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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, 1999
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. [X]
AS OF FEBRUARY 1, 2000, 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 $3,786,281,341.
AS OF FEBRUARY 1, 2000, THERE WERE 165,983,286 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, 1999 AND FILED AS AN EXHIBIT AS REQUIRED BY
ITEM 601(b)(13) OF REGULATION S-K.........................PARTS I & II
CERTAIN PAGES OF UST 2000 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 1997 through 1999 set forth on page 23 of
its Annual Report to stockholders for the fiscal year ended December 31, 1999
("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 media subject to the jurisdiction of the Federal
Communications Commission. A federal excise tax was imposed in 1986, which was
increased in 1991, 1993, 1997 and 2000. 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 2000. 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, ingredient and 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 2000. 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. On April 26, 1999,
the United States Supreme Court announced its intention to review the ruling and
oral argument was heard on December 1, 1999. A decision is expected by the end
of the Court's 1999-2000 term. Registrant is not able to predict the outcome of
the appeal, or assess the future effect that these FDA regulations, if
implemented, may have on its smokeless tobacco business.
On 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 required 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.
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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 34% of Registrant's gross sales of tobacco products are made to
five customers, one of which, McLane Co. Inc., a national distributor, accounts
for 20% 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, COLUMBIA CREST and SNOQUALMIE varietal table wines
and DOMAINE STE. MICHELLE sparkling wine are produced by Registrant in the state
of Washington and marketed throughout the United States. Registrant also
produces and markets two California premium wines under the labels of VILLA MT.
EDEN and CONN CREEK. Approximately 61% of Registrant's wine sales are made to
ten distributors, no one of which accounts for more than 29% 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 2000. 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 2000. 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 1999 was slightly higher than in 1998. The supply of grapes is
adequate to meet expected demand.
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 in select markets and the 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, ingredient and
constituent disclosure, 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 2000. 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,
ingredient and 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 2000. 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 1999 was 4,765.
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
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<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............ 1,075,000 Office, plants and warehouses for
tobacco leaf handling, processing
and storage and for manufacture of
dry flour for smokeless tobacco
products.
Franklin Park, Illinois........... 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............ 20,000 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. ............ 257,000 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............ 203,000 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..................... 3,164 Vineyards.
Grant and Benton Counties,
Washington..................... 10,794 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, 1999 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 December 17, 1999, Registrant was served with a Summons and Complaint in
an action entitled Jonathan Clay and Donna Clay, his wife v. The American
Tobacco Company, et. al. (No. 99-C-0701), Circuit Court of Cabell County, West
Virginia. This action was brought by an individual plaintiff and his wife
against smokeless tobacco manufacturers, including Registrant, cigarette and
loose tobacco manufacturers and other entities for "some form of cancer and/or
vascular disease, more particularly squamous cell carcinoma . . . and other
personal injuries" allegedly sustained as a result of his use of various tobacco
products, including one of Registrant's smokeless tobacco products. The
Complaint further alleges "addiction" to tobacco and seeks compensatory and
punitive damages and other relief.
Registrant has been named in two 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. A third similar action, Charles Guidry and Charlene Guidry v. United
States Tobacco Company, et al. (C.A. No. CV96-1285), United States District
Court, Western District of Louisiana, Lake Charles Division, was voluntarily
dismissed without prejudice by Order dated December 8, 1999.
Registrant is named in an action in Illinois brought by an individual
plaintiff and purporting to state a class action "on behalf of himself and all
other persons similarly situated" alleging that Registrant "manipulates the
nicotine levels and absorption rates" in its smokeless tobacco products and
seeking to recover monetary damages "in an amount not less than the purchase
price" of Registrant's smokeless tobacco products and certain other relief. The
purported class excludes all persons who claim any personal injury as a result
of using Registrant's smokeless tobacco products.
Registrant is also named in several actions in West Virginia brought on
behalf of individual plaintiffs against cigarette manufacturers, smokeless
tobacco manufacturers, and other organizations seeking damages and other relief
in connection with injuries allegedly sustained as a result of tobacco usage,
including smokeless tobacco products. Included among the plaintiffs are two
individuals alleging, in addition to the use of other tobacco products, use of
Registrant's smokeless tobacco products and alleging the types of injuries
claimed to be associated with the use of smokeless tobacco products.
Registrant has been named in an action commenced in Nevada by an individual
plaintiff against cigarette and smokeless tobacco manufacturers seeking damages
and other relief for injuries allegedly sustained as a result of his exposure to
environmental tobacco smoke, cigarette smoking and use of smokeless tobacco
products.
Registrant has been named in a wrongful death and survival action in
California brought by a plaintiff, individually and as executor of decedent's
estate and as guardian ad litem for minor, for injuries allegedly sustained as a
result of decedent's use of Registrant's smokeless tobacco products. Plaintiff
seeks compensatory and punitive damages and other relief.
Registrant is also named in an action in San Francisco, California along
with five other smokeless tobacco manufacturers seeking damages and other relief
brought by the City and County of San Francisco and the
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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."
Registrant is named in an action in Kentucky seeking more than $400 million
in "actual damages" before trebling, punitive damages and injunctive relief
brought by one of Registrant's competitors alleging that certain actions and
practices of Registrant 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. In an opinion dated February
17, 2000, the Court denied both Registrant's and the plaintiff's motion for
summary judgment. Trial in this case commenced on February 28, 2000.
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, 2000 is set forth below:
<TABLE>
<CAPTION>
NAME OFFICE AGE
---- ------ ---
<S> <C> <C>
Vincent A. Gierer, Jr........................... Chairman of the Board, Chief 52
Executive Officer and President
Robert E. Barrett............................... Executive Vice President and 61
President -- UST Enterprises Inc.
Richard H. Verheij.............................. Executive Vice President and General 41
Counsel
Robert T. D'Alessandro.......................... Senior Vice President and Chief 46
Financial Officer
Allen C. Shoup.................................. President -- International Wine & 56
Spirits Ltd.
A. Gary Smith................................... President -- United States Tobacco 51
Company
</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.
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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 and as Senior Vice President and
Associate General Counsel from April 4, 1994 to November 30, 1994. Mr. Verheij
has been employed by Registrant since November 24, 1986.
Mr. D'Alessandro has served as Senior Vice President and Chief Financial
Officer since January 3, 2000. He served as Senior Vice President and Controller
from December 19, 1991 until January 2, 2000. Mr. D'Alessandro has been employed
by Registrant since May 4, 1981.
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.
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, 2000, there were
approximately 8,600 stockholders of record of its Common Stock.
ITEM 6 -- SELECTED FINANCIAL DATA
Registrant hereby incorporates by reference the Consolidated Selected
Financial Data -- Eleven 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
Registrant is exposed to market risk, primarily related to interest rates,
and to a lesser extent, foreign currency exchange rates. Registrant routinely
monitors this risk to minimize any adverse effects that changes in interest
rates or foreign currency rates may have on its net earnings and cash flows.
Registrant manages interest rate risk by utilizing fixed rate debt and
derivative instruments, primarily interest rate swaps and treasury locks. All
derivative contracts are for non-trading purposes, and are entered into with
major reputable financial institutions, thereby minimizing the risk of credit
loss.
Registrant had $240 million aggregate principal amount of senior notes
payable at December 31, 1999, of which $200 million is 7.25 percent fixed rate
debt and $40 million is floating rate debt. In order to eliminate the interest
rate risk on the floating rate debt, Registrant entered into an interest rate
swap contract to pay a fixed rate of interest (7.25 percent) and receive a
floating rate of interest on a notional amount of $40 million. This swap
effectively locks the interest rate on the floating rate debt at 7.25 percent
due to the full correlation of the variable rates on the swap and the debt.
At December 31, 1999, Registrant also had treasury lock interest agreements
with an aggregate notional amount of $50 million, to hedge its exposure to
increasing interest rates for an anticipated debt offering in 2000.
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Registrant has prepared a sensitivity analysis of interest rate risk and
the effects of hypothetical changes in the applicable market conditions on the
succeeding year's earnings, based upon year-end positions. Computations of the
potential effects of the hypothetical market changes are based upon various
assumptions, involving interest rates and other variables.
The fair value of Registrant's fixed rate senior notes payable is sensitive
to changes in interest rates. Based upon an immediate 100 basis point increase
in the applicable interest rate at December 31, 1999, the fair value of
Registrant's fixed rate senior notes would decrease by approximately $11.5
million. Conversely, a 100 basis point decrease in that rate would increase the
fair value of the notes by $12.5 million. Registrant did not have any fixed rate
senior notes payable at December 31, 1998.
Taking into account Registrant's floating rate senior notes payable,
interest rate swaps and treasury locks outstanding at December 31, 1999, each
100 basis point increase in the applicable market rates of interest, with all
other variables held constant would decrease our annual interest expense by
approximately $0.4 million. On the contrary, a 100 basis point decrease in these
interest rates would effectively increase our annual interest expense by
approximately $0.4 million. Registrant did not have any floating rate senior
notes payable or derivative instruments at December 31, 1998.
These hypothetical changes and assumptions may be different from what
actually transpires in the future, and the computations do not take into account
management's possible actions if such changes actually occurred over time.
Considering these limitations, actual effects on future earnings could differ
from those calculated above.
In addition, to hedge the risk associated with changes in foreign exchange
rates related to forecasted purchases of barrels for its wine operations,
Registrant enters into foreign currency forward contracts. The notional amounts,
fair values and the effects of hypothetical changes in applicable rates of
forward foreign currency contracts at December 31, 1999 were not material.
