Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2008
OR
     
o   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 incorporation or organization)   (I.R.S. Employer Identification No.)
     
6 High Ridge Park, Building A, Stamford, Connecticut   06905
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (203) 817-3000
 
 
(Former name, former address and former fiscal year, if changed since last report.)
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 þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Number of Common Shares ($.50 par value) outstanding at October 24, 2008 148,394,153
 
 

 

 


 

UST Inc.
(the “Registrant” or the “Company”)
INDEX
         
    Page No.  
 
       
       
 
       
       
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    26  
 
       
    59  
 
       
    60  
 
       
       
 
       
    61  
 
       
    61  
 
       
    62  
 
       
    63  
 
       
    64  
 
       
 Exhibit 10.1
 Exhibit 10.2
 Exhibit 10.3
 Exhibit 10.4
 Exhibit 10.5
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32

 

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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands, except per share data)
                 
    September 30, 2008     December 31, 2007  
    (Unaudited)     (Note)  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 29,501     $ 73,697  
Accounts receivable
    64,406       60,318  
Inventories
               
Leaf tobacco
    163,159       202,137  
Products in process
    205,879       258,814  
Finished goods
    196,438       163,247  
Other materials and supplies
    23,014       22,365  
 
           
Total inventories
    588,490       646,563  
Deferred income taxes
    22,743       26,737  
Income taxes receivable
    7,848       8,663  
Assets held for sale
    25,047        
Prepaid expenses and other current assets
    30,673       30,296  
 
           
Total current assets
    768,708       846,274  
Property, plant and equipment, net
    486,280       505,101  
Deferred income taxes
    45,397       35,972  
Goodwill
    28,093       28,304  
Intangible assets, net
    55,385       56,221  
Other assets
    18,325       15,206  
 
           
Total assets
  $ 1,402,188     $ 1,487,078  
 
           
 
               
Liabilities and stockholders’ deficit
               
Current liabilities:
               
Short-term borrowings
  $ 40,000     $  
Current portion of long-term debt
    240,000        
Accounts payable and accrued expenses
    228,574       321,256  
Litigation liability
    23,380       75,360  
 
           
Total current liabilities
    531,954       396,616  
Long-term debt
    900,000       1,090,000  
Postretirement benefits other than pensions
    86,235       81,668  
Pensions
    165,781       150,318  
Income taxes payable
    28,519       38,510  
Other liabilities
    15,268       20,162  
 
           
Total liabilities
    1,727,757       1,777,274  
Contingencies (see Note 14)
               
 
               
Minority interest and put arrangement
    30,504       30,006  
 
               
Stockholders’ deficit:
               
Capital stock (1)
    106,187       105,635  
Additional paid-in capital
    1,153,190       1,096,923  
Retained earnings
    883,418       773,829  
Accumulated other comprehensive loss
    (48,633 )     (45,083 )
 
           
 
    2,094,162       1,931,304  
Less treasury stock (2)
    2,450,235       2,251,506  
 
           
Total stockholders’ deficit
    (356,073 )     (320,202 )
 
           
Total liabilities and stockholders’ deficit
  $ 1,402,188     $ 1,487,078  
 
           
     
(1)  
Common Stock par value $.50 per share: Authorized — 600 million shares; Issued — 212,373,904 shares at September 30, 2008 and 211,269,622 shares at December 31, 2007. Preferred Stock par value $.10 per share: Authorized — 10 million shares; Issued — None.
 
(2)  
64,016,506 shares and 60,332,966 shares of treasury stock at September 30, 2008 and December 31, 2007, respectively.
 
Note:  
The Condensed Consolidated Statement of Financial Position at December 31, 2007 has been derived from the audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.

 

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UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Net sales
  $ 484,631     $ 479,612     $ 1,463,516     $ 1,417,884  
 
                               
Costs and expenses:
                               
Cost of products sold
    121,250       112,150       363,594       328,064  
Excise taxes
    22,414       14,319       51,725       40,907  
Selling, advertising and administrative
    123,347       129,832       376,851       395,450  
Restructuring charges
    6,406       1,677       8,024       9,105  
Antitrust litigation
    450       3,158       1,975       125,258  
Acquisition-related costs
    7,082             7,082        
 
                       
Total costs and expenses
    280,949       261,136       809,251       898,784  
Gain on sale of corporate headquarters building
                      105,143  
 
                       
Operating income
    203,682       218,476       654,265       624,243  
Interest, net
    18,493       9,308       55,024       27,438  
 
                       
Earnings before income taxes, minority interest and equity earnings
    185,189       209,168       599,241       596,805  
Income tax expense
    59,286       75,484       207,620       215,296  
 
                       
Earnings before minority interest and equity earnings
    125,903       133,684       391,621       381,509  
Minority interest expense and equity earnings, net
    581       84       1,305       425  
 
                       
Net earnings
  $ 125,322     $ 133,600     $ 390,316     $ 381,084  
 
                       
 
                               
Net earnings per share:
                               
Basic
  $ 0.85     $ 0.85     $ 2.64     $ 2.40  
Diluted
    0.84       0.84       2.62       2.37  
 
                               
Dividends per share
  $ 0.63     $ 0.60     $ 1.89     $ 1.80  
 
                               
Average number of shares:
                               
Basic
    147,212       157,666       147,861       159,056  
Diluted
    148,653       158,951       149,202       160,536  
See Notes to Condensed Consolidated Financial Statements.

 

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UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    Nine Months Ended September 30,  
    2008     2007  
Operating Activities:
               
Net earnings
  $ 390,316     $ 381,084  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
    39,542       33,362  
Share-based compensation expense
    8,357       9,575  
Excess tax benefits from share-based compensation
    (11,644 )     (7,520 )
Minority interest expense and equity earnings, net
    1,305       423  
Gain on sale of corporate headquarters
          (105,143 )
Gain on disposition of property, plant and equipment
    (1,260 )     (474 )
Amortization of imputed rent on corporate headquarters
          6,740  
Deferred income taxes
    (3,518 )     (12,024 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (4,088 )     (9,856 )
Inventories
    58,073       41,914  
Prepaid expenses and other assets
    1,619       (1,476 )
Accounts payable, accrued expenses, pensions and other liabilities
    (67,669 )     (16,462 )
Income taxes
    4,395       3,802  
Litigation liability
    (51,980 )     119,597  
 
           
Net cash provided by operating activities
    363,448       443,542  
 
           
 
               
Investing Activities:
               
Short-term investments, net
          10,000  
Purchases of property, plant and equipment
    (46,990 )     (51,504 )
Proceeds from dispositions of property, plant and equipment
    2,733       130,701  
Acquisition of business
          (155,202 )
Loan to minority interest holder
          (27,096 )
Repayment of loan by minority interest holder
          27,096  
Investment in joint venture
    (339 )     (579 )
 
           
Net cash used in investing activities
    (44,596 )     (66,584 )
 
           
 
               
Financing Activities:
               
Repayment of debt
          (7,095 )
Revolving credit facility repayments, net
    (210,000 )      
Proceeds from the issuance of debt
    296,307        
Change in book cash overdraft
    (16,973 )      
Excess tax benefits from share-based compensation
    11,644       7,520  
Proceeds from the issuance of stock
    34,916       30,517  
Dividends paid
    (280,213 )     (286,622 )
Stock repurchased
    (198,729 )     (250,014 )
 
           
Net cash used in financing activities
    (363,048 )     (505,694 )
 
           
 
               
Decrease in cash and cash equivalents
    (44,196 )     (128,736 )
Cash and cash equivalents at beginning of year
    73,697       254,393  
 
           
Cash and cash equivalents at end of the period
  $ 29,501     $ 125,657  
 
           
 
               
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
 
               
Income taxes
  $ 206,883     $ 224,126  
Interest
    61,450       48,717  
See Notes to Condensed Consolidated Financial Statements.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
(In thousands, except per share amounts or where otherwise noted)
1 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. Management believes that all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of UST Inc. (the “Company”) and all of its subsidiaries after the elimination of intercompany accounts and transactions. The Company provides for minority interests in consolidated companies in which the Company’s ownership is less than 100 percent. Certain prior year amounts have been reclassified to conform to the 2008 financial statement presentation. Operating results for the nine month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”).
2 — RECENT ACCOUNTING PRONOUNCEMENTS
In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share pursuant to the two-class method, as described in Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share (“SFAS No. 128”). The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF 03-6-1 is to be applied on a retrospective basis and is effective for fiscal years beginning after December 15, 2008; as such, the Company plans to adopt the provisions of this FSP on January 1, 2009. The Company does not expect the adoption of this FSP to have a material impact on its results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect the adoption of this standard to have a material impact on the preparation of its consolidated financial statements.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”), in April 2008. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset, as determined under the provisions of SFAS No. 142, and the period of expected cash flows used to measure the fair value of the asset in accordance with SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”). FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to intangible assets acquired subsequent to its effective date. Accordingly, the Company plans to adopt the provisions of this FSP on January 1, 2009. The impact that the adoption of FSP FAS 142-3 may have on the Company’s results of operations and financial condition will depend on the nature and extent of any intangible assets acquired subsequent to its effective date.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires entities to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”) and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, and, as such, the Company plans to adopt the provisions of this standard on January 1, 2009. Although SFAS No. 161 requires enhanced disclosures, its adoption will not impact the Company’s results of operations or financial condition.
In December 2007, the FASB issued SFAS No. 141(R). SFAS No. 141(R), replaces SFAS No. 141, Business Combinations, and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and any goodwill acquired in a business combination. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of a business combination. SFAS No. 141(R) is to be applied on a prospective basis and, for the Company, would be effective for any business combination transactions with an acquisition date on or after January 1, 2009. The impact that the adoption of this pronouncement may have on the Company’s results of operations and financial condition will depend on the nature and extent of any business combinations subsequent to its effective date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”), which establishes accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. The key provisions of SFAS No. 160 included the following: (1) noncontrolling interests in consolidated subsidiaries shall be presented in the consolidated statement of financial position within equity, but separate from the parent’s equity, (2) consolidated net income shall include amounts attributable to both the parent and the noncontrolling interest, with the amount applicable to each party clearly presented in the consolidated statement of operations, (3) fair value measures shall be used when deconsolidating a subsidiary and determining any resulting gain or loss, and (4) sufficient disclosures shall be made to clearly distinguish between the interests of the parent and the interests of the noncontrolling owners. The calculation of net earnings per share will continue to be based only on income attributable to the parent. SFAS No. 160 is to be applied on a prospective basis, except for the presentation and disclosure requirements, which are to be applied retrospectively. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and, as such, the Company plans to adopt the provisions of this standard on January 1, 2009. The Company is in the process of evaluating the impact that the adoption of this pronouncement may have on its results of operations and financial condition.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure eligible financial instruments and certain other items at fair value at specified election dates. The Company adopted the provisions of SFAS No. 159 on January 1, 2008, as required. The adoption of SFAS No. 159 did not have an impact on the Company’s results of operations or financial condition, as the Company has not elected to measure any eligible items at fair value.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 provides a common definition of fair value to be applied to existing GAAP requiring the use of fair value measures, establishes a framework for measuring fair value and enhances disclosure about fair value measures under other accounting pronouncements, but does not change existing guidance as to whether or not an asset or liability is carried at fair value. The Company adopted the provisions of SFAS No. 157 on January 1, 2008, as required. See Note 12, “Derivative Instruments and Hedging Activities,” for more details.
3 — CAPITAL STOCK
There were no repurchases of outstanding common stock made by the Company during the three months ended September 30, 2008. During the nine months ended September 30, 2008, the Company repurchased approximately 3.7 million shares of outstanding common stock at a cost of approximately $198.7 million. Of the total shares repurchased, 1.9 million shares were repurchased at a cost of $104.8 million pursuant to the Company’s authorized program, approved in December 2004, bringing the total repurchases of outstanding common stock under the program to the authorized maximum of 20 million shares. The cumulative cost of repurchases under the completed program was approximately $1 billion. The remaining 1.8 million shares repurchased during the nine months ended September 30, 2008 were made pursuant to a new program to repurchase up to 20 million shares of the Company’s outstanding common stock, which was authorized by the Company’s Board of Directors in December 2007. As of September 30, 2008, the cumulative cost of the 1.8 million shares repurchased under the new program was approximately $93.9 million.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4 — SHARE-BASED COMPENSATION
The Company accounts for share-based compensation in accordance with the provisions of SFAS No. 123(R), Share-Based Payment, (“SFAS No. 123(R)”). SFAS No. 123(R) requires all share-based payments issued to acquire goods or services, including grants of employee stock options, to be recognized in the statement of operations based on their fair values, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Compensation expense related to share-based awards is recognized over the requisite service period, which is generally the vesting period.
The following table provides a breakdown by line item of the pre-tax share-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2008 and 2007, respectively, as well as the related income tax benefit and amounts capitalized as a component of inventory for each period.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Selling, advertising and administrative expense (1)
  $ 2,474     $ 2,380     $ 7,703     $ 9,082  
Cost of products sold
    187       138       517       426  
Restructuring charges (2)
    137       56       137       67  
 
                       
Total pre-tax share-based compensation expense
  $ 2,798     $ 2,574     $ 8,357     $ 9,575  
 
                       
 
                               
Income tax benefit
  $ 1,021     $ 1,025     $ 3,049     $ 3,788  
Capitalized as inventory
    52       30       138       92  
     
(1)  
The nine month period ending September 30, 2007 includes accelerated vesting charges recorded in connection with an executive officer’s separation from service.
 
(2)  
Represents share-based compensation expense recognized in connection with one-time termination benefits provided to employees affected by Project Momentum, the Company’s cost-reduction initiative. See Note 13 – “Restructuring” for additional information regarding Project Momentum.
A summary of the status of restricted stock and restricted stock units for the nine months ended September 30, 2008 is presented below:
                                 
    Restricted Stock     Restricted Stock Units  
            Weighted average           Weighted average  
    Number of     grant-date fair value     Number of     grant-date fair value  
    Shares     per share     Units     per unit  
Nonvested at January 1, 2008
    386,640     $ 46.56       222,448     $ 43.87  
Granted
    131,828     $ 52.07       53,464     $ 52.42  
Forfeited
    (10,400 )   $ 49.52       (7,467 )   $ 44.63  
Vested
    (18,940 )   $ 36.46       (4,196 )   $ 41.28  
 
                           
Nonvested at September 30, 2008
    489,128     $ 48.37       264,249     $ 45.61  
 
                           

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to the table above, during the second quarter of 2008, the Company awarded 143,100 restricted shares for which the performance targets had not been established as of September 30, 2008. In accordance with SFAS No. 123(R), a grant date, for purposes of measuring compensation expense, cannot occur until the performance measures are established, as that is when both the Company and the award recipients would have a mutual understanding of the key terms and conditions of the award. The restricted shares granted presented in the table above include 112,325 restricted shares that were originally awarded in 2007 for which the performance targets were established in 2008.
During the three and nine months ended September 30, 2008, 0.8 million and 1.1 million options were exercised with a weighted-average exercise price of $31.31 and $31.53, respectively. At September 30, 2008, there were 2.6 million options outstanding, of which 2.3 million options were exercisable, with weighted-average exercise prices of $35.31 and $33.60, respectively. Of the total options outstanding at September 30, 2008, 1.2 million were issued under the UST Inc. 1992 Stock Option Plan (“1992 Plan”) with a weighted-average exercise price of $30.53. The 1992 Plan contains contingent cash settlement provisions that require cash settlement upon the occurrence of certain events outside of the option holder’s control. Specifically, if the Company’s shareholders approve the acquisition of the Company at a future shareholders’ meeting, all options outstanding under the 1992 Plan would be settled in cash at such time, irrespective of when and if the transaction is ultimately consummated. For additional information regarding the pending acquisition of the Company, refer to Note 17, “Other Matters.”

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5 — EMPLOYEE BENEFIT PLANS
In accordance with SFAS No. 132, Employers’ Disclosures About Pensions and Other Postretirement Benefits (Revised 2003), as amended by SFAS No. 158, Employers’ Accounting For Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), the following provides the components of net periodic benefit cost for the three and nine months ended September 30, 2008 and 2007, respectively:
                                 
                    Postretirement Benefits  
    Pension Plans     Other than Pensions  
    Three Months Ended     Three Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Service cost
  $ 4,477     $ 4,766     $ 964     $ 1,154  
Interest cost
    8,837       8,338       1,176       1,215  
Expected return on plan assets
    (7,339 )     (7,239 )            
Amortization of unrecognized transition asset
          (2 )            
Amortization of prior service cost (credit)
    23       18       (1,041 )     (1,229 )
Recognized actuarial loss
    659       979       39       87  
Special termination benefits
    3,052             1,114        
 
                       
Net periodic benefit cost
  $ 9,709     $ 6,860     $ 2,252     $ 1,227  
 
                       
                                 
                    Postretirement Benefits  
    Pension Plans     Other than Pensions  
    Nine Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Service cost
  $ 13,429     $ 14,223     $ 2,892     $ 3,463  
Interest cost
    26,510       24,881       3,527       3,646  
Expected return on plan assets
    (22,019 )     (21,603 )            
Amortization of unrecognized transition asset
          (6 )            
Amortization of prior service cost (credit)
    68       56       (3,125 )     (3,690 )
Recognized actuarial loss
    1,976       2,922       116       263  
Curtailment and special termination benefits
    3,600       1,974       1,453        
 
                       
Net periodic benefit cost
  $ 23,564     $ 22,447     $ 4,863     $ 3,682  
 
                       
During the third quarter and first nine months of 2008, in connection with restructuring activities, the Company recorded special termination benefit charges of approximately $4.2 million and $5.1 million, respectively, related to its defined benefit pension plans and other postretirement benefit plans. These charges relate to enhanced retirement benefits to be provided to qualified individuals impacted by the restructuring activities and are reported on the “restructuring charges” line in the Condensed Consolidated Statement of Operations (See Note 13, “Restructuring”). During the first quarter of 2007, the Company recorded a charge for special termination benefits related to its defined benefit pension plans in connection with an executive officer’s separation from service.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company expects to contribute approximately $7.5 million to its non-qualified defined benefit pension plans in 2008, of which approximately $5.6 million was contributed during the first nine months of 2008.
In the fourth quarter of 2007, the Company amended its retiree health and welfare plans to limit the annual increase in costs subsidized by the Company to the annual percentage increase in the consumer price index. This amendment, which was effective beginning January 1, 2008, had a favorable impact on the calculation of the Company’s 2008 net periodic benefit cost.
6 — INCOME TAXES
The Company’s income tax provision takes into consideration pre-tax income, statutory tax rates and the Company’s tax profile in the various jurisdictions in which it operates. The tax bases of the Company’s assets and liabilities reflect its best estimate of the future tax benefit and costs it expects to realize when such amounts are included in its tax returns. Quantitative and probability analysis, which incorporates management’s judgment, is required in determining the Company’s effective tax rate and in evaluating its tax positions. The Company recognizes tax benefits in accordance with the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”).
As of September 30, 2008 and December 31, 2007, the total liability for unrecognized tax benefits was $28.1 million and $39.2 million, respectively, representing the gross tax liability for all jurisdictions. Approximately $0.8 million and $0.9 million of this liability, net of federal tax benefit, is included on the “income taxes receivable” line of the Condensed Consolidated Statement of Financial Position as of September 30, 2008 and December 31, 2007, respectively. The remaining $27.3 million and $38.3 million of this liability, net of federal tax benefit, as of September 30, 2008 and December 31, 2007, respectively, is reported on the “income taxes payable” line in the non-current liabilities section of the Condensed Consolidated Statement of Financial Position.
The Company recognizes accruals of interest and penalties related to unrecognized tax benefits in income tax expense. For the three and nine months ended September 30, 2008, the Company recognized a decrease in interest and penalties of approximately $4.4 million and $2.9 million, respectively, primarily due to negotiated resolutions. For the three and nine months ended September 30, 2007, the Company recognized an increase in interest and penalties of $0.8 million and $2.5 million, respectively. As of September 30, 2008 and December 31, 2007, the Company had a liability of approximately $7.8 million and $10.7 million, respectively, for the payment of interest and penalties. As of September 30, 2008 and December 31, 2007, approximately $0.2 million of this liability is included on the “income taxes receivable” line of the Condensed Consolidated Statement of Financial Position. The remaining balance for both periods is included on the “income taxes payable” line in the non-current liabilities section of the Condensed Consolidated Statement of Financial Position.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company continually and regularly evaluates, assesses and adjusts its accruals for income taxes in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period. Of the total $28.1 million of unrecognized tax benefits as of September 30, 2008, approximately $9.5 million would impact the annual effective tax rate if such amounts were recognized. The remaining $18.6 million of unrecognized tax benefits relate to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Based on information obtained to date, the Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by $0.3 million within the next 12 months due to negotiated resolution payments, lapses in statutes of limitations and the resolution of various examinations in multiple jurisdictions.
The Internal Revenue Service and other tax authorities in various states and foreign jurisdictions audit the Company’s income tax returns on a continuous basis. Depending on the tax jurisdiction, a number of years may elapse before a particular matter for which the Company has an unrecognized tax benefit is audited and ultimately resolved. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before 2004. While it is often difficult to predict the timing of tax audits and their final outcome, the Company believes that its estimates reflect the most likely outcome of known tax contingencies. However, the final resolution of any such tax audit could result in either a reduction in the Company’s accruals or an increase in its income tax provision, both of which could have a significant impact on its results of operations in any given period.
The Company’s effective tax rate, before minority interest and equity earnings, decreased to 32 percent and 34.6 percent for the third quarter and first nine months of 2008, respectively, from 36.1 percent for both the third quarter and first nine months of 2007. The decline in the effective tax rate was a result of $10.2 million of income tax accrual reversals, net of federal benefit, in the current year, of which $5.9 million, net of federal benefit, related to negotiated resolutions and $4.3 million, net of federal benefit, related to the expiration of statutes of limitation in multiple jurisdictions.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7 — SEGMENT INFORMATION
The Company’s reportable segments are Smokeless Tobacco and Wine. Those business units that do not meet quantitative reportable thresholds are included in All Other Operations. Included in All Other Operations for both periods are the Company’s international operations. Interim segment information is as follows:
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007     2008     2007  
Net Sales to Unaffiliated Customers
                               
Smokeless Tobacco
  $ 364,148     $ 384,067     $ 1,131,399     $ 1,150,518  
Wine (3)
    99,760       82,286       285,060       230,581  
All Other
    20,723       13,259       47,057       36,785  
 
                       
Net sales
  $ 484,631     $ 479,612     $ 1,463,516     $ 1,417,884  
 
                       
 
                               
Operating Profit (1)
                               
Smokeless Tobacco (2)
  $ 194,806     $ 213,073     $ 624,606     $ 507,821  
Wine (3)
    16,331       12,758       43,037       35,478  
All Other
    6,281       4,195       15,085       13,136  
 
                       
Operating profit
    217,418       230,026       682,728       556,435  
Gain on Sale of Corporate Headquarters Building
                      105,143  
Corporate expenses (1)
    (13,736 )     (11,550 )     (28,463 )     (37,335 )
Interest, net
    (18,493 )     (9,308 )     (55,024 )     (27,438 )
 
                       
Earnings before income taxes, minority interest and equity earnings
  $ 185,189     $ 209,168     $ 599,241     $ 596,805  
 
                       
     
(1)  
Operating profit for each reportable segment and corporate expenses for all periods presented reflect the impact of restructuring charges, as applicable. See Note 13, “Restructuring,” for additional information. In addition, corporate expenses reflect the impact of $7.1 million of acquisition-related costs for each of the three and nine months ended September 30, 2008. See Note 17, “Other Matters,” for additional information.
 
(2)  
Smokeless Tobacco segment operating profit includes antitrust litigation charges of $0.5 million and $2 million for the three and nine months ended September 30, 2008, respectively, and $3.2 million and $125.3 million for the three and nine months ended September 30, 2007, respectively. See Note 14, “Contingencies,” and Note 17, “Other Matters,” for additional information.
 
