-----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, AWtEwrb+bNr8RTskDY5aEk+OqVpvxg4/ny/7BEFWMKWvk7Oe7ERuiafKXYX+31cJ DLUKo88xymcIC0KIq4WeAA== 0000950123-99-002083.txt : 19990315 0000950123-99-002083.hdr.sgml : 19990315 ACCESSION NUMBER: 0000950123-99-002083 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UST INC CENTRAL INDEX KEY: 0000811669 STANDARD INDUSTRIAL CLASSIFICATION: TOBACCO PRODUCTS [2100] IRS NUMBER: 061193986 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17506 FILM NUMBER: 99563694 BUSINESS ADDRESS: STREET 1: 100 W PUTNAM AVE CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036611100 MAIL ADDRESS: STREET 1: 100 W PUTNAM AVE CITY: GREENWICH STATE: CT ZIP: 06830 10-K 1 UST INC. 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, 1998 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 EXCHANGE, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ----- (TITLE OF CLASS) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] AS OF FEBRUARY 1, 1999, THE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON STOCK, $.50 PAR VALUE, HELD BY NON-AFFILIATES OF REGISTRANT (WHICH FOR THIS PURPOSE DOES NOT INCLUDE DIRECTORS OR OFFICERS) WAS $5,552,186,929. AS OF FEBRUARY 1, 1999, THERE WERE 181,533,336 SHARES OF REGISTRANT'S COMMON STOCK, $.50 PAR VALUE, OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE CERTAIN SECTIONS OF UST ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND FILED AS AN EXHIBIT AS REQUIRED BY ITEM 601(b)(13) OF REGULATION S-K.........................PARTS I & II CERTAIN PAGES OF UST 1999 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 operating segments: SMOKELESS TOBACCO PRODUCTS: Registrant's primary activities are manufacturing and marketing smokeless tobacco (snuff and chewing tobacco). WINE: Registrant produces and markets wine and craft beers. ALL OTHER OPERATIONS: Registrant's international operation which markets moist smokeless tobacco and its cigar operation which manufactures and markets premium cigars are included in all other operations. OPERATING SEGMENT DATA Registrant hereby incorporates by reference the Consolidated Segment Information pertaining to the years 1996 through 1998 set forth on page 23 of its Annual Report to stockholders for the fiscal year ended December 31, 1998 ("Annual Report"), which page is included in Exhibit 13. 1 3 SMOKELESS 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, ROOSTER 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 1999. 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 1999. 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." 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 smokeless tobacco as "medical devices" and implementing certain labeling and access restrictions. 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." On August 14, 1998, the Fourth Circuit Court of Appeals ruled in favor of Registrant and other tobacco product manufacturers stating that FDA lacks jurisdiction to regulate tobacco products and that all of the regulations published by FDA on August 28, 1996 are invalid. On January 19, 1999, FDA filed a petition for certiorari seeking review of the Fourth Circuit's ruling by the United States Supreme Court. 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. 2 4 RAW MATERIALS Except as noted below, raw materials essential to Registrant's business are generally purchased in domestic markets under competitive conditions. Almost all of the 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 other 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 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 two to 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 21% 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, price, product recognition and distribution. 3 5 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 25% of total wine sales. Substantially all wines are sold through state-licensed distributors with whom Registrant maintains satisfactory relationships. In addition, Registrant owns and operates a microbrewery located in Yakima, Washington, which produces and markets craft beers primarily under the brand name BERT GRANT'S ALE. Registrant is a minor factor in the total nationwide business of producing craft beers. It has been claimed that the use of alcohol beverages may be harmful to health. Registrant believes that an unresolved controversy continues to exist among scientists concerning the claims made about alcohol beverages and health. In 1988, federal legislation was enacted regulating alcohol beverages by requiring health warning notices on alcohol beverages. Effective in 1991, the federal excise tax on wine was increased from $.17 a gallon to $1.07 a gallon for those manufacturers that produce more than 250,000 gallons a year, such as Registrant. In recent years at the federal level, proposals were made for additional regulation of alcohol beverages including, inter alia, an excise tax increase, modification of the required health warning notices and the regulation of labeling, advertising and packaging. Substantially similar proposals will likely be considered in 1999. 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 1999. 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 and purchased bulk wine from other sources. Total grape tonnage harvested and purchased in 1998 was slightly higher than in 1997. Due to the outstanding harvest yields experienced in 1998 and 1997, the supply of grapes is adequate to meet expected demand and thereby eliminate the need for product allocations in 1999. 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 ALL OTHER OPERATIONS All other operations consist of the international operation which markets moist smokeless tobacco; cigar operation which manufactures and markets the premium cigar brands, DON TOMAS, ASTRAL and HABANO PRIMERO. 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, 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 FDA's 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 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 1999. In recent years, various state and local governments continued the regulation of tobacco products, including, inter alia, additional 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 1999. 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 1998 was 4,924. 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 operating segment of Registrant is seasonal. ORDERS Backlog of orders is not a material factor in any operating 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 -------- ------------ ---------- Tobacco Facilities: Nashville, Tennessee.............. 973,000 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............ 998,500 Office, plants and warehouses for tobacco leaf handling, processing and storage and for manufacture of dry flour for smokeless tobacco products. Franklin Park, Illinois........... 505,000 Office and manufacturing plant for moist smokeless tobacco products, fiberboard can operations and warehouse for distribution of various products. Wine Facilities: Paterson, Washington.............. 620,000 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. Grandview, Washington............. 40,000 Winery and storage facility. 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. Santiago, Dominican Republic...... 16,000 Office and manufacturing plant for cigars. Headquarters: Greenwich, Connecticut............ 208,000 Executive, sales and general offices in several buildings.
LAND IN APPROXIMATE LOCATION ACRES ACTIVITIES -------- ----------- ---------- Yakima and Benton Counties, Washington..................... 3,390 Vineyards. Grant and Benton Counties, Washington..................... 10,864 Other, including agricultural properties.
Such principal properties in Registrant's operations were utilized only in connection with Registrant's business operations. Registrant believes that the above properties at December 31, 1998 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. On November 23, 1998, Registrant entered into the Smokeless Tobacco Master Settlement Agreement (the "Settlement Agreement") with attorneys general of various states and U.S. territories to resolve the remaining health care cost reimbursement cases initiated by various attorneys general against Registrant. The Settlement Agreement requires Registrant to adopt various marketing and advertising restrictions and make payments expected to total between $100 and approximately $200 million over ten years -- depending on various factors -- for programs to reduce youth usage of tobacco and combat youth substance abuse and for enforcement purposes. 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 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 Defendant's products and gum deterioration." Registrant has also been served with a Summons and Complaint in an action entitled Roger L. Campbell v. American Tobacco Company, et al., (File No. 98CVS10642), General Court of Justice, Superior Court Division, Guilford County, North Carolina, on November 13, 1998. This action is brought by an individual plaintiff who alleges that he developed bladder cancer as a result of his use of smokeless tobacco manufactured by Registrant. Plaintiff seeks unspecified damages in excess of $10,000. In Morgan v. United States Tobacco Company, et al., (No. 68655B), Tenth Judicial District Court for the Parish of Natchitoches, State of Louisiana, the action was dismissed by court Order dated November 6, 1997. On November 5, 1998, the same plaintiff, now in his individual capacity only, commenced another action against Registrant, entitled David Chris Morgan v. United States Tobacco Company, et al., (No. 70723A), Tenth Judicial District Court, Parish of Natchitoches, State of Louisiana. The petition alleged that plaintiff has "developed a lesion on his lower lip" and "is addicted to the nicotine contained in smokeless tobacco" as a result of his use of Registrant's smokeless tobacco products. Plaintiff sought unspecified compensatory and punitive damages and other general, special and equitable relief in an amount not to exceed $50,000. On December 18, 1998, the court entered an Order dismissing this action. In The City and County of San Francisco, on Behalf of the People of the State of California, and Environmental Law Foundation, on Behalf of the General Public v. United States Tobacco Company, et al., (No. 993992), Superior Court of the State of California, County of San Francisco, plaintiffs allege defendants' violation of The Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code sec.sec.25249.6, et seq. ("Proposition 65"), claiming "the unlawful marketing and sale by defendants of tobacco snuff and chewing tobacco . . . to children and adolescents without providing a 'clear and reasonable' warning that their use results in multiple exposures to substances known to the State of California to cause cancer, birth defects and reproductive harm." Plaintiffs further allege defendants' statutory violation of the Unfair 7 9 Competition Act, Business and Professions Code sec.sec.17200, et seq. The action seeks unspecified compensatory damages, injunctive relief, restitution, attorneys fees and costs. In Conwood Company, L.P. and Conwood Sales Company, L.P. v. United States Tobacco Company, United States Tobacco Sales and Marketing Company Inc., United States Tobacco Manufacturing Company Inc. and UST Inc. (Case No. 5:98CV-108-R), United States District Court, Western District of Kentucky, Paducah Division, Plaintiffs allege, among other things, Registrant's violation of federal antitrust and advertising laws in connection with the marketing and sale of its moist snuff brands, and alleges various violations of tort and state law. The complaint seeks an injunction against alleged "anticompetitive conduct," more than $400 million in "actual damages" before trebling, and punitive damages. Registrant believes that the complaint contains numerous misstatements of fact and that the allegations are without merit. Registrant intends to defend this action vigorously. Registrant believes, and has been so advised by counsel handling these cases, that it has a number of meritorious defenses to all such pending litigation. Except as to Registrant's willingness to consider alternative solutions for resolving certain regulatory and litigation issues, all such cases are, and will continue to be, vigorously defended. Registrant believes that the ultimate outcome of all such pending litigation will not have a material adverse effect on the consolidated financial position of Registrant, but may have a material impact on Registrant's consolidated financial results for a particular reporting period in which resolved. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to instruction 3 to Item 401(b) of Regulation S-K, the name, office, age and business experience of each executive officer of Registrant as of February 1, 1999 is set forth below:
NAME OFFICE AGE ---- ------ --- Vincent A. Gierer, Jr........................... Chairman of the Board, Chief 51 Executive Officer and President Robert E. Barrett............................... Executive Vice President and 60 President -- UST Enterprises Inc. Richard H. Verheij.............................. Executive Vice President and General 40 Counsel Allen C. Shoup.................................. President -- International Wine & 55 Spirits Ltd. A. Gary Smith................................... President -- United States Tobacco 50 Company Robert T. D'Alessandro.......................... Senior Vice President and Controller 45
None of the executive officers of Registrant has any family relationship to any other executive officer or director of Registrant. After election, all executive officers serve until the next annual organization meeting of the Board of Directors and until their successors are elected and qualified. Mr. 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 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 8 10 Associate General Counsel from December 17, 1992 to April 3, 1994. Mr. Verheij has been employed by Registrant since November 24, 1986. 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. Mr. Smith has served as President of United States Tobacco Company since June 25, 1998. He served as Executive Vice President of United States Tobacco Company from January 1, 1998 to June 24, 1998 and 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. 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 37 of its Annual Report, which page is included in Exhibit 13. Registrant's Common Stock is listed on the New York Stock Exchange and the Pacific Exchange, Inc. As of February 1, 1999, there were approximately 9,500 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 42 and 43 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 15-22 of its Annual Report, which pages are included in Exhibit 13. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk refers to the potential effects of unfavorable changes in certain prices and rates on Registrant's financial results and condition, primarily foreign currency exchange rates, interest rates on borrowings and prices of leaf tobacco and grapes. Registrant does not utilize derivative instruments in managing its exposure to such changes. Registrant does not believe that near-term changes in foreign currency exchange rates, interest rates or leaf tobacco and grape prices will have a material effect on its future earnings, fair values or cash flows. 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 23-41 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. 9 11 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 1999 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 1999 Annual Meeting and Proxy Statement. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Registrant hereby incorporates by reference the information with respect to the security ownership of management which is contained in Table I and the accompanying text set forth under the caption "Election of Directors" in its Notice of 1999 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 1999 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, 1998, 1997 and 1996 Consolidated Statement of Financial Position -- December 31, 1998 and 1997 Consolidated Statement of Cash Flows -- Years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Changes in Stockholders' Equity -- Years ended December 31, 1998, 1997 and 1996 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. 10 12 (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, and amended and restated effective October 22, 1998, incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended September 30, 1998. 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, incorporated by reference to Exhibit 10.6 to Form 10-K for the fiscal year ended December 31, 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, incorporated by reference to Exhibit 10.8 to Form 10-K for the period ended December 31, 1997. 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. 10.11* -- Nonemployee Directors' Restricted Stock Award Plan effective January 1, 1999. 13 -- Pages 15-43 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 Schedules.