Registrant did not have any foreign currency forward contracts at December 31,
1998.
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.
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 2000 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 2000 Annual Meeting and
Proxy Statement.
10
<PAGE> 12
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 2000 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
2000 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, 1999,
1998, and 1997
Consolidated Statement of Financial Position -- December 31, 1999 and
1998
Consolidated Statement of Cash Flows -- Years ended December 31, 1999,
1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity -- Years
ended December 31, 1999, 1998 and 1997
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.
11
<PAGE> 13
(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.
4.1 -- Indenture dated as of May 27, 1999, between UST Inc. and
State Street Bank and Trust Company, incorporated by
reference to Exhibit 4 to Form 10-Q for the quarter ended
June 30, 1999.
4.2 -- Form of certificate of 7.25% Senior Note, incorporated by
reference to Exhibit 4.2 to Form S-4 Registration Statement
filed on August 16, 1999.
4.3 -- Form of certificate of Floating Rate Senior Note,
incorporated by reference to Exhibit 4.3 to Form S-4
Registration Statement filed on August 16, 1999.
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 9, 1999, and incorporated by reference to Exhibit A
to 2000 Notice of Annual Meeting and Proxy Statement dated
March 20, 2000.
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, incorporated by reference to Exhibit 10.11
to Form 10-K for the fiscal year ended December 31, 1998.
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 Schedule.
</TABLE>
- ---------------
(b) No current reports on Form 8-K were filed during the fourth quarter of
Registrant's most recent fiscal year.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of the rules governing the preparation
of this Report.
12
<PAGE> 14
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: March 3, 2000
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
March 3, 2000 Executive Officer) /s/ VINCENT A. GIERER, JR.
--------------------------------------------------------
VINCENT A. GIERER, JR.
Senior Vice President
and Chief Financial Officer
(Principal Accounting
Officer and Principal
March 3, 2000 Financial Officer) /s/ ROBERT T. D'ALESSANDRO
--------------------------------------------------------
ROBERT T. D'ALESSANDRO
March 3, 2000 Director /s/ JAMES W. CHAPIN
--------------------------------------------------------
JAMES W. CHAPIN
March 3, 2000 Director /s/ JOHN P. CLANCEY
--------------------------------------------------------
JOHN P. CLANCEY
March 3, 2000 Director /s/ EDWARD H. DEHORITY, JR.
--------------------------------------------------------
EDWARD H. DEHORITY, JR.
March 3, 2000 Director /s/ ELAINE J. EISENMAN
--------------------------------------------------------
ELAINE J. EISENMAN
March 3, 2000 Director /s/ EDWARD T. FOGARTY
--------------------------------------------------------
EDWARD T. FOGARTY
March 3, 2000 Chairman of the Board /s/ VINCENT A. GIERER, JR.
--------------------------------------------------------
VINCENT A. GIERER, JR.
March 3, 2000 Director /s/ P.X. KELLEY
--------------------------------------------------------
P.X. KELLEY
March 3, 2000 Director /s/ PETER J. NEFF
--------------------------------------------------------
PETER J. NEFF
March 3, 2000 Director /s/ LOWELL P. WEICKER, JR.
--------------------------------------------------------
LOWELL P. WEICKER, JR.
</TABLE>
13
<PAGE> 15
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.
4.1 -- Indenture dated as of May 27, 1999, between UST Inc. and
State Street Bank and Trust Company, incorporated by
reference to Exhibit 4 to Form 10-Q for the quarter ended
June 30, 1999.
4.2 -- Form of certificate of 7.25% Senior Note, incorporated by
reference to Exhibit 4.2 to Form S-4 Registration Statement
filed on August 16, 1999.
4.3 -- Form of certificate of Floating Rate Senior Note,
incorporated by reference to Exhibit 4.3 to Form S-4
Registration Statement filed on August 16, 1999.
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 9, 1999, and incorporated by reference to Exhibit A
to 2000 Notice of Annual Meeting and Proxy Statement dated
March 20, 2000.
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, and incorporated by reference to Exhibit
10.11 to Form 10-K for the fiscal year ended December 31,
1998.
13 -- Pages 15-43 of the Annual Report, but only to the extent set
forth in Items 1, 5, 6, 7 and 8 hereof.
</TABLE>
<PAGE> 16
<TABLE>
<C> <S> <C>
21 -- Subsidiaries of UST.
23 -- Consent of Independent Auditors.
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of the rules governing the preparation of
this Report.
<PAGE> 1
EXHIBIT 13
(ITEMS 1 AND 8)
UST
CONSOLIDATED SEGMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
Tobacco.............................................. $1,309,566 $1,245,552 $1,181,789
Wine................................................. 174,272 148,512 145,048
All other............................................ 28,493 29,182 74,881
---------- ---------- ----------
NET SALES.................................... $1,512,331 $1,423,246 $1,401,718
========== ========== ==========
OPERATING PROFIT (LOSS)
Tobacco.............................................. $ 777,122 $ 720,622 $ 700,395
Wine................................................. 20,234 22,090 28,178
All other............................................ (10,240) 1,712 (1,270)
---------- ---------- ----------
OPERATING PROFIT............................. 787,116 744,424 727,303
Corporate expenses................................... (10,638) (12,146) (15,995)
Interest (expense) income, net....................... (13,535) 2,187 (7,451)
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES................. $ 762,943 $ 734,465 $ 703,857
========== ========== ==========
IDENTIFIABLE ASSETS AT DECEMBER 31
Tobacco.............................................. $ 529,518 $ 497,623 $ 467,972
Wine................................................. 305,447 277,249 230,896
All other............................................ 87,678 87,197 102,157
Corporate............................................ 93,005 51,250 25,338
---------- ---------- ----------
ASSETS....................................... $1,015,648 $ 913,319 $ 826,363
========== ========== ==========
CAPITAL EXPENDITURES
Tobacco.............................................. $ 26,830 $ 27,696 $ 29,410
Wine................................................. 31,182 25,646 20,135
All other............................................ 939 2,470 6,134
Corporate............................................ 338 454 2,480
---------- ---------- ----------
CAPITAL EXPENDITURES......................... $ 59,289 $ 56,266 $ 58,159
========== ========== ==========
DEPRECIATION
Tobacco.............................................. $ 17,279 $ 16,100 $ 16,266
Wine................................................. 13,279 11,953 10,423
All other............................................ 1,534 1,653 1,836
Corporate............................................ 1,645 1,665 1,611
---------- ---------- ----------
DEPRECIATION................................. $ 33,737 $ 31,371 $ 30,136
========== ========== ==========
</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>
1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS for the year ended December
31
Net sales......................................... $1,512,331 $1,423,246 $1,401,718 $1,371,705 $1,305,796 $1,203,951
Cost of products sold (includes excise taxes)..... 304,275 283,516 291,942 272,756 262,203 251,944
Selling, advertising and administrative
expenses........................................ 431,578 407,452 398,468 348,059 335,824 311,279
---------- ---------- ---------- ---------- ---------- ----------
Operating income.................................. 776,478 732,278 711,308 750,890 707,769 640,728
Other expense (income):
Interest expense (income), net.................. 13,535 (2,187) 7,451 6,364 3,179 92
Gain on disposal of product line................ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes and cumulative effect
of accounting changes........................... 762,943 734,465 703,857 744,526 704,590 640,636
---------- ---------- ---------- ---------- ---------- ----------
Income taxes...................................... 293,650 279,186 264,719 280,527 274,830 253,110
---------- ---------- ---------- ---------- ---------- ----------
Earnings before cumulative effect of accounting
changes......................................... 469,293 455,279 439,138 463,999 429,760 387,526
Cumulative effect of accounting changes (net of
income tax benefit)............................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net earnings...................................... $ 469,293 $ 455,279 $ 439,138 $ 463,999 $ 429,760 $ 387,526
========== ========== ========== ========== ========== ==========
PER SHARE DATA
Basic earnings per share before cumulative effect
of accounting changes........................... $2.69 $2.45 $2.39 $2.48 $2.21 $1.92
Basic earnings per share.......................... 2.69 2.45 2.39 2.48 2.21 1.92
Diluted earnings per share before cumulative
effect of accounting changes.................... 2.68 2.44 2.37 2.44 2.17 1.88
Diluted earnings per share........................ 2.68 2.44 2.37 2.44 2.17 1.88
Dividends per share............................... 1.68 1.62 1.62 1.48 1.30 1.12
Market price per share:
High............................................ 34 15/16 36 7/8 36 15/16 35 7/8 36 31 1/2
Low............................................. 24 1/16 24 9/16 25 1/2 28 1/4 26 5/8 23 5/8
FINANCIAL CONDITION at December 31
Current assets.................................... $ 580,024 $ 507,213 $ 441,844 $ 450,570 $ 425,555 $ 381,937
Current liabilities............................... 261,327 197,316 166,519 306,553 280,723 160,755
Working capital................................... 318,697 309,897 275,325 144,017 144,832 221,182
Ratio of current assets to current liabilities.... 2.2:1 2.6:1 2.7:1 1.5:1 1.5:1 2.4:1
Total assets...................................... 1,015,648 913,319 826,363 806,577 783,976 741,236
Long-term debt.................................... 411,000 100,000 100,000 100,000 100,000 125,000
Total debt........................................ 481,965 100,000 110,000 250,000 200,000 125,000
Stockholders' equity.............................. 200,804 468,293 436,795 281,206 292,781 361,669
OTHER DATA
Stock repurchased................................. $ 465,966 $ 151,617 $ 45,719 $ 237,759 $ 274,783 $ 298,843
Dividends paid.................................... $ 291,966 $ 301,145 $ 298,059 $ 277,302 $ 252,388 $ 225,715
Dividends paid as a percentage of net earnings.... 62.2% 66.1% 67.9% 59.8% 58.7% 58.2%
