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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, 1998
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 EXCHANGE, INC.
</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. [ ]
AS OF FEBRUARY 1, 1999, THE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON
STOCK, $.50 PAR VALUE, HELD BY NON-AFFILIATES OF REGISTRANT (WHICH FOR THIS
PURPOSE DOES NOT INCLUDE DIRECTORS OR OFFICERS) WAS $5,552,186,929.
AS OF FEBRUARY 1, 1999, THERE WERE 181,533,336 SHARES OF REGISTRANT'S COMMON
STOCK, $.50 PAR VALUE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN SECTIONS OF UST ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1998 AND FILED AS AN EXHIBIT AS REQUIRED BY
ITEM 601(b)(13) OF REGULATION S-K.........................PARTS I & II
CERTAIN PAGES OF UST 1999 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
operating segments:
SMOKELESS TOBACCO PRODUCTS: Registrant's primary activities are
manufacturing and marketing smokeless tobacco (snuff and chewing tobacco).
WINE: Registrant produces and markets wine and craft beers.
ALL OTHER OPERATIONS: Registrant's international operation which
markets moist smokeless tobacco and its cigar operation which manufactures
and markets premium cigars are included in all other operations.
OPERATING SEGMENT DATA
Registrant hereby incorporates by reference the Consolidated Segment
Information pertaining to the years 1996 through 1998 set forth on page 23 of
its Annual Report to stockholders for the fiscal year ended December 31, 1998
("Annual Report"), which page is included in Exhibit 13.
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SMOKELESS 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, ROOSTER
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 1999. 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 1999. 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." 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 smokeless tobacco
as "medical devices" and implementing certain labeling and access restrictions.
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." On August 14, 1998, the Fourth
Circuit Court of Appeals ruled in favor of Registrant and other tobacco product
manufacturers stating that FDA lacks jurisdiction to regulate tobacco products
and that all of the regulations published by FDA on August 28, 1996 are invalid.
On January 19, 1999, FDA filed a petition for certiorari seeking review of the
Fourth Circuit's ruling by the United States Supreme Court. 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.
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RAW MATERIALS
Except as noted below, raw materials essential to Registrant's business are
generally purchased in domestic markets under competitive conditions.
Almost all of the 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 other 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 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 two to 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 21% 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, price, product
recognition and distribution.
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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 25% of total wine sales.
Substantially all wines are sold through state-licensed distributors with whom
Registrant maintains satisfactory relationships.
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 1999. 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 1999. 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 and
purchased bulk wine from other sources. Total grape tonnage harvested and
purchased in 1998 was slightly higher than in 1997. Due to the outstanding
harvest yields experienced in 1998 and 1997, the supply of grapes is adequate to
meet expected demand and thereby eliminate the need for product allocations in
1999.
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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ALL OTHER OPERATIONS
All other operations consist of the international operation which markets
moist smokeless tobacco; cigar operation which manufactures and markets the
premium cigar brands, DON TOMAS, ASTRAL and HABANO PRIMERO. 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, 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 FDA's 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 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 1999. In recent years, various state and local governments
continued the regulation of tobacco products, including, inter alia, additional
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 1999. 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 1998 was 4,924.
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 operating segment of Registrant
is seasonal.
ORDERS
Backlog of orders is not a material factor in any operating segment of
Registrant.
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ITEM 2 -- PROPERTIES
Set forth below is information concerning principal facilities and real
properties of Registrant.
<TABLE>
<CAPTION>
BUILDINGS IN
APPROXIMATE
LOCATION SQUARE FEET ACTIVITIES
-------- ------------ ----------
<S> <C> <C>
Tobacco Facilities:
Nashville, Tennessee.............. 973,000 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............ 998,500 Office, plants and warehouses for
tobacco leaf handling, processing
and storage and for manufacture of
dry flour for smokeless tobacco
products.
Franklin Park, Illinois........... 505,000 Office and manufacturing plant for
moist smokeless tobacco products,
fiberboard can operations and
warehouse for distribution of
various products.
Wine Facilities:
Paterson, Washington.............. 620,000 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.
Grandview, Washington............. 40,000 Winery and storage facility.
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.
Santiago, Dominican Republic...... 16,000 Office and manufacturing plant for
cigars.
Headquarters:
Greenwich, Connecticut............ 208,000 Executive, sales and general offices
in several buildings.
</TABLE>
<TABLE>
<CAPTION>
LAND IN
APPROXIMATE
LOCATION ACRES ACTIVITIES
-------- ----------- ----------
<S> <C> <C>
Yakima and Benton Counties,
Washington..................... 3,390 Vineyards.
Grant and Benton Counties,
Washington..................... 10,864 Other, including agricultural
properties.
</TABLE>
Such principal properties in Registrant's operations were utilized only in
connection with Registrant's business operations. Registrant believes that the
above properties at December 31, 1998 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.
On November 23, 1998, Registrant entered into the Smokeless Tobacco Master
Settlement Agreement (the "Settlement Agreement") with attorneys general of
various states and U.S. territories to resolve the remaining health care cost
reimbursement cases initiated by various attorneys general against Registrant.
The Settlement Agreement requires Registrant to adopt various marketing and
advertising restrictions and make payments expected to total between $100 and
approximately $200 million over ten years -- depending on various factors -- for
programs to reduce youth usage of tobacco and combat youth substance abuse and
for enforcement purposes.
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 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 Defendant's products and gum deterioration."
Registrant has also been served with a Summons and Complaint in an action
entitled Roger L. Campbell v. American Tobacco Company, et al., (File No.
98CVS10642), General Court of Justice, Superior Court Division, Guilford County,
North Carolina, on November 13, 1998. This action is brought by an individual
plaintiff who alleges that he developed bladder cancer as a result of his use of
smokeless tobacco manufactured by Registrant. Plaintiff seeks unspecified
damages in excess of $10,000.
In Morgan v. United States Tobacco Company, et al., (No. 68655B), Tenth
Judicial District Court for the Parish of Natchitoches, State of Louisiana, the
action was dismissed by court Order dated November 6, 1997. On November 5, 1998,
the same plaintiff, now in his individual capacity only, commenced another
action against Registrant, entitled David Chris Morgan v. United States Tobacco
Company, et al., (No. 70723A), Tenth Judicial District Court, Parish of
Natchitoches, State of Louisiana. The petition alleged that plaintiff has
"developed a lesion on his lower lip" and "is addicted to the nicotine contained
in smokeless tobacco" as a result of his use of Registrant's smokeless tobacco
products. Plaintiff sought unspecified compensatory and punitive damages and
other general, special and equitable relief in an amount not to exceed $50,000.
On December 18, 1998, the court entered an Order dismissing this action.
In The City and County of San Francisco, on Behalf of the People of the
State of California, and Environmental Law Foundation, on Behalf of the General
Public v. United States Tobacco Company, et al., (No. 993992), Superior Court of
the State of California, County of San Francisco, plaintiffs allege defendants'
violation of The Safe Drinking Water and Toxic Enforcement Act of 1986, Health
and Safety Code sec.sec.25249.6, et seq. ("Proposition 65"), claiming "the
unlawful marketing and sale by defendants of tobacco snuff and chewing tobacco .
. . to children and adolescents without providing a 'clear and reasonable'
warning that their use results in multiple exposures to substances known to the
State of California to cause cancer, birth defects and reproductive harm."
Plaintiffs further allege defendants' statutory violation of the Unfair
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Competition Act, Business and Professions Code sec.sec.17200, et seq. The action
seeks unspecified compensatory damages, injunctive relief, restitution,
attorneys fees and costs.
In Conwood Company, L.P. and Conwood Sales Company, L.P. v. United States
Tobacco Company, United States Tobacco Sales and Marketing Company Inc., United
States Tobacco Manufacturing Company Inc. and UST Inc. (Case No. 5:98CV-108-R),
United States District Court, Western District of Kentucky, Paducah Division,
Plaintiffs allege, among other things, Registrant's violation of federal
antitrust and advertising laws in connection with the marketing and sale of its
moist snuff brands, and alleges various violations of tort and state law. The
complaint seeks an injunction against alleged "anticompetitive conduct," more
than $400 million in "actual damages" before trebling, and punitive damages.
Registrant believes that the complaint contains numerous misstatements of fact
and that the allegations are without merit. Registrant intends to defend this
action vigorously.
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 willingness to consider alternative
solutions for resolving certain regulatory and litigation issues, all such cases
are, and will continue to be, vigorously defended. Registrant believes that the
ultimate outcome of all such pending litigation will not have a material adverse
effect on the consolidated financial position of Registrant, but may have a
material impact on Registrant's consolidated financial results for a particular
reporting period in which resolved.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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, 1999 is set forth below:
<TABLE>
<CAPTION>
NAME OFFICE AGE
---- ------ ---
<S> <C> <C>
Vincent A. Gierer, Jr........................... Chairman of the Board, Chief 51
Executive Officer and President
Robert E. Barrett............................... Executive Vice President and 60
President -- UST Enterprises Inc.
Richard H. Verheij.............................. Executive Vice President and General 40
Counsel
Allen C. Shoup.................................. President -- International Wine & 55
Spirits Ltd.
A. Gary Smith................................... President -- United States Tobacco 50
Company
Robert T. D'Alessandro.......................... Senior Vice President and Controller 45
</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.
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 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
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Associate General Counsel from December 17, 1992 to April 3, 1994. Mr. Verheij
has been employed by Registrant since November 24, 1986.
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.
Mr. Smith has served as President of United States Tobacco Company since
June 25, 1998. He served as Executive Vice President of United States Tobacco
Company from January 1, 1998 to June 24, 1998 and 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.
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 37 of its Annual Report, which page is
included in Exhibit 13. Registrant's Common Stock is listed on the New York
Stock Exchange and the Pacific Exchange, Inc. As of February 1, 1999, there were
approximately 9,500 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 42 and 43 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
15-22 of its Annual Report, which pages are included in Exhibit 13.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the potential effects of unfavorable changes in
certain prices and rates on Registrant's financial results and condition,
primarily foreign currency exchange rates, interest rates on borrowings and
prices of leaf tobacco and grapes. Registrant does not utilize derivative
instruments in managing its exposure to such changes.
Registrant does not believe that near-term changes in foreign currency
exchange rates, interest rates or leaf tobacco and grape prices will have a
material effect on its future earnings, fair values or cash flows.
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 23-41 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.
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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 1999 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 1999 Annual Meeting and
Proxy Statement.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Registrant hereby incorporates by reference the information with respect to
the security ownership of management which is contained in Table I and the
accompanying text set forth under the caption "Election of Directors" in its
Notice of 1999 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
1999 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, 1998,
1997 and 1996
Consolidated Statement of Financial Position -- December 31, 1998 and
1997
Consolidated Statement of Cash Flows -- Years ended December 31, 1998,
1997 and 1996
Consolidated Statement of Changes in Stockholders' Equity -- Years ended
December 31, 1998, 1997 and 1996
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.
