-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, WCSLHlmGNZ3x/JRKNiWCE6S6NDf6Q4jNDaShGxBNfrYiRHGvdT9RIclaTxr2qiMp 9RHX71SAUqdY1P/WAeYfrw== 0000950123-95-000411.txt : 19950609 0000950123-95-000411.hdr.sgml : 19950609 ACCESSION NUMBER: 0000950123-95-000411 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950303 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UST INC CENTRAL INDEX KEY: 0000811669 STANDARD INDUSTRIAL CLASSIFICATION: TOBACCO PRODUCTS [2100] IRS NUMBER: 061193986 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-17506 FILM NUMBER: 95518191 BUSINESS ADDRESS: STREET 1: 100 W PUTNAM AVE CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036611100 MAIL ADDRESS: STREET 1: 100 W PUTNAM AVE CITY: GREENWICH STATE: CT ZIP: 06830 10-K405 1 FORM 10-K UST INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K --------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-17506 UST INC. (Exact name of registrant as specified in its charter) DELAWARE 06-1193986 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 WEST PUTNAM AVENUE, GREENWICH, CONNECTICUT 06830 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 661-1100 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ COMMON STOCK -- $.50 PAR VALUE NEW YORK STOCK EXCHANGE PACIFIC STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ---------------- (TITLE OF CLASS) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] AS OF FEBRUARY 15, 1995, THE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON STOCK, $.50 PAR VALUE, HELD BY NON-AFFILIATES OF REGISTRANT (WHICH FOR THIS PURPOSE DOES NOT INCLUDE DIRECTORS OR OFFICERS) WAS $5,720,449,710. AS OF FEBRUARY 15, 1995, THERE WERE 195,940,336 SHARES OF REGISTRANT'S COMMON STOCK, $.50 PAR VALUE, OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE CERTAIN SECTIONS OF UST ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 AND FILED AS AN EXHIBIT AS REQUIRED BY ITEM 601(B)(13) OF REGULATION S-K .............................. PARTS I & II CERTAIN PAGES OF UST 1995 NOTICE OF ANNUAL MEETING AND PROXY STATEMENT ................................................. PART III - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1 -- BUSINESS GENERAL UST Inc. was formed on December 23, 1986 as a Delaware corporation. Pursuant to a reorganization approved by stockholders at the 1987 Annual Meeting, United States Tobacco Company (originally incorporated in 1911) became a wholly owned subsidiary of UST Inc. on May 5, 1987. UST Inc., through its subsidiaries (collectively "Registrant" unless the context otherwise requires), is engaged in manufacturing and marketing consumer products in the following industry segments: Tobacco Products: Registrant's primary activities are manufacturing and marketing smokeless tobacco (snuff and chewing tobacco) and marketing other tobacco products. Wine: Registrant produces and markets wine. Other: The international and video entertainment operations as well as certain miscellaneous businesses are included in this segment. Registrant also produces or imports and markets certain other products such as smokers' accessories and operates certain commercial agricultural properties. INDUSTRY SEGMENT DATA Registrant hereby incorporates by reference the Consolidated Industry Segment Data pertaining to the years 1992 through 1994 set forth on page 32 of its Annual Report to stockholders for the fiscal year ended December 31, 1994 ("Annual Report"), which page is included as Exhibit 13.1. 1 3 TOBACCO PRODUCTS PRINCIPAL PRODUCTS Registrant's principal smokeless tobacco products and brand names are as follows: Moist -- COPENHAGEN, SKOAL LONG CUT, SKOAL, SKOAL BANDITS Dry -- BRUTON, CC, RED SEAL Chewing -- WB CUT It has been claimed that the use of tobacco products may be harmful to health. To the best of Registrant's knowledge, unresolved controversy continues to exist among scientists concerning the claims made about tobacco and health. In 1986, federal legislation was enacted regulating smokeless tobacco products by, inter alia, requiring health warning notices on smokeless tobacco packages and advertising and prohibiting the advertising of smokeless tobacco products on electronic media. A federal excise tax was imposed in 1986, which was increased in 1991 and 1993. The Health Security Act announced by the Clinton Administration in 1993 sought, inter alia, a significant federal excise tax increase on moist smokeless and other tobacco products. Also, in recent years, proposals have been made at the federal level for additional regulation of tobacco products including, inter alia, the requirement of additional warning notices, the disallowance of advertising and promotion expenses as deductions under federal tax law, a significant increase of federal excise taxes, a ban or further restriction of all advertising and promotion, regulation of environmental tobacco smoke and increased regulation of the manufacturing and marketing of tobacco products by new or existing federal agencies. Substantially similar proposals will likely be considered in 1995. In recent years, various state and local governments continued the regulation of tobacco products, including, inter alia, the imposition of significantly higher taxes, sampling and advertising bans or restrictions, regulation of environmental tobacco smoke and anti-tobacco advertising campaigns. Additional state and local legislative and regulatory actions will likely be considered in 1995. Registrant is unable to assess the future effects these various actions may have on its tobacco business. RAW MATERIALS Except as noted below, raw materials essential to Registrant's business are generally purchased in domestic markets under competitive conditions. In 1994, Registrant increased its purchases of dark fired, burley and dark air cured tobaccos ("tobacco") primarily from domestic sources. In 1994 purchases from foreign suppliers declined, and continued to decline as a percentage of total tobacco purchased. Such foreign suppliers were located in Canada and Italy. Various factors, including a failure of domestic tobacco production to continue to increase, may require Registrant to purchase additional amounts of tobacco from foreign sources in order to meet future requirements. Tobaccos used in the manufacture of smokeless tobacco products must be processed and aged by Registrant for a period of two to four years prior to their use. Registrant or its suppliers purchase certain flavoring components used in Registrant's tobacco products from foreign sources. At the present time, Registrant has no reason to believe that its future raw material requirements for its tobacco products will not be satisfied. However, the continuing availability and the cost of tobacco from both domestic and foreign sources is dependent upon a variety of factors which cannot be predicted, including weather, growing conditions, disease, local planting decisions, overall market demands and other factors. WORKING CAPITAL The principal portion of Registrant's operating cash requirements relates to its need to maintain significant inventories of leaf tobacco, primarily for manufacturing of smokeless tobacco products, and its need to age and cure certain of these tobaccos for periods of up to four years prior to use. 2 4 CUSTOMERS Registrant markets tobacco products throughout the United States principally to chain stores and tobacco and grocery wholesalers. Approximately 31% of Registrant's gross sales of tobacco products are made to five customers, one of which accounts for more than 10% of Registrant's consolidated revenue. Registrant has maintained satisfactory relationships with these customers for many years. COMPETITIVE CONDITIONS The tobacco manufacturing industry in the United States is composed of at least four domestic companies larger than Registrant and many smaller ones. The larger companies concentrate on the manufacture and marketing of cigarettes; one also manufactures and markets smokeless tobacco products. Registrant is a well established and major factor in the smokeless tobacco sector of the overall tobacco market. Consequently, Registrant competes actively with both larger and smaller companies in the marketing of its tobacco products. Registrant's principal methods of competition in the marketing of its tobacco products include quality, advertising, promotion, sampling, price, product recognition and distribution. WINE Registrant is an established producer of premium varietal and blended wines. CHATEAU STE. MICHELLE and COLUMBIA CREST varietal table wines and DOMAINE STE. MICHELLE sparkling wine are produced by Registrant in the state of Washington and marketed throughout the United States. Registrant also produces and markets two California premium wines under the labels of VILLA MT. EDEN and CONN CREEK. Approximately 49% of Registrant's wine sales are made to nine distributors, no one of which accounts for more than 22% of total wine sales. Substantially all wines are sold through state-licensed distributors with whom Registrant maintains satisfactory relationships. It has been claimed that the use of alcohol beverages may be harmful to health. To the best of Registrant's knowledge, unresolved controversy continues to exist among scientists concerning the claims made about alcohol beverages and health. In 1988, federal legislation was enacted regulating alcohol beverages by requiring health warning notices on alcohol beverages. Effective in 1991, the federal excise tax on wine was increased from $.17 a gallon to $1.07 a gallon for those manufacturers that produce more than 250,000 gallons a year, such as Registrant. In recent years at the federal level, proposals were made for additional regulation of alcohol beverages including, inter alia, an excise tax increase, modification of the required health warning notices and the regulation of labeling, advertising and packaging. Substantially similar proposals will likely be considered in 1995. Also in recent years, increased regulation of alcohol beverages by various states included, inter alia, the imposition of higher taxes, the requirement of health warning notices and the regulation of advertising and packaging. Additional state and local legislative and regulatory actions affecting the marketing of alcohol beverages will likely be considered during 1995. Registrant is unable to assess the future effects these regulatory and other actions may have on the sale of its wines. Registrant uses grapes harvested from its own vineyards, as well as grapes purchased from independent growers located primarily in Washington State. Grape harvest yields experienced by Registrant and throughout Washington State in 1994 continue to be adequate to meet requirements for premium varietal wines. From time to time adverse weather conditions have significantly affected grape harvests from Washington State. Should any vineyards be destroyed as a result of such conditions, new vineyards generally require five to six years to provide full yields. At the present time, Registrant has no reason to believe that its future raw material requirements for its wine products will not be satisfied. Registrant's principal competition comes from many larger, well-established national companies, as well as many smaller wine producers. Registrant's principal methods of competition include quality, price, consumer and trade wine tastings, competitive wine judging and advertising. Registrant is a minor factor in the total nationwide business of producing wines. Registrant concentrates its marketing efforts on premium varietal table wines and sparkling wines. The future of Registrant's wine business will be dependent on sales, price and volume growth for premium varietal wines, the success of new products and adequate grape harvest yields from Washington State. 3 5 OTHER Included in this segment for 1994 are the international operations, video entertainment business, pipes, smokers' accessories, agricultural properties and a majority interest in a company that develops and markets equipment used in filmmaking. None of the above, singly, constitutes a material portion of Registrant's operations. ADDITIONAL BUSINESS INFORMATION CUSTOMERS In 1994 sales to McLane Co. Inc., a national distributor, exceeded 10% of Registrant's consolidated revenue. ENVIRONMENTAL REGULATIONS Registrant does not believe that compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material effect upon the capital expenditures, earnings or competitive position of Registrant. NUMBER OF EMPLOYEES Registrant's average number of employees during 1994 was 3,817. TRADEMARKS Registrant markets consumer products under a large number of trademarks. All of the significant trademarks either have been registered or applications therefor are pending with the United States Patent and Trademark Office. SEASONAL BUSINESS No material portion of the business of any industry segment of Registrant is seasonal. ORDERS Backlog of orders is not a material factor in any industry segment of Registrant. 4 6 ITEM 2 -- PROPERTIES Set forth below is information concerning principal facilities and real properties of Registrant.
BUILDINGS IN APPROXIMATE LOCATION SQUARE FEET ACTIVITIES -------- ----------- ----------------------------------------- Headquarters: Greenwich, Connecticut........ 160,000 Executive, sales and general offices in several buildings. Tobacco Facilities: Nashville, Tennessee.......... 900,000 Office and manufacturing plants for moist and dry smokeless tobacco products, plastic injection molding operation for production of cans and lids, manufacturing engineering department, research and development laboratory and warehouse for distribution of various products. Hopkinsville, Kentucky........ 635,000 Office and plants and warehouses for tobacco leaf handling, processing and storage and for manufacture of dry flour for smokeless tobacco products. Franklin Park, Illinois....... 425,000 Office and manufacturing plant for moist smokeless tobacco products, fiberboard can operations and warehouse for distribution of various products. Wine Facilities: Paterson, Washington.......... 410,000 Winery, distribution and storage facility, office and retail shop. Woodinville, Washington....... 195,000 Winery, distribution and storage facility, executive and sales offices and retail shop. Roosevelt, Washington......... 70,000 Winery and storage facility.
LAND IN APPROXIMATE LOCATION ACRES ACTIVITIES -------- ----------- ----------------------------------------- Yakima, Benton and Island Counties, Washington......................... 3,351 Vineyards. Benton County, Washington............ 18,494 Other, including agricultural properties.