Return on net sales............................... 31.0% 32.0% 31.3% 33.8% 32.9% 32.2%
Return on average assets.......................... 48.7% 52.3% 53.8% 58.3% 56.4% 53.5%
Return on average stockholders' equity............ 140.3% 100.6% 122.3% 161.7% 131.3% 94.0%
Percentage of long-term debt to stockholders'
equity.......................................... 204.7% 21.4% 22.9% 35.6% 34.2% 34.6%
Percentage of total debt to stockholders'
equity.......................................... 240.0% 21.4% 25.2% 88.9% 68.3% 34.6%
Average number of shares (in
thousands) -- basic............................. 174,355 185,544 183,931 187,386 194,374 201,995
Average number of shares (in
thousands) -- diluted........................... 175,114 186,880 185,602 190,067 197,613 205,699
</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>
1993 1992 1991 1990 1989
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS for the year ended December 31
Net sales............................................ $1,097,533 $1,032,172 $898,436 $756,435 $673,852
Cost of products sold (includes excise taxes)........ 246,445 256,796 227,546 191,824 185,464
Selling, advertising and administrative expenses..... 286,336 274,613 247,085 215,621 189,963
---------- ---------- -------- -------- --------
Operating income..................................... 564,752 500,763 423,805 348,990 298,425
Other expense (income):
Interest expense (income), net..................... (2,004) (1,866) (2,279) (3,203) (3,190)
Gain on disposal of product line................... (35,029) -- -- -- --
---------- ---------- -------- -------- --------
Earnings before income taxes and cumulative effect of
accounting changes................................. 601,785 502,629 426,084 352,193 301,615
---------- ---------- -------- -------- --------
Income taxes......................................... 232,893 190,071 160,179 128,918 111,128
---------- ---------- -------- -------- --------
Earnings before cumulative effect of accounting
changes............................................ 368,892 312,558 265,905 223,275 190,487
Cumulative effect of accounting changes (net of
income tax benefit)................................ 19,846 -- -- -- --
---------- ---------- -------- -------- --------
Net earnings......................................... $ 349,046 $ 312,558 $265,905 $223,275 $190,487
========== ========== ======== ======== ========
PER SHARE DATA
Basic earnings per share before cumulative effect of
accounting changes................................. $1.77 $1.49 $1.26 $1.04 $.87
Basic earnings per share............................. 1.67 1.49 1.26 1.04 .87
Diluted earnings per share before cumulative effect
of accounting changes.............................. 1.73 1.43 1.20 .99 .83
Diluted earnings per share........................... 1.64 1.43 1.20 .99 .83
Dividends per share.................................. .96 .80 .66 .55 .46
Market price per share:
High............................................... 32 3/4 35 3/8 33 7/8 18 1/4 15 3/8
Low................................................ 24 3/8 25 3/8 16 3/8 12 3/8 9 5/8
FINANCIAL CONDITION at December 31
Current assets....................................... $ 334,996 $ 330,208 $305,430 $265,854 $275,954
Current liabilities.................................. 106,642 81,208 95,455 68,660 66,643
Working capital...................................... 228,354 249,000 209,975 197,194 209,311
Ratio of current assets to current liabilities....... 3.1:1 4.1:1 3.2:1 3.9:1 4.1:1
Total assets......................................... 706,195 673,965 656,513 622,595 630,155
Long-term debt....................................... 40,000 -- -- 3,060 6,789
Total debt........................................... 40,000 -- 1,250 4,849 14,469
Stockholders' equity................................. 462,972 516,606 483,875 473,873 482,254
OTHER DATA
Stock repurchased.................................... $ 236,704 $ 212,581 $184,424 $151,259 $ 97,517
Dividends paid....................................... $ 199,725 $ 167,951 $139,670 $118,295 $101,197
Dividends paid as a percentage of net earnings....... 57.2% 53.7% 52.5% 53.0% 53.1%
Return on net sales.................................. 31.8% 30.3% 29.6% 29.5% 28.3%
Return on average assets............................. 50.6% 47.0% 41.6% 35.6% 31.0%
Return on average stockholders' equity............... 71.3% 62.5% 55.6% 46.7% 40.7%
Percentage of long-term debt to stockholders'
equity............................................. 8.6% -- -- .6% 1.4%
Percentage of total debt to stockholders' equity..... 8.6% -- .3% 1.0% 3.0%
Average number of shares (in thousands) -- basic..... 208,469 209,803 211,603 215,156 219,820
Average number of shares (in thousands) -- diluted... 213,412 218,674 221,458 224,522 230,164
</TABLE>
<PAGE> 4
EXHIBIT 13 -- (CONTINUED)
(ITEM 7)
UST
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
1999 COMPARED WITH 1998
Consolidated net sales increased 6.3 percent for 1999 to $1.512 billion,
while net earnings increased 3.1 percent to $469.3 million and diluted earnings
per share increased 9.8 percent to $2.68.
Over the last three years, net sales have increased 10.3 percent at an
average annual rate of 3.3 percent, net earnings have increased 1.1 percent at
an average annual rate of 0.5 percent and diluted earnings per share have
increased 9.8 percent at an average annual rate of 3.3 percent.
Operating profit for the Tobacco segment increased due to higher selling
prices and unit volume gains for moist smokeless tobacco along with lower
tobacco settlement-related charges. These favorable results allowed the Company
the opportunity to significantly increase spending on promotional activities and
direct marketing initiatives.
Wine segment operating profit decreased, but at a lower rate than the
previous year. Case sales were strong in the second half of the year, however,
continuing higher average grape costs used in production and overall higher
spending reduced results.
All other operations reported an operating loss as slightly improved
results for the international business were more than offset by continued
weakness in the cigar business.
Corporate expenses decreased in 1999 primarily due to lower administrative
and other expenses.
Operating income increased 6 percent to $776.5 million in 1999 and was 51.3
percent of consolidated net sales. Over the last three years, operating income
has averaged 51.2 percent.
Interest expense increased significantly in 1999 due to higher average debt
levels resulting primarily from the stock repurchase program and higher interest
rates.
The effective tax rate increased slightly in 1999 to 38.5 percent.
The diluted earnings per share increase was attributable to higher net
earnings and the effect of the Company's aggressive stock repurchase program.
The reported net earnings comparison for 1999 was affected by tobacco
settlement-related charges of $9.4 million in 1999 versus $31.7 million in 1998.
Excluding the effect of settlement charges, operating income and diluted
earnings per share would have increased 3 percent and 6.7 percent, respectively.
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, the
stock repurchase program and the effects of potential regulatory actions.
1998 COMPARED WITH 1997
Consolidated net sales rose 1.5 percent to $1.423 billion in 1998, while
net earnings increased 3.7 percent to $455.3 million and diluted earnings per
share increased 3 percent to $2.44.
Operating profit for the Tobacco segment increased 2.9 percent as higher
selling prices for moist smokeless tobacco products were partially offset by
tobacco settlement-related charges and higher spending for marketing and sales
initiatives.
<PAGE> 5
Wine segment results declined primarily as a result of competitive pricing
in the marketplace and higher average grape costs.
Results for all other operations improved as gains recorded on dispositions
of a business and certain commercial agricultural properties were partially
offset by the continued weakness in the premium cigar business.
Corporate expenses were lower in 1998 versus 1997 primarily due to the
absence of a charge related to an employment contract for a former executive
officer.
Operating income increased 2.9 percent to $732.3 million and equaled 51.5
percent of sales.
Interest expense (income), 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.
The effective tax rate increased slightly in 1998 as compared with 1997.
TOBACCO SEGMENT
1999 COMPARED WITH 1998
Tobacco segment net sales increased 5.1 percent in 1999 to $1.310 billion
and accounted for 86.6 percent of consolidated net sales.
Higher selling prices and unit volume gains for moist smokeless tobacco
were the main reasons for the sales growth. Domestic moist smokeless tobacco net
unit volume increased 1.4 percent in 1999 to 634.4 million cans. Unit volume for
premium brands remained stable due to increased promotional activities along
with higher unit volume for Rooster, our premium mid-tier priced brand. Our
price/value brand, Red Seal, grew significantly as a result of higher unit sales
and continued targeted distribution. Net sales and unit volume increases for
moist smokeless tobacco products were favorably affected by lower returned goods
due to the Company's continued management of promotional programs and
merchandising strategies. Fourth quarter 1999 net unit volume for moist
smokeless tobacco increased 1.3 percent to 159.4 million cans as compared with
the similar 1998 period.
Cost of products sold remained stable in 1999 as compared to 1998.
Increased costs due to higher unit volume were offset by lower spending in other
areas. At year end, the Company reversed the previously estimated LIFO benefit
when it was determined that the amount did not apply for financial reporting
purposes.
Gross profit for the segment increased 6.1 percent in 1999. Higher selling
prices on premium products more than offset higher volume for lower priced
promotional and price/value products, resulting in an increase in the gross
profit percentage.
Selling and advertising expenses were significantly higher in 1999, due to
several factors. Better than anticipated results in the first half of 1999,
reduced settlement-related charges and accelerated stock repurchases afforded
the Company the opportunity to reinvest its resources back into its core
business while achieving its goals for profitability and growth in earnings per
share. Spending was significantly increased for promotional activities at
retail, based upon data obtained through our incentive programs, and for focused
direct marketing campaigns. These spending initiatives were aimed at retaining
and attracting adult consumers to the Company's premium and price/value products
as well as growing the moist smokeless tobacco category. Indirect selling
expenses increased in 1999 due to salaries and related costs, market research
and salesforce automation and training.
