Annual Report (Form 10-K), fiscal year 1994

ITEM 1 -- BUSINESS
GENERAL
UST Inc. was formed on December 23, 1986 as a Delaware corporation. Pursuant to a reorganization approved by stockholders at the 1987 Annual Meeting, United States Tobacco Company (originally incorporated in 1911) became a wholly owned subsidiary of UST Inc. on May 5, 1987. UST Inc., through its subsidiaries (collectively "Registrant" unless the context otherwise requires), is engaged in manufacturing and marketing consumer products in the following industry segments:
Tobacco Products: Registrant's primary activities are manufacturing and marketing smokeless tobacco (snuff and chewing tobacco) and marketing other tobacco products.
Wine: Registrant produces and markets wine.
Other: The international and video entertainment operations as well as certain miscellaneous businesses are included in this segment. Registrant also produces or imports and markets certain other products such as smokers' accessories and operates certain commercial agricultural properties.
INDUSTRY SEGMENT DATA
Registrant hereby incorporates by reference the Consolidated Industry Segment Data pertaining to the years 1992 through 1994 set forth on page 32 of its Annual Report to stockholders for the fiscal year ended December 31, 1994 ("Annual Report"), which page is included as Exhibit 13.1.
TOBACCO PRODUCTS
PRINCIPAL PRODUCTS
Registrant's principal smokeless tobacco products and brand names are as follows:
Moist -- COPENHAGEN, SKOAL LONG CUT, SKOAL, SKOAL BANDITS
Dry -- BRUTON, CC, RED SEAL
Chewing -- WB CUT
It has been claimed that the use of tobacco products may be harmful to health. To the best of Registrant's knowledge, unresolved controversy continues to exist among scientists concerning the claims made about tobacco and health. In 1986, federal legislation was enacted regulating smokeless tobacco products by, inter alia, requiring health warning notices on smokeless tobacco packages and advertising and prohibiting the advertising of smokeless tobacco products on electronic media. A federal excise tax was imposed in 1986, which was increased in 1991 and 1993. The Health Security Act announced by the Clinton Administration in 1993 sought, inter alia, a significant federal excise tax increase on moist smokeless and other tobacco products. Also, in recent years, proposals have been made at the federal level for additional regulation of tobacco products including, inter alia, the requirement of additional warning notices, the disallowance of advertising and promotion expenses as deductions under federal tax law, a significant increase of federal excise taxes, a ban or further restriction of all advertising and promotion, regulation of environmental tobacco smoke and increased regulation of the manufacturing and marketing of tobacco products by new or existing federal agencies. Substantially similar proposals will likely be considered in 1995. In recent years, various state and local governments continued the regulation of tobacco products, including, inter alia, the imposition of significantly higher taxes, sampling and advertising bans or restrictions, regulation of environmental tobacco smoke and anti-tobacco advertising campaigns. Additional state and local legislative and regulatory actions will likely be considered in 1995. Registrant is unable to assess the future effects these various actions may have on its tobacco business.
RAW MATERIALS
Except as noted below, raw materials essential to Registrant's business are generally purchased in domestic markets under competitive conditions.
In 1994, Registrant increased its purchases of dark fired, burley and dark air cured tobaccos ("tobacco") primarily from domestic sources. In 1994 purchases from foreign suppliers declined, and continued to decline as a percentage of total tobacco purchased. Such foreign suppliers were located in Canada and Italy. Various factors, including a failure of domestic tobacco production to continue to increase, may require Registrant to purchase additional amounts of tobacco from foreign sources in order to meet future requirements. Tobaccos used in the manufacture of smokeless tobacco products must be processed and aged by Registrant for a period of two to four years prior to their use.
Registrant or its suppliers purchase certain flavoring components used in Registrant's tobacco products from foreign sources.
At the present time, Registrant has no reason to believe that its future raw material requirements for its tobacco products will not be satisfied. However, the continuing availability and the cost of tobacco from both domestic and foreign sources is dependent upon a variety of factors which cannot be predicted, including weather, growing conditions, disease, local planting decisions, overall market demands and other factors.
WORKING CAPITAL
The principal portion of Registrant's operating cash requirements relates to its need to maintain significant inventories of leaf tobacco, primarily for manufacturing of smokeless tobacco products, and its need to age and cure certain of these tobaccos for periods of up to four years prior to use.
CUSTOMERS
Registrant markets tobacco products throughout the United States principally to chain stores and tobacco and grocery wholesalers. Approximately 31% of Registrant's gross sales of tobacco products are made to five customers, one of which accounts for more than 10% of Registrant's consolidated revenue. Registrant has maintained satisfactory relationships with these customers for many years.
