-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KNbqLAAvBjNnCVyBoh0fV3oIOElP7mPySX/qCqi18YJVAuq0FlJr1wwH5TECYlVx 3eBPi1So3Vc6v7Cwl5tfQA== 0000950123-96-000950.txt : 19960304 0000950123-96-000950.hdr.sgml : 19960304 ACCESSION NUMBER: 0000950123-96-000950 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960301 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: 96529726 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, 1995 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, 1996, THE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON STOCK, $.50 PAR VALUE, HELD BY NON-AFFILIATES OF REGISTRANT (WHICH FOR THIS PURPOSE DOES NOT INCLUDE DIRECTORS OR OFFICERS) WAS $6,393,995,953. AS OF FEBRUARY 15, 1996, THERE WERE 189,264,036 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, 1995 AND FILED AS AN EXHIBIT AS REQUIRED BY ITEM 601(B)(13) OF REGULATION S-K .............................. PARTS I & II CERTAIN PAGES OF UST 1996 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 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 1993 through 1995 set forth on page 31 of its Annual Report to stockholders for the fiscal year ended December 31, 1995 ("Annual Report"), which page is included in Exhibit 13. 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, SKOAL FLAVOR PACKS 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 Food and Drug Administration (FDA) published in the Federal Register in 1995 a proposal to regulate tobacco products. The contents of the proposal include unprecedented jurisdiction over the tobacco industry's ability to market, promote and advertise its products. Also, in recent years, other proposals have been made at the federal level for additional regulation of tobacco products including, inter alia, the requirement of additional warning notices, 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 1996. 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 1996. 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 1995, Registrant increased its purchases of dark fired, burley and dark air cured tobaccos ("tobacco") primarily from domestic sources. In 1995, purchases from foreign suppliers declined, and continued to decline as a percentage of total tobacco purchased. Such foreign suppliers were located in Canada, Italy and Mexico. 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 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 32% of Registrant's gross sales of tobacco products are made to five customers, one of which, McLane Co. Inc., a national distributor, accounts for more than 10% of Registrant's consolidated revenue. Registrant has maintained satisfactory relationships with 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, 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 50% of Registrant's wine sales are made to ten 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 1996. 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 1996. 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 1995 continue to be adequate to meet requirements for premium varietal wines. As in other viticultural regions, Registrant may experience variations of yields due to climatic conditions. Although yields will fluctuate from year to year, at the present time, Registrant has no reason to believe that 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 1995 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 film making. None of the above, singly, constitutes a material portion of Registrant's operations. ADDITIONAL BUSINESS INFORMATION ENVIRONMENTAL REGULATIONS Registrant does not believe that compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material effect upon the capital expenditures, earnings or competitive position of Registrant. NUMBER OF EMPLOYEES Registrant's average number of employees during 1995 was 4,082. 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, 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................ 490,000 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, 1995 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. ITEM 3 -- LEGAL PROCEEDINGS Registrant has been named in certain litigation against the major domestic cigarette companies and others seeking damages alleged to be related to the usage of cigarettes and, in certain of those complaints, "tobacco products", some of which contain several allegations relating to smokeless tobacco products. Each of these actions is in varying stages of pretrial activities. 5 7 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. In addition, Registrant has been named in an action entitled Sontag v. United States Tobacco Company, et al., (No. 95-6434), 14th Judicial District Court, Parish of Calcaseiu, State of Louisiana, served on December 27, 1995. This action is brought by an individual plaintiff and his wife against a number of smokeless tobacco manufacturers and certain other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of his use of smokeless tobacco products. Registrant believes, and has been so advised by counsel handling these cases, that it has a number of meritorious defenses to all such pending litigation. All such cases are, and will continue to be, vigorously defended, and Registrant believes that the ultimate outcome of all such pending litigation will not have a material adverse effect on the consolidated financial statements of Registrant. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to instruction 3 to Item 401(b) of Regulation S-K, the name, office, age and business experience of each executive officer of Registrant as of February 15, 1996 is set forth below:
NAME OFFICE AGE - -------------------------- ----------------------------------------------------- --- Robert E. Barrett......... Executive Vice President 57 John J. Bucchignano....... Executive Vice President and Chief Financial Officer 48 Vincent A. Gierer, Jr..... Chairman of the Board, Chief Executive Officer and 48 President Harry W. Peter III........ Executive Vice President 56 Robert D. Rothenberg...... President -- United States Tobacco Company 47 Richard H. Verheij........ Senior Vice President and General Counsel 37
None of the executive officers of Registrant has any family relationship to any other executive officer or director of Registrant. After election, all executive officers serve until the next annual organization meeting of the Board of Directors and until their successors are elected and qualified. Mr. 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. 6 8 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. Rothenberg has served as President of United States Tobacco Company since June 22, 1995. Mr. Rothenberg also served as Executive Vice President of United States Tobacco Company from April 4, 1994 to June 21, 1995 and as Senior Vice President from October 29, 1990 to April 3, 1994. Mr. Rothenberg has been employed by Registrant since January 12, 1970. 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. 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 29 and 30 of its Annual Report, which pages are included in Exhibit 13. Registrant's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange. As of February 15, 1996, there were approximately 12,283 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 in Exhibit 13. ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Registrant hereby incorporates by reference the Management's Discussion and Analysis of Results of Operations and Financial Condition set forth on pages 23-30 of its Annual Report, which pages are included in Exhibit 13. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Registrant hereby incorporates by reference the report of independent auditors and the information contained in the financial statements, including the notes thereto set forth on pages 31-45 of its Annual Report, which pages are included in Exhibit 13. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Registrant hereby incorporates by reference the information with respect to the names, ages and business histories of the directors of Registrant which is contained in Table I and the accompanying text set forth under the caption "Election of Directors" in its Notice of 1996 Annual Meeting and Proxy Statement. Information concerning executive officers of Registrant is set forth herein following Item 4 of this Report. 7 9 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 1996 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 1996 Annual Meeting and Proxy Statement. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Registrant hereby incorporates by reference information with respect to indebtedness of management which is contained in Table VI and the accompanying text set forth under the caption "Indebtedness of Management" in its Notice of 1996 Annual Meeting and Proxy Statement. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: (1) The following consolidated financial statements of Registrant included in the Annual Report are incorporated by reference in Item 8 and included in Exhibit 13: Consolidated Statement of Earnings -- Years ended December 31, 1995, 1994 and 1993 Consolidated Statement of Financial Position -- December 31, 1995 and 1994 Consolidated Statement of Cash Flows -- Years ended December 31, 1995, 1994 and 1993 Consolidated Statement of Changes in Stockholders' Equity -- Years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements (2) All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) The following exhibits are filed by Registrant pursuant to Item 601 of Regulation S-K: 3.1 -- Restated Certificate of Incorporation dated May 5, 1992, incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended March 31, 1992. 3.2 -- By-Laws adopted on December 23, 1986, incorporated by reference to Exhibit 3.2 to Form S-4 Registration Statement filed on March 20, 1987. 10.1* -- Form of Employment Agreement entered into on July 23, 1987 between 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. 10.2* -- 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. 10.3* -- Form of Severance Agreement dated October 27, 1986 between United States Tobacco Company (subsequently assumed by UST) and certain officers, incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1986.