Such principal properties in Registrant's industry segments were utilized only in connection with Registrant's business operations. Registrant believes that the above properties at December 31, 1994 were suitable and adequate for the purposes for which they were used, and were operated at satisfactory levels of capacity. All principal properties are owned in fee by Registrant. 5 7 ITEM 3 -- LEGAL PROCEEDINGS Registrant has been named in certain litigation against the major cigarette companies and others seeking damages relating to the usage of cigarettes and, in certain of the complaints, "tobacco products", one of which contains several allegations relating to smokeless tobacco products, including: -- Norma R. Broin, et al. v. Philip Morris Companies, Inc. et al., Case No.: 91-49738 CA (22), Circuit Court, 11th Judicial Circuit, Dade County, Florida, served on or about January 17, 1992. Purported class action on behalf of flight attendants seeking $5 billion in punitive damages and unspecified compensatory damages as a result of exposure to environmental tobacco smoke on airplanes; on December 12, 1994, the Circuit Court entered an order granting certification of the class, which defendants have appealed. -- John G. Allman, et al. v. Philip Morris, Inc., et al., Case No.: 94-0504-IEG (CM), U.S. District Court, Southern District of California, served on or about April 6, 1994. Purported class action on behalf of persons who have smoked defendants' cigarettes, became "addicted" and purchased, or would be purchasing in the future, nicotine patches, seeking unspecified damages for various alleged violations including allegations of a conspiracy to withhold information about the claimed effects of cigarette smoking; the court has dismissed with prejudice the plaintiffs' complaint and the parties to this action have entered into a stipulation dismissing with prejudice plaintiffs' appeal of this decision. -- Diane Castano, et al. v. The American Tobacco Company, Inc., et al., Case No.: 94-1044 "B" (3), U.S. District Court, Eastern District of Louisiana, served on or about May 12, 1994. Purported class action on behalf of "nicotine dependent" persons who have smoked defendants' cigarettes, seeking unspecified damages as a result of defendants' alleged manipulation of the levels of nicotine in their cigarettes for the purpose of "addicting" consumers. On February 17, 1995, the Court entered an order granting certification of the class "only in regard to the liability issues of fraud, breach of warranty (express or implied), intentional tort, negligence, strict liability and consumer protection and punitive damages issues." The Court denied certification of the class in regard to the issues of injury-in-fact, proximate cause, reliance, affirmative defenses, compensatory damages and medical monitoring. -- McGraw v. The American Tobacco Company, et al., Civil Action No. 94-1707, Circuit Court of Kanawha County, West Virginia, served on or about November 1, 1994. Action purportedly on behalf of the State of West Virginia seeking unspecified damages and other relief as reimbursement for amounts allegedly spent by the state as a result of "tobacco-related injuries, diseases or sickness"; several allegations relate to smokeless tobacco products. Except for the Allman action which has been dismissed with prejudice, each of these actions is in varying stages of pretrial activities. Registrant believes that these pending litigation matters will not result in any material liability for a number of reasons, including the fact that Registrant has had only limited involvement with cigarettes and Registrant's current percentage of total tobacco industry sales is relatively small. Prior to 1986, Registrant manufactured some cigarette products which had a de minimis market share. From May 1, 1982 to August 1, 1994, Registrant distributed a small volume of imported cigarettes and is indemnified against claims relating to those products. Registrant also believes that these actions are without merit and intends to defend them vigorously. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 6 8 EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to instruction 3 to Item 401(b) of Regulation S-K, the name, office, age and business experience of each executive officer of Registrant as of February 15, 1995 is set forth below:
NAME OFFICE AGE - ---------------------------------------- ---------------------------------------------- --- Robert E. Barrett....................... Executive Vice President 56 John J. Bucchignano..................... Executive Vice President and Chief Financial Officer 47 Vincent A. Gierer, Jr................... Chairman of the Board, Chief Executive Officer and President 47 Harry W. Peter III...................... Executive Vice President 55 Joseph R. Taddeo........................ Executive Vice President 50 Richard H. Verheij...................... Senior Vice President and General Counsel 36
None of the executive officers of Registrant has any family relationship to any other executive officer or director of Registrant. After election, all executive officers serve until the next annual organization meeting of the Board of Directors and until their successors are elected and qualified. All of the executive officers of Registrant have been employed continuously by it for more than five years except for Mr. Barrett. Mr. Barrett has served as Executive Vice President since October 7, 1991. He also has served as President of UST Enterprises Inc. since July 1, 1991. Mr. Barrett served as Senior Vice President from January 1, 1991 to October 6, 1991, and served as a member of the Board of Directors from July 27, 1989 through December 13, 1990. Mr. Barrett served as President of Barrett Consultants, a public and government relations firm which he founded in 1980. Mr. Barrett has been employed by Registrant since January 1, 1991. Mr. Bucchignano has served as Executive Vice President and Chief Financial Officer since October 7, 1991. Mr. Bucchignano served as Senior Vice President and Controller from September 27, 1990 to October 6, 1991, and as Controller from August 1, 1987 to September 26, 1990. Mr. Bucchignano has been employed by Registrant since December 10, 1984. Mr. Gierer has served as Chairman of the Board and Chief Executive Officer since December 1, 1993 and has served as President since September 27, 1990. Mr. Gierer also served as Chief Operating Officer from September 27, 1990 to November 30, 1993 and as Executive Vice President and Chief Financial Officer from February 17, 1988 to September 26, 1990. Mr. Gierer has been employed by Registrant since March 16, 1978. Mr. Peter has served as Executive Vice President since October 29, 1990. He also has served as President of UST International Inc. since January 1, 1993. Mr. Peter served as Senior Vice President from July 27, 1989 to October 28, 1990 and as Vice President from June 23, 1988 to July 26, 1989. Mr. Peter has been employed by Registrant since February 1, 1988. Mr. Taddeo has served as Executive Vice President and President of United States Tobacco Company since September 27, 1990. Mr. Taddeo also served as Senior Vice President of United States Tobacco Company from June 23, 1988 to September 26, 1990. Mr. Taddeo has been employed by Registrant since March 29, 1982. Mr. Verheij has served as Senior Vice President and General Counsel since December 1, 1994. Mr. Verheij served as Senior Vice President and Associate General Counsel from April 4, 1994 to November 30, 1994, as Vice President and Associate General Counsel from December 17, 1992 to April 3, 1994, as Assistant General Counsel from January 1, 1991 to December 16, 1992 and as Senior Corporate Counsel from October 1, 1988 to December 31, 1990. Mr. Verheij has been employed by Registrant since November 24, 1986. 7 9 PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Registrant hereby incorporates by reference the information with respect to the market for its common stock, $.50 par value ("Common Stock"), and related security holder matters set forth on pages 30 and 31 of its Annual Report, which pages are included herein as Exhibit 13.2. Registrant's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange. As of February 15, 1995, there were approximately 13,065 stockholders of record of its Common Stock. ITEM 6 -- SELECTED FINANCIAL DATA Registrant hereby incorporates by reference the Consolidated Selected Financial Data set forth on pages 46 and 47 of its Annual Report, which pages are included herein as Exhibit 13.3. ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Registrant hereby incorporates by reference the Management's Discussion and Analysis of Results of Operations and Financial Condition set forth on pages 24-31 of its Annual Report, which pages are included herein as Exhibit 13.4. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Registrant hereby incorporates by reference the information contained in the financial statements, including the notes thereto set forth on pages 32-45 of its Annual Report, which pages are included herein as Exhibit 13.5. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Registrant hereby incorporates by reference the information with respect to the names, ages and business histories of the directors of Registrant which is contained in Table I and the accompanying text set forth under the caption "Election of Directors" in its Notice of 1995 Annual Meeting and Proxy Statement. Information concerning executive officers of Registrant is set forth above following Item 4 of this Report. ITEM 11 -- EXECUTIVE COMPENSATION Registrant hereby incorporates by reference the information with respect to executive compensation which is contained in Tables II through V (including the notes thereto) and the accompanying text set forth under the caption "Compensation of Executive Officers" in its Notice of 1995 Annual Meeting and Proxy Statement. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Registrant hereby incorporates by reference the information with respect to the security ownership of management which is contained in Table I and the accompanying text set forth under the caption "Election of Directors" in its Notice of 1995 Annual Meeting and Proxy Statement. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Registrant hereby incorporates by reference certain transactions with directors and information with respect to indebtedness of management which is contained in Table VI and the accompanying text set forth under the caption "Compensation of Executive Officers" in its Notice of 1995 Annual Meeting and Proxy Statement. 8 10 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: (3) The following exhibits are filed by Registrant pursuant to Item 601 of Regulation S-K: 3.1 -- Restated Certificate of Incorporation dated May 5, 1992, incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended March 31, 1992. 3.2 -- By-Laws adopted on December 23, 1986, incorporated by reference to Exhibit 3.2 to Form S-4 Registration Statement filed on March 20, 1987. 10.1* -- Employment Agreement dated October 1, 1990 between UST and Joseph R. Taddeo, an Executive Officer, incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1990. 10.2* -- Form of Employment Agreement dated October 20, 1986 between United States Tobacco Company (subsequently assumed by UST) and Vincent A. Gierer, Jr., an Executive Officer, incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1986. 10.3* -- Employment Agreement dated December 1, 1993 between UST and John J. Bucchignano, an Executive Officer, incorporated by reference to Exhibit 10.3 to Form 10-K for the fiscal year ended December 31, 1993. 10.4* -- Form of Severance Agreement dated October 27, 1986 between United States Tobacco Company (subsequently assumed by UST) and nonexecutive officers, incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1990. 10.5* -- 1982 Stock Option Plan restated as of March 22, 1989, incorporated by reference to Exhibit 4.1 to Form S-8 Registration Statement filed on April 14, 1989. 10.6* -- 1992 Stock Option Plan, effective as of May 5, 1992, incorporated by reference to Appendix A to the UST 1992 Notice of Annual Meeting and Proxy Statement dated March 27, 1992. 10.7* -- Incentive Compensation Plan, as restated as of January 1, 1994, incorporated by reference to Exhibit 10.7 for Form 10-K for the fiscal year ended December 31, 1993. 10.8* -- Officers' Supplemental Retirement Plan, as restated as of December 1, 1992, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1992. 10.9 -- Nonemployee Directors' Retirement Plan, effective as of January 1, 1988, incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended December 31, 1992. 10.10 -- Directors' Supplemental Medical Plan, amended and restated as of February 16, 1995. 13.1 -- Industry Segment Data pertaining to the years 1992 through 1994. 13.2 -- Market for Registrant's Common Equity and Related Stockholder Matters. 13.3 -- Selected Financial Data. 13.4 -- Management's Discussion and Analysis of Financial Condition and Results of Operations. 13.5 -- Financial Statements and Supplementary Data.
9 11 ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K -- (CONTINUED) 21.1 -- Subsidiaries of UST. 23.1 -- Consent of Independent Auditors. 27.1 -- Financial Data Schedule.