10
<PAGE> 12
(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, and amended and
restated effective October 22, 1998, incorporated by
reference to Exhibit 3.2 to Form 10-Q for the quarter ended
September 30, 1998.
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, incorporated by reference to Exhibit
10.6 to Form 10-K for the fiscal year ended December 31,
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, incorporated by reference to
Exhibit 10.8 to Form 10-K for the period ended December 31,
1997.
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.
10.11* -- Nonemployee Directors' Restricted Stock Award Plan effective
January 1, 1999.
13 -- Pages 15-43 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 Schedules.
</TABLE>
- ---------------
(b) On November 25, 1998, Registrant filed a Current Report on Form 8-K which
reported the execution by its subsidiary, United States Tobacco Company, of
the Smokeless Tobacco Master Settlement Agreement with attorneys general of
various states and U.S. territories to resolve health care cost
reimbursement claims.
* 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 17, 1999
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 17, 1999 Executive Officer) /s/ VINCENT A. GIERER, JR.
--------------------------------------------------------
VINCENT A. GIERER, JR.
Senior Vice President
and Controller
(Principal Accounting
Officer and Principal
February 17, 1999 Financial Officer) /s/ ROBERT T. D'ALESSANDRO
--------------------------------------------------------
ROBERT T. D'ALESSANDRO
February 17, 1999 Director /s/ JAMES W. CHAPIN
--------------------------------------------------------
JAMES W. CHAPIN
February 17, 1999 Director /s/ JOHN P. CLANCEY
--------------------------------------------------------
JOHN P. CLANCEY
February 17, 1999 Director /s/ EDWARD H. DEHORITY, JR.
--------------------------------------------------------
EDWARD H. DEHORITY, JR.
February 17, 1999 Director /s/ ELAINE J. EISENMAN
--------------------------------------------------------
ELAINE J. EISENMAN
February 17, 1999 Director /s/ EDWARD T. FOGARTY
--------------------------------------------------------
EDWARD T. FOGARTY
February 17, 1999 Chairman of the Board /s/ VINCENT A. GIERER, JR.
--------------------------------------------------------
VINCENT A. GIERER, JR.
February 17, 1999 Director /s/ P.X. KELLEY
--------------------------------------------------------
P.X. KELLEY
February 17, 1999 Director /s/ PETER J. NEFF
--------------------------------------------------------
PETER J. NEFF
February 17, 1999 Director /s/ LOWELL P. WEICKER, JR.
--------------------------------------------------------
LOWELL P. WEICKER, JR.
</TABLE>
12
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
3.1 -- Restated Certificate of Incorporation dated May 5, 1992,
incorporated by reference to Exhibit 3.1 to Form 10-Q for
the quarter ended March 31, 1992.
3.2 -- By-Laws adopted on December 23, 1986, and amended and
restated effective October 22, 1998, incorporated by
reference to Exhibit 3.2 to Form 10-Q for the quarter ended
September 30, 1998.
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, incorporated by reference to Exhibit
10.6 to Form 10-K for the fiscal year ended December 31,
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, incorporated by reference to
Exhibit 10.8 to Form 10-K for the period ended December 31,
1997.
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.
10.11* -- Nonemployee Directors' Restricted Stock Award Plan effective
January 1, 1999.
13 -- Pages 15-43 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 Schedules.
</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 10.11
ADOPTED BY BOARD OF DIRECTORS ON DECEMBER 10, 1998
EFFECTIVE JANUARY 1, 1999
UST INC.
NONEMPLOYEE DIRECTORS' RESTRICTED STOCK AWARD PLAN
1. PURPOSE
1.1 The UST Inc. Nonemployee Directors' Restricted Stock Award Plan (the
"Plan") is intended to increase the alignment of the interests of
nonemployee members of the Board with the interests of stockholders of the
Company by providing further opportunity for ownership of the Company's
stock, and to increase their incentive to contribute to the success of the
Company's business through the award of Restricted Stock on the terms and
conditions set forth herein.
2. DEFINITIONS
2.1 "Board" shall mean the Board of Directors of the Company.
2.2 "Change in Control" shall have the meaning ascribed to it in Section 5.2.4.
2.3 "Committee" shall have the meaning ascribed to it in Section 3 hereof.
2.4 "Company" shall mean UST Inc., a Delaware corporation.
2.5 "Date of Award" shall mean the day on which Restricted Stock Awards are
granted pursuant to Section 5.1
2.6 "Eligible Director" shall mean each member of the Board who is not an
employee of the Company or any subsidiary of the Company.
2.7 "Fair Market Value" of a share of Stock on any given day shall be the
average of the high and low sales prices per share of Stock as reported on
the New York Stock Exchange Composite Tape for such date, or if there was
no trading of Stock on such date, for the next preceding date on which
there was such trading.
2.8 "Grantee" shall mean the individual who has been awarded Restricted Stock
under the Plan.
2.9 "Plan" shall mean the UST Inc. Nonemployee Directors' Restricted Stock
Award Plan.
2.10 "Restricted Stock" shall mean stock awarded on such terms and conditions as
are set forth in the Plan.
2.11 "Restricted Stock Agreement" shall mean the written agreement between the
Company and the Grantee evidencing an award of Restricted Stock under the
Plan.
2.12 "Rule 16b-3" shall mean Rule 16b-3 promulgated under Section 16 of the
Securities Exchange Act of 1934, as amended.
2.13 "Restricted Stock Award" shall have the meaning ascribed to it in Section
5.1.
2.14 "Stock" shall mean shares of common stock, par value $.50 per share, of the
Company.
3. ADMINISTRATION
3.1 Committee. The Plan shall be administered by the Nominating and
Compensation Committee of the Board (the "Committee"). Members of the
Committee shall be appointed by the Board.
3.2 Authority of the Committee. The Committee shall determine, consistent with
the terms of the Plan, the terms and conditions of awards granted
hereunder. The Committee may make such rules and establish such procedures
for the administration of the Plan as it deems appropriate to carry out the
purpose of the Plan. All questions of interpretation, administration and
application of the Plan shall be determined by a majority of the members of
the Committee then in office, except that the Committee may authorize any
<PAGE> 2
one or more of its members, or any officer of the Company, to execute and
deliver documents on its behalf. The determination of such majority shall
be final and binding in all matters relating to the Plan.
4. SHARES OF STOCK SUBJECT TO THIS PLAN
4.1 Shares Reserved. Subject to adjustment as provided in Section 4.2 hereof,
a maximum of 200,000 shares of Stock shall be reserved for issuance in
accordance with the terms of the Plan. Shares of Stock that may be issued
shall be issued shares that have been reacquired by the Company and are
held in its treasury. If any outstanding Restricted Stock under the Plan
for any reason expires or is cancelled or otherwise terminated without
having vested in full, the shares of Common Stock allocable to the unvested
portion of such Restricted Stock shall (unless the Plan shall have been
terminated) become available for subsequent awards of Restricted Stock
under the Plan.
4.2 Capital Adjustments. If any change in the outstanding shares of Common
Stock occurs or takes effect through declaration of stock or other
dividends or distributions with respect to such shares, through
restructuring, recapitalization or other similar event or through stock
splits, change in par value, combination or exchange of shares, or the
like, then the number and kind of shares reserved for Restricted Stock
Awards, the number and kind of shares subject to outstanding Restricted
Stock, as appropriate, of such Restricted shares shall be adjusted as
necessary to reflect equitably such change; provided, however, that any
fractional shares resulting from such adjustment shall be eliminated.
5. RESTRICTED STOCK
5.1 Awards. Each Eligible Director shall automatically be awarded 50 shares of
Restricted Stock pursuant to the Plan for his or her attendance at each
meeting of the Board and 40 shares of Restricted Stock for his or her
attendance at each meeting of any Committee of the Board ("Restricted Stock
Awards").
5.2 Terms and Conditions of Awards. Each Restricted Stock Award shall be
evidenced by a Restricted Stock Agreement in such form as the Committee
shall prescribe from time to time in accordance with the Plan. Restricted
Stock shall be subject to such restrictions on transferability and other
restrictions, if any, as the Committee may impose at the date of grant or
thereafter and shall comply with the terms and conditions set forth below
in this Section 5.2, subject to such exceptions as may be determined by the
Committee.
5.2.1 Vesting of Awards. Each Restricted Stock Award shall, subject to
the provisions of Section 5.2.4, become fully vested and
nonforfeitable upon the third anniversary of the Date of the Award
or, if earlier, upon the date of the Grantee's retirement from
service as a member of the Board pursuant to the Company's policy of
age-related retirement from the Board. If, prior to such third
anniversary, a Grantee shall die while a member of the Board, or if
the Grantee's service on the Board shall terminate by reason of
"disability," as such term is defined by the Committee, or if a
Change in Control occurs pursuant to Section 5.2, all Restricted
Stock Awards held by the Grantee shall become fully vested and
nonforfeitable as of the date of death or disability of the Grantee
or the occurrence of the Change in Control.
5.2.2 Forfeiture of Awards. Subject to such exceptions as may be
determined by the Committee, if the Grantee's continuous service as
a member of the Board shall terminate by reason of the Grantee's
resignation prior to retirement or refusal to stand for reelection
or the Board's removal of the Grantee for "cause," as such term is
defined by the Committee, prior to the vesting of the Restricted
Stock Award in accordance with Section 5.2.4, all shares subject to
such nonvested Restricted Stock Award shall thereupon be forfeited
by the Grantee and transferred to, and reacquired by, the Company at
no cost to the Company; provided, however, that (i) the Committee
may provide, by rule or regulation or in any Restricted Stock
Agreement, or may determine in any individual case, that forfeiture
conditions relating to Restricted Stock will be waived in whole or
in part in the event of terminations resulting from specified
causes, and (ii) the Committee may in other cases waive in whole or
in part the forfeiture of Restricted Stock.
<PAGE> 3
5.2.3 Restrictions on Transfer of Shares. Shares of Restricted Stock may
not be sold, assigned, transferred, pledged, hypothecated or
otherwise disposed of, except by will or the laws of descent and
distribution, or, if then permitted under Rule 16b-3, pursuant to a
qualified domestic relations order as defined in Title I of the
Employee Retirement Income Security Act of 1974, as amended, at any
time while the Grantee is a member of the Board, unless otherwise
determined by the Committee. Certificates for shares of Common Stock
issued pursuant to awards of Restricted Stock shall bear an
appropriate legend referring to such restrictions, and any attempt
to dispose of any such shares of Common Stock in contravention of
such restrictions shall be null and void and without effect. Upon
the termination of the Grantee's service as a member of the Board,
all such restrictions upon transfer shall expire with respect to
shares subject to Restricted Stock Awards that have theretofore, or
as a result of such termination, become vested and nonforfeitable.