COMPETITIVE CONDITIONS
The tobacco manufacturing industry in the United States is composed of at least four domestic companies larger than Registrant and many smaller ones. The larger companies concentrate on the manufacture and marketing of cigarettes; one also manufactures and markets smokeless tobacco products. Registrant is a well established and major factor in the smokeless tobacco sector of the overall tobacco market. Consequently, Registrant competes actively with both larger and smaller companies in the marketing of its tobacco products. Registrant's principal methods of competition in the marketing of its tobacco products include quality, advertising, promotion, sampling, price, product recognition and distribution.
WINE
Registrant is an established producer of premium varietal and blended wines. CHATEAU STE. MICHELLE and COLUMBIA CREST varietal table wines and DOMAINE STE. MICHELLE sparkling wine are produced by Registrant in the state of Washington and marketed throughout the United States. Registrant also produces and markets two California premium wines under the labels of VILLA MT. EDEN and CONN CREEK. Approximately 49% of Registrant's wine sales are made to nine distributors, no one of which accounts for more than 22% of total wine sales. Substantially all wines are sold through state-licensed distributors with whom Registrant maintains satisfactory relationships.
It has been claimed that the use of alcohol beverages may be harmful to health. To the best of Registrant's knowledge, unresolved controversy continues to exist among scientists concerning the claims made about alcohol beverages and health. In 1988, federal legislation was enacted regulating alcohol beverages by requiring health warning notices on alcohol beverages. Effective in 1991, the federal excise tax on wine was increased from $.17 a gallon to $1.07 a gallon for those manufacturers that produce more than 250,000 gallons a year, such as Registrant. In recent years at the federal level, proposals were made for additional regulation of alcohol beverages including, inter alia, an excise tax increase, modification of the required health warning notices and the regulation of labeling, advertising and packaging. Substantially similar proposals will likely be considered in 1995. Also in recent years, increased regulation of alcohol beverages by various states included, inter alia, the imposition of higher taxes, the requirement of health warning notices and the regulation of advertising and packaging. Additional state and local legislative and regulatory actions affecting the marketing of alcohol beverages will likely be considered during 1995. Registrant is unable to assess the future effects these regulatory and other actions may have on the sale of its wines.
Registrant uses grapes harvested from its own vineyards, as well as grapes purchased from independent growers located primarily in Washington State. Grape harvest yields experienced by Registrant and throughout Washington State in 1994 continue to be adequate to meet requirements for premium varietal wines. From time to time adverse weather conditions have significantly affected grape harvests from Washington State. Should any vineyards be destroyed as a result of such conditions, new vineyards generally require five to six years to provide full yields. At the present time, Registrant has no reason to believe that its future raw material requirements for its wine products will not be satisfied.
Registrant's principal competition comes from many larger, well-established national companies, as well as many smaller wine producers. Registrant's principal methods of competition include quality, price, consumer and trade wine tastings, competitive wine judging and advertising. Registrant is a minor factor in the total nationwide business of producing wines.
Registrant concentrates its marketing efforts on premium varietal table wines and sparkling wines. The future of Registrant's wine business will be dependent on sales, price and volume growth for premium varietal wines, the success of new products and adequate grape harvest yields from Washington State.
OTHER
Included in this segment for 1994 are the international operations, video entertainment business, pipes, smokers' accessories, agricultural properties and a majority interest in a company that develops and markets equipment used in filmmaking. None of the above, singly, constitutes a material portion of Registrant's operations.
ADDITIONAL BUSINESS INFORMATION
CUSTOMERS
In 1994 sales to McLane Co. Inc., a national distributor, exceeded 10% of Registrant's consolidated revenue.
ENVIRONMENTAL REGULATIONS
Registrant does not believe that compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material effect upon the capital expenditures, earnings or competitive position of Registrant.
NUMBER OF EMPLOYEES
Registrant's average number of employees during 1994 was 3,817.
TRADEMARKS
Registrant markets consumer products under a large number of trademarks. All of the significant trademarks either have been registered or applications therefor are pending with the United States Patent and Trademark Office.
SEASONAL BUSINESS
No material portion of the business of any industry segment of Registrant is seasonal.
ORDERS
Backlog of orders is not a material factor in any industry segment of Registrant.
ITEM 2



