-----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, WQ2eeB9Pt0jIym63uPleiFde574vcvKgeeK1kD1RW4zlfb/hUv87FgoNPEZXXByY ocr1GCvMh/Q4Y22YYYcQ+g== 0000950123-97-002216.txt : 19970318 0000950123-97-002216.hdr.sgml : 19970318 ACCESSION NUMBER: 0000950123-97-002216 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970317 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17506 FILM NUMBER: 97557852 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-K 1 UST INC. FORM 10-K 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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-17506 UST INC. (Exact name of registrant as specified in its charter) 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. [ ] AS OF FEBRUARY 28, 1997, THE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON STOCK, $.50 PAR VALUE, HELD BY NON-AFFILIATES OF REGISTRANT (WHICH FOR THIS PURPOSE DOES NOT INCLUDE DIRECTORS OR OFFICERS) WAS $5,588,189,225. AS OF FEBRUARY 28, 1997, THERE WERE 183,398,736 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, 1996 AND FILED AS AN EXHIBIT AS REQUIRED BY ITEM 601(b)(13) OF REGULATION S-K...........................PARTS I & II CERTAIN PAGES OF UST 1997 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). Registrant also imports and markets pipe tobacco. WINE: Registrant produces and markets wine and craft beers. OTHER: Registrant's international operation which markets moist smokeless tobacco and manufactures and markets premium cigars, and its video entertainment business are included in this segment. Registrant also operates certain commercial agricultural properties. INDUSTRY SEGMENT DATA Registrant hereby incorporates by reference the Consolidated Industry Segment Data pertaining to the years 1994 through 1996 set forth on page 31 of its Annual Report to stockholders for the fiscal year ended December 31, 1996 ("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 It has been claimed that the use of tobacco products may be harmful to health. Registrant believes that an unresolved controversy continues to exist among scientists concerning the claims made about tobacco and health. In 1986, federal legislation was enacted regulating smokeless tobacco products by, inter alia, requiring health warning notices on smokeless tobacco packages and advertising and prohibiting the advertising of smokeless tobacco products on electronic media. A federal excise tax was imposed in 1986, which was increased in 1991 and 1993. On August 28, 1996, the Food and Drug Administration (FDA) published regulations asserting unprecedented jurisdiction over nicotine in tobacco as a "drug" and purports to regulate smokeless tobacco products as a "medical device." The final regulations include severe restrictions on the advertising, marketing and promotion of smokeless tobacco products and will require Registrant to comply with a wide range of labeling, reporting and other requirements. Registrant and other smokeless tobacco manufacturers have filed suit against FDA seeking a judicial declaration that FDA has no authority to regulate smokeless tobacco 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 in federal excise taxes, a ban or further restriction of all advertising and promotion, regulation of environmental tobacco smoke and increased regulation of the manufacturing and marketing of tobacco products by new or existing federal agencies. Substantially similar proposals will likely be considered in 1997. In recent years, various state and local governments continued the regulation of tobacco products, including, inter alia, the imposition of significantly higher taxes, sampling and advertising bans or restrictions, ingredients disclosure requirements, regulation of environmental tobacco smoke and anti-tobacco advertising campaigns. Additional state and local legislative and regulatory actions will likely be considered in 1997. Registrant is unable to assess the future effects these various actions may have on its tobacco business. During 1996, media reports discussed proposals for a comprehensive legislative solution to resolve claims against the tobacco industry. Registrant believes that any such legislation would involve significant, if not insurmountable, difficulties in reconciling the views of many competing interests. Nevertheless, Registrant may be called upon to address such proposals and to that end may participate in discussions with appropriate parties. Should such circumstances arise, Registrant does not contemplate making any comment as to the existence or progress of any such discussions. Until a legislative solution is finalized, Registrant will not be able to assess the financial effect, if any, 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. The major portion of tobacco used in Registrant's products is purchased from domestic suppliers. Various factors, including the level of domestic tobacco production can affect the amount of tobacco purchased by Registrant from domestic and foreign sources. Tobaccos used in the manufacture of smokeless tobacco products are processed and aged by Registrant for a period of two to three years prior to their use. Registrant or its suppliers purchase certain flavoring components used in Registrant's tobacco products from foreign sources. At the present time, Registrant has no reason to believe that future raw material requirements for its tobacco products will not be satisfied. However, the continuing availability and the cost of tobacco 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. 2 4 WORKING CAPITAL The principal portion of Registrant's operating cash requirements relates to its need to maintain significant inventories of leaf tobacco, primarily for manufacturing of smokeless tobacco products, to ensure a three year aging process prior to use. CUSTOMERS Registrant markets tobacco products throughout the United States principally to chain stores and tobacco and grocery wholesalers. Approximately 30% of Registrant's gross sales of tobacco products are made to four 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 of which also manufactures and markets smokeless tobacco products. Registrant is a well established and major factor in the smokeless tobacco sector of the overall tobacco market. Consequently, Registrant competes actively with both larger and smaller companies in the marketing of its tobacco products. Registrant's principal methods of competition in the marketing of its tobacco products include quality, advertising, promotion, sampling, 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. 53% of Registrant's wine sales are made to ten distributors, no one of which accounts for more than 24% of total wine sales. Substantially all wines are sold through state-licensed distributors with whom Registrant maintains satisfactory relationships. In addition, Registrant owns and operates a microbrewery located in Yakima, Washington, which produces and markets craft beers primarily under the brand name BERT GRANT'S ALE. Registrant is a minor factor in the total nationwide business of producing craft beers. It has been claimed that the use of alcohol beverages may be harmful to health. Registrant believes that an unresolved controversy continues to exist among scientists concerning the claims made about alcohol beverages and health. In 1988, federal legislation was enacted regulating alcohol beverages by requiring health warning notices on alcohol beverages. Effective in 1991, the federal excise tax on wine was increased from $.17 a gallon to $1.07 a gallon for those manufacturers that produce more than 250,000 gallons a year, such as Registrant. In recent years at the federal level, proposals were made for additional regulation of alcohol beverages including, inter alia, an excise tax increase, modification of the required health warning notices and the regulation of labeling, advertising and packaging. Substantially similar proposals will likely be considered in 1997. 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 1997. Registrant is unable to assess the future effects these regulatory and other actions may have on the sale of its wines and craft beers. Registrant uses grapes harvested from its own vineyards, as well as grapes purchased from independent growers located primarily in Washington State. Due to adverse weather conditions, total grapes harvested and purchased in 1996 were significantly less than that in the prior year. Because of the fluctuation in grape harvest yields from year to year as well as the increasing demand for premium varietal wines, Registrant has taken steps that it believes will ensure that future raw material requirements for its wine products will 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. 3 5 OTHER Included in this segment are the international operation which markets moist smokeless tobacco and manufactures and markets the premium cigar brands, DON TOMAS and ASTRAL; video entertainment business; and agricultural properties. 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 1996 was 4,467. TRADEMARKS Registrant markets consumer products under a large number of trademarks. All of Registrant's trademarks either have been registered or applications therefor are pending with the United States Patent and Trademark Office. SEASONAL BUSINESS No material portion of the business of any 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............ 716,000 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. Yakima, Washington................ 26,000 Microbrewery, distribution and storage facility, and office. Other Facilities: Tampa, Florida.................... 52,000 Office, warehouse and cigar distribution center. Danli, Honduras, C.A.............. 114,000 Office, warehouses, and manufacturing plant for cigars and boxes. Talanga, Honduras, C.A............ 107,000 Office, warehouse and barns.
LAND IN APPROXIMATE LOCATION ACRES ACTIVITIES ------------------------------------ ----------- ------------------------------------ Yakima, Benton and Island Counties, Washington........... 3,351 Vineyards. Benton County, Washington......... 18,494 Other, including agricultural properties. Talanga, Honduras, C.A............ 1,400 Tobacco farm.
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, 1996 were suitable and adequate for the purposes for which they were used, and were operated at satisfactory levels of capacity. All principal properties are owned in fee by Registrant. 5 7 ITEM 3 -- LEGAL PROCEEDINGS Registrant has been named in certain health care cost reimbursement/class action litigation against the major domestic cigarette companies and others seeking damages and other relief. The complaints in these cases on their face predominantly relate to the usage of cigarettes; within that context, certain complaints contain a few allegations relating specifically to smokeless tobacco products. These actions are in varying stages of pretrial activities. Registrant believes that these pending litigation matters will not result in any material liability for a number of reasons, including the fact that Registrant has had only limited involvement with cigarettes and Registrant's current percentage of total tobacco industry sales is relatively small. Prior to 1986, Registrant manufactured some cigarette products which had a de minimis market share. From May 1, 1982 to August 1, 1994, Registrant distributed a small volume of imported cigarettes and is indemnified against claims relating to those products. Registrant has been named in three actions brought by individual plaintiffs, all of whom are represented by the same Louisiana attorney, against a number of smokeless tobacco manufacturers, cigarette manufacturers and certain other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. Registrant has also been named in an action entitled Morgan v. United States Tobacco Company, et al, (No. 68,655-B), Tenth Judicial District Court for the Parish of Natchitoches, State of Louisiana, served on January 27, 1997. This action is brought by an individual plaintiff and purports to state a class action on behalf of "[a]ll nicotine dependent persons who are residents of Louisiana who have purchased and used smokeless tobacco manufactured by defendants" (including the estates, representatives, administrators, spouses, children, relatives and "significant others" thereof) and seeks unspecified compensatory damages, costs of medical monitoring and other general, special and equitable relief. This action is brought against Registrant and certain other organizations by various plaintiffs' counsel, including counsel who initiated a similar action on behalf of Kansas residents which ultimately was dismissed by court order in 1995. 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. 6 8 EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to instruction 3 to Item 401(b) of Regulation S-K, the name, office, age and business experience of each executive officer of Registrant as of February 28, 1997 is set forth below:
NAME OFFICE AGE --------------------------------------- --------------------------------------- --- Robert E. Barrett...................... Executive Vice President and 58 President -- UST Enterprises Inc. Vincent A. Gierer, Jr. ................ Chairman of the Board, Chief Executive 49 Officer and President Harry W. Peter III..................... Executive Vice President and 57 President -- UST International Inc. Richard H. Verheij..................... Executive Vice President and General 38 Counsel
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 has been employed by Registrant since January 1, 1991. Mr. Gierer has served as Chairman of the Board and Chief Executive Officer since December 1, 1993 and has served as President since September 27, 1990. Mr. Gierer also served as Chief Operating Officer from September 27, 1990 to November 30, 1993 and as Executive Vice President and Chief Financial Officer from February 17, 1988 to September 26, 1990. Mr. Gierer has been employed by Registrant since March 16, 1978. Mr. Peter has served as Executive Vice President since October 29, 1990. He also has served as President of UST International Inc. since January 1, 1993. Mr. Peter served as Senior Vice President from July 27, 1989 to October 28, 1990 and as Vice President from June 23, 1988 to July 26, 1989. Mr. Peter has been employed by Registrant since February 1, 1988. Mr. Verheij has served as Executive Vice President and General Counsel since May 7, 1996. Mr. Verheij served as Senior Vice President and General Counsel from December 1, 1994 to May 6, 1996, as Senior Vice President and Associate General Counsel from April 4, 1994 to November 30, 1994, 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 28, 1997, there were approximately 11,800 stockholders of record of its Common Stock. ITEM 6 -- SELECTED FINANCIAL DATA Registrant hereby incorporates by reference the Consolidated Selected Financial Data -- 11 Years set forth on pages 46 and 47 of its Annual Report, which pages are included in Exhibit 13. 7 9 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 1997 Annual Meeting and Proxy Statement. Information concerning executive officers of Registrant is set forth herein following Item 4 of this Report. ITEM 11 -- EXECUTIVE COMPENSATION Registrant hereby incorporates by reference the information with respect to executive compensation which is contained in Tables II through V (including the notes thereto) and the accompanying text set forth under the caption "Compensation of Executive Officers" in its Notice of 1997 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 1997 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 1997 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, 1996, 1995 and 1994 Consolidated Statement of Financial Position -- December 31, 1996 and 1995 Consolidated Statement of Cash Flows -- Years ended December 31, 1996, 1995 and 1994 8 10 Consolidated Statement of Changes in Stockholders' Equity -- Years ended December 31, 1996, 1995 and 1994 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 Registrant and Vincent A. Gierer, Jr., an Executive Officer, incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1986. 10.2* -- Employment Agreement dated December 1, 1993 between Registrant and John J. Bucchignano, a former 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 Employment Agreement for Robert D. Rothenberg, a former Executive Officer. 10.4* -- Form of Severance Agreement dated October 27, 1986 between Registrant and certain officers, incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1986. 10.5* -- 1982 Stock Option Plan restated as of March 22, 1989, incorporated by reference to Exhibit 4.1 to Form S-8 Registration Statement filed on April 14, 1989. 10.6* -- 1992 Stock Option Plan, as amended and restated as of December 12, 1996. 10.7* -- Incentive Compensation Plan, as amended and restated as of January 1, 1996. 10.8* -- Officers' Supplemental Retirement Plan, as restated as of December 1, 1992, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1992. 10.9 -- Nonemployee Directors' Retirement Plan, effective as of January 1, 1988, incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended December 31, 1992. 10.10 -- Directors' Supplemental Medical Plan, as amended and restated as of February 16, 1995, incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1994. 10.11* -- Nonemployee Directors' Stock Option Plan effective May 2, 1995, incorporated by reference to Exhibit A to 1995 Notice of Annual Meeting and Proxy Statement dated March 24, 1995. 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 28, 1997 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 28, 1997 Executive Officer) VINCENT A. GIERER, JR. ------------------------------------------- VINCENT A. GIERER, JR. Senior Vice President and Controller (Principal Accounting Officer and Principal February 28, 1997 Financial Officer) ROBERT T. D'ALESSANDRO ------------------------------------------- ROBERT T. D'ALESSANDRO February 28, 1997 Director JAMES W. CHAPIN ------------------------------------------- JAMES W. CHAPIN February 28, 1997 Director EDWARD H. DEHORITY, JR. ------------------------------------------- EDWARD H. DEHORITY, JR. February 28, 1997 Director ELAINE J. EISENMAN ------------------------------------------- ELAINE J. EISENMAN February 28, 1997 Chairman of the Board VINCENT A. GIERER, JR. ------------------------------------------- VINCENT A. GIERER, JR. February 28, 1997 Director P.X. KELLEY ------------------------------------------- P.X. KELLEY February 28, 1997 Director RALPH L. ROSSI ------------------------------------------- RALPH L. ROSSI February 28, 1997 Director SPENCER R. STUART ------------------------------------------- SPENCER R. STUART February 28, 1997 Director JOHN P. WARWICK ------------------------------------------- JOHN P. WARWICK February 28, 1997 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 Registrant and Vincent A. Gierer, Jr., an Executive Officer, incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1986. 10.2* -- Employment Agreement dated December 1, 1993 between Registrant and John J. Bucchignano, a former 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 Employment Agreement for Robert D. Rothenberg, a former Executive Officer. 10.4* -- Form of Severance Agreement dated October 27, 1986 between Registrant and certain officers, incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1986. 10.5* -- 1982 Stock Option Plan restated as of March 22, 1989, incorporated by reference to Exhibit 4.1 to Form S-8 Registration Statement filed on April 14, 1989. 10.6* -- 1992 Stock Option Plan, as amended and restated as of December 12, 1996. 10.7* -- Incentive Compensation Plan, as amended and restated as of January 1, 1996. 10.8* -- Officers' Supplemental Retirement Plan, as restated as of December 1, 1992, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1992. 10.9 -- Nonemployee Directors' Retirement Plan, effective as of January 1, 1988, incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended December 31, 1992. 10.10 -- Directors' Supplemental Medical Plan, as amended and restated as of February 16, 1995, incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1994. 10.11* -- Nonemployee Directors' Stock Option Plan effective May 2, 1995, incorporated by reference to Exhibit A to 1995 Notice of Annual Meeting and Proxy Statement dated March 24, 1995. 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-10.3 2 FORM OF EMPLOYMENT AGREEMENT - ROBERT ROTHENBERG 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT AGREEMENT made this [ ] day of [ ], 1996, between UST INC., a Delaware corporation (the "Company"), and Robert D. Rothenberg (the "Executive"). The Executive is presently employed by the Company [or a subsidiary thereof] as [ ]. The Board of Directors of the Company (the "Board") recognizes that the Executive's contribution to the growth and success of the Company during the past [ ] years has been substantial. The Board desires to provide for the continued employment of the Executive and to make certain changes in the Executive's employment arrangements with the Company which the Board has determined will reinforce and encourage the continued attention and dedication to the Company of the Executive as a member of the Company's management, in the best interest of the Company and its shareholders. The Executive is willing to commit himself to continue to serve the Company, on the terms and conditions herein provided. In order to effect the foregoing, the Company and the Executive wish to enter into an employment agreement on the terms and conditions set forth below. Accordingly, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to continue to employ the Executive, and the Executive hereby agrees to continue to serve the Company, on the terms and conditions set forth herein. 2. Term. The term of this Agreement (the "Term") shall commence on the date hereof and end on [ ], unless further extended or sooner terminated as hereinafter provided. On the first anniversary of the date hereof, and on each successive anniversary of the date hereof, the Term shall be automatically extended one (1) additional year unless, prior to such anniversary, the Company shall have delivered to the Executive or the Executive shall have delivered to the Company written notice that the Term hereunder will not be extended. Subject to the provisions of 29 CFR Section 631(c), in no event, however, shall the Term extend beyond the end of the calendar month in which the Executive's 65th birthday occurs. 