Prior to expiration of the restrictions upon transfer, the
certificates evidencing the Restricted Stock Award may be retained
by the Company or held in escrow by an agent appointed by the
Committee.
5.2.4 Definition of Change in Control. For purposes of the Plan, a change
in control of the Company ("Change in Control") shall be deemed to
have occurred if:
5.2.4.1 any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than (1) the Company or any of its
subsidiaries, (2) any "person" who on the date hereof is a
director or officer of the Company, (3) any trustee or other
fiduciary holding securities under an employee benefit plan
of the Company, or (4) any corporation owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of
stock of the Company (a "Person"), is or becomes the
"beneficial owner" (as defined in Rule 13d-3) under the
Exchange Act (a "Beneficial Owner")), directly or indirectly,
of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired
directly from the Company or its affiliates) representing 20%
or more of the combined voting power of the Company's then
outstanding securities; or
5.2.4.2 during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board, and any
new director (other than a director designated by a person
who has entered into an agreement with the Company to effect
a transaction described in Sections 5.2.4.1 or 5.2.4.3 whose
election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least
two-thirds ( 2/3) of the directors then still in office who
either were directors at the beginning of the period or whose
election or nomination for election was previously so
approved, cease for any reason to constitute at least a
majority thereof; or
5.2.4.3 the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in
the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) more than 80% of the combined voting
power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a
plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or
substantially all of the Company's assets.
5.3 Rights as a Stockholder. Except to the extent restricted under the
Restricted Stock Agreement, a Grantee shall have all of the rights of a
stockholder including, without limitation, the right to vote Restricted
Stock and the right to receive dividends thereon.
5.4 Rights of Grantees. Nothing in the Plan or in any Restricted Stock
Agreement shall confer upon an individual any right to continue service on
the Board or interfere in any way with the right of the Company to
terminate such service. Except as expressly provided in the Plan, the
Grantee shall have no
<PAGE> 4
rights by reason of any subdivision or consolidation of shares of stock of
any class or the payment of any stock dividend or any other increase or
decrease in the number of shares of stock of any class or by reason of any
dissolution, liquidation, merger, or consolidation or spin-off of assets or
stock of another corporation, and any issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any
class, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the Restricted Stock. The award of Restricted Stock
pursuant to the Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes
of its capital or business structures or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or part of its business or
assets.
6. EFFECTIVE DATE; TERM OF PLAN
6.1 Effective Date. The Plan, as adopted by the Board on December 10, 1998
shall be effective as of January 1, 1999.
6.2 Duration of Plan. Restricted Stock may be awarded pursuant to the Plan
from time to time within a period of ten years from the date the Plan is
adopted by the Board. The Plan shall remain in effect until all Restricted
Stock Awards under the Plan have been satisfied by the issuance of shares,
or terminated under the terms of the Plan.
7. NONASSIGNABILITY AND NONTRANSFERABILITY
7.1 Restricted Stock awards under the Plan shall not be assignable or
transferable by the Eligible Director except by will or the laws of descent
and distribution.
8. AMENDMENT: TERMINATION
8.1 The Board may at any time and from time to time alter, amend, suspend, or
terminate the Plan in whole or in part. The termination or any modification
or amendment of the Plan shall not, without the consent of a director,
affect his or her rights under an Award.
9. MISCELLANEOUS
9.1 Governing Law. The Plan and all rights hereunder shall be construed in
accordance with and governed by the laws of the State of Delaware.
9.2 Headings. The headings of sections and subsections herein are included
solely for convenience of reference and shall not affect the meaning of any
of the provisions of the Plan.
<PAGE> 1
EXHIBIT 13
(ITEMS 1 AND 8)
UST
CONSOLIDATED SEGMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
Tobacco.............................................. $1,245,552 $1,181,789 $1,167,532
Wine................................................. 148,512 145,048 122,458
All other............................................ 29,182 74,881 81,715
---------- ---------- ----------
NET SALES.................................... $1,423,246 $1,401,718 $1,371,705
========== ========== ==========
OPERATING PROFIT (LOSS)
Tobacco.............................................. $ 720,622 $ 700,395 $ 745,558
Wine................................................. 22,090 28,178 17,884
All other............................................ 1,712 (1,270) 60
---------- ---------- ----------
OPERATING PROFIT............................. 744,424 727,303 763,502
Corporate expenses................................... (12,146) (15,995) (12,612)
Interest income (expense), net....................... 2,187 (7,451) (6,364)
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES................. $ 734,465 $ 703,857 $ 744,526
========== ========== ==========
IDENTIFIABLE ASSETS AT DECEMBER 31
Tobacco.............................................. $ 497,623 $ 467,972 $ 458,162
Wine................................................. 277,249 230,896 194,917
All other............................................ 87,197 102,157 91,569
Corporate............................................ 51,250 25,338 61,929
---------- ---------- ----------
$ 913,319 $ 826,363 $ 806,577
========== ========== ==========
CAPITAL EXPENDITURES
Tobacco.............................................. $ 27,696 $ 29,410 $ 29,199
Wine................................................. 25,646 20,135 12,033
All other............................................ 2,470 6,134 2,671
Corporate............................................ 454 2,480 810
---------- ---------- ----------
$ 56,266 $ 58,159 $ 44,713
========== ========== ==========
DEPRECIATION
Tobacco.............................................. $ 16,100 $ 16,266 $ 15,816
Wine................................................. 11,953 10,423 8,909
All other............................................ 1,653 1,836 1,792
Corporate............................................ 1,665 1,611 1,626
---------- ---------- ----------
$ 31,371 $ 30,136 $ 28,143
========== ========== ==========
</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>
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS for the year ended December
31
Net sales......................................... $1,423,246 $1,401,718 $1,371,705 $1,305,796 $1,203,951 $1,097,533
Cost of products sold (includes excise taxes)..... 283,516 291,942 272,756 262,203 251,944 246,445
Selling, advertising and administrative
expenses........................................ 407,452 398,468 348,059 335,824 311,279 286,336
---------- ---------- ---------- ---------- ---------- ----------
Operating income.................................. 732,278 711,308 750,890 707,769 640,728 564,752
Other (income) expense:
Interest (income) expense, net.................. (2,187) 7,451 6,364 3,179 92 (2,004)
Gain on disposal of product line................ -- -- -- -- -- (35,029)
---------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes and cumulative effect
of accounting changes........................... 734,465 703,857 744,526 704,590 640,636 601,785
---------- ---------- ---------- ---------- ---------- ----------
Income taxes...................................... 279,186 264,719 280,527 274,830 253,110 232,893
---------- ---------- ---------- ---------- ---------- ----------
Earnings before cumulative effect of accounting
changes......................................... 455,279 439,138 463,999 429,760 387,526 368,892
Cumulative effect of accounting changes (net of
income tax benefit)............................. -- -- -- -- -- 19,846
---------- ---------- ---------- ---------- ---------- ----------
Net earnings...................................... $ 455,279 $ 439,138 $ 463,999 $ 429,760 $ 387,526 $ 349,046
========== ========== ========== ========== ========== ==========
PER SHARE DATA
Basic earnings per share before cumulative effect
of accounting changes........................... $2.45 $2.39 $2.48 $2.21 $1.92 $1.77
Basic earnings per share.......................... 2.45 2.39 2.48 2.21 1.92 1.67
Diluted earnings per share before cumulative
effect of accounting changes.................... 2.44 2.37 2.44 2.17 1.88 1.73
Diluted earnings per share........................ 2.44 2.37 2.44 2.17 1.88 1.64
Dividends per share............................... 1.62 1.62 1.48 1.30 1.12 .96
Market price per share:
High............................................ 36 7/8 36 15/16 35 7/8 36 31 1/2 32 3/4
Low............................................. 24 9/16 25 1/2 28 1/4 26 5/8 23 5/8 24 3/8
FINANCIAL CONDITION at December 31
Current assets.................................... $507,213 $441,844 $450,570 $425,555 $381,937 $334,996
Current liabilities............................... 197,316 166,519 306,553 280,723 160,755 106,642
Working capital................................... 309,897 275,325 144,017 144,832 221,182 228,354
Ratio of current assets to current liabilities.... 2.6:1 2.7:1 1.5:1 1.5:1 2.4:1 3.1:1
Total assets...................................... 913,319 826,363 806,577 783,976 741,236 706,195
Long-term debt.................................... 100,000 100,000 100,000 100,000 125,000 40,000
Total debt........................................ 100,000 110,000 250,000 200,000 125,000 40,000
Stockholders' equity.............................. 468,293 436,795 281,206 292,781 361,669 462,972
OTHER DATA
Stock repurchased................................. $151,617 $ 45,719 $237,759 $274,783 $298,843 $236,704
Dividends paid on shares.......................... $301,145 $298,059 $277,302 $252,388 $225,715 $199,725
Dividends paid as a percentage of net earnings.... 66.1% 67.9% 59.8% 58.7% 58.2% 57.2%
Return on net sales............................... 32.0% 31.3% 33.8% 32.9% 32.2% 31.8%
Return on average assets.......................... 52.3% 53.8% 58.3% 56.4% 53.5% 50.6%
Return on average stockholders' equity............ 100.6% 122.3% 161.7% 131.3% 94.0% 71.3%
Percentage of long-term debt to stockholders'
equity.......................................... 21.4% 22.9% 35.6% 34.2% 34.6% 8.6%
Percentage of total debt to stockholders'
equity.......................................... 21.4% 25.2% 88.9% 68.3% 34.6% 8.6%
Average number of shares (in
thousands) -- basic............................. 185,544 183,931 187,386 194,374 201,995 208,469
Average number of shares (in
thousands) -- diluted........................... 186,880 185,602 190,067 197,613 205,699 213,412
</TABLE>
- ---------------
See Management's Discussion and Analysis and Notes to Consolidated Financial
Statements.
All share data have been adjusted to reflect the two-for-one stock splits
distributed on January 27, 1992 and 1989.
