-----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, TCdraF8cZ8gb4GA2BPyL1znNNTYKO71ZvojO9S/nNn4BEu/EhTPTlfwohfX5HjLM ZwXhdQuI8ZtZblBpaRkJ3g== 0000950123-98-002520.txt : 19980317 0000950123-98-002520.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950123-98-002520 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980313 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UST INC CENTRAL INDEX KEY: 0000811669 STANDARD INDUSTRIAL CLASSIFICATION: TOBACCO PRODUCTS [2100] IRS NUMBER: 061193986 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-17506 FILM NUMBER: 98564980 BUSINESS ADDRESS: STREET 1: 100 W PUTNAM AVE CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036611100 MAIL ADDRESS: STREET 1: 100 W PUTNAM AVE CITY: GREENWICH STATE: CT ZIP: 06830 10-K405 1 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, 1997 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. [X] AS OF FEBRUARY 1, 1998, THE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON STOCK, $.50 PAR VALUE, HELD BY NON-AFFILIATES OF REGISTRANT (WHICH FOR THIS PURPOSE DOES NOT INCLUDE DIRECTORS OR OFFICERS) WAS $6,311,690,889. AS OF FEBRUARY 1, 1998, THERE WERE 185,070,736 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, 1997 AND FILED AS AN EXHIBIT AS REQUIRED BY ITEM 601 (b)(13) OF REGULATION S-K........................PARTS I & II CERTAIN PAGES OF UST 1998 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 imported and marketed pipe tobacco through December 31, 1997. WINE: Registrant produces and markets wine and craft beers. OTHER: Registrant's international operation which markets moist smokeless tobacco, its cigar operation which manufactures and markets premium cigars, and its video entertainment business are included in this segment. Registrant also operates certain commercial agricultural properties. In November, 1997, Registrant announced its intention to sell its video entertainment business. INDUSTRY SEGMENT DATA Registrant hereby incorporates by reference the Consolidated Industry Segment Data pertaining to the years 1995 through 1997 set forth on page 31 of its Annual Report to stockholders for the fiscal year ended December 31, 1997 ("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, COPENHAGEN LONG CUT, SKOAL BANDITS, RED SEAL Dry -- BRUTON, CC, RED SEAL It has been claimed that the use of tobacco products, including smokeless tobacco, may be harmful to health. Registrant believes that an unresolved controversy continues to exist among scientists concerning the claims made about tobacco and health. In 1986, federal legislation was enacted regulating smokeless tobacco products by, inter alia, requiring health warning notices on smokeless tobacco packages and advertising and prohibiting the advertising of smokeless tobacco products on electronic media. A federal excise tax was imposed in 1986, which was increased in 1991, 1993 and 1997. 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 1998. 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 1998. Registrant is unable to assess the future effects these various actions may have on its smokeless tobacco business. On August 28, 1996, the Food and Drug Administration (FDA) published regulations asserting unprecedented jurisdiction over nicotine in tobacco as a "drug" and purporting to regulate smokeless tobacco products as a "medical device." 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 filed suit against FDA seeking a judicial declaration that FDA has no authority to regulate smokeless tobacco products. On April 25, 1997, a federal district court ruled that FDA, as a matter of law, is not precluded from regulating cigarettes and smokeless tobacco as "medical devices" and implementing certain labeling and access restrictions. Further trial proceedings are still required to determine whether FDA, based on the facts, can prove that smokeless tobacco products fit the statutory definitions and the restrictions are justified. The court, granting Registrant's motion for summary judgment, also ruled that FDA has no authority to implement restrictions on the advertising and promotion of smokeless tobacco products. The court issued an injunction to prohibit most of the restrictions (labeling, access and advertising/promotion) set for August 28, 1997 from taking effect, pending resolution of any appeals and subsequent proceedings; the court also certified the ruling for interlocutory appeal on the grounds that it involves "controlling questions of law as to which there is substantial ground for difference of opinion." Certain aspects of this ruling appealed to the Fourth Circuit Court of Appeals are awaiting decision. Registrant is not able to predict the outcome of the appeal, or assess the future effect that these FDA regulations, if implemented, may have on its smokeless tobacco business. On June 20, 1997, Registrant, along with other manufacturers in the United States tobacco industry, executed a Memorandum of Understanding (the "Memorandum") to support the adoption of federal legislation incorporating the features described in the proposed resolution attached to the Memorandum. The proposed resolution, if enacted into law, would achieve a resolution of many of the regulatory and litigation issues affecting the United States tobacco industry and, thereby, reduce uncertainties facing the industry and increase stability in business and capital markets. However, if such legislation were enacted, the financial obligations to be imposed on Registrant are expected to be significant although the precise amount of such obligations cannot be determined at this time. Discussions with other tobacco manufacturers, who were participants in the negotiations which led to the Memorandum, are continuing regarding the allocation of both the initial and subsequent payments and Registrant's obligations related thereto. Depending on the amounts required to be paid by Registrant, as well as a number of other factors, including (i) the timing of any 2 4 payments and the means used to finance such payments; (ii) the effect of the legislation on the pricing and consumption of smokeless tobacco products; and (iii) the impact of the legislation on Registrant's competitive position in the smokeless tobacco industry, its financial position could be materially adversely affected in the year of implementation and the unit volume, operating revenues and operating income of Registrant could be materially adversely affected in future years. There can be no assurance that legislation reflecting the proposed resolution or any legislation will be enacted. 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. 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 its moist smokeless tobacco products throughout the United States principally to chain stores and tobacco and grocery wholesalers. Approximately 32% of Registrant's gross sales of tobacco products are made to 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 its customers for many years. COMPETITIVE CONDITIONS The tobacco manufacturing industry in the United States is composed of at least four domestic companies larger than Registrant and many smaller ones. The larger companies concentrate on the manufacture and marketing of cigarettes; one of which also manufactures and markets smokeless tobacco products. Registrant is a well established and major factor in the smokeless tobacco sector of the overall tobacco market. Consequently, Registrant competes actively with both larger and smaller companies in the marketing of its tobacco products. Registrant's principal methods of competition in the marketing of its tobacco products include quality, advertising, promotion, sampling, 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 and imports, bottles and markets wine from France under the COLOUR VOLANT label. Approximately 54% of Registrant's wine sales are made to ten distributors, no one of which accounts for more than 26% of total wine sales. Substantially all wines are sold through state-licensed distributors with whom Registrant maintains satisfactory relationships. 3 5 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 1998. 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 1998. 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. Total grape tonnage harvested and purchased in 1997 was significantly higher than in 1996. Because of the fluctuation in grape harvest yields from year to year as well as the increasing demand for premium varietal wines, Registrant will, in 1998, continue to experience shortages of Washington state grapes for certain of its premium varieties and, accordingly, has placed them on allocation. In addition, Registrant anticipates an increase in California grape production and is taking steps to secure a supply for use in its California labels. 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. 4 6 OTHER Included in this segment are the international operation which markets moist smokeless tobacco; cigar operation which 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. It has been claimed that the use of tobacco products, including cigars, may be harmful to health. Registrant believes that an unresolved controversy continues to exist among scientists concerning the claims made about tobacco and health. The federal excise tax on cigars was last increased in 1993. On August 28, 1996, the Food and Drug Administration (FDA) published regulations asserting unprecedented jurisdiction over nicotine in tobacco as a "drug" and purports to regulate cigarettes and smokeless tobacco products as "medical devices." FDA did not attempt to assert jurisdiction over cigars, and the FDA regulations do not apply to cigars. On July 25, 1997, a public health group filed a petition with FDA requesting that the agency initiate proceedings to assert jurisdiction over cigars as "nicotine delivery systems." In the event FDA attempts to extend its purported tobacco regulations to cover cigars and the regulations survive a judicial challenge, those regulations would impose severe restrictions on the advertising, marketing and promotion of cigar products and would require Registrant to comply with a wide range of labeling, reporting and other requirements with respect to its cigar products. Also, in recent years, other proposals have been made at the federal level for additional regulation of tobacco products including, inter alia, the requirement of additional warning notices on cigar products, 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 1998. In recent years, various state and local governments continued the regulation of tobacco products, including, inter alia, proposed warning notices on cigar products, the imposition of significantly higher taxes, advertising bans and restrictions, constituent disclosure requirements, regulation of environmental tobacco smoke and anti-tobacco advertising campaigns. Additional state and local legislative and regulatory actions will likely be considered in 1998. Registrant is unable to assess the future effects these various actions may have on its cigar business. ADDITIONAL BUSINESS INFORMATION ENVIRONMENTAL REGULATIONS Registrant does not believe that compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material effect upon the capital expenditures, earnings or competitive position of Registrant. NUMBER OF EMPLOYEES Registrant's average number of employees during 1997 was 4,677. 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. 5 7 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............ 189,000 Executive, sales and general offices in 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............ 900,000 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.............. 560,000 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. St. Helena, California............ 19,800 Winery and storage facility. Yakima, Washington................ 26,000 Microbrewery, distribution and storage facility, and office. Other Facilities: Tampa, Florida.................... 57,000 Office, warehouse and cigar distribution center. Danli, Honduras, C.A.............. 134,000 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 and Benton Counties, Washington..................... 3,390 Vineyards. Grant and Benton Counties, Washington..................... 17,974 Other, including agricultural properties.