(3)  
Amounts reported in the Wine segment for the three and nine months ended September 30, 2008 reflect the acquisition of Stag’s Leap Wine Cellars, which was acquired in September 2007.
The Company’s identifiable assets by reportable segment as of September 30, 2008 did not change significantly from amounts appearing in the December 31, 2007 Consolidated Segment Information (See the 2007 Form 10-K), with the exception of corporate assets which reflect a decrease in cash and cash equivalents.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8 — ASSETS HELD FOR SALE
The Company had $25.1 million classified as “assets held for sale” at September 30, 2008, reflecting the net carrying value of one of the Company’s two corporate aircraft. Management, having proper authority, initiated the disposal of the aircraft in connection with the Company’s Project Momentum cost-reduction initiative (see Note 13, “Restructuring” for additional information regarding this initiative). The aircraft met the criteria to be considered held for sale under SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), at September 30, 2008. As the net carrying value of the aircraft was lower than its respective estimated fair value less costs to sell, there was no impairment charge recorded in 2008 upon management’s commitment to dispose of the asset. In accordance with SFAS No. 144, upon meeting the held for sale criteria, the Company ceased depreciation on the aircraft. The Company currently anticipates that the sale of the aircraft will occur within the next 12 months.
At December 31, 2007, the Company did not have any assets classified as held for sale.
In March 2008 and January 2007, the Company sold winery properties located in the State of Washington for net proceeds of $1.8 million and $3.1 million, respectively, resulting in pre-tax gains of $1.4 million and $2 million, respectively, which were recorded as a reduction to selling, advertising and administrative (“SA&A”) expenses in the Condensed Consolidated Statement of Operations. The net proceeds from the March 2008 property sale included cash of approximately $0.4 million and a note receivable of approximately $1.4 million, which has a three-year term.
In March 2007, the Company finalized the sale of its corporate headquarters for cash proceeds of $130 million, as well as a below-market, short-term lease with an imputed fair market value of approximately $6.7 million. This sale resulted in a pre-tax gain of approximately $105 million, which is reported on the “gain on sale of corporate headquarters building” line in the Condensed Consolidated Statement of Operations.
9 — NET EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had all potentially dilutive shares of common stock been issued. The dilutive effect of outstanding options, restricted stock and restricted stock units is reflected in diluted earnings per share by applying the treasury stock method under SFAS No. 128. Under the treasury stock method, an increase in the fair value of the Company’s common stock can result in a greater dilutive effect from outstanding options, restricted stock and restricted stock units. Furthermore, the exercise of options and the vesting of restricted stock and restricted stock units can result in a greater dilutive effect on earnings per share than that recognized under the treasury stock method.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the computation of basic and diluted net earnings per share:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Numerator:
                               
Net earnings
  $ 125,322     $ 133,600     $ 390,316     $ 381,084  
 
                       
 
                               
Denominator:
                               
Denominator for basic earnings per share-weighted average shares
    147,212       157,666       147,861       159,056  
Dilutive effect of share-based awards
    1,441       1,285       1,341       1,480  
 
                       
Denominator for diluted earnings per share
    148,653       158,951       149,202       160,536  
 
                       
 
                               
Basic earnings per share
  $ 0.85     $ 0.85     $ 2.64     $ 2.40  
 
                       
 
                               
Diluted earnings per share
  $ 0.84     $ 0.84     $ 2.62     $ 2.37  
 
                       
At September 30, 2008, all options outstanding were dilutive as their exercise prices were lower than the average market price of the Company’s common stock. Options to purchase 0.3 million shares of common stock outstanding as of September 30, 2007 were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the Company’s common stock and, therefore, were antidilutive.
10 — COMPREHENSIVE INCOME
The components of comprehensive income for the Company are net earnings, foreign currency translation adjustments, the change in the fair value of derivatives designated as effective cash flow hedges and changes in deferred components of net periodic pension and other postretirement benefit costs. For the third quarter of 2008 and 2007, total comprehensive income, net of taxes, amounted to $121.6 million and $131.6 million, respectively. For the first nine months of 2008 and 2007, total comprehensive income, net of taxes, amounted to $386.7 million and $382.5 million, respectively.
11 — PURCHASE COMMITMENTS
As of September 30, 2008, the Company had entered into unconditional purchase obligations in the form of contractual commitments. Unconditional purchase obligations are commitments that are either noncancelable or cancelable only under certain predefined conditions.
Through September 30, 2008, the Company completed $12.4 million in leaf tobacco purchases in fulfillment of certain contracts outstanding at December 31, 2007. As of September 30, 2008, the Company has contractual obligations of approximately $67.8 million for the purchase of leaf tobacco to be used in the production of moist smokeless tobacco products, the majority of which are expected to be fulfilled by the end of 2008.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchase commitments under contracts to purchase grapes for the periods beyond one year are subject to variability resulting from potential changes in applicable grape market price indices. The following table presents a summary of the net change in the Company’s future payment obligations since January 1, 2008, and the balance of such commitments at September 30, 2008, for the purchases and processing of grapes for use in the production of wine, based upon estimated yields and market conditions:
                                                         
    2008     2009     2010     2011     2012     Thereafter     Total  
 
                                                       
Grape commitments — January 1, 2008
  $ 73,623     $ 73,067     $ 72,713     $ 62,490     $ 36,742     $ 93,356     $ 411,991  
Net (decrease) increase
    (5,976 )     7,231       7,587       9,136       25,886       106,086       149,950  
 
                                         
Grape commitments — September 30, 2008
  $ 67,647     $ 80,298     $ 80,300     $ 71,626     $ 62,628     $ 199,442     $ 561,941  
 
                                         
12 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has hedged against the variability of forecasted interest payments attributable to changes in interest rates through the date of an anticipated debt issuance in 2009 via a forward starting interest rate swap. The forward starting interest rate swap has a notional amount of $100 million and the terms call for the Company to receive interest quarterly at a variable rate equal to the London InterBank Offered Rate (“LIBOR”) and to pay interest semi-annually at a fixed rate of 5.715 percent. The fair value of the forward starting interest rate swap at September 30, 2008 was a net liability of $8.7 million, based upon analysis derived from relevant observable market inputs, giving consideration to counterparty credit risk, and was included in “accounts payable and accrued expenses” on the Condensed Consolidated Statement of Financial Position. Accumulated other comprehensive loss at September 30, 2008 included the accumulated loss on the cash flow hedge (net of taxes) of $5.7 million, which reflects $1.7 million of other comprehensive loss recognized during each of the three and nine months ended September 30, 2008, respectively, in connection with the change in fair value of the swap.
The Company has hedged the interest rate risk on its $40 million aggregate principal amount of floating rate senior notes with a ten-year interest rate swap having a notional amount of $40 million and quarterly settlement dates over the term of the contract. The Company pays a fixed rate of 7.25 percent and receives a floating rate of three-month LIBOR plus 90 basis points on the notional amount. The fair value of the swap at September 30, 2008 was a net liability of $1.7 million, based upon analysis derived from relevant observable market inputs, giving consideration to counterparty credit risk, and was included in “accounts payable and accrued expenses” on the Condensed Consolidated Statement of Financial Position. Accumulated other comprehensive loss at September 30, 2008 included the accumulated loss on the cash flow hedge (net of taxes) of $1.1 million, which reflects the $0.3 million and $0.2 million of other comprehensive loss recognized for the three and nine months ended September 30, 2008, respectively, in connection with the change in fair value of the swap.
During 2008, the Company entered into foreign currency forward and option contracts. Such contracts have been designated as effective cash flow hedges, in order to hedge the risk of variability in cash flows associated with foreign currency payments required in connection with anticipated oak barrel purchases for its wine operations and equipment purchases for its smokeless tobacco operations. The aggregate fair value of the foreign currency forward and options contracts is presented in the table below. The amounts reflected in net earnings and accumulated other comprehensive loss during the three and nine months ended September 30, 2008 with respect to these contracts were not material.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On January 1, 2008, the Company adopted the provisions of SFAS No. 157, which establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, which gives the highest priority to quoted prices in active markets, is comprised of the following three levels:
Level 1 – Unadjusted quoted market prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs, other than Level 1 inputs. Level 2 inputs would typically include quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3 – Prices or valuations that require inputs that are both significant to the measurement and unobservable.
In accordance with the provisions of SFAS No. 157, the following table presents the fair value measurements for the Company’s derivative financial instruments at September 30, 2008, grouped by the level within the fair value hierarchy under which the measurement falls:
                                 
            Fair value measurements at reporting date using:  
            Quoted prices     Significant        
            in active     other     Significant  
            markets for     observable     unobservable  
    September 30,     identical assets     inputs     inputs  
    2008     (level 1)     (level 2)     (level 3)  
 
                               
Liabilities
                               
Derivatives — swaps
  $ 10,399     $     $ 10,399     $  
Derivatives — foreign currency hedges
    35     $       35     $  
 
                       
Total
  $ 10,434     $     $ 10,434     $  
 
                       
13 — RESTRUCTURING
During the third quarter of 2006, the Company announced and commenced implementation of a cost-reduction initiative called “Project Momentum.” This initiative was designed to create additional resources for growth via operational productivity and efficiency enhancements. The Company believes that such an effort is prudent as it provides additional flexibility in the increasingly competitive smokeless tobacco category.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with Project Momentum, restructuring charges of $6.4 million and $8 million were recognized for the three and nine months ended September 30, 2008, respectively, and $1.7 million and $9.1 million were recognized for the three and nine months ended September 30, 2007, respectively. These amounts are reported on the “restructuring charges” line in the Condensed Consolidated Statement of Operations. The charges were incurred in connection with the formal plans undertaken by management and are accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The recognition of certain restructuring charges involves the use of judgments and estimates regarding the nature, timing and amount of costs to be incurred under Project Momentum. While the Company believes that its estimates are appropriate and reasonable based upon the information available, actual results could differ from such estimates. The following table provides a summary of restructuring charges incurred for the three and nine months ended September 30, 2008, as well as cumulative charges incurred to date and the total amount of charges expected to be incurred, in connection with Project Momentum, for each major type of cost associated with the initiative:
                                 
    Restructuring Charges     Restructuring Charges              
    Incurred for the Three     Incurred for the Nine     Cumulative Charges     Total Charges  
    Months Ended     Months Ended     Incurred as of     Expected to be  
    September 30, 2008     September 30, 2008     September 30, 2008     Incurred(1)  
 
                               
One-time termination benefits
  $ 6,358     $ 7,908     $ 26,717     $ 26,700 - $27,000  
Contract termination costs
                492       500  
Other restructuring costs
    48       116       13,616       13,600 - 13,800  
 
                       
Total
  $ 6,406     $ 8,024     $ 40,825     $ 40,800 - $41,300  
 
                       
     
(1)  
The total cost of one-time termination benefits expected to be incurred under Project Momentum reflects the initiative’s anticipated elimination of certain salaried, full-time positions across various functions and operations, primarily at the Company’s corporate headquarters, as well as a reduction in the number of hourly positions within the manufacturing operations. The majority of the total restructuring costs expected to be incurred were recognized in 2006 and 2007. The remaining anticipated costs are expected to be recognized in 2008. Total restructuring charges expected to be incurred currently represent the Company’s best estimates of the ranges of such charges, although there may be additional charges recognized as additional actions are identified and finalized.
One-time termination benefits relate to severance-related costs and outplacement services for employees terminated in connection with Project Momentum, as well as enhanced retirement benefits for qualified individuals. Contract termination costs primarily relate to the termination of operating leases in conjunction with the consolidation and relocation of facilities. Other restructuring costs are mainly comprised of other costs directly related to the implementation of Project Momentum, primarily professional fees, as well as asset impairment charges and costs incurred in connection with the relocation of the Company’s headquarters.
The following table provides a summary of restructuring charges incurred for the three and nine months ended September 30, 2008, as well as cumulative charges incurred to date and the total amount of charges expected to be incurred, in connection with Project Momentum, by reportable segment:
                                 
    Restructuring Charges     Restructuring Charges              
    Incurred for the Three     Incurred for the Nine     Cumulative Charges     Total Charges  
    Months Ended     Months Ended     Incurred as of     Expected to be  
    September 30, 2008     September 30, 2008     September 30, 2008     Incurred  
Smokeless Tobacco
  $ 5,913     $ 7,235     $ 35,007     $ 35,000 - $35,300  
Wine
    273       273       595       600  
All Other Operations
    (118 )     98       1,087       1,100 - 1,200  
 
                       
Total — reportable segments
    6,068       7,606       36,689       36,700 - 37,100  
Corporate (unallocated)
    338       418       4,136       4,100 - 4,200  
 
                       
Total
  $ 6,406     $ 8,024     $ 40,825     $ 40,800 - $41,300  
 
                       

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accrued restructuring charges are included in the “accounts payable and accrued expenses” line on the Condensed Consolidated Statement of Financial Position. A reconciliation of the changes in the liability balance since December 31, 2007 is presented below.
                                 
    One-Time     Contract              
    Termination     Termination     Other        
    Benefits     Costs     Costs     Total  
Balance as of December 31, 2007
  $ 1,643     $ 78     $     $ 1,721  
Add: restructuring charges incurred
    8,026             116       8,142  
Less: payments
    (2,123 )     (47 )     (112 )     (2,282 )
Less: reclassified liabilities (1)
    (5,189 )           (4 )     (5,193 )
Less: other adjustments
    (118 )                 (118 )
 
                       
Balance as of September 30, 2008
  $ 2,239     $ 31     $     $ 2,270  
 
                       
     
(1)  
Represents liabilities associated with restructuring charges that have been recorded within other line items on the Condensed Consolidated Statement of Financial Position at September 30, 2008. The $5.2 million in the “One-Time Termination Benefits” column consists of $5.1 million associated with enhanced retirement benefits, which is reflected in the accrued liabilities for pensions and other postretirement benefits (see Note 5 – “Employee Benefit Plans”) and $0.1 million associated with share-based compensation, which is reflected in additional paid-in-capital. The $4 thousand in the “Other Costs” column relates to asset impairment charges which were reclassified as reductions to the respective asset categories.
14 — CONTINGENCIES
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.
Smokeless Tobacco Litigation
The Company is named in certain actions in West Virginia brought on behalf of individual plaintiffs against cigarette manufacturers, smokeless tobacco manufacturers, and other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. Included among the plaintiffs are three individuals alleging use of the Company’s smokeless tobacco products and alleging the types of injuries claimed to be associated with the use of smokeless tobacco products. These individuals also allege the use of other tobacco products.
The Company is named in an action in Florida by an individual plaintiff against various smokeless tobacco manufacturers including the Company for personal injuries, including cancer, oral lesions, leukoplakia, gum loss and other injuries allegedly resulting from the use of the Company’s smokeless tobacco products. The plaintiff also claims nicotine “addiction” and seeks unspecified compensatory damages and certain equitable and other relief, including, but not limited to, medical monitoring.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has been named in an action in Connecticut brought by a plaintiff individually, as executrix and fiduciary of her deceased husband’s estate and on behalf of their minor children for injuries, including “squamous cell carcinoma of the tongue,” allegedly sustained by decedent as a result of his use of the Company’s smokeless tobacco products. The Complaint also alleges “addiction” to smokeless tobacco. The Complaint seeks compensatory and punitive damages in excess of $15 thousand and other relief.
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 litigation issues, all such cases are, and will continue to be, vigorously defended. The Company believes that the ultimate outcome of such pending litigation will not have a material adverse effect on its consolidated financial results or its consolidated financial position, although if plaintiffs were to prevail, the effect of any judgment or settlement could have a material adverse impact on its consolidated financial results in the particular reporting period in which resolved and, depending on the size of any such judgment or settlement, a material adverse effect on its consolidated financial position. Notwithstanding the Company’s assessment of the potential financial impact of these cases, the Company is not able to estimate with any certainty the amount of loss, if any, which would be associated with an adverse resolution.
Antitrust Litigation
Following a previous antitrust action brought against the Company by a competitor, Conwood Company L.P, the Company was named as a defendant in certain actions brought by indirect purchasers (consumers and retailers) in a number of jurisdictions. As indirect purchasers of the Company’s smokeless tobacco products during various periods of time ranging from January 1990 to the date of certification or potential certification of the proposed class, plaintiffs in those actions allege, individually and on behalf of putative class members in a particular state or individually and on behalf of class members in the applicable states, that the Company has violated the antitrust laws, unfair and deceptive trade practices statutes and/or common law of those states. In connection with these actions, plaintiffs sought to recover compensatory and statutory damages in an amount not to exceed $75 thousand per purported class member or per class member, and certain other relief. The indirect purchaser actions, as filed, were similar in all material respects.
To date, indirect purchaser actions in almost all of the jurisdictions have been resolved, including those subject to court approval. Pursuant to the settlements in all jurisdictions except California, adult consumers received coupons redeemable on future purchases of the Company’s moist smokeless tobacco products, and the Company agreed to pay all related administrative costs and plaintiffs’ attorneys’ fees.
In September 2007, the Company entered into a Settlement Agreement to resolve the California class action (for additional details regarding the resolution of the California class action, see the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2007; also refer to Note 17, “Other Matters,” for further information). In March 2008, the court entered an order granting final approval of the California settlement, entering judgment and dismissing the settling defendants with prejudice. The court also granted plaintiffs’ motion for attorneys’ fees and costs. A Notice of Appeal from the judgment and order granting final approval of the settlement, and order granting plaintiffs’ attorneys’ fees was filed by an individual class member in April 2008.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 2008, the Company entered into a Settlement Agreement to resolve the New Hampshire action. In July 2008, the court entered a final judgment granting final approval of the settlement, including attorneys’ fees and costs, and dismissing the action with prejudice. A Notice of Appeal was filed by an individual class member in August 2008. Also in January 2008, the Company entered into a Settlement Agreement to resolve the Massachusetts class action. In April 2008, the court denied preliminary approval of the Massachusetts settlement but invited the parties to submit an amended settlement agreement to the court for preliminary approval. In connection with the settlements of the New Hampshire action and Massachusetts class action, during the fourth quarter of 2007 the Company recognized a liability reflecting the costs attributable to coupons expected to be distributed to consumers, which will be redeemable on future purchases of the Company’s moist smokeless tobacco products, as well as plaintiffs’ attorneys’ fees and other administrative costs of the settlements. Although the court denied preliminary approval of the Massachusetts settlement, since the court has invited the parties to submit an amended settlement agreement, the Company believes the liability recognized for the Massachusetts class action currently represents its best estimate of the costs to ultimately resolve this action. Notwithstanding the Company’s decision to enter into the settlement, the Company believes the facts and circumstances in the Massachusetts class action would continue to support its defenses.
Notwithstanding the fact that the Company has chosen to resolve various indirect purchaser actions via settlements, the Company believes, and has been so advised by counsel handling these cases, that it has meritorious defenses, and, in the event that any such settlements do not receive final court approval, these actions will continue to be vigorously defended.
In addition, an unresolved action remains in the State of Pennsylvania which is pending in a federal court in Pennsylvania. In this action, the Company filed an appeal of the trial court’s denial of the Company’s motion to dismiss the complaint. In August 2008 the Third Circuit Court of Appeals ruled in the Company’s favor, issuing an opinion vacating the trial court’s denial and remanding the case to the trial court to determine whether plaintiffs should be granted permission to amend their complaint. For the plaintiffs in the foregoing action to prevail, they will now have to be granted permission to amend the complaint and then amend such complaint in a manner that satisfies the standards set forth in the August 2008 Third Circuit opinion. The plaintiffs will also have to obtain class certification and favorable determinations on issues relating to liability, causation and damages. The Company believes, and has been so advised by counsel handling this case, that it has meritorious defenses in this regard, and it is, and will continue to be, vigorously defended.
The Company believes that the ultimate outcome of these actions will not have a material adverse effect on its consolidated financial results or its consolidated financial position, although if plaintiffs were to prevail, beyond the amounts accrued, the effect of any judgment or settlement could have a material adverse impact on its consolidated financial results in the particular reporting period in which resolved and, depending on the size of any such judgment or settlement, a material adverse effect on its consolidated financial position. Notwithstanding the Company’s assessment of the financial impact of these actions, management is not able to estimate the amount of loss, if any, beyond the amounts accrued, which could be associated with an adverse resolution.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The liability associated with the Company’s estimated costs to resolve all indirect purchaser actions decreased to $23.4 million at September 30, 2008, from $75.4 million at December 31, 2007, primarily as a result of a payment made in connection with the California settlement, actual coupon redemption and payments of administrative costs related to previous settlements, partially offset by charges recognized in the first nine months of 2008 reflecting a change in the estimated costs associated with the resolution of certain indirect purchaser antitrust actions.
The Company was served with a purported class action complaint filed in federal court in West Virginia, attempting to challenge certain aspects of a prior settlement approved by the Tennessee state court and seeking additional amounts purportedly consistent with subsequent settlements of similar actions, estimated by plaintiffs to be between $8.9 million and $214.2 million, as well as punitive damages and attorneys’ fees. In May 2008, the court granted defendants’ motion to dismiss, thereby dismissing this action with prejudice. In June 2008, plaintiffs filed a Notice of Appeal. In September 2008, plaintiffs’ motion to voluntarily dismiss their appeal as to the Company was granted by the court, thereby dismissing this action as to the Company.
Other Litigation
On September 7, 2008, the Company and Altria Group, Inc. (“Altria”) entered into a merger agreement, pursuant to which Altria will acquire all outstanding shares of the Company’s common stock for a price of $69.50 per share. Subsequently, the Company has been named in a purported class action filed in Connecticut by a plaintiff against the Company, the members of its Board of Directors (“Board”) and Altria challenging the transaction contemplated by the merger agreement between the Company and Altria and alleging, among other things, that the per share price offered by Altria is unfair and grossly inadequate and that the termination fee provision of the merger agreement is excessive and operates as a deterrent to other potential bidders. The complaint also alleges that the Company’s directors breached their fiduciary obligations by failing to maximize stockholder value by putting their own interests ahead of stockholder interests. The complaint also asserts a claim for aiding and abetting breaches of fiduciary duty against Altria. Recently, the plaintiff filed an amended class action complaint adding additional allegations about certain payments that the Company’s officers and directors will receive for their Company stock options and restricted stock in connection with the merger and under certain employment agreements with Altria. Further, the amended complaint adds a claim for aiding and abetting breaches of fiduciary duty against the Company and alleges that the Company’s proxy statement prepared in connection with the merger transaction, filed on October 29, 2008, omits certain material information, including information relating to the Board’s process leading to the merger and the financial analysis utilized by the Company’s financial advisors in connection with their fairness opinions. The plaintiff seeks to enjoin the merger unless and until the Company supplements its proxy, as well as attorneys’ fees and costs. The Company believes that the claims asserted by the plaintiff are wholly without merit and intends to defend vigorously against this action. See Note 17 – “Other Matters,” for additional information regarding the pending acquisition transaction.
The Company believes, and has been so advised by counsel handling this case, that it has a number of meritorious defenses. Except as to the Company’s willingness to consider alternative solutions for resolving certain litigation issues, this case has been, and will continue to be, vigorously defended. The Company believes that the ultimate outcome of this matter will not have a material adverse effect on its consolidated financial results or its consolidated financial position, although if plaintiffs were to seek damages and to prevail, the effect of any judgment or settlement could have a material adverse impact on its consolidated financial results in the particular reporting period in which resolved and, depending on the size of any such judgment or settlement, a material adverse effect on its consolidated financial position. Notwithstanding the Company’s assessment of the potential financial impact of this case, the Company is not able to estimate with any certainty the amount of loss, if any, which would be associated with an adverse resolution.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15 — BORROWING ARRANGEMENTS
Senior Notes
On February 29, 2008, the Company completed the issuance and sale of $300 million aggregate principal amount of 5.75 percent senior notes in a public offering at a price to the underwriters of 98.982 percent of the principal amount. These senior notes mature on March 1, 2018, with interest payable semiannually. Costs of $2.6 million associated with the issuance of the senior notes were capitalized and are being amortized over the term of the senior notes. Approximately $0.1 million and $0.2 million of these costs were recognized during the three and nine months ended September 30, 2008, respectively. Upon the completion of the issuance of the senior notes, the Company repaid $100 million of borrowings outstanding under the Company’s $200 million six-month credit agreement (the “Credit Agreement”) and $200 million of borrowings outstanding under the Company’s five-year revolving credit facility. In accordance with its terms, the Credit Agreement was terminated upon the issuance of the senior notes and the repayment of outstanding borrowings.
The Company’s $240 million aggregate principal amount senior notes, of which $200 million is 7.25 percent fixed rate debt and $40 million is floating rate debt, mature on June 1, 2009. As such, these notes are classified as “current portion of long-term debt” on the September 30, 2008 Condensed Consolidated Statement of Financial Position.
Revolving Credit Facility
The Company has a $300 million, five-year revolving credit facility (the “Credit Facility”) which will expire on June 29, 2012. Borrowings under the Credit Facility are primarily used for general corporate purposes, including the support of commercial paper borrowings. At September 30, 2008, the Company had borrowings of $40 million outstanding under the Credit Facility.
16 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table presents the changes in the carrying amount of goodwill for the nine months ended September 30, 2008:
         