3. Position and Duties. The Executive shall serve as Executive Vice President of the Company and shall have such responsibilities and authority as may from time to time be assigned to the Executive by the Board or the Chief Executive Officer. The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company. 4. Place of Performance. In connection with the Executive's employment by the Company, the Executive shall be based at the principal executive offices of the Company in Greenwich, Connecticut, except for required travel on the Company's business to an extent substantially consistent with present business travel obligations. 5. Compensation and Related Matters. (a) Salary. During the period of the Executive's employment hereunder, the Company shall pay to the Executive a salary at an annual rate not less than the rate in effect as of the date hereof or such higher rate as may from time to time be determined by the Board, such salary to be payable in accordance with the Company's then regular payroll practice. This salary may be increased from time to time in accordance with normal business practices of the Company and, if so increased, shall not thereafter during the term of this Agreement be decreased. Compensation of the Executive by salary payments shall not be deemed exclusive and shall not prevent the Executive from participating in any other compensation or benefit plan of the Company. The salary payments (including any increased salary payments) hereunder shall not in any way limit or reduce any other obligation of the Company hereunder, and no other compensation, benefit or payment hereunder shall in any way limit or reduce the obligation of the Company to pay the Executive's salary hereunder. (b) Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing services hereunder, including all expenses of travel and 2 living expenses while away from home on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. (c) Other Benefits. The Executive shall be eligible, while performing services hereunder, to participate in or to receive benefits under any employee benefit plan or arrangement made available by the Company to its executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements; provided, however, that this provision shall not apply to the Company's Incentive Compensation Plan ("ICP"). Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to the Executive pursuant to subsection (a) of this Section. (d) Vacations. The Executive shall be entitled to the number of vacation days in each calendar year, and to compensation in respect of earned but unused vacation days, determined in accordance with the Company's vacation policy. The Executive shall also be entitled to all paid holidays given by the Company to its executives. (e) Services Furnished. The Company shall furnish the Executive with office space, secretarial support and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 3 hereof. 6. Offices. The Executive agrees to serve without additional compensation, if elected or appointed thereto, as a director of the Company and any of its subsidiaries and in one or more executive offices of any of the Company's subsidiaries, provided that the Executive is indemnified for serving in any and all such capacities on a basis no less favorable than is currently provided by Article VIII of the Company's By-Laws. The Executive further agrees that, upon the termination of the Executive's employment for any reason, he will resign from the Board and the board of directors of any subsidiary of the Company and any directorship held by reason of his employment with the Company or any of its subsidiaries, effective as of the Date of Termination (as defined in Section 8(f) hereof). 7. Improvements; Confidential Information. Annex I hereto, as from time to time amended, is a form of Employee Secrecy Agreement between the Executive and the Company, concerning the treatment of Improvements and Confidential Proprietary Information (as defined therein) and related matters. The Executive agrees to comply with all terms of said Employee Secrecy Agreement. 8. Termination. The Executive's employment hereunder may be terminated without any breach of this Agreement only under the following circumstances: (a) Death. The Executive's employment hereunder shall terminate upon his death. (b) Disability. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full-time basis for the entire period of six consecutive months, and within thirty (30) days after written notice of termination is given (which may occur before or after the end of such six-month period) shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder. (c) Cause. The Company may terminate the Executive's employment hereunder for Cause. For purposes of this Agreement, "Cause" shall mean (i) the willful and continued failure by the Executive to substantially perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which failure is not cured within ten (10) business days after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; (ii) the willful engaging by the Executive in misconduct which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct that constitutes Competitive Activity, as defined in Section 10 hereof); or (iii) the commission of an act that constitutes a material breach of this Agreement, including without limitation the willful violation by the Executive of the provisions of the Employee Secrecy Agreement in the form of Annex I hereto; provided, however, that upon the 3 occurrence of any of the events constituting a Change in Control (as defined in Section 8(d) (iii) hereof), the foregoing definition of Cause shall cease to apply, and the Company shall have "Cause" to terminate the Executive's employment hereunder only if the Executive commits an act or acts of dishonesty constituting a felony under the laws of the United States, any State thereof or any applicable foreign country and resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company. For purposes of this subsection, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, if the Executive's employment is terminated on or following a Change in Control, the Executive shall not be deemed to have been terminated for Cause without (1) reasonable notice to the Executive setting forth the reasons for the Company's intention to terminate for Cause, (2) an opportunity for the Executive, together with his counsel, to be heard before the Chief Executive Officer of the Company or his specifically designated representative, and (3) delivery to the Executive of a Notice of Termination, as defined in subsection (e) hereof, from the Chief Executive Officer of the Company or his specifically designated representative finding that in the good faith opinion of such executive or representative the Executive was guilty of conduct set forth above in clause (i), (ii) or (iii) hereof, and specifying the particulars thereof in detail. (d) Termination by the Executive. (i) The Executive may terminate his employment hereunder (A) for Good Reason or (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor. (ii) For purposes of this Agreement, "Good Reason" shall mean (A) a Change in Control (as defined below), (B) a failure by the Company to comply with any material provision of this Agreement which has not been cured within ten (10) business days after notice of such noncompliance has been given by the Executive to the Company, or (C) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of subsection (f) hereof (and for purposes of this Agreement no such purported termination shall be effective). (iii) For purposes of this Agreement, a change in control of the Company ("Change in Control") shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than (1) the Company or any of its subsidiaries, (2) any "person" who on the date hereof is a director or officer of the Company, (3) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, (4) an underwriter temporarily holding securities pursuant to an offering of such securities, or (5) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company (a "Person"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act (a "Beneficial Owner")), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (C)(1) below; or (B) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or 4 nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds ( 2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (C) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 80% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (D) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 80% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. (e) (i) Termination by Mutual Consent. Unless a Change in Control shall have previously occurred, the Company may also terminate the Executive's employment at any time, without Cause, if, in its sole discretion, the Chief Executive Officer determines that such termination is in the best interests of the Company. The Executive acknowledges and agrees that, upon such a determination by the Chief Executive Officer, he shall be deemed to have resigned (without Good Reason) from the Company effective as of the date set forth in the Notice of Termination ("Termination by Mutual Consent") and shall be entitled only to the benefits payable pursuant to Section 9(c) hereof; provided, however, that if the Executive complies with the provisions of this Section 8(e), then in consideration therefor, he shall be entitled to the benefits provided in Section 9(d) hereof upon execution of the Subsequent Agreement (as defined in Section 9(d) hereof). (ii) In consideration of the benefits provided under Section 9(d) hereof, the Executive agrees and covenants (A) to execute a general release, in the form attached hereto as Annex II (the "Release"), of any and all claims the Executive may have or may believe he has against the Company and/or its officers, directors, employees, agents and representatives; and (B) not to seek any recovery against the Company or its officers, directors, employees, agents or representatives for any cause or reason related to or arising from his employment with the Company or the termination thereof pursuant to this Section 8(e), other than a failure or refusal of the Company to pay the Executive (x) the benefits described in Section 9(d) hereof, as specified in the Subsequent Agreement (as defined in Section 9(d)(ii) hereof), and (y) the benefits to which he is entitled subsequent to his termination of employment pursuant to the terms of one or more of the Company's employee benefit plans. The covenant set forth in clause (B) of this Section 8(e)(ii) includes, without limitation, seeking any recovery against the Company or its officers, directors, employees, agents or representatives in any forum, including without limitation any court, administrative agency or otherwise. A Termination by Mutual Consent shall not be subject to the dispute resolution procedures set forth in Section 16 of this Agreement. 5 (f) Date of Termination; Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to subsection (a) hereof) shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and, except in the event that the Executive's employment is terminated pursuant to Section 8(e) hereof, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. "Date of Termination" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated for Disability pursuant to subsection (b) hereof, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30)-day period), (iii) if the Executive's employment is terminated for Cause pursuant to subsection (c) hereof, the date specified in the Notice of Termination, which date, in the event that the occurrence of the Executive's act or failure to act constituting Cause is discovered by the Company subsequent to such occurrence, whether subsequent to the termination of the Executive's employment or not, may be earlier than the date on which the Notice of Termination is given but not earlier than the date of such occurrence, and (iv) if the Executive's employment is terminated for any other reason, the later of the date on which a Notice of Termination is given or the date set forth in such notice; provided, however, that, unless the termination of the Executive's employment is a Termination by Mutual Consent pursuant to Section 8(e) hereof, if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined (but in no event later than the date on which the Term ends), either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. Notwithstanding the foregoing provisions of this Section 8(f), no compensation shall be paid to an Executive whose employment is terminated pursuant to Section 8(e) hereof, except as set forth in the Subsequent Agreement. (g) Compensation During Dispute. If a purported termination occurs during the Term and the Date of Termination is extended in accordance with subsection (f) of this Section 8, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until such extended Date of Termination; provided, however, that unless such purported termination occurs on or after a Change in Control, such plans shall not include the ICP. Amounts paid under this Section 8(g) are in addition to all other amounts due under this Agreement (other than those due under Section 5 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 9. Compensation During Disability or Upon Termination. (a) Disability. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("disability period"), the Executive shall continue to receive his full salary at the rate then in effect for such period until his employment is terminated pursuant to Section 8(b) hereof, provided that payments so made to the Executive during the first 180 days of the disability period shall be reduced by the sum of the amounts, if any, payable to the Executive at or prior to the time of any such payment under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. If the Executive shall terminate his employment under clause (B) of Section 8(d)(i) hereof, the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given. 6 (b) Death. If the Executive's employment is terminated by his death, the Company shall (i) pay to the Executive's spouse, or if he leaves no spouse, to his estate, commencing on the next succeeding payroll day (as determined in accordance with the Company's then regular payroll practice) and, thereafter, on each succeeding payroll day until a total of six payments has been made, an amount on each payment date equal to the periodic salary payment payable to the Executive pursuant to Section 5(a) hereof at the time of his death; and (ii) provide to the Executive's surviving spouse and dependent children group medical benefits on a basis not less favorable than that to which they were entitled immediately prior to the Executive's death. (c) Cause; Resignation. If the Executive's employment shall be terminated for Cause or if the Executive shall resign or be deemed to have resigned, the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Company shall have no further obligations to the Executive under this Agreement; provided, however, that if, subsequent to the Executive's termination of employment with the Company other than for Cause, the Company discovers facts that, had such facts been known to the Company at the time of their occurrence, would have enabled the Company to terminate the Executive's employment for Cause, the Executive shall be entitled to no future benefits hereunder and agrees to repay (including without limitation by means of offset against any amount owed to the Executive) to the Company all amounts and benefits in excess of those to which he would have been entitled had the Company terminated his employment for Cause on the Date of Termination. The Executive further agrees that if, subsequent to the Executive's termination of employment with the Company for any reason, he violates the Employee Secrecy Agreement or Section 10 hereof, he shall be entitled to no further amounts hereunder and shall repay (including without limitation by means of offset against any amount owed to the Executive) to the Company all amounts and benefits in excess of those to which he would have been entitled had the Company terminated his employment for Cause on the first date on which such violation occurs. (d) Termination by the Company other than for Disability or Cause, by the Executive for Good Reason or by Mutual Consent. If (A) the Company shall terminate the Executive's employment other than pursuant to Section 8(b) or 8(c) hereof (it being understood that a purported termination pursuant to Section 8(b) or 8(c) hereof which is disputed and finally determined not to have been proper shall be a termination by the Company other than pursuant to Section 8(b) or 8(c) hereof), (B) the Executive shall terminate his employment for Good Reason or (C) the Executive's employment terminates by Mutual Consent and the Executive is in compliance with the provisions of Section 8(e) hereof, then (i) the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as severance pay to the Executive an amount equal to the product of (A) the sum of (1) the Executive's annual salary rate in effect as of the Date of Termination and (2) the highest annual amount payable to the Executive under the ICP with respect to any of the three calendar years immediately preceding the Date of Termination, and (B) the number three; such payment to be made (X) if resulting from a termination on or following a Change of Control, in a lump sum on or before the fifth day following the Date of Termination, or (Y) if resulting under any other circumstances, in substantially equal periodic installments in accordance with the Company's then regular payroll practice, commencing with the month following the month in which the Date of Termination occurs and continuing for the number of consecutive periodic payment dates (including the first such date as aforesaid) equal to the product obtained by multiplying the number three by 24 (if the Company's then regular payroll practice is semimonthly payroll dates), 26 (if the Company's then regular payroll practice is biweekly payroll dates) or such other number as is appropriate to reflect the Company's then regular payroll practice; provided, however, that any such payment resulting from a Termination by Mutual Consent shall not be due unless and until the parties hereto have agreed in writing ("Subsequent Agreement") to each and every specific dollar amount and specific in-kind benefit due under this Agreement and the Company's employee benefit plans (other than tax-qualified employee benefit plans), at which time 7 payment shall include all amounts payable commencing with the month following the month in which the Date of Termination occurs. (iii) subject (if applicable) to execution of the Subsequent Agreement, the Company shall maintain in full force and effect, for the continued benefit of the Executive for three years (including partial years) (the "Continuation Period"), all life insurance and health and medical coverage plans, disability plans, and survivor income plans in which the Executive was entitled to participate immediately prior to the Date of Termination provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. Benefits otherwise receivable by the Executive pursuant to this Section 9(d)(iii) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive without cost during the Continuation Period (and any such benefits actually received by or made available to the Executive shall be reported to the Company by the Executive); (iv) subject (if applicable) to execution of the Subsequent Agreement, the Company shall pay all additional benefits to which the Executive would have been entitled under the Company's Officers' Supplemental Retirement Plan (the "SOP") and any other supplemental retirement income plan or arrangement of the Company had his employment continued for three years at the rate of compensation specified herein, such additional benefits to be paid in such form as the benefits to which the Executive is entitled in accordance with the terms of the SOP or other supplemental retirement income plan or arrangement (the "SOP Benefits") are paid; notwithstanding anything to the contrary contained in the SOP or such other supplemental retirement income plan or arrangement, Executive agrees that, unless a Change in Control shall have occurred on or prior to the Date of Termination, the Benefits and the additional benefits payable under this Section 9(d)(iv) shall not commence prior to the end of the Continuation Period (as defined in clause (iii) above); (v) except in the event of Termination by Mutual Consent pursuant to Section 8(e) hereof, the Company shall pay all legal fees and expenses incurred by the Executive as a result of his termination of employment; provided, however, that, unless a Change of Control shall have occurred on or prior to the Date of Termination, the legal fees and expenses to which an Executive is entitled pursuant to this paragraph (v) and Section 16 hereof shall not exceed, in the aggregate, the sum of $50,000; and (vi) the Executive agrees that, notwithstanding any contrary provision in the applicable benefit plan, he shall have no right to receive any payments (A) pursuant to the SOP or any other supplemental retirement plan prior to the end of the period during which or with respect to which the Executive is entitled to payment under subsection (ii) of this Section 9(d), or (B) under the ICP in respect of the year in which the Executive ceases providing services to the Company. (e) Gross-Up Payment. Whether or not the Executive becomes entitled to the payment provided under subsection (d) hereof, if any of the Total Payments (as hereinafter defined) will be subject to the tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the Executive, no later than the fifth day following the Date of Termination (or such other date as is hereinafter described), an additional amount (the "Gross-Up Payment") such that the net amount retained by him, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all payments or benefits received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether payable pursuant to the terms of this Agreement or of any other plan, arrangement or agreement with the Company, its successors, any person whose actions 8 result in a change in control or any person affiliated (or which, as a result of the completion of the transactions causing a Change in Control, will become affiliated) with the Company or such person within the meaning of section 1504 of the Code (such payments or benefits, excluding the Gross-Up Payments, being