- --------------- (b) On November 25, 1998, Registrant filed a Current Report on Form 8-K which reported the execution by its subsidiary, United States Tobacco Company, of the Smokeless Tobacco Master Settlement Agreement with attorneys general of various states and U.S. territories to resolve health care cost reimbursement claims. * 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 17, 1999 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 17, 1999 Executive Officer) /s/ VINCENT A. GIERER, JR. -------------------------------------------------------- VINCENT A. GIERER, JR. Senior Vice President and Controller (Principal Accounting Officer and Principal February 17, 1999 Financial Officer) /s/ ROBERT T. D'ALESSANDRO -------------------------------------------------------- ROBERT T. D'ALESSANDRO February 17, 1999 Director /s/ JAMES W. CHAPIN -------------------------------------------------------- JAMES W. CHAPIN February 17, 1999 Director /s/ JOHN P. CLANCEY -------------------------------------------------------- JOHN P. CLANCEY February 17, 1999 Director /s/ EDWARD H. DEHORITY, JR. -------------------------------------------------------- EDWARD H. DEHORITY, JR. February 17, 1999 Director /s/ ELAINE J. EISENMAN -------------------------------------------------------- ELAINE J. EISENMAN February 17, 1999 Director /s/ EDWARD T. FOGARTY -------------------------------------------------------- EDWARD T. FOGARTY February 17, 1999 Chairman of the Board /s/ VINCENT A. GIERER, JR. -------------------------------------------------------- VINCENT A. GIERER, JR. February 17, 1999 Director /s/ P.X. KELLEY -------------------------------------------------------- P.X. KELLEY February 17, 1999 Director /s/ PETER J. NEFF -------------------------------------------------------- PETER J. NEFF February 17, 1999 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, and amended and restated effective October 22, 1998, incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended September 30, 1998. 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, incorporated by reference to Exhibit 10.6 to Form 10-K for the fiscal year ended December 31, 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, incorporated by reference to Exhibit 10.8 to Form 10-K for the period ended December 31, 1997. 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. 10.11* -- Nonemployee Directors' Restricted Stock Award Plan effective January 1, 1999. 13 -- Pages 15-43 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 Schedules.
- --------------- * 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-10.11 2 NONEMPLOYEE DIRECTORS' RESTRICTED STOCK AWARD PLAN 1 EXHIBIT 10.11 ADOPTED BY BOARD OF DIRECTORS ON DECEMBER 10, 1998 EFFECTIVE JANUARY 1, 1999 UST INC. NONEMPLOYEE DIRECTORS' RESTRICTED STOCK AWARD PLAN 1. PURPOSE 1.1 The UST Inc. Nonemployee Directors' Restricted Stock Award Plan (the "Plan") is intended to increase the alignment of the interests of nonemployee members of the Board with the interests of stockholders of the Company by providing further opportunity for ownership of the Company's stock, and to increase their incentive to contribute to the success of the Company's business through the award of Restricted Stock on the terms and conditions set forth herein. 2. DEFINITIONS 2.1 "Board" shall mean the Board of Directors of the Company. 2.2 "Change in Control" shall have the meaning ascribed to it in Section 5.2.4. 2.3 "Committee" shall have the meaning ascribed to it in Section 3 hereof. 2.4 "Company" shall mean UST Inc., a Delaware corporation. 2.5 "Date of Award" shall mean the day on which Restricted Stock Awards are granted pursuant to Section 5.1 2.6 "Eligible Director" shall mean each member of the Board who is not an employee of the Company or any subsidiary of the Company. 2.7 "Fair Market Value" of a share of Stock on any given day shall be the average of the high and low sales prices per share of Stock as reported on the New York Stock Exchange Composite Tape for such date, or if there was no trading of Stock on such date, for the next preceding date on which there was such trading. 2.8 "Grantee" shall mean the individual who has been awarded Restricted Stock under the Plan. 2.9 "Plan" shall mean the UST Inc. Nonemployee Directors' Restricted Stock Award Plan. 2.10 "Restricted Stock" shall mean stock awarded on such terms and conditions as are set forth in the Plan. 2.11 "Restricted Stock Agreement" shall mean the written agreement between the Company and the Grantee evidencing an award of Restricted Stock under the Plan. 2.12 "Rule 16b-3" shall mean Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as amended. 2.13 "Restricted Stock Award" shall have the meaning ascribed to it in Section 5.1. 2.14 "Stock" shall mean shares of common stock, par value $.50 per share, of the Company. 3. ADMINISTRATION 3.1 Committee. The Plan shall be administered by the Nominating and Compensation Committee of the Board (the "Committee"). Members of the Committee shall be appointed by the Board. 3.2 Authority of the Committee. The Committee shall determine, consistent with the terms of the Plan, the terms and conditions of awards granted hereunder. The Committee may make such rules and establish such procedures for the administration of the Plan as it deems appropriate to carry out the purpose of the Plan. All questions of interpretation, administration and application of the Plan shall be determined by a majority of the members of the Committee then in office, except that the Committee may authorize any 2 one or more of its members, or any officer of the Company, to execute and deliver documents on its behalf. The determination of such majority shall be final and binding in all matters relating to the Plan. 4. SHARES OF STOCK SUBJECT TO THIS PLAN 4.1 Shares Reserved. Subject to adjustment as provided in Section 4.2 hereof, a maximum of 200,000 shares of Stock shall be reserved for issuance in accordance with the terms of the Plan. Shares of Stock that may be issued shall be issued shares that have been reacquired by the Company and are held in its treasury. If any outstanding Restricted Stock under the Plan for any reason expires or is cancelled or otherwise terminated without having vested in full, the shares of Common Stock allocable to the unvested portion of such Restricted Stock shall (unless the Plan shall have been terminated) become available for subsequent awards of Restricted Stock under the Plan. 4.2 Capital Adjustments. If any change in the outstanding shares of Common Stock occurs or takes effect through declaration of stock or other dividends or distributions with respect to such shares, through restructuring, recapitalization or other similar event or through stock splits, change in par value, combination or exchange of shares, or the like, then the number and kind of shares reserved for Restricted Stock Awards, the number and kind of shares subject to outstanding Restricted Stock, as appropriate, of such Restricted shares shall be adjusted as necessary to reflect equitably such change; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. 5. RESTRICTED STOCK 5.1 Awards. Each Eligible Director shall automatically be awarded 50 shares of Restricted Stock pursuant to the Plan for his or her attendance at each meeting of the Board and 40 shares of Restricted Stock for his or her attendance at each meeting of any Committee of the Board ("Restricted Stock Awards"). 5.2 Terms and Conditions of Awards. Each Restricted Stock Award shall be evidenced by a Restricted Stock Agreement in such form as the Committee shall prescribe from time to time in accordance with the Plan. Restricted Stock shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose at the date of grant or thereafter and shall comply with the terms and conditions set forth below in this Section 5.2, subject to such exceptions as may be determined by the Committee. 5.2.1 Vesting of Awards. Each Restricted Stock Award shall, subject to the provisions of Section 5.2.4, become fully vested and nonforfeitable upon the third anniversary of the Date of the Award or, if earlier, upon the date of the Grantee's retirement from service as a member of the Board pursuant to the Company's policy of age-related retirement from the Board. If, prior to such third anniversary, a Grantee shall die while a member of the Board, or if the Grantee's service on the Board shall terminate by reason of "disability," as such term is defined by the Committee, or if a Change in Control occurs pursuant to Section 5.2, all Restricted Stock Awards held by the Grantee shall become fully vested and nonforfeitable as of the date of death or disability of the Grantee or the occurrence of the Change in Control. 5.2.2 Forfeiture of Awards. Subject to such exceptions as may be determined by the Committee, if the Grantee's continuous service as a member of the Board shall terminate by reason of the Grantee's resignation prior to retirement or refusal to stand for reelection or the Board's removal of the Grantee for "cause," as such term is defined by the Committee, prior to the vesting of the Restricted Stock Award in accordance with Section 5.2.4, all shares subject to such nonvested Restricted Stock Award shall thereupon be forfeited by the Grantee and transferred to, and reacquired by, the Company at no cost to the Company; provided, however, that (i) the Committee may provide, by rule or regulation or in any Restricted Stock Agreement, or may determine in any individual case, that forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and (ii) the Committee may in other cases waive in whole or in part the forfeiture of Restricted Stock. 3 5.2.3 Restrictions on Transfer of Shares. Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, or, if then permitted under Rule 16b-3, pursuant to a qualified domestic relations order as defined in Title I of the Employee Retirement Income Security Act of 1974, as amended, at any time while the Grantee is a member of the Board, unless otherwise determined by the Committee. Certificates for shares of Common Stock issued pursuant to awards of Restricted Stock shall bear an appropriate legend referring to such restrictions, and any attempt to dispose of any such shares of Common Stock in contravention of such restrictions shall be null and void and without effect. Upon the termination of the Grantee's service as a member of the Board, all such restrictions upon transfer shall expire with respect to shares subject to Restricted Stock Awards that have theretofore, or as a result of such termination, become vested and nonforfeitable. Prior to expiration of the restrictions upon transfer, the certificates evidencing the Restricted Stock Award may be retained by the Company or held in escrow by an agent appointed by the Committee. 5.2.4 Definition of Change in Control. For purposes of the Plan, a change in control of the Company ("Change in Control") shall be deemed to have occurred if: 5.2.4.1 any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than (1) the Company or any of its subsidiaries, (2) any "person" who on the date hereof is a director or officer of the Company, (3) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company (a "Person"), is or becomes the "beneficial owner" (as defined in Rule 13d-3) under the Exchange Act (a "Beneficial Owner")), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities; or 5.2.4.2 during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 5.2.4.1 or 5.2.4.3 whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds ( 2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or 5.2.4.3 the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 5.3 Rights as a Stockholder. Except to the extent restricted under the Restricted Stock Agreement, a Grantee shall have all of the rights of a stockholder including, without limitation, the right to vote Restricted Stock and the right to receive dividends thereon. 5.4 Rights of Grantees. Nothing in the Plan or in any Restricted Stock Agreement shall confer upon an individual any right to continue service on the Board or interfere in any way with the right of the Company to terminate such service. Except as expressly provided in the Plan, the Grantee shall have no 4 rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation, and any issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the Restricted Stock. The award of Restricted Stock pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structures or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets. 6. EFFECTIVE DATE; TERM OF PLAN 6.1 Effective Date. The Plan, as adopted by the Board on December 10, 1998 shall be effective as of January 1, 1999. 6.2 Duration of Plan. Restricted Stock may be awarded pursuant to the Plan from time to time within a period of ten years from the date the Plan is adopted by the Board. The Plan shall remain in effect until all Restricted Stock Awards under the Plan have been satisfied by the issuance of shares, or terminated under the terms of the Plan. 7. NONASSIGNABILITY AND NONTRANSFERABILITY 7.1 Restricted Stock awards under the Plan shall not be assignable or transferable by the Eligible Director except by will or the laws of descent and distribution. 8. AMENDMENT: TERMINATION 8.1 The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part. The termination or any modification or amendment of the Plan shall not, without the consent of a director, affect his or her rights under an Award. 9. MISCELLANEOUS 9.1 Governing Law. The Plan and all rights hereunder shall be construed in accordance with and governed by the laws of the State of Delaware. 9.2 Headings. The headings of sections and subsections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of the Plan. EX-13 3 PAGES 15-43 OF THE ANNUAL REPORT 1 EXHIBIT 13 (ITEMS 1 AND 8) UST CONSOLIDATED SEGMENT INFORMATION (IN THOUSANDS)