(b) No current reports on Form 8-K were filed during the fourth quarter of Registrant's most recent fiscal year. * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of the rules governing the preparation of this Report. 10 12 SIGNATURE PAGE PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. UST Inc. Date: February 16, 1995 By: VINCENT A. GIERER, JR. ---------------------------------- VINCENT A. GIERER, JR. CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Chairman of the Board, Chief Executive Officer and President (Principal February 16, 1995 Executive Officer) VINCENT A. GIERER, JR. ------------------------------------------- VINCENT A. GIERER, JR. Executive Vice President and Chief Financial Officer (Principal Financial February 16, 1995 Officer) JOHN J. BUCCHIGNANO ------------------------------------------- JOHN J. BUCCHIGNANO Controller (Principal Accounting February 16, 1995 Officer) ROBERT T. D'ALESSANDRO ------------------------------------------- ROBERT T. D'ALESSANDRO February 16, 1995 Chairman Emeritus LOUIS F. BANTLE ------------------------------------------- LOUIS F. BANTLE February 16, 1995 Director JOHN J. BUCCHIGNANO ------------------------------------------- JOHN J. BUCCHIGNANO February 16, 1995 Director JAMES W. CHAPIN ------------------------------------------- JAMES W. CHAPIN February 16, 1995 Director EDWARD H. DEHORITY, JR. ------------------------------------------- EDWARD H. DEHORITY, JR. February 16, 1995 Chairman of the Board VINCENT A. GIERER, JR. ------------------------------------------- VINCENT A. GIERER, JR. February 16, 1995 Director P.X. KELLEY ------------------------------------------- P.X. KELLEY February 16, 1995 Director ALBERT H. LEADER ------------------------------------------- ALBERT H. LEADER February 16, 1995 Director RALPH L. ROSSI ------------------------------------------- RALPH L. ROSSI February 16, 1995 Director SPENCER R. STUART ------------------------------------------- SPENCER R. STUART February 16, 1995 Director JOSEPH R. TADDEO ------------------------------------------- JOSEPH R. TADDEO February 16, 1995 Director JOHN P. WARWICK ------------------------------------------- JOHN P. WARWICK
11 13 EXHIBIT INDEX 3.1 -- Restated Certificate of Incorporation dated May 5, 1992, incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended March 31, 1992. 3.2 -- By-Laws adopted on December 23, 1986, incorporated by reference to Exhibit 3.2 to Form S-4 Registration Statement filed on March 20, 1987. 10.1* -- Employment Agreement dated October 1, 1990 between UST and Joseph R. Taddeo, an Executive Officer, incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1990. 10.2* -- Form of Employment Agreement dated October 20, 1986 between United States Tobacco Company (subsequently assumed by UST) and Vincent A. Gierer, Jr., an Executive Officer, incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1986. 10.3* -- Employment Agreement dated December 1, 1993 between UST and John J. Bucchignano, an Executive Officer, incorporated by reference to Exhibit 10.3 to Form 10-K for the fiscal year ended December 31, 1993. 10.4* -- Form of Severance Agreement dated October 27, 1986 between United States Tobacco Company (subsequently assumed by UST) and nonexecutive officers, incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1990. 10.5* -- 1982 Stock Option Plan restated as of March 22, 1989, incorporated by reference to Exhibit 4.1 to Form S-8 Registration Statement filed on April 14, 1989. 10.6* -- 1992 Stock Option Plan, effective as of May 5, 1992, incorporated by reference to Appendix A to the UST 1992 Notice of Annual Meeting and Proxy Statement dated March 27, 1992. 10.7* -- Incentive Compensation Plan, as restated as of January 1, 1994, incorporated by reference to Exhibit 10.7 for Form 10-K for the fiscal year ended December 31, 1993. 10.8* -- Officers' Supplemental Retirement Plan, as restated as of December 1, 1992, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1992. 10.9 -- Nonemployee Directors' Retirement Plan, effective as of January 1, 1988, incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended December 31, 1992. 10.10 -- Directors' Supplemental Medical Plan amended and restated as of February 16, 1995. 13.1 -- Industry Segment Data pertaining to the years 1992 through 1994. 13.2 -- Market for Registrant's Common Equity and Related Stockholder Matters. 13.3 -- Selected Financial Data. 13.4 -- Management's Discussion and Analysis of Financial Condition and Results of Operations. 13.5 -- Financial Statements and Supplementary Data. 21.1 -- Subsidiaries of UST. 23.1 -- Consent of Independent Auditors. 27.1 -- Financial Data Schedule.
* 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. EX-10.10 2 DIRECTORS' SUPPLEMENTAL MEDICAL PLAN 1 EXHIBIT 10.10 UST INC. DIRECTORS' SUPPLEMENTAL MEDICAL PLAN 1. Purpose; Applicability. The purpose of the Plan is to provide supplemental medical benefits to nonemployee members of the Board of Directors of UST Inc. (the "Company"). The Plan was adopted as of January 1, 1994 and amended and restated to add a new Section 3 as of February 16, 1995. The Plan shall be applicable to all current or future directors of the Company, other than directors who are employees or former employees of the Company or its subsidiaries, whether direct or indirect ("Eligible Directors"). Neither the spouse of an Eligible Director nor any other member of an Eligible Director's family shall be eligible for coverage under the Plan. 2. Benefits. The Company, or any third party administrator appointed by the Company, shall reimburse each Eligible Director for the reasonable, medically related expenses incurred by such Director for deductibles, coinsurance, co-pays, prescription drugs, physician charges, medically related charges, annual physicals, professional nursing care, medically related transportation and lodging, special health equipment, vision care, eyeglasses, contact lenses and hearing aids ("Covered Expenses"); provided, however, that (i) the amount of Covered Expenses incurred in any calendar year for which an Eligible Director may be reimbursed shall not exceed $7,500, and (ii) Covered Expenses shall not include cosmetic surgery, insurance premiums, hot tubs (etc.), care not approved by a physician, act of war, free services, or claims covered by any other health plan. 3. Continuing Coverage. Coverage under the Plan shall continue after an Eligible Director's service as a director ceases for any reason, for the same number of months as the number of full months that the Eligible Director shall have served as a director; provided, however, that in the event an Eligible Director dies before the end of the period in which payments are to be made, coverage shall cease as of the last day of the month in which occurs the death of such Director. 4. Administration. The Company, or any third party administrator appointed by the Company, may establish such reasonable rules and conditions for the submission and reimbursement of claims as it shall in its discretion determine. 5. No Right of Service. Nothing contained in this Plan shall give any Director the right to remain as a director. 6. Nontransferability. No amounts payable under the Plan shall be transferable by the Eligible Director. 7. Amendments to Plan. The Board of Directors of the Company may, by its duly taken action, at any time terminate or from time to time modify or suspend the Plan, in whole or in part, except that termination, modification or suspension of the Plan shall not, without the consent of the affected Eligible Directors, adversely affect any right of any such Director to receive benefits that have previously accrued. 8. Governing Law. The Plan shall be governed and construed in accordance with the laws of the State of Delaware. EX-13.1 3 INDUSTRY SEGMENT DATA 1992-1994 1 EXHIBIT 13.1 UST CONSOLIDATED INDUSTRY SEGMENT DATA (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ---------------------------------------- 1994 1993 1992 ---------- ---------- ---------- NET SALES TO UNAFFILIATED CUSTOMERS Tobacco Smokeless tobacco.................................... $1,045,546 $ 930,465 $ 832,929 Other tobacco products............................... 12,715 21,124 51,048 ---------- ---------- ---------- 1,058,261 951,589 883,977 Wine................................................... 89,170 80,205 70,458 Other.................................................. 78,737 81,489 87,603 Elimination of intersegment sales...................... (3,152) (2,880) (2,663) ---------- ---------- ---------- NET SALES.................................... $1,223,016 $1,110,403 $1,039,375 ========= ========= ========= OPERATING PROFIT Tobacco................................................ $653,695 $572,062 $508,775 Wine................................................... 8,832 6,126 4,770 Other.................................................. 1,485 9,228 9,630 ---------- ---------- ---------- OPERATING PROFIT............................. 664,012 587,416 523,175 Corporate expenses................................... (23,284) (22,664) (22,412) Interest (expense) income, net....................... (92) 2,004 1,866 Gain on disposal of product line..................... -- 35,029 -- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES............... $640,636 $601,785 $502,629 ========= ========= ========= IDENTIFIABLE ASSETS AT DECEMBER 31 Tobacco.............................................. $414,888 $394,805 $371,560 Wine................................................. 164,950 167,157 150,527 Other................................................ 88,529 95,674 91,620 Corporate............................................ 72,869 48,559 60,258 ---------- ---------- ---------- $741,236 $706,195 $673,965 ========= ========= ========= CAPITAL EXPENDITURES (DISPOSITIONS), NET Tobacco.............................................. $14,407 $38,797 $19,438 Wine................................................. 9,253 9,354 8,604 Other................................................ (536) 3,648 732 Corporate............................................ 560 2,711 1,279 ---------- ---------- ---------- $23,684 $54,510 $30,053 ========= ========= ========= DEPRECIATION Tobacco.............................................. $18,307 $17,069 $15,158 Wine................................................. 6,562 5,877 5,265 Other................................................ 1,834 2,027 2,287 Corporate............................................ 707 933 855 ---------- ---------- ---------- $27,410 $25,906 $23,565 ========= ========= =========
EX-13.2 4 MARKET FOR REGISTRANT'S COMMON EQUITY & ETC. 1 EXHIBIT 13.2 UST DIVIDENDS AND STOCK PRICES CASH DIVIDENDS The Company increased its 1994 cash dividend by 16.7 percent to an annual rate of $1.12 per share. Since 1991, the dividend rate has increased 69.7 percent reflecting an average annual increase of 19.3 percent. Total cash dividends paid by the Company in 1994 were $225.7 million or 58.2 percent of net earnings. Cash dividends paid to stockholders have exceeded 50 percent of net earnings in each of the last three years. In December 1994, the Board of Directors approved a first quarter 1995 dividend of 32 1/2 cents per share. This equates to an indicated annual rate of $1.30, and represents an increase of 16.1 percent. The Company has paid cash dividends without interruption since 1912. Future dividends depend on many factors, including internal estimates of future performance and the Company's need for funds. STOCK PRICES UST shares are traded on the New York Stock Exchange and the Pacific Stock Exchange, ticker symbol -- UST. The number of stockholders of record at December 31, 1994 was 13,116. The following table sets forth dividends paid per share and the high and low market prices for the year and each quarter of 1994 and 1993.