hereinafter referred to as the "Total Payments")) shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by the independent auditors of the Company (as of the date immediately prior to the Change in Control) and reasonably acceptable to the Executive, such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" (within the meaning of section 280G(b)(1) of the Code) shall be treated as subject to the Excise Tax, unless in the opinion of such tax counsel such excess parachute payments represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the "base amount" (within the meaning of section 280G(b)(3) of the Code), or are not otherwise subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and employment taxes at the highest marginal rate of taxation in the state and locality of the residence of the Executive on the Date of Termination (or such other date as is hereinafter described), net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the Date of Termination (or such other date as is hereinafter described), the Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax or a federal, state and local income and employment taxes deduction) plus interest on the amount of such repayment at 120% of the applicable federal rate (as defined in section 1274(d) of the Code). In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the employment of the Executive, or at such other time as is hereinafter described (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional gross-up payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. If an Executive who remains in the employ of the Company becomes entitled to the payment provided for by this paragraph, such payment shall be made no later than the later of (x) the fifth day following the date on which the Executive notifies the Company that he is subject to the Excise Tax and (y) ten days prior to the date on which the Excise Tax is initially due. (f) Mitigation; Set-Off. The Executive shall not be required to mitigate the amount of any payment provided for in this Section 9 by seeking other employment or otherwise. In addition, the amount of any payment or benefit provided for in this Agreement (other than Section 9(d)(iii) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefit, and, except as provided in Section (9)(c) hereof, shall not be reduced by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 10. Noncompetition. The Executive agrees that he will not engage in any Competitive Activity during any period with respect to which he is entitled to severance pay pursuant to Section 9(d)(ii) hereof or to employee welfare benefits pursuant to Section 9(d)(iii) hereof; provided, however, that this provision shall cease to apply upon the occurrence of any of the events constituting a Change in Control. For purposes of this Section, "Competitive Activity" shall mean activity, without the written consent of an authorized officer of the Company (which consent shall not be unreasonably withheld), consisting of the Executive's participation in the management of, or his acting as a consultant for or employee of, any business operation of any enterprise if such operation (a "Competitive Operation") is then in substantial and direct competition with a principal business operation of the Company, as now or hereafter designated by the Board; provided, however, that no 9 business operation may be designated a principal business operation of the Company unless the Company's profits, sales or assets attributable to such business operation amount to at least 10 percent (10%) of the Company's total profits, sales or assets. Competitive Activity shall not include (1) the mere ownership of up to five percent (5%) of the outstanding securities in any enterprise; or (2) the participation in the management of, or acting as a consultant for or employee of, any enterprise or any business operation thereof, other than in connection with a Competitive Operation of such enterprise, provided that the Executive does not furnish advice with respect to inventions, processes, customers, methods of distribution or methods of manufacture of any Competitive Operation of such enterprise. 11. Successors; Binding Agreement. (a) In addition to any obligations imposed by law upon any successor to the Company, the Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 12. Notice. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: --------------------------------- --------------------------------- --------------------------------- If to the Company: UST Inc. 100 West Putnam Avenue Greenwich, Connecticut 06830 Attn: Corporate Secretary or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 10 13. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company's Chief Executive Officer or such other officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term shall survive such expiration. 14. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. Settlement of Disputes; Arbitration. (a) All claims by the Executive for benefits under this Agreement (other than in connection with a termination of the Executive's employment pursuant to Section 8(e) hereof) shall be directed to and determined by the Nominating and Compensation Committee of the Board (the "Committee") and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. (b) Any further dispute or controversy arising under or in connection with this Agreement (other than in connection with a termination of the Executive's employment pursuant to Section 8(e) hereof) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in New York, New York, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any anticipated or continued violation of the provisions of Section 10 hereof or the Employee Secrecy Agreement in the form of Annex I hereto, and the Executive hereby consents that such restraining order or injunction may be granted without the necessity of the Company's posting any bond. Subject to the provisions of Section 9(d)(v) hereof, the expense of such arbitration (including legal fees) shall be borne by the Company. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising in connection with a termination of the Executive's employment hereunder on or following a Change in Control. 17. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement and the Employee Secrecy Agreement in the form of Annex I hereto. 11 IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. UST INC. Attest: By: Name: - -------------------------------------- ------------------------------------ By: Title: - -------------------------------------- ------------------------------------ EXECUTIVE - -------------------------------------- ------------------------------------ 12 ANNEX I UST INC. EMPLOYEE SECRECY AGREEMENT THIS AGREEMENT, entered into this [ ] day of [ ], 1996, by and between UST Inc., a corporation existing under the laws of Delaware and having its principal offices in Greenwich, Connecticut (hereinafter referred to as "UST"), and Robert D. Rothenberg, residing at [ ] (hereinafter referred to as the "Employee"). W I T N E S S E T H: WHEREAS, UST (which for the purposes of this Agreement shall include its subsidiaries and affiliates) has developed and uses commercially valuable technical and non-technical information (hereinafter "Proprietary Information") and, to guard the legitimate interest of UST, it is necessary to protect the Proprietary Information either by patents or by holding it secret or confidential or to copyright such Proprietary Information as may be sought to be copyrighted; and WHEREAS, the aforesaid Proprietary Information is vital to the success of UST's business, provides UST with commercial advantage vis-a-vis its competitors and Employee through his employment may become acquainted therewith and may contribute thereto either through inventions, discoveries, improvements or otherwise; and WHEREAS, the disclosure of that Proprietary Information such as confidential or secret information could be very harmful to UST's business and its employees, in turn, could suffer loss; NOW, THEREFORE, in consideration of past and present employment and in confirmation of the terms and conditions of said employment it is agreed as follows: 1. All ideas, methods, formulae, inventions, improvements and developments directly or indirectly relating to aging, curing, flavoring, manufacturing, processing and/or packaging of tobacco products and those directly or indirectly relating to other products and fields of activity of Employee's employment (whether patentable or unpatentable) made, conceived or developed by Employee alone or jointly with one or more others during the term of Employee's employment (whether at the request or suggestion of UST or otherwise and during the regular hours of work or otherwise) and within one (1) year thereafter (hereinafter called "Improvements") shall be the property of UST, and Employee shall disclose each of the same promptly and in such manner as requested by UST, including by delivery to UST of all papers, drawings, models, data and any other material relating to the Improvements. Unless and except if a specific waiver has been granted for any copyright or a renewal of such copyright or any derivative work thereof, such Improvements shall also include copyrightable works which are hereby acknowledged to be works "made-forhire", and shall include for the benefit of UST all derivative, underlying, secondary, or similar rights derived from such copyright. 2. Employee shall keep such records as UST considers desirable in connection with the conception, disclosure and utilization of the Improvements and shall execute all proper documents to insure that UST shall have the full benefit, enjoyment, ownership, and title to Improvements, including without limitations, patent disclosures, disclosures of Proprietary information, patent applications and assignments, trademark rights, copyrights, etc. In the event UST is unable, for any reason whatsoever, to secure Employee's signature to any lawful and necessary documents required for the purpose stated above, Employee hereby irrevocably designates and appoints UST, and its duly authorized officers and agents, as his agent(s) and attorney(s)-in-fact to act for and on behalf of Employee, to execute and file any such documents and to do all other lawfully permitted acts to further the prosecution and issuance of any governmental grant such as letters patent, copyrights, author's certificates, etc., thereof with the same legal force and effect as if actually executed by Employee. 3. Employee anticipates that among the Proprietary Information he will receive will be certain confidential or trade secret information which directly or indirectly relates to the business of UST, and 13 which he understands includes (i) the Improvements and the details of the construction and operation of machines and the processes followed by UST in the aging, curing, flavoring, processing, manufacturing and/or packaging of UST products, (ii) the volumes of the various products manufactured or sold by UST, and the relationships between the various products from the standpoint of the dollar volumes of such sales, (iii) the gross and net profits of UST products, and the sources of materials which are used to produce such products including the quantities and dollar values of such materials purchased by UST, (iv) the blending and other procedures involved in the blending and other procedures involved in producing the products manufactured or sold by UST, and (v) the sales and marketing plans and programs of or for UST including advertising, promotions, distribution, credit terms and customer information; and he will not at any time, whether during said employment or thereafter, directly or indirectly, disclose this Proprietary Information to others, except in the course of said employment, and then he shall not act contrary to specific instructions from UST. 4. Employee, upon termination of employment, shall promptly deliver to UST all drawings, blueprints, manuals, letters, notes, reports, and all other materials relating to Proprietary Information in his possession or under his control, without retaining any copies thereof. 5. If any Proprietary Information is required to be disclosed by a governmental request or in a judicial process, anyone served with such request shall promptly notify UST without first disclosing any such Proprietary Information. The obligation to notify UST assures UST that it may obtain sufficient counsel or seek a protective order or an order by the court placing such information under seal or designating such information "Proprietary Information" or "Trade Secret Information" or any such designation employed by the various state or federal statutes. Such obligation survives the termination of employment. 6. The compensation regularly and periodically paid Employee in the course of said employment by UST includes a component payment, in full, for his obligations hereunder. It is understood that UST shall pay all expenses incident to obtaining copyrights or patents or trademarks on the Improvements and to the execution and recording of assignments and other documents incident to security title thereto in UST. 7. It is understood that information presently in the public domain or which comes into the public domain without any breach of this Agreement by Employee shall not be Proprietary Information, but the fact that UST utilizes any such information shall be Proprietary Information. 8. It is further understood that UST may conduct a yearly audit of its Proprietary Information and each employee understands that such audit is to assure that its Proprietary Information is being maintained as prescribed by the procedures established by UST. 9. As any data storage and/or retrieval system such as electronic data storage and retrieval system, laser image or image storage and/or retrieval system and the like may accumulate and/or provide access to enormous amounts of very valuable information including Proprietary Information, and further as such information may be dispersed throughout such data storage systems, and still further as such information may be manipulated to provide significant Proprietary Information retrieved from a combination of these stored data, all such data storage systems and information retrieval from same must be considered to be based on and to contain Proprietary Information. Unless such use and/or manipulation of such information in a data storage system is authorized, all such access to and/or manipulation of such information is considered to be unauthorized. Any violation of access and/or manipulation of such information in a data storage system including making a copy, in whatever form, of this information, on premises of UST or off premises of UST, is a basis for dismissal unless good cause is shown why such use and/or copying was believed to be authorized. 10. In the event Employee's employment with UST will cease, the Employee agrees to an exit interview conducted by UST which may cover, among other items, any inquiry about Proprietary Information which belongs to UST and/or is considered by UST as belonging to it. 11. The terms of this Agreement shall survive the termination of Employee's employment by UST and shall be binding upon the Employee's heirs, successors and legal representatives. 14 12. It is also understood that if Employee were to be employed by a competitor that Employee may be asked to sign an agreement whereby Employee will be required to reiterate and reaffirm the above terms and give a positive assurance that up to termination Employee has abided by the terms of this Agreement and during the employment with the competitor Employee will scrupulously observe and abide by the terms of this Agreement. 13. It is also understood that the term "Proprietary Confidential Information" includes any and all information of or relating to UST not otherwise publicly available including, without limitation, any such information developed by management or UST's agents or representatives pertaining to proposals or similar studies or analyses with respect to any actions of any manner whatsoever which may be taken in the event of an actual or attempted acquisition or change of control of UST. UST Inc. By: ------------------------------------ I have read and understand the above and I hereby agree that its conditions set forth are fair and shall abide by them. I also agree to the issuance of a consent judgment and injunction upon violation of this Agreement which will enjoin me from future violation. -------------------------------------- Employee Bi-yearly Audit of Proprietary Information:
AUTHORIZED SIGNATURE EMPLOYEE'S DATE PLACE OF EMPLOYER SIGNATURE - ---- --------------------------- --------------------------- --------------------------- 19 --------------------------- --------------------------- --------------------------- 19 --------------------------- --------------------------- ---------------------------
15 ANNEX II UST INC. RELEASE AGREEMENT THIS RELEASE, entered into this [ ] day of [ ] 1996 by Robert D. Rothenberg, residing at [ ] (hereinafter referred to as the "Employee"). W I T N E S S E T H: WHEREAS, the Employee and UST Inc., a corporation existing under the laws of Delaware and having its principal offices in Greenwich, Connecticut (hereinafter referred to as "UST"), entered into an employment agreement (the "Employment Agreement") dated as of [ ], 199[ ], pursuant to Section 8(e)(ii) of which the Employee agreed and covenanted, upon a Termination by Mutual Consent (as defined in the Employment Agreement), to execute a general release of any and all claims he may have or may believe he has against UST and/or its officers, directors, employees, agents and representatives; and WHEREAS, the employment of the Employee was terminated as of [ ], 199[ ], in a Termination by Mutual Consent; NOW, THEREFORE, in consideration of the benefits to be provided to the Employee pursuant to the Employment Agreement, it is agreed as follows: 1. The Employee voluntarily, knowingly and willingly releases and forever discharges UST, its parents, subsidiaries and affiliates, together with their respective officers, directors, partners, shareholders, employees and agents, and each of their predecessors, successors and assigns, from any and all charges, complaints, claims, promises, agreements, controversies, causes of action and demands of any nature whatsoever which against them the Employee or his executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever arising prior to the time the Employee signs this agreement. 2. The release being provided by Employee in this agreement includes, but is not limited to, any rights or claims relating in any way to the Employee's employment relationship with UST, or the termination thereof, or under any statute, including the federal Age Discrimination in Employment Act, Title VII of the Civil Rights Act, the Americans with Disabilities Act, or any other federal, state or local law or judicial decision. 3. By signing this agreement, the Employee represents that he has not and will not in the future commence any action or proceeding arising out of the matters released hereby, and that he will not seek or be entitled to any award of legal or equitable relief in any action or proceeding that may be commenced on his behalf. 4. The Employee acknowledges that UST has hereby advised him to consult with an attorney of his choosing prior to signing this agreement. The Employee represents that he has had the opportunity to review this agreement and, specifically, the release in paragraph 1, with an attorney of his choice. The Employee also agrees that he has entered into this agreement freely and voluntarily. 5. The Employee acknowledges that he has been given at least twenty-one days to consider the terms of this agreement. Furthermore, once he has signed this agreement, the Employee shall have seven additional days from the date of signing this agreement to revoke his consent hereto. The agreement will not become effective until seven days after the date the Employee has signed it, which will be the effective date of this agreement. IN WITNESS WHEREOF, the Employee has executed this agreement as of the date first set forth above. -------------------------------------- Employee - --------------------------------------------------- WITNESS EX-10.6 3 1992 STOCK OPTION PLAN 1 EXHIBIT 10.6 As amended through December 12, 1996 UST INC. 1992 STOCK OPTION PLAN EFFECTIVE AS OF MAY 5, 1992 RESTATED AS OF MAY 5, 1992 AND DECEMBER 12, 1996 1. PURPOSE. UST Inc. (hereinafter referred to as the "Company") has adopted this UST Inc. 1992 Stock Option Plan (hereinafter referred to as the "Plan"), effective as of May 5, 1992, subject to approval by stockholders at the annual stockholders' meeting held on May 5, 1992. The purposes of the Plan are to further the long-term growth in earnings of the Company by providing incentives to those employees of the Company and its Subsidiaries (as defined below) who are or will be responsible for such growth; to facilitate the ownership of Company stock by such employees, thereby increasing the identity of their interest with those of the Company's stockholders; and to assist the Company in attracting and retaining employees with experience and ability. 2. ADMINISTRATION. The Plan shall be administered and interpreted by a Stock Option Committee or any successor committee (the "Committee") as designated by the Board of Directors of the Company (the "Board") of not less than two members as appointed from time to time by the Board. Each member of the Committee shall be a member of the Board. Unless otherwise determined by the Board, the Committee shall consist solely of members who are "nonemployee directors" within the meaning of Rule 16b-3, as from time to time amended, promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and who are "outside directors" within the meaning of section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Committee shall have full authority to establish guidelines for the administration of the Plan and to make any other determination it deems necessary to administer the Plan, which determinations shall be binding and conclusive on all parties. 