Such principal properties in Registrant's industry segments were utilized only in connection with Registrant's business operations. Registrant believes that the above properties at December 31, 1997 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. 6 8 ITEM 3 -- LEGAL PROCEEDINGS Registrant has been named in certain health care cost reimbursement/third party recoupment/class action litigation against the major domestic cigarette companies and others seeking damages and other relief. The complaints in these cases on their face predominantly relate to the usage of cigarettes; within that context, certain complaints contain a few allegations relating specifically to smokeless tobacco products. These actions are in varying stages of pretrial activities. Registrant believes that these pending litigation matters will not result in any material liability for a number of reasons, including the fact that Registrant has had only limited involvement with cigarettes and Registrant's current percentage of total tobacco industry sales is relatively small. Prior to 1986, Registrant manufactured some cigarette products which had a de minimis market share. From May 1, 1982 to August 1, 1994, Registrant distributed a small volume of imported cigarettes and is indemnified against claims relating to those products. 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 is also named in an action in Illinois seeking damages and other relief brought by an individual plaintiff and purporting to state a class action "on behalf of himself and all other persons similarly situated" alleging that his use of Registrant's smokeless tobacco products "resulted in his addiction to nicotine, increased use of Defendants' products and gum deterioration." Registrant believes, and has been so advised by counsel handling these cases, that it has a number of meritorious defenses to all such pending litigation. Except as to Registrant's intention to pursue federal legislation resolving certain regulatory and litigation issues, 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. In Cedric Doyle, et al. v. United States Tobacco Company, et al., (Case No. CV97-1488), United States District Court, Western District of Louisiana, Lake Charles Division, on October 29, 1997, defendants, including Registrant, filed a motion to strike plaintiffs' class action allegations. On December 18, 1997, the court filed a Ruling granting the motion to strike the class action allegations. On January 26, 1998, plaintiff and defendants, including Registrant, entered into a Stipulation of Dismissal providing for voluntary dismissal without prejudice of this action. On January 28, 1998, the court entered an Order granting the dismissal. In The State of Texas v. The American Tobacco Company, et al., (Civil Action No. 5-96CV91), United States District Court for the Eastern District of Texas, Texarkana Division, on January 22, 1998, the court entered a Final Judgment pursuant to the Agreed Order Granting Joint Motion to Approve Settlement Agreement, thereby approving the Settlement Agreement between plaintiff and certain defendants, including Registrant, and dismissing with prejudice all counts of the Complaint against certain defendants, including Registrant. Registrant's portion of the settlement, which relates solely to a pilot program primarily to reduce youth access to tobacco products, was approximately $3.4 million (to be paid on an installment basis) plus related expenses. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 7 9 EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to instruction 3 to Item 401(b) of Regulation S-K, the name, office, age and business experience of each executive officer of Registrant as of February 1, 1998 is set forth below:
NAME OFFICE AGE ---- ------ --- Vincent A. Gierer, Jr.................. Chairman of the Board, Chief Executive 50 Officer and President Robert E. Barrett...................... Executive Vice President and 59 President -- UST Enterprises Inc. Richard H. Verheij..................... Executive Vice President and General 39 Counsel Robert H. Lawrence, Jr................. Executive Vice President -- United 55 States Tobacco Company A. Gary Smith.......................... Executive Vice President -- United 49 States Tobacco Company Robert T. D'Alessandro................. Senior Vice President and Controller 44 Robert A. Fitzmaurice.................. Senior Vice President -- United States 57 Tobacco Company Allen C. Shoup......................... President -- International Wine & 54 Spirits Ltd.
None of the executive officers of Registrant has any family relationship to any other executive officer or director of Registrant. After election, all executive officers serve until the next annual organization meeting of the Board of Directors and until their successors are elected and qualified. All of the executive officers, except for Mr. Fitzmaurice, have been continuously employed by Registrant for more than five years. 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. Mr. Gierer has been employed by Registrant since March 16, 1978. Mr. Barrett has served as Executive Vice President since October 7, 1991. He also has served as President of UST Enterprises Inc. since July 1, 1991. Mr. Barrett has been employed by Registrant since January 1, 1991. 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 and as Vice President and Associate General Counsel from December 17, 1992 to April 3, 1994. Mr. Verheij has been employed by Registrant since November 24, 1986. Dr. Lawrence has served as Executive Vice President of United States Tobacco Company since April 4, 1994. He served as Senior Vice President of United States Tobacco Company from June 23, 1988 to April 3, 1994. Dr. Lawrence has been employed by Registrant since March 1, 1987. Mr. Smith has served as Executive Vice President of United States Tobacco Company since January 1, 1998. He served as Senior Vice President of United States Tobacco Company from December 17, 1992 to December 31, 1997. Mr. Smith has been employed by Registrant since September 18, 1972. Mr. D'Alessandro has served as Senior Vice President and Controller since January 1, 1996. He has served as Controller since December 19, 1991. Mr. D'Alessandro has been employed by Registrant since May 4, 1981. 8 10 Mr. Fitzmaurice has served as Senior Vice President of United States Tobacco Company since May 7, 1996. He served as Managing Partner of Fitzmaurice, Lewis & Partners, an advertising & marketing firm from November 1994 to May 1, 1996 and had also served as Senior Vice President -- Marketing and Sales of Brown & Williamson Tobacco Corp. from 1990 to January 1994. Mr. Fitzmaurice has been employed by Registrant since May 7, 1996. Mr. Shoup has served as President of International Wine & Spirits Ltd. since February 19, 1987. He has been employed by Registrant since December 3, 1980. PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Registrant hereby incorporates by reference the information with respect to the market for its common stock, $.50 par value ("Common Stock"), and related security holder matters set forth on page 46 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 1, 1998, there were approximately 10,650 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 50 and 51 of its Annual Report, which pages are included in Exhibit 13. ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Registrant hereby incorporates by reference the Management's Discussion and Analysis of Results of Operations and Financial Condition set forth on pages 23-30 of its Annual Report, which pages are included in Exhibit 13. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Registrant hereby incorporates by reference the report of independent auditors and the information contained in the consolidated financial statements, including the notes thereto set forth on pages 31-49 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 1998 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 1998 Annual Meeting and Proxy Statement. 9 11 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 1998 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 1998 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, 1997, 1996 and 1995 Consolidated Statement of Financial Position -- December 31, 1997 and 1996 Consolidated Statement of Cash Flows -- Years ended December 31, 1997, 1996 and 1995 Consolidated Statement of Changes in Stockholders' Equity -- Years ended December 31, 1997, 1996 and 1995 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* -- Form of Severance Agreement dated October 27, 1986 between Registrant and certain officers, incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1986. 10.3* -- 1982 Stock Option Plan restated as of March 22, 1989, incorporated by reference to Exhibit 4.1 to Form S-8 Registration Statement filed on April 14, 1989. 10.4* -- 1992 Stock Option Plan, as amended and restated as of December 12, 1996, incorporated by reference to Exhibit 10.6 to Form 10-K for the fiscal year ended December 31, 1996. 10.5* -- Incentive Compensation Plan, as amended and restated as of January 1, 1996, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1996. 10.6* -- Amendment to Incentive Compensation Plan, effective September 25, 1997. 10.7* -- Officers' Supplemental Retirement Plan, as restated as of December 1, 1992, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1992. 10.8* -- Nonemployee Directors' Retirement Plan, as amended and restated as of January 1, 1998.
10 12 10.9 -- Directors' Supplemental Medical Plan, as amended and restated as of February 16, 1995, incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1994. 10.10* -- Nonemployee Directors' Stock Option Plan effective May 2, 1995, incorporated by reference to Exhibit A to 1995 Notice of Annual Meeting and Proxy Statement dated March 24, 1995. 13 -- Pages 23-51 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. 11 13 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 18, 1998 By: /s/ VINCENT A. GIERER, JR. ---------------------------------- VINCENT A. GIERER, JR. CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Chairman of the Board, Chief Executive Officer and President (Principal February 18, 1998 Executive Officer) /s/ VINCENT A. GIERER, JR. -------------------------------------------------------- VINCENT A. GIERER, JR. Senior Vice President and Controller (Principal Accounting Officer and Principal February 18, 1998 Financial Officer) /s/ ROBERT T. D'ALESSANDRO -------------------------------------------------------- ROBERT T. D'ALESSANDRO February 18, 1998 Director /s/ JAMES W. CHAPIN -------------------------------------------------------- JAMES W. CHAPIN February 18, 1998 Director /s/ JOHN P. CLANCEY -------------------------------------------------------- JOHN P. CLANCEY February 18, 1998 Director /s/ EDWARD H. DEHORITY, JR. -------------------------------------------------------- EDWARD H. DEHORITY, JR. February 18, 1998 Director /s/ ELAINE J. EISENMAN -------------------------------------------------------- ELAINE J. EISENMAN February 18, 1998 Director /s/ EDWARD T. FOGARTY -------------------------------------------------------- EDWARD T. FOGARTY February 18, 1998 Chairman of the Board /s/ VINCENT A. GIERER, JR. -------------------------------------------------------- VINCENT A. GIERER, JR. February 18, 1998 Director /s/ P.X. KELLEY -------------------------------------------------------- P.X. KELLEY February 18, 1998 Director /s/ PETER J. NEFF -------------------------------------------------------- PETER J. NEFF February 18, 1998 Director /s/ RALPH L. ROSSI -------------------------------------------------------- RALPH L. ROSSI February 18, 1998 Director /s/ JOHN P. WARWICK -------------------------------------------------------- JOHN P. WARWICK February 18, 1998 Director /s/ LOWELL P. WEICKER, JR. -------------------------------------------------------- LOWELL P. WEICKER, JR.