MARKET PRICE CASH PER COMMON SHARE DIVIDENDS ---------------- PAID HIGH LOW --------- ----- ----- 1st Quarter 1994........................................ $ .28 $29 5/8 $24 3/8 1993........................................ .24 32 3/4 24 3/4 2nd Quarter 1994........................................ .28 28 1/2 23 5/8 1993........................................ .24 30 7/8 25 7/8 3rd Quarter 1994........................................ .28 31 1/2 27 1/4 1993........................................ .24 29 7/8 26 1/4 4th Quarter 1994........................................ .28 29 3/8 26 1993........................................ .24 31 3/8 24 3/8 Year 1994........................................ 1.12 31 1/2 23 5/8 1993........................................ .96 32 3/4 24 3/8
EX-13.3 5 SELECTED FINANCIAL DATA 1 EXHIBIT 13.3 UST CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 --------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 ---------- ---------- ---------- -------- -------- -------- SUMMARY OF OPERATIONS Net sales............................. $1,223,016 $1,110,403 $1,039,375 $904,427 $761,741 $679,322 Cost of products sold................. 251,944 246,445 256,796 227,546 191,824 185,464 Selling, advertising and administrative expenses............. 330,344 299,206 281,816 253,076 220,927 195,433 ---------- ---------- ---------- -------- -------- -------- Operating income...................... 640,728 564,752 500,763 423,805 348,990 298,425 Other (expense) income: Interest (expense) income, net...... (92) 2,004 1,866 2,279 3,203 3,190 Gain on disposal of product line.... -- 35,029 -- -- -- -- ---------- ---------- ---------- -------- -------- -------- Earnings before income taxes and cumulative effect of accounting changes............................. 640,636 601,785 502,629 426,084 352,193 301,615 ---------- ---------- ---------- -------- -------- -------- Income taxes.......................... 253,110 232,893 190,071 160,179 128,918 111,128 ---------- ---------- ---------- -------- -------- -------- Earnings before cumulative effect of accounting changes.................. 387,526 368,892 312,558 265,905 223,275 190,487 Cumulative effect of accounting changes (net of income tax benefit)............................ -- 19,846 -- -- -- -- ---------- ---------- ---------- -------- -------- -------- Net earnings.......................... $ 387,526 $ 349,046 $ 312,558 $265,905 $223,275 $190,487 ========== ========== ========== ========= ========= ========= PER SHARE DATA Primary earnings per common share before cumulative effect of accounting changes.................. $1.87 $1.71 $1.41 $1.18 $.98 $.82 Primary earnings per common share..... 1.87 1.62 1.41 1.18 .98 .82 Dividends per common share............ 1.12 .96 .80 .66 .55 .46 Market price per common share: High................................ 31 1/2 32 3/4 35 3/8 33 7/8 18 1/4 15 3/8 Low................................. 23 5/8 24 3/8 25 3/8 16 3/8 12 3/8 9 5/8 FINANCIAL CONDITION Current assets........................ $381,937 $334,996 $330,208 $305,430 $265,854 $275,954 Current liabilities................... 160,755 106,642 81,208 95,455 68,660 66,643 Working capital....................... 221,182 228,354 249,000 209,975 197,194 209,311 Ratio of current assets to current liabilities......................... 2.4:1 3.1:1 4.1:1 3.2:1 3.9:1 4.1:1 Total assets.......................... 741,236 706,195 673,965 656,513 622,595 630,155 Long-term debt........................ 125,000 40,000 -- -- 3,060 6,789 Deferred taxes........................ 5,065 7,955 46,358 50,928 53,301 55,108 Stockholders' equity.................. 361,669 462,972 516,606 482,875 473,873 482,254 OTHER DATA Common stock repurchased.............. $298,843 $236,704 $212,581 $184,424 $151,259 $97,517 Dividends paid on common shares....... $225,715 $199,725 $167,951 $139,670 $118,295 $101,197 Dividends paid as a percentage of net earnings............................ 58.2% 57.2% 53.7% 52.5% 53.0% 53.1% Return on net sales................... 31.7% 31.4% 30.1% 29.4% 29.3% 28.0% Return on average assets.............. 53.5% 50.6% 47.0% 41.6% 35.6% 31.0% Return on average stockholders' equity.............................. 94.0% 71.3% 62.5% 55.6% 46.7% 40.7% Percent of long-term debt to stockholders' equity................ 34.6% 8.6% -- -- .6% 1.4% Average number of common shares (in thousands) -- primary............... 207,504 215,719 222,033 225,130 227,667 233,305
- --------------- See Management's Discussion and Analysis. All share data have been adjusted to reflect the two-for-one stock splits distributed on January 27, 1992, 1989 and 1987. 2 UST CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ---------------------------------------------------- 1988 1987 1986 1985 1984 -------- -------- -------- -------- -------- SUMMARY OF OPERATIONS Net sales........................................... $615,614 $573,298 $516,031 $478,347 $442,367 Cost of products sold............................... 174,560 168,942 158,719 156,783 156,000 Selling, advertising and administrative expenses.......................................... 180,839 166,957 157,038 144,442 121,314 -------- -------- -------- -------- -------- Operating income.................................... 260,215 237,399 200,274 177,122 165,053 Other (expense) income: Interest (expense) income, net.................... 1,068 (2,768) (5,534) (5,898) (5,147) Gain on disposal of product line.................. -- -- -- -- -- -------- -------- -------- -------- -------- Earnings before income taxes and cumulative effect of accounting changes........... 261,283 234,631 194,740 171,224 159,906 -------- -------- -------- -------- -------- Income taxes........................................ 99,133 103,760 90,802 77,695 76,179 -------- -------- -------- -------- -------- Earnings before cumulative effect of accounting changes................................ 162,150 130,871 103,938 93,529 83,727 Cumulative effect of accounting changes (net of income tax benefit)....................... -- -- -- -- -- -------- -------- -------- -------- -------- Net earnings........................................ $162,150 $130,871 $103,938 $ 93,529 $ 83,727 ========= ========= ========= ========= ========= PER SHARE DATA Primary earnings per common share before cumulative effect of accounting changes........... $.70 $.56 $.46 $.41 $.36 Primary earnings per common share................... .70 .56 .46 .41 .36 Dividends per common share.......................... .37 .30 .24 1/4 .21 1/2 .18 Market price per common share: High.............................................. 10 1/2 8 5 5/8 4 7/8 5 3/8 Low............................................... 6 4 7/8 3 3/4 3 5/8 3 7/8 FINANCIAL CONDITION Current assets...................................... $291,006 $260,530 $250,460 $222,378 $183,927 Current liabilities................................. 69,935 63,242 60,895 55,732 65,077 Working capital..................................... 221,071 197,288 189,565 166,646 118,850 Ratio of current assets to current liabilities...... 4.2:1 4.1:1 4.1:1 4.0:1 2.8:1 Total assets........................................ 597,955 548,951 523,927 468,125 408,465 Long-term debt...................................... 21,828 37,131 47,061 57,039 35,999 Deferred taxes...................................... 52,939 47,465 44,412 31,978 26,298 Stockholders' equity................................ 453,253 401,113 371,559 323,376 281,091 OTHER DATA Common stock repurchased............................ $67,356 $50,865 $9,907 $16,288 $30,310 Dividends paid on common shares..................... $81,672 $66,789 $54,744 $47,835 $40,494 Dividends paid as a percentage of net earnings.......................................... 50.4% 51.0% 52.7% 51.1% 48.4% Return on net sales................................. 26.3% 22.8% 20.1% 19.6% 18.9% Return on average assets............................ 28.3% 24.4% 21.0% 21.3% 21.4% Return on average stockholders' equity.............. 38.0% 33.9% 29.9% 30.9% 30.9% Percent of long-term debt to stockholders' equity............................................ 4.8% 9.3% 12.7% 17.6% 12.8% Average number of common shares (in thousands) -- primary............................. 230,417 232,370 227,142 228,350 234,140
EX-13.4 6 MANAGEMENT'S DISCUSSION AND ANALYSIS 1 EXHIBIT 13.4 UST MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS CONSOLIDATED RESULTS 1994 compared with 1993 Consolidated net sales rose to $1.22 billion, a 10.1 percent increase over 1993. Tobacco segment sales increased 11.2 percent, and accounted for 94.7 percent of the $112.6 million sales increase. The Wine segment also contributed to the overall sales gain, posting an 11.2 percent increase. Other segment sales were lower due to the absence of Zig-Zag cigarette papers and related products resulting from the sale of its distribution rights on March 31, 1993, partially offset by increased sales in the entertainment business. Over the last three years, net sales have increased 35.2 percent at an average annual rate of 10.6 percent. Cost of products sold increased 2.2 percent to $251.9 million. Cost of products sold for the Tobacco segment was slightly higher, as higher unit costs and increased unit volume for moist smokeless tobacco were offset by lower costs for other tobacco products resulting from significant volume declines. Wine segment costs were higher due to volume gains which were partially offset by lower unit costs. Costs for the Other segment were lower primarily due to the absence of cigarette papers and lower Canadian excise taxes, partially offset by increased costs due to volume gains for the entertainment business. Gross profit increased $107.1 million, or 12.4 percent over 1993 primarily due to higher selling prices and increased unit volume for moist smokeless tobacco. The gross profit percentage rose to 79.4 percent mainly due to the favorable results for moist smokeless tobacco and volume declines for lower margin products. The gross profit percentage has increased 4.6 percentage points over the last three years. Selling, advertising and administrative expenses rose 10.4 percent to $330.3 million. Selling and advertising expenses increased for the Tobacco and Other segments and remained stable in the Wine segment. Administrative and other expenses were generally higher due to increases in salary and related costs, increased spending associated with addressing legal and regulatory issues, the early adoption of Statement of Financial Accounting Standards (SFAS) No. 116, "Accounting for Contributions Received and Contributions Made" and reserves recorded for nonstrategic assets. The Company incurred net interest expense as a result of interest expense on short-term borrowings and long-term debt exceeding income from cash equivalent investments. The comparison of earnings per share for the year 1994 as compared to 1993, was adversely affected by 3 cents due to several events which occurred in 1993. On March 31, 1993, the Company sold its distribution rights for Zig-Zag cigarette papers and related products which resulted in an after-tax gain of $22 million or 10 cents per share. In addition, operating results for the year of 1994 do not include Zig-Zag and related products amounting to 2 cents per share. Also in 1993, the Company adopted SFAS No. 106 and SFAS No. 109, which reduced primary earnings per share by 9 cents. Pretax profit margins decreased slightly to 52.4 percent on earnings before income taxes of $640.6 million. Over the last three years, earnings before income taxes have increased 50.4 percent at an average annual rate of 14.7 percent, while pretax margins have averaged 51.7 percent. The overall tax rate for 1994 increased slightly. Net earnings increased for the 34th consecutive year rising 11 percent to $387.5 million. Primary earnings per share rose to $1.87, a 15.4 percent increase over 1993. Primary earnings per share have increased 58.5 percent over the last three years at an average annual rate of 16.6 percent. 1993 compared with 1992 Consolidated net sales rose 6.8 percent to $1.11 billion. 2 The Tobacco segment accounted for 95.2 percent of the $71 million sales increase. The Wine segment also contributed to the overall sales gain, posting a 13.8 percent increase. Other segment sales were lower due to the absence of Zig-Zag cigarette papers and related products resulting from the sale of its distribution rights on March 31, 1993. Cost of products sold decreased 4 percent to $246.4 million. Cost of products sold for the Tobacco segment was lower due to significant volume declines for other tobacco products which was partially offset by higher unit costs and increased unit volume for moist smokeless tobacco. Costs for the Other segment were lower primarily due to the absence of cigarette papers, while Wine segment unit costs were higher. Gross profit increased $81.4 million, or 10.4 percent over 1992, primarily due to higher selling prices and increased unit volume for moist smokeless tobacco. The gross profit percentage rose to 77.8 percent, mainly due to favorable results for moist smokeless tobacco and volume declines for lower margin products. Selling, advertising and administrative expenses rose 6.2 percent to $299.2 million. Selling and advertising expenses increased for all segments. Administrative and other expenses were generally lower, with increases in salary and related costs being offset by lower spending in other areas and gains recorded on the sale of corporate investments. Operating income increased 12.8 percent in 1993 to $564.8 million. Net interest income resulted as income from cash equivalent investments exceeded interest expense. Results for 1993, as compared to 1992, were affected by several events. The Company sold its distribution rights for Zig-Zag cigarette papers and related products on March 31, 1993 for $39 million in cash and additional consideration based on future earnings for the next ten years. This transaction resulted in an after-tax gain of $22 million, amounting to 10 cents per share. The absence of these products in operating results for the remainder of 1993 reduced primary earnings per share by 2 cents. In addition, the "Omnibus Budget Reconciliation Act," which increased the statutory corporate federal income tax rate to 35 percent retroactive to January 1, 1993, reduced primary earnings per share by 3 cents for the year. Also in 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 109, "Accounting for Income Taxes." As a result of adopting SFAS No. 106 the Company recorded a one-time charge to net earnings of $32.7 million. The adoption of SFAS No. 109 resulted in an increase in net earnings of $12.8 million. The cumulative effect of these accounting changes reduced primary earnings per share by 9 cents. Profit margins rose to 54.2 percent on earnings before income taxes and the cumulative effect of accounting changes of $601.8 million. The overall tax rate for 1993 increased due to the higher statutory corporate federal income tax rate. Net earnings increased 11.7 percent to $349 million. Primary earnings per share before the cumulative effect of accounting changes rose to $1.71, a 21.3 percent increase over 1992. Primary earnings per share, after the cumulative effect of accounting changes, rose to $1.62, a 14.9 percent increase over 1992. TOBACCO SEGMENT 1994 compared with 1993 Tobacco segment sales increased 11.2 percent to $1.06 billion and accounted for 86.5 percent of consolidated revenues. Smokeless tobacco sales increased 12.4 percent to $1.05 billion, representing 85.5 percent of consolidated sales. Other tobacco product sales decreased significantly due to volume declines. The increase in smokeless tobacco sales resulted from higher selling prices and unit volume gains for moist smokeless tobacco. Domestic unit volume for moist smokeless tobacco products increased 2.6 percent in 1994 to 627.4 million cans, as compared with the similar period for 1993. Fourth quarter unit volume increased 4.1 percent to 158.2 million cans, compared with the similar 1993 period. The unit volume 3 comparison for the fourth quarter of 1994 to the similar period in the prior year was favorably affected by distributor inventory build-up in December. Cost of sales for the Tobacco segment was slightly higher, as higher unit costs and increased unit volume for moist smokeless tobacco were offset by lower costs due to significant volume declines for other tobacco products. Moist smokeless tobacco unit costs increased slightly due to higher leaf tobacco costs and overhead expenses. Gross profit for the segment rose substantially during 1994. Higher selling prices and unit volume gains for moist smokeless tobacco were the primary reasons for the increase. Selling expenses increased 7.5 percent, primarily due to higher costs associated with promotional activities as well as higher salaries for the sales force and support personnel. Advertising costs increased slightly as compared with the prior year. Selling and advertising expenses were directed at the promotion and support of our moist smokeless tobacco products. Administrative expenses were significantly higher primarily due to expenses incurred to address legal and regulatory issues and increased salary and related costs. Operating profit increased 14.3 percent to $653.7 million. 