3. ELIGIBILITY. Any employee of the Company or a Subsidiary (as defined herein) who is determined by the Committee to be making or to be expected to make a contribution to the success of the Company (an "Employee") shall be eligible to receive grants of stock options under this Plan. For the purposes of this Plan, a Subsidiary shall be deemed to be any company of which the Company owns, directly or indirectly, fifty percent (50%) or more of the stock. No Employee may be granted options covering more than 250,000 shares of Common Stock (as defined in Section 4 hereof) during any fiscal year of the Company, commencing with the Company's 1997 fiscal year. 4. STOCK (a) A maximum of 5,200,000 shares of the common stock of the Company, par value $.50 per share ("Common Stock"), shall be reserved for issuance in accordance with the terms of the Plan. Such reserved shares may be authorized but unissued shares or any issued shares which have been acquired by the Company and are held in its treasury, as the Board may from time to time determine. (b) If any change in the outstanding shares of Common Stock occurs or takes effect on or after December 19, 1991, through declaration of stock or other dividends or distributions with respect to such shares, through restructuring, recapitalization or other similar event or through stock splits, change in par value, combination or exchange of shares, or the like, then the number and kind of shares reserved for options, the number and kind of shares subject to outstanding options and the option price, as appropriate, of such optioned shares shall be adjusted as necessary to reflect equitably such change; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. 2 (c) If an option granted under this Plan is surrendered, expires, lapses or for any other reason ceases to be exercisable in whole or in part, the shares which were subject to any such option, but as to which the option ceases to be exercisable, shall again be available for the purposes of this Plan; provided, however, that to the extent any option is cancelled pursuant to the provisions of Section 7 hereof, the shares subject to such option shall no longer be available for the purposes of this Plan. 5. GRANTING OF OPTIONS. (a) The Committee may grant incentive stock options ("Incentive Stock Options") (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")), or options which do not qualify as Incentive Stock Options ("Nonstatutory Stock Options"), or both, as follows: (i) Incentive Stock Options may be granted to any Employee, provided that the aggregate Fair Market Value (determined as of the effective date of grant of the Incentive Stock Option) of the shares of Common Stock with respect to which Incentive Stock Options (under all plans of the Company and its Subsidiaries) become exercisable for the first time by an Optionee during any calendar year may not exceed $100,000. The effective date of a grant shall be the day on which the Committee adopts a resolution expressly granting an option, unless such resolution expressly provides for a specific later effective date. Any options granted in excess of such limitation shall be treated for all purposes as Nonstatutory Stock Options. (ii) Nonstatutory Stock Options may be granted to any Employee without regard to the limitations stated in subparagraph (i) hereof. (b) The option price per share for each option granted shall be determined by the Committee and shall not be less than the Fair Market Value of the shares on the date the option is granted. For purposes of this Plan, the Fair Market Value of such shares on any given day shall be the average of the high and low sales prices per share of Common Stock as reported on the New York Stock Exchange Composite Tape for such date, or, if there was no trading of Common Stock on such date, for the next preceding date on which there was such trading. 6. EXERCISE OF OPTION. (a) Each option shall be granted for, and by its terms shall not be exercisable after the expiration of, a period of ten years from the date the option is granted or such lesser period as the Committee may determine. (b) No option shall be transferable other than by will or the laws of descent and distribution, and each option shall be exercisable during the Employee's lifetime only by him or by his guardian or legal representative. (c) Subject to the provisions of Section 7 hereof and of paragraph (e) of this Section 6, no option shall be exercisable by its terms prior to the expiration of the one-year period beginning on the date of its grant. An option shall become exercisable over a period of one to five years, in ratable installments or otherwise, such period and method to be determined by the Committee. Subject to the first sentence of this Section 6(c), the Committee may accelerate the exercisability of any option or portion thereof at any time. An option may be exercised either for the total number of shares stated in the grant or, from time to time, for less than the total number, in multiples of 100 shares; provided, however, if an option holder makes a "hardship withdrawal" pursuant to Section 6.02 (Option V) of the UST Inc. Employees' Savings Plan, such holder's right of exercise shall be suspended during the 12-month period beginning on the date of such withdrawal, except that this proviso shall not apply if for any reason such suspension is not required under Section 401(k) of the Code or any final regulations issued thereunder. (d) Each exercise of an option, in whole or in part, shall be effected by a notice in writing to the Company, accompanied by one of the following: (i) by payment in cash of the full option price of the shares purchased; (ii) if authorized by the Committee, by tendering to the Company, in whole or in part, in lieu of cash, shares of Common Stock owned by such purchaser, accompanied by the certificates therefor registered in the name of such purchaser and properly endorsed for transfer, having a Fair Market Value equal to the cash exercise price applicable to the portion of such option being so exercised; or 3 (iii) if the purchaser is an employee of the Company or a Subsidiary at the time of purchase, by payment in cash of at least $1.00 per share, with the remainder of the option price being borrowed from the Company as described below. In such case the Company, unless otherwise determined by the Committee, will lend to such purchaser an amount up to the excess of the full option price of the shares purchased over such down payment, but not more than the excess of such price over the par value of such shares, such loan to be evidenced by the purchaser's delivery to the Company of his unconditional promissory note to pay the amount of the loan within ten years, in such manner as is determined by the Committee. Any such note shall be dated the date of the notice of exercise of the option, shall provide for the payment of equal installments of principal through appropriate payroll deductions or on an annual, semiannual or quarterly basis, as selected by the purchaser, shall provide for the quarterly payment of interest on such indebtedness at the applicable federal rate in effect under Section 1274(d) of the Code on the date on which the loan was made, compounded semiannually (or the equivalent thereof), or if no such rate is in effect, 8% or such other rate as the Committee may determine is necessary to comply with the requirements of applicable law, and shall be in such form and contain such other provisions as the Committee may determine from time to time. If the employment of the purchaser is terminated by reason of his death or "disability," as defined in the Company's Long-Term Disability Plan ("Disability"), or upon his "retirement" from the Company, as defined in any employee retirement plan of the Company in which the purchaser participates ("Retirement"), or if the Committee otherwise consents, any unpaid balance of such indebtedness shall become due and payable on the earlier to occur of (A) five years after the date of such termination, or (B) ten years after the date of purchase, unless otherwise determined by the Committee. If the employment of the purchaser is terminated for any other reason, any unpaid balance of such indebtedness shall become due and payable three months from the date of such termination, unless otherwise determined by the Committee. In connection with any such loan, the purchaser shall deposit with and pledge to the Company the certificate or certificates evidencing all of the shares so purchased, to be held by the Company as collateral security for such loan. Cash dividends paid on shares held by the Company as security shall be paid to the purchaser. Voting rights and other stockholders' rights with respect to all shares shall vest in the purchaser although the shares are held by the Company as security. Upon default in the payment of principal or interest on a loan provided for in this subparagraph (iii), the Company, to the extent then permitted by law and without demand or notice to the debtor, may sell any pledged shares through the facilities of the New York Stock Exchange (or other Exchange upon which the Company's shares may then be listed) for the benefit of the debtor and apply the net proceeds of such sale to the then unpaid principal and interest on such loan, and any remainder of such proceeds shall be paid to the debtor. (e) Termination of Employment. (i) Death, Disability and Retirement. If the employment of an option holder is terminated by reason of his death or Disability, or upon his Retirement, or for any other reason if the Committee so determines, all outstanding options then held by such option holder that have not theretofore become exercisable according to their terms ("Unexercisable Options") shall become exercisable as of the date of such termination of employment. (ii) Cause. With respect to any option granted on or after December 12, 1996 ("New Option"), if (A) the employment of the option holder is terminated for Cause (as defined in paragraph (iv) of this Section 6(e)), or (B) after the option holder's termination of employment with the Company other than for Cause, the Company discovers the occurrence of an act or failure to act by the option holder that would have enabled the Company to terminate the option holder's employment for Cause had the Company known of such act or failure to act at the time of its occurrence, or (C) subsequent to his termination of employment, the option holder commits a Competitive Act (as defined in clause (iv)(A) of this Section 6(e)) and, in each case, if the act constituting Cause is a Competitive Act or Willful Misconduct (as defined in clause (iv)(C) of this Section 6(e)), such Act is discovered by the Company within three years of its occurrence, then, unless otherwise determined by the Committee, (x) any and all outstanding New Options held by such option holder as of the date of such termination or discovery shall terminate and be forfeited; 4 (y) if the act constituting Cause is a Competitive Act or Willful Misconduct, the option holder (or, in the event of the option holder's death following the commission of such act, his beneficiaries or estate) shall (1) sell back to the Company all shares that are held, as of the date of such termination or discovery, by the option holder (or, if applicable, his beneficiaries or estate) and that were acquired upon exercise of the New Option on or after the date which is 180 days prior to the option holder's termination of employment (the "Acquired Shares"), for a per share price equal to the per share exercise price of such option, and (2) to the extent such Acquired Shares have previously been sold or otherwise disposed of by the option holder (other than by reason of death) or, if applicable, by his beneficiaries or estate, repay to the Company the excess of the aggregate Fair Market Value of such Acquired Shares on the date of such sale or disposition over the aggregate exercise price of such Acquired Shares. For purposes of clause (ii)(y)(2) of this subsection (e), (A) the amount of the repayment described therein shall not be affected by whether the option holder or, if applicable, his beneficiaries or estate actually received such Fair Market Value with respect to such sale or other disposition, and (B) repayment may, without limitation, be effected, at the discretion of the Company, by means of offset against any amount owed by the Company to the option holder or, if applicable, his beneficiaries or estate. (iii) If the employment of an option holder is terminated for any other reason and if the Committee does not determine otherwise, all Unexercisable Options held by such option holder shall be forfeited and shall lapse. (iv) For purposes of this Section 6(e), "Cause" shall mean (A) prior to the expiration of any Employee and Secrecy Agreement or any agreement containing noncompetition provisions between the option holder and the Company, the violation of either such agreement ("Competitive Act"); (B) the willful and continued failure by the option holder to substantially perform his job duties (other than any such failure resulting from the option holder's incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the option holder has not substantially performed his duties; or (C) the willful engaging by the option holder in misconduct that is materially injurious to the Company, monetarily or otherwise ("Willful Misconduct"). (f) No optioned shares shall be issued or transferred to an optionee until purchased as provided in paragraph (d) above, and an optionee shall have none of the rights of a stockholder with respect to such optioned shares until the certificates therefor are registered in the name of such optionee upon exercise of the option. 7. EFFECT OF CERTAIN CHANGES. If while unexercised options remain outstanding under this Plan (a) any "Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, any person who on the date hereof is a director or officer of the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a) or (c) of this Section 7) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds ( 2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the 5 combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (an "Acceleration Event"), then each outstanding option that has not theretofore become exercisable according to its terms shall become exercisable. Upon the occurrence of an Acceleration Event, the Committee shall provide for the cancellation of all options outstanding as of the effective date of such event. Upon such cancellation, the Company shall make, in exchange therefor, a cash payment under any such option in an amount per share equal to the difference between the per share exercise price of such option and (x) in the case of a Nonstatutory Stock Option, the Fair Market Value of a share of Common Stock on the date during the prior sixty-day period that produces the highest Fair Market Value, and (y) in the case of an Incentive Stock Option, such Fair Market Value on the effective date of the transaction. 8. LAWS AND REGULATIONS. No shares of Common Stock shall be issued under this Plan unless and until all legal requirements applicable to the issuance of such shares have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any issuance of shares to any Employee hereunder on such Employee's undertaking in writing to comply with such restrictions on the subsequent disposition of such shares as the Committee shall deem necessary or advisable as a result of any applicable law or regulation. The Company or a Subsidiary shall have the right to deduct from all awards hereunder paid in cash any federal, state or local taxes required by law to be withheld with respect to such cash awards. In the case of Common Stock issued upon exercise of options or in the case of any other applicable tax withholding requirement, the Employee or other person receiving such stock or otherwise subject to tax shall be required to pay to the Company or a Subsidiary the amount of any such taxes which the Company or a Subsidiary is required to withhold with respect to such stock. The provisions of this Plan shall be interpreted so as to comply with the conditions and requirements of Rule 16b-3, and, if the option is an Incentive Stock Option, with Sections 422 and 425 of the Code, unless the Committee determines otherwise. 9. OTHER TERMS AND CONDITIONS. Options may contain such other terms, conditions or provisions, which shall not be inconsistent with this Plan, as the Committee shall deem appropriate. 10. AMENDMENT OR TERMINATION OF THE PLAN. The Board may at any time, and from time to time, terminate, modify, amend or interpret the Plan in any respect; provided, however, that, unless otherwise determined by the Board, an amendment that requires stockholder approval in order for the Plan to continue to comply with Section 162(m) or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of stockholders. The termination or any modification or amendment of the Plan shall not, without the consent of an Employee, adversely affect his rights under an option previously granted to him. 11. EFFECTIVE DATE AND TERM OF THE PLAN. The adoption of the Plan shall become effective on May 5, 1992, subject to the approval of stockholders. No option shall be granted pursuant to this Plan later than May 4, 2002, but options theretofore granted may extend beyond that date in accordance with their terms. EX-10.7 4 INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.7 AS AMENDED THROUGH DECEMBER 12, 1996 UST INC. INCENTIVE COMPENSATION PLAN (FORMERLY THE UNITED STATES TOBACCO INCENTIVE COMPENSATION PLAN) RESTATED AS OF JANUARY 1, 1990, DECEMBER 1, 1992, JANUARY 1, 1994, AND JANUARY 1, 1996 PURPOSE OF PLAN The purpose of this Plan is to provide a special incentive for designated employees of the Company to increase the profits of the Company, including its Branches, Divisions and Subsidiaries, by rewarding superior performance of duties with annual bonuses calculated on the basis of the responsibility of the position held by the Participant, and the degree of excellence of his performance of duties. SECTION 1. DEFINITIONS As used herein, unless otherwise required by the context, the following terms shall have these meanings: 1.1 "Company" shall mean UST Inc., a Delaware corporation, and its Branches, Divisions and wholly owned Subsidiaries now held or hereafter acquired. "Parent Company" shall mean UST Inc. separate from its subsidiaries. 1.2 "Fund" or "Incentive Compensation Fund" shall mean the amount available for distribution for a particular Plan Year, determined in the manner provided in Section 3.1. 1.3 "Incentive Plan Income" shall mean the net earnings of the Company for a particular Plan Year computed in accordance with generally accepted accounting principles applied on a consistent basis, plus provisions for taxes based upon or measured by net income and the amount of the Incentive Compensation Fund. Subsidiaries acquired during the Plan Year which are accounted for as a pooling of interests in the financial statements and accounts of the Company shall, for the purpose of computing the Fund only, be accounted for as purchases and only the results of operations of such subsidiaries subsequent to the dates of acquisition shall be included in the computation of Incentive Plan Income. 1.4 "Stockholders' Equity" shall mean the total of the capital stock, additional paid-in capital and retained earnings (earned surplus) of the Parent Company, less the cost of treasury shares, all as at the beginning of the year, adjusted for the daily average of amounts resulting from the sales or other issuance of shares of the capital stock of the Parent Company, or from purchases of its capital stock, during the year. 1.5 "Board" or "Board of Directors" shall mean the board of directors of the Parent Company. 1.6 "Committee" shall mean the Incentive Compensation Plan Committee appointed from time to time by the Board to administer the Plan. 1.7 "Salary" shall mean the regular basic salary of a participant for the entire calendar year exclusive of incentive compensation, overtime, awards, supplements to salary of any kind, and contributions of the Company to or under any other plan of the Company for the benefit of employees. 1.8 "Participant" shall mean, with respect to any Plan Year, an employee of the Company who is, pursuant to Section 2.1 of the Plan, eligible to participate in the Plan and who is, pursuant to Section 3.2 of the Plan, selected to participate therein. 2 1.9 "Incentive Weight" shall mean a percentage of Salary determined by the Committee for the purpose of determining the performance points to be awarded to Participants in the Plan for any Plan Year. 1.10 "Branch," "Division" and "Subsidiary" are those components of the entire business venture of the Parent Company whether operated in the legal form of separately incorporated entities or as departments or profit-center units of the Parent Company and shall include those hereafter created, formed or acquired unless the Board of Directors shall otherwise by resolution determine in any particular instance and at any time. 1.11 "Continuous Employment" shall mean a period of uninterrupted service in the employ of the Company. Temporary absences or interruptions during a period of Government service or leaves of absence approved by the Committee shall not be considered terminations of service. 1.12 "Plan Year" shall be the twelve calendar months of the fiscal year of the Parent Company. 1.13 "Plan" shall mean the UST Inc. Incentive Compensation Plan set forth herein, as amended from time to time. 1.14 "Employee" shall mean any full-time employee, or designated part-time salaried employee, of the Company. SECTION 2. 2.1 Any Employee who is determined by the Committee to have made a meaningful contribution to the Company for a particular Plan Year shall be eligible to be a Participant for such Plan Year. Inclusion of the name of any employee in a list or schedule for distribution of the Fund for any particular year shall, as to that year, constitute a designation by the Committee and no further or other act shall be required to establish the eligibility of an employee. 2.2 Termination of employment prior to the end of a Plan Year for any reason shall not affect an employee's eligibility for that portion of the year prior to termination, but if such employee is designated as a Participant for such Plan Year in accordance with Section 2.1, the share of that Participant shall be determined as provided in Section 4.7. SECTION 3. DETERMINATION OF INCENTIVE COMPENSATION FUND 3.1 The Incentive Compensation Fund shall be the sum of the following portions of Incentive Plan Income for each Plan Year: 1% of the first $1,000,000 2% of the next 1,500,000 3% of the next 2,500,000 4% of the next 3,500,000 5% of amounts over 8,500,000