12 14 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* -- Form of Severance Agreement dated October 27, 1986 between Registrant and certain officers, incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1986. 10.3* -- 1982 Stock Option Plan restated as of March 22, 1989, incorporated by reference to Exhibit 4.1 to Form S-8 Registration Statement filed on April 14, 1989. 10.4* -- 1992 Stock Option Plan, as amended and restated as of December 12, 1996, incorporated by reference to Exhibit 10.6 to Form 10-K for the fiscal year ended December 31, 1996. 10.5* -- Incentive Compensation Plan, as amended and restated as of January 1, 1996, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1996. 10.6* -- Amendment to Incentive Compensation Plan, effective September 25, 1997. 10.7* -- Officers' Supplemental Retirement Plan, as restated as of December 1, 1992, incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1992. 10.8* -- Nonemployee Directors' Retirement Plan, as amended and restated as of January 1, 1998. 10.9 -- Directors' Supplemental Medical Plan, as amended and restated as of February 16, 1995, incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1994. 10.10* -- Nonemployee Directors' Stock Option Plan effective May 2, 1995, incorporated by reference to Exhibit A to 1995 Notice of Annual Meeting and Proxy Statement dated March 24, 1995. 13 -- Pages 23-51 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-10.6 2 AMENDMENT TO INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.6 AMENDMENT TO UST INC. INCENTIVE COMPENSATION PLAN The UST Inc. Incentive Compensation Plan (the "Plan"), as restated as of January 1, 1990, December 1, 1992, January 1, 1994 and January 1, 1996, is hereby amended as set forth below, effective as of September 25, 1997: 1. Section 5.1 of the Plan is hereby restated to read as follows: "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. The Chairman of the Committee shall be a member of the Board." Except as set forth above, the Plan is hereby ratified and confirmed in all respects. EX-10.8 3 NONEMPLOYEE DIRECTORS' RETIREMENT PLAN 1 EXHIBIT 10.8 EFFECTIVE AS OF JANUARY 1, 1988; AMENDED AND RESTATED AS OF JANUARY 1, 1998 UST NONEMPLOYEE DIRECTORS' RETIREMENT PLAN 1. Purpose; Applicability. The purpose of the UST Nonemployee Directors' Retirement Plan (the "Plan") is to provide retirement benefits to nonemployee members of the Board of Directors ("Directors") of UST Inc. (the "Company"). The Plan shall be effective for 1988 and each succeeding year. The Plan shall be applicable to all current or future Directors of the Company whose service as a Director equals or exceeds thirty-six months (whether or not consecutive), other than directors who are employees or former employees of the Company or its subsidiaries (whether direct or indirect). 2. Benefits. The Company shall establish on its books the necessary account to accurately reflect its liability as a credited amount payable to each Director entitled to benefits under the Plan. The Company's liability to each such Director shall be a monthly amount (the "Monthly Payment") that is equal to one-twelfth ( 1/12th) of 75% of the Director's Highest Annual Compensation (as hereinafter defined), payable for a period (the "Payment Period") that is equal to the same number of full months as the Director shall have served as a Director; provided, however, that effective January 1, 1998, the Payment Period shall not exceed 120 months. "Highest Annual Compensation" shall mean the average Compensation (as hereinafter defined) of a Director during the twelve (12) consecutive calendar months in the last thirty-six (36) calendar months of a Director's service affording the highest such average. "Compensation" shall mean payments which the Director receives from the Company for services solely in his capacity as a Director, including directors' fees, retainers, meeting fees and fees for chairing committees, but shall exclude consulting fees and direct reimbursement of expenses. The Monthly Payments to a Director shall begin on the last day of the later of the calendar month in which the Director attains the age of 65 or the calendar month in which the Director ceases to serve as a Director, and shall continue to be made on the last day of each succeeding month for a period that is equal to the same number of full months as the Director shall have served as a Director; provided, however, that the Payment Period shall not exceed 120 months. In the event of death of a Director whose retirement commenced on or after January 1, 1998, prior to the end of the Payment Period, a lump sum payment, equal to the total Monthly Payments remaining to be made to the Director had the Director survived, shall be made to the deceased Director's spouse. Effective January 1, 1998, in the event of death of a Director prior to the Director's retirement from the Board, and provided that the Director's service as a Director equals or exceeds thirty-six (36) months, a lump sum payment, equal to the total Monthly Payments to which the Director would have been entitled had the Director retired immediately before death, will be made to the deceased Director's spouse, such payment to be made on the last day of the later of the calendar month in which the Director would have attained the age of 65 or the calendar month in which the Director's death occurred. Directors shall not be entitled to any early retirement or other benefits. 3. No Right of Service. Nothing contained in this Plan shall give any Director the right to remain as a Director. 4. Nontransferability. No amounts payable under the Plan shall be transferable by the Director or former Director. 5. Amendments to the Plan. The Board of Directors of the Company may at any time terminate or from time to time modify or suspend the Plan, in whole or in part, except that termination, modification or suspension of the Plan shall not, without the consent of the affected Directors, adversely affect any right of any such Director to receive benefits that have previously vested. 6. Governing Law. The Plan shall be governed and construed in accordance with the laws of the State of Delaware. EX-13 4 PAGES 23-51 OF THE ANNUAL REPORT 1 EXHIBIT 13 (ITEMS 1 AND 8) UST CONSOLIDATED INDUSTRY SEGMENT DATA (IN THOUSANDS)
YEAR ENDED DECEMBER 31 -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- NET SALES TO UNAFFILIATED CUSTOMERS Tobacco Smokeless tobacco................................. $1,180,535 $1,170,014 $1,119,828 Other tobacco products............................ 7,588 8,413 8,792 ---------- ---------- ---------- 1,188,123 1,178,427 1,128,620 Wine................................................. 145,048 122,458 109,453 Other................................................ 72,534 74,508 70,742 Elimination of intersegment sales.................... (3,987) (3,688) (3,019) ---------- ---------- ---------- NET SALES.................................... $1,401,718 $1,371,705 $1,305,796 ========== ========== ========== OPERATING PROFIT (LOSS) Tobacco.............................................. $712,204 $751,115 $720,965 Wine................................................. 29,178 19,875 13,493 Other................................................ (5,680) (500) (5,384) ---------- ---------- ---------- OPERATING PROFIT............................. 735,702 770,490 729,074 Corporate expenses................................... (24,394) (19,600) (21,305) Interest, net........................................ (7,451) (6,364) (3,179) ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES................. $703,857 $744,526 $704,590 ========== ========== ========== IDENTIFIABLE ASSETS AT DECEMBER 31 Tobacco.............................................. $457,559 $453,228 $431,424 Wine................................................. 220,881 186,611 176,565 Other................................................ 110,609 93,875 88,847 Corporate............................................ 37,665 73,678 87,916 ---------- ---------- ---------- $826,714 $807,392 $784,752 ========== ========== ========== CAPITAL EXPENDITURES (DISPOSITIONS), NET Tobacco.............................................. $28,627 $22,606 $ 2,266 Wine................................................. 19,478 11,551 10,762 Other................................................ 7,134 3,037 2,447 Corporate............................................ 511 (445) (1,473) ---------- ---------- ---------- $55,750 $36,749 $14,002 ========== ========== ========== DEPRECIATION Tobacco.............................................. $17,128 $16,746 $17,642 Wine................................................. 10,465 8,949 7,693 Other................................................ 2,096 1,911 2,386 Corporate............................................ 447 537 633 ---------- ---------- ---------- $30,136 $28,143 $28,354 ========== ========== ==========
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)
1997 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- SUMMARY OF OPERATIONS for the year ended December 31 Net sales......................................... $1,401,718 $1,371,705 $1,305,796 $1,203,951 $1,097,533 $1,032,172 Cost of products sold (includes excise taxes)..... 291,942 272,756 262,203 251,944 246,445 256,796 Selling, advertising and administrative expenses........................................ 398,468 348,059 335,824 311,279 286,336 274,613 ---------- ---------- ---------- ---------- ---------- ---------- Operating income.................................. 711,308 750,890 707,769 640,728 564,752 500,763 Other expense (income): Interest expense (income), net.................. 7,451 6,364 3,179 92 (2,004) (1,866) Gain on disposal of product line................ -- -- -- -- (35,029) -- ---------- ---------- ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of accounting changes........................... 703,857 744,526 704,590 640,636 601,785 502,629 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes...................................... 264,719 280,527 274,830 253,110 232,893 190,071 ---------- ---------- ---------- ---------- ---------- ---------- Earnings before cumulative effect of accounting changes......................................... 439,138 463,999 429,760 387,526 368,892 312,558 Cumulative effect of accounting changes (net of income tax benefit)............................. -- -- -- -- 19,846 -- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings...................................... $ 439,138 $ 463,999 $ 429,760 $ 387,526 $ 349,046 $ 312,558 ========== ========== ========== ========== ========== ========== PER SHARE DATA Basic earnings per share before cumulative effect of accounting changes........................... $2.39 $2.48 $2.21 $1.92 $1.77 $1.49 Basic earnings per share.......................... 2.39 2.48 2.21 1.92 1.67 1.49 Diluted earnings per share before cumulative effect of accounting changes.................... 2.37 2.44 2.17 1.88 1.73 1.43 Diluted earnings per share........................ 2.37 2.44 2.17 1.88 1.64 1.43 Dividends per share............................... 1.62 1.48 1.30 1.12 .96 .80 Market price per share: High............................................ 36 15/16 35 7/8 36 31 1/2 32 3/4 35 3/8 Low............................................. 25 1/2 28 1/4 26 5/8 23 5/8 24 3/8 25 3/8 FINANCIAL CONDITION AT DECEMBER 31 Current assets.................................... $441,844 $450,570 $425,555 $381,937 $334,996 $330,208 Current liabilities............................... 166,519 306,553 280,723 160,755 106,642 81,208 Working capital................................... 275,325 144,017 144,832 221,182 228,354 249,000 Ratio of current assets to current liabilities.... 2.7:1 1.5:1 1.5:1 2.4:1 3.1:1 4.1:1 Total assets...................................... 826,714 807,392 784,752 741,236 706,195 673,965 Long-term debt.................................... 100,000 100,000 100,000 125,000 40,000 -- Total debt........................................ 110,000 250,000 200,000 125,000 40,000 -- Stockholders' equity.............................. 437,931 282,020 293,557 361,669 462,972 516,606 OTHER DATA Stock repurchased................................. $ 45,719 $237,759 $274,783 $298,843 $236,704 $212,581 Dividends paid on shares.......................... $298,059 $277,302 $252,388 $225,715 $199,725 $167,951 Dividends paid as a percentage of net earnings.... 67.9% 59.8% 58.7% 58.2% 57.2% 53.7% Return on net sales............................... 31.3% 33.8% 32.9% 32.2% 31.8% 30.3% Return on average assets.......................... 53.7% 58.3% 56.3% 53.5% 50.6% 47.0% Return on average stockholders' equity............ 122.0% 161.2% 131.2% 94.0% 71.3% 62.5% Percentage of long-term debt to stockholders' equity.......................................... 22.8% 35.5% 34.1% 34.6% 8.6% -- Percentage of total debt to stockholders' equity.......................................... 25.1% 88.6% 68.1% 34.6% 8.6% -- Average number of shares (in thousands) -- basic............................. 183,931 187,386 194,374 201,995 208,469 209,803 Average number of shares (in thousands) -- diluted........................... 185,602 190,067 197,613 205,699 213,412 218,674
- --------------- See Management's Discussion and Analysis. Net sales and selling, advertising and administrative expenses have been reclassified to conform to the 1997 presentation. 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)
