUED)
(ITEM 7)
UST
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARATIVE INFORMATION
The comparison of results for the three years presented was affected by a
number of factors. In some cases, previously reported information was restated,
as appropriate, either in this annual report, or in the quarterly filings with
the Securities and Exchange Commission. The following factors are reflected in
the analysis of Results of Operations and Financial Condition.
Due to the shipping pattern of the Tobacco segment, there was an additional
shipping day that occurred in the third quarter of 1996 which affected both the
unit volume and financial result comparisons for the last three years.
In 1997, as a result of the implementation of a number of marketing and
sales initiatives in the Tobacco segment, returned goods for moist smokeless
tobacco increased significantly. Accordingly, returned goods have been deducted
from reported unit volume, and expenses for returned goods have been
reclassified as a reduction to net sales from selling, advertising and
administrative expense. This reclassification had no effect on net earnings or
earnings per share amounts. All prior period amounts have been reclassified to
conform to the 1997 presentation.
Also, at December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which required the
restatement of all earnings per share amounts prior to 1997. (See Summary of
Significant Accounting Policies and Earnings Per Share Notes.)
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
1997 COMPARED WITH 1996
Consolidated net sales rose 2 percent to $1.402 billion while net earnings
decreased 5 percent to $439.1 million and diluted earnings per share declined 3
percent to $2.37.
Over the last three years, net sales have increased 16.4 percent at an
average annual rate of 5.2 percent; net earnings have increased 13.3 percent at
an average annual rate of 4.5 percent; and diluted earnings per share have
increased 26.1 percent at an average annual rate of 8.3 percent.
Results for the Tobacco segment were lower due to one less shipping day in
1997, along with higher spending for marketing and sales initiatives to address
competition, increased expenses relating to legal and regulatory issues and a
charge relating to recording the present value of an employment contract for a
former executive officer.
Wine segment results were substantially higher due to increased case volume
and higher selling prices for premium varietal wines. Results for the Other
segment were lower primarily due to international market development costs.
The gross margin percentage decreased to 79.2 percent, or 0.9 percentage
points, as a result of the competitive initiatives undertaken in the Tobacco
segment, along with higher case volume for the Wine segment which has lower
margins than the Tobacco segment.
Corporate expenses increased primarily due to the recording of another
employment contract for a former executive officer.
Interest expense increased due to higher average levels of debt outstanding
during the year.
<PAGE> 5
Pretax margins declined to 50.2 percent on earnings before income taxes of
$703.9 million. Over the last three years, pretax margins have averaged 52.8
percent while earnings before income taxes have increased 9.9 percent at an
average annual rate of 3.4 percent.
The effective tax rate remained stable from year to year. However, the rate
for the fourth quarter of 1997 was higher than the similar period of the prior
year as a result of tax benefits recognized from the sale of a business in the
Other segment in the fourth quarter of 1996.
Future net earnings and earnings per share growth may be impacted by
proposed federal legislation, if enacted into law, relating to the tobacco
industry, (See Contingencies Note), the Company's ability to continue to address
the competitive pressures affecting the Tobacco segment and continued growth in
other businesses.
1996 COMPARED WITH 1995
Consolidated net sales rose 5 percent to $1.372 billion, net earnings
increased 8 percent to $464 million, and diluted earnings per share increased
12.4 percent to $2.44.
The Tobacco segment posted an overall gain due to higher selling prices and
higher unit volume for moist smokeless tobacco due to an additional shipping
day, moderated by increases in spending for marketing and sales.
Results for the Wine segment rose significantly due to higher case volume
and higher selling prices for premium varietal wines. The Other segment recorded
a small loss for the year.
Corporate expenses were lower as higher salaries and related costs were
offset by the absence of provisions recorded for non-strategic assets in 1995.
Interest expense increased significantly as a result of higher average
levels of debt outstanding during the year.
Pretax margins remained stable at 54.3 percent on earnings before income
taxes of $744.5 million.
The overall effective tax rate decreased in 1996 as a result of tax
benefits recognized on the sale of a business in the Other segment and the
reversal of certain state tax reserves, both of which occurred in the fourth
quarter.
TOBACCO SEGMENT
1997 COMPARED WITH 1996
The comparison of results for the Tobacco segment was affected by an
additional shipping day in 1996 and the increase of returned goods in 1997. Due
to increasing competition in the moist smokeless tobacco market, several
initiatives were implemented during the year which increased expenses.
Accordingly, Tobacco segment results were lower for the year as higher selling
prices were more than offset by slightly lower unit volume for moist smokeless
tobacco and higher spending.
During the year, the Company introduced three new brands and offered new
promotions to stimulate unit volume growth. In an effort to re-energize the
premium-priced core market, the Company launched Copenhagen Long Cut, a line
extension of Copenhagen, at the end of the first quarter of 1997. This
introduction resulted in an overall increase in unit volume for the Copenhagen
brand. Later in the year, the Company introduced Red Seal, its entry into the
price/value category, in selected markets where price/value brands have shown
their greatest strength. In the fourth quarter, Rooster, a new premium-priced
brand offered in a larger can containing more tobacco, was test marketed in the
four states with the highest concentration of competitive premium-priced
products.
For the first time, the Company offered promotion-priced four-packs of its
two largest selling brands, Skoal and Copenhagen, one each in the third and
fourth quarters.
During the second half of the year, the Company also implemented a program
to enhance product freshness by accelerating the rotation of moist smokeless
tobacco products at retail.
<PAGE> 6
Domestic unit volume for moist smokeless tobacco products decreased 1.5
percent in 1997 to 623.8 million cans, as compared with 1996 which contained an
additional shipping day. As a result of the aforementioned initiatives, on an
equivalent shipping day basis, unit volume stabilized, reversing a downward
trend that began in the fourth quarter of 1996. However, the initiatives also
resulted in a significant increase in returned goods. The increase in returned
goods, along with the promotion-priced units and the new price/value brand,
slightly reduced gross margins for the Tobacco segment.
Unit volume results for the fourth quarter remained stable rising 0.2
percent to 154.8 million cans, compared with the similar 1996 period. The Skoal
promotion-priced four-pack, which ran during the third quarter, disrupted
wholesaler regular stock orders in the fourth quarter of 1997. This, coupled
with increased returned goods, adversely affected the fourth quarter reported
unit volume results.
Selling and advertising expenses for the year increased in support of the
new brand introductions, promotions and other targeted consumer initiatives, as
well as increased market research.
Administrative expenses were also significantly higher due to costs
associated with legal and regulatory issues, and a charge resulting from an
employment contract with a former executive officer.
Accordingly, operating profit for the Tobacco segment decreased 5.2 percent
to $712.2 million for 1997.
The Company will continue to implement current and new competitive
marketing and sales initiatives. The Company believes that competitive pressures
in the marketplace and proposed federal legislation, if enacted into law,
relating to the tobacco industry may continue to impact unit volume and
operating results for the Tobacco segment in the future.
1996 COMPARED WITH 1995
The comparison of results for the Tobacco segment was affected by an
additional shipping day in 1996. Overall, Tobacco segment results were higher
for the year due to higher selling prices and slightly higher unit volume for
moist smokeless tobacco, moderated by increases in spending for marketing and
sales.