1993 compared with 1992 Tobacco segment sales rose to $951.6 million for an increase of 7.6 percent and accounted for 85.7 percent of consolidated revenues. Smokeless tobacco sales increased 11.7 percent to $930.5 million, and represented 83.8 percent of consolidated sales. Other tobacco product sales decreased significantly due to lower unit volume. The increase in smokeless tobacco sales resulted from higher selling prices and unit volume gains for moist smokeless tobacco. Domestic unit volume for moist smokeless tobacco products increased 2.3 percent in 1993, to 611.6 million cans, which included one less shipping day as compared to 1992. On an equivalent shipping day basis unit volume for domestic moist smokeless tobacco would have increased 3.1 percent. Moist smokeless tobacco unit costs increased slightly due to higher leaf tobacco costs and increased excise taxes imposed January 1, 1993. Cost of sales for the Tobacco segment was significantly lower due to decreased unit volume for other tobacco products which have higher unit costs as compared to moist smokeless tobacco. Gross profit for the segment rose substantially during 1993 as a result of higher selling prices and unit volume gains for moist smokeless tobacco. Selling expenses increased 12.9 percent, primarily due to higher costs associated with promotional activities and higher salaries and increased expenses for the sales force. Advertising costs increased significantly as compared with the prior year. Selling and advertising expenses were directed at the promotion and support of our moist smokeless tobacco products, including two new flavors which were introduced during 1993. Administrative expenses were lower as increased salary and related costs were offset by lower spending in other areas. Operating profit increased 12.4 percent to $572.1 million. WINE SEGMENT 1994 compared with 1993 Wine segment revenue increased 11.2 percent to $89.2 million and accounted for 7.3 percent of consolidated sales. Higher case volume for premium wine accounted for the increase. Case volume for premium wine increased 13.2 percent. Overall case volume for the Wine segment increased 9.2 percent. Chateau Ste. Michelle and Columbia Crest, our two leading brands of premium wine, accounted for approximately 70 percent of total wine revenue. 4 Unit costs decreased slightly primarily due to excellent harvest yields in 1992 and 1993. The Company uses grapes both harvested from its own vineyards and purchased from regional growers in its wine production. Total grape tonnage harvested and purchased in 1994 was significantly lower than the exceptional harvest experienced in 1993. As a result of lower harvest yields, the cost for grapes was slightly higher which will affect future unit costs. However, the 1994 harvest level was adequate to enable the Company to meet its requirements for premium wine. Gross profit for the Wine segment increased 13.1 percent primarily as a result of an increase in premium wine case volume and slightly lower unit costs. Selling, advertising and administrative expenses remained stable in 1994. Selling and advertising expenses were directed toward expanding the brand awareness of premium wines, primarily Columbia Crest and Domaine Ste. Michelle. Administrative and other expenses, primarily salary and related expenses, were slightly higher. The Wine segment recorded an operating profit of $8.8 million in 1994, an increase of 44.2 percent over 1993. 1993 compared with 1992 Wine segment revenue increased 13.8 percent to $80.2 million and accounted for 7.2 percent of consolidated sales. Higher case volume for premium wine accounted for the increase. Overall case volume for the Wine segment increased 7.6 percent, while case volume for premium wine increased 14.4 percent. Overall, unit costs increased primarily due to higher grape costs resulting from low harvest yields in prior years. Total grape tonnage harvested and purchased in 1993 was significantly higher than in 1992, resulting in increased inventory levels, which will have a favorable effect on future unit costs. Gross profit for the Wine segment increased 10.7 percent primarily as a result of an increase in premium wine case volume partially offset by higher unit costs. Selling, advertising and administrative expenses increased in 1993. Selling expenses increased primarily to support higher volume levels of premium brands. Advertising expenses were higher and were aimed at supporting and expanding national brand awareness of our existing premium wines and new products. Administrative and other expenses were slightly lower as higher salary and related costs were offset by lower spending in other areas. The Wine segment recorded an operating profit of $6.1 million in 1993. OTHER SEGMENT 1994 compared with 1993 Other segment sales were $78.7 million, a 3.4 percent decrease from 1993, and accounted for 6.4 percent of consolidated sales. Other segment sales were lower due to the sale of the distribution rights for Zig-Zag cigarette papers and related products on March 31, 1993, partially offset by higher revenues for the entertainment business. The absence of the cigarette paper operations for the entire year, higher spending associated with developing international markets and reserves recorded for nonstrategic assets more than offset favorable results for the entertainment business. Overall, the Other segment recorded an operating profit of $1.5 million in 1994. 5 1993 compared with 1992 Other segment sales decreased 7 percent to $81.5 million and accounted for 7.3 percent of consolidated sales. Other segment sales were lower due to the sale of the distribution rights for Zig-Zag cigarette papers and related products on March 31, 1993. The absence of these products for the remainder of 1993 had an adverse effect on the operating results for the Other segment. Operating profit was significantly lower for tobacco-related products due to the sale of the cigarette paper business, but was partially offset by favorable results for other businesses. The Other segment recorded an operating profit of $9.2 million in 1993. HEALTH CARE REFORM As introduced by the Clinton Administration during the 103rd Congress, The Health Security Act proposed, among other things, a significant federal excise tax increase on all tobacco products, including moist snuff. This proposal failed last year. We expect some form of health care debate during the 104th Congress and we will vigorously oppose any proposed increase in the federal excise tax on our tobacco products. Accordingly, the Company is not able to predict the amount, if any, by which the federal excise tax rate may increase, or assess the future effect that any such increase may have on its tobacco business. FINANCIAL CONDITION SOURCES AND USES OF CASH -- OPERATIONS Cash provided by operating activities is the major source of funds available to the Company. Cash from operations increased to $453.2 million in 1994, as compared to $367.6 million in 1993 and $288.8 million in 1992. The primary reason for the increase was higher earnings generated by the Tobacco segment. Significant inventories of leaf tobacco are required primarily in connection with our smokeless tobacco products. During the last three years, $175.4 million was used for the purchase of leaf tobacco and related costs. In addition, the cost of grapes harvested and purchased totaled $64.7 million over the last three years. INVESTING ACTIVITIES Net cash used in investing activities was $21.5 million in 1994. Purchases of property, plant and equipment over the last three years totaled $119.9 million. Major areas of capital spending from 1992 through 1994 were: Tobacco segment - - Manufacturing, processing and packaging equipment - - Automobiles for the sales force - - Building renovations Wine segment - - Storage capacity and processing equipment - - New facilities and building renovations - - Irrigation and vineyard development Other segment - - Equipment - - Building additions and renovations 6 Shared assets - - Transportation equipment -- primarily aircraft - - Headquarters, conference and training facility renovations In 1995, the Company's capital program is expected to approximate $52 million, and will primarily include improvements to the tobacco processing and manufacturing operations and the expansion of wine processing and storage facilities. In 1993 the Company sold its distribution rights for Zig-Zag cigarette papers and related products for $39 million in cash and additional consideration based on future earnings. FINANCING ACTIVITIES Other significant sources and uses of cash over the last three years have included long-term borrowings, the issuance of common stock, stock repurchases and cash dividends. During 1994, the Company entered into a $200 million revolving credit and term loan agreement with several banks replacing the similar $50 million credit facility. The Company has borrowed $125 million under this credit facility since 1993 and used the funds for its share repurchase program. The remaining $75 million is available and may be used for the stock repurchase program depending on market conditions. (See Revolving Credit and Term Loan Agreement and Short-Term Lines of Credit Note.) Common stock was issued upon the exercise of options granted under the Company's stock option plans. Options are granted to employees who have made or who are expected to make contributions to the growth of the Company. The Company receives income tax benefits upon the exercise of certain of these options. Since 1991, funds received from the exercise of options, together with these tax benefits, totaled $168.7 million. During 1994, the Company continued its program to repurchase shares of its common stock as authorized by the Board of Directors. In 1994, the Board of Directors approved a new stock repurchase program, authorizing the Company to repurchase up to 20 million shares of its common stock from time to time in open market or negotiated transactions to be used in connection with employee benefit programs and other corporate purposes. The new program commenced during the fourth quarter of 1994, upon completion of the prior program, which provided for the repurchase of up to 40 million shares. During 1994, the Company repurchased 10.6 million shares at a cost of $298.8 million. As of December 31, 1994, 15.8 million shares remained to be repurchased under the new program. It is the Company's philosophy that its stockholders should benefit directly from increases in net earnings. Accordingly, the Company has regularly increased dividend payments as earnings have risen. During the last three years, cash dividends distributed to stockholders amounted to $593.4 million, totaling 56.6 percent of net earnings for the period. LIQUIDITY Sources of cash exceeded uses of cash by $25.4 million in 1994. The Company anticipates that cash generated from operating activities will meet most of its requirements in 1995. Seasonal purchases of leaf tobacco occasionally require the Company to use short-term borrowings in the form of commercial paper, when necessary, to augment cash generated by operating activities. In 1994 sufficient cash was generated to meet these requirements and short-term borrowings were limited. The Company anticipates that leaf tobacco purchases and related costs in 1995 will increase to approximately $82 million as compared to $70 million for 1994. Increased spending in 1995 reflects the Company's plan to maintain a higher level of leaf tobacco inventory. The ratio of current assets to current liabilities (current ratio) at December 31, 1994 was 2.4 to 1 and has averaged 3.2 to 1 over the last three years. Increases in accrued expenses and income taxes payable reduced the current ratio from prior years. However, the Company continues to maintain a strong liquidity position. Further enhancing this position is the fact that certain inventories are carried at costs computed under the 7 LIFO method. The average costs of these inventories was $41.8 million more than the amount at which they are carried in the Consolidated Statement of Financial Position at December 31, 1994. The Company believes that adequate credit facilities are available through committed short-term credit lines. The Company has available short-term lines of credit with domestic and foreign banks totaling $100 million at December 31, 1994. The lines of credit are generally committed for a one-year period expiring at various times during 1995 and provide for borrowing at prime rates. These arrangements require commitment fees which are not significant. These facilities can be used as bank financing or as support for commercial paper borrowing. The commercial paper market is expected to continue as an attractive source of funds. The Company has the highest ratings available on its commercial paper. The Company intends to maintain appropriate facilities to ensure access to credit markets providing sufficient financial resources and operational flexibility. CAPITAL RESOURCES Over the last two years the Company has taken advantage of its strong capital structure and relatively low interest rates in the marketplace and has borrowed $125 million under its $200 million credit facility. This amount was classified as long-term debt at December 31, 1994. These borrowings were used for the stock repurchase program. Depending on market conditions the Company may borrow the additional $75 million available under this credit facility in 1995 and use the proceeds for the stock repurchase program. (See Revolving Credit and Term Loan Agreement and Short-Term Lines of Credit Note.) The percentage of long-term debt outstanding to stockholders' equity is 34.6 percent. The Company had no short-term debt outstanding at December 31, 1994. Stockholders' equity decreased in 1994, as the effects of the stock repurchase program and dividend payments exceeded the effects of net earnings and common stock issued under the Company's stock option plans. The return on average stockholders' equity has increased by 38.4 percentage points to 94 percent over the last three years. 8 DIVIDENDS AND STOCK PRICES CASH DIVIDENDS The Company increased its 1994 cash dividend by 16.7 percent to an annual rate of $1.12 per share. Since 1991, the dividend rate has increased 69.7 percent reflecting an average annual increase of 19.3 percent. Total cash dividends paid by the Company in 1994 were $225.7 million or 58.2 percent of net earnings. Cash dividends paid to stockholders have exceeded 50 percent of net earnings in each of the last three years. In December 1994, the Board of Directors approved a first quarter 1995 dividend of 32 1/2 cents per share. This equates to an indicated annual rate of $1.30, and represents an increase of 16.1 percent. The Company has paid cash dividends without interruption since 1912. Future dividends depend on many factors, including internal estimates of future performance and the Company's need for funds. STOCK PRICES UST shares are traded on the New York Stock Exchange and the Pacific Stock Exchange, ticker symbol -- UST. The number of stockholders of record at December 31, 1994 was 13,116. The following table sets foth dividends paid per share and the high and low market prices for the year and each quarter of 1994 and 1993.
