<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 2000
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, CT 06830
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (203) 661-1100
NONE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether 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 registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
<TABLE>
<S> <C>
Number of Common shares ($.50 par value) outstanding at June 30, 2000 162,357,156
</TABLE>
<PAGE> 2
UST Inc.
(Registrant)
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Financial Position -
June 30, 2000 and December 31, 1999 2
Condensed Consolidated Statement of Earnings -
Three and six months ended June 30, 2000 and 1999 3
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Operations and
Financial Condition 10
Part II Other Information:
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
10. Material Contracts
27. Financial Data Schedule
Signature 15
</TABLE>
(1)
<PAGE> 3
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 43,003 $ 74,989
Accounts receivable 75,697 64,349
Inventories:
Leaf tobacco 202,872 189,414
Products in process 109,236 116,291
Finished goods 84,753 75,757
Other materials and supplies 22,351 22,007
----------- -----------
419,212 403,469
Prepaid expenses and other current assets 27,978 26,709
Deferred income taxes 9,691 10,508
----------- -----------
Total current assets 575,581 580,024
Property, plant and equipment, net 357,405 361,882
Other assets 83,135 73,742
----------- -----------
Total assets $ 1,016,121 $ 1,015,648
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt $ -- $ 70,965
Accounts payable and accrued expenses 104,388 144,678
Income taxes 48,624 45,684
----------- -----------
Total current liabilities 153,012 261,327
Long-term debt 540,000 411,000
Postretirement benefits other than pensions 81,213 80,547
Other liabilities 63,327 61,970
Contingencies (see note) -- --
----------- -----------
Total liabilities 837,552 814,844
Stockholders' equity
Preferred stock - par value $.10 per share:
Authorized - 10 million shares; issued - none
Common stock - par value $.50 per share:
Authorized - 600 million shares;
issued 204,178,756 shares in 2000
and 208,936,586 shares in 1999 102,089 104,468
Additional paid-in capital 517,925 526,676
Retained earnings 800,755 861,816
Accumulated other comprehensive loss (11,936) (12,277)
----------- -----------
1,408,833 1,480,683
Less treasury stock - 41,821,600 shares in 2000 and
42,129,500 shares in 1999 1,230,264 1,279,879
----------- -----------
Total stockholders' equity 178,569 200,804
----------- -----------
Total liabilities and stockholders' equity $ 1,016,121 $ 1,015,648
=========== ===========
</TABLE>
Note: The statement of financial position at December 31, 1999 has been
derived from the audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
(2)
<PAGE> 4
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $392,041 $378,100 $760,336 $728,185
Costs and expenses
Cost of products sold 70,245 63,168 137,220 124,454
Excise taxes 8,596 6,589 16,992 12,321
Selling, advertising and administrative 121,054 105,176 240,563 210,849
Total costs and expenses 199,895 174,933 394,775 347,624
Operating income 192,146 203,167 365,561 380,561
-------- -------- -------- --------
Interest, net 9,714 3,184 17,241 4,249
-------- -------- -------- --------
Earnings before income taxes 182,432 199,983 348,320 376,312
Income taxes 70,185 77,009 134,109 144,878
-------- -------- -------- --------
Net earnings $112,247 $122,974 $214,211 $231,434
======== ======== ======== ========
Net earnings per share
Basic $ .69 $ .70 $ 1.31 $ 1.30
Diluted $ .69 $ .70 $ 1.31 $ 1.30
Dividends per share $ .44 $ .42 $ .88 $ .84
Average number of shares
Basic 162,238 175,357 163,600 177,548
Diluted 162,277 176,113 163,700 178,369
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(3)
<PAGE> 5
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 161,484 $ 184,850
INVESTING ACTIVITIES
Purchases of property, plant and equipment (28,349) (19,959)
Dispositions of property, plant and equipment 13,631 657
--------- ---------
Net cash used in investing activities (14,718) (19,302)
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings 300,000 393,700
Repayment of borrowings (241,965) (185,400)
Proceeds from the issuance of stock 4,336 6,066
Dividends paid (143,653) (148,426)
Stock repurchased (97,470) (244,647)
--------- ---------
Net cash used in financing activities (178,752) (178,707)
--------- ---------
Decrease in cash and cash equivalents (31,986) (13,159)
Cash and cash equivalents at beginning of year 74,989 33,210
--------- ---------
Cash and cash equivalents at end of period $ 43,003 $ 20,051
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 131,440 $ 133,436
Interest 11,326 5,353
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(4)
<PAGE> 6
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in Registrant's
annual report on Form 10-K for the year ended December 31, 1999.