Domestic unit volume for moist smokeless tobacco products increased 1.5
percent in 1996 to 633.5 million cans, net of returned goods. Unit volume
results for 1996 included the effects of an additional shipping day. On an
equivalent shipping day basis, unit volume for the year approximated the 1995
level.
Selling expenses increased primarily due to the promotion and support of
new moist smokeless tobacco brands introduced in the fourth quarter of 1996 and
1995, as well as traditional brands. Advertising costs increased moderately as
higher print and billboard advertising was partially offset by lower expenses
related to promotional activities. Administrative expenses remained stable.
Operating profit increased 4.2 percent to $751.1 million.
WINE SEGMENT
1997 COMPARED WITH 1996
Wine segment revenue increased 18.4 percent to $145 million and accounted
for 10.3 percent of consolidated sales. Higher premium wine case volume and
selling prices were the primary reasons for the increase. Also contributing to
the overall sales gain were higher revenues from the microbrewery operation and
higher bulk wine sales. Case volume for premium wine increased 9.6 percent,
while total wine case volume increased 6.8 percent. Chateau Ste. Michelle and
Columbia Crest, the Company's two leading brands of premium wine, accounted for
approximately 70 percent of total Wine segment revenue.
Unit costs increased slightly in 1997 as a result of higher average costs
associated with lower harvest yields experienced in 1996.
However, gross profit for the Wine segment increased 25.2 percent, as the
low harvest yields and increased demand for premium varietal wines caused a
grape shortage in the wine industry in 1997, allowing the Company to raise
prices.
<PAGE> 7
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 1997 was significantly higher than in 1996 but at relatively stable
average costs. Because of the fluctuation in grape harvest yields from year to
year, the Company in 1998 will continue to experience shortages of Washington
state grapes for certain of its premium varietal wines and will continue to
place them on allocation. In addition, the Company anticipates an increase in
California grape production and is taking steps to secure a supply for use in
its California labels.
Selling, advertising and administrative expenses were higher in 1997.
Selling expenses were stable as compared with 1996. Advertising expenses were
significantly higher in promoting the brand awareness of premium wines,
primarily Columbia Crest. Administrative and other expenses were significantly
higher, primarily due to salary and related expenses and higher spending in
other areas.
The Wine segment recorded an operating profit of $29.2 million in 1997, an
increase of 46.8 percent.
The Company believes that the low harvest yields in Washington state in
1996 will continue to affect 1998 results for certain red varieties. Also, an
increase in the supply of competitively priced products from California and
imports will require the Company to generally maintain pricing at current
levels. In order to maintain gross margins and increase profitability, the
Company will continue to focus on higher margin products and will increase
prices only on select brands. Accordingly, the growth rate of the Wine segment
may be lower in 1998 than experienced in prior years.
1996 COMPARED WITH 1995
Wine segment revenue increased 11.9 percent to $122.5 million and accounted
for 8.9 percent of consolidated sales. Higher case volume along with higher
selling prices for premium wine accounted for the increase, partially offset by
lower bulk wine sales. Also contributing to the overall sales gain were revenues
resulting from the acquisition of a small microbrewery in late 1995. Case volume
for premium wine increased 9.6 percent, while total wine case volume increased
8.7 percent. Chateau Ste. Michelle and Columbia Crest, the Company's two leading
brands of premium wine, accounted for approximately 73 percent of total Wine
segment revenue.
Unit costs remained relatively stable in 1996 due to favorable harvest
yields in 1995 and prior years. Total grape tonnage harvested and purchased in
1996 was significantly lower than in 1995 and at significantly higher costs
which will affect future unit costs.
Gross profit for the Wine segment increased 26.9 percent primarily as a
result of an increase in premium wine case volume, higher selling prices and
relatively stable unit costs.
Selling, advertising and administrative expenses were higher in 1996.
Selling and advertising expenses increased to expand the brand awareness of
premium wines, primarily Chateau Ste. Michelle, along with increased expenses to
support higher volume levels of all premium brands.
Administrative and other expenses were significantly higher primarily due
to salary and related expenses and higher spending in other areas. Also included
in selling, advertising and administrative expenses in 1996 are costs incurred
by the microbrewery operation.
The Wine segment recorded an operating profit of $19.9 million in 1996.
OTHER SEGMENT
1997 COMPARED WITH 1996
Other segment sales decreased 2.6 percent to $72.5 million and accounted
for 5.2 percent of consolidated sales. Increased revenues for the cigar
operations were more than offset by the absence of revenues from businesses sold
in 1996. In 1997, the Company incurred a $24.1 million write-down of production
costs and prepaid royalties for its entertainment business, which it will divest
in 1998. This charge was offset by a $25.7 million prepayment of royalties
received in connection with a previous divestiture. Favorable results from the
cigar operations were more than offset by higher expenditures associated with
developing international
<PAGE> 8
markets, while results for other businesses were mixed. Overall, the Other
segment recorded an operating loss of $5.7 million.
1996 COMPARED WITH 1995
Other segment sales increased 5.3 percent to $74.5 million and accounted
for 5.4 percent of consolidated sales. Other segment revenues increased
primarily due to the cigar and international operations, partially offset by
lower revenues for the entertainment business.
Favorable results from the cigar and international operations were offset
by an operating loss for the entertainment business.
Overall, the Other segment recorded a small operating loss of $0.5 million.
FINANCIAL CONDITION
SOURCES AND USES OF CASH -- OPERATIONS
Cash provided by operating activities, primarily earnings generated by the
Tobacco segment, is the major source of funds available to the Company. Cash
provided by operating activities for 1997 was $412.6 million as compared to
$439.4 million in 1996 and $445.1 million in 1995.
Net cash provided by operating activities in 1997 as compared to 1996
decreased slightly due to lower earnings generated by the Tobacco segment and an
increase in inventories. These factors were partially offset by higher earnings
generated by the Wine segment.
Significant inventories of leaf tobacco are required in connection with the
Company's smokeless tobacco products and cigars. During the last three years,
$213.1 million was used for the purchase of leaf tobacco and related costs for
smokeless tobacco. In addition, the cost of grapes harvested and purchased
totaled $78.1 million over the last three years.
INVESTING ACTIVITIES
Net cash used in investing activities was $30 million in 1997. Purchases of
property, plant and equipment over the last three years totaled $138.2 million.
Major areas of capital spending from 1995 through 1997 were:
Tobacco segment
- Manufacturing, processing and packaging equipment
- Building additions and renovations
- Computer equipment and software
Wine segment
- Storage capacity and processing equipment
- Vineyard expansion and irrigation
- Building renovations
Other segment
- Cigar distribution facility and manufacturing capacity expansion
- Equipment
In 1998, the Company's capital program is expected to approximate $72
million and will primarily include additions and improvements to the tobacco
processing and manufacturing operations, expansion of wine storage facilities
and equipment capacity expansion for the cigar operations in the Other segment.
In 1997, the Company received $25.7 million resulting from a prepayment of
royalties in connection with a previous divestiture. In 1996, the Company sold
two businesses in the Other segment which resulted in cash proceeds of $6.3
million and in 1995, cash proceeds from the sale of a corporate aircraft were
$17.7 million.
<PAGE> 9
FINANCING ACTIVITIES
Other significant sources and uses of cash over the last three years have
included borrowings, the issuance of common stock, cash dividends, stock
repurchases and the repayment of borrowings.