MARKET PRICE CASH PER COMMON SHARE DIVIDENDS ---------------- PAID HIGH LOW --------- ----- ----- 1st Quarter 1994........................................ $ .28 $29 5/8 $24 3/8 1993........................................ .24 32 3/4 24 3/4 2nd Quarter 1994........................................ .28 28 1/2 23 5/8 1993........................................ .24 30 7/8 25 7/8 3rd Quarter 1994........................................ .28 31 1/2 27 1/4 1993........................................ .24 29 7/8 26 1/4 4th Quarter 1994........................................ .28 29 3/8 26 1993........................................ .24 31 3/8 24 3/8 Year 1994........................................ 1.12 31 1/2 23 5/8 1993........................................ .96 32 3/4 24 3/8
9 GRAPHICAL INFORMATION INCLUDED IN EXHIBIT 13.4 IS DESCRIBED BELOW. (DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS AND PERCENTAGES) The following are bar graphs: Consolidated Net Sales: 1992 - $1,039, 1993 - $1,110 and 1994 - $1,223. Consolidated Gross Profit: 1992 - $783, 1993 - $864 and 1994 - $971. Pretax Margins: 1992 - 48.4%, 1993 - 54.2% and 1994 - 52.4%. Earnings Per Share: 1992 - $1.41, 1993 - $1.62 and 1994 - $1.87. Tobacco Sales: 1992 - $884, 1993 - $952 and 1994 - $1,058. Wine Sales: 1992 - $70, 1993 - $80 and 1994 - $89. Other Sales: 1992 - $88, 1993 - $81 and 1994 - $79. Net Cash Provided By Operating Activities: 1992 - $289, 1993 - $368 and 1994 - $453. Return On Average Stockholders' Equity: 1992 - 62.5%, 1993 - 71.3% and 1994 - - 94.0%. Dividends Per Share: 1992 - $.80, 1993 - $.96 and 1994 - $1.12. The following bar graph illustrates the relationship between net earnings and dividends paid: Net Earnings: 1992 - $313, 1993 - $349 and 1994 - $388. Dividends Paid: 1992 - $168, 1993 - $200 and 1994 - $226. A pie chart illustrating the percentage of capital expenditures by segment for 1992 - 1994: Tobacco 67%, Wine 25%, Other 4% and Corporate 4%. EX-13.5 7 FINANCIAL STATEMENTS & SUPPLEMENTARY DATA 1 EXHIBIT 13.5 UST CONSOLIDATED INDUSTRY SEGMENT DATA (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ---------------------------------------- 1994 1993 1992 ---------- ---------- ---------- NET SALES TO UNAFFILIATED CUSTOMERS Tobacco Smokeless tobacco.................................... $1,045,546 $ 930,465 $ 832,929 Other tobacco products............................... 12,715 21,124 51,048 ---------- ---------- ---------- 1,058,261 951,589 883,977 Wine................................................... 89,170 80,205 70,458 Other.................................................. 78,737 81,489 87,603 Elimination of intersegment sales...................... (3,152) (2,880) (2,663) ---------- ---------- ---------- NET SALES.................................... $1,223,016 $1,110,403 $1,039,375 ========= ========= ========= OPERATING PROFIT Tobacco................................................ $653,695 $572,062 $508,775 Wine................................................... 8,832 6,126 4,770 Other.................................................. 1,485 9,228 9,630 ---------- ---------- ---------- OPERATING PROFIT............................. 664,012 587,416 523,175 Corporate expenses................................... (23,284) (22,664) (22,412) Interest (expense) income, net....................... (92) 2,004 1,866 Gain on disposal of product line..................... -- 35,029 -- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES............... $640,636 $601,785 $502,629 ========= ========= ========= IDENTIFIABLE ASSETS AT DECEMBER 31 Tobacco.............................................. $414,888 $394,805 $371,560 Wine................................................. 164,950 167,157 150,527 Other................................................ 88,529 95,674 91,620 Corporate............................................ 72,869 48,559 60,258 ---------- ---------- ---------- $741,236 $706,195 $673,965 ========= ========= ========= CAPITAL EXPENDITURES (DISPOSITIONS), NET Tobacco.............................................. $14,407 $38,797 $19,438 Wine................................................. 9,253 9,354 8,604 Other................................................ (536) 3,648 732 Corporate............................................ 560 2,711 1,279 ---------- ---------- ---------- $23,684 $54,510 $30,053 ========= ========= ========= DEPRECIATION Tobacco.............................................. $18,307 $17,069 $15,158 Wine................................................. 6,562 5,877 5,265 Other................................................ 1,834 2,027 2,287 Corporate............................................ 707 933 855 ---------- ---------- ---------- $27,410 $25,906 $23,565 ========= ========= =========
2 UST CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ---------------------------------------- 1994 1993 1992 ---------- ---------- ---------- NET SALES.............................................. $1,223,016 $1,110,403 $1,039,375 COSTS AND EXPENSES Cost of products sold................................ 251,944 246,445 256,796 Selling, advertising and administrative.............. 330,344 299,206 281,816 ---------- ---------- ---------- TOTAL COSTS AND EXPENSES............................... 582,288 545,651 538,612 ---------- ---------- ---------- OPERATING INCOME....................................... 640,728 564,752 500,763 ---------- ---------- ---------- OTHER (EXPENSE) INCOME Interest (expense) income, net....................... (92) 2,004 1,866 Gain on disposal of product line..................... -- 35,029 -- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES................................... 640,636 601,785 502,629 ---------- ---------- ---------- INCOME TAXES........................................... 253,110 232,893 190,071 ---------- ---------- ---------- EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES.............................................. 387,526 368,892 312,558 ---------- ---------- ---------- CUMULATIVE EFFECT OF ACCOUNTING CHANGES Postretirement benefits other than pensions (net of income tax benefit of $18,115).................... -- (32,690) -- Income taxes......................................... -- 12,844 -- ---------- ---------- ---------- NET EARNINGS........................................... $ 387,526 $ 349,046 $ 312,558 ========= ========= ========= EARNINGS PER SHARE Primary earnings before cumulative effect of accounting changes................................ $1.87 $1.71 $1.41 Cumulative effect of accounting changes.............. -- (.09) -- NET EARNINGS PER SHARE Primary.............................................. $1.87 $1.62 $1.41 Fully diluted........................................ $1.87 $1.62 $1.41 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Primary.............................................. 207,504 215,719 222,033 Fully diluted........................................ 207,576 215,779 222,423
See Notes to Consolidated Financial Statements. 3 UST CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN THOUSANDS)
DECEMBER 31 ---------------------- 1994 1993 --------- --------- ASSETS Current assets Cash and cash equivalents............................................ $ 50,718 $ 25,327 Accounts receivable.................................................. 65,883 64,376 Inventories.......................................................... 237,720 215,635 Prepaid expenses and other current assets............................ 27,616 29,658 --------- --------- Total current assets......................................... 381,937 334,996 --------- --------- Property, plant and equipment, net..................................... 305,885 309,611 Other assets........................................................... 53,414 61,588 --------- --------- $ 741,236 $ 706,195 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses................................ $ 104,558 $ 62,445 Income taxes......................................................... 56,197 44,197 --------- --------- Total current liabilities.................................... 160,755 106,642 --------- --------- Long-term debt......................................................... 125,000 40,000 Deferred income taxes.................................................. 5,065 7,955 Postretirement benefits other than pensions............................ 61,286 56,782 Other liabilities...................................................... 27,461 31,844 --------- --------- Total liabilities............................................ 379,567 243,223 --------- --------- Stockholders' equity Capital stock........................................................ 100,172 106,612 Additional paid-in capital........................................... 343,390 337,842 Retained earnings.................................................... 33,713 255,222 --------- --------- 477,275 699,676 Less cost of shares in treasury...................................... 115,606 236,704 --------- --------- Total stockholders' equity................................... 361,669 462,972 --------- --------- $ 741,236 $ 706,195 ======== ========
See Notes to Consolidated Financial Statements. 4 UST CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ---------------------------------- 1994 1993 1992 -------- -------- -------- OPERATING ACTIVITIES Net earnings............................................. $387,526 $349,046 $312,558 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization......................... 28,169 26,674 24,467 Deferred income taxes................................. (4,257) (24,783) (5,212) Cumulative effect of accounting changes............... -- 37,961 -- Gain on disposal of product line...................... -- (35,029) -- Changes in operating assets and liabilities: Increase in accounts receivable..................... (1,507) (10,557) (3,743) Increase in inventories............................. (22,085) (4,866) (19,751) Decrease (increase) in prepaid expenses and other assets................................. 6,038 (1,590) (10,979) Increase (decrease) in accounts payable, accrued expenses and other liabilities................... 47,338 8,719 (5,057) Increase (decrease) in income taxes payable......... 12,000 22,052 (3,458) -------- -------- -------- Net cash provided by operating activities........ 453,222 367,627 288,825 -------- -------- -------- INVESTING ACTIVITIES Purchases of property, plant and equipment............... (27,659) (58,199) (33,998) Dispositions of property, plant and equipment............ 3,975 3,689 3,945 Proceeds received from sales of businesses............... 2,221 37,218 100 Other, principally long-term investments................. -- -- 17,288 -------- -------- -------- Net cash used in investing activities............ (21,463) (17,292) (12,665) -------- -------- -------- FINANCING ACTIVITIES Proceeds from long-term debt............................. 85,000 40,000 -- Proceeds from the issuance of common stock............... 33,190 35,051 100,458 Reduction of long-term debt.............................. -- -- (1,250) Dividends paid........................................... (225,715) (199,725) (167,951) Common stock repurchased................................. (298,843) (236,704) (212,581) -------- -------- -------- Net cash used in financing activities............ (406,368) (361,378) (281,324) -------- -------- -------- Increase (decrease) in cash and cash equivalents.................................... 25,391 (11,043) (5,164) Cash and cash equivalents at beginning of year... 25,327 36,370 41,534 -------- -------- -------- Cash and cash equivalents at end of year......... $ 50,718 $ 25,327 $ 36,370 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes.......................................... $232,615 $201,082 $147,784 Interest.............................................. 4,708 1,150 756
See Notes to Consolidated Financial Statements. 5 UST CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ADDITIONAL TOTAL COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK EQUITY -------- ---------- -------- --------- ------------- Balance at December 31, 1991..... $105,490 $ 217,418 $159,967 $ -- $ 482,875 Net earnings for the year........ -- -- 312,558 -- 312,558 Cash dividends -- $.80 per share.......................... -- -- (167,951) -- (167,951) Exercise of stock options -- 6,964,400 shares.... 3,482 49,171 -- -- 52,653 Income tax benefits net of increase in receivables from exercise of stock options...... -- 47,805 -- -- 47,805 Common stock repurchased for treasury and retired -- 6,907,000 shares.... (3,454) (10,509) (198,618) -- (212,581) Adjustment for additional minimum pension liability, net of taxes.......................... -- -- 1,247 -- 1,247 -------- ---------- -------- --------- ------------- Balance at December 31, 1992..... 105,518 303,885 107,203 -- 516,606 Net earnings for the year........ -- -- 349,046 -- 349,046 Cash dividends -- $.96 per share.......................... -- -- (199,725) -- (199,725) Exercise of stock options -- 2,186,700 shares.... 1,094 18,745 -- -- 19,839 Income tax benefits net of increase in receivables from exercise of stock options...... -- 15,212 -- -- 15,212 Common stock repurchased for treasury -- 8,467,000 shares... -- -- -- (236,704) (236,704) Adjustment for additional minimum pension liability, net of taxes.......................... -- -- (1,302) -- (1,302) -------- ---------- -------- --------- ------------- Balance at December 31, 1993..... 106,612 337,842 255,222 (236,704) 462,972 Net earnings for the year........ -- -- 387,526 -- 387,526 Cash dividends -- $1.12 per share.......................... -- -- (225,715) -- (225,715) Exercise of stock options -- 2,001,800 shares.... 1,001 16,514 -- -- 17,515 Income tax benefits and decrease in receivables from exercise of stock options.................. -- 15,675 -- -- 15,675 Common stock repurchased for treasury -- 10,648,000 shares......................... -- -- -- (298,843) (298,843) Retirement of treasury stock -- 14,881,800 shares.............. (7,441) (26,641) (385,859) 419,941 -- Adjustment for additional minimum pension liability, net of taxes.......................... -- -- 2,539 -- 2,539 -------- ---------- -------- --------- ------------- Balance at December 31, 1994..... $100,172 $ 343,390 $ 33,713 $(115,606) $ 361,669 ======== ======== ======== ========= ==========