CAPITAL STOCK
In 2000, Registrant repurchased 4.7 million shares costing $97.5 million. The
repurchases were pursuant to Registrant's authorized program to repurchase its
outstanding common stock up to a maximum of 20 million shares. As of June 30,
2000, 7.2 million shares were repurchased under this program. Registrant
suspended its stock repurchase program at the end of the first quarter due to
its antitrust litigation.
In May 2000, shareholders approved an amendment to Registrant's 1992 Stock
Option Plan, authorizing an additional 5 million shares of its common stock to
be reserved for issuance under the Plan. Accordingly, 5 million shares of
Registrant's treasury shares were canceled for that purpose.
COMPREHENSIVE INCOME
Components of comprehensive income for Registrant are net earnings, foreign
currency translation adjustments and additional minimum pension liability
adjustments. For the second quarter of 2000 and 1999, total comprehensive
income, net of taxes, amounted to $112,567,000 and $127,351,000, respectively.
For the first six months of 2000 and 1999 total comprehensive income, net of
taxes, was $214,552,000 and $235,168,000, respectively.
NEW ACCOUNTING PRONOUNCEMENT
At its May 2000 meeting, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives". This
consensus provides guidance for the recognition, measurement and classification
of costs associated with sales incentives offered voluntarily by vendors without
charge to customers. These new EITF rules apply to several of Registrant's
incentives and, upon adoption, will require reclassification of expenses related
to these incentives from selling, advertising an administrative expenses to a
reduction in net sales. This reclassification will not affect operating income
or net earnings. This consensus is effective for fiscal quarters beginning after
July 20, 2000. Registrant is currently evaluating its application of the new
rules, which it will adopt in the fourth quarter of 2000.
(5)
<PAGE> 7
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OTHER MATTERS
On June 20, 2000, Registrant signed, as part of its contingency planning to
assure its continuing ability to contest the recent damage award entered in its
antitrust litigation, a commitment letter with two financial institutions.
Pursuant to this letter, these institutions have agreed to underwrite up to
$1.25 billion of senior secured financing. Registrant had also entered into a
commitment letter with sureties to post a bond. In light of the Court's recent
ruling setting the bonding requirements at $500 million, Registrant intends to
discuss with its lenders and sureties appropriate modifications to the
foregoing arrangements and to take steps to post a bond in the most
cost-effective manner.
In March 2000, Registrant issued $300 million aggregate principal amount of 8.8
percent fixed rate senior notes. These notes mature on March 15, 2005, with
semiannual interest payments. Costs associated with the issuance of the notes
have been capitalized and are being amortized over the term of the notes.
Capitalized costs were immaterial.
EARNINGS PER SHARE
(In thousands, except per share amounts)
The following table presents the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net earnings $112,247 $122,974 $214,211 $231,434
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 162,238 175,357 163,600 177,548
Dilutive effect of employee stock options 39 756 100 821
-------- -------- -------- --------
Denominator for diluted earnings per share 162,277 176,113 163,700 178,369
======== ======== ======== ========
Basic earnings per share $ .69 $ .70 $ 1.31 $ 1.30
Diluted earnings per share $ .69 $ .70 $ 1.31 $ 1.30
</TABLE>
(6)
<PAGE> 8
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEGMENT INFORMATION
Registrant's reportable segments are Tobacco and Wine. Those business units that
do not meet quantitative reportable thresholds are included in all other
operations. Included in all other operations for both periods is Registrant's
international and cigar operations. Interim segment information is as follows:
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
--------------------------- -------------------------
Net Sales to Unaffiliated Customers: 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Tobacco $ 347,779 $ 334,692 $ 672,010 $ 645,859
Wine 36,810 36,176 73,917 68,309
All other 7,452 7,232 14,409 14,017
--------- --------- --------- ---------
Net sales $ 392,041 $ 378,100 $ 760,336 $ 728,185
========= ========= ========= =========
Operating Profit (Loss):
Tobacco $ 196,742 $ 206,863 $ 376,382 $ 386,490
Wine 1,159 2,215 3,636 4,297
All other (1,767) (2,512) (3,794) (3,945)
--------- --------- --------- ---------
Operating profit 196,134 206,566 376,224 386,842
Corporate expenses (3,988) (3,399) (10,663) (6,281)
Interest, net (9,714) (3,184) (17,241) (4,249)
--------- --------- --------- ---------
Earnings before income taxes 182,432 $ 199,983 $ 348,320 $ 376,312
========= ========= ========= =========
</TABLE>
Registrant's identifiable assets did not change significantly from amounts
appearing in the December 31, 1999 Consolidated Segment Information (See Form
10-K for the year then ended).