8 10 10.4* -- 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. 10.5* -- 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. 10.6* -- Incentive Compensation Plan, as restated as of January 1, 1994, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1993. 10.7* -- Officers' Supplemental Retirement Plan, as restated as of December 1, 1992, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1992. 10.8 -- Nonemployee Directors' Retirement Plan, 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. 10.9 -- Directors' Supplemental Medical Plan, amended and restated as of February 16, 1995, incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1994. 10.10* -- Nonemployee Directors' Stock Option Plan effective May 2, 1995, incorporated by reference to Exhibit A to the UST 1995 Notice of Annual Meeting and Proxy Statement dated March 24, 1995. 13 -- Pages 23-47 of the Annual Report, but only to the extent set forth in Items 1, 5, 6, 7 and 8 hereof. 21 -- Subsidiaries of UST. 23 -- Consent of Independent Auditors. 27 -- Financial Data Schedule.
(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. 9 11 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 15, 1996 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 15, 1996 Executive Officer) VINCENT A. GIERER, JR. ------------------------------------------- VINCENT A. GIERER, JR. Executive Vice President and Chief Financial Officer (Principal Financial February 15, 1996 Officer) JOHN J. BUCCHIGNANO ------------------------------------------- JOHN J. BUCCHIGNANO Senior Vice President and Controller (Principal Accounting February 15, 1996 Officer) ROBERT T. D'ALESSANDRO ------------------------------------------- ROBERT T. D'ALESSANDRO February 15, 1996 Director JOHN J. BUCCHIGNANO ------------------------------------------- JOHN J. BUCCHIGNANO February 15, 1996 Director JAMES W. CHAPIN ------------------------------------------- JAMES W. CHAPIN February 15, 1996 Director EDWARD H. DEHORITY, JR. ------------------------------------------- EDWARD H. DEHORITY, JR. February 15, 1996 Chairman of the Board VINCENT A. GIERER, JR. ------------------------------------------- VINCENT A. GIERER, JR. February 15, 1996 Director P.X. KELLEY ------------------------------------------- P.X. KELLEY February 15, 1996 Director RALPH L. ROSSI ------------------------------------------- RALPH L. ROSSI February 15, 1996 Director SPENCER R. STUART ------------------------------------------- SPENCER R. STUART February 15, 1996 Director JOHN P. WARWICK ------------------------------------------- JOHN P. WARWICK February 15, 1996 Director LOWELL P. WEICKER, JR. ------------------------------------------- LOWELL P. WEICKER, JR.
10 12 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* -- Form of Employment Agreement entered into on July 23, 1987 between 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. 10.2* -- 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. 10.3* -- Form of Severance Agreement dated October 27, 1986 between United States Tobacco Company (subsequently assumed by UST) and certain officers, incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1986. 10.4* -- 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. 10.5* -- 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. 10.6* -- Incentive Compensation Plan, as restated as of January 1, 1994, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1993. 10.7* -- Officers' Supplemental Retirement Plan, as restated as of December 1, 1992, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1992. 10.8 -- Nonemployee Directors' Retirement Plan, 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. 10.9 -- Directors' Supplemental Medical Plan amended and restated as of February 16, 1995, incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1994. 10.10* -- Nonemployee Directors' Stock Option Plan effective May 2, 1995, incorporated by reference to Exhibit A to the UST 1995 Notice of Annual Meeting and Proxy Statement dated March 24, 1995. 13 -- Pages 23-47 of the Annual Report, but only to the extent set forth in Items 1, 5, 6, 7 and 8 hereof. 21 -- Subsidiaries of UST. 23 -- Consent of Independent Auditors. 27 -- Financial Data Schedule.
* 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-13 2 PAGES 23-47 OF THE ANNUAL REPORT 1 EXHIBIT 13 (ITEM 1) UST CONSOLIDATED INDUSTRY SEGMENT DATA (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- NET SALES TO UNAFFILIATED CUSTOMERS Tobacco Smokeless tobacco................................. $1,139,454 $1,045,546 $ 930,465 Other tobacco products............................ 12,607 12,715 21,124 ---------- ---------- ---------- 1,152,061 1,058,261 951,589 Wine................................................. 109,453 89,170 80,205 Other................................................ 67,397 78,737 81,489 Elimination of intersegment sales.................... (3,489) (3,152) (2,880) ---------- ---------- ---------- NET SALES.................................... $1,325,422 $1,223,016 $1,110,403 ========== ========== ========== OPERATING PROFIT (LOSS) Tobacco.............................................. $720,881 $653,695 $572,062 Wine................................................. 13,493 8,832 6,126 Other................................................ (5,300) 1,485 9,228 ---------- ---------- ---------- OPERATING PROFIT............................. 729,074 664,012 587,416 Corporate expenses................................... (21,305) (23,284) (22,664) Interest (expense) income, net....................... (3,179) (92) 2,004 Gain on disposal of product line..................... -- -- 35,029 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES............... $704,590 $640,636 $601,785 ========== ========== ========== IDENTIFIABLE ASSETS Tobacco.............................................. $441,347 $414,888 $394,805 Wine................................................. 176,565 164,950 167,157 Other................................................ 78,924 88,529 95,674 Corporate............................................ 87,916 72,869 48,559 ---------- ---------- ---------- $784,752 $741,236 $706,195 ========== ========== ========== CAPITAL EXPENDITURES (DISPOSITIONS), NET Tobacco.............................................. $ 2,854 $14,407 $38,797 Wine................................................. 10,762 9,253 9,354 Other................................................ 1,859 (536) 3,648 Corporate............................................ (1,473) 560 2,711 ---------- ---------- ---------- $14,002 $23,684 $54,510 ========== ========== ========== DEPRECIATION Tobacco.............................................. $17,784 $18,307 $17,069 Wine................................................. 7,693 6,562 5,877 Other................................................ 2,244 1,834 2,027 Corporate............................................ 633 707 933 ---------- ---------- ---------- $28,354 $27,410 $25,906 ========== ========== ==========
2 EXHIBIT 13 -- (CONTINUED) (ITEM 6) UST CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- -------- -------- SUMMARY OF OPERATIONS Net sales........................................... $1,325,422 $1,223,016 $1,110,403 $1,039,375 $904,427 $761,741 Cost of products sold............................... 262,203 251,944 246,445 256,796 227,546 191,824 Selling, advertising and administrative expenses.......................................... 355,450 330,344 299,206 281,816 253,076 220,927 ---------- ---------- ---------- ---------- ---------- ---------- Operating income.................................... 707,769 640,728 564,752 500,763 423,805 348,990 Other (expense) income: Interest (expense)income, net..................... (3,179) (92) 2,004 1,866 2,279 3,203 Gain on disposal of product line.................. -- -- 35,029 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of accounting changes........... 704,590 640,636 601,785 502,629 426,084 352,193 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes........................................ 274,830 253,110 232,893 190,071 160,179 128,918 ---------- ---------- ---------- ---------- ---------- ---------- Earnings before cumulative effect of accounting changes................................ 429,760 387,526 368,892 312,558 265,905 223,275 Cumulative effect of accounting changes (net of income tax benefit)....................... -- -- 19,846 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings........................................ $ 429,760 $ 387,526 $ 349,046 $ 312,558 $265,905 $223,275 ========== ========== ========== ========== ========== ========== PER SHARE DATA Primary earnings per common share before cumulative effect of accounting changes........... $2.16 $1.87 $1.71 $1.41 $1.18 $.98 Primary earnings per common share................... 2.16 1.87 1.62 1.41 1.18 .98 Dividends per common share.......................... 1.30 1.12 .96 .80 .66 .55 Market price per common share: High.............................................. 36 31 1/2 32 3/4 35 3/8 33 7/8 18 1/4 Low............................................... 26 5/8 23 5/8 24 3/8 25 3/8 16 3/8 12 3/8 FINANCIAL CONDITION Current assets...................................... $425,555 $381,937 $334,996 $330,208 $305,430 $265,854 Current liabilities................................. 280,723 160,755 106,642 81,208 95,455 68,660 Working capital..................................... 144,832 221,182 228,354 249,000 209,975 197,194 Ratio of current assets to current liabilities...... 1.5:1 2.4:1 3.1:1 4.1:1 3.2:1 3.9:1 Total assets........................................ 784,752 741,236 706,195 673,965 656,513 622,595 Long-term debt...................................... 100,000 125,000 40,000 -- -- 3,060 Deferred tax (asset) liability...................... (9,042) 5,065 7,955 46,358 50,928 53,301 Stockholders' equity................................ 293,557 361,669 462,972 516,606 482,875 473,873 OTHER DATA Common stock repurchased............................ $274,783 $298,843 $236,704 $212,581 $184,424 $151,259 Dividends paid on common shares..................... $252,388 $225,715 $199,725 $167,951 $139,670 $118,295 Dividends paid as a percentage of net earnings.......................................... 58.7% 58.2% 57.2% 53.7% 52.5% 53.0% Return on net sales................................. 32.4% 31.7% 31.4% 30.1% 29.4% 29.3% Return on average assets............................ 56.3% 53.5% 50.6% 47.0% 41.6% 35.6% Return on average stockholders' equity.............. 131.2% 94.0% 71.3% 62.5% 55.6% 46.7% Percentage of long-term debt to stockholders' equity............................................ 34.1% 34.6% 8.6% -- -- .6% Average number of common shares (in thousands) -- primary........................................... 199,246 207,504 215,719 222,033 225,130 227,667