See Notes to Consolidated Financial Statements. 6 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of the Company and all of its subsidiaries after the elimination of intercompany accounts and transactions. Investments in a limited partnership and 50 percent or less owned companies, accounted for by the equity method, are carried at amounts equal to the Company's equity in the underlying assets of such entities. Fair Value of Financial Instruments The estimated fair value of amounts reported in the consolidated financial statements have been determined by using available market information and appropriate valuation methodologies. All current assets and current liabilities are carried at their fair value, which approximates market value, because of their short-term nature. The fair value of long-term investments and long-term debt approximate their carrying value. Inventories Inventories are stated at lower of cost or market. The major portion of leaf tobacco and briar inventory costs is determined by the last-in, first-out (LIFO) method. The cost of the remaining inventories is determined by the first-in, first-out (FIFO) and average cost methods. Leaf tobacco and wine inventories are included in current assets as a standard industry practice, notwithstanding the fact that such inventories are carried for several years for the purpose of curing and aging. Property, Plant and Equipment Property, plant and equipment are carried at cost less allowances for depreciation computed by the straight line method. Goodwill Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. Unamortized goodwill is included in other assets and is being amortized ratably over periods from ten to forty years ending in 2026. Income Taxes Income taxes are provided on all revenue and expense items included in the Consolidated Statement of Earnings, regardless of the period in which such items are recognized for income tax purposes, except for items representing permanent differences between pretax accounting income and taxable income. Deferred income taxes are provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Earnings Per Share Primary earnings per share are calculated by dividing net earnings by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are shares which would be issuable upon the exercise of outstanding stock options, reduced by the number of shares which are assumed to be purchased by the Company from the resulting proceeds at the average market price during the period. For the fully diluted earnings per share calculation, shares are assumed to be purchased by the Company at the higher of the average or period-end price and may include additional dilutive options. 7 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Dollars in thousands, except per share amounts) CASH AND CASH EQUIVALENTS
DECEMBER 31 --------------------- 1994 1993 ------- ------- Cash........................................................... $ 9,718 $11,327 Commercial paper............................................... 41,000 14,000 ------- ------- $50,718 $25,327 ======= =======
Cash equivalents are all highly liquid investments generally with maturities of three months or less when acquired. INVENTORIES
DECEMBER 31 --------------------- 1994 1993 -------- -------- Leaf tobacco................................................... $104,313 $ 90,742 Products in process and finished goods......................... 115,261 108,117 Other materials and supplies................................... 18,146 16,776 -------- -------- $237,720 $215,635 ======== ========
At December 31, 1994 and 1993, $103.2 million and $88.4 million, respectively, of inventories were valued using the LIFO method. The average costs of these inventories are greater than the amounts at which these inventories are carried in the Consolidated Statement of Financial Position by $41.8 million and $39.6 million, respectively. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31 --------------------- 1994 1993 -------- -------- Land........................................................... $ 27,259 $ 27,318 Buildings...................................................... 188,872 184,147 Machinery and equipment........................................ 273,160 261,388 -------- -------- 489,291 472,853 Less allowances for depreciation............................... 183,406 163,242 -------- -------- Net property, plant and equipment.............................. $305,885 $309,611 ======== ========
OTHER ASSETS
DECEMBER 31 --------------------- 1994 1993 ------- ------- Prepaid pension costs.......................................... $22,083 $23,517 Investments in unconsolidated companies........................ 12,683 12,910 Goodwill....................................................... 6,822 7,756 Long-term investments.......................................... 3,690 3,691 Intangible pension asset....................................... 3,065 4,263 Other.......................................................... 5,071 9,451 ------- ------- $53,414 $61,588 ======= =======
The investments in unconsolidated companies consist principally of a limited partnership that owns and leases a cogeneration facility. 8 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31 -------------------- 1994 1993 -------- ------- Trade accounts payable.......................................... $ 20,544 $21,285 Employee compensation and benefits.............................. 49,059 18,349 Taxes, other than income........................................ 7,358 6,050 Other accrued expenses.......................................... 27,597 16,761 -------- ------- $104,558 $62,445 ======== =======
REVOLVING CREDIT AND TERM LOAN AGREEMENT AND SHORT-TERM LINES OF CREDIT In 1994, the Company entered into a $200 million revolving credit and term loan agreement with several banks. This agreement replaced the $50 million revolving credit and term loan agreement which had been in effect since 1993. At December 31, 1994 the Company had $125 million outstanding under this agreement at interest rates ranging from 5.9 percent to 6.5 percent. At December 31, 1994 this amount was classified as long-term debt in the Consolidated Statement of Financial Position. Under the terms of the agreement, the Company may borrow funds and elect to pay interest under the "Base Rate," "Competitive Bid" or "Eurodollar" interest rate provisions. The terms of the agreement provide for a three-year revolving line of credit. At the Company's option, any balance outstanding thereafter may be converted into a three-year term loan. Principal repayments are optional during the revolving credit period, while 36 equal monthly installments are required during the term loan period. The Company is required to pay a facility fee of 1/10 of 1 percent per annum during the revolving credit period. Certain provisions of this agreement require the maintenance of tangible net worth levels as well as certain financial ratios. The agreement expires in August of 2000. In addition, the Company has available short-term lines of credit with domestic and foreign banks totaling $100 million at December 31, 1994 and 1993. The lines of credit are generally committed for a one-year period expiring at various times during 1995, and provide for borrowing at prime rates. These arrangements require commitment fees which are not significant. OTHER LIABILITIES Other liabilities include the non-current portion of the net pension liabilities for 1994 and 1993 of $27.1 million and $30.9 million, respectively. (See Employee Benefit and Compensation Plans Note.) CAPITAL STOCK The Company has two classes of capital stock, preferred stock and common stock. Preferred stock carries a par value of $.10 and no shares have been issued. Common stock carries a $.50 par value. Authorized preferred stock is 10 million shares and authorized common stock is 600 million shares. In 1994, the Board of Directors approved a new stock repurchase program, authorizing the Company to repurchase up to 20 million shares of its common stock from time to time in open market or in negotiated transactions for use in connection with employee benefit programs and other corporate purposes. The new program began upon the completion of the prior program which provided for the repurchase of up to 40 million shares of the Company's common stock and had been in effect since 1990. In 1994, the Company repurchased a total of 10.6 million shares of its common stock pursuant to its stock repurchase programs of which 4.2 million shares related to the new program. 9 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Common stock issued and outstanding at December 31, 1994 and 1993 was 196,110,436 shares and 204,756,636 shares, respectively. Events causing changes in the issued and outstanding shares are described in the Consolidated Statement of Changes in Stockholders' Equity. STOCK OPTIONS The Company maintains two stock option plans, the 1992 and 1982 Stock Option Plans. At December 31, 1994, 7,502,700 shares were available for grant under the 1992 plan, while no shares were available under the 1982 plan. Under the plans, options may be granted at not less than the fair market value on the date of grant. Under the 1992 Stock Option Plan, options first become exercisable, in ratable installments or otherwise, over a period of one to five years from the date of grant and may be exercised up to a maximum of ten years from the date of grant using various payment methods. Receivables from the exercise of options in the amount of $15.3 million in 1994, $17.4 million in 1993 and $17.2 million in 1992 have been deducted from stockholders' equity. Changes in outstanding options were as follows:
PRICE RANGE SHARES ------------- ---------- Outstanding Dec. 31, 1991.......................................... $ 2.16-$24.19 21,234,000 Options granted........................................ 30.81 3,798,400 Options exercised...................................... 2.16- 30.81 (6,964,400) Options expired........................................ 2.16 (2,400) ---------- Outstanding Dec. 31, 1992.......................................... 4.05- 30.81 18,065,600 Options granted........................................ 25.50 1,198,800 Options exercised...................................... 4.05- 30.81 (2,186,700) Options forfeited...................................... 25.50 (4,200) ---------- Outstanding Dec. 31, 1993.......................................... 4.05- 30.81 17,073,500 Options granted........................................ 27.81- 27.88 1,706,400 Options exercised...................................... 4.05- 30.81 (2,001,800) Options forfeited...................................... 25.50- 27.81 (3,700) ---------- Outstanding Dec. 31, 1994.......................................... 4.05- 30.81 16,774,400 ==========
Under the 1982 Stock Option Plan, incentive and nonqualified options to purchase a total of 13,894,400 shares were outstanding and exercisable as of December 31, 1994. The average price per share is $18.97, with expiration dates ranging from February 11, 1995 to February 6, 2002. Under the 1992 Stock Option Plan, incentive and nonqualified options to purchase a total of 2,880,000 shares were outstanding, of which 807,900 shares were exercisable at December 31, 1994 due to vesting requirements. The average price per share is $26.88, with expiration dates ranging from February 22, 2003 to November 16, 2004. 10 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EMPLOYEE BENEFIT AND COMPENSATION PLANS The Company and its subsidiaries maintain a number of noncontributory defined benefit pension plans covering substantially all employees over age 21 with at least one year of service. The Company's plan for salaried employees provides pension benefits based on their highest three-year average compensation. The Company's funding policy for this plan is to contribute an amount sufficient to meet or exceed ERISA minimum requirements. All other funded plans base benefits on the employee's compensation in each year of employment. The Company's funding policy for these plans is generally to contribute the annual normal cost plus the amount required to amortize unfunded liabilities over 20 years from the date established. The Company also maintains unfunded plans providing pension and additional benefits for certain employees. The assumptions used to determine expense for 1994, 1993 and 1992 were:
1994 1993 1992 ---- ---- ---- Discount rate.................................................. 7% 8% 8% Average rate of increase in compensation levels................ 5% 6% 6% Expected long-term rate of return on plan assets............... 9% 10% 10%
Net periodic pension cost for 1994, 1993 and 1992 include the following components (in millions):
1994 1993 1992 ------ ------ ----- Service cost -- benefits earned during period................. $ 8.2 $ 7.1 $ 6.5 Interest cost on projected benefit obligation................. 14.2 13.9 13.1 Actual return on plan assets.................................. 4.3 (18.7) (8.3) Net amortization and deferral................................. (20.2) 1.6 (9.0) ------ ------ ----- Net periodic pension cost..................................... $ 6.5 $ 3.9 $ 2.3 ====== ====== =====
11 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents a reconciliation of the funded status of the plans (in millions):
DECEMBER 31, ------------------------------------------------------------------- 1994 1993 ------------------------------- ------------------------------- PLANS PLANS PLANS PLANS WHOSE WHOSE WHOSE WHOSE ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS ------------- ------------- ------------- ------------- Actuarial present value of benefit obligations: Vested benefits...................... $(109.3) $ (28.0) $(125.6) $ (31.1) Nonvested benefits................... (12.5) (2.3) (14.0) (3.8) ------------- ------------- ------------- ------------- Accumulated benefits................. (121.8) (30.3) (139.6) (34.9) Effect of future pay increases....... (15.9) (5.9) (23.8) (6.5) ------------- ------------- ------------- ------------- Projected benefit obligation......... (137.7) (36.2) (163.4) (41.4) Plan assets at fair value.............. 185.7 -- 195.8 1.6 Unrecognized net (gain) loss........... (17.9) 6.8 (2.3) 14.1 Prior service cost not yet recognized in net periodic pension cost......... (2.7) .8 (.5) (1.5) Unrecognized portion of initial net obligation (asset)................... (5.3) 4.4 (6.1) 4.9 Adjustment to recognize additional minimum liability.................... -- (6.1) -- (11.5) ------------- ------------- ------------- ------------- Net pension asset (liability).......... $ 22.1 $ (30.3) $ 23.5 $ (33.8) ========== ========== ========== ==========