ITEM 2 -- PROPERTIES
Set forth below is information concerning principal facilities and real properties of Registrant.
Such principal properties in Registrant's industry segments were utilized only in connection with Registrant's business operations. Registrant believes that the above properties at December 31, 1994 were suitable and adequate for the purposes for which they were used, and were operated at satisfactory levels of capacity.
All principal properties are owned in fee by Registrant.
ITEM 3

ITEM 3 -- LEGAL PROCEEDINGS
Registrant has been named in certain litigation against the major cigarette companies and others seeking damages relating to the usage of cigarettes and, in certain of the complaints, "tobacco products", one of which contains several allegations relating to smokeless tobacco products, including:
-- Norma R. Broin, et al. v. Philip Morris Companies, Inc. et al., Case No.: 91-49738 CA (22), Circuit Court, 11th Judicial Circuit, Dade County, Florida, served on or about January 17, 1992. Purported class action on behalf of flight attendants seeking $5 billion in punitive damages and unspecified compensatory damages as a result of exposure to environmental tobacco smoke on airplanes; on December 12, 1994, the Circuit Court entered an order granting certification of the class, which defendants have appealed.
-- John G. Allman, et al. v. Philip Morris, Inc., et al., Case No.: 94-0504-IEG (CM), U.S. District Court, Southern District of California, served on or about April 6, 1994. Purported class action on behalf of persons who have smoked defendants' cigarettes, became "addicted" and purchased, or would be purchasing in the future, nicotine patches, seeking unspecified damages for various alleged violations including allegations of a conspiracy to withhold information about the claimed effects of cigarette smoking; the court has dismissed with prejudice the plaintiffs' complaint and the parties to this action have entered into a stipulation dismissing with prejudice plaintiffs' appeal of this decision.
-- Diane Castano, et al. v. The American Tobacco Company, Inc., et al., Case No.: 94-1044 "B" (3), U.S. District Court, Eastern District of Louisiana, served on or about May 12, 1994. Purported class action on behalf of "nicotine dependent" persons who have smoked defendants' cigarettes, seeking unspecified damages as a result of defendants' alleged manipulation of the levels of nicotine in their cigarettes for the purpose of "addicting" consumers. On February 17, 1995, the Court entered an order granting certification of the class "only in regard to the liability issues of fraud, breach of warranty (express or implied), intentional tort, negligence, strict liability and consumer protection and punitive damages issues." The Court denied certification of the class in regard to the issues of injury-in-fact, proximate cause, reliance, affirmative defenses, compensatory damages and medical monitoring.
-- McGraw v. The American Tobacco Company, et al., Civil Action No. 94-1707, Circuit Court of Kanawha County, West Virginia, served on or about November 1, 1994. Action purportedly on behalf of the State of West Virginia seeking unspecified damages and other relief as reimbursement for amounts allegedly spent by the state as a result of "tobacco-related injuries, diseases or sickness"; several allegations relate to smokeless tobacco products.
Except for the Allman action which has been dismissed with prejudice, each of these actions is in varying stages of pretrial activities.
Registrant believes that these pending litigation matters will not result in any material liability for a number of reasons, including the fact that Registrant has had only limited involvement with cigarettes and Registrant's current percentage of total tobacco industry sales is relatively small. Prior to 1986, Registrant manufactured some cigarette products which had a de minimis market share. From May 1, 1982 to August 1, 1994, Registrant distributed a small volume of imported cigarettes and is indemnified against claims relating to those products.
Registrant also believes that these actions are without merit and intends to defend them vigorously.
ITEM 4