- --------------- 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. 3 UST CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ------------------------------------------------------------ 1989 1988 1987 1986 1985 -------- -------- -------- -------- -------- SUMMARY OF OPERATIONS Net sales................................................ $679,322 $615,614 $573,298 $516,031 $478,347 Cost of products sold.................................... 185,464 174,560 168,942 158,719 156,783 Selling, advertising and administrative expenses............................................... 195,433 180,839 166,957 157,038 144,442 -------- -------- -------- -------- -------- Operating income......................................... 298,425 260,215 237,399 200,274 177,122 Other (expense) income: Interest (expense)income, net.......................... 3,190 1,068 (2,768) (5,534) (5,898) Gain on disposal of product line....................... -- -- -- -- -- -------- -------- -------- -------- -------- Earnings before income taxes and cumulative effect of accounting changes................ 301,615 261,283 234,631 194,740 171,224 -------- -------- -------- -------- -------- Income taxes............................................. 111,128 99,133 103,760 90,802 77,695 -------- -------- -------- -------- -------- Earnings before cumulative effect of accounting changes..................................... 190,487 162,150 130,871 103,938 93,529 Cumulative effect of accounting changes (net of income tax benefit)............................ -- -- -- -- -- -------- -------- -------- -------- -------- Net earnings............................................. $190,487 $162,150 $130,871 $103,938 $ 93,529 ======== ======== ======== ======== ======== PER SHARE DATA Primary earnings per common share before cumulative effect of accounting changes................ $.82 $.70 $.56 $.46 $.41 Primary earnings per common share........................ .82 .70 .56 .46 .41 Dividends per common share............................... .46 .37 .30 .24 1/2 .21 1/2 Market price per common share: High................................................... 15 3/8 10 1/2 8 5 5/8 4 7/8 Low.................................................... 9 5/8 6 4 7/8 3 3/4 3 5/8 FINANCIAL CONDITION Current assets........................................... $275,954 $291,006 $260,530 $250,460 $222,378 Current liabilities...................................... 66,643 69,935 63,242 60,895 55,732 Working capital.......................................... 209,311 221,071 197,288 189,565 166,646 Ratio of current assets to current liabilities........... 4.1:1 4.2:1 4.1:1 4.1:1 4.0:1 Total assets............................................. 630,155 597,955 548,951 523,927 468,125 Long-term debt........................................... 6,789 21,828 37,131 47,061 57,039 Deferred tax (asset) liability........................... 55,108 52,939 47,465 44,412 31,978 Stockholders' equity..................................... 482,254 453,253 401,113 371,559 323,376 OTHER DATA Common stock repurchased................................. $97,517 $67,356 $50,865 $9,907 $16,288 Dividends paid on common shares.......................... $101,197 $81,672 $66,789 $54,744 $47,835 Dividends paid as a percentage of net earnings............................................... 53.1% 50.4% 51.0% 52.7% 51.1% Return on net sales...................................... 28.0% 26.3% 22.8% 20.1% 19.6% Return on average assets................................. 31.0% 28.3% 24.4% 21.0% 21.3% Return on average stockholders' equity................... 40.7% 38.0% 33.9% 29.9% 30.9% Percentage of long-term debt to stockholders' equity................................................. 1.4% 4.8% 9.3% 12.7% 17.6% Average number of common shares (in thousands) -- primary................................................ 233,305 230,417 232,370 227,142 228,350
4 EXHIBIT 13 -- (CONTINUED) (ITEM 7) UST MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS CONSOLIDATED RESULTS 1995 COMPARED WITH 1994 Consolidated net sales rose to $1.3 billion, an 8.4 percent increase over 1994. Tobacco segment sales increased 8.9 percent and accounted for 91.6 percent of the $102.4 million sales increase. The Wine segment also contributed to the overall sales gain, posting a 22.7 percent increase. Other segment sales were lower primarily due to lower sales for the entertainment business. Over the last three years, net sales have increased 27.5 percent at an average annual rate of 8.4 percent. Cost of products sold increased 4.1 percent to $262.2 million. Cost of products sold for the Tobacco segment was slightly higher due to higher unit costs and increased unit volume for moist smokeless tobacco. Wine segment costs were significantly higher due to volume gains and sales of bulk wine. Costs for the Other segment were lower primarily due to volume declines for the entertainment business. Gross profit increased $92.1 million or 9.5 percent over 1994 primarily due to higher selling prices and increased unit volume for moist smokeless tobacco. The gross profit percentage rose to 80.2 percent mainly due to the favorable results for moist smokeless tobacco. The gross profit percentage has increased 4.9 percentage points over the last three years. Selling, advertising and administrative expenses rose 7.6 percent to $355.5 million. Selling and advertising expenses increased for all segments. Administrative and other expenses increased slightly due to increases in salary and related costs and higher spending associated with addressing legal and regulatory issues. Included in administrative and other expenses in 1995 is a charge relating to an employment contract with a former officer, and in the fourth quarter, provisions to write-down nonstrategic assets which were partially offset by a gain recorded on the sale of a corporate aircraft. The Company incurred net interest expense as interest expense on borrowings exceeded income from cash equivalent investments. Pretax profit margins increased slightly to 53.2 percent on earnings before income taxes of $704.6 million. Over the last three years, earnings before income taxes have increased 40.2 percent at an average annual rate of 12.1 percent, while pretax margins have averaged 53.3 percent. The overall tax rate for 1995 decreased slightly. Net earnings increased for the 35th consecutive year rising 10.9 percent to $429.8 million. Primary earnings per share rose to $2.16, a 15.5 percent increase over 1994. Primary earnings per share have increased 53.2 percent over the last three years at an average annual rate of 15.3 percent. 1994 COMPARED WITH 1993 Consolidated net sales rose 10.1 percent to $1.2 billion. The Tobacco segment 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. 5 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. 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 provisions recorded for nonstrategic assets. Net interest expense resulted from 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 did 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. The overall tax rate for 1994 increased slightly. Net earnings increased 11 percent to $387.5 million. Primary earnings per share rose to $1.87, a 15.4 percent increase over 1993. TOBACCO SEGMENT 1995 COMPARED WITH 1994 Tobacco segment sales increased 8.9 percent to $1.2 billion and accounted for 86.9 percent of consolidated revenues. Smokeless tobacco sales increased 9 percent to $1.1 billion, representing 86 percent of consolidated sales. The increase in smokeless tobacco sales resulted from higher selling prices and slightly higher unit volume gains for moist smokeless tobacco products. Domestic unit volume for moist smokeless tobacco products increased 1.3 percent in 1995 to 635.4 million cans, as compared with 1994. Fourth quarter unit volume increased 3.5 percent to 163.7 million cans, compared with the similar 1994 period. Unit volume results for the year and fourth quarter as compared to the similar periods in the prior year were favorably affected by the national roll-out of Skoal Flavor Packs, a new variety of a portion pack product in the fourth quarter of 1995, and were partially offset by distributor inventory build-up in December of 1994. Adjusting for these events unit volume would have increased approximately 0.9 percent for the year and 2.3 percent for the fourth quarter. Cost of sales for the Tobacco segment was slightly higher, primarily due to higher unit costs and increased unit volume for moist smokeless tobacco. Moist smokeless tobacco unit costs increased slightly due to higher leaf tobacco and packaging costs. 