YEAR ENDED DECEMBER 31 -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- NET SALES TO UNAFFILIATED CUSTOMERS Tobacco.............................................. $1,245,552 $1,181,789 $1,167,532 Wine................................................. 148,512 145,048 122,458 All other............................................ 29,182 74,881 81,715 ---------- ---------- ---------- NET SALES.................................... $1,423,246 $1,401,718 $1,371,705 ========== ========== ========== OPERATING PROFIT (LOSS) Tobacco.............................................. $ 720,622 $ 700,395 $ 745,558 Wine................................................. 22,090 28,178 17,884 All other............................................ 1,712 (1,270) 60 ---------- ---------- ---------- OPERATING PROFIT............................. 744,424 727,303 763,502 Corporate expenses................................... (12,146) (15,995) (12,612) Interest income (expense), net....................... 2,187 (7,451) (6,364) ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES................. $ 734,465 $ 703,857 $ 744,526 ========== ========== ========== IDENTIFIABLE ASSETS AT DECEMBER 31 Tobacco.............................................. $ 497,623 $ 467,972 $ 458,162 Wine................................................. 277,249 230,896 194,917 All other............................................ 87,197 102,157 91,569 Corporate............................................ 51,250 25,338 61,929 ---------- ---------- ---------- $ 913,319 $ 826,363 $ 806,577 ========== ========== ========== CAPITAL EXPENDITURES Tobacco.............................................. $ 27,696 $ 29,410 $ 29,199 Wine................................................. 25,646 20,135 12,033 All other............................................ 2,470 6,134 2,671 Corporate............................................ 454 2,480 810 ---------- ---------- ---------- $ 56,266 $ 58,159 $ 44,713 ========== ========== ========== DEPRECIATION Tobacco.............................................. $ 16,100 $ 16,266 $ 15,816 Wine................................................. 11,953 10,423 8,909 All other............................................ 1,653 1,836 1,792 Corporate............................................ 1,665 1,611 1,626 ---------- ---------- ---------- $ 31,371 $ 30,136 $ 28,143 ========== ========== ==========
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)
1998 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- SUMMARY OF OPERATIONS for the year ended December 31 Net sales......................................... $1,423,246 $1,401,718 $1,371,705 $1,305,796 $1,203,951 $1,097,533 Cost of products sold (includes excise taxes)..... 283,516 291,942 272,756 262,203 251,944 246,445 Selling, advertising and administrative expenses........................................ 407,452 398,468 348,059 335,824 311,279 286,336 ---------- ---------- ---------- ---------- ---------- ---------- Operating income.................................. 732,278 711,308 750,890 707,769 640,728 564,752 Other (income) expense: Interest (income) expense, net.................. (2,187) 7,451 6,364 3,179 92 (2,004) Gain on disposal of product line................ -- -- -- -- -- (35,029) ---------- ---------- ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of accounting changes........................... 734,465 703,857 744,526 704,590 640,636 601,785 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes...................................... 279,186 264,719 280,527 274,830 253,110 232,893 ---------- ---------- ---------- ---------- ---------- ---------- Earnings before cumulative effect of accounting changes......................................... 455,279 439,138 463,999 429,760 387,526 368,892 Cumulative effect of accounting changes (net of income tax benefit)............................. -- -- -- -- -- 19,846 ---------- ---------- ---------- ---------- ---------- ---------- Net earnings...................................... $ 455,279 $ 439,138 $ 463,999 $ 429,760 $ 387,526 $ 349,046 ========== ========== ========== ========== ========== ========== PER SHARE DATA Basic earnings per share before cumulative effect of accounting changes........................... $2.45 $2.39 $2.48 $2.21 $1.92 $1.77 Basic earnings per share.......................... 2.45 2.39 2.48 2.21 1.92 1.67 Diluted earnings per share before cumulative effect of accounting changes.................... 2.44 2.37 2.44 2.17 1.88 1.73 Diluted earnings per share........................ 2.44 2.37 2.44 2.17 1.88 1.64 Dividends per share............................... 1.62 1.62 1.48 1.30 1.12 .96 Market price per share: High............................................ 36 7/8 36 15/16 35 7/8 36 31 1/2 32 3/4 Low............................................. 24 9/16 25 1/2 28 1/4 26 5/8 23 5/8 24 3/8 FINANCIAL CONDITION at December 31 Current assets.................................... $507,213 $441,844 $450,570 $425,555 $381,937 $334,996 Current liabilities............................... 197,316 166,519 306,553 280,723 160,755 106,642 Working capital................................... 309,897 275,325 144,017 144,832 221,182 228,354 Ratio of current assets to current liabilities.... 2.6:1 2.7:1 1.5:1 1.5:1 2.4:1 3.1:1 Total assets...................................... 913,319 826,363 806,577 783,976 741,236 706,195 Long-term debt.................................... 100,000 100,000 100,000 100,000 125,000 40,000 Total debt........................................ 100,000 110,000 250,000 200,000 125,000 40,000 Stockholders' equity.............................. 468,293 436,795 281,206 292,781 361,669 462,972 OTHER DATA Stock repurchased................................. $151,617 $ 45,719 $237,759 $274,783 $298,843 $236,704 Dividends paid on shares.......................... $301,145 $298,059 $277,302 $252,388 $225,715 $199,725 Dividends paid as a percentage of net earnings.... 66.1% 67.9% 59.8% 58.7% 58.2% 57.2% Return on net sales............................... 32.0% 31.3% 33.8% 32.9% 32.2% 31.8% Return on average assets.......................... 52.3% 53.8% 58.3% 56.4% 53.5% 50.6% Return on average stockholders' equity............ 100.6% 122.3% 161.7% 131.3% 94.0% 71.3% Percentage of long-term debt to stockholders' equity.......................................... 21.4% 22.9% 35.6% 34.2% 34.6% 8.6% Percentage of total debt to stockholders' equity.......................................... 21.4% 25.2% 88.9% 68.3% 34.6% 8.6% Average number of shares (in thousands) -- basic............................. 185,544 183,931 187,386 194,374 201,995 208,469 Average number of shares (in thousands) -- diluted........................... 186,880 185,602 190,067 197,613 205,699 213,412
- --------------- See Management's Discussion and Analysis and Notes to Consolidated Financial Statements. All share data have been adjusted to reflect the two-for-one stock splits distributed on January 27, 1992 and 1989. 3 UST CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1992 1991 1990 1989 1988 ---------- -------- -------- -------- -------- SUMMARY OF OPERATIONS for the year ended December 31 Net sales............................................ $1,032,172 $898,436 $756,435 $673,852 $611,878 Cost of products sold (includes excise taxes)........ 256,796 227,546 191,824 185,464 174,560 Selling, advertising and administrative expenses..... 274,613 247,085 215,621 189,963 177,103 ---------- -------- -------- -------- -------- Operating income..................................... 500,763 423,805 348,990 298,425 260,215 Other (income) expense: Interest (income) expense, net..................... (1,866) (2,279) (3,203) (3,190) (1,068) Gain on disposal of product line................... -- -- -- -- -- ---------- -------- -------- -------- -------- Earnings before income taxes and cumulative effect of accounting changes................................. 502,629 426,084 352,193 301,615 261,283 ---------- -------- -------- -------- -------- Income taxes......................................... 190,071 160,179 128,918 111,128 99,133 ---------- -------- -------- -------- -------- Earnings before cumulative effect of accounting changes............................................ 312,558 265,905 223,275 190,487 162,150 Cumulative effect of accounting changes (net of income tax benefit)................................ -- -- -- -- -- ---------- -------- -------- -------- -------- Net earnings......................................... $ 312,558 $265,905 $223,275 $190,487 $162,150 ========== ======== ======== ======== ======== PER SHARE DATA Basic earnings per share before cumulative effect of accounting changes................................. $1.49 $1.26 $1.04 $.87 $.74 Basic earnings per share............................. 1.49 1.26 1.04 .87 .74 Diluted earnings per share before cumulative effect of accounting changes.............................. 1.43 1.20 .99 .83 .71 Diluted earnings per share........................... 1.43 1.20 .99 .83 .71 Dividends per share.................................. .80 .66 .55 .46 .37 Market price per share: High............................................... 35 3/8 33 7/8 18 1/4 15 3/8 10 1/2 Low................................................ 25 3/8 16 3/8 12 3/8 9 5/8 6 FINANCIAL CONDITION at December 31 Current assets....................................... $ 330,208 $305,430 $265,854 $275,954 $291,006 Current liabilities.................................. 81,208 95,455 68,660 66,643 69,935 Working capital...................................... 249,000 209,975 197,194 209,311 221,071 Ratio of current assets to current liabilities....... 4.1:1 3.2:1 3.9:1 4.1:1 4.2:1 Total assets......................................... 673,965 656,513 622,595 630,155 597,955 Long-term debt....................................... -- -- 3,060 6,789 21,828 Total debt........................................... -- 1,250 4,849 14,469 30,763 Stockholders' equity................................. 516,606 482,875 473,873 482,254 453,253 OTHER DATA Stock repurchased.................................... $ 212,581 $184,424 $151,259 $ 97,517 $ 67,356 Dividends paid on shares............................. $ 167,951 $139,670 $118,295 $101,197 $ 81,672 Dividends paid as a percentage of net earnings....... 53.7% 52.5% 53.0% 53.1% 50.4% Return on net sales.................................. 30.3% 29.6% 29.5% 28.3% 26.5% Return on average assets............................. 47.0% 41.6% 35.6% 31.0% 28.3% Return on average stockholders' equity............... 62.5% 55.6% 46.7% 40.7% 38.0% Percentage of long-term debt to stockholders' equity............................................. -- -- .6% 1.4% 4.8% Percentage of total debt to stockholders' equity..... -- .3% 1.0% 3.0% 6.8% Average number of shares (in thousands) -- basic..... 209,803 211,603 215,156 219,820 220,550 Average number of shares (in thousands) -- diluted... 218,674 221,458 224,522 230,164 228,579