Common stock was issued upon the exercise of options granted under the
Company's stock option plans. The Company receives income tax benefits upon the
exercise of certain of these options. Since 1994, funds received primarily from
the exercise of options, together with these tax benefits, totaled $134.6
million.
It is the Company's philosophy that its stockholders should benefit
directly from the financial strength of its operations. Accordingly, the Company
has increased dividend payments as earnings have risen. The Company increased
its 1997 cash dividend by 9.5 percent to an annual rate of $1.62 per share.
Since 1994, the dividend has increased 44.6 percent reflecting an average annual
increase of 13.1 percent. Total cash dividends paid by the Company in 1997 were
$298.1 million or 67.9 percent of net earnings. Cash dividends paid to
stockholders have exceeded 50 percent of net earnings in each of the last three
years. 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. During the last three years, cash
dividends distributed to stockholders amounted to $827.7 million, totaling 62.1
percent of net earnings for the period.
During the first half of 1997, the Company continued its program to
repurchase shares of its common stock as authorized by the Board of Directors.
The current program began in 1996 upon the completion of the prior program, and
authorizes 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 and compensation plans and other corporate
purposes. In the first six months of 1997, the Company repurchased 1.5 million
shares at a cost of $45.7 million. As of December 31, 1997, 18 million shares
remained to be repurchased under the current program. The Company has suspended
its stock repurchase program and has not increased the quarterly dividend rate
in view of the proposed resolution of regulatory and litigation issues affecting
the tobacco industry and the financial obligations expected to be imposed on the
Company. If, and when, federal legislation is enacted, the Company will reassess
its share repurchase and dividend programs.
As a result of the suspension of the stock repurchase program at mid-year,
the Company used excess cash to repay borrowings. Over the last three years the
Company had net repayments on borrowings of $15 million.
LIQUIDITY AND CAPITAL RESOURCES
Uses of cash exceeded sources of cash by $47.5 million. Cash generated from
operating activities and proceeds received from the prepayment of royalties,
along with cash on hand at December 31, 1996 were used to meet the Company's
cash requirements. These requirements were for raw material inventory, primarily
seasonal purchases of leaf tobacco for moist smokeless tobacco and cigars, as
well as grapes harvested and purchased for the wine operations, quarterly
dividend payments, capital projects and the stock repurchase program.
The Company currently maintains two revolving credit agreements totaling
$350 million with a group of banks. The terms of these agreements provide for a
five-year revolving credit facility in the amount of $262.5 million and a
364-day revolving credit facility in the amount of $87.5 million. These
facilities will be used primarily as support for commercial paper issuances and
can also be used as direct bank financing. Of the $350 million available under
its credit facilities, the Company has allocated $110 million to support
outstanding commercial paper at December 31, 1997.
The ratio of current assets to current liabilities (current ratio) at
December 31,1997 was 2.7 to 1 and has averaged 1.9 to 1 over the last three
years. The current ratio increased in 1997 as compared to 1996 due to higher
inventories and lower short-term borrowings. The Company's liquidity position is
enhanced by the fact that leaf inventories are carried at costs computed under
the LIFO method. The average costs of these inventories are $47.4 million more
than the amount at which they are carried in the Consolidated Statement of
Financial Position at December 31, 1997.
In 1998, projected leaf tobacco purchases will approximate the amounts
expended in 1997. In addition, significant levels of cash will be required for
dividend payments and capital projects.
<PAGE> 10
The Company intends to maintain appropriate facilities to ensure access to
credit markets providing sufficient financial resources and operational
flexibility. The Company is also analyzing its current capital structure to
determine the appropriate level of debt financing. The Company may be required
to seek additional borrowing capacity if federal legislation relating to the
tobacco industry is enacted, and for other corporate purposes.
The percentage of total debt outstanding to stockholders' equity was 25.1
percent at December 31, 1997, versus 88.6 percent at December 31, 1996. This
decrease was due to the significant paydown of short-term borrowings as a result
of the suspension of the stock repurchase program.
The Company anticipates that its operating cash requirements will be met by
amounts generated from operating activities augmented by borrowings.
Stockholders' equity increased in 1997, as net earnings and common stock
issued under the Company's stock option plans were partially offset by the
effects of dividend payments and the stock repurchase program.
At December 31, 1997, the return on average stockholders' equity declined
to 122 percent from 161.2 percent at December 31, 1996, as a result of the
increase in stockholders' equity for the year. In 1996 and 1995 this same return
was higher due to the level of stock repurchases in those years.
YEAR 2000 ISSUE
The year 2000 issue relates to computer system programs which may not
properly recognize the change in date years from 1999 to 2000. As a result of
this time sensitivity of existing software, any business entity is at risk for
possible system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a risk assessment, the Company is currently modifying or replacing
significant portions of its software so that its computer systems will function
properly with respect to the year 2000 date recognition. The Company presently
believes that with modifications to existing software and conversions to new
software, the year 2000 issue will not pose a significant operational problem.
However, if such modifications and conversions are not made, or not completed
timely, the year 2000 issue could have a material impact on the operations of
the Company.
The Company is utilizing both internal and external resources to reprogram,
or replace, and test software for year 2000 modifications. The Company
anticipates completing the year 2000 project no later than June 30, 1999. The
total cost of the year 2000 project is not material to the financial results of
the Company and software and related costs will be capitalized where
appropriate.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a
safe harbor for forward-looking information made on behalf of the Company. All
statements, other than statements of historical facts, which address activities,
actions or new brand introductions that the Company expects or anticipates will
or may occur in the future, including such things as expansion and growth of the
Company's operations and other such matters are forward-looking statements. To
take advantage of the safe harbor provided by the Act, the Company is
identifying certain factors that could cause actual results to differ materially
from those expressed in any forward-looking statements made by the Company.
Any one, or a combination, of these factors could materially affect the
results of the Company's operations. These factors include competitive
pressures, changes in consumer preferences, wholesaler ordering patterns,
consumer acceptance of new brand introductions and other marketing and sales
initiatives, legal and regulatory initiatives (including those described under
Items 1 and 3 of the Company's Annual Report on Form 10-K and its Form 8-K), and
conditions in the capital markets. Forward-looking statements made by the
Company are based on knowledge of its business and the environment in which it
operates, but because of the factors listed above, as well as other factors
beyond the control of the Company, actual results may differ from those in the
forward-looking statements.