6 Gross profit for the segment rose substantially during 1995. Higher selling prices and unit volume gains for moist smokeless tobacco were the primary reasons for the increase. Selling expenses increased 6 percent, primarily due to higher costs associated with the promotion and retail placement of our moist smokeless products. Field and sales support expenses were generally higher as were salaries and related costs for the sales force and support personnel. Advertising costs increased significantly for promotional activities in support of our moist smokeless tobacco products, and the Skoal Flavor Pack roll-out during the fourth quarter. Administrative expenses were significantly higher due to a charge resulting from recording the present value of future payments due to the former president of United States Tobacco Company under terms of his employment contract, higher expenses incurred to address legal and regulatory issues as well as increased support costs. Operating profit increased 10.3 percent to $720.9 million. 1994 COMPARED WITH 1993 Tobacco segment sales rose to $1.1 billion for an increase of 11.2 percent and accounted for 86.5 percent of consolidated revenues. Smokeless tobacco sales increased 12.4 percent to $1.0 billion, and represented 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 1993. 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 as a result of higher selling prices and unit volume gains for moist smokeless tobacco. 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 and 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. WINE SEGMENT 1995 COMPARED WITH 1994 Wine segment revenue increased 22.7 percent to $109.5 million and accounted for 8.3 percent of consolidated sales. Higher case volume for premium wine accounted for the majority of the sales gain along with increased bulk wine sales. Case volume for premium wine increased 18.8 percent, while overall case volume for the Wine segment increased 15.2 percent. Chateau Ste. Michelle and Columbia Crest, our two leading brands of premium wine, accounted for approximately 70 percent of total wine revenue. Unit costs increased slightly primarily due to lower harvest yields in 1994. 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 1995 was significantly higher than in 1994 and at slightly lower average costs, which will have a favorable effect on unit costs in 1996. However, recent adverse weather conditions may affect grape harvest yields in 1996, which may result in higher unit costs in future years. 7 Gross profit for the Wine segment increased 21.7 percent primarily as a result of an increase in premium wine case volume which was partially offset by slightly higher unit costs and higher costs associated with bulk wine sales. Selling, advertising and administrative expenses were higher in 1995. Selling expenses increased significantly primarily to support higher volume levels of premium brands. Advertising expenses were higher and were directed toward expanding and supporting 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 $13.5 million in 1995, an increase of 52.8 percent. 1994 COMPARED WITH 1993 Wine segment revenue increased 11.2 percent to $89.2 million and accounted for 7.3 percent of consolidated sales. Case volume for premium wine accounted for the increase, rising 13.2 percent. Overall case volume for the Wine segment increased 9.2 percent. Unit costs decreased slightly primarily due to excellent harvest yields in 1992 and 1993. Total grape tonnage harvested and purchased in 1994 was significantly lower than the exceptional harvest experienced in 1993 and as a result, 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. OTHER SEGMENT 1995 COMPARED WITH 1994 Other segment sales were $67.4 million, a 14.4 percent decrease from 1994, and accounted for 5.1 percent of consolidated sales. Other segment sales declined primarily due to lower revenues from the entertainment business. An operating loss for the entertainment business, along with higher spending associated with developing international markets and provisions recorded for the anticipated sale of the pipe business resulted in the Other segment operating loss of $5.3 million in 1995. 1994 COMPARED WITH 1993 Other segment sales decreased 3.4 percent in 1994 to $78.7 million 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, along with higher spending associated with developing international markets and provisions recorded for nonstrategic assets more than offset favorable results for the entertainment business. The Other segment recorded an operating profit of $1.5 million in 1994. 8 FOOD AND DRUG ADMINISTRATION (FDA) PROPOSAL The FDA has published in the Federal Register a proposal to regulate tobacco products. The contents of the proposal include unprecedented jurisdiction over the tobacco industry's ability to market, promote and advertise its products. The comment period for this proposal expired on January 2, 1996, on which date the Company filed written comments with the FDA, challenging the agency's jurisdiction to regulate the Company's smokeless tobacco products. Also, in the fall of 1995, United States Tobacco Company filed suit in Federal District Court in Greensboro, North Carolina, seeking judicial confirmation that the FDA lacks jurisdiction to regulate the Company's smokeless tobacco products. The Company is not able to predict the outcome of the FDA's proposal, or assess the future effect that this proposal may have on its tobacco business. FINANCIAL CONDITION SOURCES AND USES OF CASH -- OPERATIONS Cash provided by operating activities, primarily earnings generated by the Tobacco segment is the major source of funds available to the Company. Cash from operations for 1995 was $445.1 million as compared to $453.2 million in 1994 and $367.6 million in 1993. Net cash provided by operating activities has increased $156.3 million over the last three years, at an average annual rate of 16.3 percent. Net cash provided by operating activities in 1995 as compared to 1994 decreased slightly as higher earnings generated by the Tobacco segment were offset primarily by the timing of payments for accrued expenses related to the prior year. Significant inventories of leaf tobacco are required primarily in connection with our smokeless tobacco products. During the last three years, $198.3 million was used for the purchase of leaf tobacco and related costs. In addition, the cost of grapes harvested and purchased totaled $65.4 million over the last three years. INVESTING ACTIVITIES Net cash used in investing activities was $14 million in 1995. Purchases of property, plant and equipment over the last three years totaled $121.1 million. Major areas of capital spending from 1993 through 1995 were: Tobacco segment - Manufacturing, processing and packaging equipment - Building renovations - Computer equipment - Automobiles for the sales force Wine segment - Storage capacity and processing equipment - New facilities and building renovations Other segment - Equipment - Building additions and renovations Shared assets - Transportation equipment -- primarily aircraft - Headquarters renovations 9 In 1996, the Company's capital program is expected to approximate $70 million, and will primarily include improvements to the tobacco processing and manufacturing operations and the expansion of wine processing and storage facilities. In 1995, cash proceeds from the sale of an aircraft were $17.7 million. In 1993, the Company sold its distribution rights for Zig-Zag cigarette papers and related products for $39 million. FINANCING ACTIVITIES Other significant sources and uses of cash over the last three years have included borrowings, the issuance of common stock, stock repurchases and cash dividends. Over the last three years the Company has borrowed $200 million through a combination of its credit facilities and the issuance of commercial paper. (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. The Company receives income tax benefits upon the exercise of certain of these options. Since 1992, funds received from the exercise of options, together with these tax benefits, totaled $108 million. During 1995, the Company continued its program to repurchase shares of its common stock as authorized by the Board of Directors. The current program began in 1994 upon the completion of a prior program, and authorizes the Company to repurchase up to 20 million shares of its common stock from time to time in open market or negotiated transactions to be used in connection with employee benefit programs and other corporate purposes. During 1995, the Company repurchased 8.9 million shares at a cost of $274.8 million. As of December 31, 1995, 6.6 million shares remained to be repurchased under the current program, which is net of put options outstanding on .3 million shares. (See Other Liabilities Note.) 