provided, however, that no Fund shall be deemed to have been earned, and none shall be distributed for any Plan Year, unless (a) a cash dividend shall have been declared and paid on the common stock of the Parent Company in such year, and (b) the Incentive Plan Income shall have exceeded 12% of Stockholders' Equity for that year. A statement of the amount of the Fund shall be prepared under the direction of and certified by the Controller as soon after the close of the Plan Year as may conveniently be done, and be delivered to the Committee. The Nominating and Compensation Committee of the Parent Company's Board of Directors (the "Compensation Committee") shall certify in writing prior to the payment of any Incentive Compensation that the foregoing conditions have been satisfied. 3.2 Upon receipt of the statement described in Section 3.1 above, based upon the amount of the Fund as certified therein and subject to the other provisions of the Plan, including Section 3.3 hereof, the 3 Committee shall with all reasonable dispatch determine who shall participate and the amount of Incentive Compensation payable to each Participant in accordance with the terms of the Plan, and shall thereupon furnish to the Controller a list or schedule showing: (a) the names of all Participants, (b) the incentive group, A or B, of each Participant, (c) the Incentive Weight of each Participant, (d) the performance points of each Participant, (e) the adjustment factor applicable to the Participants in each incentive group, and (f) the amount of Incentive Compensation payable to each Participant. 3.3 Subject to applicable provisions of Section 4, the Committee shall for each Plan Year, with respect to Participants who are "executive officers" (as defined in Rule 3b-7 issued under Section 3 of the Securities Exchange Act of 1934, as amended) of the Parent Company during such Plan Year (the "Executive Officers"), recommend the amount of Incentive Compensation payable to each such Participant and submit its recommendation to the Compensation Committee. Payments of Incentive Compensation with respect to the Executive Officers shall be subject to the approval of the Compensation Committee. SECTION 4. DISTRIBUTION OF INCENTIVE COMPENSATION FUND 4.1 The Fund shall be divided by the Committee into two portions, for Group A and Group B Participants, respectively. Such portions for each Plan Year shall be determined by the Committee, but in no event shall the Group A portion exceed 50% of the Fund. 4.2 The employees eligible to be designated by the Committee, in accordance with Section 2.1, as Group A Participants for a Plan Year shall be the employee-directors of the Parent Company, the principal officers of the Parent Company and such other officers of the Company as the Committee may from time to time select. All Executive Officers shall be designated as Group A Participants for each Plan Year. 4.3 The employees eligible to be designated by the Committee, in accordance with Section 2.1, as Group B Participants for a Plan Year shall be those employees of the Company other than employees designated as Group A Participants. 4.4 As to each group and for each Plan Year, without reference to any prior Plan Year, an Incentive Weight as defined in Section 1.9 above will be determined for each Participant in such group, taking into account the other provisions of the Plan and any and all factors deemed to be relevant to the evaluation of individual performance, including, but not limited to, general knowledge and repute, personal observations, importance of the individual employee's duties, responsibilities, complexity of his work, skills required, attendance record and attitude, performance of duties, attainment of corporate objectives, and such other grounds for judgment as are deemed appropriate; Incentive Weights shall be expressed in percentages, but in no event shall they exceed 40% for any Participant. 4.5 The allocation of the Fund within each group shall be determined by multiplying the Salary of each Participant in the group by the Incentive Weight determined by the Committee for such participant. The product thereof shall be the performance points of such Participant. The total performance points of each group shall then be compared with the total number of dollars of the Fund applicable to each group, and an adjustment factor derived therefrom from each group by dividing the performance points into the number of dollars of the Fund for the group. Within each group the performance points of each Participant shall be adjusted by multiplying such points by the adjustment factor for that group. The performance points as so adjusted shall be the amount of Incentive Compensation payable to each such Participant in the Plan for that Plan Year. 4 4.6 Incentive Compensation payments shall be made in cash as soon after the completion of the several computations as may be practicable, provided, however, that as to Group A Participants, an election may be made prior to the commencement of each Plan Year in writing addressed and delivered to the Chairman of the Committee as to whether or not the Participant desires to receive his Incentive Compensation when available for distribution or wishes to defer its payment until a specified date after the date of his retirement. If no such election is made, payment shall be made currently and not deferred. Any such deferred payment shall be wholly vested in the Participant upon the final determination of the amount thereof and in the event of his death prior to payment shall be paid to the legal representative of his estate, or, in the event of termination of employment for any reason prior to retirement, shall be paid within thirty (30) days thereafter to the Participant or to his order. No interest shall accrue on deferred payments regardless of the period of deferment. 4.7 In the event an employee who is designated as a Participant for a Plan Year under Sections 2.1 and 3.2 had terminated employment for any reason during such Plan Year, he shall not forfeit Incentive Compensation for such Plan Year but he shall be entitled to receive pro rata compensation according to the number of whole months of Continuous Employment prior to such termination in that Plan Year. 4.8 Notwithstanding any other provision of the Plan, in no event shall the amount of Incentive Compensation payable for any Plan Year to the Chief Executive Officer of the Company exceed 15% of Fund A; nor shall the amount of Incentive Compensation payable for any Plan Year to any other Executive Officer exceed the lesser of (i) 12% of Fund A and (ii) the percentage obtained by dividing 85% by the number of Executive Officers other than the Chief Executive Officer, provided that in each case the Compensation Committee shall have the discretion to award less than the indicated maximum amount. If less than the indicated maximum amount is allocated to any Executive Officer for any Plan Year, the excess of the maximum amount over the actual amount of the award may not be used to increase the maximum award to any other Executive Officer. SECTION 5. ADMINISTRATION 5.1 The Incentive Compensation Plan shall be administered by a Committee of three (3) to six (6) members, as determined from time to time by the Board, subject to the provisions of Section 3.3 and applicable provisions of Section 4 hereof. Such members shall be appointed from time to time by the Board, upon recommendation by the Chief Executive Officer of the Parent Company. Not less than a majority of the Committee shall be members of the Board. 5.2 The President or Chief Executive Officer of the Parent Company shall be a member and Chairman of the Committee. The Committee shall select one of its members to act as Secretary and shall authorize one or more of its members to execute or deliver any instruments or to make any certificates in behalf of the Committee. 5.3 Members of the Committee shall serve without special remuneration but shall be entitled to be reimbursed for reasonable expenses necessarily incurred in the performance of their duties as Committee members. They shall not be liable for any acts or omissions to act unless the same are due to their willful misconduct or gross negligence. 5.4 Committee action may be taken by the concurrence, in assembled meeting or otherwise, of a simple majority of the full Committee, provided that all members have been fully informed and given opportunity to record their concurrence or disagreement. At any meeting of the Committee, a quorum for the transaction of any business shall consist of a simple majority of the full number of the Committee regardless of vacancies. 5.5 The Secretary selected by the Committee shall keep full and accurate minutes of all meetings and records of the actions of the Committee, and these minutes and records shall be at all times open to inspection by the members of the Board of Directors. The Secretary shall annually transmit to the Board certified copies of the statements or schedules described in Sections 3.1 and 3.2 promptly upon completion thereof. 5 5.6 The Plan is designed to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended, with respect to "qualified performance-based compensation" paid to Participants who are "covered employees," each as defined in such Section 162(m), and shall be interpreted accordingly. SECTION 6. AMENDMENT, TERMINATION OR MODIFICATION OF THE PLAN 6.1 The Plan may be amended from time to time or terminated by the stockholders of the Parent Company or by the Board of Directors; provided, however, that no amendment of the Plan shall be made without the approval of stockholders if such amendment would (i) change the method of calculation of the Fund, (ii) make less restrictive the existing restrictions on the distribution of the Fund contained in clauses (a) and (b) of Section 3.1, or (iii) increase to more than 50% the proportion of the Fund payable for any Plan Year to employees who are either employee-directors or principal officers of the Parent Company. 6.2 In the event of a change in the Parent Company's fiscal year, this Plan shall apply, with appropriate pro rata adjustments, to any intermediate period not consisting of twelve months, and shall then apply to each fiscal year following, and the term "Plan Year" shall under such circumstances be deemed to refer to the Parent Company's fiscal year. 6.3 No employee, Participant or group of employees or Participants shall have any right or vested interest in the continuation of this Plan at any time, nor, by being a Participant, have any right or vested interest in continuation of his employment or of his status as a Participant, or of his rate of compensation. 6.4 No right or interest of any Participant under this Plan shall be subject to anticipation, assignment, pledge, or charge, in whole or in part, either directly or by operation of law or otherwise, including, but without limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or any other manner, but excluding devolution by death or mental incompetency, and any attempt to anticipate, assign, pledge or charge any such right or interest shall be void and no right or interest of any Participant under this Plan shall be liable for, or subject to, any obligation or liability or tort of such Participant. If any Participant shall attempt to anticipate, assign, pledge or charge (except as specifically provided herein) any of his rights or interests hereunder or if such rights or interests shall be subjected to execution, levy, garnishment, attachment, pledge or bankruptcy, then such rights or interests shall, in the discretion of the Committee, cease and terminate and in that event the Committee may hold or apply the same or any part thereof to or for the benefit of such Participant or his estate in such manner and in such proportion as the Committee may think proper. EX-13 5 PAGES 23-47 OF THE ANNUAL REPORT 1 EXHIBIT 13 (ITEMS 1 AND 8) UST CONSOLIDATED INDUSTRY SEGMENT DATA (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- NET SALES TO UNAFFILIATED CUSTOMERS Tobacco Smokeless tobacco................................. $1,195,156 $1,139,454 $1,045,546 Other tobacco products............................ 8,413 8,792 10,509 ---------- ---------- ---------- 1,203,569 1,148,246 1,056,055 Wine................................................. 122,458 109,453 89,170 Other................................................ 74,508 70,742 80,604 Elimination of intersegment sales.................... (3,688) (3,019) (2,813) ---------- ---------- ---------- NET SALES.................................... $1,396,847 $1,325,422 $1,223,016 ========== ========== ========== OPERATING PROFIT (LOSS) Tobacco.............................................. $751,115 $720,965 $654,068 Wine................................................. 19,875 13,493 8,832 Other................................................ (500) (5,384) 1,112 ---------- ---------- ---------- OPERATING PROFIT............................. 770,490 729,074 664,012 Corporate expenses................................... (19,600) (21,305) (23,284) Interest, net........................................ (6,364) (3,179) (92) ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES................. $744,526 $704,590 $640,636 ========== ========== ========== IDENTIFIABLE ASSETS AT DECEMBER 31 Tobacco.............................................. $453,228 $431,424 $407,374 Wine................................................. 186,611 176,565 164,950 Other................................................ 93,875 88,847 96,043 Corporate............................................ 73,678 87,916 72,869 ---------- ---------- ---------- $807,392 $784,752 $741,236 ========== ========== ========== CAPITAL EXPENDITURES (DISPOSITIONS), NET Tobacco.............................................. $22,606 $ 2,266 $14,240 Wine................................................. 11,551 10,762 9,253 Other................................................ 3,037 2,447 (369) Corporate............................................ (445) (1,473) 560 ---------- ---------- ---------- $36,749 $14,002 $23,684 ========== ========== ========== DEPRECIATION Tobacco.............................................. $16,746 $17,642 $18,171 Wine................................................. 8,949 7,693 6,562 Other................................................ 1,911 2,386 1,970 Corporate............................................ 537 633 707 ---------- ---------- ---------- $28,143 $28,354 $27,410 ========== ========== ==========
See Notes to Consolidated Financial Statements. 2 EXHIBIT 13 -- (CONTINUED) (ITEM 6) UST CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- -------- SUMMARY OF OPERATIONS for the year ended December 31 Net sales.......................................... $1,396,847 $1,325,422 $1,223,016 $1,110,403 $1,039,375 $904,427 Cost of products sold.............................. 272,756 262,203 251,944 246,445 256,796 227,546 Selling, advertising and administrative expenses... 373,201 355,450 330,344 299,206 281,816 253,076 ---------- ---------- ---------- ---------- ---------- ---------- Operating income................................... 750,890 707,769 640,728 564,752 500,763 423,805 Other expense (income): Interest expense (income), net................... 6,364 3,179 92 (2,004) (1,866) (2,279) Gain on disposal of product line................. -- -- -- (35,029) -- -- ---------- ---------- ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of accounting change............................. 744,526 704,590 640,636 601,785 502,629 426,084 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes....................................... 280,527 274,830 253,110 232,893 190,071 160,179 ---------- ---------- ---------- ---------- ---------- ---------- Earnings before cumulative effect of accounting changes.......................................... 463,999 429,760 387,526 368,892 312,558 265,905 Cumulative effect of accounting changes (net of income tax benefit).............................. -- -- -- 19,846 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings....................................... $ 463,999 $ 429,760 $ 387,526 $ 349,046 $ 312,558 $265,905 ========== ========== ========== ========== ========== ========== PER SHARE DATA Primary earnings per common share before cumulative effect of accounting changes..................... $2.42 $2.16 $1.87 $1.71 $1.41 $1.18 Primary earnings per common share.................. 2.42 2.16 1.87 1.62 1.41 1.18 Dividends per common share......................... 1.48 1.30 1.12 .96 .80 .66 Market price per common share: High............................................. 35 7/8 36 31 1/2 32 3/4 35 3/8 33 7/8 Low.............................................. 28 1/4 26 5/8 23 5/8 24 3/8 25 3/8 16 3/8 FINANCIAL CONDITION at December 31 Current assets..................................... $444,178 $425,555 $381,937 $334,996 $330,208 $305,430 Current liabilities................................ 306,553 280,723 160,755 106,642 81,208 95,455 Working capital.................................... 137,625 144,832 221,182 228,354 249,000 209,975 Ratio of current assets to current liabilities..... 1.4:1 1.5:1 2.4:1 3.1:1 4.1:1 3.2:1 Deferred tax asset (liability)..................... 7,626 9,042 (5,065) (7,955) (46,358) (50,928) Total assets....................................... 807,392 784,752 741,236 706,195 673,965 656,513 Long-term debt..................................... 100,000 100,000 125,000 40,000 -- -- Total debt......................................... 250,000 200,000 125,000 40,000 -- 1,250 Stockholders' equity............................... 282,020 293,557 361,669 462,972 516,606 482,875 OTHER DATA Common stock repurchased........................... $237,759 $274,783 $298,843 $236,704 $212,581 $184,424 Dividends paid on common shares.................... $277,302 $252,388 $225,715 $199,725 $167,951 $139,670 Dividends paid as a percentage of net earnings..... 59.8% 58.7% 58.2% 57.2% 53.7% 52.5% Return on net sales................................ 33.2% 32.4% 31.7% 31.4% 30.1% 29.4% Return on average assets........................... 58.3% 56.3% 53.5% 50.6% 47.0% 41.6% Return on average stockholders' equity............. 161.2% 131.2% 94.0% 71.3% 62.5% 55.6% Percentage of long-term debt to stockholders' equity........................................... 35.5% 34.1% 34.6% 8.6% -- -- Percentage of total debt to stockholders' equity... 88.6% 68.1% 34.6% 8.6% -- .3% Average number of common shares (in thousands) -- primary.......................................... 191,894 199,246 207,504 215,719 222,033 225,130
- --------------- 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)
1990 1989 1988 1987 1986 -------- -------- -------- -------- -------- SUMMARY OF OPERATIONS for the year ended December 31 Net sales........................................ $761,741 $679,322 $615,614 $573,298 $516,031 Cost of products sold............................ 191,824 185,464 174,560 168,942 158,719 Selling, advertising and administrative expenses....................................... 220,927 195,433 180,839 166,957 157,038 -------- -------- -------- -------- -------- Operating income................................. 348,990 298,425 260,215 237,399 200,274 Other expense (income): Interest expense (income), net................. (3,203) (3,190) (1,068) 2,768 5,534 Gain on disposal of product line............... -- -- -- -- -- -------- -------- -------- -------- -------- Earnings before income taxes and cumulative effect of accounting changes................... 352,193 301,615 261,283 234,631 194,740 -------- -------- -------- -------- -------- Income taxes..................................... 128,918 111,128 99,133 103,760 90,802 -------- -------- -------- -------- -------- Earnings before cumulative effect of accounting changes........................................ 223,275 190,487 162,150 130,871 103,938 Cumulative effect of accounting changes (net of income tax benefit)............................ -- -- -- -- -- -------- -------- -------- -------- -------- Net earnings..................................... $223,275 $190,487 $162,150 $130,871 $103,938 ======== ======== ======== ======== ======== PER SHARE DATA Primary earnings per common share before cumulative effect of accounting changes........ $.98 $.82 $.70 $.56 $.46 Primary earnings per common share................ .98 .82 .70 .56 .46 Dividends per common share....................... .55 .46 .37 .30 .24 1/2 Market price per common share: High........................................... 18 1/4 15 3/8 10 1/2 8 5 5/8 Low............................................ 12 3/8 9 5/8 6 4 7/8 3 3/4 FINANCIAL CONDITION at December 31 Current assets................................... $265,854 $275,954 $291,006 $260,530 $250,460 Current liabilities.............................. 68,660 66,643 69,935 63,242 60,895 Working capital.................................. 197,194 209,311 221,071 197,288 189,565 Ratio of current assets to current liabilities... 3.9:1 4.1:1 4.2:1 4.1:1 4.1:1 Deferred tax asset (liability)................... (53,301) (55,108) (52,939) (47,465) (44,412) Total assets..................................... 622,595 630,155 597,955 548,951 523,927 Long-term debt................................... 3,060 6,789 21,828 37,131 47,061 Total debt....................................... 4,849 14,469 30,763 48,292 59,765 Stockholders' equity............................. 473,873 482,254 453,253 401,113 371,559 OTHER DATA Common stock repurchased......................... $151,259 $ 97,517 $67,356 $50,865 $ 9,907 Dividends paid on common shares.................. $118,295 $101,197 $81,672 $66,789 $54,744 Dividends paid as a percentage of net earnings... 53.0% 53.1% 50.4% 51.0% 52.7% Return on net sales.............................. 29.3% 28.0% 26.3% 22.8% 20.1% Return on average assets......................... 35.6% 31.0% 28.3% 24.4% 21.0% Return on average stockholders' equity........... 46.7% 40.7% 38.0% 33.9% 29.9% Percentage of long-term debt to stockholders' equity......................................... .6% 1.4% 4.8% 9.3% 12.7% Percentage of total debt to stockholders' equity......................................... 1.0% 3.0% 6.8% 12.0% 16.1% Average number of common shares (in thousands) -- primary........................................ 227,667 233,305 230,417 232,370 227,142