<PAGE> 11
GRAPHICAL INFORMATION INCLUDED IN EXHIBIT 13 (ITEM 7) IS DESCRIBED BELOW:
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS AND PERCENTAGES)
The following are bar graphs:
Consolidated Net Sales: 1995 -- $1,306, 1996 -- $1,372 and
1997 -- $1,402
Pretax Margins: 1995 -- 54.0%, 1996 -- 54.3% and 1997 -- 50.2%
Diluted Earnings Per Share: 1995 -- $2.17, 1996 -- $2.44 and
1997 -- $2.37
Tobacco Sales: 1995 -- $1,129, 1996 -- $1,178 and 1997 -- $1,188
Wine Sales: 1995 -- $109, 1996 -- $122 and 1997 -- $145
Other Sales: 1995 -- $71, 1996 -- $75 and 1997 -- $73
Net Cash Provided By Operating Activities: 1995 -- $445, 1996 -- $439
and 1997 -- $413
Return on Average Stockholders' Equity: 1995 -- 131.2%, 1996 -- 161.2%
and 1997 -- 122.0%
Total Debt to Stockholders' Equity: 1995 -- 68.1%, 1996 -- 88.6% and
1997 -- 25.1%
Dividends Per Share: 1995 -- $1.30, 1996 -- $1.48 and 1997 -- $1.62
The following bar graph illustrates the relationship between net earnings
and dividends paid:
Net Earnings: 1995 -- $430, 1996 -- $464 and 1997 -- $439
Dividends Paid: 1995 -- $252, 1996 -- $277 and 1997 -- $298
A pie chart illustrating the percentage of capital expenditures by segment
for 1995 -- 1997:
Tobacco 56%, Wine 34% and Other 10%.
<PAGE> 12
EXHIBIT 13 -- (CONTINUED)
(ITEMS 5 AND 8)
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
1997
Net sales.......................... $334,616 $355,764 $360,582 $350,756 $1,401,718
Gross profit....................... 269,526 284,406 286,008 269,836 1,109,776
Net earnings....................... 101,206 116,889 114,222 106,821 439,138
Basic earnings per share........... .55 .64 .62 .58 2.39
Diluted earnings per share......... .54 .63 .62 .57 2.37
Dividends per share................ .40 1/2 .40 1/2 .40 1/2 .40 1/2 1.62
Market price per share:
High............................. 34 1/8 30 1/8 31 3/4 36 15/16 36 15/16
Low.............................. 26 3/4 25 1/2 26 7/8 28 1/8 25 1/2
----------------------------------------------------------
1996
Net sales.......................... $322,835 $344,983 $359,485 $344,402 $1,371,705
Gross profit....................... 259,310 277,935 289,593 272,111 1,098,949
Net earnings....................... 106,796 119,077 123,657 114,469 463,999
Basic earnings per share........... .56 .63 .66 .62 2.48
Diluted earnings per share......... .55 .62 .65 .61 2.44
Dividends per share................ .37 .37 .37 .37 1.48
Market price per share:
High............................. 35 7/8 35 3/8 34 3/4 35 35 7/8
Low.............................. 31 1/2 30 3/8 29 1/4 28 1/4 28 1/4
</TABLE>
The Company's shares trade on the New York Stock Exchange and the Pacific
Stock Exchange, ticker symbol -- UST. The number of stockholders of record at
December 31, 1997 was 10,799.
<PAGE> 13
EXHIBIT 13 -- (CONTINUED)
(ITEM 8)
UST
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.............................................. $1,401,718 $1,371,705 $1,305,796
COSTS AND EXPENSES
Cost of products sold................................ 265,193 246,381 236,743
Excise taxes......................................... 26,749 26,375 25,460
Selling, advertising and administrative.............. 398,468 348,059 335,824
Interest, net........................................ 7,451 6,364 3,179
---------- ---------- ----------
TOTAL COSTS AND EXPENSES............................... 697,861 627,179 601,206
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES........................... 703,857 744,526 704,590
INCOME TAXES........................................... 264,719 280,527 274,830
---------- ---------- ----------
NET EARNINGS........................................... $ 439,138 $ 463,999 $ 429,760
========== ========== ==========
NET EARNINGS PER SHARE
Basic................................................ $2.39 $2.48 $2.21
Diluted.............................................. $2.37 $2.44 $2.17
AVERAGE NUMBER OF SHARES
Basic................................................ 183,931 187,386 194,374
Diluted.............................................. 185,602 190,067 197,613
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 14
UST
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
---------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 6,927 $ 54,452
Accounts receivable....................................... 67,702 77,855
Inventories............................................... 319,666 271,425
Prepaid expenses and other current assets................. 31,753 40,446
Deferred income taxes..................................... 15,796 6,392
---------- --------
Total current assets................................... 441,844 450,570
---------- --------
Property, plant and equipment, net.......................... 326,709 300,885
Other assets................................................ 58,161 55,937
---------- --------
Total assets...................................... $ 826,714 $807,392
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term obligations.................................... $ 10,000 $150,000
Accounts payable and accrued expenses..................... 119,345 113,635
Income taxes.............................................. 37,174 42,918
---------- --------
Total current liabilities......................... 166,519 306,553
---------- --------
Long-term debt.............................................. 100,000 100,000
Postretirement benefits other than pensions................. 73,868 70,209
Other liabilities........................................... 48,396 48,610
Contingencies (see note).................................... -- --
---------- --------
Total liabilities................................. 388,783 525,372
---------- --------
STOCKHOLDERS' EQUITY
Capital stock............................................. 103,307 102,077
Additional paid-in capital................................ 474,661 414,274
Retained earnings......................................... 528,518 388,505
---------- --------
1,106,486 904,856
Less cost of shares in treasury........................... 668,555 622,836
---------- --------
Total stockholders' equity........................ 437,931 282,020
---------- --------
Total liabilities and stockholders' equity........ $ 826,714 $807,392
========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 15
UST
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings.............................................. $439,138 $463,999 $429,760
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization.......................... 30,491 28,318 29,119
Deferred income taxes.................................. (8,779) 2,412 (12,717)
Prepayment of royalties................................ (25,732) -- --
Write-down of production costs and prepaid assets...... 24,089 -- --
Changes in operating assets and liabilities:
Accounts receivable.................................. 8,430 (11,128) (3,434)
Inventories.......................................... (56,146) (18,494) (21,134)
Prepaid expenses and other assets.................... (1,884) (9,576) (4,670)
Accounts payable, accrued expenses and other
liabilities....................................... 8,743 9,895 15,449
Income taxes payable................................. (5,744) (26,038) 12,759
--------- --------- ---------
Net cash provided by operating activities......... 412,606 439,388 445,132
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment................ (58,159) (44,713) (35,280)
Dispositions of property, plant and equipment............. 2,409 7,964 21,278
Proceeds from the prepayment of royalties................. 25,732 -- --
Proceeds from the sale of businesses...................... -- 6,256 --
--------- --------- ---------
Net cash used in investing activities............. (30,018) (30,493) (14,002)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings.................................. 10,000 150,000 100,000
Repayment of borrowings................................... (150,000) (100,000) (25,000)
Proceeds from the issuance of stock and put options....... 53,665 41,215 39,726
Dividends paid............................................ (298,059) (277,302) (252,388)
Stock repurchased......................................... (45,719) (237,759) (274,783)
--------- --------- ---------
Net cash used in financing activities............. (430,113) (423,846) (412,445)
--------- --------- ---------
(Decrease) increase in cash and cash
equivalents..................................... (47,525) (14,951) 18,685
Cash and cash equivalents at beginning of year.... 54,452 69,403 50,718
--------- --------- ---------
Cash and cash equivalents at end of year.......... $ 6,927 $ 54,452 $ 69,403
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes........................................... $268,158 $290,024 $267,236
Interest............................................... 8,718 7,151 4,521
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 16
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, 1994............. $100,172 $343,390 $ 33,713 $(115,606) $ 361,669
Net earnings............................. -- -- 429,760 -- 429,760