Administrative expenses were lower primarily due to tobacco
settlement-related charges of $9.4 million in 1999 as compared with $31.7
million in 1998. All other administrative expenses also decreased.
Operating profit for the Tobacco segment increased 7.8 percent to $777.1
million for 1999. Absent the tobacco settlement-related charges, operating
profit for the Tobacco segment would have increased 4.6 percent.
<PAGE> 6
The Company continued to face competitive pressures in the marketplace in
1999. Marketing and sales initiatives over the past several years appear to have
reduced the rate of 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.
1998 COMPARED WITH 1997
Tobacco segment net sales increased 5.4 percent to $1.246 billion and
accounted for 87.5 percent of consolidated revenue.
The primary reason for the increase was higher selling prices for moist
smokeless tobacco. Unit volume for moist smokeless tobacco products was slightly
higher, rising 0.2 percent to 625.3 million cans as compared to 1997. In 1998,
unit volume results were unfavorably affected by higher returned goods resulting
from several large promotions run in the latter part of 1997 which negatively
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 to reduce the amount of returned goods.
The mid-year introduction 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 year.
Gross profit for the Tobacco segment rose 5.6 percent during 1998 as a
result of higher selling prices.
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-related charges, partially offset by the absence of a charge relating
to another 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-related charges, operating profit
for the Tobacco segment would have increased approximately 7 percent.
WINE SEGMENT
1999 COMPARED WITH 1998
Wine segment net sales increased 17.3 percent in 1999 to $174.3 million and
represented 11.5 percent of consolidated net sales. The net sales gain was
mainly attributable to increased premium case volume of 18.8 percent to 2.7
million cases. Competitive pricing in the marketplace continued to affect net
sales growth in 1999, as the Company held its premium wine selling prices
stable. Case volume for the Company's two leading brands of premium wine,
Columbia Crest and Chateau Ste. Michelle, which accounted for 76.6 percent of
total premium case volume sales, increased 16.6 percent in 1999.
Wine unit costs increased in 1999 due to higher average grape costs used in
production, which caused the overall gross profit percentage to decline for
1999. However, gross profit increased 6.8 percent as the higher case volume more
than offset the effects of higher unit costs.
Selling, advertising and administrative expenses for the Wine segment
increased in 1999. Selling and advertising expenses were higher primarily as a
result of media and point-of-sale spending for premium varietal brands to
increase case volume. Indirect selling, administrative and other expenses also
increased in
<PAGE> 7
1999 primarily due to higher salary and related costs and spending on
infrastructure to meet current and expected growth. Also included in other
expenses for 1999 was a $3 million write-off of goodwill for the Company's
brewery operations, partially offset by a $1.9 million gain recorded from the
sale of underperforming wine assets.
The Wine segment included mixed results during 1999. The first half of the
year included significantly lower operating profit as a result of higher costs
and a slight increase in net sales and premium case volume. The third and fourth
quarters of 1999 produced highly favorable results as net sales and premium case
unit volume increased 30 percent and 32.2 percent, respectively, over the
corresponding periods of the prior year.
The Wine segment recorded an operating profit of $20.2 million in 1999, a
decrease of 8.4 percent from 1998 results.
The Company believes that competitive pricing will continue in the
marketplace in 2000. In the short term, the Company will 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. For
the long term, the Company will increase its operations in California in order
to take advantage of an increased grape supply. This will be achieved through
internal growth and expansion and possibly through acquisition.
1998 COMPARED WITH 1997
Wine segment net sales increased 2.4 percent to $148.5 million and
accounted for 10.4 percent of consolidated sales. Higher selling prices for
premium wines was the primary reason for the increase. Premium case volume
decreased slightly in 1998 versus 1997. During 1998, premium case volume was
adversely affected by competitive pricing in the marketplace and shortages of
red wine due to a low harvest yield in 1996, which caused the Company to begin
1998 with certain varieties on allocation. The Company removed the allocations
in the second quarter of 1998 and reduced prices during the second half of 1998,
both in an effort to increase case volume. These initiatives had a positive
effect on the Wine segment results in the fourth quarter of 1998, as net sales
and premium case unit volume increased 10.9 percent and 11.9 percent,
respectively. 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.
Cost of sales and unit costs were higher in 1998 as a result of higher
average costs associated with the 1996 and 1997 harvests used in production. As
a result of the higher unit costs, gross profit for the Wine segment decreased
1.2 percent in 1998.
Selling, advertising and administrative expenses were higher in 1998 as
compared with 1997. Higher selling expenses 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.
Increased selling, advertising and administrative spending coupled with
lower gross profit caused Wine segment operating profit to decrease 21.6 percent
in 1998 to $22.1 million.
ALL OTHER OPERATIONS
1999 COMPARED WITH 1998
Net sales for all other operations decreased 2.4 percent in 1999 to $28.5
million and accounted for 1.9 percent of consolidated net sales. Net sales
results included lower cigar unit volume, due to the continued weakness in the
premium cigar market, partially offset by increased sales from our international
operations. All other operations reported an operating loss of $10.2 million in
1999, primarily due to the cigar operation, as compared with operating income of
$1.7 million in 1998. 1998 results included a gain of $10.7 million resulting
from the sale of certain commercial agricultural properties and the Company's
video entertainment subsidiary.
Consolidation in the cigar industry may impact the Company's ability to
improve its cigar operations. We are in process of evaluating the cigar
operation, and based upon that evaluation we expect to either expand or
eliminate this operation within the next few years.
<PAGE> 8
Beginning in January 2002, certain countries of the European monetary union
will use one common currency, the Euro. Based on our current operations, the
Company currently anticipates that the Euro conversion will not have a material
adverse impact on its international 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 decrease was primarily due to the disposition
of the Company's video entertainment subsidiary in the first quarter of 1998 and
a significant decline in cigar unit volume 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 operation, while spending in the international operation was lower.
Overall, all other operations recorded a small operating profit of $1.7 million.
FINANCIAL CONDITION
LIQUIDITY
In 1999, sources of cash exceeded uses by $41.8 million. The Company's two
main sources of cash in 1999 were net earnings of $469.3 million and net
proceeds from borrowings of $382 million. The major uses of cash in 1999 were
for the Company's stock repurchase program of $466 million, payment of dividends
to stockholders of $292 million and the capital program of $59.3 million.
Cash generated from net earnings in 1999 was more than sufficient to meet
the Company's day-to-day operational needs to purchase inventory, property,
plant and equipment and pay cash dividends to stockholders. Excess cash from net
earnings and net proceeds from borrowings were utilized for the Company's stock
repurchase program.
OPERATING ACTIVITIES
Net cash provided by operating activities for 1999 was $459.7 million as
compared to $465.6 million in 1998 and $412.6 million in 1997. The major source
of cash provided by operating activities is net earnings generated by the
Tobacco segment.
Net cash provided by operating activities decreased 1.3 percent in 1999 as
compared to 1998. The decrease was primarily due to an accounts payable and
accrued expense increase in 1998 and an increase for prepaid expenses and other
assets in 1999, partially offset by higher Tobacco segment net earnings and a
lower increase in inventories as compared to the prior year.
The Company carries significant amounts of leaf tobacco and grape
inventories for use in the production of moist smokeless tobacco products and
wine, respectively. Total costs of leaf tobacco and related costs for moist
smokeless tobacco in 1999 were $74.8 million and $220.4 million over the last
three years. The total costs of grapes harvested and purchased and purchases of
bulk wine were $49.7 million in 1999 and $138.5 million over the last three
years.
INVESTING ACTIVITIES
Net cash used in investing activities was $56.9 million in 1999, $15.4
million in 1998 and $30 million in 1997.
The primary use of cash in investing activities over the last three years
was for the purchase of property, plant and equipment. The amount of capital
expenditures has been relatively stable over the last three years, with a three
year average of $57.9 million per year and a total of $173.7 million.
Major areas of capital spending from 1997 through 1999 were:
Tobacco segment
- Manufacturing and packaging equipment
- Computer equipment
- Building additions and renovations
<PAGE> 9
Wine segment
- Wine barrels and storage tanks
- Building additions and renovations
- Vineyard expansion and development
All other operations
- Cigar distribution facility and manufacturing capacity expansion
Capital expenditures for equipment and buildings for the Tobacco segment
were primarily focused on increasing capacity and manufacturing flexibility.
Wine segment capital expenditures were for normal replacement of wine barrels
and storage tanks and to increase storage capacity. Building and vineyard
expenditures were primarily for production expansion and increased capacity.
Net cash used in investing activities was lower in 1998 and 1997 due to
certain one-time events. In 1998, the Company received $14.6 million from the
disposition of certain commercial agricultural properties and $20.2 million
resulting from the sale of the Company's video entertainment subsidiary. In
1997, the Company received $25.7 million resulting from the prepayment of
royalties in connection with a previous divestiture.
FINANCING ACTIVITIES
Net cash used in financing activities decreased in 1999 to $361 million as
net proceeds from borrowings more than offset the additional cash used for the
Company's stock repurchase program as compared with 1998.
In 1999, the Company increased its outstanding debt by $382 million. This
was achieved through the issuance of $240 million in senior notes and increased
commercial paper borrowings. The proceeds from these borrowings were primarily
utilized for the Company's stock repurchase program.