1991 1990 1989 1988 1987 -------- -------- -------- -------- -------- SUMMARY OF OPERATIONS for the year ended December 31 Net sales............................................ $898,436 $756,435 $673,852 $611,878 $570,816 Cost of products sold (includes excise taxes)........ 227,546 191,824 185,464 174,560 168,942 Selling, advertising and administrative expenses..... 247,085 215,621 189,963 177,103 164,475 -------- -------- -------- -------- -------- Operating income..................................... 423,805 348,990 298,425 260,215 237,399 Other expense (income): Interest expense (income), net..................... (2,279) (3,203) (3,190) (1,068) 2,768 Gain on disposal of product line................... -- -- -- -- -- -------- -------- -------- -------- -------- Earnings before income taxes and cumulative effect of accounting changes................................. 426,084 352,193 301,615 261,283 234,631 -------- -------- -------- -------- -------- Income taxes......................................... 160,179 128,918 111,128 99,133 103,760 -------- -------- -------- -------- -------- Earnings before cumulative effect of accounting changes............................................ 265,905 223,275 190,487 162,150 130,871 Cumulative effect of accounting changes (net of income tax benefit)................................ -- -- -- -- -- -------- -------- -------- -------- -------- Net earnings......................................... $265,905 $223,275 $190,487 $162,150 $130,871 ======== ======== ======== ======== ======== PER SHARE DATA Basic earnings per share before cumulative effect of accounting changes................................. $1.26 $1.04 $.87 $.74 $.59 Basic earnings per share............................. 1.26 1.04 .87 .74 .59 Diluted earnings per share before cumulative effect of accounting changes.............................. 1.20 .99 .83 .71 .57 Diluted earnings per share........................... 1.20 .99 .83 .71 .57 Dividends per share.................................. .66 .55 .46 .37 .30 Market price per share: High............................................... 33 7/8 18 1/4 15 3/8 10 1/2 8 Low................................................ 16 3/8 12 3/8 9 5/8 6 4 7/8 FINANCIAL CONDITION at December 31 Current assets....................................... $305,430 $265,854 $275,954 $291,006 $260,530 Current liabilities.................................. 95,455 68,660 66,643 69,935 63,242 Working capital...................................... 209,975 197,194 209,311 221,071 197,288 Ratio of current assets to current liabilities....... 3.2:1 3.9:1 4.1:1 4.2:1 4.1:1 Total assets......................................... 656,513 622,595 630,155 597,955 548,951 Long-term debt....................................... -- 3,060 6,789 21,828 37,131 Total debt........................................... 1,250 4,849 14,469 30,763 48,292 Stockholders' equity................................. 482,875 473,873 482,254 453,253 401,113 OTHER DATA Stock repurchased.................................... $184,424 $151,259 $ 97,517 $ 67,356 $ 50,865 Dividends paid on shares............................. $139,670 $118,295 $101,197 $ 81,672 $ 66,789 Dividends paid as a percentage of net earnings....... 52.5% 53.0% 53.1% 50.4% 51.0% Return on net sales.................................. 29.6% 29.5% 28.3% 26.5% 22.9% Return on average assets............................. 41.6% 35.6% 31.0% 28.3% 24.4% Return on average stockholders' equity............... 55.6% 46.7% 40.7% 38.0% 33.9% Percentage of long-term debt to stockholders' equity............................................. -- .6% 1.4% 4.8% 9.3% Percentage of total debt to stockholders' equity..... .3% 1.0% 3.0% 6.8% 12.0% Average number of shares (in thousands) -- basic..... 211,603 215,156 219,820 220,550 222,492 Average number of shares (in thousands) -- diluted... 221,458 224,522 230,164 228,579 230,224
4 EXHIBIT 13 -- (CONTINUED) (ITEM 7) UST MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARATIVE INFORMATION The comparison of results for the three years presented was affected by a number of factors. In some cases, previously reported information was restated, as appropriate, either in this annual report, or in the quarterly filings with the Securities and Exchange Commission. The following factors are reflected in the analysis of Results of Operations and Financial Condition. Due to the shipping pattern of the Tobacco segment, there was an additional shipping day that occurred in the third quarter of 1996 which affected both the unit volume and financial result comparisons for the last three years. In 1997, as a result of the implementation of a number of marketing and sales initiatives in the Tobacco segment, returned goods for moist smokeless tobacco increased significantly. Accordingly, returned goods have been deducted from reported unit volume, and expenses for returned goods have been reclassified as a reduction to net sales from selling, advertising and administrative expense. This reclassification had no effect on net earnings or earnings per share amounts. All prior period amounts have been reclassified to conform to the 1997 presentation. Also, at December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," which required the restatement of all earnings per share amounts prior to 1997. (See Summary of Significant Accounting Policies and Earnings Per Share Notes.) RESULTS OF OPERATIONS CONSOLIDATED RESULTS 1997 COMPARED WITH 1996 Consolidated net sales rose 2 percent to $1.402 billion while net earnings decreased 5 percent to $439.1 million and diluted earnings per share declined 3 percent to $2.37. Over the last three years, net sales have increased 16.4 percent at an average annual rate of 5.2 percent; net earnings have increased 13.3 percent at an average annual rate of 4.5 percent; and diluted earnings per share have increased 26.1 percent at an average annual rate of 8.3 percent. Results for the Tobacco segment were lower due to one less shipping day in 1997, along with higher spending for marketing and sales initiatives to address competition, increased expenses relating to legal and regulatory issues and a charge relating to recording the present value of an employment contract for a former executive officer. Wine segment results were substantially higher due to increased case volume and higher selling prices for premium varietal wines. Results for the Other segment were lower primarily due to international market development costs. The gross margin percentage decreased to 79.2 percent, or 0.9 percentage points, as a result of the competitive initiatives undertaken in the Tobacco segment, along with higher case volume for the Wine segment which has lower margins than the Tobacco segment. Corporate expenses increased primarily due to the recording of another employment contract for a former executive officer. Interest expense increased due to higher average levels of debt outstanding during the year. 5 Pretax margins declined to 50.2 percent on earnings before income taxes of $703.9 million. Over the last three years, pretax margins have averaged 52.8 percent while earnings before income taxes have increased 9.9 percent at an average annual rate of 3.4 percent. The effective tax rate remained stable from year to year. However, the rate for the fourth quarter of 1997 was higher than the similar period of the prior year as a result of tax benefits recognized from the sale of a business in the Other segment in the fourth quarter of 1996. Future net earnings and earnings per share growth may be impacted by proposed federal legislation, if enacted into law, relating to the tobacco industry, (See Contingencies Note), the Company's ability to continue to address the competitive pressures affecting the Tobacco segment and continued growth in other businesses. 1996 COMPARED WITH 1995 Consolidated net sales rose 5 percent to $1.372 billion, net earnings increased 8 percent to $464 million, and diluted earnings per share increased 12.4 percent to $2.44. The Tobacco segment posted an overall gain due to higher selling prices and higher unit volume for moist smokeless tobacco due to an additional shipping day, moderated by increases in spending for marketing and sales. Results for the Wine segment rose significantly due to higher case volume and higher selling prices for premium varietal wines. The Other segment recorded a small loss for the year. Corporate expenses were lower as higher salaries and related costs were offset by the absence of provisions recorded for non-strategic assets in 1995. Interest expense increased significantly as a result of higher average levels of debt outstanding during the year. Pretax margins remained stable at 54.3 percent on earnings before income taxes of $744.5 million. The overall effective tax rate decreased in 1996 as a result of tax benefits recognized on the sale of a business in the Other segment and the reversal of certain state tax reserves, both of which occurred in the fourth quarter. TOBACCO SEGMENT 1997 COMPARED WITH 1996 The comparison of results for the Tobacco segment was affected by an additional shipping day in 1996 and the increase of returned goods in 1997. Due to increasing competition in the moist smokeless tobacco market, several initiatives were implemented during the year which increased expenses. Accordingly, Tobacco segment results were lower for the year as higher selling prices were more than offset by slightly lower unit volume for moist smokeless tobacco and higher spending. During the year, the Company introduced three new brands and offered new promotions to stimulate unit volume growth. In an effort to re-energize the premium-priced core market, the Company launched Copenhagen Long Cut, a line extension of Copenhagen, at the end of the first quarter of 1997. This introduction resulted in an overall increase in unit volume for the Copenhagen brand. Later in the year, the Company introduced Red Seal, its entry into the price/value category, in selected markets where price/value brands have shown their greatest strength. In the fourth quarter, Rooster, a new premium-priced brand offered in a larger can containing more tobacco, was test marketed in the four states with the highest concentration of competitive premium-priced products. For the first time, the Company offered promotion-priced four-packs of its two largest selling brands, Skoal and Copenhagen, one each in the third and fourth quarters. During the second half of the year, the Company also implemented a program to enhance product freshness by accelerating the rotation of moist smokeless tobacco products at retail. 6 Domestic unit volume for moist smokeless tobacco products decreased 1.5 percent in 1997 to 623.8 million cans, as compared with 1996 which contained an additional shipping day. As a result of the aforementioned initiatives, on an equivalent shipping day basis, unit volume stabilized, reversing a downward trend that began in the fourth quarter of 1996. However, the initiatives also resulted in a significant increase in returned goods. The increase in returned goods, along with the promotion-priced units and the new price/value brand, slightly reduced gross margins for the Tobacco segment. Unit volume results for the fourth quarter remained stable rising 0.2 percent to 154.8 million cans, compared with the similar 1996 period. The Skoal promotion-priced four-pack, which ran during the third quarter, disrupted wholesaler regular stock orders in the fourth quarter of 1997. This, coupled with increased returned goods, adversely affected the fourth quarter reported unit volume results. Selling and advertising expenses for the year increased in support of the new brand introductions, promotions and other targeted consumer initiatives, as well as increased market research. Administrative expenses were also significantly higher due to costs associated with legal and regulatory issues, and a charge resulting from an employment contract with a former executive officer. Accordingly, operating profit for the Tobacco segment decreased 5.2 percent to $712.2 million for 1997. The Company will continue to implement current and new competitive marketing and sales initiatives. The Company believes that competitive pressures in the marketplace and proposed federal legislation, if enacted into law, relating to the tobacco industry may continue to impact unit volume and operating results for the Tobacco segment in the future. 1996 COMPARED WITH 1995 The comparison of results for the Tobacco segment was affected by an additional shipping day in 1996. Overall, Tobacco segment results were higher for the year due to higher selling prices and slightly higher unit volume for moist smokeless tobacco, moderated by increases in spending for marketing and sales. Domestic unit volume for moist smokeless tobacco products increased 1.5 percent in 1996 to 633.5 million cans, net of returned goods. 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. Selling expenses increased primarily due to the promotion and support of new moist smokeless tobacco brands introduced in the fourth quarter of 1996 and 1995, as well as traditional brands. Advertising costs increased moderately as higher print and billboard advertising was partially offset by lower expenses related to promotional activities. Administrative expenses remained stable. Operating profit increased 4.2 percent to $751.1 million. WINE SEGMENT 1997 COMPARED WITH 1996 Wine segment revenue increased 18.4 percent to $145 million and accounted for 10.3 percent of consolidated sales. Higher premium wine case volume and selling prices were the primary reasons for the increase. Also contributing to the overall sales gain were higher revenues from the microbrewery operation and higher bulk wine sales. Case volume for premium wine increased 9.6 percent, while total wine case volume increased 6.8 percent. Chateau Ste. Michelle and Columbia Crest, the Company's two leading brands of premium wine, accounted for approximately 70 percent of total Wine segment revenue. Unit costs increased slightly in 1997 as a result of higher average costs associated with lower harvest yields experienced in 1996. However, gross profit for the Wine segment increased 25.2 percent, as the low harvest yields and increased demand for premium varietal wines caused a grape shortage in the wine industry in 1997, allowing the Company to raise prices. 