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 $677.8 million, totaling 58.1 percent of net earnings for the period. LIQUIDITY AND CAPITAL RESOURCES Sources of cash exceeded uses of cash by $18.7 million in 1995. Cash generated from operating activities and borrowings were used to meet the Company's requirements for seasonal purchases of leaf tobacco, capital projects, quarterly dividend payments and its stock repurchase program. The Company maintains adequate credit facilities through short-term lines of credit with domestic and foreign banks and through its revolving credit and term loan facility. These facilities can be used as bank financing or as support for commercial paper borrowings for which the Company has the highest rating. At December 31, 1995, the Company had $100 million available under its credit facilities. The ratio of current assets to current liabilities (current ratio) at December 31, 1995 was 1.5 to 1 and has averaged 2.3 to 1 over the last three years. The current ratio declined in 1995 primarily as a result of the short- term obligations outstanding at December 31, 1995. The Company's liquidity position is enhanced by the fact that certain inventories are carried at costs computed under the LIFO method. The average costs of these inventories are $42.9 million more than the amount at which they are carried in the Consolidated Statement of Financial Position at December 31, 1995. In 1996, projected leaf tobacco purchases will approximate the amounts expended in 1995, as the Company continues its plan to maintain higher levels of leaf tobacco. In addition, significant levels of cash will be required for the stock repurchase program, dividend payments and capital projects. The Company anticipates that these and other requirements will be met by amounts generated from operating activities augmented by short-term borrowings. The Company intends to maintain appropriate facilities to ensure access to credit markets providing sufficient financial resources and operational flexibility. 10 The percentage of total debt outstanding to stockholders' equity is 68.1 percent. In 1996, the Company intends to maintain $100 million of long-term debt and approximately the same level of total debt outstanding as of December 31, 1995, by utilizing a combination of its credit facilities and commercial paper, depending on conditions in the credit markets. Stockholders' equity decreased in 1995, 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 68.7 percentage points to 131.2 percent over the last three years. 11 EXHIBIT 13 -- (CONTINUED) (ITEMS 5 AND 7) DIVIDENDS AND STOCK PRICES CASH DIVIDENDS The Company increased its 1995 cash dividend by 16.1 percent to an annual rate of $1.30 per share. Since 1992, the dividend rate has increased 62.5 percent reflecting an average annual increase of 17.6 percent. Total cash dividends paid by the Company in 1995 were $252.4 million or 58.7 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 1995, the Board of Directors approved a first quarter 1996 dividend of 37 cents per share. This equates to an indicated annual rate of $1.48, and represents an increase of 13.8 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, 1995 was 12,320. The following table sets forth dividends paid per share and the high and low market prices for the year and each quarter of 1995 and 1994.
MARKET PRICE PER CASH COMMON SHARE DIVIDENDS ---------------- PAID HIGH LOW --------- ---- --- 1st Quarter 1995....................................................... $ .32 1/2 $32 3/8 $27 1/2 1994....................................................... .28 29 5/8 24 3/8 2nd Quarter 1995....................................................... .32 1/2 32 5/8 28 1994....................................................... .28 28 1/2 23 5/8 3rd Quarter 1995....................................................... .32 1/2 30 26 5/8 1994....................................................... .28 31 1/2 27 1/4 4th Quarter 1995....................................................... .32 1/2 36 28 1/2 1994....................................................... .28 29 3/8 26 Year 1995....................................................... 1.30 36 26 5/8 1994....................................................... 1.12 31 1/2 23 5/8
12 GRAPHICAL INFORMATION INCLUDED IN EXHIBIT 13 (ITEM 7) IS DESCRIBED BELOW: (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS AND PERCENTAGES) The following are bar graphs: Consolidated Net Sales: 1993 - $1,110, 1994 - $1,223 and 1995 - $1,325 Consolidated Gross Profit: 1993 - $864, 1994 - $971 and 1995 - $1,063 Pretax Margins: 1993 - 54.2%, 1994 - 52.4% and 1995 - 53.2% Earnings Per Share: 1993 - $1.62, 1994 - $1.87 and 1995 - $2.16 Tobacco Sales: 1993 - $952, 1994 - $1,058 and 1995 - $1,152 Wine Sales: 1993 - $80, 1994 - $89 and 1995 - $109 Other Sales: 1993 - $81, 1994 - $79 and 1995 - $67 Net Cash Provided By Operating Activities: 1993 - $368, 1994 - $453 and 1995 - $445 Return On Average Stockholders' Equity: 1993 - 71.3%, 1994 - 94.0% and 1995 - 131.2% Dividends Per Share: 1993 - $.96, 1994 - $1.12 and 1995 - $1.30 The following bar graph illustrates the relationship between net earnings and dividends paid: Net Earnings: 1993 - $349, 1994 - $388 and 1995 - $430 Dividends Paid: 1993 - $200, 1994 - $226 and 1995 - $252 A pie chart illustrating the percentage of capital expenditures by segment for 1993 - 1995: Tobacco 65%, Wine 27%, Other 5% and Corporate 3%. 13 EXHIBIT 13 -- (CONTINUED) (ITEM 8) UST CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- NET SALES.............................................. $1,325,422 $1,223,016 $1,110,403 COSTS AND EXPENSES Cost of products sold................................ 262,203 251,944 246,445 Selling, advertising and administrative.............. 355,450 330,344 299,206 ---------- ---------- ---------- TOTAL COSTS AND EXPENSES............................... 617,653 582,288 545,651 ---------- ---------- ---------- OPERATING INCOME....................................... 707,769 640,728 564,752 ---------- ---------- ---------- OTHER (EXPENSE) INCOME Interest (expense) income, net....................... (3,179) (92) 2,004 Gain on disposal of product line..................... -- -- 35,029 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES................................... 704,590 640,636 601,785 ---------- ---------- ---------- INCOME TAXES........................................... 274,830 253,110 232,893 ---------- ---------- ---------- EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES.............................................. 429,760 387,526 368,892 ---------- ---------- ---------- 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........................................... $ 429,760 $ 387,526 $ 349,046 ========== ========== ========== EARNINGS PER SHARE Primary earnings before cumulative effect of accounting changes................................ $2.16 $1.87 $1.71 Cumulative effect of accounting changes.............. -- -- (.09) NET EARNINGS PER SHARE Primary.............................................. $2.16 $1.87 $1.62 Fully diluted........................................ $2.15 $1.87 $1.62 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Primary.............................................. 199,246 207,504 215,719 Fully diluted........................................ 200,336 207,576 215,779
See Notes to Consolidated Financial Statements. 14 UST CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN THOUSANDS)
DECEMBER 31 --------------------- 1995 1994 -------- -------- ASSETS Current assets Cash and cash equivalents............................................ $ 69,403 $ 50,718 Accounts receivable.................................................. 69,598 65,883 Inventories.......................................................... 256,101 237,720 Prepaid expenses and other current assets............................ 30,453 27,616 -------- -------- Total current assets......................................... 425,555 381,937 -------- -------- Property, plant and equipment, net..................................... 294,806 305,885 Deferred income taxes.................................................. 9,042 -- Other assets........................................................... 55,349 53,414 -------- -------- TOTAL ASSETS................................................. $784,752 $741,236 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term obligations............................................... $100,000 $ -- Accounts payable and accrued expenses................................ 111,767 104,558 Income taxes......................................................... 68,956 56,197 -------- -------- Total current liabilities.................................... 280,723 160,755 -------- -------- Long-term debt......................................................... 100,000 125,000 Deferred income taxes.................................................. -- 5,065 Postretirement benefits other than pensions............................ 65,292 61,286 Other liabilities...................................................... 45,180 27,461 -------- -------- Total liabilities............................................ 491,195 379,567 -------- -------- Stockholders' equity Capital stock........................................................ 101,040 100,172 Additional paid-in capital........................................... 373,935 343,390 Retained earnings.................................................... 203,659 33,713 -------- -------- 678,634 477,275 Less cost of shares in treasury...................................... 385,077 115,606 -------- -------- Total stockholders' equity................................... 293,557 361,669 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $784,752 $741,236 ======== ========