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 which are reflected in the analysis of Results of Operations and Financial Condition. During the fourth quarter of 1998, the Company entered into the Smokeless Tobacco Master Settlement Agreement (the "Settlement Agreement") with attorneys general of various states and U.S. territories to resolve the remaining health care cost recovery cases pending against the Company. Subject to final court approval in the respective states, the Settlement Agreement requires the Company to make payments expected to total between $100 and approximately $200 million over ten years, depending on various factors, for programs to reduce youth usage of tobacco and combat youth substance abuse and for enforcement purposes. In addition, the Settlement Agreement provides for payment by the Company of legal costs in the amount of $5 million. Settlement Agreement charges recorded by the Company in the fourth quarter of 1998 totaled $15.3 million; including $4.3 million for payments to the enforcement fund, $5 million for the payment of legal fees and $6 million representing the first on-going payment to the public education fund due in March of 1999. The balance of the future on-going payments related to the Company's market share will be charged to expense in the period the related shipments occur. In addition, included in 1998 results is a charge of $16.4 million versus $3 million in 1997, resulting from the Company's portion of the funding for pilot programs, primarily to reduce youth access to tobacco products, and related expenses as part of the settlements with the states of Texas, Florida and Washington in connection with their health care cost reimbursement litigation. Tobacco settlement charges negatively impacted diluted earnings per share by 10 cents in 1998 versus 1 cent in 1997, and 8 cents for the fourth quarter of 1998 versus no effect in the fourth quarter of 1997. At December 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which required the restatement of segment information prior to 1998. In addition, due to the shipping pattern of the Tobacco segment, there was an additional shipping day that occurred in 1996 which affected both the unit volume and financial result comparisons for 1997 versus 1996. RESULTS OF OPERATIONS CONSOLIDATED RESULTS 1998 COMPARED WITH 1997 Consolidated net sales rose 2 percent to $1.423 billion while net earnings increased 4 percent to $455.3 million and diluted earnings per share increased 3 percent to $2.44. Over the last three years, net sales have increased 9 percent at an average annual rate of 2.9 percent, net earnings have increased 5.9 percent at an average annual rate of 2.1 percent; and diluted earnings per share have increased 12.4 percent at an average annual rate of 4.2 percent. Results for the Tobacco segment increased 2.9 percent as higher selling prices for moist smokeless tobacco were offset by the tobacco settlement charges and higher spending for marketing and sales initiatives, partially off set by the absence of a 1997 charge relating to recording the present value of an employment contract for a former executive officer. Wine segment results declined as a result of competitive pricing in the marketplace. Results for all other operations improved as gains recorded on dispositions of a business and certain agricultural properties were offset by the continued weakness in the premium cigar business. 5 Corporate expenses were lower in 1998 versus 1997 due to the absence of a charge related to another employment contract for a former executive officer. Interest, net, resulted in income in 1998 versus expense in 1997 due to higher income on cash equivalent investments and lower average debt levels during the year. Pretax margins increased to 51.6 percent on earnings before income taxes of $734.5 million. Over the last three years, pretax margins have averaged 52 percent while earnings before income taxes have increased 4.2 percent at an average annual rate of 1.5 percent. The effective tax rate increased slightly in 1998 as compared to 1997. Future net earnings and earnings per share growth may be affected by the Company's ability to address competitive pressures, the overall growth rate of the moist smokeless tobacco category, continued growth in other businesses and the effects of potential regulatory actions. 1997 COMPARED WITH 1996 Consolidated net sales rose 2 percent to $1.402 billion, net earnings decreased 5 percent to $439.1 million and diluted earnings per share declined 3 percent to $2.37. Tobacco segment results were lower due to an additional shipping day in 1996, 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 an employment contract for a former executive officer. Results for the Wine segment were substantially higher due to increased case volume and higher selling prices for premium varietal wines. All other operations recorded a small loss for the year. 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. Pretax margins declined to 50.2 percent on earnings before income taxes of $703.9 million. The effective tax rate remained stable from year to year. TOBACCO SEGMENT 1998 COMPARED WITH 1997 Tobacco segment sales increased 5.4 percent to $1.246 billion and accounted for 87.5 percent of consolidated revenue. Higher selling prices for moist smokeless tobacco was the primary reason for the increase. Domestic unit volume for moist smokeless tobacco products was slightly higher, rising 0.2 percent to 625.3 million cans as compared to 1997. For the year, unit volume results were unfavorably affected by higher returned goods resulting from several large promotions run in the latter part of 1997 which impacted regular stock at retail in 1998, and the implementation in mid-1997 of a program to enhance product freshness by accelerating the rotation of moist smokeless tobacco products at retail. During 1998, the Company fine-tuned its promotional activities by focusing on the number and distribution of promotional units. As a result, the Company believes that the returned goods comparison should stabilize going forward and therefore have less of an impact on reported net unit volume. Fourth quarter unit volume increased 1.6 percent to 157.3 million cans compared with the similar 1997 period which reflects growth in both the premium priced and price/value brands, as well as lower returned goods. The national introduction at mid-year of Rooster, the Company's premium mid-tier priced brand, continued targeted growth of Red Seal, the Company's price/value brand, and better management of promotional activity during the year all had a favorable impact on unit volume results for the fourth quarter and year. 6 Gross profit for the segment rose 5.6 percent during 1998. Higher selling prices on premium brands more than offset higher volume for lower priced promotional and price/value products resulting in a slight increase in the gross profit percentage for the Tobacco segment. Selling and advertising expenses increased in 1998 approximately 7 percent. Selling expenses were significantly higher as the Company introduced an incentive program for wholesalers and retailers to build partnerships with the trade in support of the Company's smokeless tobacco brands. Spending was also higher on consumer focused activities, market research, additional sales and support personnel and higher salary related costs. Overall, advertising expenses were favorable, resulting from the absence of a major consumer promotion which ran in the prior year. Spending, however, was redirected and resulted in increased print advertising and direct marketing efforts in support of premium brands. Administrative expenses were significantly higher due to the tobacco settlement charges, partially offset by the absence of a charge relating to an employment contract with a former executive officer. Operating profit for the Tobacco segment increased 2.9 percent to $720.6 million for 1998. Absent tobacco settlement charges operating profit for the Tobacco segment would have increased approximately 7 percent. The Company continued to face competitive pressures in the marketplace in 1998. Marketing and sales initiatives over the past two years seem to have slowed the rate of segment share loss experienced in prior years. Competitive pressures, as well as the rate of growth of the moist smokeless tobacco category and the effects of potential regulatory actions will continue to impact unit volume and operating results for the Tobacco segment in the future. 1997 COMPARED WITH 1996 The comparison of results for the Tobacco segment was affected by an additional shipping day in 1996 as well as an increase in returned goods resulting from a program implemented during the second half of 1997 to enhance product freshness by accelerating the rotation of moist smokeless tobacco products at retail. In addition, due to increasing competition in the moist smokeless tobacco category, additional 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 products and higher spending. 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. On an equivalent shipping day basis, unit volume stabilized, reversing a downward trend that began in the fourth quarter of 1996. Selling and advertising expenses for the year increased in support of 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 6.1 percent to $700.4 million in 1997. WINE SEGMENT 1998 COMPARED WITH 1997 Wine segment revenue increased 2.4 percent to $148.5 million and accounted for 10.4 percent of consolidated sales. Competitive pricing in the marketplace had an unfavorable effect on premium case sales during the year. In addition, due to anticipated shortages of red wines resulting from the low harvest yields in 1996, the Company began 1998 with certain varieties on allocation. The Company took action by removing the allocations on red wines in the second quarter and reduced prices in the second half of the year in an effort to increase case volume. Premium case volume decreased slightly in 1998 versus 1997. However, as a result of the actions taken, premium case volume for the fourth quarter increased approximately 12 percent as compared to the similar period in the prior year. 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. 7 Unit costs were higher in 1998 as a result of higher average costs associated with the 1996 and 1997 harvests. As a result of the competitive pricing issues in the marketplace and higher unit costs, gross profit for the Wine segment decreased 1.2 percent in 1998. The Company's wines are produced using grapes both harvested from its own vineyards and purchased from regional growers as well as purchased bulk wine. The demand for premium varietal wine continues to increase. Given the outstanding harvest yields experienced over the last two years, the supply of grapes is adequate to meet expected demand and thereby eliminate the need for product allocations in 1999. Selling, advertising and administrative expenses were higher in 1998. Selling expenses were higher and were focused on promotional activities to address the competitive marketplace. Overall, advertising expenses were significantly lower; however, spending was focused on specific premium varietal brands. Administrative and other expenses were significantly higher primarily due to expenses incurred in improving information systems, salary and related costs and professional fees. The Wine segment recorded an operating profit of $22.1 million, a decrease of 21.6 percent. The Company believes that competitive pricing will continue in the marketplace in 1999. In order to increase profitability, the Company will continue to monitor current pricing levels and take the necessary actions to remain competitive at the appropriate margin level, introduce new products and focus on higher margin products. 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. Case volume for premium wine increased 9.6 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. Total grape tonnage harvested and purchased in 1997 was significantly higher than in 1996 but at relatively stable average costs. 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. Selling, advertising and administrative expenses were higher in 1997. Selling expenses were stable while advertising expenses were significantly higher in promoting 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 $28.2 million in 1997. ALL OTHER OPERATIONS 1998 COMPARED WITH 1997 All other sales decreased 61 percent to $29.2 million and accounted for 2.1 percent of consolidated sales. The primary reason for the decrease was the disposition of the Company's video entertainment subsidiary in the first quarter of 1998 and a significant decline in the cigar operations due to the weakness in the premium cigar market. 1998 results include a gain of $10.7 million resulting from the sale of certain commercial agricultural properties and the Company's video entertainment subsidiary. This gain was offset by unfavorable results for the cigar operations, while spending in the international operation was lower. Overall, all other operations recorded a small operating profit of $1.7 million. 8 1997 COMPARED WITH 1996 All other sales decreased 8.4 percent to $74.9 million and accounted for 5.3 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. 