4 EXHIBIT 13 -- (CONTINUED) (ITEM 7) UST MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS CONSOLIDATED RESULTS 1996 COMPARED WITH 1995 In 1996, the Company reclassified its cigar operation from the Tobacco segment to the Other segment since it is part of the Company's international operations which are included in the Other segment. All prior period amounts have been reclassified to conform to the 1996 presentation. Consolidated net sales rose to $1.4 billion, a 5.4 percent increase over 1995. Tobacco segment sales increased 4.8 percent and accounted for 77.5 percent of the $71.4 million sales increase. The Wine and Other segments also contributed to the overall sales gain, posting 11.9 percent and 5.3 percent increases, respectively. Over the last three years, net sales have increased 25.8 percent at an average annual rate of 8 percent. Cost of products sold increased 4 percent to $272.8 million. Cost of products sold for the Tobacco segment increased due to higher unit costs and increased unit volume for moist smokeless tobacco. Wine segment costs were slightly higher as increased costs resulting from unit volume gains were partially offset by lower bulk wine sales. Costs for the Other segment were lower primarily due to volume declines for the entertainment business, partially offset by increased unit volume for the international and cigar operations. Gross profit increased $60.9 million or 5.7 percent over 1995 primarily due to higher selling prices and increased unit volume for moist smokeless tobacco. The gross profit percentage rose to 80.5 percent mainly due to the favorable results for moist smokeless tobacco and has increased 2.7 percentage points over the last three years. Selling, advertising and administrative expenses rose 5 percent to $373.2 million. Selling and advertising expenses increased for all segments. Administrative and other expenses remained stable in 1996. Higher spending associated with addressing legal and regulatory issues, and increases in salary and related costs, were offset by the net effect of the absence of charges relating to an employment contract with a former officer and in the fourth quarter of 1995, provisions to write-down nonstrategic assets, and 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 remained stable at 53.3 percent on earnings before income taxes of $744.5 million. Over the last three years, earnings before income taxes have increased 23.7 percent at an average annual rate of 7.4 percent, while pretax margins have averaged 53 percent. The effective tax rate for the fourth quarter of 1996 decreased as a result of tax benefits recognized from the sale of a business in the Other segment and the reversal of certain state tax reserves, which also caused the overall tax rate to decrease in 1996. Net earnings increased for the 36th consecutive year rising 8 percent to $464 million. Primary earnings per share rose to $2.42, a 12 percent increase over 1995. Primary earnings per share have increased 49.4 percent over the last three years at an average annual rate of 14.3 percent. The rate of growth in net earnings and earnings per share experienced over the last three years will be impacted in the short-term by competitive pressures affecting the Tobacco segment. The long-term effects on 5 consolidated results will be dependent upon the Company's ability to successfully address the competitive situation in the Tobacco segment, along with continued growth in other businesses. 1995 COMPARED WITH 1994 Consolidated net sales rose 8.4 percent to $1.3 billion. Tobacco segment sales accounted for 90 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. 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. 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, partially offset by a gain recorded on the sale of a corporate aircraft. Net interest expense resulted 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. The overall tax rate for 1995 decreased slightly. Net earnings increased 10.9 percent to $429.8 million. Primary earnings per share rose to $2.16, a 15.5 percent increase over 1994. TOBACCO SEGMENT 1996 COMPARED WITH 1995 Tobacco segment sales increased 4.8 percent to $1.2 billion and accounted for 86.2 percent of consolidated revenues. The increase was due to smokeless tobacco sales while sales for other tobacco products declined slightly. 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 2 percent in 1996 to 648 million cans, as compared with 1995. Unit volume results for 1996 included the effects of an additional shipping day. On an equivalent shipping day basis, unit volume for the year approximated the 1995 level. Fourth quarter unit volume decreased 3 percent to 158.7 million cans, compared with the similar 1995 period. The Company believes that the principal factors were increased growth of competitors' price value brands, a pricing policy change by the military in commissaries, less volume from its new product introductions than in the comparative period of the prior year and wholesaler ordering patterns around the holidays. The Company is continuing its efforts to address the competitive pressures in the marketplace. The Company believes that these, as well as other factors, will continue to impact unit volume and operating results in the short-term. For the long-term, the growth of unit volume and increased profitability for the Tobacco segment will be dependent upon the Company's ability to successfully address these factors. 6 Cost of sales for the Tobacco segment was higher primarily due to higher unit costs and increased unit volume for moist smokeless tobacco. Moist smokeless tobacco unit costs increased due to higher overhead and labor expenses and higher leaf tobacco costs. Gross profit for the segment rose 4.3 percent during 1996. Higher selling prices and unit volume gains for moist smokeless tobacco, partially offset by higher unit costs, were the primary reasons for the increase. Selling expenses increased 10.6 percent, primarily due to higher costs associated with the promotion and support of our new moist smokeless tobacco products introduced during the fourth quarters of 1996 and 1995, as well as traditional brands. Salary and related costs for the sales force and support personnel were generally higher as were field sales force expenses. Advertising costs increased moderately. A significant increase in print and billboard advertising in support of our moist smokeless tobacco products was partially offset by lower expenses for certain promotional activities. Administrative expenses remained stable as higher expenses incurred to address legal and regulatory issues and increased salary and related costs, were offset by the absence of a charge relating to an employment contract with a former officer in 1995. Operating profit increased 4.2 percent to $751.1 million. 1995 COMPARED WITH 1994 Tobacco segment sales rose to $1.1 billion, an increase of 8.7 percent, and accounted for 86.6 percent of consolidated revenues. Smokeless tobacco sales increased 9 percent to $1.1 billion, while sales of other tobacco products decreased. 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. Unit volume results for the year as compared to 1994 were favorably affected by the national roll-out of Skoal Flavor Packs in the fourth quarter of 1995, 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. 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. Gross profit for the segment rose substantially during 1995 as a result of higher selling prices and unit volume gains for moist smokeless tobacco. 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 introduction of Skoal Flavor Packs. Administrative expenses were significantly higher due to a charge resulting from an employment contract with a former officer, higher expenses incurred to address legal and regulatory issues as well as increased support costs. Operating profit increased 10.2 percent to $721 million. WINE SEGMENT 1996 COMPARED WITH 1995 Wine segment revenue increased 11.9 percent to $122.5 million and accounted for 8.8 percent of consolidated sales. Higher case volume along with higher selling prices for premium wine accounted for the increase, which were partially offset by lower bulk wine sales. Also contributing to the overall sales gain were revenues resulting from the acquisition of a small microbrewery in late 1995. Case volume for premium wine 7 increased 9.6 percent, while total wine case volume increased 8.7 percent. Chateau Ste. Michelle and Columbia Crest, our two leading brands of premium wine, accounted for approximately 73 percent of total Wine segment revenue. Unit costs remained relatively stable in 1996 due to favorable harvest yields in 1995 and prior years. 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 1996 was significantly lower than in 1995. Adverse weather conditions in California and Washington state in early 1996 caused the current year harvest yields in these areas to be lower than in previous years, resulting in significantly higher prices which will affect future unit costs. Demand for premium varietal wines continues to increase. In order to mitigate the shortage of grape supply for 1997 and beyond the Company put certain premium wine shipments on allocation and has secured juice from other viticultural areas for future new product lines. Similar steps were also taken by other producers in the wine industry. In addition, the Company has entered into long-term leases for future vineyard development in California. As a result of the wine shipment allocations, the increase in case volume growth experienced by the Company in 1996 was lower than in the previous year. Gross profit for the Wine segment increased 26.9 percent, primarily as a result of an increase in premium wine case volume, higher selling prices and relatively stable unit costs. In order to maintain the gross margin percent level and increase profitability in the future the Company plans to maintain the product allocation process, raise prices as market conditions warrant and introduce new product lines from other grape sources. Selling, advertising and administrative expenses were higher in 1996. Selling and advertising expenses increased to expand the brand awareness of premium wines, primarily the Ste. Michelle brand, along with increased expenses to support higher volume levels of all premium brands. Administrative and other expenses were significantly higher, primarily due to salary and related expenses and higher spending in other areas. Also included in selling, advertising and administrative expenses in 1996 are costs incurred by the microbrewery operation. The Wine segment recorded an operating profit of $19.9 million in 1996, an increase of 47.3 percent. 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 increase along with higher bulk wine sales. Case volume for premium wine increased 18.8 percent, while overall case volume for the Wine segment increased 15.2 percent. Unit costs increased slightly primarily due to lower harvest yields in 1994. Total grape tonnage harvested and purchased in 1995 was significantly higher than in 1994 and at slightly lower average costs. 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. 8 OTHER SEGMENT 1996 COMPARED WITH 1995 Other segment sales increased 5.3 percent to $74.5 million and accounted for 5.3 percent of consolidated sales. Other segment revenues increased primarily due to the international operations, which includes the cigar business, partially offset by lower revenues for the entertainment business. In 1996 the Company sold its pipe business and its majority interest in a company that develops and markets equipment used in film making. Both sales resulted in losses which were provided for in prior years. Favorable results from the international and cigar operations were offset by an operating loss for the entertainment business. Overall, the Other segment recorded a small operating loss of $.5 million. 1995 COMPARED WITH 1994 Other segment sales decreased 12.2 percent to $70.7 million and accounted for 5.3 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 a provision recorded for the anticipated sale of the pipe business resulted in the Other segment recording an operating loss of $5.4 million in 1995. FOOD AND DRUG ADMINISTRATION (FDA) REGULATIONS AND LITIGATION MATTERS On August 28, 1996, the Food and Drug Administration (FDA) published regulations asserting unprecedented jurisdiction over nicotine in tobacco as a "drug" and purports to regulate smokeless tobacco products as a "medical device." The final regulations include severe restrictions on the advertising, marketing and promotion of smokeless tobacco products and will require the Company to comply with a wide range of labeling, reporting and other requirements. The Company and other smokeless tobacco manufacturers have filed suit against the FDA seeking a judicial declaration that the FDA has no authority to regulate smokeless tobacco products. The Company is not able to predict the outcome of the suit, or assess the future effect that these FDA regulations may have on its tobacco business. Also, during 1996, media reports discussed proposals for a comprehensive legislative solution to resolve claims against the tobacco industry. The Company believes that any such legislation would involve significant, if not insurmountable, difficulties in reconciling the views of many competing interests. Nevertheless, the Company may be called upon to address such proposals and to that end may participate in discussions with appropriate parties. Should such circumstances arise, the Company does not contemplate making any comment as to the existence or progress of any such discussions. Until a legislative solution is finalized, the Company will not be able to assess the financial effect, if any, 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 1996 was $439.4 million as compared to $445.1 million in 1995 and $453.2 million in 1994. Net cash provided by operating activities in 1996 as compared to 1995 decreased slightly as higher earnings generated by the Tobacco segment were primarily offset by a reduction in income taxes payable. Significant inventories of leaf tobacco are required primarily in connection with our smokeless tobacco products. During the last three years, $216.4 million was used for the purchase of leaf tobacco and related costs. In addition, the cost of grapes harvested and purchased totaled $61.8 million over the last three years. 9 INVESTING ACTIVITIES Net cash used in investing activities was $30.5 million in 1996. Purchases of property, plant and equipment over the last three years totaled $107.7 million. Major areas of capital spending from 1994 through 1996 were: Tobacco segment - Manufacturing, processing and packaging equipment - Building additions and renovations - Computer equipment Wine segment - Storage capacity and processing equipment - Building renovations and new facilities Other segment - Building renovations - Equipment In 1997, the Company's capital program is expected to approximate $79 million, and will primarily include improvements and additions to the tobacco processing and manufacturing operations, expansion of wine processing and storage facilities and capacity expansion in the Other segment, primarily for the cigar operations. In 1996, the Company sold two businesses in the Other segment which resulted in cash proceeds of $6.3 million. In 1995, cash proceeds from the sale of an aircraft were $17.7 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, cash dividends and the repayment of borrowings. Over the last three years the Company had net borrowings of $210 million through a combination of its credit facilities and the issuance of commercial paper. (See Revolving Credit Agreements 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 1993, funds received from the exercise of options, together with these tax benefits, totaled $114.1 million. During 1996, the Company continued its program to repurchase shares of its common stock as authorized by the Board of Directors. During the fourth quarter of 1996, the Board of Directors approved a new stock repurchase program, authorizing the Company to repurchase up to 20 million shares of its common stock from time to time in open market or negotiated transactions to be used in connection with employee benefit and compensation plans and other corporate purposes. The new program began in December 1996 upon the completion of the prior program which began in 1994 authorizing the Company to repurchase up to 20 million shares. During 1996, the Company repurchased 7.4 million shares at a cost of $237.8 million. As of December 31, 1996, 19.3 million shares remained to be repurchased under the current program, which is net of put options outstanding of .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 $755.4 million, totaling 59 percent of net earnings for the period. 10 LIQUIDITY AND CAPITAL RESOURCES Uses of cash exceeded sources of cash by $15 million. Cash generated from operating activities and net borrowings, along with the cash on hand at December 31, 1995 were used to meet the Company's requirements for seasonal purchases of leaf tobacco, capital projects, quarterly dividend payments and its stock repurchase program. During the fourth quarter of 1996 the Company entered into two revolving credit agreements totaling $350 million with a group of ten banks. These agreements replaced the previous $200 million Revolving Credit and Term Loan Agreement and $100 million of committed short-term lines of credit. The terms of the new agreements provide for a five-year revolving credit facility in the amount of $262.5 million and a 364-day revolving credit facility in the amount of $87.5 million. These facilities will be used primarily as support for commercial paper issuances and can also be used as direct bank financing. Of the $350 million available under its credit facility, the Company has allocated $250 million to support outstanding commercial paper at December 31, 1996. The ratio of current assets to current liabilities (current ratio) at December 31, 1996 was 1.4 to 1 and has averaged 1.8 to 1 over the last three years. The current ratio remained relatively stable in 1996 as compared to 1995 as higher short-term obligations outstanding at December 31, 1996 were partially offset by a decrease in income taxes payable and higher inventories. The Company's liquidity position is enhanced by the fact that leaf inventories are carried at costs computed under the LIFO method. The average costs of these inventories are $43.1 million more than the amount at which they are carried in the Consolidated Statement of Financial Position at December 31, 1996. In 1997, projected leaf tobacco purchases will approximate the amounts expended in 1996. In addition, significant levels of cash will be required for the stock repurchase program, dividend payments and capital projects. The Company intends to maintain appropriate facilities to ensure access to credit markets providing sufficient financial resources and operational flexibility. The percentage of total debt outstanding to stockholders' equity is 88.6 percent. In 1997, the Company intends to increase its total debt by $50 million to augment the share repurchase program. The Company anticipates that its overall cash requirements will be met by amounts generated from operating activities augmented by borrowings. Stockholders' equity decreased in 1996, as the effects of dividend payments and the stock repurchase program 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 89.9 percentage points to 161.2 percent over the last three years. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 ("the Act") provides a safe harbor for forward-looking information made on behalf of the Company. All statements, other than statements of historical facts, which address activities, actions or new product introductions that the Company expects or anticipates will or may occur in the future, including such things as expansion and growth of the Company's operations and other such matters are forward-looking statements. To take advantage of the safe harbor provided by the Act, the Company is identifying certain factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by the Company. Any one, or a combination, of these factors could materially affect the results of the Company's operations. These factors include competitive pressures, changes in consumer preferences, wholesaler ordering patterns, consumer acceptance of new product introductions and other marketing initiatives, legal and regulatory initiatives (including those described under Items 1 and 3 of the Company's Annual Report on Form 10-K), and conditions in the capital markets. Forward-looking statements made by the Company are based on knowledge of its business and the environment in which it operates, but because of the factors listed above, as well as other factors beyond the control of the Company, actual results may differ from those in the forward-looking statements. 11 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: 1994 -- $1,223, 1995 -- $1,325 and 1996 -- $1,397 Consolidated Gross Profit: 1994 -- $971, 1995 -- $1,063 and 1996 -- $1,124 Pretax Margins: 1994 -- 52.4%, 1995 -- 53.2% and 1996 -- 53.3% Earnings Per Share: 1994 -- $1.87, 1995 -- $2.16 and 1996 -- $2.42 Tobacco Sales: 1994 -- $1,056, 1995 -- $1,148 and 1996 -- $1,204 Wine Sales: 1994 -- $89, 1995 -- $109 and 1996 -- $122 Other Sales: 1994 -- $81, 1995 -- $71 and 1996 $75 Net Cash Provided By Operating Activities: 1994 -- $453, 1995 -- $445 and 1996 -- $439 Return On Average Stockholders' Equity: 1994 -- 94%, 1995 -- 131.2% and 1996 -- 161.2% Dividends Per Share: 1994 -- $1.12, 1995 $1.30 and 1996 -- $1.48 The following bar graph illustrates the relationship between net earnings and dividends paid: Net Earnings: 1994 -- $388, 1995 -- $430 and 1996 -- $464 Dividends Paid: 1994 -- $226, 1995 -- $252 and 1996 -- $277 A pie chart illustrating the percentage of capital expenditures by segment for 1994 -- 1996: Tobacco 60%, Wine 35% and Other 5%. 12 EXHIBIT 13 -- (CONTINUED) (ITEMS 5 AND 7) DIVIDENDS AND STOCK PRICES CASH DIVIDENDS The Company increased its 1996 cash dividend by 13.8 percent to an annual rate of $1.48 per share. Since 1993, the dividend has increased 54.2 percent reflecting an average annual increase of 15.5 percent. Total cash dividends paid by the Company in 1996 were $277.3 million or 59.8 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 1996, the Board of Directors approved a first quarter 1997 dividend of 40 1/2 cents per share. This equates to an indicated annual rate of $1.62, and represents an increase of 9.5 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, 1996 was 11,907. The following table sets forth dividends paid per share and the high and low market prices for the year and each quarter of 1996 and 1995.