The Company used $466 million for its stock repurchase program in 1999. The
Company repurchased stock throughout 1999 as compared to 1998 which only
included stock repurchases of $151.6 million in the month of December. During
1998, the Company had suspended its stock repurchase program due to the proposed
resolution of regulatory and litigation issues affecting the tobacco industry.
Total shares repurchased in 1999 were 16.1 million as compared to 4.4 million in
1998.
Total cash dividends paid by the Company in 1999 were $292 million or 62.2
percent of net earnings. Cash dividends decreased in 1999 as compared to 1998
mainly due to lower common shares outstanding, partially offset by the 3.7
percent dividend increase approved by the Board of Directors in December 1998.
Proceeds from the issuance of stock were from the exercise of stock options
granted under the Company's stock option plans and the income tax benefits
received upon exercise of certain stock options.
CAPITAL RESOURCES
In May 1999, the Company issued $240 million aggregate principal amount of
senior notes of which $200 million is 7.25 percent fixed rate debt and $40
million is floating rate debt. The Company executed an interest rate swap on the
$40 million floating rate debt, effectively fixing the rate at 7.25 percent.
These notes mature on June 1, 2009.
The Company currently maintains two revolving credit agreements totaling
$350 million with various 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 credit
facilities have been primarily used to support commercial paper borrowings and
can also be used as direct bank financing. At December 31, 1999, the Company
allocated $242 million to support outstanding commercial paper borrowings.
In 2000, the Company intends to issue additional senior notes of which a
portion will be used to refinance the commercial paper borrowings outstanding at
the time of issuance.
<PAGE> 10
The issuance of the $240 million and the senior notes in 2000 are both part
of the plan, approved by the Board of Directors in 1998, to borrow up to $1
billion over five years. These borrowings are to be utilized to augment the
Company's stock repurchase program and for other corporate purposes.
The Company's percentage of total debt to total capitalization (total debt
and stockholders' equity) increased to 70.6 percent as of December 31, 1999 as
compared to 17.6 percent as of December 31, 1998. A significantly higher level
of debt outstanding and a decrease in stockholders' equity caused the percentage
to increase.
The Company's working capital increased slightly at December 31, 1999 to
$318.7 million as compared to $309.9 million at December 31, 1998. The ratio of
current assets to current liabilities (current ratio) at December 31, 1999 was
2.2 to 1, which decreased from 2.6 to 1 at December 31, 1998. The decrease was
primarily due to higher short-term debt at December 31, 1999.
In 2000, the Company projects that tobacco leaf purchases for moist
smokeless tobacco products and grape purchases for wine will approximate amounts
expended in 1999.
In October 1999, the Board of Directors approved a new stock repurchase
program authorizing the Company to repurchase up to 20 million shares of its
common stock from time to time in open market or negotiated transactions to be
used in connection with benefit and compensation plans and other corporate
purposes. The new program commenced immediately upon the completion of the 1996
program. The Company plans to allocate $350 million to $400 million to the stock
repurchase program in 2000. Stock prices, market conditions and other factors
will determine the actual amount expended for the program.
In December 1999, the Board of Directors increased the Company's first
quarter 2000 dividends to stockholders to 44 cents per share with an indicated
annual rate of $1.76 per share. This represented a 4.8 percent increase over
1998. 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.
In 2000, the Company's capital program is expected to approximate $106
million and will include a significant increase in wine capital expenditures due
to expansion in California either through internal expansion or through
acquisitions. The 2000 capital program also includes Tobacco segment spending
for our tobacco manufacturing operations.
The Company anticipates that cash generated from net earnings in 2000 will
be sufficient to meet its day-to-day operational cash needs.
YEAR 2000
The Company completed all year 2000 readiness work related to its computer
systems and non-information technology systems prior to December 31, 1999. The
Company experienced no disruption of its business operations due to the year
2000. Costs to become year 2000 compliant were not material. The Company does
not anticipate any year 2000 related issues to arise during the upcoming year.
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.
<PAGE> 11
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: 1997 -- $1,402, 1998 -- $1,423 and
1999 -- $1,512
Operating Income (Percent of Net Sales): 1997 -- 50.7%, 1998 -- 51.5%
and 1999 -- 51.3%
Diluted Earnings Per Share: 1997 -- $2.37, 1998 -- $2.44 and
1999 -- $2.68
Tobacco Sales: 1997 -- $1,182, 1998 -- $1,246 and 1999 -- $1,310
Wine Sales: 1997 -- $145, 1998 -- $149 and 1999 -- $174
All Other Sales: 1997 -- $75, 1998 -- $29 and 1999 -- $28
Net Cash Provided by Operating Activities: 1997 -- $413, 1998 -- $466
and 1999 -- $460
EBITDA(1): 1997 -- $742, 1998 -- $764 and 1999 -- $813
Dividends Per Share: 1997 -- $1.62, 1998 -- $1.62 and 1999 -- $1.68
The following bar graph illustrates the relationship between net earnings
and dividends paid:
Net Earnings: 1997 -- $439, 1998 -- $455 and 1999 -- $469
Dividends Paid: 1997 -- $298, 1998 -- $301 and 1999 -- $292
A pie chart illustrating the percentage of capital expenditures by
operating unit for 1997 -- 1999:
Tobacco 48%, Wine 44% and Other 8%.
- ---------------
(1) Earnings before interest, taxes, depreciation and amortization.
<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>
1999
Net sales.......................... $350,085 $378,100 $383,367 $400,779 $1,512,331
Gross profit....................... 283,067 308,343 308,562 308,084 1,208,056
Net earnings....................... 108,460 122,974 119,817 118,042 469,293
Basic earnings per share........... .60 .70 .69 .70 2.69
Diluted earnings per share......... .60 .70 .69 .70 2.68
Dividends per share................ .42 .42 .42 .42 1.68
Market price per share:
High............................. 34 15/16 32 1/2 32 5/16 31 3/8 34 15/16
Low.............................. 26 25 5/16 29 1/4 24 1/16 24 1/16
----------------------------------------------------------
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 7/8 31 5/16 35 5/8 36 7/8
Low.............................. 31 24 9/16 25 5/16 28 5/8 24 9/16
</TABLE>
- ---------------
The first, second, third and fourth quarters of 1999 include pretax charges of
$3.1 million, $3 million, $1.6 million and $1.7 million (1 cent per diluted
share in each of the quarters), respectively, associated with tobacco
settlements. (See Other Matters note).
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 tobacco settlements. (See Other Matters
note).
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, 1999 was 8,664.
<PAGE> 13
EXHIBIT 13 -- (CONTINUED)
(ITEM 8)
UST
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.............................................. $1,512,331 $1,423,246 $1,401,718
COSTS AND EXPENSES
Cost of products sold................................ 276,358 257,155 265,193
Excise taxes......................................... 27,917 26,361 26,749
Selling, advertising and administrative.............. 431,578 407,452 398,468
---------- ---------- ----------
TOTAL COSTS AND EXPENSES............................... 735,853 690,968 690,410
---------- ---------- ----------
OPERATING INCOME....................................... 776,478 732,278 711,308
---------- ---------- ----------
INTEREST EXPENSE (INCOME), NET......................... 13,535 (2,187) 7,451
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES........................... 762,943 734,465 703,857
---------- ---------- ----------
INCOME TAXES........................................... 293,650 279,186 264,719
---------- ---------- ----------
NET EARNINGS........................................... $ 469,293 $ 455,279 $ 439,138
========== ========== ==========
NET EARNINGS PER SHARE
Basic................................................ $2.69 $2.45 $2.39
Diluted.............................................. $2.68 $2.44 $2.37
AVERAGE NUMBER OF SHARES
Basic................................................ 174,355 185,544 183,931
Diluted.............................................. 175,114 186,880 185,602
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 14
UST
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 74,989 $ 33,210
Accounts receivable....................................... 64,349 63,269
Inventories............................................... 403,469 372,634
Prepaid expenses and other current assets................. 26,709 24,653
Deferred income taxes..................................... 10,508 13,447
---------- ----------
Total current assets................................... 580,024 507,213
---------- ----------
Property, plant and equipment, net.......................... 361,882 338,695
Other assets................................................ 73,742 67,411
---------- ----------
Total assets...................................... $1,015,648 $ 913,319
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt........................................... $ 70,965 $ --
Accounts payable and accrued expenses..................... 144,678 156,699
Income taxes.............................................. 45,684 40,617
---------- ----------
Total current liabilities......................... 261,327 197,316
---------- ----------
Long-term debt.............................................. 411,000 100,000
Postretirement benefits other than pensions................. 80,547 78,567
Other liabilities........................................... 61,970 69,143
Contingencies (see note).................................... -- --
---------- ----------
Total liabilities................................. 814,844 445,026
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock............................................. 104,468 104,048
Additional paid-in capital................................ 526,676 512,089
Retained earnings......................................... 861,816 684,489
Accumulated other comprehensive loss...................... (12,277) (18,420)
---------- ----------
1,480,683 1,282,206
Less treasury stock....................................... 1,279,879 813,913
---------- ----------
Total stockholders' equity........................ 200,804 468,293
---------- ----------
Total liabilities and stockholders' equity........ $1,015,648 $ 913,319
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 15
UST
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings.......................................... $ 469,293 $ 455,279 $ 439,138
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization...................... 37,013 31,726 30,491
Deferred income taxes.............................. (1,894) 236 (8,779)
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.............................. (1,080) (2,918) 8,430
Inventories...................................... (30,835) (57,087) (56,146)
Prepaid expenses and other assets................ (11,630) 2,084 (1,884)
Accounts payable, accrued expenses and other
liabilities................................... (6,271) 43,538 8,743
Income taxes payable............................. 5,067 3,443 (5,744)
--------- --------- ---------
Net cash provided by operating activities..... 459,663 465,641 412,606
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment............ (59,289) (56,266) (58,159)
Dispositions of property, plant and equipment......... 2,365 20,749 2,409
Proceeds from the prepayment of royalties............. -- -- 25,732
Proceeds from the sale of a business.................. -- 20,152 --
--------- --------- ---------
Net cash used in investing activities......... (56,924) (15,365) (30,018)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings.............................. 567,365 -- 10,000
Repayment of borrowings............................... (185,400) (10,000) (150,000)
Proceeds from the issuance of stock................... 15,007 38,769 53,665
Dividends paid........................................ (291,966) (301,145) (298,059)
Stock repurchased..................................... (465,966) (151,617) (45,719)
--------- --------- ---------
Net cash used in financing activities......... (360,960) (423,993) (430,113)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents................................. 41,779 26,283 (47,525)
Cash and cash equivalents at beginning of
year........................................ 33,210 6,927 54,452
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 74,989 $ 33,210 $ 6,927
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes....................................... $287,133 $266,745 $268,158
Interest........................................... 13,734 5,935 8,718
</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, 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
Comprehensive income:
Net earnings........................... -- -- 469,293 -- -- 469,293
Other comprehensive (loss) income, net
of tax:
Foreign currency translation
adjustment......................... -- -- -- (743) -- (743)
Minimum pension liability
adjustment......................... -- -- -- 6,886 -- 6,886
---------
Other comprehensive income............. 6,143
---------
Comprehensive income................. 475,436
Cash dividends -- $1.68 per share........ -- -- (291,966) -- -- (291,966)
Exercise of stock options -- 836,200
shares and issuance of restricted
stock -- 4,550 shares.................. 420 13,587 -- -- -- 14,007
Income tax benefits, net of increase in
receivables from exercise of stock
options................................ -- 1,000 -- -- -- 1,000
Stock repurchased for treasury --
16,121,000 shares...................... -- -- -- -- (465,966) (465,966)
-------- -------- --------- -------- ----------- ---------
Balance at December 31, 1999............. $104,468 $526,676 $ 861,816 $(12,277) $(1,279,879) $ 200,804
======== ======== ========= ======== =========== =========
</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
accounting principles generally accepted in the United States 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.