    Total  
Goodwill as of December 31, 2007
  $ 28,304  
Translation adjustments
    (211 )
 
     
Goodwill as of September 30, 2008
  $ 28,093  
 
     
Approximately $25.2 million of the goodwill balance at September 30, 2008 and December 31, 2007 related to the Company’s Wine segment, with the remainder related to the Company’s international operations.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Non-amortizable Intangible Assets Other than Goodwill
At both September 30, 2008 and December 31, 2007, the Company had $41.9 million of identifiable intangible assets that were not being amortized, as such assets were deemed to have indefinite useful lives. These non-amortizable intangible assets relate to Wine segment acquired trademarks. There were no impairment charges recorded relating to these assets during the nine months ended September 30, 2008 or 2007.
Amortizable Intangible Assets
The value of the Company’s amortizable intangible assets at September 30, 2008 and December 31, 2007 were approximately $13.5 million and $14.3 million (net of accumulated amortization of $2.2 million and $1.4 million), respectively. These assets consist primarily of acquired customer relationships, customer lists and intellectual property, which are being amortized on a straight-line basis over a weighted-average period of approximately 18 years.
For the third quarter of 2008 and 2007, amortization expense related to intangible assets was approximately $0.3 million and $0.1 million, respectively. For the first nine months of 2008 and 2007, amortization expense related to intangible assets was approximately $0.8 million and $0.3 million, respectively.
17 — OTHER MATTERS
Minority Put Arrangement
In September 2007 the Company completed the acquisition of Stag’s Leap Wine Cellars through one of the Company’s consolidated subsidiaries, Michelle-Antinori, LLC (“Michelle-Antinori”), in which the Company holds an 85 percent ownership interest, with a 15 percent non-controlling interest held by Antinori California (“Antinori”). In connection with the acquisition of Stag’s Leap Wine Cellars and the related formation of Michelle-Antinori, the Company provided a put right to Antinori (“minority put arrangement”). The minority put arrangement, as amended, provides Antinori with the right to require the Company to purchase its 15 percent ownership interest in Michelle-Antinori at a price equivalent to Antinori’s initial investment. The minority put arrangement becomes exercisable beginning on the third anniversary of the Stag’s Leap Wine Cellars acquisition (September 11, 2010). The Company accounts for the minority put arrangement as mandatorily redeemable securities under Accounting Series Release No. 268, Redeemable Preferred Stocks, and Emerging Issues Task Force Abstract Topic No. D-98, Classification and Measurement of Redeemable Securities, as redemption is outside of the control of the Company. Under this accounting model, to the extent the value of the minority put arrangement is greater than the minority interest reflected on the balance sheet (“traditional minority interest”), the Company recognizes the difference as an increase to the value of minority interest, with an offset to retained earnings and a similar reduction to the numerator in the earnings per share available to common shareholders calculation.  The Company also reflects any decreases to the amount in a similar manner, with the floor in all cases being the traditionally calculated minority interest balance as of that date. The Company values the put arrangement as if the redemption date were the end of the current reporting period. As of September 30, 2008, the value of the minority put arrangement did not exceed the traditional minority interest balance. Therefore, no adjustment was recognized in the Condensed Consolidated Statement of Financial Position or in the calculation of earnings per share.

 

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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Antitrust Litigation
In the first quarter of 2007 the Company recorded a $122.1 million pre-tax charge, representing the estimated costs to be incurred in connection with the resolution of the Wisconsin and California indirect purchaser class actions. Approximately $28.5 million of this charge related to settlement of the Wisconsin action resulting from court-ordered mediation in April 2007. The charge reflected costs attributable to coupons that will be distributed to consumers, which will be redeemable on future purchases of the Company’s moist smokeless tobacco products. Also reflected in the Wisconsin charge are plaintiffs’ attorneys’ fees and other administrative costs of the settlement. The terms of the Wisconsin settlement were approved by the court in December 2007. The remaining $93.6 million of the first quarter 2007 charge related to settlement of the California action in May 2007, as a result of court-ordered mediation. This charge brought the total recognized liability for the California action to $96 million, which reflected the cost of cash payments to be made to the benefit of class members, as well as plaintiffs’ attorneys’ fees and other administrative costs of the settlement. Refer to Note 14, “Contingencies,” for additional information.
Pending Acquisition
On September 7, 2008, the Company, Altria, and Armchair Merger Sub, Inc., a wholly-owned subsidiary of Altria, entered into an Agreement and Plan of Merger (as previously amended, the “Merger Agreement”), pursuant to which Altria will acquire all outstanding shares of the Company’s common stock for a price of $69.50 per share. The completion of the acquisition is subject to certain customary conditions, including, but not limited to, the receipt of applicable shareholder and regulatory approvals. The Merger Agreement contains specified termination rights for each of the parties and provides that, in certain circumstances, the Company would be required to pay Altria a termination fee of $250 million plus the reimbursement of certain expenses up to an aggregate amount of $10 million. Additionally, in certain circumstances Altria would be required to pay the Company a reverse termination fee of either $200 million or $300 million. The foregoing summary of the Merger Agreement and the transactions contemplated therein does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement. For the complete Merger Agreement, including any amendments thereto, please refer to Exhibits 2.1 and 2.2 to this Quarterly Report on Form 10-Q.
The Company incurred $7.1 million of acquisition-related costs during the third quarter of 2008, consisting of legal and other professional fees. These amounts are reported on the “acquisition-related costs” line in the Condensed Consolidated Statement of Operations.
In October 2008, the Federal Trade Commission granted early termination of the initial waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and, therefore, no further regulatory review by the federal antitrust authorities is required in connection with the acquisition. Assuming shareholder approval is provided at a special shareholder meeting to be held on December 4, 2008 and all other conditions to close are satisfied, the transaction is anticipated to close the first week of January 2009 and no later than January 7, 2009.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s consolidated results of operations and financial condition should be read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements within this Quarterly Report on Form 10-Q, as well as the consolidated financial statements and notes thereto included in the 2007 Form 10-K. Herein, the Company makes forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in those forward-looking statements as a result of various factors, including, but not limited to, those presented under “Cautionary Statement Regarding Forward-Looking Information” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).” In addition, the Company has presented certain risk factors relevant to the Company’s business included in Item 1A in Part I of the 2007 Form 10-K, as well as additional risk factors associated with the Company’s pending acquisition by Altria, which are included in Item 1A in Part II of this Quarterly Report on Form 10-Q.
INTRODUCTION
MD&A is provided as a supplement to the accompanying consolidated financial statements and notes thereto, to assist individuals in their review of such statements. MD&A has been organized as follows:
   
OVERVIEW – This section provides context for the remainder of MD&A, including a general description of the Company’s overall business, its business segments and a high-level summary of Company-specific and industry-wide factors impacting its operations.
 
   
RESULTS OF OPERATIONS – This section provides an analysis of the Company’s results of operations for the three and nine months ended September 30, 2008 and 2007. This section is organized using a layered approach, beginning with a discussion of consolidated results at a summary level, followed by more detailed discussions of business segment results and unallocated corporate items, including interest and income taxes.
 
   
OUTLOOK – This section provides information regarding the Company’s current expectations, mainly with regard to the remainder of the current fiscal year, and is organized to provide information by business segment and on a consolidated basis.
 
   
LIQUIDITY AND CAPITAL RESOURCES – This section provides an analysis of the Company’s financial condition, including cash flows for the nine months ended September 30, 2008 and 2007 and any material updates to the Company’s aggregate contractual obligations as of September 30, 2008.
 
   
OFF-BALANCE SHEET ARRANGEMENTS – This section provides information regarding any off-balance sheet arrangements that are, or could be, material to the Company’s results of operations or financial condition.
 
   
NEW ACCOUNTING STANDARDS – This section provides information regarding any newly issued accounting standards which have not yet been adopted by the Company.

 

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OVERVIEW
BUSINESS
UST Inc. is a holding company for its wholly-owned subsidiaries: U.S. Smokeless Tobacco Company and International Wine & Spirits Ltd. The Company’s largest subsidiary, U.S. Smokeless Tobacco Company, is the leading manufacturer and marketer of moist smokeless tobacco products, including the iconic premium brands Copenhagen and Skoal, and the value brands Red Seal and Husky. The Company’s International Wine & Spirits Ltd. subsidiary produces and markets premium wines sold nationally, via its Ste. Michelle Wine Estates subsidiary, under 20 different labels including Chateau Ste. Michelle, Columbia Crest, Conn Creek, Red Diamond, Erath and Stag’s Leap Wine Cellars. The Company also produces and markets sparkling wine under the Domaine Ste. Michelle label. In addition, the Company is the exclusive United States importer and distributor of the portfolio of wines produced by the Italian winemaker Marchesi Antinori, Srl (“Antinori”).
The Company conducts its business principally in the United States. The Company’s operations are divided primarily into two reportable segments: Smokeless Tobacco and Wine. The Company’s international smokeless tobacco operations, which are less significant, are reported as All Other Operations.
As discussed in Item 1, “Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 17, Other Matters,” on September 7, 2008, the Company and Altria entered into a merger agreement, pursuant to which Altria will acquire all outstanding shares of the Company’s common stock for a price of $69.50 per share. The completion of the acquisition is subject to certain customary conditions, including, but not limited to, the receipt of shareholder approval. The transaction is currently expected to close, subject to the satisfaction of all conditions to closing, the first week of January 2009 and no later than January 7, 2009. The matters set forth in this Quarterly Report on Form 10-Q do not reflect any actions that Altria may take, or request the Company to take, following completion of the transaction.
SMOKELESS TOBACCO SEGMENT
The Company’s vision in the Smokeless Tobacco segment is for its smoke-free products to be recognized by adults as the preferred way to experience tobacco satisfaction. The Company’s primary objective in the Smokeless Tobacco segment is to continue to grow the moist smokeless tobacco category by building awareness and social acceptability of smokeless tobacco products among adults, primarily smokers, with a secondary objective of competing effectively in every segment of the moist smokeless tobacco category.
Category Growth
Category growth is the Company’s top focus, as moist smokeless tobacco is a low incidence category and offers a viable option to adult smokers who are increasingly facing restrictions and are seeking a discreet and convenient alternative. For perspective, the number of adults who smoke is significantly larger than the number of adults who use smokeless tobacco products. As a result, every one percent of adult smokers who converts to moist smokeless tobacco products represent a 7 percent to 8 percent increase in the moist smokeless tobacco category’s adult consumer base. The Company views conversion as essential because consumer research indicates that the majority of new adult consumers who enter the category do so in the premium segment, of which the Company has approximately a 91 percent share.

 

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In addition to advertising initiatives focused on category growth, the Company has utilized its direct mail and one-on-one marketing programs to promote the discreetness and convenience of smokeless tobacco relative to cigarettes. These programs, which the Company believes have been successful over the past several years, reaching over 6 million adult smokers, continue in 2008. The success of the category growth initiatives is also impacted by product innovation, as evidenced by the contribution that new products have made to the Smokeless Tobacco segment’s results over the past several years. The success of the category growth initiatives is further evidenced by the fact that over the past several years, a majority of the new adult consumers who have recently entered the moist smokeless tobacco category first smoked cigarettes and that category growth has accelerated since the initiatives’ inception. Based on these results and the rate of growth experienced for the first nine months of 2008, the Company expects category growth of about 7 percent for full-year 2008.
Competing Effectively
The Company is committed to competing effectively in every segment of the moist smokeless tobacco category by accelerating profitable volume growth, with the goal of growing as fast as the category. The Company intends to achieve this goal through its premium brand loyalty and brand-building initiatives, and also through price-focused efforts related to price-value products.
Premium Brand Loyalty While category growth remains the Company’s top priority, it has also significantly enhanced its efforts on adult consumer loyalty for its premium moist smokeless tobacco products. The premium brand loyalty plan is designed to minimize migration from premium to price-value products by delivering value to adult consumers through product quality and brand-building efforts, along with promotional spending and other initiatives. The Company believes this effort has been successful over the last two years, as demonstrated by the premium net can volume growth experienced during the vast majority of that period. However, during the second quarter of 2008, there was some softness in premium net unit volume as a result of macroeconomic challenges, high gasoline prices and increased competitive activity, in response to which the Company increased its promotional efforts. The Company believes these efforts were effective, as evidenced by an improving trend in premium net can volume in the latter half of the third quarter, with an increase of approximately 1.2 percent, versus the corresponding period of 2007. For the first nine months of 2008, despite the challenging external environment, premium net can volume increased 0.3 percent, as compared to the first nine months of 2007. The Company believes that the increased competitive activity experienced earlier in the year is moderating, with price-value brands all taking price increases. In addition, the rate of growth experienced by competitors is also expected to moderate, as they begin to compare to prior year product launches. Taking this improvement, as well as lower gasoline prices, into consideration, the Company does not intend any further increase to its premium brand-building and loyalty initiatives beyond currently planned levels for the remainder of 2008.
Price-Value Initiatives – The Company’s commitment to accelerate profitable volume growth reflects a balanced portfolio approach, which also includes a full complement of marketing support for its price-value products. The Company’s successful execution of a balanced portfolio approach continued in the first nine months of 2008, as 6.9 percent growth in price-value net can volume occurred at the same time as 0.3 percent growth in premium net can volume. Of note, the Company repriced and repositioned its Rooster brand to compete as a price-value brand during the second quarter of 2008.

 

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WINE SEGMENT
The Company’s vision in the Wine segment is for Ste. Michelle Wine Estates to be recognized as the premier fine wine company in the world. This is a vision based on continuous improvement in quality and greater recognition through third-party acclaim and superior products. In connection with that vision, the Company aims to elevate awareness of the quality of Washington state wines and increase its prestige to that of the top regions of the world through superior products, innovation and customer focus. In order to achieve these goals, attention is directed towards traditional style wines in the super premium to luxury-priced categories. The Company has made progress towards its vision, as demonstrated by its recent accomplishments, with premium case volume growth of 17.8 percent in the first nine months of 2008, as compared to the corresponding period of 2007. According to ACNielsen, Ste. Michelle Wine Estates continued to be the fastest growing of the ten largest wineries in the United States during the first nine months of 2008. During the first nine months of 2008, the Company’s Chateau Ste. Michelle brand was the fastest growing top ten premium brand, according to ACNielsen. In addition, as reported by ACNielsen, volume growth for Washington state wines, where the Company maintained its strong leadership position, outpaced most other major regions thus far during 2008, with a growth rate of approximately 10 percent.
Strategic alliances and acquisitions in the Wine segment outside of Washington State have also been important in enabling the Company to achieve its long-term vision. The alliance with Antinori, to become its exclusive United States importer and distributor, and the purchase of the Erath label and winery, both of which occurred in 2006, have broadened the Company’s position with respect to two key wine regions, Tuscany and Oregon. The addition of Antinori wines positions the Company as a leader in United States distribution of Tuscan wines, while the addition of Erath establishes the Company as one of the largest producers of Oregon Pinot Noir. The Company also completed the acquisition of Stag’s Leap Wine Cellars and its signature Napa Valley, CA vineyards in September 2007, with a 15 percent minority interest held by Antinori California. This acquisition provides additional prestige to the Wine segment’s acclaimed portfolio, further strengthens the Company’s relationship with Antinori, and has contributed favorably to the segment’s continued operating profit growth.
Another key element of the Wine segment’s strategy is expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers. To that end, the Company remains focused on the continued expansion of its sales force and category management staff.

 

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RESULTS OF OPERATIONS
(In thousands, except per share amounts or where otherwise noted)
CONSOLIDATED RESULTS
Third Quarter of 2008 compared with the Third Quarter of 2007
                                 
    Three Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net sales
  $ 484,631     $ 479,612     $ 5,019       1.0  
Net earnings
    125,322       133,600       (8,278 )     (6.2 )
Basic earnings per share
    0.85       0.85              
Diluted earnings per share
    0.84       0.84              
 
                               
Restructuring charges
    6,406       1,677       4,729        
Antitrust litigation
    450       3,158       (2,708 )     (85.8 )
Acquisition-related costs
    7,082             7,082        
Net Earnings
Consolidated net earnings decreased in the third quarter of 2008, as compared to the third quarter of 2007, primarily due to decreased operating income and higher net interest expense, partially offset by lower income tax expense. The Company reported operating income of $203.7 million in the third quarter of 2008, representing 42 percent of consolidated net sales, compared to operating income of $218.5 million, or 45.6 percent of consolidated net sales, in the third quarter of 2007. The decrease in operating income was primarily due to the following:
   
Lower net sales and gross margin in the Smokeless Tobacco segment;
 
   
The impact of $7.1 million in acquisition-related costs recognized in connection with the pending acquisition of the Company by Altria, which adversely impacted the operating margin by 1.5 percentage points;
 
   
Higher restructuring charges incurred in connection with the Project Momentum initiative (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 1.3 percentage points and 0.3 percentage points in the third quarter of 2008 and 2007, respectively; and
 
   
Higher SA&A expenses in the Wine segment, including the impact of the addition of Stag’s Leap Wine Cellars, which was acquired in mid-September 2007.
These factors were partially offset by:
   
Increased net sales and gross margin in the Wine segment and the Company’s international operations;
 
   
Lower SA&A expenses in the Smokeless Tobacco segment, which can be attributed to Project Momentum;
 
   
Lower unallocated corporate expenses, primarily due to the absence of the amortization of imputed rent related to a below-market short-term lease the Company executed in connection with the sale of its former corporate headquarters building, which adversely impacted the third quarter of 2007 operating margin percentage by 0.6 percentage points, as well as lower professional fees; and
 
   
Lower antitrust litigation charges which adversely impacted the operating margin by 0.1 percentage points and 0.7 percentage points in the third quarter of 2008 and 2007, respectively.

 

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Basic and diluted earnings per share of $0.85 and $0.84, respectively, for the third quarter of 2008, were equal to the corresponding comparative measures in 2007. Basic average shares outstanding in the third quarter of 2008 were 6.6 percent lower than in the comparable prior year period, primarily as a result of the 10 million shares repurchased during the 12-month period ended September 30, 2008, the majority of which were repurchased in the latter half of 2007, partially offset by the exercise of stock options. This decline in basic average shares outstanding occurred despite the Company’s suspension of its share repurchase program during the second quarter of 2008 in connection with the pending acquisition by Altria. Diluted average shares outstanding in the third quarter of 2008 were lower than those in the third quarter of 2007 mainly due to the decrease in basic average shares outstanding and a lower level of dilutive options outstanding.
Net Sales
                                 
    Three Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net Sales by Segment:
                               
Smokeless Tobacco
  $ 364,148     $ 384,067     $ (19,919 )     (5.2 )
Wine
    99,760       82,286       17,474       21.2  
All Other Operations
    20,723       13,259       7,464       56.3  
 
                         
Consolidated Net Sales
  $ 484,631     $ 479,612     $ 5,019       1.0  
 
                         
The increase in consolidated net sales for the third quarter of 2008, as compared to the third quarter of 2007, was primarily due to the following:
   
Improved case volume for existing premium wine brands, as well as the incremental impact from the addition of the Stag’s Leap Wine Cellars portfolio of wines, which was acquired in September 2007;
 
   
Higher international net sales, primarily relating to a Canadian excise tax increase, which is passed through to customers; and
 
   
Increased net can volume for price-value moist smokeless tobacco products.
These factors were partially offset by:
   
A slight decrease in premium net can volume for moist smokeless tobacco products; and
 
   
Lower net revenue realization per can in the Smokeless Tobacco segment.

 

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Segment Net Sales as a Percentage of Consolidated Net Sales
(PIE CHART)
     
*  
Smokeless Tobacco
Gross Margin
                                 
    Three Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Gross Margin by Segment:
                               
Smokeless Tobacco
  $ 294,299     $ 315,199     $ (20,900 )     (6.6 )
Wine
    36,920       29,626       7,294       24.6  
All Other Operations
    9,748       8,318       1,430       17.2  
 
                         
Consolidated Gross Margin
  $ 340,967     $ 353,143     $ (12,176 )     (3.4 )
 
                         
The consolidated gross margin decrease in the third quarter of 2008, as compared to the third quarter of 2007, was primarily due to lower net sales in the Smokeless Tobacco segment and higher cost of products sold in all segments, partially offset by higher net sales in the Wine segment and the Company’s international operations.
                         
    Three Months Ended        
    September 30,     Increase/  
    2008     2007     (Decrease)  
Gross Margin as a % of Net Sales by Segment:
                       
Smokeless Tobacco
    80.8 %     82.1 %     (1.3 )
Wine
    37.0 %     36.0 %     1.0  
All Other Operations
    47.0 %     62.7 %     (15.7 )
Consolidated
    70.4 %     73.6 %     (3.2 )
The decline in the consolidated gross margin, as a percentage of net sales, was mainly due to a change in segment mix, as case volume for wine, which sells at comparatively lower margins, grew faster than the net can volume for moist smokeless tobacco products. Also contributing to this decline was the lower net revenue realization per can in the Smokeless Tobacco segment, as well as the impact of a Canadian excise tax related price increase affecting the Company’s international operations. Gross margin percentages for each segment are discussed further below.

 

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Acquisition-Related Costs
In connection with Altria’s pending acquisition of the Company, $7.1 million of acquisition-related costs were incurred during the third quarter of 2008, consisting of legal and other professional fees.
Restructuring Charges
The Company recognized $6.4 million and $1.7 million in restructuring charges in the third quarter of 2008 and 2007, respectively, related to further actions undertaken in connection with Project Momentum. Under this initiative, the Company has targeted at least $150 million in annual savings to be realized within the three years following its initial implementation in September 2006, of which $130 million has been achieved through September 30, 2008. Refer to the Restructuring Charges section within the First Nine Months of 2008 compared with the First Nine Months of 2007 discussion below for additional information.
First Nine Months of 2008 compared with the First Nine Months of 2007
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net sales
  $ 1,463,516     $ 1,417,884     $ 45,632       3.2  
Net earnings
    390,316       381,084       9,232       2.4  
Basic earnings per share
    2.64       2.40       0.24       10.0  
Diluted earnings per share
    2.62       2.37       0.25       10.5  
 
Gain on sale of corp. HQ bldg.
          105,143       (105,143 )      
 
Restructuring charges
    8,024       9,105       (1,081 )     (11.9 )
Antitrust litigation
    1,975       125,258       (123,283 )     (98.4 )
Acquisition-related costs
    7,082             7,082        

 

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Net Earnings
Consolidated net earnings increased in the first nine months of 2008, as compared to the first nine months of 2007, as a result of increased operating income and the impact of a lower effective tax rate, partially offset by higher net interest expense. The Company reported operating income of $654.3 million in the first nine months of 2008, representing 44.7 percent of consolidated net sales, compared to operating income of $624.2 million, or 44 percent of consolidated net sales, in the first nine months of 2007. The increase in operating income was primarily due to the following:
   
Lower antitrust litigation charges, as the 2008 period included $2 million and the prior year period included $125.3 million. The charges in 2007 represented the estimated costs associated with the resolution of indirect purchaser antitrust class actions in the States of Wisconsin and California. Antitrust litigation charges adversely impacted the operating margin percentage by 0.1 percentage points and 8.8 percentage points in the first nine months of 2008 and 2007, respectively;
 
   
Increased net sales and gross margin in the Wine segment and the Company’s international operations;
 
   
Lower SA&A expenses in the Smokeless Tobacco segment, which can be attributed to Project Momentum;
 
   
Lower restructuring charges incurred in connection with the Project Momentum initiative (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 0.5 percentage points and 0.6 percentage points in the first nine months of 2008 and 2007, respectively; and
 
   
Lower unallocated corporate expenses, primarily due to lower costs related to changes in executive management and the absence of amortization of imputed rent related to a below-market short-term lease the Company executed in connection with the sale of its former corporate headquarters building. The impact of such charges adversely impacted the operating margin percentage by 0.1 and 0.8 percentage points in the first nine months of 2008 and 2007, respectively.
These factors were partially offset by:
   
The absence of a $105 million pre-tax gain recognized in the prior year in connection with the sale of the Company’s former corporate headquarters building, which favorably impacted the prior year operating margin by 7.4 percentage points;
 
   
Lower net sales and gross margin in the Smokeless Tobacco segment;
 
   
The impact of $7.1 million in acquisition-related costs recognized in connection with the pending acquisition of the Company by Altria, which adversely impacted the operating margin by 0.5 percentage points; and
 
   
Higher SA&A expenses in the Wine segment, including the impact of the addition of Stag’s Leap Wine Cellars, which was acquired in September 2007.
Basic and diluted earnings per share were $2.64 and $2.62, respectively, for the first nine months of 2008, representing increases of 10 percent and 10.5 percent, respectively, from each of the corresponding comparative measures in 2007. Basic average shares outstanding in the first nine months of 2008 were 7 percent lower than in the comparable prior year period, primarily as a result of the 10 million shares repurchased during the 12-month period ended September 30, 2008, partially offset by the exercise of stock options. Diluted average shares outstanding in the first nine months of 2008 were lower than those in the first nine months of 2007 mainly due to the decrease in basic average shares outstanding and a lower level of dilutive options outstanding.