7 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 1997 was significantly higher than in 1996 but at relatively stable average costs. Because of the fluctuation in grape harvest yields from year to year, the Company in 1998 will continue to experience shortages of Washington state grapes for certain of its premium varietal wines and will continue to place them on allocation. In addition, the Company anticipates an increase in California grape production and is taking steps to secure a supply for use in its California labels. Selling, advertising and administrative expenses were higher in 1997. Selling expenses were stable as compared with 1996. Advertising expenses were significantly higher in promoting the brand awareness of premium wines, primarily Columbia Crest. Administrative and other expenses were significantly higher, primarily due to salary and related expenses and higher spending in other areas. The Wine segment recorded an operating profit of $29.2 million in 1997, an increase of 46.8 percent. The Company believes that the low harvest yields in Washington state in 1996 will continue to affect 1998 results for certain red varieties. Also, an increase in the supply of competitively priced products from California and imports will require the Company to generally maintain pricing at current levels. In order to maintain gross margins and increase profitability, the Company will continue to focus on higher margin products and will increase prices only on select brands. Accordingly, the growth rate of the Wine segment may be lower in 1998 than experienced in prior years. 1996 COMPARED WITH 1995 Wine segment revenue increased 11.9 percent to $122.5 million and accounted for 8.9 percent of consolidated sales. Higher case volume along with higher selling prices for premium wine accounted for the increase, 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 increased 9.6 percent, while total wine case volume increased 8.7 percent. Chateau Ste. Michelle and Columbia Crest, the Company's two leading brands of premium wine, accounted for approximately 73 percent of total Wine segment revenue. Unit costs remained relatively stable in 1996 due to favorable harvest yields in 1995 and prior years. Total grape tonnage harvested and purchased in 1996 was significantly lower than in 1995 and at significantly higher costs which will affect future unit costs. 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. Selling, advertising and administrative expenses were higher in 1996. Selling and advertising expenses increased to expand the brand awareness of premium wines, primarily Chateau Ste. Michelle, 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. OTHER SEGMENT 1997 COMPARED WITH 1996 Other segment sales decreased 2.6 percent to $72.5 million and accounted for 5.2 percent of consolidated sales. Increased revenues for the cigar operations were more than offset by the absence of revenues from businesses sold in 1996. In 1997, the Company incurred a $24.1 million write-down of production costs and prepaid royalties for its entertainment business, which it will divest in 1998. This charge was offset by a $25.7 million prepayment of royalties received in connection with a previous divestiture. Favorable results from the cigar operations were more than offset by higher expenditures associated with developing international 8 markets, while results for other businesses were mixed. Overall, the Other segment recorded an operating loss of $5.7 million. 1996 COMPARED WITH 1995 Other segment sales increased 5.3 percent to $74.5 million and accounted for 5.4 percent of consolidated sales. Other segment revenues increased primarily due to the cigar and international operations, partially offset by lower revenues for the entertainment business. Favorable results from the cigar and international operations were offset by an operating loss for the entertainment business. Overall, the Other segment recorded a small operating loss of $0.5 million. 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 provided by operating activities for 1997 was $412.6 million as compared to $439.4 million in 1996 and $445.1 million in 1995. Net cash provided by operating activities in 1997 as compared to 1996 decreased slightly due to lower earnings generated by the Tobacco segment and an increase in inventories. These factors were partially offset by higher earnings generated by the Wine segment. Significant inventories of leaf tobacco are required in connection with the Company's smokeless tobacco products and cigars. During the last three years, $213.1 million was used for the purchase of leaf tobacco and related costs for smokeless tobacco. In addition, the cost of grapes harvested and purchased totaled $78.1 million over the last three years. INVESTING ACTIVITIES Net cash used in investing activities was $30 million in 1997. Purchases of property, plant and equipment over the last three years totaled $138.2 million. Major areas of capital spending from 1995 through 1997 were: Tobacco segment - Manufacturing, processing and packaging equipment - Building additions and renovations - Computer equipment and software Wine segment - Storage capacity and processing equipment - Vineyard expansion and irrigation - Building renovations Other segment - Cigar distribution facility and manufacturing capacity expansion - Equipment In 1998, the Company's capital program is expected to approximate $72 million and will primarily include additions and improvements to the tobacco processing and manufacturing operations, expansion of wine storage facilities and equipment capacity expansion for the cigar operations in the Other segment. In 1997, the Company received $25.7 million resulting from a prepayment of royalties in connection with a previous divestiture. In 1996, the Company sold two businesses in the Other segment which resulted in cash proceeds of $6.3 million and in 1995, cash proceeds from the sale of a corporate aircraft were $17.7 million. 9 FINANCING ACTIVITIES Other significant sources and uses of cash over the last three years have included borrowings, the issuance of common stock, cash dividends, stock repurchases and the repayment of borrowings. 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 1994, funds received primarily from the exercise of options, together with these tax benefits, totaled $134.6 million. It is the Company's philosophy that its stockholders should benefit directly from the financial strength of its operations. Accordingly, the Company has increased dividend payments as earnings have risen. The Company increased its 1997 cash dividend by 9.5 percent to an annual rate of $1.62 per share. Since 1994, the dividend has increased 44.6 percent reflecting an average annual increase of 13.1 percent. Total cash dividends paid by the Company in 1997 were $298.1 million or 67.9 percent of net earnings. Cash dividends paid to stockholders have exceeded 50 percent of net earnings in each of the last three years. 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. During the last three years, cash dividends distributed to stockholders amounted to $827.7 million, totaling 62.1 percent of net earnings for the period. During the first half of 1997, the Company continued its program to repurchase shares of its common stock as authorized by the Board of Directors. The current program began in 1996 upon the completion of the prior program, and authorizes the Company to repurchase up to 20 million shares of its common stock from time to time in open market or negotiated transactions to be used in connection with employee benefit and compensation plans and other corporate purposes. In the first six months of 1997, the Company repurchased 1.5 million shares at a cost of $45.7 million. As of December 31, 1997, 18 million shares remained to be repurchased under the current program. The Company has suspended its stock repurchase program and has not increased the quarterly dividend rate in view of the proposed resolution of regulatory and litigation issues affecting the tobacco industry and the financial obligations expected to be imposed on the Company. If, and when, federal legislation is enacted, the Company will reassess its share repurchase and dividend programs. As a result of the suspension of the stock repurchase program at mid-year, the Company used excess cash to repay borrowings. Over the last three years the Company had net repayments on borrowings of $15 million. LIQUIDITY AND CAPITAL RESOURCES Uses of cash exceeded sources of cash by $47.5 million. Cash generated from operating activities and proceeds received from the prepayment of royalties, along with cash on hand at December 31, 1996 were used to meet the Company's cash requirements. These requirements were for raw material inventory, primarily seasonal purchases of leaf tobacco for moist smokeless tobacco and cigars, as well as grapes harvested and purchased for the wine operations, quarterly dividend payments, capital projects and the stock repurchase program. The Company currently maintains two revolving credit agreements totaling $350 million with a group of banks. The terms of these agreements provide for a five-year revolving credit facility in the amount of $262.5 million and a 364-day revolving credit facility in the amount of $87.5 million. These 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 facilities, the Company has allocated $110 million to support outstanding commercial paper at December 31, 1997. The ratio of current assets to current liabilities (current ratio) at December 31,1997 was 2.7 to 1 and has averaged 1.9 to 1 over the last three years. The current ratio increased in 1997 as compared to 1996 due to higher inventories and lower short-term borrowings. 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 $47.4 million more than the amount at which they are carried in the Consolidated Statement of Financial Position at December 31, 1997. In 1998, projected leaf tobacco purchases will approximate the amounts expended in 1997. In addition, significant levels of cash will be required for dividend payments and capital projects. 10 The Company intends to maintain appropriate facilities to ensure access to credit markets providing sufficient financial resources and operational flexibility. The Company is also analyzing its current capital structure to determine the appropriate level of debt financing. The Company may be required to seek additional borrowing capacity if federal legislation relating to the tobacco industry is enacted, and for other corporate purposes. The percentage of total debt outstanding to stockholders' equity was 25.1 percent at December 31, 1997, versus 88.6 percent at December 31, 1996. This decrease was due to the significant paydown of short-term borrowings as a result of the suspension of the stock repurchase program. The Company anticipates that its operating cash requirements will be met by amounts generated from operating activities augmented by borrowings. Stockholders' equity increased in 1997, as net earnings and common stock issued under the Company's stock option plans were partially offset by the effects of dividend payments and the stock repurchase program. At December 31, 1997, the return on average stockholders' equity declined to 122 percent from 161.2 percent at December 31, 1996, as a result of the increase in stockholders' equity for the year. In 1996 and 1995 this same return was higher due to the level of stock repurchases in those years. YEAR 2000 ISSUE The year 2000 issue relates to computer system programs which may not properly recognize the change in date years from 1999 to 2000. As a result of this time sensitivity of existing software, any business entity is at risk for possible system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on a risk assessment, the Company is currently modifying or replacing significant portions of its software so that its computer systems will function properly with respect to the year 2000 date recognition. The Company presently believes that with modifications to existing software and conversions to new software, the year 2000 issue will not pose a significant operational problem. However, if such modifications and conversions are not made, or not completed timely, the year 2000 issue could have a material impact on the operations of the Company. The Company is utilizing both internal and external resources to reprogram, or replace, and test software for year 2000 modifications. The Company anticipates completing the year 2000 project no later than June 30, 1999. The total cost of the year 2000 project is not material to the financial results of the Company and software and related costs will be capitalized where appropriate. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 ("the Act") provides a safe harbor for forward-looking information made on behalf of the Company. All statements, other than statements of historical facts, which address activities, actions or new brand introductions that the Company expects or anticipates will or may occur in the future, including such things as expansion and growth of the Company's operations and other such matters are forward-looking statements. To take advantage of the safe harbor provided by the Act, the Company is identifying certain factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by the Company. Any one, or a combination, of these factors could materially affect the results of the Company's operations. These factors include competitive pressures, changes in consumer preferences, wholesaler ordering patterns, consumer acceptance of new brand introductions and other marketing and sales initiatives, legal and regulatory initiatives (including those described under Items 1 and 3 of the Company's Annual Report on Form 10-K and its Form 8-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: 1995 -- $1,306, 1996 -- $1,372 and 1997 -- $1,402 Pretax Margins: 1995 -- 54.0%, 1996 -- 54.3% and 1997 -- 50.2% Diluted Earnings Per Share: 1995 -- $2.17, 1996 -- $2.44 and 1997 -- $2.37 Tobacco Sales: 1995 -- $1,129, 1996 -- $1,178 and 1997 -- $1,188 Wine Sales: 1995 -- $109, 1996 -- $122 and 1997 -- $145 Other Sales: 1995 -- $71, 1996 -- $75 and 1997 -- $73 Net Cash Provided By Operating Activities: 1995 -- $445, 1996 -- $439 and 1997 -- $413 Return on Average Stockholders' Equity: 1995 -- 131.2%, 1996 -- 161.2% and 1997 -- 122.0% Total Debt to Stockholders' Equity: 1995 -- 68.1%, 1996 -- 88.6% and 1997 -- 25.1% Dividends Per Share: 1995 -- $1.30, 1996 -- $1.48 and 1997 -- $1.62 The following bar graph illustrates the relationship between net earnings and dividends paid: Net Earnings: 1995 -- $430, 1996 -- $464 and 1997 -- $439 Dividends Paid: 1995 -- $252, 1996 -- $277 and 1997 -- $298 A pie chart illustrating the percentage of capital expenditures by segment for 1995 -- 1997: Tobacco 56%, Wine 34% and Other 10%. 12 EXHIBIT 13 -- (CONTINUED) (ITEMS 5 AND 8) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR -------- -------- -------- -------- ---------- 1997 Net sales.......................... $334,616 $355,764 $360,582 $350,756 $1,401,718 Gross profit....................... 269,526 284,406 286,008 269,836 1,109,776 Net earnings....................... 101,206 116,889 114,222 106,821 439,138 Basic earnings per share........... .55 .64 .62 .58 2.39 Diluted earnings per share......... .54 .63 .62 .57 2.37 Dividends per share................ .40 1/2 .40 1/2 .40 1/2 .40 1/2 1.62 Market price per share: High............................. 34 1/8 30 1/8 31 3/4 36 15/16 36 15/16 Low.............................. 26 3/4 25 1/2 26 7/8 28 1/8 25 1/2 ---------------------------------------------------------- 1996 Net sales.......................... $322,835 $344,983 $359,485 $344,402 $1,371,705 Gross profit....................... 259,310 277,935 289,593 272,111 1,098,949 Net earnings....................... 106,796 119,077 123,657 114,469 463,999 Basic earnings per share........... .56 .63 .66 .62 2.48 Diluted earnings per share......... .55 .62 .65 .61 2.44 Dividends per share................ .37 .37 .37 .37 1.48 Market price per share: High............................. 35 7/8 35 3/8 34 3/4 35 35 7/8 Low.............................. 31 1/2 30 3/8 29 1/4 28 1/4 28 1/4
The Company's shares trade on the New York Stock Exchange and the Pacific Stock Exchange, ticker symbol -- UST. The number of stockholders of record at December 31, 1997 was 10,799. 13 EXHIBIT 13 -- (CONTINUED) (ITEM 8) UST CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- NET SALES.............................................. $1,401,718 $1,371,705 $1,305,796 COSTS AND EXPENSES Cost of products sold................................ 265,193 246,381 236,743 Excise taxes......................................... 26,749 26,375 25,460 Selling, advertising and administrative.............. 398,468 348,059 335,824 Interest, net........................................ 7,451 6,364 3,179 ---------- ---------- ---------- TOTAL COSTS AND EXPENSES............................... 697,861 627,179 601,206 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES........................... 703,857 744,526 704,590 INCOME TAXES........................................... 264,719 280,527 274,830 ---------- ---------- ---------- NET EARNINGS........................................... $ 439,138 $ 463,999 $ 429,760 ========== ========== ========== NET EARNINGS PER SHARE Basic................................................ $2.39 $2.48 $2.21 Diluted.............................................. $2.37 $2.44 $2.17 AVERAGE NUMBER OF SHARES Basic................................................ 183,931 187,386 194,374 Diluted.............................................. 185,602 190,067 197,613
See Notes to Consolidated Financial Statements. 14 UST CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN THOUSANDS)
DECEMBER 31 ---------------------- 1997 1996 ---------- -------- ASSETS Current assets Cash and cash equivalents................................. $ 6,927 $ 54,452 Accounts receivable....................................... 67,702 77,855 Inventories............................................... 319,666 271,425 Prepaid expenses and other current assets................. 31,753 40,446 Deferred income taxes..................................... 15,796 6,392 ---------- -------- Total current assets................................... 441,844 450,570 ---------- -------- Property, plant and equipment, net.......................... 326,709 300,885 Other assets................................................ 58,161 55,937 ---------- -------- Total assets...................................... $ 826,714 $807,392 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term obligations.................................... $ 10,000 $150,000 Accounts payable and accrued expenses..................... 119,345 113,635 Income taxes.............................................. 37,174 42,918 ---------- -------- Total current liabilities......................... 166,519 306,553 ---------- -------- Long-term debt.............................................. 100,000 100,000 Postretirement benefits other than pensions................. 73,868 70,209 Other liabilities........................................... 48,396 48,610 Contingencies (see note).................................... -- -- ---------- -------- Total liabilities................................. 388,783 525,372 ---------- -------- STOCKHOLDERS' EQUITY Capital stock............................................. 103,307 102,077 Additional paid-in capital................................ 474,661 414,274 Retained earnings......................................... 528,518 388,505 ---------- -------- 1,106,486 904,856 Less cost of shares in treasury........................... 668,555 622,836 ---------- -------- Total stockholders' equity........................ 437,931 282,020 ---------- -------- Total liabilities and stockholders' equity........ $ 826,714 $807,392 ========== ========
See Notes to Consolidated Financial Statements. 15 UST CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 --------------------------------- 1997 1996 1995 --------- --------- --------- OPERATING ACTIVITIES Net earnings.............................................. $439,138 $463,999 $429,760 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization.......................... 30,491 28,318 29,119 Deferred income taxes.................................. (8,779) 2,412 (12,717) Prepayment of royalties................................ (25,732) -- -- Write-down of production costs and prepaid assets...... 24,089 -- -- Changes in operating assets and liabilities: Accounts receivable.................................. 8,430 (11,128) (3,434) Inventories.......................................... (56,146) (18,494) (21,134) Prepaid expenses and other assets.................... (1,884) (9,576) (4,670) Accounts payable, accrued expenses and other liabilities....................................... 8,743 9,895 15,449 Income taxes payable................................. (5,744) (26,038) 12,759 --------- --------- --------- Net cash provided by operating activities......... 412,606 439,388 445,132 --------- --------- --------- INVESTING ACTIVITIES Purchases of property, plant and equipment................ (58,159) (44,713) (35,280) Dispositions of property, plant and equipment............. 2,409 7,964 21,278 Proceeds from the prepayment of royalties................. 25,732 -- -- Proceeds from the sale of businesses...................... -- 6,256 -- --------- --------- --------- Net cash used in investing activities............. (30,018) (30,493) (14,002) --------- --------- --------- FINANCING ACTIVITIES Proceeds from borrowings.................................. 10,000 150,000 100,000 Repayment of borrowings................................... (150,000) (100,000) (25,000) Proceeds from the issuance of stock and put options....... 53,665 41,215 39,726 Dividends paid............................................ (298,059) (277,302) (252,388) Stock repurchased......................................... (45,719) (237,759) (274,783) --------- --------- --------- Net cash used in financing activities............. (430,113) (423,846) (412,445) --------- --------- --------- (Decrease) increase in cash and cash equivalents..................................... (47,525) (14,951) 18,685 Cash and cash equivalents at beginning of year.... 54,452 69,403 50,718 --------- --------- --------- Cash and cash equivalents at end of year.......... $ 6,927 $ 54,452 $ 69,403 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes........................................... $268,158 $290,024 $267,236 Interest............................................... 8,718 7,151 4,521
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, 1994............. $100,172 $343,390 $ 33,713 $(115,606) $ 361,669 Net earnings............................. -- -- 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 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 deferred taxes....... -- -- (2,582) -- (2,582) -------- -------- --------- --------- --------- Balance at December 31, 1995............. 101,040 373,935 203,659 (385,077) 293,557 Net earnings............................. -- -- 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 Stock repurchased for treasury -- 7,405,800 shares........... -- -- -- (237,759) (237,759) Put option proceeds and obligations...... -- 735 -- -- 735 Adjustment for additional minimum pension liability, net of deferred taxes....... -- -- (1,851) -- (1,851) -------- -------- --------- --------- --------- Balance at December 31, 1996............. 102,077 414,274 388,505 (622,836) 282,020 Net earnings............................. -- -- 439,138 -- 439,138 Cash dividends -- $1.62 per share........ -- -- (298,059) -- (298,059) Exercise of stock options -- 2,459,500 shares................................. 1,230 36,645 -- -- 37,875 Income tax benefits and decrease in receivables from exercise of stock options................................ -- 15,956 -- -- 15,956 Stock repurchased for treasury -- 1,526,000 shares........... -- -- -- (45,719) (45,719) Put option obligations, net of proceeds............................... -- 7,786 -- -- 7,786 Adjustment for additional minimum pension liability, net of deferred taxes....... -- -- (1,066) -- (1,066) -------- -------- --------- --------- --------- Balance at December 31, 1997............. $103,307 $474,661 $ 528,518 $(668,555) $ 437,931 ======== ======== ========= ========= =========
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. Certain prior year amounts have been reclassified to conform to the 1997 presentation. CASH AND CASH EQUIVALENTS The Company classifies as cash equivalents amounts invested in highly liquid instruments with maturities of three months or less when acquired. INVENTORIES Inventories are stated at lower of cost or market. The major portion of leaf tobacco costs is determined by the last-in, first-out (LIFO) method. The cost of the remaining inventories is determined by the first-in, first-out (FIFO) and average cost methods. Leaf tobacco and wine inventories are included in current assets as a standard industry practice, notwithstanding the fact that such inventories are carried for several years for the purpose of curing and aging. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Depreciation is computed by the straight-line method based on the estimated useful lives of the assets which range from 5 to 40 years. 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 assets and long-term liabilities approximate their carrying value. STOCK COMPENSATION The Company applies the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," in accounting for stock options. 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. 18 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share," which was adopted in the fourth quarter of 1997. This new rule changes the way earnings per share is calculated and requires restatement of all reported prior period amounts. Under the new requirements, basic earnings per share is calculated by dividing net earnings by the weighted-average number of common shares outstanding during the period. The diluted earnings per share computation includes the effect of shares which would be issuable upon the exercise of outstanding stock options, reduced by the number of shares which are assumed to be purchased by the Company from the resulting proceeds at the average market price during the period. NEW ACCOUNTING PRONOUNCEMENTS During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 is effective for the first quarter of 1998, while SFAS No. 131 is effective for year end financial reporting in 1998 and on an interim basis thereafter. Both of these pronouncements require additional disclosures and the Company expects no material impact upon adoption. INVENTORIES