CONTINGENCIES
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 these pending litigation matters will not result in any
material liability for a number of reasons, including the fact that Registrant
has had only limited involvement with cigarettes and Registrant's current
percentage of total tobacco industry sales is relatively small. Prior to 1986,
Registrant manufactured some cigarette products which had a de minimis market
share. From May 1, 1982 to August 1, 1994, Registrant distributed a small volume
of imported cigarettes and is indemnified against claims relating to those
products.
Registrant has been named in two actions brought by individual plaintiffs, both
of which 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.
(7)
<PAGE> 9
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONTINGENCIES (continued)
Registrant 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 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 three
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 an action in Florida by an individual plaintiff and
his spouse seeking damages and other relief for personal injuries, including
"cancer of the tongue," allegedly sustained by plaintiff as a result of his use
of Registrant's smokeless tobacco products.
Registrant 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 Sections 25249.6, et seq.
("Proposition 65") and the California Unfair Competition Act, Business and
Professions Code Sections 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 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.
On March 28, 2000, a Kentucky jury rendered a verdict against Registrant,
awarding $350 million in compensatory damages to Conwood Company, L.P., for its
claims under federal antitrust laws that Registrant had engaged in exclusionary
and anticompetitive conduct in the marketing and promotion of moist smokeless
tobacco products. The verdict, when entered as a judgment, was subject to
trebling under federal antitrust laws to $1.05 billion. Following the entering
of the judgment, Registrant had filed motions with the court for judgment
(8)
<PAGE> 10
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONTINGENCIES (Continued)
as a matter of law to overturn the verdict, for a new trial or reduced damages
award, and to authorize a supersedeas bond at less than the full amount of the
judgment. On August 10, 2000, the district court, in ruling on Registrant's
post-trial motions, granted Registrant's request that the appeal bond be set
substantially below the judgment amount; however, the court denied
Registrant's motions to vacate or reduce the judgment. Under the court's
order, the bond requirement was set at $500 million. Registrant believes that
the evidence presented at trial was insufficient to support the jury verdict
and, as a result, believes that, while there can be no assurances, the judgment
should ultimately be reversed on appeal. The Company is not presently able to
reasonably estimate the amount of damages, if any, which may be ultimately
imposed and, accordingly, no charge relating to the judgment is reflected in
Registrant's financial statements. While Registrant believes that the judgment
should ultimately be reversed, if the adverse judgment is sustained after all
appeals, satisfaction of the judgment is likely to have a material adverse
effect on Registrant's consolidated financial results for a particular year,
but is not expected to have a material adverse effect on Registrant's
consolidated financial position.
Registrant was also named in two purported class actions filed in state court in
Tennessee and New Mexico on behalf of putative class members who were indirect
purchasers of smokeless tobacco products manufactured by Registrant during the
period April 1996 through March 28, 2000, alleging that Registrant has violated
the antitrust laws, unfair or deceptive trade practices statutes and the common
law of certain states. The plaintiffs seek to recover compensatory and statutory
damages in an amount not to exceed $74,000 after trebling per putative class
member, and certain other relief. The actions are similar in all material
respects and are derived directly from the Conwood litigation and therefore will
need to overcome the same issues raised by Registrant in its post-trial motions
discussed above. Even if Conwood were ultimately to prevail on issues which
Registrant will challenge on appeal, the plaintiffs in these two actions will
still need to establish additional elements before liability can be imposed
upon Registrant. Registrant believes that it has meritorious defenses in this
regard, and that the ultimate outcome of these class actions will not have a
material adverse effect on its consolidated financial position, although if
plaintiffs were to prevail, these actions could have a material impact on its
consolidated financial results for a particular reporting period in which
resolved.