 

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Net Sales
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net Sales by Segment:
                               
Smokeless Tobacco
  $ 1,131,399     $ 1,150,518     $ (19,119 )     (1.7 )
Wine
    285,060       230,581       54,479       23.6  
All Other Operations
    47,057       36,785       10,272       27.9  
 
                         
Consolidated Net Sales
  $ 1,463,516     $ 1,417,884     $ 45,632       3.2  
 
                         
The increase in consolidated net sales for the first nine months of 2008, as compared to the first nine months of 2007, was primarily due to the following:
   
Higher case volume for premium wine, including the incremental impact from the addition of the Stag’s Leap Wine Cellars portfolio of wines, which was acquired in September 2007;
 
   
Improved net can volume for moist smokeless tobacco products, with increases for both premium and price-value products; and
 
   
Improved international results.
These factors were partially offset by:
   
Lower net revenue realization per can in the Smokeless Tobacco segment.
Segment Net Sales as a Percentage of Consolidated Net Sales
(PIE CHART)
     
*  
Smokeless Tobacco
Gross Margin
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Gross Margin by Segment:
                               
Smokeless Tobacco
  $ 920,235     $ 945,138     $ (24,903 )     (2.6 )
Wine
    102,119       80,575       21,544       26.7  
All Other Operations
    25,843       23,200       2,643       11.4  
 
                         
Consolidated Gross Margin
  $ 1,048,197     $ 1,048,913     $ (716 )     (0.1 )
 
                         

 

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The consolidated gross margin in the first nine months of 2008 remained relatively flat, as compared to the first nine months of 2007, as higher net sales in the Wine segment and the Company’s international operations were offset by lower sales in the Smokeless Tobacco segment and higher cost of products sold in all segments.
                         
    Nine Months Ended        
    September 30,     Increase/  
    2008     2007     (Decrease)  
Gross Margin as a % of Net Sales by Segment:
                       
Smokeless Tobacco
    81.3 %     82.1 %     (0.8 )
Wine
    35.8 %     34.9 %     0.9  
All Other Operations
    54.9 %     63.1 %     (8.2 )
Consolidated
    71.6 %     74.0 %     (2.4 )
The decline in the consolidated gross margin, as a percentage of net sales, was mainly due to a change in segment mix, as case volume for wine, which sells at comparatively lower margins, grew faster than the net can volume for moist smokeless tobacco products. In addition, lower net revenue realization per can in the Smokeless Tobacco segment and higher costs per case in the Wine segment, contributed to the overall decline in gross margin, as a percentage of net sales. The impact of a Canadian excise tax related price increase affecting the Company’s international operations also contributed to the overall decline in gross margin, as a percentage of net sales. Gross margin percentages for each segment are discussed further below.
Restructuring Charges
The Company recognized $8 million and $9.1 million in restructuring charges in the first nine months of 2008 and 2007, respectively, related to actions undertaken in connection with Project Momentum. The following table provides a summary of restructuring charges incurred during the third quarter and first nine months of 2008, the cumulative charges incurred to date and the total amount of charges expected to be incurred in connection with this initiative for each major cost, by category:
                                 
    Restructuring Charges     Restructuring Charges              
    Incurred for the Three     Incurred for the Nine     Cumulative Charges     Total Charges  
    Months Ended     Months Ended     Incurred as of     Expected to be  
    September 30, 2008     September 30, 2008     September 30, 2008     Incurred(1)  
 
One-time termination benefits
  $ 6,358     $ 7,908     $ 26,717     $ 26,700 - $27,000  
Contract termination costs
                492       500  
Other restructuring costs
    48       116       13,616       13,600-13,800  
 
                       
Total
  $ 6,406     $ 8,024     $ 40,825     $ 40,800 - $41,300  
 
                       
     
(1)  
The total cost of one-time termination benefits expected to be incurred under Project Momentum reflects the initiative’s anticipated elimination of certain salaried, full-time positions across various functions and operations, primarily at the Company’s corporate headquarters, as well as a reduction in the number of hourly positions within the manufacturing operations. The majority of the total one-time termination benefit costs expected to be incurred were recognized in 2006 and 2007, with the remainder expected to be recognized in 2008. The majority of total contract termination costs expected to be incurred were recognized in 2006, with the remainder recognized in 2007. Substantially all of the total other restructuring charges currently expected to be incurred were recognized through the end of 2007, with approximately half

 

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of such amounts recognized in each of 2006 and 2007. The remainder of the total other restructuring charges to be incurred are expected to be recognized in 2008. While the Company believes that its estimates of total restructuring charges expected to be incurred related to the aforementioned $150 million in savings are appropriate and reasonable based upon the information available, actual results could differ from such estimates. Total restructuring charges expected to be incurred currently represent the Company’s best estimates of the ranges of such charges; although there may be additional charges recognized as additional actions are identified and finalized. As any additional actions are approved and finalized and costs or charges are determined, the Company will file a Current Report on Form 8-K under Item 2.05 or report such costs or charges in its periodic reports, as appropriate.
One-time termination benefits relate to severance-related costs and outplacement services for employees terminated in connection with Project Momentum, as well as enhanced retirement benefits for qualified individuals. Contract termination costs primarily relate to charges for the termination of operating leases incurred in conjunction with the consolidation and relocation of facilities. Other restructuring costs are mainly comprised of other costs directly related to the implementation of Project Momentum, primarily professional fees, as well as asset impairment charges and applicable costs incurred in connection with the relocation of the Company’s headquarters. Primarily all of the restructuring charges expected to be incurred will result in cash expenditures, although approximately $9 million of such charges relate to pension enhancements offered to applicable employees, all of which will be paid directly from the respective pension plan’s assets. As of September 30, 2008, the liability balance associated with restructuring charges amounted to $2.3 million. Refer to Item 1, “Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 13, Restructuring,” for further information regarding accrued restructuring charges.

 

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SMOKELESS TOBACCO SEGMENT
Third Quarter of 2008 compared with the Third Quarter of 2007
                                 
    Three Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net sales
  $ 364,148     $ 384,067     $ (19,919 )     (5.2 )
Restructuring charges
    5,913       403       5,510        
Antitrust litigation
    450       3,158       (2,708 )     (85.8 )
Operating profit
    194,806       213,073       (18,267 )     (8.6 )
Net Sales
Smokeless Tobacco segment net sales decreased in the third quarter of 2008, as compared to the third quarter of 2007, due to a 0.2 percent decrease in overall net can volume for moist smokeless tobacco products and lower net revenue realization per can. The lower net revenue realization per can was attributable to the following:
   
Increased sales incentives, primarily retail buydowns, for both premium and price-value brands, reflecting incremental spending in response to increased competitive and new product activity and a weakening economy;
 
   
An unfavorable shift in premium product mix, with net can volume for value pack and promotional products, the nature of which are described below in further detail, comprising a larger percentage of premium net can volume; and
 
   
An unfavorable shift in overall product mix, with net can volume for price-value products increasing 3.9 percent and premium products declining 0.9 percent.
Percentage of Smokeless Tobacco Segment Net Sales by Product Category
(PIE CHART)
     
*  
Moist smokeless tobacco products
 
**  
Includes dry snuff products and tobacco seeds
Net sales results for both premium and price-value products include net can sales for standard products, which consist of straight stock and value pack products, as well as pre-pack promotional products. Straight stock refers to single cans sold at wholesale list prices. Value packs, which were introduced to more effectively compete for and retain value-conscious adult consumers, are two-can packages sold year-round reflecting lower per-can wholesale list prices than wholesale list prices for straight stock single-can products. Pre-pack promotions refer to those products that are bundled and packaged in connection with a specific promotional pricing initiative for a limited period of time.

 

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MSTP Net Can Volume
                                 
    Three Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net Can Volume (in thousands):
                               
Premium
    137,309       138,615       (1,306 )     (0.9 )
Price Value
    27,600       26,576       1,024       3.9  
 
                         
Total
    164,909       165,191       (282 )     (0.2 )
 
                         
     
*  
In April 2008, the Company repositioned its Rooster moist smokeless tobacco brand as a price-value product. In order to ensure comparability and to conform to the current positioning, amounts related to Rooster for all periods presented have been reclassified from premium to price-value.
Percentage of Total Moist Smokeless Tobacco Products Net Can Volume by Category Segment
(PIE CHART)
Overall net can volume for moist smokeless tobacco products decreased 0.2 percent in the third quarter of 2008, as compared to the similar 2007 period, which includes a difference in the timing of shipments versus the corresponding prior year period which negatively affected the comparison by approximately 2 million cans. Adjusting for the negative comparative impact of the shipment timing, total moist smokeless tobacco net can volume increased 0.9 percent and premium net can volume increased 0.1 percent in the third quarter of 2008. The difference in timing of shipments relates to the Company’s process of delivering approximately 2 million cans each Sunday to qualified wholesalers to allow them to meet retailer requests for Monday delivery of the Company’s products. While the Company has had such a process in place for qualified wholesalers over the past several years, this was the first instance that it materially affected the comparison of reported shipment results, as the last day of the third quarter of 2007 was a Sunday. As such, the Company believes that the underlying results are more indicative of its actual shipment trends.

 

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The Company believes the underlying overall and premium net can volume results, as well as the improvement in trend achieved as the third quarter of 2008 progressed, reflect the positive impact of the following:
   
Incremental spending during the quarter under the Company’s premium brand loyalty plan;
 
   
Continued execution of the Company’s category growth initiatives; and
 
   
Focused promotional spending on price-value brands.
These underlying results were achieved despite the following factors:
   
A more challenging external environment, including a weak economy, high gasoline prices and increased competitive promotional and new product activity;
 
   
The impact of gasoline shortages in the Southeast region of the country that occurred late in the third quarter, which had a negative impact on convenience store sales in the region; and
 
   
The impact of increased net can volume in the third quarter of 2007 related to pipeline volume associated with the launch of the Company’s Cope product line.
Net can volume for premium products includes the Copenhagen brand, which is comprised of the Company’s traditional Copenhagen products and the Cope product line, as well as the Skoal brand. Net can volume for the Company’s traditional Copenhagen and Skoal products, including pouch products, increased in the third quarter of 2008, as compared to the third quarter of 2007, with improving results occurring in the latter half of the quarter reflecting the positive impact of the Company’s incremental promotional spending. For perspective, the Company’s premium net can volume increased 1.2 percent during the second half of the third quarter.
The Company remains committed to the development of new products and packaging that cover both core product launches and other possible innovations. In connection with that objective, during the first quarter of 2008, the Company launched Skoal Edge Wintergreen Long Cut, which contributed to third quarter 2008 premium net can volume results. Skoal Edge Wintergreen Long Cut is a newer, bolder wintergreen premium product, which the Company believes is unique in terms of flavor and texture, providing a softer, more comfortable mouth feel.
The Company’s premium pouch products also responded well to incremental support during the third quarter, resulting in strong double-digit growth. Such products are a key component to the Company’s objective to grow the moist smokeless tobacco category by building awareness and improving the social acceptability of smokeless tobacco products among adult consumers, primarily smokers. Specifically, they are designed to differentiate the Company’s premium brands from competitive products, and to provide more approachable forms and flavors for adult smokers, who continue to switch to smokeless tobacco products. Net can volume for these pouch products, which include Copenhagen Pouches and Skoal Pouches, posted double-digit growth in the third quarter of 2008, as compared to the third quarter of 2007. Net can volume for pouch products represented 9 percent of the Company’s premium net can volume for the third quarter of 2008.
In addition, with regards to innovation, the Company has launched Skoal Snus in a limited lead market. In keeping with the objective to improve smokeless tobacco’s social acceptability, this product is aimed at converting adult smokers, and is designed to be spit-free. Over the course of the past two years, several similar competitive snus products have been introduced in select domestic markets. All of these dry, spit-free products have substantially different attributes than traditional moist smokeless tobacco products. The limited volume associated with these launches has been largely incremental to the category and has had no measurable impact on the Company’s existing products within these markets.

 

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Net can volume for price-value products includes the Red Seal and Husky brands, along with the Rooster brand. Net can volume for the Company’s mid-priced Red Seal brand grew low-single digits in the third quarter of 2008, as compared to the third quarter of 2007, which the Company believes reflects the brand’s inherent value proposition with 25 percent more tobacco per can than other leading brands. Net can volume for the Company’s deep discount Husky brand declined slightly in the third quarter of 2008, as compared to the corresponding prior year period, as the third quarter of 2007 reflected higher net can volume associated with an increased focus on brand-building efforts, expanded distribution and strengthened retail presence. Rooster, which was repositioned as a price-value product beginning in April 2008, posted strong growth in the third quarter of 2008, as compared to the third quarter of 2007.
For additional perspective on third quarter 2008 volume trends, the Company believes it is useful to provide information from the Company’s Retail Account Data Share & Volume Tracking System (“RAD-SVT”) for the 12-week period ending September 6, 2008, as provided by Management Science Associates, Inc. RAD-SVT measures shipments from wholesale to retail, a measure the Company believes is reflective of consumer takeaway.
                         
                    Percentage Point  
    Can-Volume %             Increase/(Decrease)  
    Change from Prior     %     from Prior Year  
    Year Period     Share     Period  
Total Category Data:
                       
Total Moist Smokeless Category
    8.2 %     N/A       N/A  
Total Premium Segment
    1.9 %     52.0 %*     (3.2 )
Total Value Segments
    16.0 %     47.9 %*     3.2  
 
                       
Company Data:
                       
Total Moist Smokeless Category
    2.9 %     57.4 %     (3.0 )
Total Premium Segment
    1.6 %     90.9 %     (0.2 )
Total Value Segments
    8.9 %     21.3 %     (1.4 )
     
*  
Amounts reported do not add to 100 percent, as this table does not reflect the herbal segment of the total moist smokeless category.
The Company believes the RAD-SVT data for the 12-week period ending September 6, 2008 aligns most closely with the third quarter and supports underlying shipment trends. For the 12 weeks ended September 6, 2008, the total moist smokeless tobacco category grew 8.2 percent, with volume for the Company’s overall products increasing 2.9 percent and volume for its premium products increasing 1.6 percent. The Company’s total share of the moist smokeless tobacco category of 57.4 percent was the same as the second quarter, which the Company believes reflects the positive impact of the increased promotional efforts implemented during the third quarter. Refer to the First Nine Months of 2008 compared with the First Nine Months of 2007 below for RAD-SVT data for the 26-week period ending September 6, 2008.

 

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Cost of Products Sold
Costs of products sold for the third quarter of 2008 increased as compared to the corresponding period of 2007, mainly due to higher unit costs, including costs associated with certain trade promotional packaging.
Gross Margin
                                 
    Three Months Ended        
    September 30,     Increase/(Decrease)
    2008     2007     Amount     %  
Gross margin
  $ 294,299     $ 315,199     $ (20,900 )     (6.6 )
 
                               
Gross margin as % of net sales
    80.8 %     82.1 %                
Gross margin decreased in the third quarter of 2008, compared to the third quarter of 2007, primarily as a result of lower net revenue realized per can, primarily due to increased sales incentives, as well as the aforementioned increase in cost of products sold. The gross margin, as a percentage of net sales, declined by 1.3 percentage points in the third quarter of 2008, as compared to the corresponding period of 2007, as a result of these factors and a shift in product mix, which included a higher percentage of price-value, value pack and promotional products.
SA&A Expenses
SA&A expenses decreased 5.5 percent in the third quarter of 2008 to $93.1 million, compared to $98.6 million in the third quarter of 2007, reflecting the following:
   
Lower tobacco settlement-related costs;
 
   
Lower direct marketing expenses;
 
   
Decreased legal expenses;
 
   
Lower tax expense related to samples;
 
   
Decreased trade promotional costs;
 
   
Lower promotional supplies expense; and
 
   
Decreased handling fees due to a reduction in returned goods.
These decreases were partially offset by:
   
Higher print advertising costs, primarily for Copenhagen and Skoal products;
 
   
Higher salaries and related costs; and
 
   
Higher field sales expenses, primarily the impact of higher fuel costs.
The Company’s SA&A expenses include legal expenses, which incorporate, among other things, costs of administering and litigating product liability claims. For the quarters ended September 30, 2008 and 2007, outside legal fees and other internal and external costs incurred in connection with administering and litigating product liability claims were $4.1 million and $3.4 million, respectively. These costs reflect a number of factors, including the number of claims, and the legal and regulatory environments affecting the Company’s products. The Company expects these factors to be the primary influence on its future costs of administering and litigating product liability claims. The Company does not expect these costs to increase significantly in the future; however, it is possible that adverse changes in the aforementioned factors could have a material adverse effect on such costs, as well as on results of operations and cash flows in the periods such costs are incurred.

 

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Antitrust Litigation
In the third quarter of 2008, the Company recorded a $0.5 million charge related to the previous settlement of an indirect purchaser antitrust action, due to a change in the estimated costs associated with the resolution of such action. In the third quarter of 2007 an antitrust litigation charge of $3.2 million was recognized related to a ruling on a motion filed with respect to the settlement of the Kansas and New York actions seeking additional plaintiffs’ attorneys’ fees and expenses, plus interest.
See Item 1, “Notes to Condensed Consolidated Financial Statements — Note 14, Contingencies,” for additional details regarding the Company’s antitrust litigation.
Restructuring Charges
Smokeless Tobacco segment results for the three months ended September 30, 2008 and 2007 reflect $5.9 million and $0.4 million, respectively, of the restructuring charges discussed in the Consolidated Results section above.
First Nine Months of 2008 compared with the First Nine Months of 2007
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net sales
  $ 1,131,399     $ 1,150,518     $ (19,119 )     (1.7 )
Restructuring charges
    7,235       6,889       346       5.0  
Antitrust litigation
    1,975       125,258       (123,283 )     (98.4 )
Operating profit
    624,606       507,821       116,785       23.0  
Net Sales
Smokeless Tobacco segment net sales declined in the first nine months of 2008, as compared to the first nine months of 2007, as the favorable impact of increased net can volume for both premium and price-value moist smokeless tobacco products was more than offset by lower net revenue realization per can, which was attributable to the following:
   
Increased sales incentives, primarily retail buydowns, for both premium and price-value brands;
 
   
An unfavorable shift in premium product mix, with net can volume for value pack and promotional premium products, comprising a larger percentage of premium net can volume; and
 
   
An unfavorable shift in overall product mix, with price-value products contributing to a larger percentage of total net can volume.

 

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Percentage of Smokeless Tobacco Segment Net Sales by Product Category
(PIE CHART)
     
*  
Moist smokeless tobacco products
 
**  
Includes dry snuff products and tobacco seeds
MSTP Net Can Volume*
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net Can Volume (in thousands):
                               
Premium
    414,862       413,635       1,227       0.3  
Price Value
    81,929       76,606       5,323       6.9  
 
                         
Total
    496,791       490,241       6,550       1.3  
 
                         
     
*  
In order to ensure comparability and to conform to Rooster’s current positioning, amounts related to this brand have been reclassified from premium to price-value for all periods presented.
Percentage of Total Moist Smokeless Tobacco Products Net Can Volume by Category Segment
(PIE CHART)
Overall net can volume for moist smokeless tobacco products increased 1.3 percent in the first nine months of 2008, as compared to the first nine months of 2007. Net can volume for premium products accounted for approximately 19 percent of the overall volume increase. The premium net can volume growth of 0.3 percent in the first nine months of 2008, as compared to the first nine months of 2007, was experienced at the same time as a 6.9 percent increase in net can volume for price-value products.

 

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The Company believes the overall net can volume growth is attributable to the following:
   
The Company’s continued category growth efforts aimed at converting adult smokers to moist smokeless tobacco products; and
 
   
An increased focus on brand building, including promotional spending and other price-focused initiatives related to the Company’s premium brand loyalty plan and price-value efforts.
The impact of these initiatives was partially offset by:
   
A continued challenging external environment, including a weak economy, high gasoline prices and increased competitive activity.
The premium net can volume growth of 0.3 percent for the first nine months of 2008 was attributable to both Copenhagen and Skoal products, reflecting the Company’s continued focus on premium brand loyalty efforts, even in the face of the economic and competitive challenges.

Premium pouch products posted double-digit net can volume growth in the first nine months of 2008, as compared to first nine months of 2007 and represented 8.3 percent of the Company’s premium net can volume.
Net can volume for Red Seal grew mid-single digits in the first nine months of 2008, as compared to the first nine months of 2007, reflecting the benefit of focused promotional spending. Net can volume for the Company’s Husky brand grew high single-digits in the first nine months of 2008, as compared to the corresponding prior year period, a lower growth rate than historical trends as the comparisons are now lapping the period of increased focus on brand-building efforts, expanded distribution and strengthened retail presence. For the first nine months of 2008, the Company continued to achieve price-value volume growth concurrent with premium volume growth, which is reflective of the Company’s strategy to compete effectively within every segment of the moist smokeless tobacco category.
For additional perspective on year-to-date results, the Company believes it is useful to provide the following RAD-SVT data for the 26-week period ending September 6, 2008, as provided by Management Science Associates, Inc.
                         
                    Percentage Point  
    Can-Volume %             Increase/(Decrease)  
    Change from Prior     %     from Prior Year  
    Year Period     Share     Period  
Total Category Data:
                       
Total Moist Smokeless Category
    8.5 %     N/A       N/A  
Total Premium Segment
    1.1 %     52.1 %*     (3.8 )
Total Value Segments
    18.0 %     47.8 %*     3.8  
 
                       
Company Data:
                       
Total Moist Smokeless Category
    2.1 %     57.4 %     (3.6 )
Total Premium Segment
    0.6 %     90.7 %     (0.4 )
Total Value Segments
    9.5 %     21.3 %     (1.7 )
     
*  
Amounts reported do not add to 100 percent, as this table does not reflect the herbal segment of the total moist smokeless category.