<PAGE> 3
UST
CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS for the year ended December 31
Net sales............................................ $1,032,172 $898,436 $756,435 $673,852 $611,878
Cost of products sold (includes excise taxes)........ 256,796 227,546 191,824 185,464 174,560
Selling, advertising and administrative expenses..... 274,613 247,085 215,621 189,963 177,103
---------- -------- -------- -------- --------
Operating income..................................... 500,763 423,805 348,990 298,425 260,215
Other (income) expense:
Interest (income) expense, net..................... (1,866) (2,279) (3,203) (3,190) (1,068)
Gain on disposal of product line................... -- -- -- -- --
---------- -------- -------- -------- --------
Earnings before income taxes and cumulative effect of
accounting changes................................. 502,629 426,084 352,193 301,615 261,283
---------- -------- -------- -------- --------
Income taxes......................................... 190,071 160,179 128,918 111,128 99,133
---------- -------- -------- -------- --------
Earnings before cumulative effect of accounting
changes............................................ 312,558 265,905 223,275 190,487 162,150
Cumulative effect of accounting changes (net of
income tax benefit)................................ -- -- -- -- --
---------- -------- -------- -------- --------
Net earnings......................................... $ 312,558 $265,905 $223,275 $190,487 $162,150
========== ======== ======== ======== ========
PER SHARE DATA
Basic earnings per share before cumulative effect of
accounting changes................................. $1.49 $1.26 $1.04 $.87 $.74
Basic earnings per share............................. 1.49 1.26 1.04 .87 .74
Diluted earnings per share before cumulative effect
of accounting changes.............................. 1.43 1.20 .99 .83 .71
Diluted earnings per share........................... 1.43 1.20 .99 .83 .71
Dividends per share.................................. .80 .66 .55 .46 .37
Market price per share:
High............................................... 35 3/8 33 7/8 18 1/4 15 3/8 10 1/2
Low................................................ 25 3/8 16 3/8 12 3/8 9 5/8 6
FINANCIAL CONDITION at December 31
Current assets....................................... $ 330,208 $305,430 $265,854 $275,954 $291,006
Current liabilities.................................. 81,208 95,455 68,660 66,643 69,935
Working capital...................................... 249,000 209,975 197,194 209,311 221,071
Ratio of current assets to current liabilities....... 4.1:1 3.2:1 3.9:1 4.1:1 4.2:1
Total assets......................................... 673,965 656,513 622,595 630,155 597,955
Long-term debt....................................... -- -- 3,060 6,789 21,828
Total debt........................................... -- 1,250 4,849 14,469 30,763
Stockholders' equity................................. 516,606 482,875 473,873 482,254 453,253
OTHER DATA
Stock repurchased.................................... $ 212,581 $184,424 $151,259 $ 97,517 $ 67,356
Dividends paid on shares............................. $ 167,951 $139,670 $118,295 $101,197 $ 81,672
Dividends paid as a percentage of net earnings....... 53.7% 52.5% 53.0% 53.1% 50.4%
Return on net sales.................................. 30.3% 29.6% 29.5% 28.3% 26.5%
Return on average assets............................. 47.0% 41.6% 35.6% 31.0% 28.3%
Return on average stockholders' equity............... 62.5% 55.6% 46.7% 40.7% 38.0%
Percentage of long-term debt to stockholders'
equity............................................. -- -- .6% 1.4% 4.8%
Percentage of total debt to stockholders' equity..... -- .3% 1.0% 3.0% 6.8%
Average number of shares (in thousands) -- basic..... 209,803 211,603 215,156 219,820 220,550
Average number of shares (in thousands) -- diluted... 218,674 221,458 224,522 230,164 228,579
</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 which are reflected in the analysis of Results of Operations
and Financial Condition. During the fourth quarter of 1998, the Company entered
into the Smokeless Tobacco Master Settlement Agreement (the "Settlement
Agreement") with attorneys general of various states and U.S. territories to
resolve the remaining health care cost recovery cases pending against the
Company. Subject to final court approval in the respective states, the
Settlement Agreement requires the Company to make payments expected to total
between $100 and approximately $200 million over ten years, depending on various
factors, for programs to reduce youth usage of tobacco and combat youth
substance abuse and for enforcement purposes. In addition, the Settlement
Agreement provides for payment by the Company of legal costs in the amount of $5
million. Settlement Agreement charges recorded by the Company in the fourth
quarter of 1998 totaled $15.3 million; including $4.3 million for payments to
the enforcement fund, $5 million for the payment of legal fees and $6 million
representing the first on-going payment to the public education fund due in
March of 1999. The balance of the future on-going payments related to the
Company's market share will be charged to expense in the period the related
shipments occur. In addition, included in 1998 results is a charge of $16.4
million versus $3 million in 1997, resulting from the Company's portion of the
funding for pilot programs, primarily to reduce youth access to tobacco
products, and related expenses as part of the settlements with the states of
Texas, Florida and Washington in connection with their health care cost
reimbursement litigation. Tobacco settlement charges negatively impacted diluted
earnings per share by 10 cents in 1998 versus 1 cent in 1997, and 8 cents for
the fourth quarter of 1998 versus no effect in the fourth quarter of 1997.
At December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which required the restatement of segment information prior to
1998.
In addition, due to the shipping pattern of the Tobacco segment, there was
an additional shipping day that occurred in 1996 which affected both the unit
volume and financial result comparisons for 1997 versus 1996.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
1998 COMPARED WITH 1997
Consolidated net sales rose 2 percent to $1.423 billion while net earnings
increased 4 percent to $455.3 million and diluted earnings per share increased 3
percent to $2.44.
Over the last three years, net sales have increased 9 percent at an average
annual rate of 2.9 percent, net earnings have increased 5.9 percent at an
average annual rate of 2.1 percent; and diluted earnings per share have
increased 12.4 percent at an average annual rate of 4.2 percent.
Results for the Tobacco segment increased 2.9 percent as higher selling
prices for moist smokeless tobacco were offset by the tobacco settlement charges
and higher spending for marketing and sales initiatives, partially off set by
the absence of a 1997 charge relating to recording the present value of an
employment contract for a former executive officer.
Wine segment results declined as a result of competitive pricing in the
marketplace.
Results for all other operations improved as gains recorded on dispositions
of a business and certain agricultural properties were offset by the continued
weakness in the premium cigar business.
<PAGE> 5
Corporate expenses were lower in 1998 versus 1997 due to the absence of a
charge related to another employment contract for a former executive officer.
Interest, net, resulted in income in 1998 versus expense in 1997 due to
higher income on cash equivalent investments and lower average debt levels
during the year.
Pretax margins increased to 51.6 percent on earnings before income taxes of
$734.5 million. Over the last three years, pretax margins have averaged 52
percent while earnings before income taxes have increased 4.2 percent at an
average annual rate of 1.5 percent.
The effective tax rate increased slightly in 1998 as compared to 1997.
Future net earnings and earnings per share growth may be affected by the
Company's ability to address competitive pressures, the overall growth rate of
the moist smokeless tobacco category, continued growth in other businesses and
the effects of potential regulatory actions.
1997 COMPARED WITH 1996
Consolidated net sales rose 2 percent to $1.402 billion, net earnings
decreased 5 percent to $439.1 million and diluted earnings per share declined 3
percent to $2.37.
Tobacco segment results were lower due to an additional shipping day in
1996, 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 an employment contract for a former executive officer.
Results for the Wine segment were substantially higher due to increased
case volume and higher selling prices for premium varietal wines.
All other operations recorded a small loss for the year.
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.
Pretax margins declined to 50.2 percent on earnings before income taxes of
$703.9 million.
The effective tax rate remained stable from year to year.
TOBACCO SEGMENT
1998 COMPARED WITH 1997
Tobacco segment sales increased 5.4 percent to $1.246 billion and accounted
for 87.5 percent of consolidated revenue.
Higher selling prices for moist smokeless tobacco was the primary reason
for the increase. Domestic unit volume for moist smokeless tobacco products was
slightly higher, rising 0.2 percent to 625.3 million cans as compared to 1997.
For the year, unit volume results were unfavorably affected by higher returned
goods resulting from several large promotions run in the latter part of 1997
which impacted regular stock at retail in 1998, and the implementation in
mid-1997 of a program to enhance product freshness by accelerating the rotation
of moist smokeless tobacco products at retail. During 1998, the Company
fine-tuned its promotional activities by focusing on the number and distribution
of promotional units. As a result, the Company believes that the returned goods
comparison should stabilize going forward and therefore have less of an impact
on reported net unit volume. Fourth quarter unit volume increased 1.6 percent to
157.3 million cans compared with the similar 1997 period which reflects growth
in both the premium priced and price/value brands, as well as lower returned
goods.
The national introduction at mid-year of Rooster, the Company's premium
mid-tier priced brand, continued targeted growth of Red Seal, the Company's
price/value brand, and better management of promotional activity during the year
all had a favorable impact on unit volume results for the fourth quarter and
year.
<PAGE> 6
Gross profit for the segment rose 5.6 percent during 1998. Higher selling
prices on premium brands more than offset higher volume for lower priced
promotional and price/value products resulting in a slight increase in the gross
profit percentage for the Tobacco segment.
Selling and advertising expenses increased in 1998 approximately 7 percent.
Selling expenses were significantly higher as the Company introduced an
incentive program for wholesalers and retailers to build partnerships with the
trade in support of the Company's smokeless tobacco brands. Spending was also
higher on consumer focused activities, market research, additional sales and
support personnel and higher salary related costs. Overall, advertising expenses
were favorable, resulting from the absence of a major consumer promotion which
ran in the prior year. Spending, however, was redirected and resulted in
increased print advertising and direct marketing efforts in support of premium
brands.
Administrative expenses were significantly higher due to the tobacco
settlement charges, partially offset by the absence of a charge relating to an
employment contract with a former executive officer.
Operating profit for the Tobacco segment increased 2.9 percent to $720.6
million for 1998. Absent tobacco settlement charges operating profit for the
Tobacco segment would have increased approximately 7 percent.
The Company continued to face competitive pressures in the marketplace in
1998. Marketing and sales initiatives over the past two years seem to have
slowed the rate of segment share loss experienced in prior years. Competitive
pressures, as well as the rate of growth of the moist smokeless tobacco category
and the effects of potential regulatory actions will continue to impact unit
volume and operating results for the Tobacco segment in the future.
1997 COMPARED WITH 1996
The comparison of results for the Tobacco segment was affected by an
additional shipping day in 1996 as well as an increase in returned goods
resulting from a program implemented during the second half of 1997 to enhance
product freshness by accelerating the rotation of moist smokeless tobacco
products at retail. In addition, due to increasing competition in the moist
smokeless tobacco category, additional 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 products and higher spending.
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. On an equivalent shipping day basis, unit volume
stabilized, reversing a downward trend that began in the fourth quarter of 1996.
Selling and advertising expenses for the year increased in support of 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 6.1 percent
to $700.4 million in 1997.
WINE SEGMENT
1998 COMPARED WITH 1997
Wine segment revenue increased 2.4 percent to $148.5 million and accounted
for 10.4 percent of consolidated sales. Competitive pricing in the marketplace
had an unfavorable effect on premium case sales during the year. In addition,
due to anticipated shortages of red wines resulting from the low harvest yields
in 1996, the Company began 1998 with certain varieties on allocation. The
Company took action by removing the allocations on red wines in the second
quarter and reduced prices in the second half of the year in an effort to
increase case volume. Premium case volume decreased slightly in 1998 versus
1997. However, as a result of the actions taken, premium case volume for the
fourth quarter increased approximately 12 percent as compared to the similar
period in the prior year. 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.