DECEMBER 31 -------------------- 1997 1996 -------- -------- Leaf tobacco................................................ $152,869 $136,881 Products in process and finished goods...................... 148,720 117,924 Other materials and supplies................................ 18,077 16,620 -------- -------- $319,666 $271,425 ======== ========
At December 31, 1997 and 1996, $136.9 million and $133.9 million, respectively, of leaf tobacco inventories were valued using the LIFO method. The average costs of these inventories are greater than the amounts at which these inventories are carried in the Consolidated Statement of Financial Position by $47.4 million and $43.1 million, respectively. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31 -------------------- 1997 1996 -------- -------- Land........................................................ $ 29,586 $ 26,570 Buildings................................................... 224,889 203,522 Machinery and equipment..................................... 310,019 284,221 -------- -------- 564,494 514,313 Less allowances for depreciation............................ 237,785 213,428 -------- -------- $326,709 $300,885 ======== ========
Depreciation expense was $30.1 million for 1997, $28.1 million for 1996 and $28.4 million for 1995. The Company also leases certain property and equipment under various operating lease arrangements. Annual commitments under these leases, which average $3.5 million per year through the year 2002, extend through 2030 and total $31.3 million. Lease expense for the years 1997, 1996 and 1995 was $6.4 million, $5.7 million and $5.1 million, respectively. 19 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER ASSETS
DECEMBER 31 ------------------ 1997 1996 ------- ------- Prepaid pension costs....................................... $27,162 $26,512 Limited partnership investment.............................. 11,177 12,357 Deferred income taxes....................................... 1,183 1,234 Other....................................................... 18,639 15,834 ------- ------- $58,161 $55,937 ======= =======
The limited partnership investment owns and leases a cogeneration facility. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31 -------------------- 1997 1996 -------- -------- Trade accounts payable...................................... $ 34,150 $ 27,863 Employee compensation and benefits.......................... 58,192 58,132 Other accrued expenses...................................... 27,003 27,640 -------- -------- $119,345 $113,635 ======== ========
REVOLVING CREDIT AGREEMENTS In 1996, the Company entered into two revolving credit agreements totaling $350 million with several banks. The terms of the agreements provide for a five-year revolving credit facility in the amount of $262.5 million, which expires in November 2001, and a 364-day revolving credit facility, renewed in November 1997 in the amount of $87.5 million, which expires in November 1998. 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 1997 and 1996. At December 31, 1997, the Company had $110 million outstanding under commercial paper borrowings, of which $100 million was classified as long-term debt. The Company's revolving credit agreements support these borrowings which are intended to be refinanced on a long-term basis, either through continued commercial paper borrowings or its revolving credit facilities. Commercial paper borrowings at December 31, 1997 have a weighted-average interest rate of 5.8 percent. 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, had a weighted-average interest rate of 5.7 percent. OTHER LIABILITIES Other liabilities include the noncurrent portion of the pension liabilities at December 31, 1997 and 1996 of $44.7 million and $39.9 million, respectively. (See Employee Benefit and Compensation Plans Note.) In 1997 and 1996, the Company had sold put options that entitled the holder to sell a specific number of shares of common stock to the Company at a predetermined price. The Company has suspended its put option program. 20 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1997, the Company had no liability or shares outstanding under its put option program. There was no effect on earnings per share 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 1997, the Company repurchased 1.5 million shares pursuant to its stock repurchase program authorized by the Board of Directors in 1996. The program allows 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. As of December 31, 1997, 2 million shares of the 20 million authorized have been repurchased. The Company suspended its stock repurchase program indefinitely in anticipation of the proposed federal legislation, if enacted into law, relating to the tobacco industry. (See Contingencies Note.) Common stock issued at December 31, 1997 and 1996 was 206,614,236 shares and 204,154,736 shares, respectively. Treasury shares held at December 31, 1997 and 1996 was 21,825,000 shares and 20,299,000 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. 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. 21 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Consistent with the method described in SFAS No. 123, if compensation expense for the Company's plans had been determined based on the fair value at the grant dates for awards under its plans, net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 -------- -------- -------- Net earnings: As reported...................................... $439,138 $463,999 $429,760 Pro forma........................................ $436,106 $461,059 $429,281 Basic earnings per share: As reported...................................... $2.39 $2.48 $2.21 Pro forma........................................ $2.37 $2.46 $2.21 Diluted earnings per share: As reported...................................... $2.37 $2.44 $2.17 Pro forma........................................ $2.35 $2.42 $2.17
In accordance with the provisions of SFAS No. 123, the pro forma disclosures include only the effect of stock options granted since 1995. 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:
1997 1996 1995 --------- --------- --------- Expected dividend yield........................... 4.4% 4.4% 4.2% Risk-free interest rate........................... 5.9% 6.6% 6.1% Expected volatility............................... 29.7% 18.0% 17.8% Expected life of option........................... 6.5 years 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, 0.2 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 exercise. At December 31, 1997, 2,950,400 shares were available for grant under the 1992 Stock Option Plan and 168,500 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 $9.5 million in 1997, $12.1 million in 1996 and $11.3 million in 1995 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:
1997 1996 1995 ----------------------------- ----------------------------- ----------------------------- 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............... 15,782,600 $24.57 16,321,700 $22.20 16,774,400 $20.33 Granted.............. 1,861,600 31.39 1,567,800 33.93 1,510,100 30.54 Exercised............ (2,459,500) 15.40 (2,075,500) 12.98 (1,935,600) 12.42 Forfeited............ (297,900) 32.45 (30,600) 29.61 (27,200) 27.68 Expired.............. -- -- (800) 4.23 -- -- ---------- ---------- ---------- Outstanding at end of year............... 14,886,800 $26.78 15,782,600 $24.57 16,321,700 $22.20 ========== ====== ========== ====== ========== ====== Exercisable at end of year............... 11,932,700 $25.49 13,020,600 $22.96 13,811,300 $20.92 ========== ====== ========== ====== ========== ====== Weighted-average fair value of options granted during the year............... $ 7.58 $ 5.95 $ 5.21 ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 1997:
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 --------------- ---------- ---------------- ---------------- ---------- ---------------- $ 7.69 461,100 .3 years $ 7.69 461,100 $ 7.69 13.78-18.28 1,878,800 2.3 years 14.44 1,878,800 14.44 24.19-35.25 12,546,900 6.2 years 29.32 9,592,800 28.51 ---------- ---------- $ 7.69-35.25 14,886,800 5.5 years $26.78 11,932,700 $25.49 ---------- ----------- ---------- ----------- ---------- ---------- ----------- ---------- ----------- ----------
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 Employee Retirement Income Security Act of 1974 (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:
1997 1996 1995 ------ ------ ------ Discount rate............................................ 7.75% 7.5% 9.0% Average rate of increase in compensation levels.......... 5.00% 5.0% 5.0% Expected long-term rate of return on plan assets......... 9.25% 9.0% 11.0%
23 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension cost includes the following components (in millions):
1997 1996 1995 ------ ------ ------ Service cost-benefits earned during period............... $ 8.7 $ 8.6 $ 6.4 Interest cost on projected benefit obligation............ 18.8 17.1 15.7 Actual return on plan assets............................. (47.7) (20.2) (53.6) Net amortization and deferral............................ 27.5 1.4 34.5 ------ ------ ------ Net periodic pension cost................................ $ 7.3 $ 6.9 $ 3.0 ====== ====== ======
The following table presents a reconciliation of the funded status of the plans at December 31 (in millions):
1997 1996 -------------------------------- -------------------------------- 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................. $(173.6) $(46.2) $(150.6) $(42.3) Nonvested benefits.............. (17.8) (5.2) (15.4) (2.9) ------- ------ ------- ------ Accumulated benefits............ (191.4) (51.4) (166.0) (45.2) Effect of future pay increases.................... (29.3) (12.0) (24.7) (10.2) ------- ------ ------- ------ Projected benefit obligation.... (220.7) (63.4) (190.7) (55.4) Plan assets at fair value......... 275.8 4.0 239.3 3.0 Unrecognized net (gain) loss...... (23.1) 22.0 (16.3) 18.0 Prior service cost not yet recognized in net periodic pension cost.................... (2.1) .8 (2.3) .7 Unrecognized portion of initial net (asset) obligation.......... (2.7) 2.4 (3.5) 3.0 Adjustment to recognize additional minimum liability............... -- (14.6) -- (12.9) ------- ------ ------- ------ Net pension asset (liability)..... $ 27.2 $(48.8) $ 26.5 $(43.6) ======= ====== ======= ======
At December 31, 1997 and 1996, the net pension assets of $27.2 million and $26.5 million, respectively, consist of prepaid pension costs and are included in other assets. The noncurrent portion of the net pension liabilities at December 31, 1997 and 1996 are included in other liabilities. For pension plans in which accumulated benefits exceed assets at December 31, 1997, the Consolidated Statement of Financial Position reflects an additional minimum liability of $14.6 million: an intangible asset of $3.1 million included in other assets and a reduction of retained earnings of $7.5 million, which is net of deferred tax benefits of $4 million. At December 31, 1996, the Consolidated Statement of Financial Position included an additional minimum liability of $12.9 million: an intangible asset of $3 million and a reduction of retained earnings of $6.5 million, which is net of deferred tax benefits of $3.4 million. Plan assets include marketable equity securities, including common stock of the Company, and corporate and government debt securities. At December 31, 1997 and 1996, the fund held 1.3 million shares of the Company's common stock having a market value of $47.3 million as of December 31, 1997 and $41.4 million as of December 31, 1996. Dividends paid on shares held by the fund were $2.1 million in 1997 and $1.9 million in 1996. 24 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The discount rate used in determining the present value of benefit obligations was 7.25 percent for 1997 and 7.75 percent for 1996. The Company sponsors a defined contribution plan (Employees' Savings Plan) covering substantially all of its employees. The Plan requires one year of service prior to eligibility for participation. Company contributions are based upon participant contributions. The expense was $4 million in 1997, $3.9 million in 1996 and $3.8 million in 1995. The Company has an Incentive Compensation Plan which provides for incentive payments to designated employees based on stated percentages of net earnings as defined in the Plan. Expenses under the Plan amounted to $36.9 million in 1997, $39 million in 1996 and $36.9 million in 1995. 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 benefit plans are not funded. Net periodic postretirement benefit cost includes the following components:
1997 1996 1995 ------ ------ ------ Service cost............................................. $2,857 $2,989 $2,318 Interest cost............................................ 4,003 4,162 4,037 Amortization of unrecognized gain and prior service cost................................................... (780) (190) (651) ------ ------ ------ Net periodic postretirement benefit cost................. $6,080 $6,961 $5,704 ====== ====== ======
The following table sets forth the combined status of the plans at December 31:
1997 1996 ------- ------- Accumulated postretirement benefit obligation: Retirees.................................................. $22,432 $21,236 Fully eligible active plan participants................... 7,526 9,735 Other active plan participants............................ 29,993 27,045 ------- ------- 59,951 58,016 Unrecognized gain......................................... 13,557 12,193 Unrecognized prior service cost........................... 360 -- ------- ------- Accrued postretirement benefit obligation................. $73,868 $70,209 ======= =======