 

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As reflected in such data, for the 26 weeks ended September 6, 2008, the total moist smokeless tobacco category grew 8.5 percent, which was higher than both trends seen in recent quarters and the Company’s most recent estimate of category growth of about 7 percent for full-year 2008. Volume for the Company’s moist smokeless tobacco products increased 2.1 percent and its share of the total category was 57.4 percent during the period. Volume for the Company’s premium brands grew 0.6 percent for the 26 weeks ended September 6, 2008, while the overall premium segment grew 1.1 percent versus the comparable prior year period. The Company’s 90.7 percent share of the overall premium segment for the 26 weeks ended September 6, 2008 was level with the percent share reported for the 26 weeks ended June 14, 2008. Volume for the Company’s value products grew 9.5 percent from the prior year, compared to growth for the overall value segment of 18 percent in the most recent 26-week period, driven by the competitive promotional and new product launch activity.
RAD-SVT information is provided as an indication of current domestic moist smokeless tobacco trends from wholesale to retail and is not intended as a basis for measuring the Company’s financial performance. This information can vary significantly from the Company’s actual results due to the fact that the Company reports net shipments to wholesale, while RAD-SVT measures shipments from wholesale to retail. In addition, differences in the time periods measured, as well as differences as a result of new product introductions and promotions and levels of inventory at wholesale, affect comparisons of the Company’s actual results to those from RAD-SVT. The Company believes the difference in trend between RAD-SVT and its own net shipments is due to such factors. Furthermore, Management Science Associates, Inc. periodically reviews and adjusts RAD-SVT information, in order to improve the overall accuracy of the information for comparative and analytical purposes, by incorporating refinements to the extrapolation methodology used to project data from a statistically representative sample. Adjustments are typically made for static store counts and new reporting customers.
Cost of Products Sold
Costs of products sold for the first nine months of 2008 increased as compared to the corresponding period of 2007, mainly due to the overall increased net unit volume for moist smokeless tobacco products and higher unit costs, including costs associated with certain trade promotional packaging.
Gross Margin
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Gross margin
  $ 920,235     $ 945,138     $ (24,903 )     (2.6 )
 
Gross margin as % of net sales
    81.3 %     82.1 %                
Gross margin decreased in the first nine months of 2008, compared to the first nine months of 2007, as a result of lower net revenue realized per can, primarily due to increased sales incentives, as well as the increase in cost of products sold. The gross margin, as a percentage of net sales, declined by 0.8 percentage points in the first nine months of 2008, as compared to the corresponding period of 2007, as a result of these factors and a shift in product mix, which included a higher percentage of price-value, value pack and promotional products.

 

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SA&A Expenses
SA&A expenses decreased 6.1 percent in the first nine months of 2008 to $286.4 million, compared to $305.2 million in the first nine months of 2007, reflecting the following:
   
Lower tobacco settlement-related costs;
 
   
A reduction in legal expenses;
 
   
Lower tax expense related to samples;
 
   
Lower direct marketing costs;
 
   
Decreased handling fees due to a reduction in returned goods; and
 
   
A tax refund related to the Company’s seed operations.
These decreases were partially offset by:
   
Higher field sales expenses, including the impact of higher fuel costs;
 
   
Increased point-of-sale and advertising production costs; and
 
   
Higher consumer promotion costs, primarily due to the Cope Chop Shop Sweepstakes.
For the nine months ended September 30, 2008 and 2007, outside legal fees and other internal and external costs incurred in connection with administering and litigating product liability claims were $12.9 million and $10.4 million, respectively.
Antitrust Litigation
In the first nine months of 2008, the Company recorded charges of $2 million reflecting a change in the estimated costs associated with the resolution of certain indirect purchaser antitrust actions. The first nine months of 2007 reflect the impact of $125.3 million in antitrust litigation charges, primarily representing the estimated costs to be incurred in connection with the resolution of the Company’s two most significant remaining indirect purchaser class actions. The Company believes the settlement of these actions was prudent, as it removed a major distraction from the organization and reduced uncertainties regarding legal actions. The charge relating to these two actions was comprised of the following:
   
A $93.6 million pre-tax charge related to a May 2007 settlement, subject to court approval, reached in the State of California action as a result of court-ordered mediation. This charge brought the total recognized liability for the California action to $96 million, and reflected the cost of cash payments to be made to the benefit of class members, as well as plaintiffs’ attorneys’ fees and other administrative costs of the settlement. The terms of the California settlement were approved by the court in March 2008, however, an individual class member subsequently filed an appeal in April 2008.
 
   
A $28.5 million charge related to a settlement, subject to court approval, reached in the State of Wisconsin action during a court-ordered mediation session that was held in April 2007. This charge reflects costs attributable to coupons, which will be distributed to consumers, and will be redeemable, over the next several years, on future purchases of the Company’s moist smokeless tobacco products. Also reflected in this charge are plaintiffs’ attorneys’ fees and other administrative costs of the settlement. The terms of the Wisconsin settlement were approved by the court in December 2007.
In addition, an antitrust litigation charge of $3.2 million was recognized in the third quarter of 2007, related to a ruling on a motion filed with respect to the settlement of the Kansas and New York actions seeking additional plaintiffs’ attorneys’ fees and expenses, plus interest. See Item 1, “Notes to Condensed Consolidated Financial Statements — Note 14, Contingencies and Note 17, Other Matters,” for additional details regarding the Company’s antitrust litigation.

 

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Restructuring Charges
Smokeless Tobacco segment results for the nine months ended September 30, 2008 and 2007 reflect $7.2 million and $6.9 million, respectively, of the restructuring charges discussed in the Consolidated Results section above.
WINE SEGMENT
Third Quarter of 2008 compared with the Third Quarter of 2007
                                 
    Three Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net sales
  $ 99,760     $ 82,286     $ 17,474       21.2  
Restructuring charges
    273             273        
Operating profit
    16,331       12,758       3,573       28.0  
Net Sales
The increase in Wine segment net sales for the third quarter of 2008, as compared to the corresponding 2007 period, was primarily due to a 17.7 percent increase in premium case volume. These favorable net sales results reflect the following factors:
   
Strong performance by existing brands, primarily Columbia Crest, Chateau Ste. Michelle, Red Diamond, 14 Hands, and Domaine Ste. Michelle;
 
   
Incremental revenue contributed by the Stag’s Leap Wine Cellars labels, which were added to the Company’s portfolio in September 2007, with net sales of these labels accounting for approximately $4 million, or 22.6 percent, of the increase in net sales;
 
   
Higher sales of the imported Antinori products, for which the Company is the exclusive U.S. distributor; and
 
   
The continued benefit of favorable third-party acclaim and product ratings received in late 2007 and 2008. During the third quarter of 2008 the Company’s wines received 40 ratings of 90-plus from national publications, such as Wine Spectator.

 

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Case Volume
Percentage of Total Case Volume by Brand
(PIE CHART)
     
*  
Includes Stag’s Leap Wine Cellars, which was acquired in September 2007.
Chateau Ste. Michelle and Columbia Crest, the Company’s two leading brands, accounted for 69.1 percent of total premium case volume in the third quarter of 2008, as compared to 68.6 percent for the corresponding 2007 period.
Case volume for the third quarter of 2008 reflected the following:
   
A double-digit increase in Columbia Crest case volume, primarily due to higher case volume for Grand Estates Chardonnay, which recently received a 90 rating from two publications. New product introductions, including the Horse Heaven Hills (H3) ultra-premium line and the Two Vines Vineyard 10 products, also contributed to the increase. In addition, case volume for the Two Vines red and white varietals was higher in the third quarter of 2008, as compared to the same period of 2007. These increases were partially offset by lower case volume for other Grand Estates products;
 
   
A double-digit increase in case volume for Chateau Ste. Michelle, reflecting higher case volume for all varietals;
 
   
Case volume related to the Stag’s Leap Wine Cellars labels, which were added to the Company’s portfolio in mid-September 2007. Case volume for Stag’s Leap Wine Cellars labels accounted for 1.3 percentage points of the overall 17.7 percent case volume increase; and
 
   
Strong growth for the Company’s Red Diamond, 14 Hands, and Domaine Ste. Michelle labels.
Cost of Products Sold
Segment cost of products sold in the third quarter of 2008 increased 19.3 percent from the same prior year period, which was primarily attributable to the increased case volume, as well as higher costs per case, which includes the impact of higher freight costs driven by increased fuel prices.

 

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Gross Margin
                                 
    Three Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Gross margin
  $ 36,920     $ 29,626     $ 7,294       24.6  
 
Gross margin as % of net sales
    37.0 %     36.0 %                
The increase in gross margin in the third quarter of 2008, versus the third quarter of 2007, was primarily due to the increase in net sales. Gross margin, as a percentage of net sales, increased in the third quarter of 2008, as compared to the corresponding prior year period, mainly due to case sales associated with the higher margin Stag’s Leap Wine Cellars and Erath labels, as well as a favorable shift in mix to higher priced varietals for the Columbia Crest and Chateau Ste. Michelle labels.
SA&A Expenses
SA&A expenses of $20.3 million in the third quarter of 2008 were 20.4 percent higher than the $16.9 million of such expenses recognized in the third quarter of 2007, reflecting the following:
   
Higher salaries and related costs, due to the continued expansion of the sales force, in alignment with the Company’s strategy of broadening distribution of its wines;
 
   
Higher costs related to the addition of Stag’s Leap Wine Cellars, acquired in September 2007, which accounted for approximately 28 percent (or 5.8 percentage points) of the total increase in SA&A expenses; and
 
   
Increased advertising and promotional costs related to Columbia Crest, Chateau Ste. Michelle and Domaine Ste. Michelle.
First Nine Months of 2008 compared with the First Nine Months of 2007
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net sales
  $ 285,060     $ 230,581     $ 54,479       23.6  
Restructuring charges
    273             273        
Operating profit
    43,037       35,478       7,559       21.3  
Net Sales
The increase in Wine segment net sales for the first nine months of 2008, as compared to the corresponding 2007 period, was primarily due to an increase in premium case volume of 17.8 percent. These favorable net sales results reflect the following factors:
   
Strong performance by existing brands, primarily Columbia Crest, Chateau Ste. Michelle, Erath, Red Diamond, 14 Hands and Domaine Ste. Michelle;
 
   
Incremental revenue contributed by the Stag’s Leap Wine Cellars labels, which were added to the Company’s portfolio in September 2007, with net sales of these labels accounting for approximately 34 percent of the increase in net sales;
 
   
Increased sales of Antinori products; and
 
   
The continued benefit of favorable third-party acclaim and product ratings, with 89 ratings of 90+ from various publications thus far in 2008.

 

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Case Volume
Percentage of Total Case Volume by Brand
(PIE CHART)
     
*  
Includes Stag’s Leap Wine Cellars, which was acquired in September 2007.
Chateau Ste. Michelle and Columbia Crest accounted for 67.7 percent of total premium case volume in the first nine months of 2008, as compared to 70 percent for the corresponding 2007 period.
Case volume for the first nine months of 2008 reflected the following:
   
A double-digit increase in Columbia Crest case volume, primarily due to higher case volume for Grand Estates Chardonnay, as well as case volume related to the newly introduced Horse Heaven Hills (H3) ultra-premium line and Two Vines Vineyard 10 products. Increased case volume for existing Two Vines products also contributed to the growth, as compared to the prior year. These increases were partially offset by lower case volume for other Grand Estates products;
 
   
Low double-digit case volume growth for Chateau Ste. Michelle, due to higher case volume for most varietals, primarily whites;
 
   
Incremental case volume related to the September 2007 addition of Stag’s Leap Wine Cellars labels, which accounted for 2.2 percentage points of the overall 17.8 percent case volume increase;
 
   
Strong growth for the Company’s Red Diamond, Erath, 14 Hands and Domaine Ste. Michelle labels; and
 
   
Higher case volume for the Antinori brands.
Cost of Products Sold
Segment cost of products sold increased 22 percent in the first nine months of 2008, as compared to the first nine months of 2007, primarily due to the increased case volume and higher costs per case, which includes the impact of higher freight costs driven by increased fuel prices.

 

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Gross Margin
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Gross margin
  $ 102,119     $ 80,575     $ 21,544       26.7  
 
Gross margin as % of net sales
    35.8 %     34.9 %                
The increase in gross margin in the first nine months of 2008, versus the first nine months of 2007, was primarily due to the increase in net sales. Gross margin, as a percentage of net sales, increased in the first nine months of 2008, as compared to the corresponding prior year period, mainly due to case sales associated with the higher margin Stag’s Leap Wine Cellars and Erath labels.
SA&A Expenses
SA&A expenses increased 30.4 percent to $58.8 million in the first nine months of 2008, from $45.1 million in the first nine months of 2007, reflecting the following:
   
Higher costs related to the addition of Stag’s Leap Wine Cellars, acquired in September 2007, which accounted for approximately 28 percent (or 8.6 percentage points) of the total increase in SA&A expenses;
 
   
Higher salaries and related costs, due to the continued expansion of the sales force, in alignment with the Company’s strategy of broadening distribution of its wines;
 
   
A lower pre-tax gain associated with the sale of non-strategic winery property located in Washington, as the current year reflects a $1.4 million pre-tax gain related to the sale of property, as compared to a $2 million pre-tax gain reflected in the prior year;
 
   
Increased point-of-sale advertising costs; and
 
   
Higher advertising and promotional costs related to Columbia Crest.
ALL OTHER OPERATIONS
Third Quarter of 2008 compared with the Third Quarter of 2007
                                 
    Three Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net sales
  $ 20,723     $ 13,259     $ 7,464       56.3  
Restructuring charges
    (118 )     615       (733 )      
Operating profit
    6,281       4,195       2,086       49.7  
Net sales for All Other Operations increased 56.3 percent in the third quarter of 2008, as compared to the third quarter of 2007, primarily due to a July 2008 federal excise tax-related price increase for the Company’s moist smokeless tobacco products sold in Canada, which more than offset a decrease in Canadian net unit volume resulting from the tax increase. Net sales in the Company’s other international markets were not significant to the results of All Other Operations.

 

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The Canadian excise tax increase had an unfavorable impact on costs of products sold in the third quarter of 2008, as compared to the comparable prior year period. Gross margin, as a percentage of net sales, was 47 percent in the third quarter of 2008, as compared to 62.7 percent in the third quarter of 2007. The decrease in the gross margin, as a percentage of net sales, was primarily due to the federal excise-tax related price increase, as excise taxes are a pass-through item that are reflected in both net sales and costs of products sold. Operating profit for All Other Operations represented 30.3 percent of net sales in the third quarter of 2008, as compared to 31.6 percent in the corresponding period of 2007. The decrease in the operating margin percentage was primarily due to the aforementioned excise tax increase, as well as an increase in direct selling and advertising costs, primarily within the Company’s Canadian operations.
First Nine Months of 2008 compared with the First Nine Months of 2007
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net sales
  $ 47,057     $ 36,785     $ 10,272       27.9  
Restructuring charges
    98       615       (517 )     (84.1 )
Operating profit
    15,085       13,136       1,949       14.8  
The increase in net sales for All Other Operations in the first nine months of 2008, as compared to the corresponding period of 2007, was mainly due to the federal excise tax-related price increase noted in the discussion of quarterly results above and the favorable impact of foreign exchange rates related to the Company’s international operations in Canada. In addition, higher net unit volume in the Company’s other international markets contributed to the increase in net sales. The excise tax increase and foreign exchange rates both had an unfavorable impact on costs of products sold in the first nine months of 2008, as compared to the first nine months of 2007. Gross margin, as a percentage of net sales decreased to 54.9 percent in the first nine months of 2008, as compared to 63.1 percent in the first nine months of 2007. The decline was primarily due to the previously discussed excise tax increase. Operating profit for All Other Operations represented 32.1 percent of net sales in the first nine months of 2008, as compared to 35.7 percent in the first nine months of 2007. The decrease in the operating margin percentage was primarily due to the aforementioned excise tax increase, as well as an increase in direct selling and advertising costs, primarily within the Company’s Canadian operations.
UNALLOCATED CORPORATE
Third Quarter of 2008 compared with the Third Quarter of 2007
Administrative Expenses
Unallocated corporate administrative expenses decreased 42 percent to $6.3 million in the third quarter of 2008, as compared to $10.9 million in the third quarter of 2007, reflecting the following:
   
The absence of $2.9 million of amortization of imputed rent recognized in the third quarter of 2007 related to a below-market short-term lease the Company executed in connection with the sale of its former corporate headquarters building; and
 
   
A decrease in consulting and other professional fees.
Restructuring Charges
Unallocated restructuring charges incurred in connection with Project Momentum amounted to $0.3 million and $0.7 million in the third quarter of 2008 and 2007, respectively. The unallocated restructuring charges primarily consisted of one-time termination benefit charges, as well as professional fees directly related to the implementation of Project Momentum.

 

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Acquisition-related Costs
As discussed in Item 1, “Financial Statements — Notes to Condensed Consolidated Financial Statements — Note 17, Other Matters,” on September 7, 2008, the Company and Altria, entered into a merger agreement, pursuant to which Altria will acquire all outstanding shares of the Company’s common stock for a price of $69.50 per share. The Company incurred $7.1 million in acquisition-related costs in the third quarter of 2008, consisting of legal and other professional fees.
Interest Expense
Net interest expense increased to $18.5 million in the third quarter of 2008, from $9.3 million in the third quarter of 2007, due to higher levels of debt outstanding in the current year as a result of borrowings under the Company’s revolving credit facility and the issuance of senior notes in February 2008, as well as lower income from cash equivalent investments in the current year.
Income Tax Expense
The Company recorded income tax expense of $59.3 million in the third quarter of 2008 compared to $75.5 million in the third quarter of 2007. The Company’s effective tax rate, before minority interest and equity earnings, decreased to 32 percent for the third quarter of 2008, from 36.1 percent for the third quarter of 2007. The decline in the effective tax rate was a result of $9.1 million of income tax accrual reversals, net of federal benefit, in the current year, of which $5.9 million, net of federal benefit, related to negotiated resolutions and $3.2 million, net of federal benefit, related to the expiration of statutes of limitation in multiple jurisdictions.
First Nine Months of 2008 compared with the First Nine Months of 2007
Administrative Expenses
Unallocated corporate administrative expenses decreased 41.3 percent to $21 million in the first nine months of 2008, as compared to $35.7 million in the first nine months of 2007, reflecting the following:
   
The absence of $6.8 million of amortization of imputed rent recognized in the first nine months of 2007 related to a below-market short-term lease the Company executed in connection with the sale of its former corporate headquarters building;
 
   
Lower costs related to changes in executive management, which accounted for approximately 35 percent of the overall decrease in SA&A expenses in the first nine months of 2008; and
 
   
Lower legal fees.
Restructuring Charges
Unallocated restructuring charges incurred in connection with Project Momentum amounted to $0.4 million in the first nine months of 2008, as compared to approximately $1.6 million in the first nine months of 2007. The unallocated restructuring charges primarily consisted of one-time termination benefit charges, as well as professional fees directly related to the implementation of Project Momentum.

 

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Interest Expense
Net interest expense increased to $55 million in the first nine months of 2008, from $27.4 million in the corresponding period of 2007, due to higher levels of debt outstanding in the current year as a result of borrowings under the Company’s revolving credit facility and the issuance of senior notes in February 2008, as well as lower income from cash equivalent investments in 2008.
Income Tax Expense
The Company recorded income tax expense of $207.6 million in the first nine months of 2008 compared to $215.3 million in the first nine months of 2007. Income tax expense in the first nine months of 2007 reflects the impact of antitrust litigation charges, as well as the gain recognized in connection with the sale of the Company’s corporate headquarters building. The Company’s effective tax rate, before minority interest and equity earnings, decreased to 34.6 percent in first nine months of 2008, from 36.1 percent in the corresponding period of 2007. The decline in the effective tax rate was a result of $10.2 million of income tax accrual reversals, net of federal benefit, in the current year, of which $5.9 million, net of federal benefit, related to negotiated resolutions and $4.3 million, net of federal benefit, related to the expiration of statutes of limitation in multiple jurisdictions.
OUTLOOK
With respect to Altria’s pending acquisition of the Company, the Federal Trade Commission granted early termination of the initial waiting period under the Hart-Scott-Rodino Antiturst Improvements Act of 1976 in October 2008. Therefore, no further regulatory review by the federal antitrust authorities is required in connection with the acquisition. Assuming shareholder approval is provided at a special shareholder meeting to be held on December 4, 2008 and all other customary conditions to close are satisfied, the transaction is anticipated to close the first week of January 2009 and no later than January 7, 2009.
The Company is currently targeting 2008 GAAP diluted earnings per share of $3.55, with a range of $3.50 to $3.60, which includes the unfavorable impact of approximately $.10 per diluted share related to antitrust litigation settlement charges, restructuring charges and acquisition-related costs.
LIQUIDITY AND CAPITAL RESOURCES
(In thousands, except per share amounts or where otherwise noted)
                                 
    Nine Months Ended        
    September 30,     Increase/(Decrease)  
    2008     2007     Amount     %  
Net cash provided by (used in):
                               
Operating activities
  $ 363,448     $ 443,542     $ (80,094 )     (18.1 )
Investing activities
    (44,596 )     (66,584 )     21,988       33.0  
Financing activities
    (363,048 )     (505,694 )     142,646       28.2  

 

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Operating Activities
The primary source of cash from operating activities in the first nine months of 2008 and 2007, respectively, was net earnings generated mainly by the Smokeless Tobacco segment, adjusted for the effects of non-cash items. In the first nine months of 2008, the most significant uses of cash were for the payment of accounts payable and accrued expenses incurred in the normal course of business, including payments for purchases of leaf tobacco for use in moist smokeless tobacco products and grapes for use in the production of wine. The decrease in cash provided by operating activities during the first nine months of 2008, as compared to the corresponding 2007 period, was primarily related to the timing of payments related to accounts payable and accrued expenses and antitrust litigation settlements, partially offset by the timing of payments related to federal income taxes.
Investing Activities
The decrease in cash used in investing activities for the first nine months of 2008, as compared to the first nine months of 2007, was primarily due to prior year spending of $155.2 million related to the acquisition of Stag’s Leap Wine Cellars. In addition, expenditures related to property, plant and equipment of $47 million for the first nine months of 2008, mainly related to purchases of manufacturing equipment for the Smokeless Tobacco segment and spending related to facilities expansion and equipment for the Wine segment, were lower than the $51.5 million of such expenditures in the comparable prior year period. The impact of these items was partially offset by a decrease in cash proceeds from dispositions of property, as the first nine months of 2008 included $2.7 million of such proceeds, compared to $130.7 million in the first nine months of 2007 mainly related to the sale of the Company’s former corporate headquarters building. The prior year period also included $10 million in proceeds from the sale of short-term investments. The Company currently expects spending under the 2008 capital program to approximate $65 million.
Financing Activities
The lower level of net cash used in financing activities during the first nine months of 2008, as compared to the first nine months of 2007, was primarily due to the issuance of senior notes in February 2008, with an aggregate principal amount of $300 million. Proceeds from the senior notes issuance, net of underwriting discounts and issuance costs, amounted to $296.3 million. Upon the completion of the issuance of the senior notes, the Company repaid $100 million of borrowings that it had drawn earlier in the first quarter of 2008 under its Credit Agreement, as well as $200 million of borrowings outstanding under the Company’s Credit Facility. Subsequent activity under the Credit Facility resulted in an additional net repayment of $10 million, thus bringing total net repayment activity under the facility to $210 million during the first nine months of 2008. The $198.7 million utilized to repurchase common stock under the Company’s share repurchase programs in the first nine months of 2008 was lower than the $250 million utilized in the corresponding period of 2007, as the Company suspended share repurchases as a result of its pending acquisition by Altria. Dividends of $280.2 million paid during the first nine months of 2008 were lower than the $286.6 million paid during the first nine months of 2007, as the impact of a lower level of shares outstanding resulting from repurchases of common stock under the Company’s share repurchase program was partially offset by a 5 percent dividend increase. Proceeds received from the issuance of stock related to stock option activity was higher in the first nine months of 2008, as compared to the first nine months of 2007, with proceeds amounting to $34.9 million in the first nine months of 2008, as compared to $30.5 million in the first nine months of 2007. The increase in stock option exercise activity also resulted in a increase in the tax benefit realized by the Company related to share-based compensation, in excess of the tax deduction that would have been recorded had the fair value method of accounting been applied to all share-based compensation grants, with the excess tax benefit reflected in the first nine months of 2008 amounting to $11.6 million, as compared to $7.5 million in the corresponding period of 2007. Cash flow from financing activities also reflects a $17 million decrease in book cash overdrafts for the first nine months of 2008. In addition, the first nine months of 2007 included $7.1 million for the repayment of debt assumed in connection with the Stag’s Leap Wine Cellars acquisition.