Cash dividends -- $1.30 per share........ -- -- (252,388) -- (252,388)
Exercise of stock options -- 1,935,600
shares................................. 968 23,074 -- -- 24,042
Income tax benefits and decrease in
receivables from exercise of stock
options................................ -- 15,684 -- -- 15,684
Stock repurchased for
treasury -- 8,860,000 shares........... -- -- -- (274,783) (274,783)
Retirement of treasury stock -- 200,000
shares................................. (100) (368) (4,844) 5,312 --
Put option obligations, net of
proceeds............................... -- (7,845) -- -- (7,845)
Adjustment for additional minimum pension
liability, net of deferred taxes....... -- -- (2,582) -- (2,582)
-------- -------- --------- --------- ---------
Balance at December 31, 1995............. 101,040 373,935 203,659 (385,077) 293,557
Net earnings............................. -- -- 463,999 -- 463,999
Cash dividends -- $1.48 per share........ -- -- (277,302) -- (277,302)
Exercise of stock options -- 2,075,500
shares................................. 1,037 25,895 -- -- 26,932
Income tax benefits, net of increase in
receivables from exercise of stock
options................................ -- 13,709 -- -- 13,709
Stock repurchased for
treasury -- 7,405,800 shares........... -- -- -- (237,759) (237,759)
Put option proceeds and obligations...... -- 735 -- -- 735
Adjustment for additional minimum pension
liability, net of deferred taxes....... -- -- (1,851) -- (1,851)
-------- -------- --------- --------- ---------
Balance at December 31, 1996............. 102,077 414,274 388,505 (622,836) 282,020
Net earnings............................. -- -- 439,138 -- 439,138
Cash dividends -- $1.62 per share........ -- -- (298,059) -- (298,059)
Exercise of stock options -- 2,459,500
shares................................. 1,230 36,645 -- -- 37,875
Income tax benefits and decrease in
receivables from exercise of stock
options................................ -- 15,956 -- -- 15,956
Stock repurchased for
treasury -- 1,526,000 shares........... -- -- -- (45,719) (45,719)
Put option obligations, net of
proceeds............................... -- 7,786 -- -- 7,786
Adjustment for additional minimum pension
liability, net of deferred taxes....... -- -- (1,066) -- (1,066)
-------- -------- --------- --------- ---------
Balance at December 31, 1997............. $103,307 $474,661 $ 528,518 $(668,555) $ 437,931
======== ======== ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 17
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based on
judgments and estimates made by management, which may differ from actual
results. The consolidated financial statements include the accounts of the
Company and all of its subsidiaries after the elimination of intercompany
accounts and transactions. An investment in a limited partnership is accounted
for by the equity method and is carried at an amount equal to the Company's
equity in the underlying net assets of the limited partnership.
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents amounts invested in highly
liquid instruments with maturities of three months or less when acquired.
INVENTORIES
Inventories are stated at lower of cost or market. The major portion of
leaf tobacco 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. Depreciation is computed
by the straight-line method based on the estimated useful lives of the assets
which range from 5 to 40 years.
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 assets and long-term
liabilities approximate their carrying value.
STOCK COMPENSATION
The Company applies the recognition and measurement provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
in accounting for stock options.
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, adjusted for items representing
permanent differences between pretax accounting income and taxable income.
Deferred income taxes result from the future tax consequences associated with
temporary differences between the carrying amounts of assets and liabilities for
tax and financial reporting purposes.
<PAGE> 18
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
128, "Earnings per Share," which was adopted in the fourth quarter of 1997. This
new rule changes the way earnings per share is calculated and requires
restatement of all reported prior period amounts. Under the new requirements,
basic earnings per share is calculated by dividing net earnings by the
weighted-average number of common shares outstanding during the period. The
diluted earnings per share computation includes the effect of 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.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 is effective for the first quarter of 1998, while
SFAS No. 131 is effective for year end financial reporting in 1998 and on an
interim basis thereafter. Both of these pronouncements require additional
disclosures and the Company expects no material impact upon adoption.
INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Leaf tobacco................................................ $152,869 $136,881
Products in process and finished goods...................... 148,720 117,924
Other materials and supplies................................ 18,077 16,620
-------- --------
$319,666 $271,425
======== ========
</TABLE>
At December 31, 1997 and 1996, $136.9 million and $133.9 million,
respectively, of leaf tobacco 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
$47.4 million and $43.1 million, respectively.
PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Land........................................................ $ 29,586 $ 26,570
Buildings................................................... 224,889 203,522
Machinery and equipment..................................... 310,019 284,221
-------- --------
564,494 514,313
Less allowances for depreciation............................ 237,785 213,428
-------- --------
$326,709 $300,885
======== ========
</TABLE>
Depreciation expense was $30.1 million for 1997, $28.1 million for 1996 and
$28.4 million for 1995.
The Company also leases certain property and equipment under various
operating lease arrangements. Annual commitments under these leases, which
average $3.5 million per year through the year 2002, extend through 2030 and
total $31.3 million. Lease expense for the years 1997, 1996 and 1995 was $6.4
million, $5.7 million and $5.1 million, respectively.
<PAGE> 19
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
------- -------
<S> <C> <C>
Prepaid pension costs....................................... $27,162 $26,512
Limited partnership investment.............................. 11,177 12,357
Deferred income taxes....................................... 1,183 1,234
Other....................................................... 18,639 15,834
------- -------
$58,161 $55,937
======= =======
</TABLE>
The limited partnership investment owns and leases a cogeneration facility.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Trade accounts payable...................................... $ 34,150 $ 27,863
Employee compensation and benefits.......................... 58,192 58,132
Other accrued expenses...................................... 27,003 27,640
-------- --------
$119,345 $113,635
======== ========
</TABLE>
REVOLVING CREDIT AGREEMENTS
In 1996, the Company entered into two revolving credit agreements totaling
$350 million with several banks.
The terms of the agreements provide for a five-year revolving credit
facility in the amount of $262.5 million, which expires in November 2001, and a
364-day revolving credit facility, renewed in November 1997 in the amount of
$87.5 million, which expires in November 1998. The Company may borrow funds and
elect to pay interest under the "Base Rate," "Competitive Bid" or "Eurodollar"
interest rate provisions. Principal repayments are optional during the revolving
credit periods. The agreements require facility fees which are not significant,
as well as maintenance of certain financial ratios. There were no borrowings
under these facilities in 1997 and 1996.
At December 31, 1997, the Company had $110 million outstanding under
commercial paper borrowings, of which $100 million was classified as long-term
debt. The Company's revolving credit agreements support these borrowings which
are intended to be refinanced on a long-term basis, either through continued
commercial paper borrowings or its revolving credit facilities. Commercial paper
borrowings at December 31, 1997 have a weighted-average interest rate of 5.8
percent. At December 31, 1996, the Company had $250 million outstanding under
commercial paper borrowings, of which $100 million was classified as long-term
debt. Commercial paper borrowings at December 31, 1996, had a weighted-average
interest rate of 5.7 percent.
OTHER LIABILITIES
Other liabilities include the noncurrent portion of the pension liabilities
at December 31, 1997 and 1996 of $44.7 million and $39.9 million, respectively.
(See Employee Benefit and Compensation Plans Note.)