Registrant was also named in two actions, an individual action and a purported
class action, filed in federal court in Washington D.C. by
wholesalers/distributors of Registrant's smokeless tobacco products. Other than
the fact that one purports to be a class action, the two actions are similar in
all material respects, contain the same substantive allegations, and were
brought by the same plaintiffs' counsel. Plaintiffs allege that Registrant
engaged in conduct that violates the federal antitrust laws, including Sections
1 and 2 of the Sherman Act and Section 3 of the Clayton Act, and that Registrant
engaged in this conduct unilaterally and in concert with "its co-conspirators
(including various retailers and distributors)". Plaintiffs seek to recover
unspecified statutory damages, before trebling, and certain equitable and other
relief. These two actions are derived directly from the Conwood litigation and
therefore will need to overcome the same issues raised by Registrant in its
post-trial motions discussed above. Even if Conwood were ultimately to prevail
on issues which Registrant will challenge on appeal, the plaintiffs in these
two actions will still need to establish additional elements before liability
can be imposed upon Registrant. Registrant believes that it has meritorious
defenses in this regard, and that the ultimate outcome of these actions will
not have a material adverse effect on its consolidated financial position,
although if plaintiffs were to prevail, these actions could have a material
impact on its consolidated financial results for a particular reporting period
in which resolved.
(9)
<PAGE> 11
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
(Unaudited)
Results of Operations
Second quarter and six months of 2000 compared
with the corresponding periods of 1999
CONSOLIDATED RESULTS
Consolidated net sales increased 3.7 percent to $392 million for the second
quarter of 2000, while net sales for the first six months of 2000 increased 4.4
percent to $760.3 million. For the second quarter and first six months of 2000,
operating income decreased by 5.4 percent to $192.1 million and 3.9 percent to
$365.6 million, respectively, as compared to the related 1999 periods. In the
second quarter of 2000, net earnings decreased 8.7 percent to $112.2 million,
while basic and diluted earnings per share decreased 1.4 percent to $0.69 per
share. For the six months ended June 30, 2000, net earnings declined by 7.4
percent to $214.2 million versus $231.4 million in the same period in 1999.
Year-to-date basic and diluted earnings per share both increased 0.8 percent to
$1.31 per share in 2000. The consolidated gross profit percentage decreased
slightly for both periods primarily as a result of increased unit cost and
product mix, partially offset by higher selling prices for our moist smokeless
tobacco products. Corporate expenses for the second quarter of 2000 increased
slightly from the corresponding 1999 period, while they increased more
significantly for the six-month period primarily as a result of hedging losses
related to the issuance of debt. Net interest expense increased significantly to
$9.7 million and $17.2 million for the second quarter and first six months of
2000, respectively, compared to the equivalent 1999 periods, primarily due to
higher average debt levels and interest rates on debt outstanding. Income taxes
decreased in both 2000 periods, as a result of lower earnings before taxes
compared to 1999. The effective tax rates for both periods remained level with
the corresponding 1999 periods.
TOBACCO SEGMENT
Tobacco segment net sales increased 3.9 percent to $347.8 million for the second
quarter of 2000, while they increased 4 percent to $672 million for the
six-month period, accounting for 88.4 percent of year-to-date consolidated net
sales. The increase for both periods was primarily attributable to higher
selling prices for moist smokeless tobacco products as compared to the
corresponding 1999 periods. Smokeless tobacco net unit volume increased 2.4
percent to 167.7 million cans and 2.2 percent to 320.2 million cans for the
second quarter and six-month period, respectively. Unit volume results for moist
smokeless tobacco products included non-premium products' contribution of an
additional 5.9 million cans and 10.2 million cans to the second quarter and
six-month period of 2000, respectively, while unit volume for premium products
declined slightly in both periods compared to the corresponding 1999 periods.
Registrant believes that the recent conversion from 1.0 oz. to 1.2 oz. of
tobacco per can of Skoal Long Cut products adversely affected premium products'
unit volume comparisons between 2000 and 1999.