 

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As a result of the aforementioned sources and uses of cash, the Company’s cash and cash equivalents balance decreased to $29.5 million at September 30, 2008 from $73.7 million at December 31, 2007.
The Company will continue to have significant cash requirements for the remainder of 2008, primarily for the payment of dividends, purchases of leaf tobacco and grape inventories, and capital spending. In addition, if the pending acquisition of the Company by Altria is approved by shareholders at a special meeting being held in December 2008, all options outstanding under the 1992 Plan (1.2 million options as of September 30, 2008, with a weighted-average exercise price of $30.53) would be settled in cash at such time, irrespective of when and if the transaction is ultimately consummated (see Part I, Item 1, “Financial Statements — Notes to Condensed Consolidated Financial Statements — Note 4, Share-Based Compensation,” for further information). The Company estimates that amounts expended in 2008 for tobacco leaf purchases for moist smokeless tobacco products will approximate the amounts expended in 2007, while grape and bulk wine purchases and grape harvest costs for wine products are expected to be higher than amounts expended in 2007. Funds generated from net earnings, supplemented by borrowings under the Company’s Credit Facility, will be the primary means of meeting cash requirements over this period.
Senior Notes
On February 29, 2008, the Company completed the issuance and sale of $300 million aggregate principal amount of 5.75 percent senior notes in a public offering at a price to the underwriters of 98.982 percent of the principal amount. These senior notes mature on March 1, 2018, with interest payable semiannually. Costs of $2.6 million associated with the issuance of the senior notes were capitalized and are being amortized over the term of the senior notes. As mentioned above, upon completion of the issuance of the senior notes the Company repaid $100 million of borrowings outstanding under the Credit Agreement and $200 million of borrowings outstanding under the Company’s Credit Facility. In accordance with its terms, the Credit Agreement was terminated upon the issuance of the senior notes and the repayment of outstanding borrowings.
The Company’s $240 million aggregate principal amount senior notes, of which $200 million is 7.25 percent fixed rate debt and $40 million is floating rate debt, mature on June 1, 2009. As previously disclosed, the Company has entered into an agreement with Altria, pursuant to which the Company will be acquired by Altria, pending shareholder approval and other customary closing conditions. Absent the acquisition, the Company currently intends to fund the repayment of this debt through the issuance of long-term senior notes. If the adverse conditions recently experienced in the credit markets continue during 2009, the Company’s future borrowing costs may increase or its ability to access the capital markets may be adversely impacted.
Revolving Credit Facility
The Company’s Credit Facility, which is a $300 million five-year revolving facility, will expire on June 29, 2012. Borrowings under the Credit Facility will primarily be used for general corporate purposes, including the support of commercial paper borrowings. At September 30, 2008, the Company had borrowings of $40 million outstanding under the Credit Facility.

 

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AGGREGATE CONTRACTUAL OBLIGATIONS
There have been no material changes in the Company’s aggregate contractual obligations since December 31, 2007, with the exception of the execution of leaf tobacco and grape purchase activity in connection with normal purchase contracts and payments associated with antitrust litigation settlements.
Through September 30, 2008, the Company completed $12.4 million in leaf tobacco purchases related to certain contracts outstanding at December 31, 2007. As of September 30, 2008, the Company has contractual obligations of approximately $67.8 million for the purchase of leaf tobacco to be used in the production of moist smokeless tobacco products and $561.9 million for the purchase and processing of grapes to be used in the production of wine products. The majority of the contractual obligations to purchase leaf tobacco are expected to be fulfilled by the end of 2008.
In addition, as of September 30, 2008, the Company believes that it is reasonably possible that within the next 12 months payments of up to $2.2 million may be made to various tax authorities related to FIN 48 unrecognized tax benefits and interest. The Company cannot make a reasonably reliable estimate of the amount of liabilities for unrecognized tax benefits that may result in cash settlements for periods beyond 12 months.
OFF-BALANCE SHEET ARRANGEMENTS
The minority put arrangement provided to Antinori in connection with the acquisition of Stag’s Leap Wine Cellars and the related formation of Michelle-Antinori provides Antinori with the right to require the Company to purchase its 15 percent ownership interest in Michelle-Antinori at a price equivalent to Antinori’s initial investment. The minority put arrangement becomes exercisable beginning on the third anniversary of the Stag’s Leap Wine Cellars acquisition (September 11, 2010). The Company accounts for the minority put arrangement as mandatorily redeemable securities under Accounting Series Release No. 268, Redeemable Preferred Stocks, and Emerging Issues Task Force Abstract Topic No. D-98, Classification and Measurement of Redeemable Securities, as redemption is outside of the control of the Company. Under this accounting model, to the extent the value of the minority put arrangement is greater than the minority interest reflected on the balance sheet (“traditional minority interest”), the Company recognizes the difference as an increase to the value of the minority interest, with an offset to retained earnings and a similar reduction to the numerator in the earnings per share available to common shareholders calculation. The Company also reflects any decreases to the amount in a similar manner, with the floor in all cases being the traditionally calculated minority interest balance as of that date. The Company values the put arrangement as if the redemption date were the end of the current reporting period. As of September 30, 2008, the value of the minority put arrangement did not exceed the traditional minority interest balance. Therefore, no adjustment was recognized in the Consolidated Statement of Financial Position or in the calculation of earnings per share.
The Company does not have any other off-balance sheet arrangements that are material to its results of operations or financial condition.
NEW ACCOUNTING STANDARDS
The Company reviews new accounting standards to determine the expected financial impact, if any, that the adoption of each such standard will have. As of the filing of this Quarterly Report on Form 10-Q, there were no new accounting standards issued that were projected to have a material impact on the Company’s consolidated financial position, results of operations or liquidity. Refer to Part I, Item 1, “Financial Statements — Notes to Condensed Consolidated Financial Statements — Note 2, Recent Accounting Pronouncements,” for further information regarding new accounting standards.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Reference is made to the section captioned “Cautionary Statement Regarding Forward-Looking Information” which was filed as part of Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of the 2007 Form 10-K, regarding important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by the Company, including forward-looking statements contained in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7A of the 2007 Form 10-K, which is incorporated herein by reference. There has been no material change in the information provided therein, with the exception of the issuance of fixed rate senior notes (see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Notes,” for additional information). However, in order to demonstrate the sensitivity of the Company’s interest rate hedges to immediate changes in applicable market interest rates, updated sensitivity analyses are provided below.
The Company has hedged against the variability of forecasted interest payments attributable to changes in interest rates through the date of an anticipated debt issuance in 2009 with a forward starting interest rate swap. The forward starting interest rate swap has a notional amount of $100 million and the terms call for the Company to receive interest quarterly at a variable rate equal to LIBOR and to pay interest semi-annually at a fixed rate of 5.715 percent. The fair value of the forward starting interest rate swap at September 30, 2008 was a net liability of $8.7 million, based upon analysis derived from relevant observable market inputs and giving consideration to counterparty credit risk. As an indication of the forward starting swap’s sensitivity to changes in interest rates, based upon an immediate 100 basis point increase in the applicable interest rate at September 30, 2008, the fair value of the forward starting swap would increase by approximately $7.8 million to a net liability of $0.9 million. Conversely, a 100 basis point decrease in that rate would decrease the fair value of the forward starting swap by $9.3 million to a net liability of approximately $18 million.
The Company has hedged the interest rate risk on its $40 million aggregate principal amount of floating rate senior notes with a ten-year interest rate swap having a notional amount of $40 million and quarterly settlement dates over the term of the contract. The Company pays a fixed rate of 7.25 percent and receives a floating rate of three-month LIBOR plus 90 basis points on the notional amount. The fair value of the swap at September 30, 2008 was a net liability of $1.7 million, based upon analysis derived from relevant observable market inputs and giving consideration to counterparty credit risk. As an indication of the interest rate swap’s sensitivity to changes in interest rates, based upon an immediate 100 basis point increase in the applicable interest rate at September 30, 2008, the fair value of the interest rate swap would increase by approximately $0.2 million to a net liability of $1.5 million. Conversely, a 100 basis point decrease in that rate would decrease the fair value of the interest rate swap by $0.2 million to a net liability of $1.9 million.
The Company’s $240 million aggregate principal amount senior notes mature on June 1, 2009. As previously disclosed, the Company has entered into a merger agreement with Altria, pursuant to which the Company will be acquired by Altria, pending shareholder approval and other customary closing conditions. Absent the acquisition, the Company currently intends to fund the repayment of this debt through the issuance of long-term senior notes. If the adverse conditions recently experienced in the credit markets continue during 2009, the Company’s future borrowing costs may increase or its ability to access the capital markets may be adversely impacted.

 

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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company, under the direction of its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has reviewed and evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s CEO and CFO believe, as of the end of such period, that the Company’s disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In Robert A. Martin, et al. v. Gordon Ball, et al., United States District Court for the Northern District of West Virginia (No. 5:06-cv-1985), on September 2, 2008, the United States Court of Appeals for the Fourth Circuit entered an order granting plaintiffs’ motion to dismiss the appeal as to the Company, thereby dismissing this action as to the Company.
On September 9, 2008, a plaintiff filed a putative class action complaint against the Company, the members of its Board of Directors (“Board”) and Altria Group, Inc. (“Altria”) in the Connecticut Superior Court, Judicial District of Stamford/Norwalk at Stamford, entitled Darren Suprina, on behalf of himself and all others similarly situated v. UST Inc., et al., Docket No. FST-CV-08-4014863-S. The complaint challenges the transaction contemplated by the merger agreement between the Company and Altria and alleges, among other things, that the per share price offered by Altria is unfair and grossly inadequate and that the termination fee provision of the merger agreement is excessive and operates as a deterrent to other potential bidders. The complaint also alleges that the Company’s directors breached their fiduciary obligations by failing to maximize stockholder value by putting their own interests ahead of stockholder interests. The complaint asserts a claim for aiding and abetting breaches of fiduciary duty against Altria. The plaintiff seeks, among other things, an order enjoining the defendants from consummating the transaction and directing the individual defendants to exercise their fiduciary duties to obtain a transaction that is in the best interests of the Company’s stockholders.
On October 30, 2008, the plaintiff filed an amended class action complaint in this action. The amended complaint, among other things, adds additional allegations about certain payments that the Company’s officers and directors will receive for their Company stock options and restricted stock in connection with the merger and under certain employment agreements with Altria. Further, the amended complaint adds a claim for aiding and abetting breaches of fiduciary duty against the Company and alleges that the Company’s proxy statement prepared in connection with the merger transaction, filed on October 29, 2008, omits certain material information, including information relating to the Board’s process leading to the merger and the financial analysis utilized by the Company’s financial advisors in connection with their fairness opinions. The plaintiff seeks to enjoin the merger unless and until the Company supplements its proxy, as well as attorneys’ fees and costs. The action is in a very preliminary stage. The Company believes that the claims asserted by the plaintiff are wholly without merit and intends to defend vigorously against this action.
ITEM 1A. RISK FACTORS
Except for the additional risk factors related to the Company’s pending acquisition by Altria set forth below, there have been no material changes in the Company’s risk factors from those disclosed in Part I, Item 1A of the 2007 Form 10-K.
The Company’s pending acquisition by Altria is subject to various risks that could have a material adverse effect on the Company’s results of operations, financial condition and market price for its common stock.
On September 7, 2008, the Company and Altria entered into a merger agreement, pursuant to which Altria will acquire all outstanding shares of the Company’s common stock for a price of $69.50 per share. The completion of the acquisition is subject to certain conditions, including, but not limited to, the receipt of applicable shareholder and regulatory approvals. In October 2008, the Federal Trade Commission granted early termination of the initial waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and, therefore, no further regulatory review by the federal antitrust authorities is required in connection with the acquisition. Assuming shareholder approval is provided at a special shareholder meeting to be held on December 4, 2008 and all other customary conditions to close are satisfied, the transaction is anticipated to close the first week of January 2009 and no later than January 7, 2009. The announcement and pending completion of the acquisition could have an adverse effect on the Company’s business generally, customer relationships, results of operations and the ability to retain employees, including key employees.

 

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The Company expects to incur substantial acquisition-related costs, including legal and other professional fees. Through the end of the third quarter of 2008, the Company incurred $7.1 million of such acquisition-related costs. In addition, the merger agreement contains specified termination rights for each of the parties and provides that, in certain circumstances, the Company would be required to pay Altria a termination fee of $250 million plus the reimbursement of certain expenses up to an aggregate amount of $10 million.
If the acquisition is not completed for any reason, the market price of the Company’s common stock will likely decline, to the extent that the current market price reflects the market assumption that the acquisition will be completed at the stated transaction price of $69.50 per share.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents the monthly share repurchases during the quarter ended September 30, 2008:
                                 
                    Total Number        
                    of Shares      
    Total     Average     Purchased as     Maximum Number of  
    Number of     Price Paid     Part of the     Shares that May Yet Be  
    Shares     Per     Repurchase     Purchased Under the  
Period   Purchased(1)     Share(1)     Programs     Repurchase Programs(2)  
July 1 — 31, 2008
    4,620     $             18,246,219  
August 1 — 31, 2008
        $             18,246,219  
September 1 — 30, 2008
        $             18,246,219  
 
                           
Total
    4,620     $                
 
                           
     
(1)
  Amounts reported in this column include shares of restricted stock withheld upon vesting to satisfy tax withholding obligations. The fair market value of the Company’s common stock used to calculate the restricted shares withheld for taxes was $52.66.
 
(2)  
In December 2007, the Company’s Board of Directors authorized a program to repurchase up to 20 million shares of its outstanding common stock. Repurchases under the new program commenced in March 2008.

 

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ITEM 6. EXHIBITS
         
Exhibit 2.1    
Agreement and Plan of Merger by and among Altria Group, Inc., Armchair Merger Sub, Inc. and UST Inc., dated as of September 7, 2008, incorporated by reference to Exhibit 1.1 to Form 8-K filed September 8, 2008.
   
 
Exhibit 2.2    
Amendment No. 1 to the Agreement and Plan of Merger by and among Altria Group, Inc., Armchair Merger Sub, Inc. and UST Inc., dated as of October 3, 2008, incorporated by reference to Exhibit 1.1 to Form 8-K filed October 3, 2008.
   
 
Exhibit 10.1    
UST Inc. 1992 Stock Option Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 10.2    
UST Inc. Stock Incentive Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 10.3    
UST Inc. 2005 Long-Term Incentive Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 10.4    
UST Inc. Officers’ Supplemental Retirement Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 10.5    
UST Inc. Benefit Restoration Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 31.1    
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
   
 
Exhibit 31.2    
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
   
 
Exhibit 32    
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  UST Inc.    
  (Registrant)
 
 
Date: November 3, 2008  /s/ RAYMOND P. SILCOCK    
  Raymond P. Silcock   
  Senior Vice President and
Chief Financial Officer
(Principal Financial Officer) 
 
 
Date: November 3, 2008  /s/ JAMES D. PATRACUOLLA    
  James D. Patracuolla   
  Vice President and Controller
(Principal Accounting Officer) 
 
 

 

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EXHIBIT INDEX
         
Exhibit 2.1    
Agreement and Plan of Merger by and among Altria Group, Inc., Armchair Merger Sub, Inc. and UST Inc., dated as of September 7, 2008, incorporated by reference to Exhibit 1.1 to Form 8-K filed September 8, 2008.
   
 
Exhibit 2.2    
Amendment No. 1 to the Agreement and Plan of Merger by and among Altria Group, Inc., Armchair Merger Sub, Inc. and UST Inc., dated as of October 3, 2008, incorporated by reference to Exhibit 1.1 to Form 8-K filed October 3, 2008.
   
 
Exhibit 10.1    
UST Inc. 1992 Stock Option Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 10.2    
UST Inc. Stock Incentive Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 10.3    
UST Inc. 2005 Long-Term Incentive Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 10.4    
UST Inc. Officers’ Supplemental Retirement Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 10.5    
UST Inc. Benefit Restoration Plan, as amended and restated as of September 7, 2008.
   
 
Exhibit 31.1    
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
   
 
Exhibit 31.2    
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
   
 
Exhibit 32    
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

65

Exhibit 10.1
UST INC.
1992 STOCK OPTION PLAN
Effective as of May 5, 1992
Restated as of May 5, 1992; December 12, 1996;
January 1, 1999; December 9, 1999; and September 7, 2008
1. Purpose.
UST Inc. (hereinafter referred to as the “Company”) has adopted this UST Inc. 1992 Stock Option Plan (hereinafter referred to as the “Plan”), effective as of May 5, 1992, subject to approval by stockholders at the annual stockholders’ meeting held on May 5, 1992. The purposes of the Plan are to further the long-term growth in earnings of the Company by providing incentives to those employees of the Company and its Subsidiaries (as defined below) who are or will be responsible for such growth; to facilitate the ownership of Company stock by such employees, thereby increasing the identity of their interest with those of the Company’s stockholders; and to assist the Company in attracting and retaining employees with experience and ability.
2. Administration.
The Plan shall be administered and interpreted by a Stock Option Committee or any successor committee (the “Committee”) as designated by the Board of Directors of the Company (the “Board”) of not less than two members as appointed from time to time by the Board. Each member of the Committee shall be a member of the Board. Unless otherwise determined by the Board, the Committee shall consist solely of members who are “nonemployee directors” within the meaning of Rule 16b-3, as from time to time amended, promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and who are “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Committee shall have full authority to establish guidelines for the administration of the Plan and to make any other determination it deem necessary to administer the Plan, which determinations shall be binding and conclusive on all parties.
3. Eligibility.
Any employee of the Company or a Subsidiary (as defined herein) or an affiliate (whether or not incorporated) of the Company who is determined by the Committee to be making or to be expected to make a contribution to the success of the Company (an “Employee”) shall be eligible to receive grants of stock options under this Plan. For the purposes of this Plan, a Subsidiary shall be deemed to be any company of which the Company owns, directly or indirectly, fifty percent (50%) or more of the stock. No employee may be granted options covering more than 250,000 shares of Common Stock (as defined in Section 4 hereof) during any fiscal year of the Company, commencing with the Company’s 1997 fiscal year.

 

 


 

4. Stock.
(a) A maximum of 15,400,000 shares of the common stock of the Company, par value $.50 per share (“Common Stock”), shall be reserved for issuance in accordance with the terms of the Plan. Such reserved shares may be authorized but unissued shares or any issued shares which have been acquired by the Company and are held in its treasury, as the Board may from time to time determine.
(b) If any change in the outstanding shares of Common Stock occurs or takes effect on or after December 19, 1991, through declaration of stock or other dividends or distributions with respect to such shares, through restructuring, recapitalization or other similar event or through stock splits, change in par value, combination or exchange of shares, or the like, then the number and kind of shares reserved for options, the number and kind of shares subject to outstanding options and the option price, as appropriate, of such optioned shares shall be adjusted as necessary to reflect equitably such change; provided, however, that any fractional shares resulting from such adjustment shall be eliminated.
(c) If an option granted under this Plan is surrendered, expires, lapses or for any other reason ceases to be exercisable in whole or in part, the shares which were subject to any such option, but as to which the option ceases to be exercisable, shall again be available for the purposes of this Plan; provided, however, that to the extent any option is cancelled pursuant to the provisions of Section 7 hereof, the shares subject to such option shall no longer be available for the purposes of this Plan.
5. Granting of Options.
(a) The Committee may grant incentive stock options (“Incentive Stock Options”) (within the meaning of Section 422 of the Code), or options which do not qualify as Incentive Stock Options (“Nonstatutory Stock Options”), or both, as follows:
(i) Incentive Stock Options may be granted to any Employee, provided that the aggregate Fair Market Value (determined as of the effective date of grant of the Incentive Stock Option) of the shares of Common Stock with respect to which Incentive Stock Options (under all plans of the Company and its Subsidiaries) become exercisable for the first time by an Optionee during any calendar year may not exceed $100,000. The effective date of a grant shall be the day on which the Committee adopts a resolution expressly granting an option, unless such resolution expressly provides for a specific later effective date. Any options granted in excess of such limitation shall be treated for all purposes as Nonstatutory Stock Options.
(ii) Nonstatutory Stock Options may be granted to any Employee without regard to the limitations stated in subparagraph (i) hereof.
(b) The option price per share for each option granted shall be determined by the Committee and shall not be less than the Fair Market Value of the shares on the date the option is granted. Effective prior to January 1, 2005, for purposes of this Plan, the Fair Market Value of such shares on any given day shall be the average of the high and low sales prices per share of Common Stock as reported on the New York Stock Exchange Composite Tape for such date, or, if there was no trading of Common Stock on such date, for the next preceding date on which there was trading. Effective on and after January 1, 2005, for purposes of this Plan, the Fair Market Value of such shares on any given day shall be the average of the high and low sales prices per share of Common Stock as reported on the New York Stock Exchange Composite Tape for such date, or, if there was no trading of Common Stock on such date, for the next preceding date on which there was trading, or, alternatively, in the discretion of the Committee in the case of an option that is intended to be exempt from Section 409A of the Code, fair market value as determined by the Committee in accordance with Section 409A of the Code.

 

2


 

6. Exercise of Option.
(a) Each option shall be granted for, and by its terms shall not be exercisable after the expiration of, a period of ten years from the date the option is granted or such lesser period as the Committee may determine.
(b) No option shall be transferable other than by will or the laws of descent and distribution, and each option shall be exercisable during the Employee’s lifetime only by him or by his guardian or legal representative.
(c) Subject to the provisions of Section 7 hereof and of paragraph (e) of this Section 6, no option shall be exercisable by its terms prior to the expiration of the one-year period beginning on the date of its grant. An option shall become exercisable over a period of one to five years, in ratable installments or otherwise, such period and method to be determined by the Committee. Subject to the first sentence of this Section 6(c), the Committee may accelerate the exercisability of any option or portion thereof at any time. An option may be exercised either for the total number of shares stated in the grant or, from time to time, for less than the total number, in multiples of 100 shares; provided, however, if an option holder makes a “hardship withdrawal” pursuant to Section 6.02 (Option V) of the UST Inc. Employees’ Savings Plan, such holder’s right of exercise shall be suspended during the 12-month period beginning on the date of such withdrawal, except that this proviso shall not apply if for any reason such suspension is not required under Section 401(k) of the Code or any final regulations issued thereunder.
(d) Each exercise of an option, in whole or in part, shall be effected by a notice in writing to the Company, accompanied by one of the following:
(i) by payment in cash of the full option price of the shares purchased;
(ii) if authorized by the Committee, by tendering to the Company, in whole or in part, in lieu of cash, shares of Common Stock owned by such purchaser, accompanied by the certificates therefore registered in the name of such purchaser and properly endorsed for transfer, having a Fair Market Value equal to the cash exercise price applicable to the portion of such option being so exercised; or

 

3


 

(iii) if the purchaser is an employee of the Company or a Subsidiary or affiliate at the time of purchase, by payment in cash of at least $1.00 per share, with the remainder of the option price being borrowed from the Company as described below. In such case the Company, unless otherwise determined by the Committee, will lend to such purchaser an amount up to the excess of the full option price of the shares purchased over such down payment, but not more than the excess of such price over the par value of such shares, such loan to be evidenced by the purchaser’s delivery to the Company of his unconditional promissory note to pay the amount of the loan within ten years, in such manner as is determined by the Committee. Any such note shall be dated the date of the notice of exercise of the option, shall provide for the payment of equal installments of principal through appropriate payroll deductions or on an annual, semiannual or quarterly basis, as selected by the purchaser, shall provide for the quarterly payment of interest on such indebtedness at the applicable federal rate in effect under Section 1274(d) of the Code on the date on which the loan was made, compounded semiannually (or the equivalent thereof), or if no such rate is in effect, 8% or such other rate as the Committee may determine is necessary to comply with the requirements of applicable law, and shall be in such form and contain such other provisions as the Committee may determine from time to time. If the employment of the purchaser is terminated by reason of his death or “disability,” as defined in the Company’s Long-Term Disability Plan (“Disability”), or upon his “retirement” from the Company, as defined in any employee retirement plan of the Company in which the purchaser participates (“Retirement”), or if the Committee otherwise consents, any unpaid balance of such indebtedness shall become due and payable on the earlier to occur of (A) five years after the date of such termination, or (B) ten years after the date of purchase, unless otherwise determined by the Committee. If the employment of the purchaser is terminated for any other reason, any unpaid balance of such indebtedness shall become due and payable three months from the date of such termination, unless otherwise determined by the Committee.
In connection with any such loan, the purchaser shall deposit with and pledge to the Company the certificate or certificates evidencing all of the shares so purchased, to be held by the Company as collateral security for such loan. Cash dividends paid on shares held by the Company as security shall be paid to the purchaser. Voting rights and other stockholders’ rights with respect to all shares shall vest in the purchaser although the shares are held by the Company as security. Upon default in the payment of principal or interest on a loan provided for in this subparagraph (iii), the Company, to the extent then permitted by law and without demand or notice to the debtor, may sell any pledged shares through the facilities of the New York Stock Exchange (or other Exchange upon which the Company’s shares may then be listed) for the benefit of the debtor and apply the net proceeds of such sale to the then unpaid principal and interest on such loan, and any remainder of such proceeds shall be paid to the debtor.
(e) Termination of Employment.
(i) Death, Disability and Retirement. If the employment of an option holder is terminated by reason of his death or Disability, or upon his Retirement, or for any other reason if the Committee so determines, all outstanding options then held by such option holder that have not theretofore become exercisable according to their terms (“Unexercisable Options”) shall become exercisable as of the date of such termination of employment.