In 1997 and 1996, the Company had sold put options that entitled the holder
to sell a specific number of shares of common stock to the Company at a
predetermined price. The Company has suspended its put option program.
<PAGE> 20
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company had no liability or shares outstanding
under its put option program. There was no effect on earnings per share as a
result of these put options. (See Consolidated Statement of Changes in
Stockholders' Equity.)
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 1997, the Company repurchased 1.5 million shares pursuant to its stock
repurchase program authorized by the Board of Directors in 1996. The program
allows the Company to repurchase up to 20 million shares of its common stock
from time to time in open market or negotiated transactions for use in
connection with employee benefit programs and other corporate purposes. As of
December 31, 1997, 2 million shares of the 20 million authorized have been
repurchased. The Company suspended its stock repurchase program indefinitely in
anticipation of the proposed federal legislation, if enacted into law, relating
to the tobacco industry. (See Contingencies Note.)
Common stock issued at December 31, 1997 and 1996 was 206,614,236 shares
and 204,154,736 shares, respectively. Treasury shares held at December 31, 1997
and 1996 was 21,825,000 shares and 20,299,000 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 three stock option plans, the 1992 and 1982 Stock
Option Plans and a Nonemployee Directors' Stock Option Plan. The Company
accounts for stock options in accordance with APB Opinion No. 25. Under the
Company's current plans, options may be granted at not less than the fair market
value on the date of grant and therefore no compensation expense is recognized
for the stock options granted.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
<PAGE> 21
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consistent with the method described in SFAS No. 123, if compensation
expense for the Company's plans had been determined based on the fair value at
the grant dates for awards under its plans, net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net earnings:
As reported...................................... $439,138 $463,999 $429,760
Pro forma........................................ $436,106 $461,059 $429,281
Basic earnings per share:
As reported...................................... $2.39 $2.48 $2.21
Pro forma........................................ $2.37 $2.46 $2.21
Diluted earnings per share:
As reported...................................... $2.37 $2.44 $2.17
Pro forma........................................ $2.35 $2.42 $2.17
</TABLE>
In accordance with the provisions of SFAS No. 123, the pro forma
disclosures include only the effect of stock options granted since 1995. The
application of the pro forma disclosures presented above are not representative
of the effects SFAS No. 123 may have on net earnings and earnings per share in
future years due to the timing of stock option grants and considering that
options vest over a period of six months to three years.
The fair value of each option grant, for pro forma disclosure purposes, was
estimated on the date of grant using the modified Black-Scholes option pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield........................... 4.4% 4.4% 4.2%
Risk-free interest rate........................... 5.9% 6.6% 6.1%
Expected volatility............................... 29.7% 18.0% 17.8%
Expected life of option........................... 6.5 years 6.5 years 6.5 years
</TABLE>
Under the 1992 Stock Option Plan, 10.4 million shares were authorized for
grant and 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. Under the Nonemployee Directors' Stock Option Plan, 0.2 million
shares were authorized for grant and options first become exercisable six months
from the date of grant and may be exercisable up to a maximum of ten years from
the date of grant and must be paid in full at the time of exercise.
At December 31, 1997, 2,950,400 shares were available for grant under the
1992 Stock Option Plan and 168,500 shares were available for grant under the
Nonemployee Directors' Stock Option Plan, while no shares were available under
the 1982 Stock Option Plan.
Receivables from the exercise of options in the amount of $9.5 million in
1997, $12.1 million in 1996 and $11.3 million in 1995 have been deducted from
stockholders' equity.
<PAGE> 22
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents a summary of the Company's stock option
activity and related information for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ---------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year............... 15,782,600 $24.57 16,321,700 $22.20 16,774,400 $20.33
Granted.............. 1,861,600 31.39 1,567,800 33.93 1,510,100 30.54
Exercised............ (2,459,500) 15.40 (2,075,500) 12.98 (1,935,600) 12.42
Forfeited............ (297,900) 32.45 (30,600) 29.61 (27,200) 27.68
Expired.............. -- -- (800) 4.23 -- --
---------- ---------- ----------
Outstanding at end of
year............... 14,886,800 $26.78 15,782,600 $24.57 16,321,700 $22.20
========== ====== ========== ====== ========== ======
Exercisable at end of
year............... 11,932,700 $25.49 13,020,600 $22.96 13,811,300 $20.92
========== ====== ========== ====== ========== ======
Weighted-average fair
value of options
granted during the
year............... $ 7.58 $ 5.95 $ 5.21
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OF REMAINING EXERCISE OF EXERCISE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS PRICE
--------------- ---------- ---------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$ 7.69 461,100 .3 years $ 7.69 461,100 $ 7.69
13.78-18.28 1,878,800 2.3 years 14.44 1,878,800 14.44
24.19-35.25 12,546,900 6.2 years 29.32 9,592,800 28.51
---------- ----------
$ 7.69-35.25 14,886,800 5.5 years $26.78 11,932,700 $25.49
---------- ----------- ---------- -----------
----------
---------- ----------- ---------- -----------
----------
</TABLE>
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 Employee Retirement Income Security Act of
1974 (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 were:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Discount rate............................................ 7.75% 7.5% 9.0%
Average rate of increase in compensation levels.......... 5.00% 5.0% 5.0%
Expected long-term rate of return on plan assets......... 9.25% 9.0% 11.0%
</TABLE>
<PAGE> 23
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension cost includes the following components (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost-benefits earned during period............... $ 8.7 $ 8.6 $ 6.4
Interest cost on projected benefit obligation............ 18.8 17.1 15.7
Actual return on plan assets............................. (47.7) (20.2) (53.6)
Net amortization and deferral............................ 27.5 1.4 34.5
------ ------ ------
Net periodic pension cost................................ $ 7.3 $ 6.9 $ 3.0
====== ====== ======
</TABLE>
The following table presents a reconciliation of the funded status of the
plans at December 31 (in millions):
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
PLANS IN WHICH PLANS IN WHICH PLANS IN WHICH PLANS IN WHICH
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................. $(173.6) $(46.2) $(150.6) $(42.3)
Nonvested benefits.............. (17.8) (5.2) (15.4) (2.9)
------- ------ ------- ------
Accumulated benefits............ (191.4) (51.4) (166.0) (45.2)
Effect of future pay
increases.................... (29.3) (12.0) (24.7) (10.2)
------- ------ ------- ------
Projected benefit obligation.... (220.7) (63.4) (190.7) (55.4)
Plan assets at fair value......... 275.8 4.0 239.3 3.0
Unrecognized net (gain) loss...... (23.1) 22.0 (16.3) 18.0
Prior service cost not yet
recognized in net periodic
pension cost.................... (2.1) .8 (2.3) .7
Unrecognized portion of initial
net (asset) obligation.......... (2.7) 2.4 (3.5) 3.0
Adjustment to recognize additional
minimum liability............... -- (14.6) -- (12.9)
------- ------ ------- ------
Net pension asset (liability)..... $ 27.2 $(48.8) $ 26.5 $(43.6)
======= ====== ======= ======
</TABLE>
At December 31, 1997 and 1996, the net pension assets of $27.2 million and
$26.5 million, respectively, consist of prepaid pension costs and are included
in other assets. The noncurrent portion of the net pension liabilities at
December 31, 1997 and 1996 are included in other liabilities.