(10)
<PAGE> 12
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
Costs of products sold increased 21.1 percent and 16.6 percent in the second
quarter and first six months of 2000, respectively, primarily as a result of
increased federal excise taxes and higher leaf tobacco costs associated with the
increased can weight for Skoal Long Cut products, as well as increased LIFO
inventory expense. Tobacco segment gross profit increased 1.3 percent for the
second quarter and 2 percent for the six-month period, as compared to the
similar 1999 periods. The gross profit percentage for both 2000 periods
decreased slightly versus the corresponding 1999 periods primarily as a result
of the aforementioned unfavorable increases in costs of products sold.
Selling and advertising expenses increased significantly in both 2000 periods,
primarily as a result of higher planned spending on promotional activities at
retail in an effort to increase category growth. Indirect selling expenses also
rose in both periods, primarily as a result of higher costs associated with
sales personnel training along with increased salaries and related costs
attributable to additional sales support personnel in the salesforce. Tobacco
segment administrative expenses decreased slightly in the second quarter
primarily as a result of lower legal spending and tobacco settlement-related
charges, partially offset by the bonding cost incurred for the Conwood
litigation. For the six month period, administrative expenses increased
primarily as a result of the Conwood bonding cost.
Operating profit for the Tobacco segment decreased 4.9 percent to $196.7 million
and 2.6 percent to $376.4 million for the second quarter and first six months of
2000, respectively.
WINE SEGMENT
Wine segment net sales increased 1.8 percent to $36.8 million and 8.2 percent to
$73.9 million for the quarter and six months ended June 30, 2000, respectively,
accounting for 9.7 percent of consolidated net sales for the six month period.
Sales volume increases of 2 percent and 6.5 percent on premium wine cases for
the quarter and six-month periods, respectively, were the primary sources of the
increased net sales in both periods. The premium case volume growth for the
quarter and year-to-date periods was attributable to the Chateau Ste. Michelle
and Villa Mt. Eden brands, partially offset by the decreased volume of the
Columbia Crest brand. Registrant's two leading brands of premium wine, Chateau
Ste. Michelle and Columbia Crest accounted for 81 percent of Registrant's total
premium wine sales in 2000.
Wine unit costs were relatively level for the second quarter, while increasing
for the first six months of 2000 compared to the corresponding 1999 periods. The
increase in the six-month period is primarily a result of higher premium case
sales. Gross profit for the Wine segment increased 6.7 percent to $14.4 million
and 10.7 percent to $29.6 million for the second quarter and six-month periods,
respectively, primarily as a result of increased premium case unit volume. The
Wine segment gross profit percentage increased slightly for both 2000 periods
compared to the similar 1999 periods.
(11)
<PAGE> 13
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
Selling and advertising expenses for both 2000 periods increased significantly
primarily as a result of higher spending for point of sale and media
advertising. Indirect selling, administrative and other expenses were also
higher in both 2000 periods primarily due to continued infrastructure spending
to meet current and expected growth, and costs incurred for the Guenoc
acquisition, which has since been discontinued.
For the second quarter of 2000, operating profit for the Wine segment decreased
47.7 percent to $1.2 million, while for the first six months of 2000, segment
operating profit declined 15.4 percent to $3.6 million, as compared to the
corresponding 1999 periods.
ALL OTHER OPERATIONS
Net sales for all other operations for both the second quarter and first six
months of 2000 increased slightly from corresponding 1999 levels, to $7.5
million and $14.4 million, respectively. Overall, all other operations recorded
operating losses of $1.8 million and $3.8 million for the second quarter and
first six months of 2000, respectively, compared to operating losses of $2.5
million and $3.9 million for the similar 1999 periods.
LIQUIDITY AND CAPITAL RESOURCES
CHANGES IN FINANCIAL CONDITION SINCE DECEMBER 31, 1999
Net cash provided by operating activities decreased to $161.5 million as
compared with $184.9 million for the corresponding 1999 period. The principal
basis for this decline was lower net earnings. The primary sources of cash from
operations were net earnings generated by the Tobacco segment, while the primary
uses of cash in operations were decreased accounts payable and accrued expenses
as well as seasonal purchases of leaf tobacco for use in moist smokeless tobacco
products. Registrant estimates that 2000 overall raw material inventory
purchases and other costs, for leaf tobacco and grapes, will approximate amounts
expended in 1999.