 

4


 

(ii) Cause. With respect to any option granted on or after December 12, 1996 (“New Option”), if (A) the employment of the option holder is terminated for Cause (as defined in paragraph (iv) of this Section 6(e)); or (B) after the option holder’s termination of employment with the Company other than for Cause, the Company discovers the occurrence of an act or failure to act by the option holder that would have enabled the Company to terminate the option holder’s employment for Cause had the Company known of such act or failure to act at the time of its occurrence; or (C) subsequent to his termination of employment, the option holder commits a Competitive Act (as defined in clause (iv)(A) of this Section 6(e)) and, in each case, if the act constituting Cause is a Competitive Act or Willful Misconduct (as defined in clause (iv)(C) of this Section 6(e)), such act is discovered by the Company within three years of its occurrence, then, unless otherwise determined by the Committee, (x) any and all outstanding New Options held by such option holder as of the date of such termination or discovery shall terminate and be forfeited; (y) if the act constituting Cause is a Competitive Act or Willful Misconduct, the option holder (or, in the event of the option holder’s death following the commission of such act, his beneficiaries or estate) shall (1) sell back to the Company all shares that are held, as of the date of such termination or discovery, by the option holder (or, if applicable, his beneficiaries or estate) and that were acquired upon exercise of the New Option on or after the date which is 180 days prior to the option holder’s termination of employment (the “Acquired Shares”), for a per share price equal to the per share exercise price of such option, and (2) to the extent such Acquired Shares have previously been sold or otherwise disposed of by the option holder (other than by reason of death) or, if applicable, by his beneficiaries or estate, repay to the Company the excess of the aggregate Fair Market Value of such Acquired Shares on the date of such sale or disposition over the aggregate exercise price of such Acquired Shares.
For purposes of clause (ii)(y)(2) of this subsection (e), (A) the amount of the repayment described therein shall not be affected by whether the option holder or, if applicable, his beneficiaries or estate actually received such Fair Market Value with respect to such sale or other disposition, and (B) repayment may, without limitation, be effected, at the discretion of the Company, by means of offset against any amount owed by the Company to the option holder or, if applicable, his beneficiaries or estate.
(iii) If the employment of an option holder is terminated for any other reason and if the Committee does not determine otherwise, all Unexercisable Options held by such option holder shall be forfeited and shall lapse.
(iv) For purposes of this Section 6(e), “Cause” shall mean (A) prior to the expiration of any Employee and Secrecy Agreement or any agreement containing noncompetition provisions between the option holder and the Company, the violation of either such agreement (“Competitive Act”); (B) the willful and continued failure by the option holder to substantially perform his job duties (other than any such failure resulting from the option holder’s incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the option holder has not substantially performed his duties; or (C) the willful engaging by the option holder in misconduct that is materially injurious to the Company, monetarily or otherwise (“Willful Misconduct”).
(f) No optioned shares shall be issued or transferred to an optionee until purchased as provided in paragraph (d) above, and an optionee shall have none of the rights of a stockholder with respect to such optioned shares until the certificates therefor are registered in the name of such optionee upon exercise of the option.

 

5


 

7. Effect of Certain Changes.
If while unexercised options remain outstanding under this Plan (a) any “Person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, any person who on the date hereof is a director or officer of the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities; (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a) or (c) of this Section 7) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets (an “Acceleration Event”), then each outstanding option that has not theretofore become exercisable according to its terms shall become exercisable. Upon the occurrence of an Acceleration Event, the Committee shall provide for the cancellation of all options outstanding as of the effective date of such event. Effective (i) prior to September 7, 2008, and (ii) on and after September 7, 2008, with respect to any stock options outstanding on September 7, 2008, that were both earned and vested within the meaning of Section 409A of the Code on December 31, 2004, upon such cancellation, the Company shall make, in exchange therefor, a cash payment under any such option in an amount per share equal to the difference between the per share exercise price of such option and (x) in the case of a Nonstatutory Stock Option, the Fair Market Value of a share of Common Stock on the date during the prior sixty-day period that produces the highest Fair Market Value, and (y) in the case of an Incentive Stock Option, such Fair Market Value on the effective date of the transaction. Effective on and after September 7, 2008, with respect to all awards other than stock options outstanding on September 7, 2008, that were both earned and vested within the meaning of Section 409A of the Code on December 31, 2004, upon such cancellation, the Company shall make, in exchange therefor, a cash payment under any such option in an amount per share equal to the difference (if any) between the per share exercise price of such option and the value of the consideration that would be received per share of Common Stock in the Acceleration Event or, if no consideration is to be received by the Company’s stockholders in connection with the Acceleration Event, the Fair Market Value of a share of Common Stock on the date of the Acceleration Event (except that such payment shall be limited as necessary to prevent the option from being subject to Section 409A of the Code).

 

6


 

8. Laws and Regulations.
No shares of Common Stock shall be issued under this Plan unless and until all legal requirements applicable to the issuance of such shares have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any issuance of shares to any Employee hereunder on such Employee’s undertaking in writing to comply with such restrictions on the subsequent disposition of such shares as the Committee shall deem necessary or advisable as a result of any applicable law or regulation. The Company or a Subsidiary shall have the right to deduct from all awards hereunder paid in cash any federal, state or local taxes required by law to be withheld with respect to such cash awards. In the case of Common Stock issued upon exercise of options or in the case of any other applicable tax withholding requirement, the Employee or other person receiving such stock or otherwise subject to tax shall be required to pay to the Company or a Subsidiary the amount of any such taxes which the Company or a Subsidiary is required to withhold with respect to such stock. The provisions of this Plan shall be interpreted so as to comply with the conditions and requirements of Rule16b-3, and, if the option is an Incentive Stock Option, with Sections 422 and 424 of the Code, unless the Committee determines otherwise.
9. Other Terms and Conditions.
Options may contain such other terms, conditions or provisions, which shall not be inconsistent with this Plan, as the Committee shall deem appropriate.
10. Amendment or Termination of the Plan.
The Board may at any time, and from time to time, terminate, modify, amend or interpret the Plan in any respect; provided, however, that unless otherwise determined by the Board, an amendment that requires stockholder approval in order for the Plan to continue to comply with Section 162(m) of the Code or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of stockholders.
The termination or any modification or amendment of the Plan shall not, without the consent of an Employee, adversely affect his rights under an option previously granted to him.
11. Effective Date and Term of the Plan.
The adoption of the Plan shall become effective on May 5, 1992, subject to the approval of stockholders. No option shall be granted pursuant to this Plan later than May 4, 2002, but options theretofore granted may extend beyond that date in accordance with their terms.
12. Compliance with Section 409A of the Code.
Effective January 1, 2005, at all times this Plan shall be interpreted and operated (i) with respect to 409A Awards (as defined below), in accordance with the requirements of Section 409A of the Code, unless an exemption is available and applicable, (ii) to maintain the exemptions from Section 409A of the Code of options granted under the Plan, and (iii) to preserve the status of deferrals made prior to the effective date of Section 409A of the Code (“Prior Deferrals”), if any, as exempt from Section 409A of the Code, i.e., to preserve the grandfathered status of Prior Deferrals. For purposes of this Section 12, “409A Awards” include all options that were not both earned and vested as of December 31, 2004, and all options that were materially modified after October 3, 2004, determined in each case within the meaning of Section 409A of the Code. To the extent there is a conflict between the provisions of the Plan relating to compliance with Section 409A of the Code and the provisions of any award agreement issued under the Plan, the provisions of the Plan control.

 

7

Exhibit 10.2
UST INC.
AMENDED AND RESTATED
STOCK INCENTIVE PLAN
1.  
Purpose.
 
   
UST Inc. (the “Company”) adopted the UST Inc. 2001 Stock Option Plan effective as of May 1, 2001, adopted an amendment and restatement effective as of February 20, 2003, subject to approval by stockholders at the annual stockholders’ meeting held on May 6, 2003 (the “Effective Date”), and has adopted this restatement effective September 7, 2008. The name of the plan as amended and restated effective May 6, 2003 is the UST Inc. Amended and Restated Stock Incentive Plan (the “Plan”). The purposes of the Plan are to further the long-term growth in earnings of the Company by providing incentives to those employees of the Company and its Subsidiaries (as defined below) who are or will be responsible for such growth; to facilitate the ownership of Company stock by such employees, thereby increasing the identity of their interest with those of the Company’s stockholders; and to assist the Company in attracting and retaining employees with experience and ability.
 
2.  
Definitions. As used in the Plan, the following terms shall have the meanings set forth below:
  (a)  
“Award” shall mean any Option, SAR, Restricted Stock Award, Performance Stock Award, Stock Unit Award or Other Stock-Based Award granted under the Plan.
 
  (b)  
“Board” shall mean the Board of Directors of UST Inc.
 
  (c)  
“Cause” shall mean (i) a Competitive Act; (ii) the willful and continued failure by a Grantee to substantially perform his job duties (other than any such failure resulting from the Grantee’s incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Grantee has not substantially performed his duties; or (iii) Willful Misconduct.
 
  (d)  
A “Change in Control” shall be deemed to occur upon the occurrence of any of the following events:
  (i)  
any “Person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, any person who on the date hereof is a director or officer of the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities; or

 

 


 

  (ii)  
during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i) or (iii) of this definition) 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
 
  (iii)  
consummation of 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 then 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.
  (e)  
“Code” shall mean the Internal Revenue Code of 1986, as amended.
 
  (f)  
“Committee” shall mean the Compensation Committee of the Board or any successor committee.
 
  (g)  
“Common Stock” shall mean the common stock of the Company, par value $.50 per share.
 
  (h)  
“Company” shall mean UST Inc., a Delaware corporation, including any successor thereto.
 
  (i)  
“Competitive Act” shall mean, prior to the expiration of an Employee and Secrecy Agreement or any agreement containing noncompetition provisions between a Grantee and the Company, the violation of either such agreement.
 
  (j)  
“Effective Date” shall mean May 6, 2003, the date of the Company’s annual meeting of stockholders or any adjournment thereof.
 
  (k)  
“Employee” shall mean any employee of the Company or a Subsidiary or an affiliate (whether or not incorporated) of the Company.

 

 


 

  (l)  
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
 
  (m)  
“Fair Market Value”, effective prior to January 1, 2005, shall mean the average of the high and low sales prices per share of Common Stock as reported on the New York Stock Exchange Composite Tape for such date, or, if there was no trading of Common Stock on such date, for the next preceding date on which there was such trading. Effective on and after January 1, 2005, “Fair Market Value” shall mean the average of the high and low sales prices per share of Common Stock as reported on the New York Stock Exchange Composite Tape for such date, or, if there was no trading of Common Stock on such date, for the next preceding date on which there was such trading, or, alternatively, in the discretion of the Committee in the case of an Option or SAR that is intended to be exempt from Section 409A of the Code, fair market value as determined by the Committee in accordance with Section 409A of the Code.
 
  (n)  
“Grantee” shall mean an Employee who has been granted an Award under the Plan.
 
  (o)  
“Incentive Stock Option” shall mean an Option intended to qualify as an “incentive stock option” under Section 422 of the Code.
 
  (p)  
“Nonstatutory Stock Option” shall mean an Option not intended to be an Incentive Stock Option.
 
  (q)  
“Option” shall mean an Incentive Stock Option or a Nonstatutory Stock Option.
 
  (r)  
“Other Stock-Based Awards” shall have the meaning set forth in Section 7(a) of the Plan.
 
  (s)  
“Performance Goal” shall mean one or more of the following pre-established criteria, determined in accordance with generally accepted accounting principles, where applicable: (1) net earnings; (2) earnings per share; (3) net sales growth; (4) net income (before taxes); (5) net operating profit; (6) return measures (including, but not limited to, return on assets, capital, equity or sales); (7) cash flow (including, but not limited to, operating cash flow and free cash flow); (8) earnings before or after taxes, interest, depreciation, and/or amortization; (9) productivity ratios; (10) share price (including, but not limited to, growth measures and total stockholder return); (11) expense targets; (12) operating efficiency; (13) customer satisfaction; (14) working capital targets; (15) any combination of, or a specified increase in, any of the foregoing; (16) the achievement of certain target levels of discovery and/or development of products; and (17) the formation of joint ventures, or the completion of other corporate transactions. Without limiting the generality of the foregoing, the Committee shall have the authority to make equitable adjustments in the Performance Goals in recognition of unusual or non-recurring events affecting the Company, in response to changes in applicable laws or regulations, or to account for items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent occurrence or related to the disposal of a segment of a business or related to a change in accounting principles.

 

 


 

  (t)  
“Performance Stock Award” shall mean a right granted under Section 7 of the Plan to receive shares of Common Stock or its cash equivalent which is contingent on the achievement of specified Performance Goals or other objectives during a specified performance period determined by the Committee.
 
  (u)  
“Permitted Transferee” means (i) a trust for the benefit of a Grantee; (ii) a partnership in which a Grantee is the general partner and immediate family members (any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships of the Grantee) are the only additional partners; or (iii) immediate family members of the Grantee.
 
  (v)  
“Plan” shall mean the UST Inc. Amended and Restated Stock Incentive Plan.
 
  (w)  
“Restricted Stock Award” shall mean an Award consisting of shares of Common Stock granted under Section 7 of the Plan that are subject to certain restrictions determined by the Committee, which may include the achievement of specified Performance Goals.
 
  (x)  
“SAR” shall mean a stock appreciation right that is granted pursuant to Section 6 of the Plan.
 
  (y)  
“Stock Unit Award” shall mean a right granted under Section 7 of the Plan to receive shares of Common Stock or its cash equivalent in the future, contingent upon the satisfaction of conditions established by the Committee, which may include the achievement of specified Performance Goals.
 
  (z)  
“Subsidiary” shall mean any company of which the Company owns, directly or indirectly, fifty percent (50%) or more of the stock.
 
  (aa)  
“Tandem SAR” shall mean an SAR that is related to an Option.
 
  (bb)  
“Willful Misconduct” shall mean the willful engaging by an individual in misconduct that is materially injurious to the Company, monetarily or otherwise.
3.  
Administration.
  (a)  
The Plan shall be administered and interpreted by the Committee, as designated by the Board, of not less than two members as appointed from time to time by the Board. Each member of the Committee shall be a member of the Board. Unless otherwise determined by the Board, the Committee shall consist solely of members who are “nonemployee directors” within the meaning of Rule 16b-3, as from time to time amended, promulgated under Section 16 of the Exchange Act, and who are “outside directors” within the meaning of Section 162(m) of the Code. The Committee may delegate its authority to make grants under the Plan, subject to conditions determined by the

 

 


 

     
Committee, to such person(s) as the Committee shall determine, provided that in no event shall the Committee delegate the authority to make or approve Awards to Employees who are officers of the Company. Notwithstanding the generality of the foregoing, neither the Committee nor its delegate shall have the authority to reprice (or cancel and regrant) any Option or SAR at a lower exercise price without first obtaining the approval of the Company’s stockholders. The Committee shall have full authority to establish guidelines for the administration of the Plan and to make any other determination it deems necessary to administer the Plan, which determinations shall be binding and conclusive on all parties.
 
  (b)  
Subject to the express provisions of the Plan, the Committee shall have the authority to determine the persons to whom Awards shall be made, the timing of Awards, the number of shares of Common Stock to be made subject to each Award, the exercise price of Options and SARs, the exercisability of Options and SARs, and such other terms and conditions with respect to any Award, not inconsistent with the Plan, as the Committee shall deem appropriate. The terms of Awards need not be consistent with one another.
4.  
Eligibility.
Any Employee who is determined by the Committee to be making or to be expected to make a contribution to the success of the Company shall be eligible to receive Awards under the Plan.
5.  
Stock.
  (a)  
Authorized Shares. A maximum of 6,000,000 shares of Common Stock shall be reserved for issuance in accordance with the terms of the Plan. Such reserved shares may be authorized but unissued shares or any issued shares which have been acquired by the Company and are held in its treasury, as the Board may from time to time determine.
 
  (b)  
Plan and Individual Limits. No Employee may be granted Options covering more than 250,000 shares of Common Stock during any fiscal year of the Company. No Employee may be granted an Award under Section 7 of the Plan covering more than 100,000 shares of Common Stock during any fiscal year of the Company. During the term of the Plan, the aggregate number of shares of Common Stock that may be made subject to Awards other than Options shall not exceed 1,000,000.

 

 


 

  (c)  
Adjustments. If any change in the outstanding shares of Common Stock occurs or takes effect on or after May 1, 2001, 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 Awards, the individual and Plan limits set forth in Section 5(b), the number and kind of shares subject to outstanding Awards and the exercise, base or purchase price, as appropriate, of such shares shall be equitably adjusted as necessary to reflect such change; provided, however, that any fractional shares resulting from such adjustment shall be eliminated.
 
  (d)  
Reuse of Shares. If an Award granted under the Plan is forfeited, expires, lapses or for any other reason ceases to be vested or exercisable in whole or in part, the shares which were subject to any such Award, but as to which the Award ceases to be vested or exercisable, shall again be available for the purposes of this Plan; provided, however, that to the extent any Award is cancelled pursuant to the provisions of Section 9 of the Plan, the shares subject to such Award shall no longer be available for the purposes of the Plan.
6.  
Options and Stock Appreciation Rights (SARs). The Committee may grant Options and SARs as follows:
  (a)  
General. The terms and conditions applicable to any Option or SAR granted under the Plan shall be determined by the Committee in its discretion; provided, that the exercise price per share for each Option and SAR granted shall not be less than the Fair Market Value of the shares on the date the Option or SAR is granted. No shares subject to an Option or an SAR that is payable in shares of Common Stock shall be issued or transferred to a Grantee until such Option or SAR is exercised in accordance with its terms and, in the case of an Option, such shares have been purchased, and a Grantee shall have none of the rights of a stockholder with respect to such shares until the certificates therefor are registered in the name of such Grantee upon exercise of the Option or SAR. Options and SARs shall be exercised by a Grantee in accordance with the methods approved by the Committee.
 
  (b)  
Options. With respect to any grant of an Option, the Option agreement entered into by the Grantee shall identify the grant as an Incentive Stock Option or a Nonstatutory Stock Option. Incentive Stock Options shall be subject to such additional terms and conditions as are necessary to preserve their status as Incentive Stock Options. To the extent that an Option intended to be an Incentive Stock Option does not comply with the applicable rules of the Code, it shall be treated as a Nonstatutory Stock Option. The exercise of an Option, or the cancellation, termination or expiration of an Option (other than pursuant to Section 6(c) upon exercise of a Tandem SAR), with respect to a number of shares of Common Stock shall cause the automatic and immediate cancellation of any related Tandem SARs to the extent of the number of shares of Common Stock subject to such Option which is so exercised, cancelled, terminated or expired.
 
  (c)  
SARs. The exercise of an SAR with respect to any number of shares of Common Stock shall entitle the Grantee to a payment, for each such share, equal to the excess of (i) the Fair Market Value of a share of Common Stock on the exercise date over (ii) the exercise price of the SAR. Such payment shall be made in the form of cash or shares of Common Stock, or a combination of cash and shares of Common Stock, in the discretion of the Committee, as soon as practicable after the effective date of such exercise. The exercise of a Tandem SAR with respect to a number of shares of Common Stock shall cause the immediate and automatic cancellation of its related Option with respect to an equal number of shares.

 

 


 

7.  
Stock-Based Awards Other Than Options and SARs.
  (a)  
The Committee may, in its discretion, grant shares of Restricted Stock, Performance Stock Awards or Stock Unit Awards subject to the terms of the Plan and the restrictions set forth in this Section 7. Other forms of Awards (“Other Stock-Based Awards”) valued in whole or in part by reference to, or otherwise based on, Common Stock (which may include, without limitation, restricted stock units) may be granted by the Committee either alone or in addition to other Awards under the Plan. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the persons to whom and the time or times at which such Awards shall be granted, the number of shares of Common Stock to be subject to such Awards and all other conditions of such Awards, including whether the vesting of such Awards may be based on the attainment of one or more Performance Goals.
 
  (b)  
Restrictions On Awards Other Than Options and SARs. An Award granted pursuant to this Section 7 shall be subject to such conditions, restrictions and contingencies as the Committee shall determine. If the Committee shall designate any Award granted under this Section 7 as an Award intended to qualify as “performance-based compensation”, within the meaning of Section 162(m) of the Code, such Award shall be designed and administered by the Committee so to qualify, including, but not limited to, conditioning the vesting and/or payment of such Award upon the achievement of one or more Performance Goals and certifying in writing that such conditions have been satisfied prior to the payment of, or vesting with respect to, such Award.
 
  (c)  
Performance-Based Restricted Stock Awards. This Section 7(c) is effective January 1, 2005. The Committee has granted performance-based Restricted Stock Awards that provide for contingent rights to receive additional shares of Common Stock in the event that actual performance exceeds target. These contingent rights are subject to the vesting requirements specified in the applicable Award agreements for the corresponding Restricted Stock Awards and will be paid upon vesting, except as specified in Section 7(d) below with respect to payments at Separation from Service to Specified Employees and Section 9(b) with respect to shares that vest on a Change in Control that may not trigger payment. If vesting is accelerated from when it would apply under the original terms of an Award agreement, such accelerated vesting shall not trigger payment of the contingent rights unless permissible under Section 409A of the Code and contemplated by the acceleration in vesting. These contingent rights will be paid in shares of Common Stock.

 

 


 

  (d)  
Section 409A Provisions. This Section 7(d) is effective January 1, 2005. Notwithstanding any contrary terms in an agreement evidencing a Stock Unit Award (including a Stock Unit Award that is a contingent right under a Restricted Stock Award), any Stock Unit Award that is a 409A Award (as defined in Section 14(a) below) shall be subject to the following:
  (i)  
The vested portion of a Grantee’s Stock Unit Award will be paid not later than the date on which the Grantee incurs a Separation from Service (as defined below). Any portion of the Stock Unit Award that is not vested on the date on which the Grantee incurs a Separation from Service shall be paid later or forfeited, as required by the terms of the applicable agreement and the Plan. For purpose of this paragraph, whether or not a Grantee’s Stock Unit Award is vested on the date on which the Grantee incurs a Separation from Service will be determined under the terms of the applicable agreement and the Plan. If vesting is accelerated from when it would apply under the original terms of an Award agreement, such accelerated vesting shall not trigger payment of the contingent rights unless permissible under Section 409A of the Code and contemplated by the acceleration in vesting. If the Grantee is determined to be a Specified Employee on the date of the participant’s Separation from Service, the otherwise applicable payment date related to the Separation from Service (including a retirement) shall be delayed six months after such Separation from Service.
 