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 markets, while results for other businesses were mixed. Overall, all other operations recorded an operating loss of $1.3 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 was $465.6 million in 1998 as compared to $412.6 million in 1997 and $439.4 million in 1996. Net cash provided by operating activities in 1998 increased 12.9 percent as compared to 1997. The increase was due to higher earnings generated by the Tobacco segment, partially offset by lower 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, $217.8 million was used for the purchase of leaf tobacco and related costs for smokeless tobacco. In addition, the cost of grapes harvested and purchased and the cost of bulk wine totaled $92.1 million over the last three years. INVESTING ACTIVITIES Net cash used in investing activities was $15.4 million in 1998. Purchases of property, plant and equipment over the last three years totaled $159.1 million. Major areas of capital spending from 1996 through 1998 were: Tobacco segment - Building additions and renovations - Manufacturing, processing and packaging equipment - Computer equipment and software Wine segment - Storage capacity - Vineyard expansion and development - Building additions and renovations - Computer equipment and software Other - Cigar distribution facility and manufacturing capacity expansion - Equipment In 1999, the Company's capital program is expected to approximate $65 million and will primarily include improvements to the tobacco processing and manufacturing operations, information systems, and expansion of storage facilities, related equipment and vineyard development for the wine operation. In 1998, the Company received $14.6 million from the disposition of certain commercial agricultural properties and $20.2 million resulting from a sale of a business. In 1997, the Company received $25.7 million resulting from a prepayment of royalties in connection with a previous divestiture and in 1996 received cash proceeds of $6.3 million from the sale of two businesses. 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 1995, funds received primarily from the exercise of options, together with these tax benefits, totaled $133.6 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. In 1998 however, the Company did not increase its quarterly dividend rate and its stock repurchase program had been suspended since June 1997 in view of the proposed resolution of regulatory and litigation issues affecting the tobacco industry. In December 1998, upon the execution of the Settlement Agreement, the Company resumed its stock repurchase program. Also in December, the Board of Directors approved a first quarter 1999 dividend of 42 cents per share. This equates to an indicated annual rate of $1.68, and represents an increase of 3.7 percent. Since 1995, the dividend rate has increased 24.6 percent reflecting an average annual increase of 7.8 percent. Total cash dividends paid by the Company in 1998 were $301.1 million or 66.1 percent of net earnings. Cash dividends paid to stockholders have exceeded 50 percent of net earnings in each of the last three years. It is the Company's intention to moderate dividend increases in the future to better align the payout ratio closer to 50 percent of net earnings. 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 $876.5 million, totaling 64.5 percent of net earnings for the period. The current stock repurchase program, as approved by the Board of Directors, began in 1996 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 December 1998, the Company repurchased 4.4 million shares at a cost of $151.6 million. As of December 31, 1998, 13.6 million shares remained to be repurchased under the current program. As a result of the suspension of the stock repurchase program for substantially all of 1998, the Company used excess cash to repay borrowings. Over the last three years the Company had net repayments on borrowings of $100 million. LIQUIDITY AND CAPITAL RESOURCES In 1998, sources of cash exceeded uses of cash by $26.3 million. Cash generated from operating activities and proceeds received from the sale of certain commercial agricultural properties and a business, along with cash on hand at December 31, 1997 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 $100 million to support outstanding commercial paper at December 31, 1998. The ratio of current assets to current liabilities (current ratio) at December 31, 1998 was 2.6 to 1 and has averaged 2.3 to 1 over the last three years. The current ratio remained stable as compared to 1997 as increases in inventories were offset by higher accrued expenses. The Company's liquidity position is enhanced by the fact that leaf inventories are carried at costs computed under the last-in, first-out (LIFO) method. The 10 average costs of these inventories are $50.9 million more than the amount at which they are carried in the Consolidated Statement of Financial Position at December 31, 1998. In 1999, projected leaf tobacco purchases will be slightly higher than amounts expended in 1998. In addition, significant levels of cash will be required for the stock repurchase program, dividend payments and capital projects. In December 1998, the Board of Directors approved borrowing up to $1 billion over five years to augment the Company's stock repurchase program and for other corporate purposes. Additional credit facilities will be required in the future to cover these additional borrowings and the Company is currently analyzing appropriate additional debt financing vehicles. The Company intends to maintain appropriate facilities to ensure access to credit markets providing sufficient financial resources and operational flexibility. The percentage of total debt outstanding to stockholders' equity decreased to 21.4 percent at December 31, 1998, from 25.2 percent at December 31, 1997. Slightly lower debt levels and an increase in stockholders' equity caused the percentage to decline. The Company anticipates that its operating cash requirements will be met by amounts generated from operating activities augmented by borrowings. Stockholders' equity increased in 1998, 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, 1998, the return on average stockholders' equity declined to 100.6 percent from 122.3 percent at December 31, 1997. In 1997 and 1996 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 has developed plans to address the year 2000 issue and is currently modifying or replacing critical computer systems to become year 2000 compliant. The Company's year 2000 plan includes both information technology (IT) systems and non-IT systems and a risk assessment of its major vendors and customers. Major vendors and customers were surveyed to determine their state of readiness and the potential implications they may have on the Company's business. Site visits are being planned for critical vendors and customers. Remediation and testing of critical business IT systems are currently in process and these systems are expected to be year 2000 compliant by June 30, 1999. The Company's most critical business system was replaced with year 2000 compliant software in the fourth quarter of 1998. Remediation and testing of non-IT systems will also continue, as necessary, during the first half of 1999. Based on current information available, the Company estimates that the cost to become year 2000 compliant will not be material. Incomplete or untimely resolution of the year 2000 issue by the Company or critically important customers or vendors could cause delays in the Company's ability to manufacture and ship its products, process transactions or engage in similar normal business activities, which would have a material financial impact on the Company's operations. With the implementation of its year 2000 plan, the Company believes the year 2000 issue should not pose any significant operational problems. The Company is developing contingency plans in order to minimize the potential disruption of business operations that may result if the Company, its vendors or customers fail to become year 2000 compliant. The contingency plans may include stockpiling or securing alternate sources of manufacturing supplies. 11 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 product 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 in the Form 8-Ks and in the quarterly Form 10-Qs), 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. 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: 1996 -- $1,372, 1997 -- $1,402 and 1998 -- $1,423 Pretax Margins: 1996 -- 54.3%, 1997 -- 50.2% and 1998 -- 51.6% Diluted Earnings Per Share: 1996 -- $2.44, 1997 -- $2.37 and 1998 -- $2.44 Tobacco Sales: 1996 -- $1,168, 1997 -- $1,182 and 1998 -- $1,246 Wine Sales: 1996 -- $122, 1997 -- $145 and 1998 -- $149 Other Sales: 1996 -- $82, 1997 -- $75 and 1998 -- $29 Net Cash Provided by Operating Activities: 1996 -- $439, 1997 -- $413 and 1998 -- $466 Return on Average Stockholders' Equity: 1996 -- 161.7%, 1997 -- 122.3% and 1998 -- 100.6% Total Debt to Stockholders' Equity: 1996 -- 88.9%, 1997 -- 25.2% and 1998 -- 21.4% Dividends Per Share: 1996 -- $1.48, 1997 -- $1.62 and 1998 -- $1.62 The following bar graph illustrates the relationship between net earnings and dividends paid: Net Earnings: 1996 -- $464, 1997 -- $439 and 1998 -- $455 Dividends Paid: 1996 -- $277, 1997 -- $298 and 1998 -- $301 A pie chart illustrating the percentage of capital expenditures by operating unit for 1996 -- 1998: Tobacco 54%, Wine 36% and Other 10%. 12 EXHIBIT 13 - (CONTINUED) (ITEMS 5 AND 8) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR -------- -------- -------- -------- ---------- 1998 Net sales.......................... $340,164 $357,390 $354,146 $371,546 $1,423,246 Gross profit....................... 272,296 288,285 285,313 293,836 1,139,730 Net earnings....................... 111,977 119,140 117,753 106,409 455,279 Basic earnings per share........... .60 .64 .63 .57 2.45 Diluted earnings per share......... .60 .64 .63 .57 2.44 Dividends per share................ .40 1/2 .40 1/2 .40 1/2 .40 1/2 1.62 Market price per share: High............................. 36 7/8 31 7/88 31 5/16 35 5/8 36 7/88 Low.............................. 31 7/8 24 9/16 25 5/16 28 5/8 24 9/16 ---------------------------------------------------------- 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 1/2 30 1/8 31 3/4 36 15/16 36 15/16 Low.............................. 26 3/4 25 1/2 26 1/8 28 1/8 25 1/28
- --------------- The first quarter of 1998 includes a pretax gain of $10.7 million (4 cents per diluted share) from the sale of certain commercial agricultural properties and the Company's video entertainment subsidiary. The first, third and fourth quarters of 1998 include pretax charges of $4.6 million, $3.1 million and $24 million (2 cents, 1 cent and 8 cents per diluted share), respectively, associated with the settlement of health care cost reimbursement litigation. (See Contingencies Note.) The first quarter of 1997 includes a pretax charge of $6.6 million (2 cents per diluted share) for the present value of future obligations arising under employment contracts with two former executive officers. The third quarter of 1997 includes a pretax charge of $3 million (1 cent per diluted share) resulting from the Company's settlement with the state of Florida regarding health care cost reimbursement litigation. The Company's shares trade on the New York Stock Exchange and the Pacific Exchange, ticker symbol -- UST. The number of stockholders of record at December 31, 1998 was 9,668. 13 EXHIBIT 13 -- (CONTINUED) (ITEM 8) UST CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- NET SALES.............................................. $1,423,246 $1,401,718 $1,371,705 COSTS AND EXPENSES Cost of products sold................................ 257,155 265,193 246,381 Excise taxes......................................... 26,361 26,749 26,375 Selling, advertising and administrative.............. 407,452 398,468 348,059 Interest (income) expense, net....................... (2,187) 7,451 6,364 ---------- ---------- ---------- TOTAL COSTS AND EXPENSES............................... 688,781 697,861 627,179 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES........................... 734,465 703,857 744,526 ---------- ---------- ---------- INCOME TAXES........................................... 279,186 264,719 280,527 ---------- ---------- ---------- NET EARNINGS........................................... $ 455,279 $ 439,138 $ 463,999 ========== ========== ========== NET EARNINGS PER SHARE Basic................................................ $2.45 $2.39 $2.48 Diluted.............................................. $2.44 $2.37 $2.44 AVERAGE NUMBER OF SHARES Basic................................................ 185,544 183,931 187,386 Diluted.............................................. 186,880 185,602 190,067
See Notes to Consolidated Financial Statements. 14 UST CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN THOUSANDS)