MARKET PRICE PER CASH COMMON SHARE DIVIDENDS --------------- PAID HIGH LOW --------- ----- --- 1st Quarter 1996.......................................................... $ .37 $35 7/8 $31 1/2 1995.......................................................... .32 1/2 32 3/8 27 1/2 2nd Quarter 1996.......................................................... .37 35 3/8 30 3/8 1995.......................................................... .32 1/2 32 5/8 28 3rd Quarter 1996.......................................................... .37 34 3/4 29 1/4 1995.......................................................... .32 1/2 30 26 5/8 4th Quarter 1996.......................................................... .37 35 28 1/4 1995.......................................................... .32 1/2 36 28 1/2 Year 1996.......................................................... 1.48 35 7/8 28 1/4 1995.......................................................... 1.30 36 26 5/8
13 EXHIBIT 13 -- (CONTINUED) (ITEM 8) UST CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- NET SALES.............................................. $1,396,847 $1,325,422 $1,223,016 COSTS AND EXPENSES Cost of products sold................................ 272,756 262,203 251,944 Selling, advertising and administrative.............. 373,201 355,450 330,344 Interest, net........................................ 6,364 3,179 92 ---------- ---------- ---------- TOTAL COSTS AND EXPENSES............................... 652,321 620,832 582,380 EARNINGS BEFORE INCOME TAXES........................... 744,526 704,590 640,636 ---------- ---------- ---------- INCOME TAXES........................................... 280,527 274,830 253,110 ---------- ---------- ---------- NET EARNINGS........................................... $ 463,999 $ 429,760 $ 387,526 ========== ========== ========== NET EARNINGS PER SHARE Primary.............................................. $2.42 $2.16 $1.87 Fully diluted........................................ $2.42 $2.15 $1.87 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Primary.............................................. 191,894 199,246 207,504 Fully diluted........................................ 192,093 200,336 207,576
See Notes to Consolidated Financial Statements. 14 UST CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN THOUSANDS)
DECEMBER 31 --------------------- 1996 1995 -------- -------- ASSETS Current assets Cash and cash equivalents............................................ $ 54,452 $ 69,403 Accounts receivable.................................................. 77,855 69,598 Inventories.......................................................... 271,425 256,101 Prepaid expenses and other current assets............................ 40,446 30,453 -------- -------- Total current assets......................................... 444,178 425,555 -------- -------- Property, plant and equipment, net..................................... 300,885 294,806 Deferred income taxes.................................................. 7,626 9,042 Other assets........................................................... 54,703 55,349 -------- -------- Total assets................................................. $807,392 $784,752 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term obligations............................................... $150,000 $100,000 Accounts payable and accrued expenses................................ 113,635 111,767 Income taxes......................................................... 42,918 68,956 -------- -------- Total current liabilities.................................... 306,553 280,723 -------- -------- Long-term debt......................................................... 100,000 100,000 Postretirement benefits other than pensions............................ 70,209 65,292 Other liabilities...................................................... 48,610 45,180 -------- -------- Total liabilities............................................ 525,372 491,195 -------- -------- STOCKHOLDERS' EQUITY Capital stock........................................................ 102,077 101,040 Additional paid-in capital........................................... 414,274 373,935 Retained earnings.................................................... 388,505 203,659 -------- -------- 904,856 678,634 Less cost of shares in treasury...................................... 622,836 385,077 -------- -------- Total stockholders' equity................................... 282,020 293,557 -------- -------- Total liabilities and stockholders' equity................... $807,392 $784,752 ======== ========
See Notes to Consolidated Financial Statements. 15 UST CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 --------------------------------- 1996 1995 1994 --------- --------- --------- OPERATING ACTIVITIES Net earnings.............................................. $463,999 $429,760 $387,526 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization.......................... 28,318 29,119 28,169 Deferred income taxes.................................. 2,412 (12,717) (4,257) Changes in operating assets and liabilities: Accounts receivable.................................. (11,128) (3,434) (1,507) Inventories.......................................... (18,494) (21,134) (22,085) Prepaid expenses and other assets.................... (9,576) (4,670) 6,038 Accounts payable, accrued expenses and other liabilities....................................... 9,895 15,449 47,338 Income taxes payable................................. (26,038) 12,759 12,000 --------- --------- --------- Net cash provided by operating activities......... 439,388 445,132 453,222 --------- --------- --------- INVESTING ACTIVITIES Purchases of property, plant and equipment................ (44,713) (35,280) (27,659) Dispositions of property, plant and equipment............. 7,964 21,278 3,975 Proceeds received from sales of businesses................ 6,256 -- 2,221 --------- --------- --------- Net cash used in investing activities............. (30,493) (14,002) (21,463) --------- --------- --------- FINANCING ACTIVITIES Proceeds from borrowings.................................. 150,000 100,000 85,000 Repayment of borrowings................................... (100,000) (25,000) -- Proceeds from the issuance of common stock and put options................................................ 41,215 39,726 33,190 Dividends paid............................................ (277,302) (252,388) (225,715) Common stock repurchased.................................. (237,759) (274,783) (298,843) --------- --------- --------- Net cash used in financing activities............. (423,846) (412,445) (406,368) --------- --------- --------- (Decrease) increase in cash and cash equivalents..................................... (14,951) 18,685 25,391 Cash and cash equivalents at beginning of year.... 69,403 50,718 25,327 --------- --------- --------- Cash and cash equivalents at end of year.......... $ 54,452 $ 69,403 $ 50,718 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes........................................... $290,024 $267,236 $232,615 Interest............................................... 7,151 4,521 4,708
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, 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 -- 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 Net earnings for the year................ -- -- 463,999 -- 463,999 Cash dividends -- $1.48 per share........ -- -- (277,302) -- (277,302) Exercise of stock options -- 2,075,500 shares................................. 1,037 25,895 -- -- 26,932 Income tax benefits net of increase in receivables from exercise of stock options................................ -- 13,709 -- -- 13,709 Common stock repurchased for treasury -- 7,405,800 shares....................... -- -- -- (237,759) (237,759) Put option proceeds, net of obligations............................ -- 735 -- -- 735 Adjustment for additional minimum pension liability, net of taxes................ -- -- (1,851) -- (1,851) -------- -------- -------- --------- --------- Balance at December 31, 1996............. $102,077 $ 414,274 $ 388,505 $(622,836) $ 282,020 ======== ======== ======== ========= =========
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. An investment in a limited partnership is accounted for by the equity method and is carried at an amount equal to the Company's equity in the underlying net assets of the limited partnership. INVENTORIES Inventories are stated at lower of cost or market. The major portion of leaf tobacco costs is determined by the last-in, first-out (LIFO) method. The cost of the remaining inventories is determined by the first-in, first-out (FIFO) and average cost methods. Leaf tobacco and wine inventories are included in current assets as a standard industry practice, notwithstanding the fact that such inventories are carried for several years for the purpose of curing and aging. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Depreciation is computed by the straight-line method based on the estimated useful lives of the assets which range from 5 to 40 years. 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. INCOME TAXES Income taxes are provided on all revenue and expense items included in the Consolidated Statement of Earnings, regardless of the period in which such items are recognized for income tax purposes, adjusted for items representing permanent differences between pretax accounting income and taxable income. Deferred income taxes result from the future tax consequences associated with temporary differences between the carrying amounts of assets and liabilities for tax and financial reporting purposes. EARNINGS PER SHARE 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. 18 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." IMPAIRMENT OF LONG-LIVED ASSETS In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This new rule requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company determined that no impairment loss needed to be recognized for applicable assets in 1996. CASH AND CASH EQUIVALENTS
DECEMBER 31 ------------------- 1996 1995 ------- ------- Cash............................................................. $ 9,452 $11,013 Commercial paper................................................. 45,000 58,390 ------- ------- $54,452 $69,403 ======= =======
Cash equivalents are all highly liquid investments generally with maturities of three months or less when acquired. INVENTORIES
DECEMBER 31 --------------------- 1996 1995 -------- -------- Leaf tobacco................................................... $136,881 $122,748 Products in process and finished goods......................... 117,924 117,102 Other materials and supplies................................... 16,620 16,251 ------- ------- $271,425 $256,101 ======= =======
At December 31, 1996 and 1995, $133.9 million and $122.7 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 $43.1 million and $42.9 million, respectively. 19 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31 --------------------- 1996 1995 -------- -------- Land........................................................... $ 26,570 $ 27,425 Buildings...................................................... 203,522 197,101 Machinery and equipment........................................ 284,221 267,639 ------- ------- 514,313 492,165 Less allowances for depreciation............................... 213,428 197,359 ------- ------- $300,885 $294,806 ======= =======
OTHER ASSETS
DECEMBER 31 --------------------- 1996 1995 -------- -------- Prepaid pension costs.......................................... $26,512 $26,064 Investments in unconsolidated companies........................ 12,357 12,495 Other.......................................................... 15,834 16,790 ------- ------- $54,703 $55,349 ======= =======
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 --------------------- 1996 1995 -------- -------- Trade accounts payable......................................... $ 27,863 $ 24,861 Employee compensation and benefits............................. 58,132 55,771 Other accrued expenses......................................... 27,640 31,135 -------- -------- $113,635 $111,767 ======== ========
REVOLVING CREDIT AGREEMENTS In 1996, the Company entered into two revolving credit agreements totaling $350 million with a group of ten banks which replaced the previous $200 million Revolving Credit and Term Loan Agreement which was in effect since 1994 and $100 million of committed short-term lines of credit. The terms of the agreements provide for a five-year revolving credit facility in the amount of $262.5 million, which expires in November 2001, and a 364-day revolving credit facility in the amount of $87.5 million, which expires in November 1997. The Company may borrow funds and elect to pay interest under the "Base Rate," "Competitive Bid" or "Eurodollar" interest rate provisions. Principal repayments are optional during the revolving credit periods. The agreements require facility fees which are not significant, as well as maintenance of certain financial ratios. There were no borrowings under these facilities in 1996. At December 31, 1996, the Company had $250 million outstanding under commercial paper borrowings, of which $100 million was classified as long-term debt. Commercial paper borrowings at December 31, 1996 have a weighted-average interest rate of 5.7 percent. At December 31, 1995, the Company had $100 million outstanding under its Revolving Credit and Term Loan Agreement at a weighted-average interest rate of 6.2 percent and $100 million outstanding under commercial paper borrowings at a weighted-average interest rate of 5.9 percent. 20 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER LIABILITIES Other liabilities include the noncurrent portion of the net pension liabilities at December 31, 1996 and 1995 of $39.9 million and $34.5 million, respectively. (See Employee Benefit and Compensation Plans Note.) In 1996 and 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. During 1996 and the fourth quarter of 1995, put options for 975,000 and 250,000 shares were issued for $1.1 million and $.3 million in premiums, respectively, and were included in additional paid-in capital. In 1996, put options for 475,000 shares were exercised and $.5 million of put premium was transferred from additional paid-in capital to treasury stock. Put options for 250,000 shares were outstanding at December 31, 1996 and 1995. All options outstanding as of December 31, 1995 expired or were exercised. Put options outstanding at December 31, 1996 expire on various dates between January and March of 1997 with exercise prices ranging from $29.09 to $33.75. At December 31, 1996 and 1995, $8 million and $8.1 million, respectively, relating to the Company's potential put obligations are reflected as reductions to additional paid-in capital and are included in other liabilities. 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 November 1996, the Board of Directors approved a new stock repurchase program, authorizing the Company to repurchase up to 20 million shares of its common stock from time to time in open market or negotiated transactions for use in connection with employee benefit programs and other corporate purposes. The new program commenced upon completion of the prior program, which provided for the repurchase of up to 20 million shares of the Company's common stock and had been in effect since June 1994. In 1996, the Company repurchased a total of 7.4 million shares of its common stock pursuant to its stock repurchase programs of which .5 million shares were repurchased under the new program. In addition, .3 million shares were subject to outstanding put options. Common stock issued and outstanding at December 31, 1996 and 1995 was 183,855,736 shares and 189,186,036 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. The Company accounts for stock options in accordance with APB Opinion No. 25. Under the Company's current plans, options may be granted at not less than the fair market value on the date of grant and therefore no compensation expense is recognized for the stock options granted. 21 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. If compensation expense for the Company's plans had been determined based on the fair value at the grant dates for awards under its plans, consistent with the method described in SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 -------- -------- Net earnings: As reported.................................................. $463,999 $429,760 Pro forma.................................................... $461,059 $429,281 Primary earnings per share: As reported.................................................. $2.42 $2.16 Pro forma.................................................... $2.40 $2.15 Fully diluted earnings per share: As reported.................................................. $2.42 $2.15 Pro forma.................................................... $2.40 $2.14
In accordance with the provisions of SFAS No. 123, the pro forma disclosures include only the effect of stock options granted in 1995 and 1996. The application of the pro forma disclosures presented above are not representative of the effects SFAS No. 123 may have on net earnings and earnings per share in future years due to the timing of stock option grants and considering that options vest over a period of six months to three years. The fair value of each option grant, for pro forma disclosure purposes, was estimated on the date of grant using the modified Black-Scholes option pricing model with the following weighted-average assumptions:
1996 1995 ---------- ---------- Expected dividend yield........................................ 4.4% 4.2% Risk-free interest rate........................................ 6.6% 6.1% Expected volatility............................................ 18.0% 17.8% Expected life of option........................................ 6.5 years 6.5 years