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. Revenue from sales of all other products are predominantly
recognized when such 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.
STOCK OPTIONS
The Company accounts for employee stock compensation plans in accordance
with the intrinsic value-based method permitted by Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
which generally does not result in compensation cost.
INCOME TAXES
Income taxes are provided on all revenue and expense items included in the
Consolidated Statement of Earnings, regardless of the period in which such items
are recognized for income tax purposes, adjusted for items representing
permanent differences between pretax accounting income and taxable income.
Deferred income taxes result from the future tax consequences associated with
temporary differences between the carrying amounts of assets and liabilities for
tax and financial reporting purposes.
<PAGE> 18
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
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.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which provides new accounting rules for various derivatives
and related transactions. In June 1999, the FASB deferred the effective date of
SFAS No. 133 to fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS No. 133 requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position with measurement at fair
value. Changes in the fair value of derivative instruments will be recognized in
either net income or other comprehensive income, based upon the designated
purpose of the derivative. The Company expects to adopt SFAS No. 133 with
regards to accounting for its use of derivative instruments, such as interest
rate swaps and foreign currency forward contracts, in the first quarter of 2001,
on a cumulative basis. The Company is currently evaluating the impact of
adopting this standard.
INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Leaf tobacco................................................ $189,414 $178,078
Products in process......................................... 116,291 110,752
Finished goods.............................................. 75,757 66,688
Other materials and supplies................................ 22,007 17,116
-------- --------
$403,469 $372,634
======== ========
</TABLE>
At December 31, 1999 and 1998, $187.9 million and $176.8 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
$53.4 million and $50.9 million, respectively.
As of December 31, 1999, the Company had purchase commitments for the
upcoming year of approximately $27 million for leaf tobacco for use in future
production of its smokeless tobacco products. Commitments to purchase grapes
over the next five years, for use in future production of wine, average
approximately $37.4 million per year.
<PAGE> 19
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Land........................................................ $ 22,703 $ 22,828
Buildings................................................... 251,107 234,559
Machinery and equipment..................................... 358,595 332,603
-------- --------
632,405 589,990
Less allowances for depreciation............................ 270,523 251,295
-------- --------
$361,882 $338,695
======== ========
</TABLE>
Depreciation expense was $33.7 million for 1999, $31.4 million for 1998 and
$30.1 million for 1997.
The Company also leases certain property and equipment under various
operating lease arrangements. Annual commitments under these leases, which
average $5.2 million per year through the year 2004, extend through 2030 and
total $44.3 million. Lease expense for the years 1999, 1998 and 1997 was $9.8
million, $9.5 million and $6.4 million, respectively.
OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1999 1998
------- -------
<S> <C> <C>
Prepaid pension costs....................................... $28,164 $28,884
Limited partnership investment.............................. 10,934 11,166
Deferred income taxes....................................... 10,702 9,178
Other....................................................... 23,942 18,183
------- -------
$73,742 $67,411
======= =======
</TABLE>
The limited partnership investment owns and leases a cogeneration facility.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Trade accounts payable...................................... $ 43,913 $ 37,281
Employee compensation and benefits.......................... 55,865 57,415
Settlement charges.......................................... 11,916 18,703
Other accrued expenses...................................... 32,984 43,300
-------- --------
$144,678 $156,699
======== ========
</TABLE>
BORROWING ARRANGEMENTS
In May 1999, the Company issued $240 million aggregate principal amount of
senior notes, of which $200 million is 7.25 percent fixed rate debt and $40
million is floating rate debt, which bears interest at the three-month London
Interbank Offered Rate (LIBOR) plus 90 basis points. These notes mature on June
1, 2009, with semiannual and quarterly interest payments to be made on the fixed
and floating rate notes, respectively. The fair value of these notes at December
31, 1999 was $219.6 million, based upon the present value of future cash flows.
Costs associated with the issuance of these notes have been capitalized, and are
being amortized over the term of the debt. Capitalized costs were not material.
Additionally, to hedge the
<PAGE> 20
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rate risk on the $40 million floating rate debt, the Company executed
an interest rate swap on May 27, 1999, effectively fixing the rate at 7.25
percent.
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 1999 in the amount
of $87.5 million, which expires in November 2000. 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 compliance with certain
financial covenants.
At December 31, 1999, the Company had $242 million outstanding under
commercial paper borrowings, of which $171 million was classified as long-term
debt. The Company's revolving credit agreements support these borrowings.
Commercial paper borrowings at December 31, 1999 had a weighted-average interest
rate of 6.5 percent. At December 31, 1998, the Company had $100 million
outstanding under commercial paper borrowings, all of which was classified as
long-term debt. Commercial paper borrowings at December 31, 1998 had a
weighted-average interest rate of 5.9 percent.
FINANCIAL INSTRUMENTS
The estimated fair values 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 values, which approximate market values, because of
their short-term nature. The fair values of long-term assets and long-term
liabilities approximate their carrying values, with the exception of our senior
notes (See Borrowing Arrangements note).
On May 27, 1999, the Company hedged its interest rate risk by entering into
a ten-year interest rate swap with a notional amount of $40 million and
quarterly settlement dates over the term of the contract. The Company pays 7.25
percent and receives LIBOR plus 90 basis points on the notional amount. As there
is full correlation between the interest rate swap and the underlying floating
rate debt, this contract effectively locks the interest rate for the debt at
7.25 percent (See Borrowing Arrangements note). The fair value of this interest
rate swap represents the estimated cash receipts or payments required to settle
the agreement. At December 31, 1999, the fair value of the swap was $2.4
million, based on a dealer quote, considering current market rates.
In anticipation of a debt offering in 2000, the Company entered into
several short-term treasury lock agreements during 1999 and 2000. These
instruments will be used to hedge the risk of movement in interest rates on the
debt to be issued in 2000. The gain or loss on the treasury locks will be
amortized over the life of the debt as an adjustment to interest expense. The
total notional value of these agreements at December 31, 1999 was $50 million,
with a weighted-average interest rate of 6.10 percent. The fair value of these
agreements represents the estimated cash receipts or payments required to settle
them. The fair value of treasury lock agreements at December 31, 1999 was $1.4
million, based on dealer quotes, considering current market rates. The treasury
lock agreements entered into in 2000 had a total notional value of $200 million
and a weighted-average interest rate of 6.66 percent.
In addition, from time to time, the Company enters into foreign currency
forward contracts to partially hedge forecasted purchases of barrels for its
wine operations. Resulting gains or losses from these transactions are included
as adjustments to the cost of purchasing these barrels. The notional amounts of
forward foreign currency contracts was $5.9 million at December 31, 1999. The
difference between the fair value and notional value of the contracts at that
date was immaterial.
The Company monitors and manages risk associated with changes in interest
rates and, to a lesser extent, foreign currency exchange rates. The use of
derivative instruments, primarily interest rate swaps and other contracts,
contributes to reducing and managing such risks. The Company does not currently
use derivatives
<PAGE> 21
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for trading or speculative purposes. Notional amounts do not represent assets or
liabilities of the Company, but are used in determination of cash settlements
under the various agreements, and as such they are not reported on the
Consolidated Statement of Financial Position. In the event of non-performance by
a counterparty, the risk in these transactions is the cost of replacing the
contracts at current market rates. The Company mitigates this risk by using only
major reputable financial institutions with high credit ratings.