For 1994 and 1993, the net pension assets of $22.1 million and $23.5 million, respectively, consist of prepaid pension costs and are included in other assets. The noncurrent portion of the net liabilities for 1994 and 1993 of $30.3 million and $33.8 million, respectively, are included in other liabilities. For pension plans whose accumulated benefits exceed assets at December 31, 1994, the Consolidated Statement of Financial Position reflects an additional minimum liability of $6.1 million: an intangible asset of $3.1 million included in other assets and a reduction of retained earnings of $2 million, which is net of deferred tax benefits of $1 million. At December 31, 1993, the Consolidated Statement of Financial Position included an additional minimum liability of $11.5 million: an intangible asset of $4.3 million and a reduction of retained earnings of $4.8 million, which is net of deferred tax benefits of $2.4 million. Plan assets include marketable equity securities (including common stock of the Company having a market value of $35.7 million as of December 31, 1994 and $35.5 million as of December 31, 1993) and corporate and government debt securities. The discount rate used in determining the present value of benefit obligations was 9 percent for 1994 and 7 percent for 1993. The Company sponsors a defined contribution plan (Employees' Savings Plan) covering substantially all of its employees. The Plan requires one year of service prior to eligibility for participation. Company contributions are based upon participant contributions. The expense was $3.7 million in 1994, $3.6 million in 1993 and $3.4 million in 1992. The Company has an Incentive Compensation Plan which provides for incentive payments to designated employees based on stated percentages of net income as defined in the Plan. Expenses under the Plan amounted to $33.5 million for 1994, $28.8 million for 1993 and $26.3 million for 1992. 12 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company and certain of its subsidiaries maintain a number of postretirement welfare benefit plans which provide certain medical and life insurance benefits to substantially all full-time employees who have attained certain age and service requirements upon retirement. The health care benefits are subject to deductibles, co-insurance and in some cases flat dollar contributions which vary by plan, age and service at retirement. All life insurance coverage is noncontributory. The welfare plans are not funded. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires the Company to accrue the expected cost of providing postretirement benefits as an employee renders service. In 1993 the Company elected to immediately recognize the accumulated postretirement benefit obligation of $50.8 million through a one-time cumulative effect adjustment to earnings of $32.7 million, net of income taxes. The liability is stated separately in the Consolidated Statement of Financial Position. The following table sets forth the combined status of the plans at December 31:
1994 1993 ------- ------- Accumulated postretirement benefit obligation: Retirees....................................................... $15,153 $15,599 Fully eligible active plan participants........................ 7,719 8,076 Other active plan participants................................. 22,400 24,886 ------- ------- 45,272 48,561 Unrecognized net gain............................................ 16,014 8,221 ------- ------- Accrued postretirement benefit obligation........................ $61,286 $56,782 ======= =======
Postretirement benefit expense was $6 million in 1994, $7.3 million in 1993 and $1.6 million in 1992. The expense for 1992 was recorded on a pay-as-you-go (cash) basis. The net periodic postretirement benefit cost for 1994 and 1993 included the following components:
1994 1993 ------ ------ Service cost..................................................... $2,835 $3,311 Interest cost.................................................... 3,342 4,009 Amortization of unrecognized gain................................ (226) -- ------ ------ Net periodic postretirement benefit cost......................... $5,951 $7,320 ====== ======
The discount rate used in determining the net periodic postretirement benefit cost was 7 percent for 1994 and 8 percent for 1993. The rate of increase in per capita costs of covered health care benefits is assumed to be 11.1 percent for 1995 and to decrease gradually to 6.5 percent by the year 2008 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by approximately $7 million and the 1994 net periodic postretirement benefit cost by approximately $1.2 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 9 percent at December 31, 1994 and 7 percent at December 31, 1993. 13 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which required a change in the method of accounting for income taxes from the deferred method to the liability method. The Company reflected this change through a cumulative effect adjustment which increased net earnings and reduced deferred tax liabilities reported in the Consolidated Statement of Financial Position by $12.8 million. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31 are as follows:
1994 1993 ------- ------- Deferred tax liabilities: Depreciation................................................... $40,883 $38,452 Investment in limited partnerships............................. 10,269 11,198 Prepaid pension assets......................................... 8,230 8,360 ------- ------- Total deferred tax liabilities......................... 59,382 58,010 ------- ------- Deferred tax assets: Postretirement benefits other than pensions.................... 21,450 19,927 Other accrued liabilities...................................... 19,608 16,773 Accrued pension liabilities.................................... 9,674 9,920 All other, net................................................. 3,585 3,435 ------- ------- Total deferred tax assets.............................. 54,317 50,055 ------- ------- Net deferred tax liabilities..................................... $ 5,065 $ 7,955 ======= =======
Significant components of the provision for income taxes are as follows:
DEFERRED LIABILITY METHOD METHOD --------------------- -------- 1994 1993 1992 -------- -------- -------- Current: Federal.............................................. $223,407 $208,059 $168,357 State and local...................................... 33,960 31,502 26,926 -------- -------- -------- Total current................................ 257,367 239,561 195,283 -------- -------- -------- Deferred: Federal.............................................. (4,257) (23,261) (5,164) State and local...................................... -- (1,522) (48) -------- -------- -------- Total deferred............................... (4,257) (24,783) (5,212) -------- -------- -------- $253,110 $214,778 $190,071 ======== ======== ========
The current tax provisions do not reflect $13.5 million, $15.4 million and $52.5 million for 1994, 1993 and 1992, respectively, of tax benefits arising from the exercise of stock options. These amounts were credited directly to additional paid-in capital. The deferred tax provision for 1993 includes the benefit of $18.1 million resulting from the adoption of SFAS No. 106. In addition, the deferred tax provisions for 1994, 1993 and 1992 do not reflect the respective tax effects of $(1.4) million, $.8 million and $(.6) million resulting from the minimum pension liability adjustment required by SFAS No. 87, "Employers' Accounting for Pensions." 14 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1993 "Omnibus Budget Reconciliation Act" increased the statutory corporate federal income tax rate to 35 percent effective January 1, 1993. Differences between the effective tax rate and the statutory U.S. federal income tax rate are explained as follows:
1994 1993 1992 ---- ---- ---- Statutory U.S. federal income tax rate......................... 35.0% 35.0% 34.0% State and local taxes, net of federal benefit.................. 3.4 3.5 3.5 Other, net..................................................... 1.1 .5 .3 ---- ---- ---- 39.5% 39.0% 37.8% ==== ==== ====
EXCISE TAXES Net sales and cost of products sold include excise taxes of $25.3 million in 1994, $30 million in 1993 and $31.7 million in 1992. INTEREST Interest (expense) income, net, is comprised of expense associated with short-term and long-term obligations and income from cash equivalent investments.
YEAR ENDED DECEMBER 31 ------------------------------ 1994 1993 1992 ------- ------- ------ Short-term obligations................................. $(1,660) $(1,091) $(700) Long-term obligations.................................. (2,956) (152) (33) ------- ------- ------ (4,616) (1,243) (733) ------- ------- ------ Income from cash equivalents........................... 4,524 3,247 2,599 ------- ------- ------ $ (92) $ 2,004 $1,866 ======= ======= ======
QUARTERLY FINANCIAL DATA (UNAUDITED)
1994 FIRST SECOND THIRD FOURTH YEAR -------- -------- -------- -------- ---------- Net sales.................................. $280,379 $310,203 $310,366 $322,068 $1,223,016 Gross profit............................... 225,978 246,803 246,383 251,908 971,072 Net earnings............................... 88,758 99,486 100,330 98,952 387,526 Primary earnings per share................. $.42 $.48 $.48 $.49 $1.87 ------------------------------------------------------ 1993 Net sales.................................. $265,019 $279,707 $278,978 $286,699 $1,110,403 Gross profit............................... 201,866 219,230 220,464 222,398 863,958 Earnings before cumulative effect of accounting changes....................... 103,555 89,836 88,703 86,798 368,892 Net earnings............................... 83,709 89,836 88,703 86,798 349,046 Primary earnings per share before cumulative effect of accounting changes.................................. $.47 $.41 $.41 $.41 $1.71 Primary earnings per share................. $.38 $.41 $.41 $.41 $1.62
The first quarter of 1993 includes a pretax gain of $35 million, amounting to 10 cents per share, from the sale of a tobacco-related business. This gain was offset by the cumulative effect of accounting changes as a result of the adoption of SFAS No. 106 and SFAS No. 109, which resulted in a decrease in net earnings of $19.8 million, or 9 cents per share. 15 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INDUSTRY SEGMENT DATA The Company's industry segments are Tobacco, Wine and Other. The Company operates primarily in the tobacco industry and also produces and markets a number of nontobacco products. Tobacco segment sales are principally to a large number of wholesalers and chain stores which are widely dispersed. In 1994, sales to one wholesale customer accounted for approximately 19 percent of Tobacco segment sales. The Company operates primarily in the United States; foreign operations and export sales are not significant. Intersegment sales are accounted for at cost. Operating profit is total revenue less operating expenses excluding corporate expenses and interest, net, and in 1993, the gain on disposal of a product line. Identifiable assets by segment include assets directly identified with those operations and an allocable share of jointly used assets. Corporate assets consist primarily of cash and cash equivalents, other long-term investments and an allocation of property, plant and equipment associated with nonsegment activities. OTHER MATTERS The Company has been named in certain litigation against the major cigarette companies and others seeking damages relating to the usage of cigarettes and, in certain of the complaints, "tobacco products," one of which contains several allegations relating to smokeless tobacco products. The Company believes that these pending litigation matters will not result in any material liability for a number of reasons, including the fact that the Company has had only limited involvement with cigarettes and the Company's current percentage of total tobacco industry sales is relatively small. Prior to 1986, the Company manufactured some cigarette products which had a de minimis market share. From May 1, 1982 to August 1, 1994, the Company distributed a small volume of imported cigarettes and is indemnified against claims relating to those products. The Company also believes that these actions are without merit and intends to defend them vigorously. On March 31, 1993, the Company sold its distribution rights for Zig-Zag cigarette papers and related products for $39 million in cash and additional consideration for the next ten years. The transaction resulted in a pretax gain of $35 million, amounting to 10 cents per share. 16 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Directors and Stockholders UST Inc. We have audited the accompanying consolidated statement of financial position of UST Inc. as of December 31, 1994 and 1993, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UST Inc. at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in the notes to the financial statements, in 1993 the Company changed its methods of accounting for Income Taxes and Postretirement Benefits Other Than Pensions. ERNST & YOUNG LLP Stamford, Connecticut February 1, 1995 EX-21.1 8 SUBSIDIARIES OF UST 1 EXHIBIT 21.1 PARENT AND SUBSIDIARIES UST is an independent corporation without parent. It had the following significant subsidiaries as of December 31, 1994:
PERCENTAGE OF OWNERSHIP BY UST OR ITS JURISDICTION OF WHOLLY OWNED NAME OF SUBSIDIARY OR AFFILIATE INCORPORATION SUBSIDIARIES - --------------------------------------------------------------- --------------- ------------ International Wine & Spirits Ltd. ............................. Delaware 100% Stimson Lane Ltd. >.......................................... Washington 100% United States Tobacco Company.................................. Delaware 100% United States Tobacco Manufacturing Company Inc. ............ Delaware 100% United States Tobacco Sales and Marketing Company Inc. ...... Delaware 100% UST Enterprises Inc. .......................................... Delaware 100% UST International Inc. ........................................ Delaware 100%
- --------------- Certain subsidiaries have been omitted since, if considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. EX-23.1 9 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of UST Inc. of our report dated February 1, 1995, included in the 1994 Annual Report to stockholders of UST Inc. We also consent to the incorporation by reference in Post-Effective Amendment No. 4 to the Registration Statement (Form S-8 No. 2-72410) pertaining to the UST Inc. Employees' Savings Plan, the Registration Statement (Form S-8 No. 33-28137) pertaining to the 1982 Stock Option Plan, and the Registration Statement (Form S-8 No. 33-48828) pertaining to the 1992 Stock Option Plan, of our report dated February 1, 1995, with respect to the consolidated financial statements of UST Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1994. ERNST & YOUNG LLP Stamford, Connecticut March 3, 1995 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 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). 1,000 YEAR DEC-31-1994 DEC-31-1994 50,718 0 65,883 0 237,720 381,937 489,291 183,406 741,236 160,755 125,000 100,172 0 0 261,497 741,236 1,223,016 1,223,016 251,944 251,944 330,344 0 92 640,636 253,110 387,526 0 0 0 387,526 1.87 1.87
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