Under the 1992 Stock Option Plan, 10.4 million shares were authorized for grant and options first become exercisable, in ratable installments or otherwise, over a period of one to five years from the date of grant and may be exercised up to a maximum of ten years from the date of grant using various payment methods. Under the Nonemployee Directors' Stock Option Plan, .2 million shares were authorized for grant and options first become exercisable six months from the date of grant and may be exercisable up to a maximum of ten years from the date of grant and must be paid in full at the time of the exercise. At December 31, 1996, 4,503,600 shares were available for grant under the 1992 Stock Option Plan and 179,000 shares were available for grant under the Nonemployee Directors' Stock Option Plan, while no shares were available under the 1982 Stock Option Plan. Receivables from the exercise of options in the amount of $12.1 million in 1996, $11.3 million in 1995 and $15.3 million in 1994 have been deducted from stockholders' equity. 22 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents a summary of the Company's stock option activity and related information for the years ended December 31:
1996 1995 1994 ---------------------------- ---------------------------- ---------------------------- NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE OF EXERCISE OF EXERCISE OF EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- ---------------- ---------- ---------------- ---------- ---------------- Outstanding at beginning of year............... 16,321,700 $22.20 16,774,400 $20.33 17,073,500 $18.23 Granted.............. 1,567,800 33.93 1,510,100 30.54 1,706,400 27.83 Exercised............ (2,075,500) 12.98 (1,935,600) 12.42 (2,001,800) 8.75 Forfeited............ (30,600) 29.61 (27,200) 27.68 (3,700) 26.94 Expired.............. (800) 4.23 -- -- -- -- ---------- ---------- ---------- Outstanding at end of year............... 15,782,600 $24.57 16,321,700 $22.20 16,774,400 $20.33 ========== ====== ========== ====== ========== ====== Exercisable at end of year............... 13,020,600 $22.96 13,811,300 $20.92 14,702,300 $19.34 ========== ====== ========== ====== ========== ====== Weighted-average fair value of options granted during the year............... $5.95 $5.21 $7.88 ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ----------------------------- NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE RANGE OF OF REMAINING EXERCISE OF EXERCISE EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS PRICE - -------------------------- ---------- ---------------- ---------------- ---------- ---------------- $ 6.09-$ 7.69............. 1,388,700 1.1 years $ 7.43 1,388,700 $ 7.43 13.78- 18.28............. 2,683,200 3.3 14.44 2,683,200 14.44 24.19- 35.25............. 11,710,700 6.5 28.92 8,948,700 27.92 ---------- ---------- $ 6.09-$35.25............. 15,782,600 5.5 $24.57 13,020,600 $22.96 ========== ========== ====== ========== ======
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 were:
1996 1995 1994 ------ ------ ------ Discount rate............................................ 7.5% 9.0% 7.0% Average rate of increase in compensation levels.......... 5.0% 5.0% 5.0% Expected long-term rate of return on plan assets......... 9.0% 11.0% 9.0%
23 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension cost includes the following components (in millions):
1996 1995 1994 ------ ------ ------ Service cost - benefits earned during period............. $ 8.6 $ 6.4 $ 8.2 Interest cost on projected benefit obligation............ 17.1 15.7 14.2 Actual return on plan assets............................. (20.2) (53.6) 4.3 Net amortization and deferral............................ 1.4 34.5 (20.2) ------ ------ ------ Net periodic pension cost................................ $ 6.9 $ 3.0 $ 6.5 ====== ====== ======
The following table presents a reconciliation of the funded status of the plans (in millions):
DECEMBER 31 ----------------------------------------------------------------------- 1996 1995 --------------------------------- --------------------------------- PLANS IN WHICH PLANS IN WHICH PLANS IN WHICH PLANS IN WHICH ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS -------------- -------------- -------------- -------------- Actuarial present value of benefit obligations: Vested benefits................. $ (150.6) $(42.3) $ (140.2) $(36.3) Nonvested benefits.............. (15.4) (2.9) (15.4) (3.2) ------- ------ ------- ------ Accumulated benefits............ (166.0) (45.2) (155.6) (39.5) Effect of future pay increases.................... (24.7) (10.2) (24.0) (10.8) ------- ------ ------- ------ Projected benefit obligation.... (190.7) (55.4) (179.6) (50.3) Plan assets at fair value......... 239.3 3.0 228.6 2.5 Unrecognized net (gain) loss...... (16.3) 18.0 (16.1) 16.1 Prior service cost not yet recognized in net periodic pension cost.................... (2.3) .7 (2.4) .8 Unrecognized portion of initial net (asset) obligation.......... (3.5) 3.0 (4.4) 3.6 Adjustment to recognize additional minimum liability............... -- (12.9) -- (10.8) ------- ------ ------- ------ Net pension asset (liability)..... $ 26.5 $(43.6) $ 26.1 $(38.1) ======= ====== ======= ======
At December 31, 1996 and 1995, the net pension assets of $26.5 million and $26.1 million, respectively, consist of prepaid pension costs and are included in other assets. The noncurrent portion of the net pension liabilities at December 31, 1996 and 1995 are included in other liabilities. For pension plans in which accumulated benefits exceed assets at December 31, 1996, the Consolidated Statement of Financial Position reflects an additional minimum liability of $12.9 million: an intangible asset of $3 million included in other assets and a reduction of retained earnings of $6.5 million, which is net of deferred tax benefits of $3.4 million. At December 31, 1995, the Consolidated Statement of Financial Position included an additional minimum liability of $10.8 million: an intangible asset of $3.8 million and a reduction of retained earnings of $4.6 million, which is net of deferred tax benefits of $2.4 million. Plan assets include marketable equity securities, including common stock of the Company, and corporate and government debt securities. At December 31, 1996 and 1995, the fund held 1.3 million shares of the Company's common stock having a market value of $41.4 million as of December 31, 1996 and $42.7 million as of December 31, 1995. Dividends paid on shares held by the fund were $1.9 million in 1996 and $1.7 million in 1995. 24 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The discount rate used in determining the present value of benefit obligations was 7.75 percent for 1996 and 7.5 percent for 1995. 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 $3.9 million in 1996, $3.8 million in 1995 and $3.7 million in 1994. 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 $39 million in 1996, $36.9 million in 1995 and $33.5 million in 1994. 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 postretirement welfare plans are not funded. The net periodic postretirement benefit cost included the following components:
1996 1995 1994 ------ ------ ------ Service cost............................................. $2,989 $2,318 $2,835 Interest cost............................................ 4,162 4,037 3,342 Amortization of unrecognized gain........................ (190) (651) (226) ------ ------ ------ Net periodic postretirement benefit cost................. $6,961 $5,704 $5,951 ====== ====== ======
The following table sets forth the combined status of the plans at December 31:
1996 1995 ------- ------- Accumulated postretirement benefit obligation: Retirees....................................................... $21,236 $20,326 Fully eligible active plan participants........................ 9,735 9,372 Other active plan participants................................. 27,045 26,804 ------- ------- 58,016 56,502 Unrecognized gain.............................................. 12,193 8,790 ------- ------- Accrued postretirement benefit obligation...................... $70,209 $65,292 ======= =======
The discount rate used in determining the net periodic postretirement benefit cost was 7.5 percent for 1996, 9 percent for 1995 and 7 percent for 1994. The rate of increase in per capita costs of covered health care benefits is assumed to be 9.9 percent for 1997 and to decrease gradually to 5.3 percent by the year 2005 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, 1996 by approximately $9 million and the 1996 net periodic postretirement benefit cost by approximately $1.4 million. The discount rate used in determining the accumulated postretirement benefit obligation was 7.75 percent at December 31, 1996 and 7.5 percent at December 31, 1995. 25 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES The income tax provision (benefit) consisted of the following:
1996 1995 1994 -------- -------- -------- Current: Federal.......................................... $245,386 $250,612 $223,407 State and local.................................. 32,729 36,935 36,960 -------- -------- -------- Total current............................ 278,115 287,547 257,367 -------- -------- -------- Deferred: Federal.......................................... 1,927 (13,695) (4,257) State and local.................................. 485 978 -- -------- -------- -------- Total deferred........................... 2,412 (12,717) (4,257) -------- -------- -------- $280,527 $274,830 $253,110 ======== ======== ========
The 1996 current federal tax provision includes a tax benefit from the sale of a subsidiary and the 1996 current state tax provision reflects the reversal of certain state tax reserves. In addition, the current tax provisions do not reflect $14.5 million, $11.7 million and $13.5 million for 1996, 1995 and 1994, respectively, of tax benefits arising from the exercise of stock options. These amounts were credited directly to additional paid-in capital. The deferred tax provision for 1996 and benefits for 1995 and 1994 do not reflect the respective tax effects of $1 million, $1.4 million and $(1.4) million resulting from the additional minimum pension liability adjustments 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:
1996 1995 ------- ------- Deferred tax assets: Postretirement benefits other than pensions.................... $24,573 $22,852 Other accrued liabilities...................................... 23,289 29,049 Accrued pension liabilities.................................... 14,185 12,025 All other, net................................................. 3,867 3,298 ------- ------- Total deferred tax assets.............................. 65,914 67,224 ------- ------- Deferred tax liabilities: Depreciation................................................... 40,487 39,613 Investment in limited partnerships............................. 8,522 9,447 Prepaid pension assets......................................... 9,279 9,122 ------- ------- Total deferred tax liabilities......................... 58,288 58,182 ------- ------- Net deferred tax assets.......................................... $ 7,626 $ 9,042 ======= =======
26 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Differences between the effective tax rate and the U.S. federal statutory income tax rate are explained as follows:
1996 1995 1994 ---- ---- ---- U.S. federal statutory income tax rate......................... 35.0% 35.0% 35.0% State and local taxes, net of federal benefit.................. 2.9 3.5 3.4 Other, net..................................................... (.2) .5 1.1 ---- ---- ---- 37.7% 39.0% 39.5% ==== ==== ====
EXCISE TAXES Net sales and cost of products sold include excise taxes of $26.4 million in 1996, $25.5 million in 1995 and $25.3 million in 1994. ADVERTISING COSTS The Company expenses the production costs of advertising in the period in which the costs are incurred. Advertising expenses were $66 million in 1996, $65 million in 1995 and $53.7 million in 1994. At December 31, 1996 and 1995, $6.1 million and $7.8 million, respectively, of advertising related costs were included in prepaid expenses and other current assets. INTEREST, NET Interest, net, is comprised of expense associated with short-term and long-term obligations and income from cash equivalent investments.
1996 1995 1994 ------ ------- ------- Short-term obligations................................. $1,853 $ 1,831 $ 1,660 Long-term obligations.................................. 5,432 2,961 2,956 ------ ------- ------- 7,285 4,792 4,616 ------ ------- ------- Income from cash equivalents........................... (921) (1,613) (4,524) ------ ------- ------- $6,364 $ 3,179 $ 92 ====== ======= =======
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR --------- --------- --------- --------- ----------- 1996 Net sales.................................. $327,791 $350,542 $366,036 $352,478 $1,396,847 Gross profit............................... 264,266 283,494 296,144 280,187 1,124,091 Net earnings............................... 106,796 119,077 123,657 114,469 463,999 Primary earnings per share................. $.55 $.62 $.65 $.61 $2.42 1995 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
27 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INDUSTRY SEGMENT DATA The Company's industry segments are Tobacco, Wine and Other. In 1996, the Company reclassified its cigar operation from the Tobacco segment to the Other segment since it is part of the Company's international operations which are included in the Other segment. All prior period amounts have been reclassified to conform to the 1996 presentation. The Company operates predominantly in the tobacco industry as a producer and marketer of moist smokeless tobacco products. The Company also produces and markets premium wines and has a presence in the entertainment industry which is in the Other segment. Tobacco segment sales are principally to a large number of wholesalers and chain stores which are widely dispersed. In 1996, sales to one wholesale customer accounted for approximately 22 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. 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, net, associated with nonsegment activities. In 1995, capital expenditures for each segment were netted with their allocable share of a sale of a corporate aircraft of $17.7 million along with other dispositions. Gross capital expenditures in 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. Consolidated Industry Segment Data appears on page 31. OTHER MATTERS The Company and/or its subsidiary, United States Tobacco Company (hereafter "the Company") has been named in certain health care cost reimbursement/class action litigation against the major domestic cigarette companies and others seeking damages and other relief. The complaints in these cases on their face predominantly relate to the usage of cigarettes; within that context, certain complaints contain a few allegations relating specifically to smokeless tobacco products. These actions are in varying stages of pretrial activities. The Company believes that these pending litigation matters will not result in any material liability for a number of reasons, including the fact that the Company has had only limited involvement with cigarettes and the Company's current percentage of total tobacco industry sales is relatively small. Prior to 1986, the Company manufactured some cigarette products which had a de minimis market share. From May 1, 1982 to August 1, 1994, the Company distributed a small volume of imported cigarettes and is indemnified against claims relating to those products. The Company has been named in three actions brought by individual plaintiffs, all of whom are represented by the same Louisiana attorney, against a number of smokeless tobacco manufacturers, cigarette manufacturers and certain other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. 28 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On January 27, 1997, the Company was named in an action brought by an individual plaintiff and purports to state a class action on behalf of residents of Louisiana who have purchased and used smokeless tobacco manufactured by defendants. This action seeks unspecified compensatory damages, costs of medical monitoring and other general, special and equitable relief. This action is brought against the Company and certain other organizations by various plaintiffs' counsel, including counsel who initiated a similar action on behalf of Kansas residents which ultimately was dismissed by court order in 1995. 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. On August 28, 1996, the Food and Drug Administration (FDA) published regulations asserting unprecedented jurisdiction over nicotine in tobacco as a "drug" and purports to regulate smokeless tobacco products as a "medical device." The final regulations include severe restrictions on the advertising, marketing and promotion of smokeless tobacco products and will require the Company to comply with a wide range of labeling, reporting and other requirements. The Company and other smokeless tobacco manufacturers have filed suit against the FDA seeking a judicial declaration that the FDA has no authority to regulate smokeless tobacco products. The Company is not able to predict the outcome of the suit, or assess the future effect that these FDA regulations may have on its tobacco business. 29 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Stamford, Connecticut February 7, 1997 EX-21 6 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, 1996:
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 7 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 7, 1997, included in the 1996 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 7, 1997, 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, 1996. ERNST & YOUNG LLP Stamford, Connecticut March 17, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 DEC-31-1996 54,452 0 77,855 0 271,425 444,178 514,313 213,428 807,392 306,553 100,000 0 0 102,077 179,943 807,392 1,396,847 1,396,847 272,756 272,756 0 0 6,364 744,526 280,527 463,999 0 0 0 463,999 2.42 2.42
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