The discount rate used in determining the net periodic postretirement benefit cost was 7.75 percent for 1997, 7.5 percent for 1996 and 9 percent for 1995. The rate of increase in per capita costs of covered health care benefits is assumed to be 9.2 percent for 1998 and to decrease gradually to 5 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, 1997 by approximately $8.7 million and the 1997 net periodic postretirement benefit cost by approximately $1.2 million. 25 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent at December 31, 1997 and 7.75 percent at December 31, 1996. INCOME TAXES The income tax provision (benefit) consists of the following:
1997 1996 1995 -------- -------- -------- Current: Federal.......................................... $247,224 $245,386 $250,612 State and local.................................. 26,274 32,729 36,935 -------- -------- -------- Total current............................ 273,498 278,115 287,547 -------- -------- -------- Deferred: Federal.......................................... (6,807) 1,927 (13,695) State and local.................................. (1,972) 485 978 -------- -------- -------- Total deferred........................... (8,779) 2,412 (12,717) -------- -------- -------- $264,719 $280,527 $274,830 ======== ======== ========
The 1997 and 1996 current state tax provisions reflect the reversal of certain state tax reserves. The 1996 current federal tax provision included a tax benefit from the sale of a subsidiary. In addition, the current tax provisions do not reflect $13.4 million, $14.5 million and $11.7 million for 1997, 1996 and 1995, respectively, of tax benefits arising from the exercise of stock options. These amounts were credited directly to additional paid-in capital. The deferred tax provision (benefit) amounts for 1997, 1996 and 1995 do not reflect the tax effects of $0.6 million, $1 million and $1.4 million, respectively, 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:
1997 1996 ------- ------- Deferred tax assets: Postretirement benefits other than pensions............... $25,854 $24,573 Other accrued liabilities................................. 28,629 23,289 Accrued pension liabilities............................... 15,964 14,185 All other, net............................................ 5,129 3,867 ------- ------- Total deferred tax assets......................... 75,576 65,914 ------- ------- Deferred tax liabilities: Depreciation.............................................. 41,593 40,487 Investment in limited partnerships........................ 7,497 8,522 Prepaid pension assets.................................... 9,507 9,279 ------- ------- Total deferred tax liabilities.................... 58,597 58,288 ------- ------- Net deferred tax assets..................................... $16,979 $ 7,626 ======= =======
26 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Differences between the Company's effective tax rate and the U.S. federal statutory income tax rate are explained as follows:
1997 1996 1995 ----- ----- ----- U.S. federal statutory income tax rate..................... 35.0% 35.0% 35.0% State and local taxes, net of federal benefit.............. 2.2 2.9 3.5 Other, net................................................. .4 (.2) .5 ----- ----- ----- 37.6% 37.7% 39.0% ===== ===== =====
ADVERTISING COSTS The Company expenses the production costs of advertising in the period in which the costs are incurred. Advertising expenses were $75.7 million in 1997, $66 million in 1996 and $65 million in 1995. At December 31, 1997 and 1996, $8.2 million and $6.1 million, respectively, of advertising related costs are included in prepaid expenses and other current assets. INTEREST, NET Interest, net, is comprised of expense associated with short-term obligations, long-term debt and income from cash equivalents and capitalized interest.
1997 1996 1995 ------ ------ ------ Short-term obligations................................... $3,112 $1,853 $1,831 Long-term debt........................................... 5,632 5,432 2,961 ------ ------ ------ 8,744 7,285 4,792 ------ ------ ------ Income from cash equivalents............................. (951) (921) (1,613) Capitalized interest..................................... (342) -- -- ------ ------ ------ $7,451 $6,364 $3,179 ====== ====== ======
EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share:
1997 1996 1995 -------- -------- -------- Numerator: Net earnings..................................... $439,138 $463,999 $429,760 ======== ======== ======== Denominator: Denominator for basic earnings per share -- weighted-average shares....................... 183,931 187,386 194,374 Dilutive effect of employee stock options.......... 1,671 2,681 3,239 -------- -------- -------- Denominator for diluted earnings per share....... 185,602 190,067 197,613 ======== ======== ======== Basic earnings per share........................... $2.39 $2.48 $2.21 Diluted earnings per share......................... $2.37 $2.44 $2.17
Options to purchase 2.3 million shares, 1.9 million shares and 0.3 million shares of common stock, outstanding as of December 31, 1997, 1996 and 1995, respectively, were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares and, therefore, would be antidilutive. 27 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INDUSTRY SEGMENT DATA The Company's industry segments are Tobacco, Wine and Other. 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. The Other segment includes the international operations, the cigar operations and an entertainment subsidiary. Tobacco segment sales are principally to a large number of wholesalers and chain stores which are widely dispersed. In 1997, sales to one wholesale customer accounted for approximately 23 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. In 1997, the write-down of production costs and prepaid royalties at the entertainment subsidiary and the income received from the prepayment of royalties from a previous divestiture were included in the operating profit of the Other segment. 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 $17.7 million from the sale of a corporate aircraft 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 $0.2 million for Corporate. Consolidated Industry Segment Data appears on page 31. CONTINGENCIES The Company and/or its subsidiary, United States Tobacco Company (hereafter "the Company") has been named in certain health care cost reimbursement/third party recoupment/class action litigation against the major domestic cigarette companies and others seeking damages and other relief. The complaints in these cases on their face predominantly relate to the usage of cigarettes; within that context, certain complaints contain a few allegations relating specifically to smokeless tobacco products. These actions are in varying stages of pretrial activities. The Company believes 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. During the third quarter of 1997, the Company made a payment of approximately $3 million resulting from its portion of the settlement with the state of Florida in connection with its health care cost reimbursement litigation. In January 1998, similar litigation was settled with the state of Texas; the Company's portion was approximately $3.4 million (to be paid on an installment basis), plus related expenses. Both payments relate solely to pilot programs primarily to reduce youth access to tobacco products in each state. 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. An action seeking damages and/or other relief and which purported to state a class action on behalf of residents of Louisiana who have purchased and used smokeless tobacco manufactured by defendants was dismissed by court order in January 1998. 28 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company is also named in an action in Illinois seeking damages and other relief brought by an individual plaintiff and purporting to state a class action "on behalf of himself and all other persons similarly situated" alleging that his use of the Company's smokeless tobacco products "resulted in his addiction to nicotine, increased use of Defendants' products and gum deterioration." The Company believes, and has been so advised by counsel handling these cases, that it has a number of meritorious defenses to all such pending litigation. Except as to the Company's intention to pursue federal legislation resolving certain regulatory and litigation issues, all such cases are, and will continue to be, vigorously defended. The Company believes that the ultimate outcome of all such pending litigation will not have a material adverse effect on the consolidated financial 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 purporting 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 filed suit against the FDA seeking a judicial declaration that the FDA has no authority to regulate smokeless tobacco products. On April 25, 1997, a federal district court ruled that the FDA, as a matter of law, is not precluded from regulating cigarettes and smokeless tobacco as "medical devices" and implementing certain labeling and access restrictions. Further trial proceedings are still required to determine whether the FDA, based on the facts, can prove that smokeless tobacco products fit the statutory definitions and the restrictions are justified. The court, granting the Company's motion for summary judgment, also ruled that the FDA has no authority to implement restrictions on the advertising and promotion of smokeless tobacco products. The court issued an injunction to prohibit most of the restrictions (labeling, access and advertising/promotion) set for August 28, 1997 from taking effect, pending resolution of any appeals and subsequent proceedings; the court also certified the ruling for interlocutory appeal on the grounds that it involves "controlling questions of law as to which there is substantial ground for difference of opinion." Certain aspects of this ruling appealed to the Fourth Circuit Court of Appeals are awaiting decision. The Company is not able to predict the outcome of the appeal, or assess the future effect that these FDA regulations, if implemented, may have on its smokeless tobacco business. On June 20, 1997, United States Tobacco Company, along with other manufacturers in the United States tobacco industry, executed a Memorandum of Understanding (the "Memorandum") to support the adoption of federal legislation incorporating the features described in the proposed resolution attached to the Memorandum. The proposed resolution, if enacted into law, would achieve a resolution of many of the regulatory and litigation issues affecting the United States tobacco industry and, thereby, reduce uncertainties facing the industry and increase stability in business and capital markets. However, if such legislation were enacted the financial obligations to be imposed on the Company are expected to be significant although the precise amount of such obligations cannot be determined at this time. Discussions with other tobacco manufacturers, who were participants in the negotiations which led to the Memorandum, are continuing regarding the allocation of both the initial and subsequent payments and the Company's obligations related thereto. Depending on the amounts required to be paid by the Company, as well as a number of other factors, including (i) the timing of any payments and the means used to finance such payments; (ii) the effect of the legislation on the pricing and consumption of smokeless tobacco products; and (iii) the impact of the legislation on the Company's competitive position in the smokeless tobacco industry, its financial position could be materially adversely affected in the year of implementation and the unit volume, operating revenues and operating income of the Company could be materially adversely affected in future years. There can be no assurance that legislation reflecting the proposed resolution or any legislation will be enacted. 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, 1997 and 1996, 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, 1997. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of UST Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Stamford, Connecticut February 9, 1998 EX-21 5 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, 1997:
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 6 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 9, 1998, included in the 1997 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 9, 1998, 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, 1997. ERNST & YOUNG LLP Stamford, Connecticut March 13, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Registrant's condensed consolidated statement of financial position and condensed consolidated statement of earnings and is qualified in its entirety by reference to such financial statements. (In thousands, except per share amounts). 1,000 YEAR DEC-31-1997 DEC-31-1997 6,927 0 67,702 0 319,666 441,844 564,494 237,785 826,714 166,519 100,000 0 0 103,307 334,624 826,714 1,401,718 1,401,718 291,942 291,942 0 0 7,451 703,857 264,719 439,138 0 0 0 439,138 2.39 2.37 Note: Item number 5-03(b)(20) amounts for earnings per share of $2.39 and $2.37 represent earnings per share -- basic and earnings per share -- diluted, respectively.
-----END PRIVACY-ENHANCED MESSAGE-----