<PAGE> 7
Unit costs were higher in 1998 as a result of higher average costs
associated with the 1996 and 1997 harvests. As a result of the competitive
pricing issues in the marketplace and higher unit costs, gross profit for the
Wine segment decreased 1.2 percent in 1998.
The Company's wines are produced using grapes both harvested from its own
vineyards and purchased from regional growers as well as purchased bulk wine.
The demand for premium varietal wine continues to increase. Given the
outstanding harvest yields experienced over the last two years, the supply of
grapes is adequate to meet expected demand and thereby eliminate the need for
product allocations in 1999.
Selling, advertising and administrative expenses were higher in 1998.
Selling expenses were higher and were focused on promotional activities to
address the competitive marketplace. Overall, advertising expenses were
significantly lower; however, spending was focused on specific premium varietal
brands. Administrative and other expenses were significantly higher primarily
due to expenses incurred in improving information systems, salary and related
costs and professional fees.
The Wine segment recorded an operating profit of $22.1 million, a decrease
of 21.6 percent.
The Company believes that competitive pricing will continue in the
marketplace in 1999. In order to increase profitability, the Company will
continue to monitor current pricing levels and take the necessary actions to
remain competitive at the appropriate margin level, introduce new products and
focus on higher margin products.
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. Case volume for
premium wine increased 9.6 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. Total grape tonnage
harvested and purchased in 1997 was significantly higher than in 1996 but at
relatively stable average costs.
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.
Selling, advertising and administrative expenses were higher in 1997.
Selling expenses were stable while advertising expenses were significantly
higher in promoting 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 $28.2 million in 1997.
ALL OTHER OPERATIONS
1998 COMPARED WITH 1997
All other sales decreased 61 percent to $29.2 million and accounted for 2.1
percent of consolidated sales. The primary reason for the decrease was the
disposition of the Company's video entertainment subsidiary in the first quarter
of 1998 and a significant decline in the cigar operations due to the weakness in
the premium cigar market. 1998 results include a gain of $10.7 million resulting
from the sale of certain commercial agricultural properties and the Company's
video entertainment subsidiary. This gain was offset by unfavorable results for
the cigar operations, while spending in the international operation was lower.
Overall, all other operations recorded a small operating profit of $1.7 million.
<PAGE> 8
1997 COMPARED WITH 1996
All other sales decreased 8.4 percent to $74.9 million and accounted for
5.3 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. 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 markets, while
results for other businesses were mixed. Overall, all other operations recorded
an operating loss of $1.3 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 was $465.6 million in 1998 as compared to
$412.6 million in 1997 and $439.4 million in 1996.
Net cash provided by operating activities in 1998 increased 12.9 percent as
compared to 1997. The increase was due to higher earnings generated by the
Tobacco segment, partially offset by lower 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,
$217.8 million was used for the purchase of leaf tobacco and related costs for
smokeless tobacco. In addition, the cost of grapes harvested and purchased and
the cost of bulk wine totaled $92.1 million over the last three years.
INVESTING ACTIVITIES
Net cash used in investing activities was $15.4 million in 1998. Purchases
of property, plant and equipment over the last three years totaled $159.1
million.
Major areas of capital spending from 1996 through 1998 were:
Tobacco segment
- Building additions and renovations
- Manufacturing, processing and packaging equipment
- Computer equipment and software
Wine segment
- Storage capacity
- Vineyard expansion and development
- Building additions and renovations
- Computer equipment and software
Other
- Cigar distribution facility and manufacturing capacity expansion
- Equipment
In 1999, the Company's capital program is expected to approximate $65
million and will primarily include improvements to the tobacco processing and
manufacturing operations, information systems, and expansion of storage
facilities, related equipment and vineyard development for the wine operation.
In 1998, the Company received $14.6 million from the disposition of certain
commercial agricultural properties and $20.2 million resulting from a sale of a
business. In 1997, the Company received $25.7 million resulting from a
prepayment of royalties in connection with a previous divestiture and in 1996
received cash proceeds of $6.3 million from the sale of two businesses.
<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 1995, funds received primarily from
the exercise of options, together with these tax benefits, totaled $133.6
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. In 1998 however, the
Company did not increase its quarterly dividend rate and its stock repurchase
program had been suspended since June 1997 in view of the proposed resolution of
regulatory and litigation issues affecting the tobacco industry. In December
1998, upon the execution of the Settlement Agreement, the Company resumed its
stock repurchase program. Also in December, the Board of Directors approved a
first quarter 1999 dividend of 42 cents per share. This equates to an indicated
annual rate of $1.68, and represents an increase of 3.7 percent.
Since 1995, the dividend rate has increased 24.6 percent reflecting an
average annual increase of 7.8 percent. Total cash dividends paid by the Company
in 1998 were $301.1 million or 66.1 percent of net earnings. Cash dividends paid
to stockholders have exceeded 50 percent of net earnings in each of the last
three years. It is the Company's intention to moderate dividend increases in the
future to better align the payout ratio closer to 50 percent of net earnings.
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 $876.5 million, totaling 64.5
percent of net earnings for the period.
The current stock repurchase program, as approved by the Board of
Directors, began in 1996 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 December 1998, the Company
repurchased 4.4 million shares at a cost of $151.6 million. As of December 31,
1998, 13.6 million shares remained to be repurchased under the current program.
As a result of the suspension of the stock repurchase program for
substantially all of 1998, the Company used excess cash to repay borrowings.
Over the last three years the Company had net repayments on borrowings of $100
million.
LIQUIDITY AND CAPITAL RESOURCES
In 1998, sources of cash exceeded uses of cash by $26.3 million. Cash
generated from operating activities and proceeds received from the sale of
certain commercial agricultural properties and a business, along with cash on
hand at December 31, 1997 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 $100 million to support
outstanding commercial paper at December 31, 1998.
The ratio of current assets to current liabilities (current ratio) at
December 31, 1998 was 2.6 to 1 and has averaged 2.3 to 1 over the last three
years. The current ratio remained stable as compared to 1997 as increases in
inventories were offset by higher accrued expenses. The Company's liquidity
position is enhanced by the fact that leaf inventories are carried at costs
computed under the last-in, first-out (LIFO) method. The
<PAGE> 10
average costs of these inventories are $50.9 million more than the amount at
which they are carried in the Consolidated Statement of Financial Position at
December 31, 1998.
In 1999, projected leaf tobacco purchases will be slightly higher than
amounts expended in 1998. In addition, significant levels of cash will be
required for the stock repurchase program, dividend payments and capital
projects.
In December 1998, the Board of Directors approved borrowing up to $1
billion over five years to augment the Company's stock repurchase program and
for other corporate purposes. Additional credit facilities will be required in
the future to cover these additional borrowings and the Company is currently
analyzing appropriate additional debt financing vehicles. The Company intends to
maintain appropriate facilities to ensure access to credit markets providing
sufficient financial resources and operational flexibility.
The percentage of total debt outstanding to stockholders' equity decreased
to 21.4 percent at December 31, 1998, from 25.2 percent at December 31, 1997.
Slightly lower debt levels and an increase in stockholders' equity caused the
percentage to decline.
The Company anticipates that its operating cash requirements will be met by
amounts generated from operating activities augmented by borrowings.
Stockholders' equity increased in 1998, 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, 1998, the return on average stockholders' equity declined
to 100.6 percent from 122.3 percent at December 31, 1997. In 1997 and 1996 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 has developed plans to address the
year 2000 issue and is currently modifying or replacing critical computer
systems to become year 2000 compliant. The Company's year 2000 plan includes
both information technology (IT) systems and non-IT systems and a risk
assessment of its major vendors and customers. Major vendors and customers were
surveyed to determine their state of readiness and the potential implications
they may have on the Company's business. Site visits are being planned for
critical vendors and customers. Remediation and testing of critical business IT
systems are currently in process and these systems are expected to be year 2000
compliant by June 30, 1999. The Company's most critical business system was
replaced with year 2000 compliant software in the fourth quarter of 1998.
Remediation and testing of non-IT systems will also continue, as necessary,
during the first half of 1999.
Based on current information available, the Company estimates that the cost
to become year 2000 compliant will not be material.
Incomplete or untimely resolution of the year 2000 issue by the Company or
critically important customers or vendors could cause delays in the Company's
ability to manufacture and ship its products, process transactions or engage in
similar normal business activities, which would have a material financial impact
on the Company's operations. With the implementation of its year 2000 plan, the
Company believes the year 2000 issue should not pose any significant operational
problems.
The Company is developing contingency plans in order to minimize the
potential disruption of business operations that may result if the Company, its
vendors or customers fail to become year 2000 compliant. The contingency plans
may include stockpiling or securing alternate sources of manufacturing supplies.
<PAGE> 11
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 product 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 in the Form 8-Ks
and in the quarterly Form 10-Qs), 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.
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: 1996 -- $1,372, 1997 -- $1,402 and
1998 -- $1,423
Pretax Margins: 1996 -- 54.3%, 1997 -- 50.2% and 1998 -- 51.6%
Diluted Earnings Per Share: 1996 -- $2.44, 1997 -- $2.37 and
1998 -- $2.44
Tobacco Sales: 1996 -- $1,168, 1997 -- $1,182 and 1998 -- $1,246
Wine Sales: 1996 -- $122, 1997 -- $145 and 1998 -- $149
Other Sales: 1996 -- $82, 1997 -- $75 and 1998 -- $29
Net Cash Provided by Operating Activities: 1996 -- $439, 1997 -- $413
and 1998 -- $466
Return on Average Stockholders' Equity: 1996 -- 161.7%, 1997 -- 122.3%
and 1998 -- 100.6%
Total Debt to Stockholders' Equity: 1996 -- 88.9%, 1997 -- 25.2% and
1998 -- 21.4%
Dividends Per Share: 1996 -- $1.48, 1997 -- $1.62 and 1998 -- $1.62
The following bar graph illustrates the relationship between net earnings
and dividends paid:
Net Earnings: 1996 -- $464, 1997 -- $439 and 1998 -- $455
Dividends Paid: 1996 -- $277, 1997 -- $298 and 1998 -- $301
A pie chart illustrating the percentage of capital expenditures by
operating unit for 1996 -- 1998:
Tobacco 54%, Wine 36% 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>
1998
Net sales.......................... $340,164 $357,390 $354,146 $371,546 $1,423,246
Gross profit....................... 272,296 288,285 285,313 293,836 1,139,730
Net earnings....................... 111,977 119,140 117,753 106,409 455,279
Basic earnings per share........... .60 .64 .63 .57 2.45
Diluted earnings per share......... .60 .64 .63 .57 2.44
Dividends per share................ .40 1/2 .40 1/2 .40 1/2 .40 1/2 1.62
Market price per share:
High............................. 36 7/8 31 7/88 31 5/16 35 5/8 36 7/88
Low.............................. 31 7/8 24 9/16 25 5/16 28 5/8 24 9/16
----------------------------------------------------------
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 1/2 30 1/8 31 3/4 36 15/16 36 15/16
Low.............................. 26 3/4 25 1/2 26 1/8 28 1/8 25 1/28
</TABLE>
- ---------------
The first quarter of 1998 includes a pretax gain of $10.7 million (4 cents per
diluted share) from the sale of certain commercial agricultural properties and
the Company's video entertainment subsidiary.