For pension plans in which accumulated benefits exceed assets at December
31, 1997, the Consolidated Statement of Financial Position reflects an
additional minimum liability of $14.6 million: an intangible asset of $3.1
million included in other assets and a reduction of retained earnings of $7.5
million, which is net of deferred tax benefits of $4 million. At December 31,
1996, the Consolidated Statement of Financial Position included an additional
minimum liability of $12.9 million: an intangible asset of $3 million and a
reduction of retained earnings of $6.5 million, which is net of deferred tax
benefits of $3.4 million.
Plan assets include marketable equity securities, including common stock of
the Company, and corporate and government debt securities. At December 31, 1997
and 1996, the fund held 1.3 million shares of the Company's common stock having
a market value of $47.3 million as of December 31, 1997 and $41.4 million as of
December 31, 1996. Dividends paid on shares held by the fund were $2.1 million
in 1997 and $1.9 million in 1996.
<PAGE> 24
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The discount rate used in determining the present value of benefit
obligations was 7.25 percent for 1997 and 7.75 percent for 1996.
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 $4 million in 1997, $3.9 million
in 1996 and $3.8 million in 1995.
The Company has an Incentive Compensation Plan which provides for incentive
payments to designated employees based on stated percentages of net earnings as
defined in the Plan. Expenses under the Plan amounted to $36.9 million in 1997,
$39 million in 1996 and $36.9 million in 1995.
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 postretirement welfare benefit plans
are not funded.
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost............................................. $2,857 $2,989 $2,318
Interest cost............................................ 4,003 4,162 4,037
Amortization of unrecognized gain and prior service
cost................................................... (780) (190) (651)
------ ------ ------
Net periodic postretirement benefit cost................. $6,080 $6,961 $5,704
====== ====== ======
</TABLE>
The following table sets forth the combined status of the plans at December
31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $22,432 $21,236
Fully eligible active plan participants................... 7,526 9,735
Other active plan participants............................ 29,993 27,045
------- -------
59,951 58,016
Unrecognized gain......................................... 13,557 12,193
Unrecognized prior service cost........................... 360 --
------- -------
Accrued postretirement benefit obligation................. $73,868 $70,209
======= =======
</TABLE>
The discount rate used in determining the net periodic postretirement
benefit cost was 7.75 percent for 1997, 7.5 percent for 1996 and 9 percent for
1995.
The rate of increase in per capita costs of covered health care benefits is
assumed to be 9.2 percent for 1998 and to decrease gradually to 5 percent by the
year 2005 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, 1997 by approximately $8.7 million and the 1997 net periodic
postretirement benefit cost by approximately $1.2 million.
<PAGE> 25
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25 percent at December 31, 1997 and 7.75 percent at
December 31, 1996.
INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $247,224 $245,386 $250,612
State and local.................................. 26,274 32,729 36,935
-------- -------- --------
Total current............................ 273,498 278,115 287,547
-------- -------- --------
Deferred:
Federal.......................................... (6,807) 1,927 (13,695)
State and local.................................. (1,972) 485 978
-------- -------- --------
Total deferred........................... (8,779) 2,412 (12,717)
-------- -------- --------
$264,719 $280,527 $274,830
======== ======== ========
</TABLE>
The 1997 and 1996 current state tax provisions reflect the reversal of
certain state tax reserves. The 1996 current federal tax provision included a
tax benefit from the sale of a subsidiary. In addition, the current tax
provisions do not reflect $13.4 million, $14.5 million and $11.7 million for
1997, 1996 and 1995, 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 (benefit) amounts for 1997, 1996 and 1995 do not
reflect the tax effects of $0.6 million, $1 million and $1.4 million,
respectively, resulting from the additional minimum pension liability
adjustments required by SFAS No. 87, "Employers' Accounting for Pensions."
Deferred income taxes arise from 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 deferred tax assets and liabilities as of
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other than pensions............... $25,854 $24,573
Other accrued liabilities................................. 28,629 23,289
Accrued pension liabilities............................... 15,964 14,185
All other, net............................................ 5,129 3,867
------- -------
Total deferred tax assets......................... 75,576 65,914
------- -------
Deferred tax liabilities:
Depreciation.............................................. 41,593 40,487
Investment in limited partnerships........................ 7,497 8,522
Prepaid pension assets.................................... 9,507 9,279
------- -------
Total deferred tax liabilities.................... 58,597 58,288
------- -------
Net deferred tax assets..................................... $16,979 $ 7,626
======= =======
</TABLE>
<PAGE> 26
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Differences between the Company's effective tax rate and the U.S. federal
statutory income tax rate are explained as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
U.S. federal statutory income tax rate..................... 35.0% 35.0% 35.0%
State and local taxes, net of federal benefit.............. 2.2 2.9 3.5
Other, net................................................. .4 (.2) .5
----- ----- -----
37.6% 37.7% 39.0%
===== ===== =====
</TABLE>
ADVERTISING COSTS
The Company expenses the production costs of advertising in the period in
which the costs are incurred. Advertising expenses were $75.7 million in 1997,
$66 million in 1996 and $65 million in 1995. At December 31, 1997 and 1996, $8.2
million and $6.1 million, respectively, of advertising related costs are
included in prepaid expenses and other current assets.
INTEREST, NET
Interest, net, is comprised of expense associated with short-term
obligations, long-term debt and income from cash equivalents and capitalized
interest.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Short-term obligations................................... $3,112 $1,853 $1,831
Long-term debt........................................... 5,632 5,432 2,961
------ ------ ------
8,744 7,285 4,792
------ ------ ------
Income from cash equivalents............................. (951) (921) (1,613)
Capitalized interest..................................... (342) -- --
------ ------ ------
$7,451 $6,364 $3,179
====== ====== ======
</TABLE>
EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net earnings..................................... $439,138 $463,999 $429,760
======== ======== ========
Denominator:
Denominator for basic earnings per share --
weighted-average shares....................... 183,931 187,386 194,374
Dilutive effect of employee stock options.......... 1,671 2,681 3,239
-------- -------- --------
Denominator for diluted earnings per share....... 185,602 190,067 197,613
======== ======== ========
Basic earnings per share........................... $2.39 $2.48 $2.21
Diluted earnings per share......................... $2.37 $2.44 $2.17
</TABLE>
Options to purchase 2.3 million shares, 1.9 million shares and 0.3 million
shares of common stock, outstanding as of December 31, 1997, 1996 and 1995,
respectively, were not included in the computation of diluted earnings per share
because their exercise prices were greater than the average market price of the
common shares and, therefore, would be antidilutive.
<PAGE> 27
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INDUSTRY SEGMENT DATA
The Company's industry segments are Tobacco, Wine and Other. The Company
operates predominantly in the tobacco industry as a producer and marketer of
moist smokeless tobacco products. The Company also produces and markets premium
wines. The Other segment includes the international operations, the cigar
operations and an entertainment subsidiary. Tobacco segment sales are
principally to a large number of wholesalers and chain stores which are widely
dispersed. In 1997, sales to one wholesale customer accounted for approximately
23 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. In 1997, the write-down of production
costs and prepaid royalties at the entertainment subsidiary and the income
received from the prepayment of royalties from a previous divestiture were
included in the operating profit of the Other segment. Identifiable assets by
segment include both 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, net, associated with nonsegment activities. In
1995, capital expenditures for each segment were netted with their allocable
share of $17.7 million from the sale of a corporate aircraft along with other
dispositions. Gross capital expenditures in 1995 were $22.2 million for the
Tobacco segment, $11.1 million for the Wine segment, $1.8 million for the Other
segment and $0.2 million for Corporate. Consolidated Industry Segment Data
appears on page 31.