See Notes to Consolidated Financial Statements. 15 UST CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ---------------------------------- 1995 1994 1993 -------- -------- -------- OPERATING ACTIVITIES Net earnings............................................. $429,760 $387,526 $349,046 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization......................... 29,119 28,169 26,674 Deferred income taxes................................. (12,717) (4,257) (24,783) Cumulative effect of accounting changes............... -- -- 37,961 Gain on disposal of product line...................... -- -- (35,029) Changes in operating assets and liabilities: Accounts receivable................................. (3,434) (1,507) (10,557) Inventories......................................... (21,134) (22,085) (4,866) Prepaid expenses and other assets................... (4,670) 6,038 (1,590) Accounts payable, accrued expenses and other liabilities...................................... 15,449 47,338 8,719 Income taxes payable................................ 12,759 12,000 22,052 --------- --------- --------- Net cash provided by operating activities........ 445,132 453,222 367,627 --------- --------- --------- INVESTING ACTIVITIES Purchases of property, plant and equipment............... (35,280) (27,659) (58,199) Dispositions of property, plant and equipment............ 21,278 3,975 3,689 Proceeds received from sales of businesses............... -- 2,221 37,218 --------- --------- --------- Net cash used in investing activities............ (14,002) (21,463) (17,292) --------- --------- --------- FINANCING ACTIVITIES Proceeds from borrowings................................. 100,000 85,000 40,000 Repayment of borrowings.................................. (25,000) -- -- Proceeds from the issuance of common stock............... 39,726 33,190 35,051 Dividends paid........................................... (252,388) (225,715) (199,725) Common stock repurchased................................. (274,783) (298,843) (236,704) --------- --------- --------- Net cash used in financing activities............ (412,445) (406,368) (361,378) --------- --------- --------- Increase (decrease) in cash and cash equivalents.................................... 18,685 25,391 (11,043) Cash and cash equivalents at beginning of year... 50,718 25,327 36,370 --------- --------- --------- Cash and cash equivalents at end of year......... $ 69,403 $ 50,718 $ 25,327 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes.......................................... $267,236 $232,615 $201,082 Interest.............................................. 4,521 4,708 1,150
See Notes to Consolidated Financial Statements. 16 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, 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 Net earnings for the year................... -- -- 429,760 -- 429,760 Cash dividends -- $1.30 per share........... -- -- (252,388) -- (252,388) Exercise of stock options -- 1,935,600 shares.................................... 968 23,074 -- -- 24,042 Income tax benefits and decrease in receivables from exercise of stock options................................... -- 15,684 -- -- 15,684 Common stock repurchased for treasury -- 8,860,000 shares.......................... -- -- -- (274,783) (274,783) Retirement of treasury stock -- 200,000 shares.................................... (100) (368) (4,844) 5,312 -- Reclassification of put option obligations, net of proceeds........................... -- (7,845) -- -- (7,845) Adjustment for additional minimum pension liability, net of taxes................... -- -- (2,582) -- (2,582) -------- -------- --------- -------- -------- Balance at December 31, 1995................ $101,040 $373,935 $203,659 $(385,077) $293,557 ======== ======== ========= ======== ========
See Notes to Consolidated Financial Statements. 17 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on judgments and estimates made by management, which may differ from actual results. The consolidated financial statements include the accounts of the Company and all of its subsidiaries after the elimination of intercompany accounts and transactions. 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 net 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 obligations 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. STOCK COMPENSATION The Company accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under the Company's current plans, options may be granted at not less than the fair market value on the date of grant and therefore no compensation expense is recognized for the stock options granted. In 1996, the Company intends to adopt the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." IMPAIRMENT OF LONG-LIVED ASSETS In 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company will adopt SFAS No. 121 in 1996, and the impact, if any, will not be material. 18 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES Income taxes are provided on all revenue and expense items included in the Consolidated Statement of Earnings, regardless of the period in which such items are recognized for income tax purposes, except for items representing permanent differences between pretax accounting income and taxable income. Deferred income taxes result from the future tax consequences associated with temporary differences between the carrying amounts of assets and liabilities for tax and financial reporting purposes. EARNINGS PER SHARE 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. CASH AND CASH EQUIVALENTS
DECEMBER 31 ------------------- 1995 1994 ------- ------- Cash............................................................. $11,013 $ 9,718 Commercial paper................................................. 58,390 41,000 ------- ------- $69,403 $50,718 ======= =======
Cash equivalents are all highly liquid investments generally with maturities of three months or less when acquired. INVENTORIES
DECEMBER 31 --------------------- 1995 1994 -------- -------- Leaf tobacco................................................... $122,748 $104,313 Products in process and finished goods......................... 117,102 115,261 Other materials and supplies................................... 16,251 18,146 -------- -------- $256,101 $237,720 ======== ========
At December 31, 1995 and 1994, $122.7 million and $103.2 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 $42.9 million and $41.8 million, respectively. 19 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31 --------------------- 1995 1994 -------- -------- Land........................................................... $ 27,425 $ 27,259 Buildings...................................................... 197,101 188,872 Machinery and equipment........................................ 267,639 273,160 -------- -------- 492,165 489,291 Less allowances for depreciation............................... 197,359 183,406 -------- -------- Net property, plant and equipment.............................. $294,806 $305,885 ======== ========
OTHER ASSETS
DECEMBER 31 ------------------- 1995 1994 ------- ------- Prepaid pension costs............................................ $26,064 $22,083 Investments in unconsolidated companies.......................... 12,495 12,683 Other............................................................ 16,790 18,648 ------- ------- $55,349 $53,414 ======= =======
The investments in unconsolidated companies consist principally of a limited partnership that owns and leases a cogeneration facility. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31 --------------------- 1995 1994 -------- -------- Trade accounts payable......................................... $ 24,861 $ 20,544 Employee compensation and benefits............................. 55,771 49,059 Taxes, other than income....................................... 4,097 7,358 Other accrued expenses......................................... 27,038 27,597 -------- -------- $111,767 $104,558 ======== ========