The first, third and fourth quarters of 1998 include pretax charges of $4.6
million, $3.1 million and $24 million (2 cents, 1 cent and 8 cents per diluted
share), respectively, associated with the settlement of health care cost
reimbursement litigation. (See Contingencies Note.)
The first quarter of 1997 includes a pretax charge of $6.6 million (2 cents per
diluted share) for the present value of future obligations arising under
employment contracts with two former executive officers.
The third quarter of 1997 includes a pretax charge of $3 million (1 cent per
diluted share) resulting from the Company's settlement with the state of Florida
regarding health care cost reimbursement litigation.
The Company's shares trade on the New York Stock Exchange and the Pacific
Exchange, ticker symbol -- UST. The number of stockholders of record at December
31, 1998 was 9,668.
<PAGE> 13
EXHIBIT 13 -- (CONTINUED)
(ITEM 8)
UST
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.............................................. $1,423,246 $1,401,718 $1,371,705
COSTS AND EXPENSES
Cost of products sold................................ 257,155 265,193 246,381
Excise taxes......................................... 26,361 26,749 26,375
Selling, advertising and administrative.............. 407,452 398,468 348,059
Interest (income) expense, net....................... (2,187) 7,451 6,364
---------- ---------- ----------
TOTAL COSTS AND EXPENSES............................... 688,781 697,861 627,179
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES........................... 734,465 703,857 744,526
---------- ---------- ----------
INCOME TAXES........................................... 279,186 264,719 280,527
---------- ---------- ----------
NET EARNINGS........................................... $ 455,279 $ 439,138 $ 463,999
========== ========== ==========
NET EARNINGS PER SHARE
Basic................................................ $2.45 $2.39 $2.48
Diluted.............................................. $2.44 $2.37 $2.44
AVERAGE NUMBER OF SHARES
Basic................................................ 185,544 183,931 187,386
Diluted.............................................. 186,880 185,602 190,067
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 14
UST
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 33,210 $ 6,927
Accounts receivable....................................... 63,269 67,702
Inventories............................................... 372,634 319,666
Prepaid expenses and other current assets................. 24,653 31,753
Deferred income taxes..................................... 13,447 15,796
---------- ----------
Total current assets................................... 507,213 441,844
---------- ----------
Property, plant and equipment, net.......................... 338,695 326,709
Other assets................................................ 67,411 57,810
---------- ----------
Total assets...................................... $ 913,319 $ 826,363
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term obligations.................................... $ -- $ 10,000
Accounts payable and accrued expenses..................... 156,699 119,345
Income taxes.............................................. 40,617 37,174
---------- ----------
Total current liabilities......................... 197,316 166,519
---------- ----------
Long-term debt.............................................. 100,000 100,000
Postretirement benefits other than pensions................. 78,567 73,868
Other liabilities........................................... 69,143 49,181
Contingencies (see note).................................... -- --
---------- ----------
Total liabilities................................. 445,026 389,568
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock............................................. 104,048 103,307
Additional paid-in capital................................ 512,089 474,661
Retained earnings......................................... 684,489 536,014
Accumulated other comprehensive loss...................... (18,420) (8,632)
---------- ----------
1,282,206 1,105,350
Less cost of shares in treasury........................... 813,913 668,555
---------- ----------
Total stockholders' equity........................ 468,293 436,795
---------- ----------
Total liabilities and stockholders' equity........ $ 913,319 $ 826,363
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 15
UST
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings........................................ $ 455,279 $ 439,138 $ 463,999
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization.................... 31,726 30,491 28,318
Deferred income taxes............................ 236 (8,779) 2,412
Prepayment of royalties.......................... -- (25,732) --
Write-down of production costs and prepaid
assets......................................... -- 24,089 --
Gain on sale of property, plant and equipment.... (7,840) -- --
Gain on sale of a business....................... (2,820) -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (2,918) 8,430 (11,128)
Inventories.................................... (57,087) (56,146) (18,494)
Prepaid expenses and other assets.............. 2,084 (1,884) (9,576)
Accounts payable, accrued expenses and other
liabilities................................. 43,538 8,743 9,895
Income taxes payable........................... 3,443 (5,744) (26,038)
--------- --------- ---------
Net cash provided by operating activities... 465,641 412,606 439,388
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.......... (56,266) (58,159) (44,713)
Dispositions of property, plant and equipment....... 20,749 2,409 7,964
Proceeds from the prepayment of royalties........... -- 25,732 --
Proceeds from the sale of businesses................ 20,152 -- 6,256
--------- --------- ---------
Net cash used in investing activities....... (15,365) (30,018) (30,493)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings............................ -- 10,000 150,000
Repayment of borrowings............................. (10,000) (150,000) (100,000)
Proceeds from the issuance of stock................. 38,769 53,665 41,215
Dividends paid...................................... (301,145) (298,059) (277,302)
Stock repurchased................................... (151,617) (45,719) (237,759)
--------- --------- ---------
Net cash used in financing activities....... (423,993) (430,113) (423,846)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents............................... 26,283 (47,525) (14,951)
Cash and cash equivalents at beginning of
year...................................... 6,927 54,452 69,403
--------- --------- ---------
Cash and cash equivalents at end of year.... $ 33,210 $ 6,927 $ 54,452
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes..................................... $266,745 $268,158 $290,024
Interest......................................... 5,935 8,718 7,151
</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>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS LOSS STOCK EQUITY
-------- ---------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.............. $101,040 $373,935 $ 208,238 $ (5,355) $(385,077) $ 292,781
Comprehensive income:
Net earnings............................ -- -- 463,999 -- -- 463,999
Other comprehensive loss, net of tax:
Foreign currency translation
adjustment.......................... -- -- -- (38) -- (38)
Minimum pension liability
adjustment.......................... -- -- -- (1,851) -- (1,851)
---------
Other comprehensive loss................ (1,889)
---------
Comprehensive income.................. 462,110
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
-------- -------- --------- -------- --------- ---------
Balance at December 31, 1996.............. 102,077 414,274 394,935 (7,244) (622,836) 281,206
Comprehensive income:
Net earnings............................ -- -- 439,138 -- -- 439,138
Other comprehensive loss, net of tax:
Foreign currency translation
adjustment.......................... -- -- -- (322) -- (322)
Minimum pension liability
adjustment.......................... -- -- -- (1,066) -- (1,066)
---------
Other comprehensive loss................ (1,388)
---------
Comprehensive income.................. 437,750
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
-------- -------- --------- -------- --------- ---------
Balance at December 31, 1997.............. 103,307 474,661 536,014 (8,632) (668,555) 436,795
Comprehensive income:
Net earnings............................ -- -- 455,279 -- -- 455,279
Other comprehensive loss, net of tax:
Foreign currency translation
adjustment.......................... -- -- -- (602) -- (602)
Minimum pension liability
adjustment.......................... -- -- -- (9,186) -- (9,186)
---------
Other comprehensive loss................ (9,788)
---------
Comprehensive income.................. 445,491
Cash dividends -- $1.62 per share......... -- -- (301,145) -- -- (301,145)
Exercise of stock options -- 1,681,600
shares.................................. 841 29,759 -- -- -- 30,600
Income tax benefits, net of increase in
receivables from exercise of stock
options................................. -- 8,169 -- -- -- 8,169
Stock repurchased for
treasury -- 4,383,500 shares............ -- -- -- -- (151,617) (151,617)
Retirement of treasury stock -- 200,000
shares.................................. (100) (500) (5,659) -- 6,259 --
-------- -------- --------- -------- --------- ---------
Balance at December 31, 1998.............. $104,048 $512,089 $ 684,489 $(18,420) $(813,913) $ 468,293
======== ======== ========= ======== ========= =========
</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.
Prior year financial statements have been revised to conform to the 1998
presentation.
REVENUE RECOGNITION
Revenue from sales of smokeless tobacco products are recognized when title
passes, which is when products are received by the customer. Revenue from sales
of wine products are recognized when title passes to the customer, which is when
products are shipped.
CASH AND CASH EQUIVALENTS
Cash equivalents are 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. Long-lived assets are reviewed for impairment
whenever facts and circumstances indicate that the carrying amount may not be
recoverable.
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 approximates their carrying value.
STOCK OPTIONS
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 reporting for stock options.
<PAGE> 18
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE
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.
INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
Leaf tobacco................................................ $178,078 $152,869
Products in process......................................... 110,752 96,314
Finished goods.............................................. 66,688 52,406
Other materials and supplies................................ 17,116 18,077
-------- --------
$372,634 $319,666
======== ========
</TABLE>
At December 31, 1998 and 1997, $150.3 million and $136.9 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
$50.9 million and $47.4 million, respectively.
PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
Land........................................................ $ 22,828 $ 29,586
Buildings................................................... 234,559 224,889
Machinery and equipment..................................... 332,603 310,019
-------- --------
589,990 564,494
Less allowances for depreciation............................ 251,295 237,785
-------- --------
$338,695 $326,709
======== ========
</TABLE>
Depreciation expense was $31.4 million for 1998, $30.1 million for 1997 and
$28.1 million for 1996.
The Company also leases certain property and equipment under various
operating lease arrangements. Annual commitments under these leases, which
average $4.3 million per year through the year 2003, extend through 2030 and
total $37.1 million. Lease expense for the years 1998, 1997 and 1996 was $9.5
million, $6.4 million and $5.7 million, respectively.
<PAGE> 19
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1997
------- -------
<S> <C> <C>
Prepaid pension costs....................................... $28,884 $27,947
Limited partnership investment.............................. 11,166 11,177
Deferred income taxes....................................... 9,178 1,795
Other....................................................... 18,183 16,891
------- -------
$67,411 $57,810
======= =======
</TABLE>
The limited partnership investment owns and leases a cogeneration facility.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
Trade accounts payable...................................... $ 37,281 $ 34,150
Employee compensation and benefits.......................... 57,415 58,192
Settlement charges.......................................... 18,703 --
Other accrued expenses...................................... 43,300 27,003
-------- --------
$156,699 $119,345
======== ========
</TABLE>
REVOLVING CREDIT AGREEMENTS
The Company has two revolving credit agreements totaling $350 million with
various 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 1998 in the amount
of $87.5 million, which expires in November 1999. The Company may borrow funds
and elect to pay interest under the "Base Rate," "Competitive Bid" or
"Eurodollar" interest rate provisions of the agreements. 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.