OTHER LIABILITIES
Other liabilities include the noncurrent portion of the pension liabilities
at December 31, 1999 and 1998 of $60.3 million and $65.1 million, respectively.
(See Employee Benefit and Compensation Plans note.)
CAPITAL STOCK
The Company has two classes of capital stock, preferred stock and common
stock. Preferred stock carries a par value of $.10 and no shares have been
issued. Common stock carries a $.50 par value. Authorized preferred stock is 10
million shares and authorized common stock is 600 million shares.
In October 1999, the Board of Directors approved a new stock repurchase
program, authorizing the Company to repurchase up to 20 million shares of its
common stock from time to time in open market or negotiated transactions for use
in connection with benefit and compensation plans and other corporate purposes.
The new program commenced upon completion of the prior program, which was
in effect since November 1996, and provided for the repurchase of up to 20
million shares of the Company's common stock. In 1999, the Company repurchased a
total of 16.1 million shares of its common stock for $466 million under its
stock repurchase programs, of which 2.5 million shares were purchased under the
new program for $65.4 million. In 1998, the Company repurchased 4.4 million
shares under the 1996 stock repurchase program, at a cost of $151.6 million.
Common stock issued and outstanding at December 31, 1999 and 1998 was
208,936,586 shares and 208,095,836 shares, respectively. Treasury shares held at
December 31, 1999 and 1998 were 42,129,500 shares and 26,008,500 shares,
respectively.
In December 1998, the Board of Directors approved the Nonemployee
Directors' Restricted Stock Award Plan. Under this plan, up to 200,000 shares of
the Company's common stock may be granted to nonemployee Directors in accordance
with the provisions of the plan, and accordingly, 200,000 shares of the
Company's treasury stock were cancelled and reserved for use upon issuance of
stock for this plan. During 1999, 4,550 shares of the Company's common stock
were issued under 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 the intrinsic value-based method
permitted by SFAS No. 123. 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
<PAGE> 22
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net earnings:
As reported.............................................. $469,293 $455,279 $439,138
Pro forma................................................ $463,052 $449,445 $436,106
Basic earnings per share:
As reported.............................................. $2.69 $2.45 $2.39
Pro forma................................................ $2.66 $2.42 $2.37
Diluted earnings per share:
As reported.............................................. $2.68 $2.44 $2.37
Pro forma................................................ $2.64 $2.41 $2.35
</TABLE>
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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield............................ 5.1% 4.6% 4.4%
Risk-free interest rate............................ 5.6% 5.6% 5.9%
Expected volatility................................ 26.0% 22.0% 29.7%
Expected life of option............................ 7.5 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, 200,000
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, 1999, 21,100 shares were available for grant under the 1992
Stock Option Plan and 144,500 shares were available for grant under the
Nonemployee Directors' Stock Option Plan, while no shares were available under
the 1982 Stock Option Plan.
In December 1999, the Board of Directors adopted, subject to shareholders'
approval, an amendment to the 1992 Stock Option Plan, authorizing an additional
5 million shares to be reserved for issuance.
Receivables from the exercise of options in the amount of $13.6 million in
1999, $10.6 million in 1998 and $9.5 million in 1997 have been deducted from
stockholders' equity.
<PAGE> 23
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 (options in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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................. 14,454.6 $28.10 14,886.8 $26.78 15,782.6 $24.57
Granted................... 1,774.6 28.35 1,359.5 30.64 1,861.6 31.39
Exercised................. (836.2) 16.60 (1,681.6) 18.20 (2,459.5) 15.40
Forfeited................. (71.5) 30.62 (109.3) 31.81 (297.9) 32.45
Expired................... -- -- (.8) 7.69 -- --
-------- -------- --------
Outstanding at end of
year.................... 15,321.5 $28.74 14,454.6 $28.10 14,886.8 $26.78
======== ====== ======== ====== ======== ======
Exercisable at end of
year.................... 12,188.7 $28.54 11,637.5 $27.31 11,932.7 $25.49
======== ====== ======== ====== ======== ======
Weighted-average fair
value of options granted
during the year......... $ 5.46 $ 5.42 $ 7.58
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999 (options in thousands):
<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>
$14.84 -- 18.28 793.3 0.7 years $14.87 793.3 $14.87
24.19 -- 35.25 14,528.2 5.3 years 29.50 11,395.4 29.49
-------- --------
$14.84 -- 35.25 15,321.5 5.0 years $28.74 12,188.7 $28.54
======== ========= ====== ======== ======
</TABLE>
EMPLOYEE BENEFIT AND COMPENSATION PLANS
The Company and its subsidiaries maintain a number of noncontributory
defined benefit pension plans covering substantially all employees over age 21
with at least one year of service.
The Company 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> 24
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents a reconciliation of the plans at December
31:
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
PENSION PLANS OTHER THAN PENSIONS
-------------------- ------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year....... $342,012 $284,164 $ 74,556 $ 59,951
Service cost.................................. 11,957 10,195 3,348 3,349
Interest cost................................. 21,738 20,833 3,908 4,384
Plan participants' contributions.............. -- -- 43 71
Plan amendments............................... (1,105) -- (18,535) --
Actuarial (gain)/loss......................... (45,438) 42,063 (4,300) 9,481
Benefits paid................................. (16,075) (15,243) (2,745) (2,680)
-------- -------- -------- --------
Benefit obligation at end of year............. $313,089 $342,012 $ 56,275 $ 74,556
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year....................................... $295,161 $279,733 -- --
Actual return on plan assets.................. 16,276 25,868 -- --
Employer contributions........................ 5,350 5,377 -- --
Benefits paid................................. (16,075) (15,243) -- --
Administrative expenses....................... (621) (574) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year...... $300,091 $295,161 -- --
-------- -------- -------- --------
FUNDED STATUS
Funded status at end of year.................. $(12,998) $(46,851) $(56,275) $(74,556)
Unrecognized actuarial (gain)/loss............ (4,322) 36,567 (7,971) (3,684)
Unrecognized prior service cost............... (2,064) (1,174) (16,301) (327)
Unrecognized transition obligation............ 268 21 -- --
-------- -------- -------- --------
Accrued benefit cost.......................... $(19,116) $(11,437) $(80,547) $(78,567)
======== ======== ======== ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED STATEMENT
OF FINANCIAL POSITION:
Prepaid benefit asset......................... $ 28,164 $ 28,884 $ -- $ --
Accrued benefit liability..................... (64,643) (69,768) (80,547) (78,567)
Intangible asset.............................. 2,292 3,783 -- --
Accumulated other comprehensive loss.......... 15,071 25,664 -- --
-------- -------- -------- --------
Net amount recognized......................... $(19,116) $(11,437) $(80,547) $(78,567)
======== ======== ======== ========
</TABLE>
The weighted-average assumptions used for the year ended December 31 were:
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
PENSION PLANS OTHER THAN PENSIONS
-------------------- ------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Discount rate................................... 7.75% 6.50% 7.75% 6.50%
Expected return on plan assets.................. 8.50% 8.75% -- --
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 7.4 percent for 2000 and is assumed to decrease gradually to 5.3
percent by the year 2005 and remain at that level thereafter.
<PAGE> 25
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
-------------------------------- ---------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service cost.................. $ 11,957 $ 10,195 $ 8,744 $ 3,348 $3,349 $2,857
Interest cost................. 21,738 20,833 18,761 3,908 4,384 4,003
Expected return on plan
assets...................... (23,202) (23,036) (21,110) -- -- --
Amortization of unrecognized
transition obligation....... (247) (247) (247) -- -- --
Amortization of prior service
cost........................ (215) (113) (133) (2,561) (33) (33)
Recognized actuarial loss/
(gain)...................... 2,998 2,176 1,254 (13) (392) (747)
-------- -------- -------- ------- ------ ------
Net periodic benefit cost..... $ 13,029 $ 9,808 $ 7,269 $ 4,682 $7,308 $6,080
======== ======== ======== ======= ====== ======
</TABLE>
The projected benefit obligation and accumulated benefit obligation for the
pension plans with accumulated benefit obligations in excess of plan assets were
$67.1 million and $59.8 million, respectively, as of December 31, 1999, and
$82.4 million and $72.8 million, respectively, as of December 31, 1998. The fair
value of plan assets for such plans as of December 31, 1998 was $5 million.
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, 1999 by
approximately $5.7 million and increase the service and interest cost components
of expense by approximately $.9 million. A one-percentage point decrease in the
assumed health care trend rate would have decreased the accumulated
postretirement benefit obligation at December 31, 1999 by approximately $5.1
million and decreased the service and interest components of expense by
approximately $.8 million.
Changes in unrecognized prior service cost, net periodic benefit cost and
Plan amendments for the Company's Postretirement Welfare Benefit Plan were
affected by a 1999 change in eligibility for salaried employees to recognize
service only on or after age 45.
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, 1999 and 1998, the fund held 1.3 million shares
of the Company's common stock having a market value of $32.2 million as of
December 31, 1999 and $44.6 million as of December 31, 1998. Dividends paid on
shares held by the fund were $2.2 million and $2.1 million in 1999 and 1998,
respectively.
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 $4.2 million in 1999, $4.4
million in 1998 and $4 million in 1997.
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 $40 million in 1999,
$38.5 million in 1998 and $36.9 million in 1997.