Net cash used in investing activities was $14.7 million in 2000 versus $19.3
million in 1999. Expenditures in both years relate to purchases of property
plant and equipment, while 2000 also includes the offsetting effect of the
disposition of an office building.
Net cash used in financing activities was $178.8 million, remaining level
compared to the corresponding 1999 period, as the decrease in net proceeds from
borrowings was almost fully offset by the decrease in funds used to repurchase
common stock. Registrant expended $97.5 million during 2000 for its stock
repurchase program, versus $244.6 million in 1999. This program has been
suspended since the end of the first quarter of 2000, due to Registrant's
antitrust litigation.
(12)
<PAGE> 14
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
On June 20, 2000, Registrant signed a $1.25 billion commitment letter with
several financial institutions in connection with the contingency planning for
bonding requirements associated with the damage award entered in the antitrust
litigation. Registrant's cash requirements for the remainder of 2000 for its
capital program may be affected by the post-trial rulings associated with this
antitrust litigation. Additional borrowings and internally generated funds will
be utilized to meet Registrant's cash requirements over this period.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In March 2000, Registrant issued $300 million aggregate principal amount of 8.8
percent fixed rate senior notes, which mature on March 15, 2005. Upon this
issuance, Registrant settled its treasury lock interest agreements used to hedge
the exposure to interest rate fluctuations. There were no other material changes
in market risk since December 31, 1999.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Reference is made to the section captioned "Cautionary Statement Regarding
Forward-Looking Information" which was filed as part of Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Registrant's 1999 Form 10-K, and Forms 8-K, dated March 30, 2000 and June 22,
2000, regarding important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by
Registrant, including forward-looking statements contained in this report.
(13)
<PAGE> 15
UST Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 23, 2000, Registrant was served with a Summons and
Amended Complaint in an action entitled Michael L. McMullin,
et al. v. UST Inc., et al. (Case No.: 00-02790-CA), Circuit
Court, Fourth Judicial Circuit, Duval County, Florida. This
action was brought by an individual plaintiff and his spouse
against Registrant and two local retailers and seeks
compensatory damages and other relief in excess of $15,000 for
"cancer of the tongue, permanent cellular damages, genetic
changes in the tongue, mouth, and other cells, and other
injuries" allegedly sustained by Plaintiff as a result of his
use of Registrant's smokeless tobacco products. Registrant
intends to defend this action vigorously.
In Conwood Company, L.P. and Conwood Sales Company, L.P. v.
United States Tobacco Company, United States Tobacco Sales
and Marketing Company Inc., United States Manufacturing
Company Inc. and UST Inc. (Case No. 5:98CV-108-R), United
States District Court, Western District of Kentucky, Paducah
Division, on August 10, 2000, the district court, in
ruling on Registrant's post-trial motions, granted
Registrant's request that the appeal bond be set
substantially below the judgment amount. Under the court's
order, the bond requirement was set at $500 million. The
court, however, denied Registrant's motions to vacate or
reduce the judgment. Also, in response to Plaintiffs' motion
for a permanent injunction, the court has granted certain
injunctive relief which will not become effective until
September 1, 2000, prior to which Registrant will seek a
further stay during the pendency of any appeal. Registrant
will promptly appeal the district court's decision to the
United States Court of Appeals for the Sixth Circuit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10. Employment Agreement dated as of June 27, 2000 for
Robert E. Barrett, a former Executive Officer.
27. Financial Data Schedule
(b) Reports on Form 8-K
On June 22, 2000, Registrant filed a Current Report
on Form 8-K which reported Registrant's entering into
commitment arrangements for financing to satisfy any
bonding requirements that may be imposed by the court
in the pending antitrust litigation involving
Registrant's smokeless tobacco subsidiary.
(14)
<PAGE> 16
SIGNATURE
Pursuant to the requirements 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.
(Registrant)
Date August 11, 2000 /s/ Robert T. D'Alessandro
--------------- ----------------------------------
Robert T. D'Alessandro
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
(15)