CONTINGENCIES
The Company and/or its subsidiary, United States Tobacco Company (hereafter
"the Company") has been named in certain health care cost reimbursement/third
party recoupment/class action litigation against the major domestic cigarette
companies and others seeking damages and other relief. The complaints in these
cases on their face predominantly relate to the usage of cigarettes; within that
context, certain complaints contain a few allegations relating specifically to
smokeless tobacco products. These actions are in varying stages of pretrial
activities.
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.
During the third quarter of 1997, the Company made a payment of
approximately $3 million resulting from its portion of the settlement with the
state of Florida in connection with its health care cost reimbursement
litigation. In January 1998, similar litigation was settled with the state of
Texas; the Company's portion was approximately $3.4 million (to be paid on an
installment basis), plus related expenses. Both payments relate solely to pilot
programs primarily to reduce youth access to tobacco products in each state.
The Company has been named in three actions brought by individual
plaintiffs, all of whom are represented by the same Louisiana attorney, against
a number of smokeless tobacco manufacturers, cigarette manufacturers and certain
other organizations seeking damages and other relief in connection with injuries
allegedly sustained as a result of tobacco usage, including smokeless tobacco
products. An action seeking damages and/or other relief and which purported to
state a class action on behalf of residents of Louisiana who have purchased and
used smokeless tobacco manufactured by defendants was dismissed by court order
in January 1998.
<PAGE> 28
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is also named in an action in Illinois seeking damages and
other relief brought by an individual plaintiff and purporting to state a class
action "on behalf of himself and all other persons similarly situated" alleging
that his use of the Company's smokeless tobacco products "resulted in his
addiction to nicotine, increased use of Defendants' products and gum
deterioration."
The Company believes, and has been so advised by counsel handling these
cases, that it has a number of meritorious defenses to all such pending
litigation. Except as to the Company's intention to pursue federal legislation
resolving certain regulatory and litigation issues, all such cases are, and will
continue to be, vigorously defended. The Company believes that the ultimate
outcome of all such pending litigation will not have a material adverse effect
on the consolidated financial statements of the Company.
On August 28, 1996, the Food and Drug Administration (FDA) published
regulations asserting unprecedented jurisdiction over nicotine in tobacco as a
"drug" and purporting to regulate smokeless tobacco products as a "medical
device." The final regulations include severe restrictions on the advertising,
marketing and promotion of smokeless tobacco products and will require the
Company to comply with a wide range of labeling, reporting and other
requirements. The Company and other smokeless tobacco manufacturers filed suit
against the FDA seeking a judicial declaration that the FDA has no authority to
regulate smokeless tobacco products. On April 25, 1997, a federal district court
ruled that the FDA, as a matter of law, is not precluded from regulating
cigarettes and smokeless tobacco as "medical devices" and implementing certain
labeling and access restrictions. Further trial proceedings are still required
to determine whether the FDA, based on the facts, can prove that smokeless
tobacco products fit the statutory definitions and the restrictions are
justified. The court, granting the Company's motion for summary judgment, also
ruled that the FDA has no authority to implement restrictions on the advertising
and promotion of smokeless tobacco products. The court issued an injunction to
prohibit most of the restrictions (labeling, access and advertising/promotion)
set for August 28, 1997 from taking effect, pending resolution of any appeals
and subsequent proceedings; the court also certified the ruling for
interlocutory appeal on the grounds that it involves "controlling questions of
law as to which there is substantial ground for difference of opinion." Certain
aspects of this ruling appealed to the Fourth Circuit Court of Appeals are
awaiting decision. The Company is not able to predict the outcome of the appeal,
or assess the future effect that these FDA regulations, if implemented, may have
on its smokeless tobacco business.
On June 20, 1997, United States Tobacco Company, along with other
manufacturers in the United States tobacco industry, executed a Memorandum of
Understanding (the "Memorandum") to support the adoption of federal legislation
incorporating the features described in the proposed resolution attached to the
Memorandum. The proposed resolution, if enacted into law, would achieve a
resolution of many of the regulatory and litigation issues affecting the United
States tobacco industry and, thereby, reduce uncertainties facing the industry
and increase stability in business and capital markets. However, if such
legislation were enacted the financial obligations to be imposed on the Company
are expected to be significant although the precise amount of such obligations
cannot be determined at this time. Discussions with other tobacco manufacturers,
who were participants in the negotiations which led to the Memorandum, are
continuing regarding the allocation of both the initial and subsequent payments
and the Company's obligations related thereto. Depending on the amounts required
to be paid by the Company, as well as a number of other factors, including (i)
the timing of any payments and the means used to finance such payments; (ii) the
effect of the legislation on the pricing and consumption of smokeless tobacco
products; and (iii) the impact of the legislation on the Company's competitive
position in the smokeless tobacco industry, its financial position could be
materially adversely affected in the year of implementation and the unit volume,
operating revenues and operating income of the Company could be materially
adversely affected in future years. There can be no assurance that legislation
reflecting the proposed resolution or any legislation will be enacted.
<PAGE> 29
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, 1997 and 1996, 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, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UST Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Stamford, Connecticut
February 9, 1998
<PAGE> 1
EXHIBIT 21
PARENT AND SUBSIDIARIES
UST is an independent corporation without parent. It had the following
significant subsidiaries as of December 31, 1997:
<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
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 9, 1998, included in the 1997
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, the Registration
Statement (Form S-8 No. 33-48828) pertaining to the 1992 Stock Option Plan and
the Registration Statement (Form S-8 No. 33-59229) pertaining to the Nonemployee
Directors' Stock Option Plan, of our report dated February 9, 1998, 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, 1997.
ERNST & YOUNG LLP
Stamford, Connecticut
March 13, 1998
<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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,927
<SECURITIES> 0
<RECEIVABLES> 67,702
<ALLOWANCES> 0
<INVENTORY> 319,666
<CURRENT-ASSETS> 441,844
<PP&E> 564,494
<DEPRECIATION> 237,785
<TOTAL-ASSETS> 826,714
<CURRENT-LIABILITIES> 166,519
<BONDS> 100,000
0
0
<COMMON> 103,307
<OTHER-SE> 334,624
<TOTAL-LIABILITY-AND-EQUITY> 826,714
<SALES> 1,401,718
<TOTAL-REVENUES> 1,401,718
<CGS> 291,942
<TOTAL-COSTS> 291,942
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,451
<INCOME-PRETAX> 703,857
<INCOME-TAX> 264,719
<INCOME-CONTINUING> 439,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439,138
<EPS-PRIMARY> 2.39<F1>
<EPS-DILUTED> 2.37<F1>
<FN>
<F1>Note: Item number 5-03(b)(20) amounts for earnings per share of $2.39 and $2.37
represent earnings per share -- basic and earnings per share -- diluted,
respectively.
</FN>
</TABLE>