At December 31, 1998, the Company had $100 million outstanding under
commercial paper borrowings, all of which 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, 1998 had a weighted-average interest rate of 5.9
percent. At December 31, 1997, the Company had $110 million outstanding under
commercial paper borrowings, of which $100 million was classified as long-term
debt. Commercial paper borrowings at December 31, 1997 had a weighted-average
interest rate of 5.8 percent.
OTHER LIABILITIES
Other liabilities include the noncurrent portion of the pension liabilities
at December 31, 1998 and 1997 of $65.1 million and $45.5 million, respectively.
(See Employee Benefit and Compensation Plans Note.)
In 1997, the Company had sold put options which entitled the holder to sell
a specific number of shares of common stock to the Company at a predetermined
price. The Company's put option program was suspended during 1997, and the
Company had no liability or shares outstanding under its put option program at
December 31, 1998 or 1997.
<PAGE> 20
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998 and 1997, the Company repurchased 4.4 million and 1.5 million
shares, respectively, 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, 1998, 6.4 million shares of the 20
million authorized have been repurchased. The Company had suspended its stock
repurchase program from June 1997 through November 1998, due to the proposed
resolution of regulatory and litigation issues affecting the tobacco industry.
Common stock issued at December 31, 1998 and 1997 was 208,095,836 shares
and 206,614,236 shares, respectively. Treasury shares held at December 31, 1998
and 1997 was 26,008,500 shares and 21,825,000 shares, respectively.
In December 1998, the Board of Directors approved the Nonemployee
Directors' Restricted Stock Award Plan. Under this Plan, up to 0.2 million
shares of the Company's common stock may be granted to nonemployee directors in
accordance with the provisions of the Plan, and accordingly, 0.2 million shares
of the Company's treasury stock has been cancelled and reserved for use upon
issuance of stock for this Plan.
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>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net earnings:
As reported.............................................. $455,279 $439,138 $463,999
Pro forma................................................ $449,445 $436,106 $461,059
Basic earnings per share:
As reported.............................................. $2.45 $2.39 $2.48
Pro forma................................................ $2.42 $2.37 $2.46
Diluted earnings per share:
As reported.............................................. $2.44 $2.37 $2.44
Pro forma................................................ $2.41 $2.35 $2.42
</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 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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield............................ 4.6% 4.4% 4.4%
Risk-free interest rate............................ 5.6% 5.9% 6.6%
Expected volatility................................ 22.0% 29.7% 18.0%
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 the exercise.
At December 31, 1998, 1,712,200 shares were available for grant under the
1992 Stock Option Plan and 156,500 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 $10.6 million in
1998, $9.5 million in 1997 and $12.1 million in 1996 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>
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
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............... 14,886,800 $26.78 15,782,600 $24.57 16,321,700 $22.20
Granted.............. 1,359,500 30.64 1,861,600 31.39 1,567,800 33.93
Exercised............ (1,681,600) 18.20 (2,459,500) 15.40 (2,075,500) 12.98
Forfeited............ (109,300) 31.81 (297,900) 32.45 (30,600) 29.61
Expired.............. (800) 7.69 -- -- (800) 4.23
---------- ------ ---------- ------ ---------- ------
Outstanding at end of
year............... 14,454,600 $28.10 14,886,800 $26.78 15,782,600 $24.57
========== ====== ========== ====== ========== ======
Exercisable at end of
year............... 11,637,500 $27.31 11,932,700 $25.49 13,020,600 $22.96
========== ====== ========== ====== ========== ======
Weighted-average fair
value of options
granted during the
year............... $ 5.42 $ 7.58 $ 5.95
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<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>
$13.78 -- 18.28 1,439,100 1.3 years $14.48 1,439,100 $14.48
24.19 -- 35.25 13,015,500 5.7 years 29.60 10,198,400 29.12
---------- ----------
$13.78 -- 35.25 14,454,600 5.3 years $28.10 11,637,500 $27.31
========== ====== ========== ======
</TABLE>
EMPLOYEE BENEFIT AND COMPENSATION PLANS
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits," which changed the Company's
reporting requirements for its pension and postretirement welfare benefit 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 and certain of its subsidiaries also 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.
<PAGE> 23
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents a reconciliation of the plans at December
31:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
POSTRETIREMENT BENEFITS
PENSION PLANS OTHER THAN PENSIONS
-------------------- ------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year....... $284,164 $246,081 $ 59,951 $ 58,016
Service cost.................................. 10,195 8,744 3,349 2,857
Interest cost................................. 20,833 18,761 4,384 4,003
Plan participants' contributions.............. -- -- 71 99
Plan amendments............................... -- 102 -- --
Actuarial loss/(gain)......................... 42,063 24,377 9,481 (2,734)
Benefits paid................................. (15,243) (13,901) (2,680) (2,290)
-------- -------- -------- --------
Benefit obligation at end of year............. $342,012 $284,164 $ 74,556 $ 59,951
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year....................................... $279,733 $242,230 -- --
Actual return on plan assets.................. 25,868 47,687 -- --
Employer contributions........................ 5,377 4,387 -- --
Benefits paid................................. (15,243) (13,901) -- --
Administrative expenses....................... (574) (670) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year...... $295,161 $279,733 -- --
-------- -------- -------- --------
FUNDED STATUS
Funded status at end of year.................. $(46,851) $ (4,431) $(74,556) $(59,951)
Unrecognized actuarial loss/(gain)............ 36,567 (1,061) (3,684) (13,557)
Unrecognized prior service cost............... (1,174) (1,287) (327) (360)
Unrecognized transition obligation............ 21 (226) -- --
-------- -------- -------- --------
Accrued benefit cost.......................... $(11,437) $ (7,005) $(78,567) $(73,868)
-------- -------- -------- --------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED STATEMENT
OF FINANCIAL POSITION:
Prepaid benefit cost.......................... $ 28,884 $ 27,947 $ -- $ --
Accrued benefit liability..................... (69,768) (49,561) (78,567) (73,868)
Intangible asset.............................. 3,783 3,076 -- --
Accumulated other comprehensive loss.......... 25,664 11,533 -- --
-------- -------- -------- --------
Net amount recognized......................... $(11,437) $ (7,005) $(78,567) $(73,868)
======== ======== ======== ========
</TABLE>
The weighted-average assumptions used for the year ended December 31 were:
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
PENSION PLANS OTHER THAN PENSIONS
-------------------- ------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Discount rate................................... 6.50% 7.25% 6.50% 7.25%
Expected return on plan assets.................. 8.75% 9.25% -- --
Rate of compensation increase................... 5.00% 5.00% -- --
</TABLE>
The rate of increase in per capita costs of covered health care benefits is
assumed to be 8.3 percent for 1999 and to decrease gradually to 4.5 percent by
the year 2005 and remain at that level thereafter.
<PAGE> 24
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic benefit cost for the year ended December 31 includes the
following components:
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
PENSION PLANS OTHER THAN PENSIONS
-------------------------------- --------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service cost................... $ 10,195 $ 8,744 $ 8,594 $3,349 $2,857 $2,989
Interest cost.................. 20,833 18,761 17,098 4,384 4,003 4,162
Expected return on plan
assets....................... (23,036) (21,110) (19,608) -- -- --
Amortization of unrecognized
transition obligation........ (247) (247) (247) -- -- --
Amortization of prior service
cost......................... (113) (133) (142) (33) (33) --
Recognized actuarial
loss/(gain).................. 2,176 1,254 1,192 (392) (747) (190)
-------- -------- -------- ------ ------ ------
Net periodic benefit cost...... $ 9,808 $ 7,269 $ 6,887 $7,308 $6,080 $6,961
======== ======== ======== ====== ====== ======
</TABLE>
The projected benefit obligation, the accumulated benefit obligation and
the fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $82.4 million, $72.8 million and $5
million, respectively, as of December 31, 1998, and $63.4 million, $51.4 million
and $4 million, respectively, as of December 31, 1997.
The assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. To illustrate, a one-percentage
point increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1998 by
approximately $11 million and increase the service and interest cost components
of expense by approximately $1.4 million. A one-percentage point decrease in the
assumed health care trend rate would have decreased the accumulated
postretirement benefit obligation at December 31, 1998 by approximately $9.2
million and decreased the service and interest components of expense by
approximately $1.2 million.
Plan assets of the Company's pension plans include marketable equity
securities, including common stock of the Company, and corporate and government
debt securities. At December 31, 1998 and 1997, the fund held 1.3 million shares
of the Company's common stock having a market value of $44.6 million as of
December 31, 1998 and $47.3 million as of December 31, 1997. Dividends paid on
shares held by the fund were $2.1 million in 1998 and 1997.
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 $4.4 million in 1998, $4 million
in 1997 and $3.9 million in 1996.
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 $38.5 million in 1998,
$36.9 million in 1997 and $39 million in 1996.
<PAGE> 25
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $247,526 $247,224 $245,386
State and local.................................. 31,424 26,274 32,729
-------- -------- --------
Total current............................ 278,950 273,498 278,115
-------- -------- --------
Deferred:
Federal.......................................... 346 (6,807) 1,927
State and local.................................. (110) (1,972) 485
-------- -------- --------
Total deferred........................... 236 (8,779) 2,412
-------- -------- --------
$279,186 $264,719 $280,527
======== ======== ========
</TABLE>
The 1998, 1997 and 1996 current tax provisions reflect the reversal of
certain 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 $9.3 million, $13.4 million and $14.5 million for 1998, 1997 and
1996, 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 1998, 1997 and 1996 do not
reflect the tax effects resulting from the additional minimum pension liability
adjustments required by SFAS No. 87, "Employers' Accounting for Pensions" and
SFAS No. 52, "Foreign Currency Translation."
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>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other than pensions............... $27,498 $25,854
Other accrued liabilities................................. 24,747 28,629
Accrued pension liabilities............................... 24,419 17,346
All other, net............................................ 5,235 4,633
------- -------
Total deferred tax assets......................... 81,899 76,462
------- -------
Deferred tax liabilities:
Depreciation.............................................. 42,798 41,593
Investment in limited partnerships........................ 6,367 7,497
Prepaid pension assets.................................... 10,109 9,781
------- -------
Total deferred tax liabilities.................... 59,274 58,871
------- -------
Net deferred tax assets..................................... $22,625 $17,591
======= =======
</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>
1998 1997 1996
----- ----- -----
<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............... 2.8 2.2 2.9
Other, net.................................................. .2 .4 (.2)
----- ----- -----
38.0% 37.6% 37.7%
===== ===== =====
</TABLE>
ADVERTISING COSTS
The Company expenses the production costs of advertising in the period in
which they are incurred. Advertising expenses were $68.7 million in 1998, $75.7
million in 1997 and $66 million in 1996. At December 31, 1998 and 1997, $5
million and $8.2 million, respectively, of advertising related costs are
included in prepaid expenses and other current assets.