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. The Company had $100 million and $125 million outstanding at December 31, 1995 and 1994, respectively, under this agreement. The weighted average interest rate on the outstanding borrowings at December 31, 1995 was 6.2 percent. 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. 20 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. At December 31, 1995, the Company had $100 million outstanding under commercial paper borrowings at a weighted average interest rate of 5.9 percent. In addition, the Company has short-term lines of credit with domestic and foreign banks totaling $100 million at December 31, 1995 and 1994. The lines of credit are generally committed for a one-year period expiring at various times during 1996, and provide for borrowing at prime rates. These arrangements require commitment fees which are not significant. OTHER LIABILITIES Other liabilities include the noncurrent portion of the net pension liabilities for 1995 and 1994 of $34.5 million and $27.1 million, respectively. (See Employee Benefit and Compensation Plans Note.) During the fourth quarter of 1995, the Company sold put options that entitle the holder to sell a specified number of shares of common stock to the Company at a predetermined price. Put options to repurchase 250,000 shares of the Company's stock were outstanding at December 31, 1995, expiring on various dates between January 1996 and March 1996 with exercise prices ranging from $29.75 to $35.13. At December 31, 1995, the amount related to the Company's potential repurchase obligation, $8.1 million, has been reclassified from stockholders' equity and is included in other liabilities. The Company received a premium of $.3 million from the sale of these put options in 1995. There was no effect on earnings per share for the periods presented as a result of these put options. (See Consolidated Statement of Changes in Stockholders' Equity.) CAPITAL STOCK The Company has two classes of capital stock, preferred stock and common stock. Preferred stock carries a par value of $.10 and no shares have been issued. Common stock carries a $.50 par value. Authorized preferred stock is 10 million shares and authorized common stock is 600 million shares. In 1995, the Company repurchased 8.9 million shares pursuant to a stock repurchase program authorized by the Board of Directors in 1994. The program allows 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. As of December 31, 1995, 13.1 million shares of the 20 million authorized have been repurchased and .3 million shares were subject to put options outstanding. Common stock issued and outstanding at December 31, 1995 and 1994 was 189,186,036 shares and 196,110,436 shares, respectively. Events causing changes in the issued and outstanding shares are described in the Consolidated Statement of Changes in Stockholders' Equity. STOCK OPTIONS The Company maintains three stock option plans, the 1992 and 1982 Stock Option Plans and a Nonemployee Directors' Stock Option Plan. Under the plans, options may be granted at not less than the fair market value on the date of grant. In May 1995, stockholders approved the Nonemployee Directors' Stock Option Plan. Under this plan, options to purchase up to 200,000 shares of common stock may be granted. 21 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Under the Nonemployee Directors' Plan options first become exercisable six months from the date of grant and may be exercisable up to a maximum of ten years from the date of grant and must be paid in full at the time of the exercise. At December 31, 1995, 6,030,300 shares were available for grant under the 1992 plan and 189,500 shares were available for grant under the Nonemployee Directors' Plan, while no shares were available under the 1982 plan. Receivables from the exercise of options in the amount of $11.3 million in 1995, $15.3 million in 1994 and $17.4 million in 1993 have been deducted from stockholders' equity. Changes in outstanding options were as follows:
PRICE RANGE SHARES --------------- ---------- 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 Options granted....................................... 29.31- 35.25 1,510,100 Options exercised..................................... 4.05- 30.81 (1,935,600) Options forfeited..................................... 25.50- 29.38 (27,200) ---------- Outstanding Dec. 31, 1995......................................... $ 4.05- $35.25 16,321,700 =========
Under the 1982 Stock Option Plan, incentive and nonqualified options to purchase a total of 12,018,600 shares were outstanding and exercisable as of December 31, 1995. The average price per share is $20.07, with expiration dates ranging from February 3, 1996 to February 6, 2002. Under the 1992 Stock Option Plan, incentive and nonqualified options to purchase a total of 4,292,600 shares were outstanding, of which 1,782,200 shares were exercisable at December 31, 1995 due to vesting requirements. The average price per share is $28.16, with expiration dates ranging from February 22, 2003 to December 13, 2005. Under the Nonemployee Directors' Plan a total of 10,500 shares were outstanding and exercisable at December 31, 1995 with an average price per share of $29.31, which expire on May 2, 2005. In connection with the Nonemployee Directors' Plan, 200,000 shares of the Company's treasury stock has been cancelled and reserved for use upon the exercise of stock options for this plan. 22 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 1995, 1994 and 1993 were:
1995 1994 1993 ---- ---- ---- Discount rate.................................................. 9% 7% 8% Average rate of increase in compensation levels................ 5% 5% 6% Expected long-term rate of return on plan assets............... 11% 9% 10%
Net periodic pension cost for 1995, 1994 and 1993 include the following components (in millions):
1995 1994 1993 ------ ------ ------ Service cost -- benefits earned during period.................... $ 6.4 $ 8.2 $ 7.1 Interest cost on projected benefit obligation.................... 15.7 14.2 13.9 Actual return on plan assets..................................... (53.6) 4.3 (18.7) Net amortization and deferral.................................... 34.5 (20.2) 1.6 ------ ------ ------ Net periodic pension cost........................................ $ 3.0 $ 6.5 $ 3.9 ====== ====== ======
The following table presents a reconciliation of the funded status of the plans (in millions):
DECEMBER 31 ------------------------------------------------------------- 1995 1994 ----------------------------- ----------------------------- 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............................ $(140.2) $ (36.3) $(109.3) $ (28.0) Nonvested benefits......................... (15.4) (3.2) (12.5) (2.3) ------- ------ ------- ------ Accumulated benefits....................... (155.6) (39.5) (121.8) (30.3) Effect of future pay increases............. (24.0) (10.8) (15.9) (5.9) ------- ------ ------- ------ Projected benefit obligation............... (179.6) (50.3) (137.7) (36.2) Plan assets at fair value.................... 228.6 2.5 185.7 -- Unrecognized net (gain) loss................. (16.1) 16.1 (17.9) 6.8 Prior service cost not yet recognized in net periodic pension cost...................... (2.4) .8 (2.7) .8 Unrecognized portion of initial net (asset) obligation................................. (4.4) 3.6 (5.3) 4.4 Adjustment to recognize additional minimum liability.................................. -- (10.8) -- (6.1) ------- ------ ------- ------ Net pension asset (liability)................ $ 26.1 $ (38.1) $ 22.1 $ (30.3) ======= ====== ======= ======
23 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For 1995 and 1994, the net pension assets of $26.1 million and $22.1 million, respectively, consist of prepaid pension costs and are included in other assets. The noncurrent portion of the net liabilities for 1995 and 1994 are included in other liabilities. For pension plans whose accumulated benefits exceed assets at December 31, 1995, the Consolidated Statement of Financial Position reflects an additional minimum liability of $10.8 million: an intangible asset of $3.8 million included in other assets and a reduction of retained earnings of $4.6 million, which is net of deferred tax benefits of $2.4 million. At December 31, 1994, the Consolidated Statement of Financial Position included an additional minimum liability of $6.1 million: an intangible asset of $3.1 million and a reduction of retained earnings of $2 million, which is net of deferred tax benefits of $1 million. Plan assets include marketable equity securities (including common stock of the Company having a market value of $42.7 million as of December 31, 1995 and $35.7 million as of December 31, 1994) and corporate and government debt securities. The discount rate used in determining the present value of benefit obligations was 7.5 percent for 1995 and 9 percent for 1994. 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 $3.8 million in 1995, $3.7 million in 1994 and $3.6 million in 1993. 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 $36.9 million for 1995, $33.5 million for 1994 and $28.8 million for 1993. 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. In 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and 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 net periodic postretirement benefit cost for 1995, 1994 and 1993 included the following components:
1995 1994 1993 ------ ------ ------ Service cost............................................. $2,318 $2,835 $3,311 Interest cost............................................ 4,037 3,342 4,009 Amortization of unrecognized gain........................ (651) (226) -- ------ ------ ------ Net periodic postretirement benefit cost................. $5,704 $5,951 $7,320 ====== ====== ======
24 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the combined status of the plans at December 31:
1995 1994 ------- ------- Accumulated postretirement benefit obligation: Retirees....................................................... $20,326 $15,153 Fully eligible active plan participants........................ 9,372 7,719 Other active plan participants................................. 26,804 22,400 ------- ------- 56,502 45,272 Unrecognized gain................................................ 8,790 16,014 ------- ------- Accrued postretirement benefit obligation........................ $65,292 $61,286 ======= =======
The discount rate used in determining the net periodic postretirement benefit cost was 9 percent for 1995, 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 10.6 percent for 1996 and to decrease gradually to 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, 1995 by approximately $8.5 million and the 1995 net periodic postretirement benefit cost by approximately $1.2 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5 percent at December 31, 1995 and 9 percent at December 31, 1994. INCOME TAXES In 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which changed 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. The income tax provision (benefit) consisted of the following:
1995 1994 1993 -------- -------- -------- Current: Federal.......................................... $250,612 $223,407 $208,059 State and local.................................. 36,935 33,960 31,502 -------- -------- -------- Total current............................ 287,547 257,367 239,561 -------- -------- -------- Deferred: Federal.......................................... (13,695) (4,257) (23,261) State and local.................................. 978 -- (1,522) -------- -------- -------- Total deferred........................... (12,717) (4,257) (24,783) -------- -------- -------- $274,830 $253,110 $214,778 ======== ======== ========
The current tax provisions do not reflect $11.7 million, $13.5 million and $15.4 million for 1995, 1994 and 1993, respectively, of tax benefits arising from the exercise of stock options. These amounts were credited directly to additional paid-in capital. 25 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred taxes for 1993 includes an $18.1 million benefit resulting from the adoption of SFAS No. 106. In addition, the deferred tax benefits for 1995, 1994 and 1993 do not reflect the respective tax effects of $1.4 million, $(1.4) million and $.8 million resulting from the minimum pension liability adjustment required by SFAS No. 87, "Employers' Accounting for Pensions." Deferred income taxes arise from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities as of December 31 are as follows:
1995 1994 ------- ------- Deferred tax assets: Postretirement benefits other than pensions.................... $22,852 $21,450 Other accrued liabilities...................................... 29,049 19,608 Accrued pension liabilities.................................... 12,025 9,674 All other, net................................................. 3,298 3,585 ------- ------- Total deferred tax assets.............................. 67,224 54,317 ------- ------- Deferred tax liabilities: Depreciation................................................... 39,613 40,883 Investment in limited partnerships............................. 9,447 10,269 Prepaid pension assets......................................... 9,122 8,230 ------- ------- Total deferred tax liabilities......................... 58,182 59,382 ------- ------- Net deferred tax assets (liabilities)............................ $ 9,042 $(5,065) ======= =======
Differences between the effective tax rate and the statutory U.S. federal income tax rate are explained as follows:
1995 1994 1993 ---- ---- ---- Statutory U.S. federal income tax rate......................... 35.0% 35.0% 35.0% State and local taxes, net of federal benefit.................. 3.5 3.4 3.5 Other, net..................................................... .5 1.1 .5 ---- ---- ---- 39.0% 39.5% 39.0% ==== ==== ====
EXCISE TAXES Net sales and cost of products sold include excise taxes of $25.5 million in 1995, $25.3 million in 1994 and $30 million in 1993. ADVERTISING COSTS The Company expenses the production costs of advertising in the period in which the costs are incurred. Advertising expenses were $65 million in 1995, $53.7 million in 1994 and $48.7 million in 1993. At December 31, 1995 and 1994, $7.8 million and $7.2 million, respectively, of advertising related costs were reported as prepaid expenses and other current assets. 26 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ------------------------------- 1995 1994 1993 ------- ------- ------- Short-term obligations................................ $(1,831) $(1,660) $(1,091) Long-term obligations................................. (2,961) (2,956) (152) ------- ------- ------- (4,792) (4,616) (1,243) ------- ------- ------- Income from cash equivalents.......................... 1,613 4,524 3,247 ------- ------- ------- $(3,179) $ (92) $ 2,004 ======= ======= =======
QUARTERLY FINANCIAL DATA (UNAUDITED)
1995 FIRST SECOND THIRD FOURTH YEAR -------- -------- -------- -------- ---------- Net sales.......................... $306,097 $340,181 $334,268 $344,876 $1,325,422 Gross profit....................... 249,491 272,889 267,366 273,473 1,063,219 Net earnings....................... 99,233 109,870 109,955 110,702 429,760 Primary earnings per share......... $.49 $.55 $.55 $.56 $2.16 -------------------------------------------------------------- 1994 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
INDUSTRY SEGMENT DATA The Company's industry segments are Tobacco, Wine and Other. The Company operates predominately in the tobacco industry as a producer and marketer of moist smokeless tobacco products. The Company also produces and markets premium wines as well as a number of nontobacco products. Tobacco segment sales are principally to a large number of wholesalers and chain stores which are widely dispersed. In 1995, sales to one wholesale customer accounted for approximately 21 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 both assets directly identified with those operations and an allocable share of jointly used assets. Corporate assets consist primarily of cash and cash equivalents, other long-term investments and an allocation of property, plant and equipment associated with nonsegment activities. Gross capital expenditures for 1995 were $22.2 million for the Tobacco segment, $11.1 million for the Wine segment, $1.8 million for the Other segment and $.2 million for Corporate. These amounts were netted with each segment's allocable share of the sale of a corporate aircraft of $17.7 million along with other dispositions. 27 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER MATTERS The Company has been named in certain litigation against the major domestic cigarette companies and others seeking damages alleged to be related to the usage of cigarettes and, in certain of those complaints, "tobacco products," some of which contain several allegations relating to smokeless tobacco products. Each of these actions is in varying stages of pretrial activities. The Company believes that these pending litigation matters will not result in any material liability for a number of reasons, including the fact that the Company has had only limited involvement with cigarettes and the Company's current percentage of total tobacco industry sales is relatively small. Prior to 1986, the Company manufactured some cigarette products which had a de minimis market share. From May 1, 1982 to August 1, 1994, the Company distributed a small volume of imported cigarettes and is indemnified against claims relating to those products. In addition, in December 1995, the Company was named in an action brought by an individual plaintiff and his wife against a number of smokeless tobacco manufacturers and certain other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of his use of smokeless tobacco products. The Company believes, and has been so advised by counsel handling these cases, that it has a number of meritorious defenses to all such pending litigation. All such cases are, and will continue to be, vigorously defended, and the Company believes that the ultimate outcome of all such pending litigation will not have a material adverse effect on the consolidated financial statements of the Company. The Food and Drug Administration (FDA) has published in the Federal Register a proposal to regulate tobacco products. The Company filed suit in Federal District Court in Greensboro, North Carolina, seeking judicial confirmation that the FDA lacks jurisdiction to regulate smokeless tobacco products. The Company is not able to predict the outcome of the FDA's proposal, or assess the future effect that this proposal may have on its tobacco business. 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. 28 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, 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 6, 1996 EX-21 3 SUBSIDIARIES OF UST 1 EXHIBIT 21 PARENT AND SUBSIDIARIES UST is an independent corporation without parent. It had the following significant subsidiaries as of December 31, 1995:
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 4 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of UST Inc. of our report dated February 6, 1996, included in the 1995 Annual Report to stockholders of UST Inc. We also consent to the incorporation by reference in Post-Effective Amendment No. 4 to the Registration Statement (Form S-8 No. 2-72410) pertaining to the UST Inc. Employees' Savings Plan, the Registration Statement (Form S-8 No. 33-28137) pertaining to the 1982 Stock Option Plan, the Registration Statement (Form S-8 No. 33-48828) pertaining to the 1992 Stock Option Plan and the Registration Statement (Form S-8 No. 33-59229) pertaining to the Nonemployee Directors' Stock Option Plan, of our report dated February 6, 1996, 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, 1995. ERNST & YOUNG LLP Stamford, Connecticut March 1, 1996 EX-27 5 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-31-1995 DEC-31-1995 69,403 0 69,598 0 256,101 425,555 492,165 197,359 784,752 280,723 100,000 101,040 0 0 192,517 784,752 1,325,422 1,325,422 262,203 262,203 355,450 0 3,179 704,590 274,830 429,760 0 0 0 429,760 2.16 2.15
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