DECEMBER 31 ------------------------ 1998 1997 ---------- ---------- ASSETS Current assets Cash and cash equivalents................................. $ 33,210 $ 6,927 Accounts receivable....................................... 63,269 67,702 Inventories............................................... 372,634 319,666 Prepaid expenses and other current assets................. 24,653 31,753 Deferred income taxes..................................... 13,447 15,796 ---------- ---------- Total current assets................................... 507,213 441,844 ---------- ---------- Property, plant and equipment, net.......................... 338,695 326,709 Other assets................................................ 67,411 57,810 ---------- ---------- Total assets...................................... $ 913,319 $ 826,363 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term obligations.................................... $ -- $ 10,000 Accounts payable and accrued expenses..................... 156,699 119,345 Income taxes.............................................. 40,617 37,174 ---------- ---------- Total current liabilities......................... 197,316 166,519 ---------- ---------- Long-term debt.............................................. 100,000 100,000 Postretirement benefits other than pensions................. 78,567 73,868 Other liabilities........................................... 69,143 49,181 Contingencies (see note).................................... -- -- ---------- ---------- Total liabilities................................. 445,026 389,568 ---------- ---------- STOCKHOLDERS' EQUITY Capital stock............................................. 104,048 103,307 Additional paid-in capital................................ 512,089 474,661 Retained earnings......................................... 684,489 536,014 Accumulated other comprehensive loss...................... (18,420) (8,632) ---------- ---------- 1,282,206 1,105,350 Less cost of shares in treasury........................... 813,913 668,555 ---------- ---------- Total stockholders' equity........................ 468,293 436,795 ---------- ---------- Total liabilities and stockholders' equity........ $ 913,319 $ 826,363 ========== ==========
See Notes to Consolidated Financial Statements. 15 UST CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ----------------------------------- 1998 1997 1996 --------- --------- --------- OPERATING ACTIVITIES Net earnings........................................ $ 455,279 $ 439,138 $ 463,999 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization.................... 31,726 30,491 28,318 Deferred income taxes............................ 236 (8,779) 2,412 Prepayment of royalties.......................... -- (25,732) -- Write-down of production costs and prepaid assets......................................... -- 24,089 -- Gain on sale of property, plant and equipment.... (7,840) -- -- Gain on sale of a business....................... (2,820) -- -- Changes in operating assets and liabilities: Accounts receivable............................ (2,918) 8,430 (11,128) Inventories.................................... (57,087) (56,146) (18,494) Prepaid expenses and other assets.............. 2,084 (1,884) (9,576) Accounts payable, accrued expenses and other liabilities................................. 43,538 8,743 9,895 Income taxes payable........................... 3,443 (5,744) (26,038) --------- --------- --------- Net cash provided by operating activities... 465,641 412,606 439,388 --------- --------- --------- INVESTING ACTIVITIES Purchases of property, plant and equipment.......... (56,266) (58,159) (44,713) Dispositions of property, plant and equipment....... 20,749 2,409 7,964 Proceeds from the prepayment of royalties........... -- 25,732 -- Proceeds from the sale of businesses................ 20,152 -- 6,256 --------- --------- --------- Net cash used in investing activities....... (15,365) (30,018) (30,493) --------- --------- --------- FINANCING ACTIVITIES Proceeds from borrowings............................ -- 10,000 150,000 Repayment of borrowings............................. (10,000) (150,000) (100,000) Proceeds from the issuance of stock................. 38,769 53,665 41,215 Dividends paid...................................... (301,145) (298,059) (277,302) Stock repurchased................................... (151,617) (45,719) (237,759) --------- --------- --------- Net cash used in financing activities....... (423,993) (430,113) (423,846) --------- --------- --------- Increase (decrease) in cash and cash equivalents............................... 26,283 (47,525) (14,951) Cash and cash equivalents at beginning of year...................................... 6,927 54,452 69,403 --------- --------- --------- Cash and cash equivalents at end of year.... $ 33,210 $ 6,927 $ 54,452 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes..................................... $266,745 $268,158 $290,024 Interest......................................... 5,935 8,718 7,151
See Notes to Consolidated Financial Statements. 16 UST CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS LOSS STOCK EQUITY -------- ---------- --------- ------------- --------- ------------- Balance at December 31, 1995.............. $101,040 $373,935 $ 208,238 $ (5,355) $(385,077) $ 292,781 Comprehensive income: Net earnings............................ -- -- 463,999 -- -- 463,999 Other comprehensive loss, net of tax: Foreign currency translation adjustment.......................... -- -- -- (38) -- (38) Minimum pension liability adjustment.......................... -- -- -- (1,851) -- (1,851) --------- Other comprehensive loss................ (1,889) --------- Comprehensive income.................. 462,110 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 -------- -------- --------- -------- --------- --------- Balance at December 31, 1996.............. 102,077 414,274 394,935 (7,244) (622,836) 281,206 Comprehensive income: Net earnings............................ -- -- 439,138 -- -- 439,138 Other comprehensive loss, net of tax: Foreign currency translation adjustment.......................... -- -- -- (322) -- (322) Minimum pension liability adjustment.......................... -- -- -- (1,066) -- (1,066) --------- Other comprehensive loss................ (1,388) --------- Comprehensive income.................. 437,750 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 -------- -------- --------- -------- --------- --------- Balance at December 31, 1997.............. 103,307 474,661 536,014 (8,632) (668,555) 436,795 Comprehensive income: Net earnings............................ -- -- 455,279 -- -- 455,279 Other comprehensive loss, net of tax: Foreign currency translation adjustment.......................... -- -- -- (602) -- (602) Minimum pension liability adjustment.......................... -- -- -- (9,186) -- (9,186) --------- Other comprehensive loss................ (9,788) --------- Comprehensive income.................. 445,491 Cash dividends -- $1.62 per share......... -- -- (301,145) -- -- (301,145) Exercise of stock options -- 1,681,600 shares.................................. 841 29,759 -- -- -- 30,600 Income tax benefits, net of increase in receivables from exercise of stock options................................. -- 8,169 -- -- -- 8,169 Stock repurchased for treasury -- 4,383,500 shares............ -- -- -- -- (151,617) (151,617) Retirement of treasury stock -- 200,000 shares.................................. (100) (500) (5,659) -- 6,259 -- -------- -------- --------- -------- --------- --------- Balance at December 31, 1998.............. $104,048 $512,089 $ 684,489 $(18,420) $(813,913) $ 468,293 ======== ======== ========= ======== ========= =========
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. Prior year financial statements have been revised to conform to the 1998 presentation. REVENUE RECOGNITION Revenue from sales of smokeless tobacco products are recognized when title passes, which is when products are received by the customer. Revenue from sales of wine products are recognized when title passes to the customer, which is when products are shipped. CASH AND CASH EQUIVALENTS Cash equivalents are 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. Long-lived assets are reviewed for impairment whenever facts and circumstances indicate that the carrying amount may not be recoverable. 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 approximates their carrying value. STOCK OPTIONS 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 reporting for stock options. 18 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES Income taxes are provided on all revenue and expense items included in the Consolidated Statement of Earnings, regardless of the period in which such items are recognized for income tax purposes, adjusted for items representing permanent differences between pretax accounting income and taxable income. Deferred income taxes result from the future tax consequences associated with temporary differences between the carrying amounts of assets and liabilities for tax and financial reporting purposes. EARNINGS PER SHARE 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. INVENTORIES
DECEMBER 31 -------------------- 1998 1997 -------- -------- Leaf tobacco................................................ $178,078 $152,869 Products in process......................................... 110,752 96,314 Finished goods.............................................. 66,688 52,406 Other materials and supplies................................ 17,116 18,077 -------- -------- $372,634 $319,666 ======== ========
At December 31, 1998 and 1997, $150.3 million and $136.9 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 $50.9 million and $47.4 million, respectively. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31 -------------------- 1998 1997 -------- -------- Land........................................................ $ 22,828 $ 29,586 Buildings................................................... 234,559 224,889 Machinery and equipment..................................... 332,603 310,019 -------- -------- 589,990 564,494 Less allowances for depreciation............................ 251,295 237,785 -------- -------- $338,695 $326,709 ======== ========
Depreciation expense was $31.4 million for 1998, $30.1 million for 1997 and $28.1 million for 1996. The Company also leases certain property and equipment under various operating lease arrangements. Annual commitments under these leases, which average $4.3 million per year through the year 2003, extend through 2030 and total $37.1 million. Lease expense for the years 1998, 1997 and 1996 was $9.5 million, $6.4 million and $5.7 million, respectively. 19 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER ASSETS
DECEMBER 31 ------------------ 1998 1997 ------- ------- Prepaid pension costs....................................... $28,884 $27,947 Limited partnership investment.............................. 11,166 11,177 Deferred income taxes....................................... 9,178 1,795 Other....................................................... 18,183 16,891 ------- ------- $67,411 $57,810 ======= =======
The limited partnership investment owns and leases a cogeneration facility. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31 -------------------- 1998 1997 -------- -------- Trade accounts payable...................................... $ 37,281 $ 34,150 Employee compensation and benefits.......................... 57,415 58,192 Settlement charges.......................................... 18,703 -- Other accrued expenses...................................... 43,300 27,003 -------- -------- $156,699 $119,345 ======== ========
REVOLVING CREDIT AGREEMENTS The Company has two revolving credit agreements totaling $350 million with various 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 1998 in the amount of $87.5 million, which expires in November 1999. The Company may borrow funds and elect to pay interest under the "Base Rate," "Competitive Bid" or "Eurodollar" interest rate provisions of the agreements. 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. At December 31, 1998, the Company had $100 million outstanding under commercial paper borrowings, all of which 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, 1998 had a weighted-average interest rate of 5.9 percent. At December 31, 1997, the Company had $110 million outstanding under commercial paper borrowings, of which $100 million was classified as long-term debt. Commercial paper borrowings at December 31, 1997 had a weighted-average interest rate of 5.8 percent. OTHER LIABILITIES Other liabilities include the noncurrent portion of the pension liabilities at December 31, 1998 and 1997 of $65.1 million and $45.5 million, respectively. (See Employee Benefit and Compensation Plans Note.) In 1997, the Company had sold put options which entitled the holder to sell a specific number of shares of common stock to the Company at a predetermined price. The Company's put option program was suspended during 1997, and the Company had no liability or shares outstanding under its put option program at December 31, 1998 or 1997. 20 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 1998 and 1997, the Company repurchased 4.4 million and 1.5 million shares, respectively, 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, 1998, 6.4 million shares of the 20 million authorized have been repurchased. The Company had suspended its stock repurchase program from June 1997 through November 1998, due to the proposed resolution of regulatory and litigation issues affecting the tobacco industry. Common stock issued at December 31, 1998 and 1997 was 208,095,836 shares and 206,614,236 shares, respectively. Treasury shares held at December 31, 1998 and 1997 was 26,008,500 shares and 21,825,000 shares, respectively. In December 1998, the Board of Directors approved the Nonemployee Directors' Restricted Stock Award Plan. Under this Plan, up to 0.2 million shares of the Company's common stock may be granted to nonemployee directors in accordance with the provisions of the Plan, and accordingly, 0.2 million shares of the Company's treasury stock has been cancelled and reserved for use upon issuance of stock for this Plan. 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:
1998 1997 1996 -------- -------- -------- Net earnings: As reported.............................................. $455,279 $439,138 $463,999 Pro forma................................................ $449,445 $436,106 $461,059 Basic earnings per share: As reported.............................................. $2.45 $2.39 $2.48 Pro forma................................................ $2.42 $2.37 $2.46 Diluted earnings per share: As reported.............................................. $2.44 $2.37 $2.44 Pro forma................................................ $2.41 $2.35 $2.42
In accordance with the provisions of SFAS No. 123, the pro forma disclosures include only the effect of stock options granted since 1995. 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:
1998 1997 1996 --------- --------- --------- Expected dividend yield............................ 4.6% 4.4% 4.4% Risk-free interest rate............................ 5.6% 5.9% 6.6% Expected volatility................................ 22.0% 29.7% 18.0% 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 the exercise. At December 31, 1998, 1,712,200 shares were available for grant under the 1992 Stock Option Plan and 156,500 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 $10.6 million in 1998, $9.5 million in 1997 and $12.1 million in 1996 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:
1998 1997 1996 ----------------------------- ----------------------------- ----------------------------- 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............... 14,886,800 $26.78 15,782,600 $24.57 16,321,700 $22.20 Granted.............. 1,359,500 30.64 1,861,600 31.39 1,567,800 33.93 Exercised............ (1,681,600) 18.20 (2,459,500) 15.40 (2,075,500) 12.98 Forfeited............ (109,300) 31.81 (297,900) 32.45 (30,600) 29.61 Expired.............. (800) 7.69 -- -- (800) 4.23 ---------- ------ ---------- ------ ---------- ------ Outstanding at end of year............... 14,454,600 $28.10 14,886,800 $26.78 15,782,600 $24.57 ========== ====== ========== ====== ========== ====== Exercisable at end of year............... 11,637,500 $27.31 11,932,700 $25.49 13,020,600 $22.96 ========== ====== ========== ====== ========== ====== Weighted-average fair value of options granted during the year............... $ 5.42 $ 7.58 $ 5.95 ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 1998:
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 - --------------- ---------- ---------------- ---------------- ---------- ---------------- $13.78 -- 18.28 1,439,100 1.3 years $14.48 1,439,100 $14.48 24.19 -- 35.25 13,015,500 5.7 years 29.60 10,198,400 29.12 ---------- ---------- $13.78 -- 35.25 14,454,600 5.3 years $28.10 11,637,500 $27.31 ========== ====== ========== ======
EMPLOYEE BENEFIT AND COMPENSATION PLANS In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which changed the Company's reporting requirements for its pension and postretirement welfare benefit 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 and certain of its subsidiaries also 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. 23 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table represents a reconciliation of the plans at December 31:
DECEMBER 31 ------------------------------------------------ POSTRETIREMENT BENEFITS PENSION PLANS OTHER THAN PENSIONS -------------------- ------------------------ 1998 1997 1998 1997 -------- -------- ---------- ---------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year....... $284,164 $246,081 $ 59,951 $ 58,016 Service cost.................................. 10,195 8,744 3,349 2,857 Interest cost................................. 20,833 18,761 4,384 4,003 Plan participants' contributions.............. -- -- 71 99 Plan amendments............................... -- 102 -- -- Actuarial loss/(gain)......................... 42,063 24,377 9,481 (2,734) Benefits paid................................. (15,243) (13,901) (2,680) (2,290) -------- -------- -------- -------- Benefit obligation at end of year............. $342,012 $284,164 $ 74,556 $ 59,951 -------- -------- -------- -------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year....................................... $279,733 $242,230 -- -- Actual return on plan assets.................. 25,868 47,687 -- -- Employer contributions........................ 5,377 4,387 -- -- Benefits paid................................. (15,243) (13,901) -- -- Administrative expenses....................... (574) (670) -- -- -------- -------- -------- -------- Fair value of plan assets at end of year...... $295,161 $279,733 -- -- -------- -------- -------- -------- FUNDED STATUS Funded status at end of year.................. $(46,851) $ (4,431) $(74,556) $(59,951) Unrecognized actuarial loss/(gain)............ 36,567 (1,061) (3,684) (13,557) Unrecognized prior service cost............... (1,174) (1,287) (327) (360) Unrecognized transition obligation............ 21 (226) -- -- -------- -------- -------- -------- Accrued benefit cost.......................... $(11,437) $ (7,005) $(78,567) $(73,868) -------- -------- -------- -------- AMOUNTS RECOGNIZED IN THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION: Prepaid benefit cost.......................... $ 28,884 $ 27,947 $ -- $ -- Accrued benefit liability..................... (69,768) (49,561) (78,567) (73,868) Intangible asset.............................. 3,783 3,076 -- -- Accumulated other comprehensive loss.......... 25,664 11,533 -- -- -------- -------- -------- -------- Net amount recognized......................... $(11,437) $ (7,005) $(78,567) $(73,868) ======== ======== ======== ========
The weighted-average assumptions used for the year ended December 31 were:
POSTRETIREMENT BENEFITS PENSION PLANS OTHER THAN PENSIONS -------------------- ------------------------ 1998 1997 1998 1997 -------- -------- ---------- ---------- Discount rate................................... 6.50% 7.25% 6.50% 7.25% Expected return on plan assets.................. 8.75% 9.25% -- -- Rate of compensation increase................... 5.00% 5.00% -- --
The rate of increase in per capita costs of covered health care benefits is assumed to be 8.3 percent for 1999 and to decrease gradually to 4.5 percent by the year 2005 and remain at that level thereafter. 24 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic benefit cost for the year ended December 31 includes the following components:
POSTRETIREMENT BENEFITS PENSION PLANS OTHER THAN PENSIONS -------------------------------- -------------------------- 1998 1997 1996 1998 1997 1996 -------- -------- -------- ------ ------ ------ Service cost................... $ 10,195 $ 8,744 $ 8,594 $3,349 $2,857 $2,989 Interest cost.................. 20,833 18,761 17,098 4,384 4,003 4,162 Expected return on plan assets....................... (23,036) (21,110) (19,608) -- -- -- Amortization of unrecognized transition obligation........ (247) (247) (247) -- -- -- Amortization of prior service cost......................... (113) (133) (142) (33) (33) -- Recognized actuarial loss/(gain).................. 2,176 1,254 1,192 (392) (747) (190) -------- -------- -------- ------ ------ ------ Net periodic benefit cost...... $ 9,808 $ 7,269 $ 6,887 $7,308 $6,080 $6,961 ======== ======== ======== ====== ====== ======
The projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $82.4 million, $72.8 million and $5 million, respectively, as of December 31, 1998, and $63.4 million, $51.4 million and $4 million, respectively, as of December 31, 1997. The assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. To illustrate, a one-percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1998 by approximately $11 million and increase the service and interest cost components of expense by approximately $1.4 million. A one-percentage point decrease in the assumed health care trend rate would have decreased the accumulated postretirement benefit obligation at December 31, 1998 by approximately $9.2 million and decreased the service and interest components of expense by approximately $1.2 million. Plan assets of the Company's pension plans include marketable equity securities, including common stock of the Company, and corporate and government debt securities. At December 31, 1998 and 1997, the fund held 1.3 million shares of the Company's common stock having a market value of $44.6 million as of December 31, 1998 and $47.3 million as of December 31, 1997. Dividends paid on shares held by the fund were $2.1 million in 1998 and 1997. 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 $4.4 million in 1998, $4 million in 1997 and $3.9 million in 1996. 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 $38.5 million in 1998, $36.9 million in 1997 and $39 million in 1996. 25 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES The income tax provision (benefit) consists of the following:
1998 1997 1996 -------- -------- -------- Current: Federal.......................................... $247,526 $247,224 $245,386 State and local.................................. 31,424 26,274 32,729 -------- -------- -------- Total current............................ 278,950 273,498 278,115 -------- -------- -------- Deferred: Federal.......................................... 346 (6,807) 1,927 State and local.................................. (110) (1,972) 485 -------- -------- -------- Total deferred........................... 236 (8,779) 2,412 -------- -------- -------- $279,186 $264,719 $280,527 ======== ======== ========
The 1998, 1997 and 1996 current tax provisions reflect the reversal of certain 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 $9.3 million, $13.4 million and $14.5 million for 1998, 1997 and 1996, 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 1998, 1997 and 1996 do not reflect the tax effects resulting from the additional minimum pension liability adjustments required by SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 52, "Foreign Currency Translation." 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:
1998 1997 ------- ------- Deferred tax assets: Postretirement benefits other than pensions............... $27,498 $25,854 Other accrued liabilities................................. 24,747 28,629 Accrued pension liabilities............................... 24,419 17,346 All other, net............................................ 5,235 4,633 ------- ------- Total deferred tax assets......................... 81,899 76,462 ------- ------- Deferred tax liabilities: Depreciation.............................................. 42,798 41,593 Investment in limited partnerships........................ 6,367 7,497 Prepaid pension assets.................................... 10,109 9,781 ------- ------- Total deferred tax liabilities.................... 59,274 58,871 ------- ------- Net deferred tax assets..................................... $22,625 $17,591 ======= =======
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:
1998 1997 1996 ----- ----- ----- U.S. federal statutory income tax rate...................... 35.0% 35.0% 35.0% State and local taxes, net of federal benefit............... 2.8 2.2 2.9 Other, net.................................................. .2 .4 (.2) ----- ----- ----- 38.0% 37.6% 37.7% ===== ===== =====
ADVERTISING COSTS The Company expenses the production costs of advertising in the period in which they are incurred. Advertising expenses were $68.7 million in 1998, $75.7 million in 1997 and $66 million in 1996. At December 31, 1998 and 1997, $5 million and $8.2 million, respectively, of advertising related costs are included in prepaid expenses and other current assets. INTEREST (INCOME) EXPENSE, NET Interest (income) expense, net, is comprised of income from cash equivalents and capitalized interest and expense associated with short-term obligations and long-term debt.