<PAGE> 26
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $256,901 $247,526 $247,224
State and local.................................. 38,643 31,424 26,274
-------- -------- --------
Total current...................................... 295,544 278,950 273,498
-------- -------- --------
Deferred:
Federal.......................................... (1,988) 346 (6,807)
State and local.................................. 94 (110) (1,972)
-------- -------- --------
Total deferred..................................... (1,894) 236 (8,779)
-------- -------- --------
$293,650 $279,186 $264,719
======== ======== ========
</TABLE>
The 1999, 1998 and 1997 current tax provisions reflect the reversal of
certain tax reserves. In addition, the tax provisions do not reflect $4 million,
$9.3 million and $13.4 million for 1999, 1998 and 1997, 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 1999, 1998 and 1997 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.
Components of deferred tax assets and liabilities as of December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other than pensions............... $28,191 $27,498
Other accrued liabilities................................. 22,442 24,747
Accrued pension liabilities............................... 21,996 24,419
All other, net............................................ 7,002 5,235
------- -------
Total deferred tax assets................................... 79,631 81,899
------- -------
Deferred tax liabilities:
Depreciation.............................................. 43,419 42,798
Prepaid pension asset..................................... 9,857 10,109
Investment in limited partnerships........................ 5,145 6,367
------- -------
Total deferred tax liabilities.............................. 58,421 59,274
------- -------
Net deferred tax assets..................................... $21,210 $22,625
======= =======
</TABLE>
<PAGE> 27
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>
1999 1998 1997
---- ---- ----
<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............... 3.3 2.8 2.2
Other, net.................................................. .2 .2 .4
---- ---- ----
38.5% 38.0% 37.6%
==== ==== ====
</TABLE>
ADVERTISING COSTS
The Company expenses the production costs of advertising in the period in
which they are incurred. Advertising expenses were $80.3 million in 1999, $68.7
million in 1998 $75.7 million in 1997. At December 31, 1999 and 1998, $5.3
million and $5 million, respectively, of advertising related costs are included
in prepaid expenses and other current assets.
INTEREST EXPENSE (INCOME), NET
Interest expense (income), net, is comprised of expense associated with
short-term and long-term debt and income from cash equivalents and capitalized
interest.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Short-term debt........................................ $ 2,891 $ 16 $3,112
Long-term debt......................................... 12,778 5,518 5,632
------- ------- ------
15,669 5,534 8,744
------- ------- ------
Income from cash equivalents........................... (1,155) (6,602) (951)
Capitalized interest................................... (979) (1,119) (342)
------- ------- ------
$13,535 $(2,187) $7,451
======= ======= ======
</TABLE>
ACCUMULATED OTHER COMPREHENSIVE LOSS
The 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. Changes in accumulated other
comprehensive (loss) income are recorded directly to stockholders' equity and do
not affect the net earnings or cash flow of the Company.
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, 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)
Net change for the year................................... (743) 6,886
------- --------
Balance at December 31, 1999................................ $(2,481) $ (9,796)
======= ========
</TABLE>
<PAGE> 28
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net change for the year in foreign currency translation adjustment is
reflected net of tax benefits of $400, $324 and $173 in 1999, 1998 and 1997,
respectively. The net change for the year in minimum pension liability
adjustment is reflected net of tax (expense) benefits of $(3,708), $4,946 and
$574 in 1999, 1998 and 1997, respectively.
EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net earnings..................................... $469,293 $455,279 $439,138
======== ======== ========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares.............. 174,355 185,544 183,931
Dilutive effect of employee stock options.......... 759 1,336 1,671
-------- -------- --------
Denominator for diluted earnings per share....... 175,114 186,880 185,602
======== ======== ========
Basic earnings per share........................... $2.69 $2.45 $2.39
Diluted earnings per share......................... $2.68 $2.44 $2.37
</TABLE>
Options to purchase 12.1 million shares, 2.2 million shares and 2.3 million
shares of common stock, outstanding as of December 31, 1999, 1998 and 1997,
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
The Company's reportable segments are Tobacco and Wine. Through its
subsidiaries, the Company operates predominantly in the tobacco industry as a
producer of moist smokeless tobacco products and 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 wholesalers and
chain stores which are widely dispersed throughout the United States. In 1999,
net sales to one customer accounted for approximately 22 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 net sales less operating expenses and an allocation of
corporate expenses. Tobacco settlement-related charges for 1999, 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 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.
<PAGE> 29
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company has been named in two 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 also named in an action in Illinois brought by an individual
plaintiff and purporting to state a class action "on behalf of himself and all
other persons similarly situated" alleging that the Company "manipulates the
nicotine levels and absorption rates" in its smokeless tobacco products and
seeking to recover monetary damages "in an amount not less than the purchase
price" of the Company's smokeless tobacco products and certain other relief. The
purported class excludes all persons who claim any personal injury as a result
of using the Company's smokeless tobacco products.
The Company is also named in several actions in West Virginia brought on
behalf of individual plaintiffs against cigarette manufacturers, smokeless
tobacco manufacturers, and other organizations seeking damages and other relief
in connection with injuries allegedly sustained as a result of tobacco usage,
including smokeless tobacco products. Included among the plaintiffs are three
individuals alleging, in addition to the use of other tobacco products, use of
the Company's smokeless tobacco products and alleging the types of injuries
claimed to be associated with the use of smokeless tobacco products.
The Company has been named in an action commenced in Nevada by an
individual plaintiff against cigarette and smokeless tobacco manufacturers
seeking damages and other relief for injuries allegedly sustained as a result of
his exposure to environmental tobacco smoke, cigarette smoking and use of
smokeless tobacco products.
The Company has been named in a wrongful death and survival action in
California brought by a plaintiff, individually and as executor of decedent's
estate and as guardian ad litem for minor, for injuries allegedly sustained as a
result of decedent's use of the Company's smokeless tobacco products. Plaintiff
seeks compensatory and punitive damages and other relief.
The Company is named in an action in San Francisco, California along with
five other smokeless tobacco manufacturers 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."
<PAGE> 30
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is named in an action in Kentucky seeking more than $400
million in "actual damages" before trebling, punitive damages and injunctive
relief 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. Trial in this case is
scheduled to commence on February 28, 2000.
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. 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 the FDA seeking a judicial declaration that the FDA has no authority to
regulate smokeless tobacco products. On April 25, 1997, a federal district court
ruled that the FDA, as a matter of law, is not precluded from regulating
cigarettes and smokeless tobacco as "medical devices" and implementing certain
labeling and access restrictions. The court, granting the Company's motion for
summary judgment, also ruled that the FDA has no authority to implement
restrictions on the advertising and promotion of smokeless tobacco products. The
court issued an injunction to prohibit most of the restrictions (labeling,
access and advertising/ promotion) set for August 28, 1997 from taking effect,
pending resolution of any appeals and subsequent proceedings; the court also
certified the ruling for interlocutory appeal on the grounds that it involves
"controlling questions of law as to which there is substantial ground for
difference of opinion." On August 14, 1998, the Fourth Circuit Court of Appeals
ruled in favor of the Company and other tobacco product manufacturers stating
that the FDA lacks jurisdiction to regulate tobacco products and that all of the
regulations published by the FDA on August 26, 1996 are invalid. On January 19,
1999, the FDA filed a petition for certiorari seeking review of the Fourth
Circuit's ruling by the United States Supreme Court. On April 26, 1999, the
United States Supreme Court announced its intention to review that ruling. Oral
arguments were presented on December 1, 1999. A decision is expected by the end
of the Court's 1999-2000 term. 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.
OTHER MATTERS
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
required 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 1999 results is $6 million relating to the Settlement Agreement
for the ongoing payment based on 1999 shipments and $3.4 million resulting from
the Company's portion of attorneys' fees for prior state settlements. 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
<PAGE> 31
UST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fund, $5 million for attorneys' fees for outside counsel retained by the
settling states and $6 million for the first on-going payment. 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.
Subsequent to December 31, 1999, the Company signed an asset purchase
agreement for a winery in California for approximately $100 million.
<PAGE> 32
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, 1999 and 1998, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Stamford, Connecticut
February 7, 2000
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, 1999:
<TABLE>
<CAPTION>
PERCENTAGE OF
JURISDICTION OF OWNERSHIP BY
INCORPORATION UST OR ITS
OR WHOLLY OWNED
NAME OF SUBSIDIARY OR AFFILIATE REGISTRATION 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 Limited Partnership... 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 7, 2000, included in the 1999
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, the
Registration Statement (Form S-8 No. 33-59229) pertaining to the Nonemployee
Directors' Stock Option Plan and the Registration Statement (Form S-4 No.
333-85285) pertaining to the registration of senior notes due June 1, 2009, of
our report dated February 7, 2000, 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, 1999.
Stamford, Connecticut
March 3, 2000
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 74,989
<SECURITIES> 0
<RECEIVABLES> 64,349
<ALLOWANCES> 0
<INVENTORY> 403,469
<CURRENT-ASSETS> 580,024
<PP&E> 632,405
<DEPRECIATION> 270,523
<TOTAL-ASSETS> 1,015,648
<CURRENT-LIABILITIES> 261,327
<BONDS> 411,000
0
0
<COMMON> 104,468
<OTHER-SE> 96,336
<TOTAL-LIABILITY-AND-EQUITY> 1,015,648
<SALES> 1,512,331
<TOTAL-REVENUES> 1,512,331
<CGS> 304,275
<TOTAL-COSTS> 304,275
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,535
<INCOME-PRETAX> 762,943
<INCOME-TAX> 293,650
<INCOME-CONTINUING> 469,293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469,293
<EPS-BASIC> 2.69
<EPS-DILUTED> 2.68
</TABLE>