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to instruction 3 to Item 401(b) of Regulation S-K, the name, office, age and business experience of each executive officer of Registrant as of February 15, 1995 is set forth below:
None of the executive officers of Registrant has any family relationship to any other executive officer or director of Registrant.
After election, all executive officers serve until the next annual organization meeting of the Board of Directors and until their successors are elected and qualified.
All of the executive officers of Registrant have been employed continuously by it for more than five years except for Mr. Barrett.
Mr. Barrett has served as Executive Vice President since October 7, 1991. He also has served as President of UST Enterprises Inc. since July 1, 1991. Mr. Barrett served as Senior Vice President from January 1, 1991 to October 6, 1991, and served as a member of the Board of Directors from July 27, 1989 through December 13, 1990. Mr. Barrett served as President of Barrett Consultants, a public and government relations firm which he founded in 1980. Mr. Barrett has been employed by Registrant since January 1, 1991.
Mr. Bucchignano has served as Executive Vice President and Chief Financial Officer since October 7, 1991. Mr. Bucchignano served as Senior Vice President and Controller from September 27, 1990 to October 6, 1991, and as Controller from August 1, 1987 to September 26, 1990. Mr. Bucchignano has been employed by Registrant since December 10, 1984.
Mr. Gierer has served as Chairman of the Board and Chief Executive Officer since December 1, 1993 and has served as President since September 27, 1990. Mr. Gierer also served as Chief Operating Officer from September 27, 1990 to November 30, 1993 and as Executive Vice President and Chief Financial Officer from February 17, 1988 to September 26, 1990. Mr. Gierer has been employed by Registrant since March 16, 1978.
Mr. Peter has served as Executive Vice President since October 29, 1990. He also has served as President of UST International Inc. since January 1, 1993. Mr. Peter served as Senior Vice President from July 27, 1989 to October 28, 1990 and as Vice President from June 23, 1988 to July 26, 1989. Mr. Peter has been employed by Registrant since February 1, 1988.
Mr. Taddeo has served as Executive Vice President and President of United States Tobacco Company since September 27, 1990. Mr. Taddeo also served as Senior Vice President of United States Tobacco Company from June 23, 1988 to September 26, 1990. Mr. Taddeo has been employed by Registrant since March 29, 1982.
Mr. Verheij has served as Senior Vice President and General Counsel since December 1, 1994. Mr. Verheij served as Senior Vice President and Associate General Counsel from April 4, 1994 to November 30, 1994, as Vice President and Associate General Counsel from December 17, 1992 to April 3, 1994, as Assistant General Counsel from January 1, 1991 to December 16, 1992 and as Senior Corporate Counsel from October 1, 1988 to December 31, 1990. Mr. Verheij has been employed by Registrant since November 24, 1986.
PART II
ITEM 5

ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Registrant hereby incorporates by reference the information with respect to the market for its common stock, $.50 par value ("Common Stock"), and related security holder matters set forth on pages 30 and 31 of its Annual Report, which pages are included herein as Exhibit 13.2. Registrant's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange. As of February 15, 1995, there were approximately 13,065 stockholders of record of its Common Stock.
ITEM 6

ITEM 6 -- SELECTED FINANCIAL DATA
Registrant hereby incorporates by reference the Consolidated Selected Financial Data set forth on pages 46 and 47 of its Annual Report, which pages are included herein as Exhibit 13.3.
ITEM 7

ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Registrant hereby incorporates by reference the Management's Discussion and Analysis of Results of Operations and Financial Condition set forth on pages 24-31 of its Annual Report, which pages are included herein as Exhibit 13.4.
ITEM 8


ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Registrant hereby incorporates by reference the information contained in the financial statements, including the notes thereto set forth on pages 32-45 of its Annual Report, which pages are included herein as Exhibit 13.5.
ITEM 9

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10



ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Registrant hereby incorporates by reference the information with respect to the names, ages and business histories of the directors of Registrant which is contained in Table I and the accompanying text set forth under the caption "Election of Directors" in its Notice of 1995 Annual Meeting and Proxy Statement. Information concerning executive officers of Registrant is set forth above following Item 4 of this Report.
ITEM 11

ITEM 11 -- EXECUTIVE COMPENSATION
Registrant hereby incorporates by reference the information with respect to executive compensation which is contained in Tables II through V (including the notes thereto) and the accompanying text set forth under the caption "Compensation of Executive Officers" in its Notice of 1995 Annual Meeting and Proxy Statement.
ITEM 12

ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Registrant hereby incorporates by reference the information with respect to the security ownership of management which is contained in Table I and the accompanying text set forth under the caption "Election of Directors" in its Notice of 1995 Annual Meeting and Proxy Statement.
ITEM 13

ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Registrant hereby incorporates by reference certain transactions with directors and information with respect to indebtedness of management which is contained in Table VI and the accompanying text set forth under the caption "Compensation of Executive Officers" in its Notice of 1995 Annual Meeting and Proxy Statement.
PART IV
ITEM 14

ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report:
(3) The following exhibits are filed by Registrant pursuant to Item 601 of Regulation S-K:
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K -- (CONTINUED)
(b) No current reports on Form 8-K were filed during the fourth quarter of Registrant's most recent fiscal year.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of the rules governing the preparation of this Report.
SIGNATURE PAGE
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
UST Inc. Date: February 16, 1995 By: VINCENT A. GIERER, JR. ---------------------------------- VINCENT A. GIERER, JR. CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
EXHIBIT INDEX
* 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.