INTEREST (INCOME) EXPENSE, NET
Interest (income) expense, net, is comprised of income from cash
equivalents and capitalized interest and expense associated with short-term
obligations and long-term debt.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Income from cash equivalents........................... $(6,602) $ (951) $ (921)
Capitalized interest................................... (1,119) (342) --
------- ------- ------
(7,721) (1,293) (921)
------- ------- ------
Short-term obligations................................. 16 3,112 1,853
Long-term debt......................................... 5,518 5,632 5,432
------- ------- ------
$(2,187) $ 7,451 $6,364
======= ======= ======
</TABLE>
ACCUMULATED OTHER COMPREHENSIVE LOSS
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes rules for the reporting of comprehensive income and
its components. The main components of comprehensive income that relate to the
Company are net earnings, foreign currency translation adjustments, and
additional minimum pension liability adjustments, all of which are presented in
the Consolidated Statement of Changes in Stockholders' Equity. Prior to
adoption, the pension adjustment was included in stockholders' equity and the
translation adjustment was included in other assets. The Consolidated Statements
of Financial Position and Changes in Stockholders' Equity have been revised to
conform to the requirements of SFAS No. 130.
<PAGE> 27
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated other comprehensive loss consists of the following components,
net of taxes:
<TABLE>
<CAPTION>
FOREIGN MINIMUM
CURRENCY PENSION
TRANSLATION LIABILITY
ADJUSTMENT ADJUSTMENT
----------- ----------
<S> <C> <C>
Balance at December 31, 1995................................ $ (776) $ (4,579)
Net change for the year................................... (38) (1,851)
------- --------
Balance at December 31, 1996................................ (814) (6,430)
Net change for the year................................... (322) (1,066)
------- --------
Balance at December 31, 1997................................ (1,136) (7,496)
Net change for the year................................... (602) (9,186)
------- --------
Balance at December 31, 1998................................ $(1,738) $(16,682)
======= ========
</TABLE>
The net change for the year in foreign currency translation adjustment is
reflected net of tax benefits of $.3 million, $.2 million and $.02 million in
1998, 1997 and 1996, respectively. The net change for the year in minimum
pension liability adjustment is reflected net of tax benefits of $4.9 million,
$.6 million and $1 million in 1998, 1997 and 1996, respectively.
EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net earnings..................................... $455,279 $439,138 $463,999
======== ======== ========
Denominator:
Denominator for basic earnings per share -- 185,544 183,931 187,386
weighted-average shares.......................
Dilutive effect of employee stock options.......... 1,336 1,671 2,681
-------- -------- --------
Denominator for diluted earnings per share....... 186,880 185,602 190,067
======== ======== ========
Basic earnings per share........................... $2.45 $2.39 $2.48
Diluted earnings per share......................... $2.44 $2.37 $2.44
</TABLE>
Options to purchase 2.2 million shares, 2.3 million shares and 1.9 million
shares of common stock, outstanding as of December 31, 1998, 1997 and 1996,
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.
SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changed the method the Company
uses in reporting information about its operating segments. As a result of the
adoption, segment information for 1997 and 1996 has been restated to conform to
the 1998 presentation.
The Company's reportable segments are Tobacco and Wine. The Company
operates predominantly in the tobacco industry as a producer of moist smokeless
tobacco products. The Company also produces and markets premium wines. Those
business units that do not meet quantitative reportable thresholds are included
in the all other category. This category is comprised of the international
operations, cigar operations and discontinued businesses and product lines.
Tobacco segment sales are principally to a large number of
<PAGE> 28
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
wholesalers and chain stores which are widely dispersed. In 1998, net sales to
one customer accounted for approximately 23 percent of Tobacco segment net
sales.
The Company operates primarily in the United States; foreign operations and
export sales are not significant. Net sales and operating profit are reflected
net of intersegment sales and profits.
Operating profit is revenue less operating expenses and an allocation of
corporate expenses. Tobacco settlement charges for both 1998 and 1997 are
included in the operating results for the Tobacco segment. Included in the
operating results for all other operations in 1998 are the gains on the sale of
certain commercial agricultural properties and the video entertainment
subsidiary and 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. Corporate assets consist primarily of
cash and cash equivalents and other long-term investments. Corporate capital
expenditures and depreciation expense include amounts which have been allocated
to each reportable segment and all other operations for purposes of reporting
operating profit and identifiable assets. Consolidated Segment Information
appears on page 23.
CONTINGENCIES
The Company and/or its subsidiary, United States Tobacco Company
(hereinafter "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 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.
On November 23, 1998, the Company entered into a Smokeless Tobacco Master
Settlement Agreement (the "Settlement Agreement") with attorneys general of
various states and U.S. territories to resolve the remaining health care cost
reimbursement cases initiated against the Company. The Settlement Agreement
requires the Company to adopt various marketing and advertising restrictions and
make payments expected to total between $100 and approximately $200 million over
ten years -- depending on various factors -- for programs to reduce youth usage
of tobacco and combat youth substance abuse and for enforcement purposes.
Included in 1998 results is a charge of $15.3 million relating to the
Settlement Agreement, which represents $4.3 million to fund the States'
Anti-Trust/Consumer Protection Tobacco Enforcement Fund, $5 million for
attorneys' fees for outside counsel retained by the settling states and $6
million for the first on-going payment due in March 1999 based on 1998
shipments. Also included in 1998 results is a charge of $16.4 million resulting
from the Company's portion of the funding for pilot programs, primarily to
reduce youth access to tobacco products, and attorneys' fees and other costs
associated with the settlement of health care cost reimbursement litigation
initiated on behalf of the states of Florida, Texas and Washington.
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.
The Company is 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"
<PAGE> 29
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
alleging that his use of the Company's smokeless products "resulted in his
addiction to nicotine, increased use of Defendant's products and gum
deterioration."
The Company is named in an action in North Carolina seeking unspecified
damages brought by an individual plaintiff who alleges that he developed bladder
cancer as a result of his usage of smokeless tobacco manufactured by the
Company.
The Company is named in an action in San Francisco, California along with
other smokeless tobacco manufacturers and others seeking unspecified damages and
other relief brought by the City and County of San Francisco and the
Environmental Law Foundation purportedly on behalf of "the residents of San
Francisco County and the general public" alleging violation of The Safe Drinking
Water and Toxic Enforcement Act of 1986, Health and Safety Code sec.sec.25249.6,
et seq. ("Proposition 65") and the California Unfair Competition Act, Business
and Professions Code sec.sec.17200, et seq. The action alleges, among other
things, that the defendants sold smokeless tobacco products in California
without providing a ". . . 'clear and reasonable' warning that their use results
in multiple exposures to substances known to the State of California to cause
cancer, birth defects and reproductive harm."
The Company is named in an action in Kentucky seeking injunctive relief,
more than $400 million in "actual damages" before trebling and punitive damages
brought by one of the Company's competitors alleging that certain actions and
practices of the Company violate federal antitrust and advertising laws in
connection with the marketing and sale of its moist snuff brands and also
alleges various violations of tort and state law.
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 willingness to consider alternative
solutions for resolving certain regulatory and litigation issues, all such cases
are, and will continue to be, vigorously defended, and the Company believes that
the ultimate outcome of all such pending litigation will not have a material
adverse effect on the consolidated financial position of the Company, but may
have a material impact on the Company's consolidated financial results for a
particular reporting period in which resolved.
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 Company 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 smokeless tobacco
as "medical devices" and implementing certain labeling and access restrictions.
The court, granting the Company'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." On August 14, 1998, the Fourth
Circuit Court of Appeals ruled in favor of the Company and other tobacco product
manufacturers stating that FDA lacks jurisdiction to regulate tobacco products
and that all of the regulations published by FDA on August 28, 1996 are invalid.
On January 19, 1999, FDA filed a petition for certiorari seeking review of the
Fourth Circuit's ruling by the United States Supreme Court. 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.
<PAGE> 30
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, 1998 and 1997, 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, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UST Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Stamford, Connecticut
February 8, 1999
ERNST & YOUNG LLP
<PAGE> 1
EXHIBIT 21
PARENT AND SUBSIDIARIES
UST is an independent corporation without parent. It had the following
significant subsidiaries as of December 31, 1998:
<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 8, 1999, included in the 1998
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 8, 1999, 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, 1998.
Stamford, Connecticut
March 12, 1999
ERNST & YOUNG LLP
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,210
<SECURITIES> 0
<RECEIVABLES> 63,269
<ALLOWANCES> 0
<INVENTORY> 372,634
<CURRENT-ASSETS> 507,213
<PP&E> 589,990
<DEPRECIATION> 251,295
<TOTAL-ASSETS> 913,319
<CURRENT-LIABILITIES> 197,316
<BONDS> 100,000
0
0
<COMMON> 104,048
<OTHER-SE> 364,245
<TOTAL-LIABILITY-AND-EQUITY> 913,319
<SALES> 1,423,246
<TOTAL-REVENUES> 1,423,246
<CGS> 283,516
<TOTAL-COSTS> 283,516
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,187)
<INCOME-PRETAX> 734,465
<INCOME-TAX> 279,186
<INCOME-CONTINUING> 455,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 455,279
<EPS-PRIMARY> 2.45<F1>
<EPS-DILUTED> 2.44<F1>
<FN>
<F1>Note: Item number 5-03(b)(20) amounts for earnings per share of $2.45 and $2.44
represent earnings per share -- basic and earnings per share -- diluted,
respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated 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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 6,927 54,452 69,403
<SECURITIES> 0 0 0
<RECEIVABLES> 67,702 77,855 69,598
<ALLOWANCES> 0 0 0
<INVENTORY> 319,666 271,425 256,101
<CURRENT-ASSETS> 441,844 450,570 425,555
<PP&E> 564,494 514,313 492,165
<DEPRECIATION> 237,785 213,428 197,359
<TOTAL-ASSETS> 826,363 806,577 783,976
<CURRENT-LIABILITIES> 166,519 306,553 280,723
<BONDS> 100,000 100,000 100,000
0 0 0
0 0 0
<COMMON> 103,307 102,077 101,040
<OTHER-SE> 333,488 179,129 191,741
<TOTAL-LIABILITY-AND-EQUITY> 826,363 806,577 783,976
<SALES> 1,401,718 1,371,705 1,305,796
<TOTAL-REVENUES> 1,401,718 1,371,705 1,305,796
<CGS> 291,942 272,756 262,203
<TOTAL-COSTS> 291,942 272,756 262,203
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 7,451 6,364 3,179
<INCOME-PRETAX> 703,857 744,526 704,590
<INCOME-TAX> 264,719 280,527 274,830
<INCOME-CONTINUING> 439,138 463,999 429,760
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 439,138 463,999 429,760
<EPS-PRIMARY> 2.39 2.48 2.21
<EPS-DILUTED> 2.37 2.44 2.17
</TABLE>