1998 1997 1996 ------- ------- ------ Income from cash equivalents........................... $(6,602) $ (951) $ (921) Capitalized interest................................... (1,119) (342) -- ------- ------- ------ (7,721) (1,293) (921) ------- ------- ------ Short-term obligations................................. 16 3,112 1,853 Long-term debt......................................... 5,518 5,632 5,432 ------- ------- ------ $(2,187) $ 7,451 $6,364 ======= ======= ======
ACCUMULATED OTHER COMPREHENSIVE LOSS In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes rules for the reporting of comprehensive income and its components. The main components of comprehensive income that relate to the Company are net earnings, foreign currency translation adjustments, and additional minimum pension liability adjustments, all of which are presented in the Consolidated Statement of Changes in Stockholders' Equity. Prior to adoption, the pension adjustment was included in stockholders' equity and the translation adjustment was included in other assets. The Consolidated Statements of Financial Position and Changes in Stockholders' Equity have been revised to conform to the requirements of SFAS No. 130. 27 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accumulated other comprehensive loss consists of the following components, net of taxes:
FOREIGN MINIMUM CURRENCY PENSION TRANSLATION LIABILITY ADJUSTMENT ADJUSTMENT ----------- ---------- Balance at December 31, 1995................................ $ (776) $ (4,579) Net change for the year................................... (38) (1,851) ------- -------- Balance at December 31, 1996................................ (814) (6,430) Net change for the year................................... (322) (1,066) ------- -------- Balance at December 31, 1997................................ (1,136) (7,496) Net change for the year................................... (602) (9,186) ------- -------- Balance at December 31, 1998................................ $(1,738) $(16,682) ======= ========
The net change for the year in foreign currency translation adjustment is reflected net of tax benefits of $.3 million, $.2 million and $.02 million in 1998, 1997 and 1996, respectively. The net change for the year in minimum pension liability adjustment is reflected net of tax benefits of $4.9 million, $.6 million and $1 million in 1998, 1997 and 1996, respectively. EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share:
1998 1997 1996 -------- -------- -------- Numerator: Net earnings..................................... $455,279 $439,138 $463,999 ======== ======== ======== Denominator: Denominator for basic earnings per share -- 185,544 183,931 187,386 weighted-average shares....................... Dilutive effect of employee stock options.......... 1,336 1,671 2,681 -------- -------- -------- Denominator for diluted earnings per share....... 186,880 185,602 190,067 ======== ======== ======== Basic earnings per share........................... $2.45 $2.39 $2.48 Diluted earnings per share......................... $2.44 $2.37 $2.44
Options to purchase 2.2 million shares, 2.3 million shares and 1.9 million shares of common stock, outstanding as of December 31, 1998, 1997 and 1996, 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. SEGMENT INFORMATION In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which changed the method the Company uses in reporting information about its operating segments. As a result of the adoption, segment information for 1997 and 1996 has been restated to conform to the 1998 presentation. The Company's reportable segments are Tobacco and Wine. The Company operates predominantly in the tobacco industry as a producer of moist smokeless tobacco products. The Company also produces and markets premium wines. Those business units that do not meet quantitative reportable thresholds are included in the all other category. This category is comprised of the international operations, cigar operations and discontinued businesses and product lines. Tobacco segment sales are principally to a large number of 28 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) wholesalers and chain stores which are widely dispersed. In 1998, net sales to one customer accounted for approximately 23 percent of Tobacco segment net sales. The Company operates primarily in the United States; foreign operations and export sales are not significant. Net sales and operating profit are reflected net of intersegment sales and profits. Operating profit is revenue less operating expenses and an allocation of corporate expenses. Tobacco settlement charges for both 1998 and 1997 are included in the operating results for the Tobacco segment. Included in the operating results for all other operations in 1998 are the gains on the sale of certain commercial agricultural properties and the video entertainment subsidiary and 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. Corporate assets consist primarily of cash and cash equivalents and other long-term investments. Corporate capital expenditures and depreciation expense include amounts which have been allocated to each reportable segment and all other operations for purposes of reporting operating profit and identifiable assets. Consolidated Segment Information appears on page 23. CONTINGENCIES The Company and/or its subsidiary, United States Tobacco Company (hereinafter "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 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. On November 23, 1998, the Company entered into a Smokeless Tobacco Master Settlement Agreement (the "Settlement Agreement") with attorneys general of various states and U.S. territories to resolve the remaining health care cost reimbursement cases initiated against the Company. The Settlement Agreement requires the Company to adopt various marketing and advertising restrictions and make payments expected to total between $100 and approximately $200 million over ten years -- depending on various factors -- for programs to reduce youth usage of tobacco and combat youth substance abuse and for enforcement purposes. Included in 1998 results is a charge of $15.3 million relating to the Settlement Agreement, which represents $4.3 million to fund the States' Anti-Trust/Consumer Protection Tobacco Enforcement Fund, $5 million for attorneys' fees for outside counsel retained by the settling states and $6 million for the first on-going payment due in March 1999 based on 1998 shipments. Also included in 1998 results is a charge of $16.4 million resulting from the Company's portion of the funding for pilot programs, primarily to reduce youth access to tobacco products, and attorneys' fees and other costs associated with the settlement of health care cost reimbursement litigation initiated on behalf of the states of Florida, Texas and Washington. 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. The Company is 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" 29 UST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) alleging that his use of the Company's smokeless products "resulted in his addiction to nicotine, increased use of Defendant's products and gum deterioration." The Company is named in an action in North Carolina seeking unspecified damages brought by an individual plaintiff who alleges that he developed bladder cancer as a result of his usage of smokeless tobacco manufactured by the Company. The Company is named in an action in San Francisco, California along with other smokeless tobacco manufacturers and others seeking unspecified damages and other relief brought by the City and County of San Francisco and the Environmental Law Foundation purportedly on behalf of "the residents of San Francisco County and the general public" alleging violation of The Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code sec.sec.25249.6, et seq. ("Proposition 65") and the California Unfair Competition Act, Business and Professions Code sec.sec.17200, et seq. The action alleges, among other things, that the defendants sold smokeless tobacco products in California without providing a ". . . 'clear and reasonable' warning that their use results in multiple exposures to substances known to the State of California to cause cancer, birth defects and reproductive harm." The Company is named in an action in Kentucky seeking injunctive relief, more than $400 million in "actual damages" before trebling and punitive damages brought by one of the Company's competitors alleging that certain actions and practices of the Company violate federal antitrust and advertising laws in connection with the marketing and sale of its moist snuff brands and also alleges various violations of tort and state law. 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 willingness to consider alternative solutions for resolving certain regulatory and litigation issues, all such cases are, and will continue to be, vigorously defended, and the Company believes that the ultimate outcome of all such pending litigation will not have a material adverse effect on the consolidated financial position of the Company, but may have a material impact on the Company's consolidated financial results for a particular reporting period in which resolved. 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 Company 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 smokeless tobacco as "medical devices" and implementing certain labeling and access restrictions. The court, granting the Company'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." On August 14, 1998, the Fourth Circuit Court of Appeals ruled in favor of the Company and other tobacco product manufacturers stating that FDA lacks jurisdiction to regulate tobacco products and that all of the regulations published by FDA on August 28, 1996 are invalid. On January 19, 1999, FDA filed a petition for certiorari seeking review of the Fourth Circuit's ruling by the United States Supreme Court. 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. 30 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Stamford, Connecticut February 8, 1999 ERNST & YOUNG LLP EX-21 4 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, 1998:
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 5 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 8, 1999, included in the 1998 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 8, 1999, 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, 1998. Stamford, Connecticut March 12, 1999 ERNST & YOUNG LLP EX-27.1 6 FINANCIAL DATA SCHEDULE FOR 1998
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-31-1998 JAN-01-1998 DEC-31-1998 33,210 0 63,269 0 372,634 507,213 589,990 251,295 913,319 197,316 100,000 0 0 104,048 364,245 913,319 1,423,246 1,423,246 283,516 283,516 0 0 (2,187) 734,465 279,186 455,279 0 0 0 455,279 2.45 2.44 Note: Item number 5-03(b)(20) amounts for earnings per share of $2.45 and $2.44 represent earnings per share -- basic and earnings per share -- diluted, respectively.
EX-27.2 7 RESTATED FINANCIAL DATA SCHEDULES FOR 97,96 & 95
5 This schedule contains restated 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 YEAR YEAR DEC-31-1997 DEC-31-1996 DEC-31-1995 JAN-01-1997 JAN-01-1996 JAN-01-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 6,927 54,452 69,403 0 0 0 67,702 77,855 69,598 0 0 0 319,666 271,425 256,101 441,844 450,570 425,555 564,494 514,313 492,165 237,785 213,428 197,359 826,363 806,577 783,976 166,519 306,553 280,723 100,000 100,000 100,000 0 0 0 0 0 0 103,307 102,077 101,040 333,488 179,129 191,741 826,363 806,577 783,976 1,401,718 1,371,705 1,305,796 1,401,718 1,371,705 1,305,796 291,942 272,756 262,203 291,942 272,756 262,203 0 0 0 0 0 0 7,451 6,364 3,179 703,857 744,526 704,590 264,719 280,527 274,830 439,138 463,999 429,760 0 0 0 0 0 0 0 0 0 439,138 463,999 429,760 2.39 2.48 2.21 2.37 2.44 2.17
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