  (ii)  
For purposes of determining the time of payment of the Stock Unit Award, a Change in Control shall not be deemed to have occurred unless the transaction constitutes a change in the ownership or effective control of a corporation or a change in the ownership of a substantial portion of the assets of a corporation within the meaning of Treasury Regulation §1.409A-3(i)(5). It is expressly intended that a Change in Control may occur for vesting purposes with respect to a Stock Unit Award at a different time than when a Change in Control occurs for payment purposes. If a Change in Control occurs for vesting purposes with respect to a Stock Unit Award at a time when a Change in Control has not occurred for payment purposes with respect to such Stock Unit Award, then payment of such Stock Unit Award will be made at the earliest of (i) the date on which payment would have been made if the Grantee had remained in employment until vesting without regard to a Change in Control or Separation from Service, (ii) the date on which the Grantee incurs a Separation from Service, (iii) the date on which a Change in Control occurs for payment purposes (as described in this subsection), or (iv) the date of the participant’s death. If payment is made in connection the Grantee’s Separation from Service and the Grantee is determined to be a Specified Employee on the date of the Grantee’s Separation from Service, the payment shall be delayed six months after such Separation from Service.

 

 


 

  (iii)  
For purposes of this Section 7(d), “Specified Employee” has the meaning set out in Section 409A(a)(2)(B)(i) of the Code.
 
  (iv)  
For purposes of this Section 7(d), “Separation from Service” has the meaning set out in Section 409A(a)(2)(A)(i) of the Code.
8.  
Termination of Employment; Forfeiture. The terms and conditions applicable to Awards with respect to the termination for any reason of a Grantee’s employment or service with the Company and its Subsidiaries shall be determined by the Committee in its discretion and shall be set forth in the agreement evidencing such Award. Notwithstanding the generality of foregoing, any Award and/or the proceeds of any Award shall be forfeited, as follows:
 
   
If (x) the employment of the Grantee is terminated for Cause, or (y) after the Grantee’s termination of employment with the Company other than for Cause, the Company discovers the occurrence of an act or failure to act by the Grantee that would have enabled the Company to terminate the Grantee’s employment for Cause had the Company known of such act or failure to act at the time of its occurrence, or (z) subsequent to his termination of employment, the Grantee commits a Competitive Act and, in each case, if the act constituting Cause is a Competitive Act or Willful Misconduct and such act is discovered by the Company within three years of its occurrence, then, unless otherwise determined by the Committee,
  (a)  
any and all outstanding Awards held by such Grantee as of the date of such termination or discovery (whether or not then vested) shall terminate and be forfeited; and
 
  (b)  
if the act constituting Cause is a Competitive Act or Willful Misconduct, the Grantee (or, in the event of the Grantee’s death following the commission of such act, his beneficiaries or estate) shall (i) to the extent such Award was paid in the form of shares of Common Stock, sell back to the Company all shares that are held, as of the date of such termination or discovery, by the Grantee (or, if applicable, his beneficiaries or estate) and that were acquired upon the grant, exercise or vesting of any Award on or after the date which is 180 days prior to the Grantee’s termination of employment (the “Acquired Shares”), for a per share price equal to the price paid by the Grantee (or, if applicable his beneficiaries or estate) for such shares (or, if no consideration was paid for such shares, the shares shall be immediately returned to the Company for no consideration), (ii) to the extent Acquired Shares have previously been sold or otherwise disposed of by the Grantee (other than by reason of death) or, if applicable, by his beneficiaries or estate, repay to the Company the excess of the aggregate Fair Market Value of such Acquired Shares on the date of such sale or disposition over the aggregate price paid for such Acquired Shares and (iii) to the extent such Award was paid in the form of cash, repay to the Company the aggregate cash received by such Grantee (or, if applicable, his beneficiaries or estate) upon the exercise or vesting of any Award on or after the date which is 180 days prior to the Grantee’s termination of employment.

 

 


 

For purposes of clause (ii) of paragraph (b) above, (A) the amount of the repayment described therein shall not be affected by whether the Grantee or, if applicable, his beneficiaries or estate, actually received such Fair Market Value with respect to such sale or other disposition, and (B) repayment may, without limitation, be effected, at the discretion of the Company, by means of offset against any amount owed by the Company to the Grantee or, if applicable, his beneficiaries or estate.
9.  
Effect of Certain Changes.
  (a)  
Effective prior to January 1, 2005, unless otherwise determined by the Committee at the time a grant is made, upon the occurrence of a Change in Control, (i) each outstanding Award that is subject to time-based vesting or payment conditions which has not theretofore become vested and/or exercisable according to its terms shall immediately become 100% vested and/or exercisable and (ii) in the case of each outstanding Award that is subject to performance-based vesting or payment conditions, such Award shall become immediately due and payable in respect of the aggregate value of such Awards (as determined pursuant to Section 9(b)(ii) below) for all then uncompleted performance periods, assuming the achievement at target level of the performance goals established with respect to such Awards. Effective on and after January 1, 2005, subject to limitations in an Award agreement, upon the occurrence of a Change in Control (i) each outstanding Award that is subject to time-based vesting or payment conditions shall immediately vest and become exercisable, be released from restriction, or be paid out to the Grantee, as applicable, and (ii) in the case of each outstanding Award that is subject to performance-based vesting or payment conditions, such Award shall immediately vest and become exercisable, be released from restriction, or be paid out to the Grantee, as applicable, in respect of the aggregate value of such Award (as determined pursuant to Section 9(b)(ii) below) for all then uncompleted performance periods assuming the achievement at target level of the performance goals established with respect to such Award (but only if the Change in Control constitutes a change in control within the meaning of Section 409A of the Code in the case of a Stock Unit Award that is subject to Section 409A).

 

 


 

  (b)  
Upon a Change in Control where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation) or other Change in Control described in clause (iii) of the definition of “Change in Control”, the Committee shall provide for the cancellation of all Awards outstanding as of the effective date of such Change in Control and, in exchange therefor, the Company shall make a cash payment under any such outstanding Award as follows:
  (i)  
Effective (i) prior to September 7, 2008, and (ii) on and after September 7, 2008, with respect to any Options outstanding on September 7, 2008, that were both earned and vested within the meaning of Section 409A of the Code on December 31, 2004, an amount per share equal to the excess of (A) in the case of a Nonstatutory Stock Option or any SAR, the Fair Market Value of a share of Common Stock on the date during the prior 60-day period that produces the highest Fair Market Value, or (B) in the case of an Incentive Stock Option, the Fair Market Value of a share of Common Stock on the effective date of the transaction, over the per share exercise price of such Option or SAR. Effective on and after September 7, 2008, with respect to all awards other than Options outstanding on September 7, 2008, that were both earned and vested within the meaning of Section 409A of the Code on December 31, 2004, an amount per share equal to the excess (if any) of the value of the consideration that would be received per share of Common Stock in the Change in Control over the per share exercise price of such Option or SAR or, if no consideration is to be received by the Company’s stockholders in connection with the Change in Control, the Fair Market Value of a share of Common Stock on the date of the Change in Control (except that such payment shall be limited as necessary to prevent the Option or SAR from being subject to Section 409A of the Code).
 
  (ii)  
Effective prior to September 7, 2008, in the case of any other Award, an amount equal to the Fair Market Value of a share of Common Stock on the date during the prior 60-day period that produces the highest Fair Market Value, multiplied by the number of shares of Common Stock subject to such Award; provided, however, that for purposes of this Section 9(b)(ii), the amount of the payment in respect of each outstanding Award that is subject to performance-based vesting or payment conditions shall be calculated by multiplying (x) the number of shares of Common Stock the Grantee would have received at the end of all relevant performance periods assuming the achievement at target level of the performance goals established for such Award by (y) the Fair Market Value of a share of Common Stock on the date during the prior 60-day period that produces the highest Fair Market Value. Effective on and after September 7, 2008, in the case of any other Award, an amount equal to the value of the consideration that would be received per share of Common Stock in the Change in Control or, if no consideration is to be received by the Company’s stockholders in connection with the Change in Control, the Fair Market Value of a share of Common Stock on the date of the Change in Control, in either case multiplied by the number of shares of Common Stock subject to such Award; provided, however, that for purposes of this Section 9(b)(ii), the amount of the payment in respect of each outstanding Award that is subject to performance-based vesting or payment conditions shall be calculated by multiplying (x) the number of shares of Common Stock the Grantee would have received at the end of all relevant performance periods assuming the achievement at target level of the performance goals established for such Award by (y) an amount equal to the value of the consideration that would be received per share of Common Stock in the Change in Control or, if no consideration is to be received by the Company’s stockholders in connection with the Change in Control, the Fair Market Value of a share of Common Stock on the date of the Change in Control.

 

 


 

10.  
Transferability of Awards.
 
   
No Award shall be transferable other than by will or the laws of descent and distribution, and each Option and SAR shall be exercisable during the Grantee’s lifetime only by the Grantee or by the Grantee’s guardian or legal representative. Notwithstanding the foregoing, during the Grantee’s lifetime, the Committee may, in its sole discretion, permit the transfer of certain Awards by a Grantee to a Permitted Transferee, subject to any conditions that the Committee may prescribe, provided that no such transfer by any Grantee may be made in exchange for consideration. In the event that the transfer of an Option is approved by the Committee, the Permitted Transferee shall be required to pay the exercise price of such Option in cash.
 
11.  
Laws and Regulations.
 
   
No shares of Common Stock shall be issued under this Plan unless and until all legal requirements applicable to the issuance of such shares have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any issuance of shares to any Employee hereunder on such Employee’s undertaking in writing to comply with such restrictions on the subsequent disposition of such shares as the Committee shall deem necessary or advisable as a result of any applicable law or regulation. The provisions of this Plan shall be interpreted so as to comply with the conditions and requirements of Rule 16b-3 under the Exchange Act, and, if the Award is an Incentive Stock Option, with Sections 422 and 424 of the Code, unless the Committee determines otherwise.
 
12.  
Withholding.
 
   
The Company or a Subsidiary shall have the right to deduct from all Awards hereunder paid in cash any federal, state or local taxes required by law to be withheld with respect to such cash awards. Unless otherwise specified by the Committee in the Award agreement, in the case of Common Stock issued upon the vesting or exercise of an Award payable in shares (whether by the Grantee or a Permitted Transferee) or in the case of any other applicable tax withholding requirement, the Grantee subject to tax shall be required to pay to the Company or a Subsidiary the amount of any such taxes which the Company or a Subsidiary is required to withhold with respect to such stock. Effective prior to September 7, 2008, the Committee may provide, in the Award agreement or otherwise, that in the event that a Grantee is required to pay to the Company any amount to be withheld in connection with the vesting or exercise of an Award that is payable in shares of Common Stock, the Grantee may satisfy such obligation (in whole or in part) by electing to have the Company withhold a portion of the shares to be received upon the vesting or exercise of the Award equal in value to the minimum amount required to be withheld. Effective on and after September 7, 2008, the Committee may provide, in the Award agreement or otherwise, that in the event that a Grantee is required to pay to the Company any amount to be withheld in connection with

 

 


 

   
the exercise of an Award, upon the Award being earned or upon a Restricted Stock Award becoming nonforfeitable or Stock Unit Award becoming nonforfeitable and payable, that to the extent the Award is payable in shares of Common Stock, the Grantee may satisfy such obligation (in whole or in part) by electing to have the Company withhold a portion of the shares to be received upon the exercise of the Award, upon the Award being earned or upon Restricted Stock Awards becoming nonforfeitable or Stock Unit Awards becoming nonforfeitable and payable equal in value to the minimum amount required to be withheld. The value of the shares to be withheld shall be their Fair Market Value on the date that the amount of tax to be withheld is determined. Any election by a Grantee to have shares withheld under this Section 12 shall be subject to such terms and conditions as the Committee may specify.
 
13.  
Amendment or Termination of the Plan.
 
   
The Board may at any time, and from time to time, terminate, modify, amend or interpret the Plan in any respect; provided, however, that unless otherwise determined by the Board, an amendment that requires stockholder approval in order for the Plan to continue to comply with Section 162(m) of the Code or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of stockholders. The termination or any modification or amendment of the Plan shall not, without the consent of a Grantee, adversely affect his rights under an Award previously granted to him.
 
14.  
Miscellaneous.
  (a)  
Governing Law; Interpretation. The Plan and Award agreements issued under the Plan shall be construed, administered, and governed in all respects under the laws of the State of Delaware, without giving effect to the principles of conflicts of laws thereof.
 
  (b)  
Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to any Grantee or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provisions shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provisions shall be stricken as to such jurisdiction, Grantee or Award and the remainder of the Plan and any such Award shall remain in full force and effect.
 
  (c)  
No Right to Employment. The grant of an Award shall not be construed as giving a Grantee the right to be retained in the employ or service of the Company or any of its affiliates. Further, the Company or any of its affiliates may at any time dismiss a Grantee from employment or service, free from any liability or any clam under the Plan, unless otherwise expressly provided in the Plan or in any Award agreement.

 

 


 

  (d)  
Compliance with Code Section 409A. Effective January 1, 2005, at all times this Plan shall be interpreted and operated (i) with respect to 409A Awards (as defined below), in compliance with the requirements of Section 409A of the Code, unless an exemption is available and applicable; (ii) to maintain the exemptions from Section 409A of the Code of Options, SARs and Restricted Stock Awards and awards designed to meet the short-deferral exception under Section 409A of the Code; and (iii) to preserve the status of deferrals made prior to the effective date of Section 409A of the Code (“ Prior Deferrals”) as exempt from Section 409A of the Code, i.e., to preserve the grandfathered status of Prior Deferrals. For purposes of this Section 14(d), “409A Awards” include all Plan awards that were not both earned and vested on December 31, 2004, and all Plan awards that were materially modified after October 3, 2004, determined in each case within the meaning of Section 409A of the Code. To the extent there is a conflict between the provisions of the Plan relating to compliance with Section 409A of the Code and the provisions of any award agreement issued under the Plan, the provisions of the Plan control.
15.  
Term of the Plan.
 
   
The UST Inc. 2001 Stock Option Plan was originally established effective as of May 1, 2001, was amended and restated, effective as of the Effective Date, as the Amended and Restated Stock Incentive Plan, subject to obtaining the approval of the Company’s stockholders, and has been restated effective September 7, 2008. No Award shall be granted pursuant to this Plan later than April 30, 2011, but Awards theretofore granted may extend beyond that date in accordance with their terms.

 

 

Exhibit 10.3
UST Inc.
2005 Long-Term Incentive Plan
1. Purposes.
The purposes of this Plan are to further the long-term growth in earnings of UST Inc. (the “Company”) and its subsidiaries by providing incentives to those persons with significant responsibility for such growth, to associate the interests of such persons with those of the Company’s stockholders, to assist the Company in recruiting, retaining and motivating a diverse group of employees and outside directors on a competitive basis, and to ensure a pay for performance linkage for such employees and outside directors. If approved by the Company’s stockholders, this Plan shall replace the UST Inc. Amended and Restated Stock Incentive Plan, the Nonemployee Director Stock Option Plan and the Nonemployee Director Restricted Stock Award Plan, and no further awards shall be made under any of the foregoing plans as of the Effective Date of this Plan (defined below).
2. Definitions.
For purposes of the Plan:
(a) “Award” means a grant of Options, Stock Appreciation Rights (SAR), Restricted Stock, Restricted Stock Units, Performance Awards, Other Stock Based Awards or any or all of them.
(b) “Board” means the Board of Directors of UST Inc.
(c) “Cause” shall mean (i) prior to the expiration of an Employee and Secrecy Agreement or any agreement containing noncompetition provisions between a Participant and the Company, the violation of either such agreement; (ii) the willful and continued failure by a Participant to substantially perform his job duties (other than any such failure resulting from the Participant’s incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Participant has not substantially performed his duties; or (iii) the willful engaging by a Participant in misconduct that is materially injurious to the Company, monetarily or otherwise.
(d) “Change in Control” shall have the meaning set forth in Section 11(f).
(e) “Code” means the Internal Revenue Code of 1986, as amended.

 

 


 

(f) “Committee” means the Compensation Committee of the Board of Directors of UST Inc. The Compensation Committee shall be appointed by the Board and shall consist of two or more outside, disinterested members of the Board. The Compensation Committee, in the judgment of the Board, shall be qualified to administer the Plan as contemplated by (i) Rule 16b-3 of the Securities and Exchange Act of 1934 (or any successor rule), (ii) Section 162(m) of the Code, as amended, and the regulations thereunder (or any successor Section and regulations), and (iii) any rules and regulations of a stock exchange on which Common Stock is traded. Any member of the Compensation Committee who does not satisfy the qualifications set out in the preceding sentence may recuse himself or herself from any vote or other action taken by the Committee. The Board may, at any time and in its complete discretion, remove any member of the Compensation Committee and may fill any vacancy in the Compensation Committee.
(g) “Common Stock” means the common stock of the UST Inc., par value $.50 per share.
(h) “Company” means UST Inc., its subsidiaries and affiliated businesses.
(i) “Covered Employee” means an Eligible Participant who, as of the date that the value of an Award is recognizable as taxable income, is one of the group of “covered employees” within the meaning of Section 162(m) of the Code, generally, the Named Executive Officers.
(j) “Dividend Equivalent” means a right granted to a Participant to receive cash or Common Stock equal in value to dividends paid with respect to a specified number of shares of Common Stock underlying an Award. Dividend Equivalents may also be granted on a free-standing basis under the Committee’s authority to make Other Stock-Based Awards. Dividend Equivalents may be paid currently or on a deferred basis, in the discretion of the Committee.
(k) “Eligible Participants” means any individual who is designated by the Committee as eligible to receive Awards, subject to the conditions set forth in this Plan as follows: any officer or employee of the Company and any consultant or advisor (provided such consultant or advisor is a natural person) providing services to the Company. The term employee does not include any individual who is not, as of the grant date of an Award, classified by the Company as an employee on its corporate books and records even if that individual is later reclassified (by the Company, any court or any governmental or regulatory agency) as an employee as of the grant date. Non-Employee Directors are not Eligible Participants.
(l) “Fair Market Value” on any date means the closing sales price (for actions occurring prior to August 2, 2007, the average of the high and low sales prices) per share of Common Stock as reported on the New York Stock Exchange Composite Transactions Listing for such date, or the immediately preceding trading day if such date was not a trading day, or alternatively, in the discretion of the Committee in the case of an Option or SAR that is intended to be exempt from Section 409A of the Code, fair market value as determined by the Committee in accordance with Section 409A of the Code. Notwithstanding the foregoing, in the case of an ISO, such term means fair market value as determined by the Committee in accordance with Section 422 of the Code.
(m) “ISO” or “Incentive Stock Option” means an Option satisfying the requirements of Section 422 of the Code and designated by the Committee as an ISO.

 

2


 

(n) “Named Executive Officer” means UST Inc.’s Chief Executive Officer and the next four highest paid executive officers, as reported in UST Inc.’s proxy statement pursuant to Regulation S-K, Item 402(a)(3) for a given year.
(o) “Non-Employee Director” means a member of the Board who is not an employee of the Company.
(p) “NQSO” or “Non-Qualified Stock Option” means an Option that does not satisfy the requirements of Section 422 of the Code and that is not designated as an ISO by the Committee.
(q) “Option” means the right to purchase shares of Common Stock at a specified price for a specified period of time.
(r) “Option Exercise Price” means the purchase price per share of Common Stock covered by an Option granted pursuant to this Plan.
(s) “Other Stock-Based Awards” means any form of award valued in whole or in part by reference to, or otherwise based on, Common Stock, including an outright award of Common Stock.
(t) “Participant” means an individual who has received an Award under this Plan, including any Non-Employee Director who has received an Award under Section 8.
(u) “Performance Awards” means an Award of Performance Shares or Performance Units based on the achievement of Performance Goals during a Performance Period.
(v) “Performance-Based Exception” means the performance-based exception set forth in Section 162(m)(4)(C) of the Code from the deductibility limitations of Section 162(m) of the Code.
(w) “Performance Goals” means the goals established by the Committee under Section 7(d).
(x) “Performance Period” means the period established by the Committee during which the achievement of Performance Goals is assessed in order to determine whether and to what extent a Performance Award has been earned.
(y) “Performance Shares” means shares of Common Stock awarded to a Participant based on the achievement of Performance Goals during a Performance Period.
(z) “Performance Units” means an Award denominated in shares of Common Stock, cash or a combination thereof, as determined by the Committee, awarded to a Participant based on the achievement of Performance Goals during a Performance Period.

 

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(aa) “Plan” means the UST Inc. 2005 Long-Term Incentive Plan, as amended and restated from time to time.
(bb) “Prior Plans” means the UST Inc. Amended and Restated Stock Incentive Plan, the Nonemployee Director Stock Option Plan and the Nonemployee Director Restricted Stock Award Plan.
(cc) “Restriction Period” means, with respect to Restricted Stock or Restricted Stock Units, the period during which any restrictions set by the Committee remain in place. Restrictions remain in place until such time as they have lapsed under the terms and conditions of the Restricted Stock or Restricted Stock Units or as otherwise determined by the Committee.
(dd) “Restricted Stock” means shares of Common Stock, which may not be traded or sold until the date that the restrictions on transferability imposed by the Committee with respect to such shares have lapsed.
(ee) “Restricted Stock Units” means the right, as described in Section 7(c), to receive an amount, payable in either cash or shares of Common Stock, equal to the value of a specified number of shares of Common Stock.
(ff) “Retirement” with respect to a Non-Employee Director shall mean termination from the Board after such Non-Employee Director shall have attained at least age 65 after having completed at least thirty-six months of service or after such Non-Employee Director shall have satisfied the criteria for Retirement established by the Board from time to time. “Retirement” with respect to an employee shall mean termination from employment having satisfied the definition of retirement under any of the qualified or nonqualified pension plans or arrangements sponsored by the Company.
(gg) “Stock Appreciation Rights” or “SAR” means the right to receive the difference between the Fair Market Value of a share of Common Stock on the grant date (the “Strike Price”) and the Fair Market Value of a share of Common Stock on the date the Stock Appreciation Right is exercised.
(hh) “Total Disability” shall have the meaning set forth in the long-term disability program of UST Inc.
3. Administration of the Plan.
(a) Authority of Committee. The Plan shall be administered by the Committee, which shall have all the powers vested in it by the terms of the Plan, such powers to include the authority (consistent with the terms of the Plan):
to select the persons to be granted Awards under the Plan,
to determine the type, size and terms of Awards to be made to each person selected,

 

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to determine the time when Awards are to be made and any conditions which must be satisfied before an Award is made,
to establish objectives and conditions for earning Awards,
to determine whether an Award shall be evidenced by an agreement and, if so, to determine the terms of such agreement (which shall not be inconsistent with the Plan) and who must sign such agreement,
to determine whether an Award shall be cancelled or terminated,
to determine whether the conditions for earning an Award have been met and whether or to what extent an Award will be paid at the end of the Performance Period,
to determine if and when an Award may be deferred, and the terms and conditions of such deferral,
to determine whether the amount or payment of an Award should be reduced or eliminated,
to determine the guidelines and/or procedures for the payment or exercise of Awards,
to determine whether a leave of absence shall constitute a termination of employment for purposes of the Plan or shall have any other effect on outstanding Awards under the Plan, and
to determine whether an Award should qualify, regardless of its amount, as deductible in its entirety for federal income tax purposes, including whether any Awards granted to Covered Employees comply with the Performance-Based Exception under Section 162(m) of the Code.
(b) Interpretation of Plan. The Committee shall have full power and authority to administer and interpret the Plan and to adopt or establish such rules, regulations, agreements, guidelines, procedures and instruments, which are not contrary to the terms of the Plan and which, in its opinion, may be necessary or advisable for the administration and operation of the Plan. The Committee’s interpretations of the Plan, and all actions taken and determinations made by the Committee pursuant to the powers vested in it hereunder, shall be conclusive and binding on all parties concerned, including the Company, its stockholders and any person receiving an Award under the Plan.
(c) Delegation of Authority. To the extent not prohibited by law, the Committee may delegate its authority hereunder and may grant authority to employees or designate employees of the Company to execute documents on behalf of the Committee or to otherwise assist the Committee in the administration and operation of the Plan; provided, however, that in no event shall the Committee delegate the authority to make or approve Awards that benefit officers of the Company.

 

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4. Eligibility.
(a) General. Subject to the provisions of the Plan, the Committee may, from time to time, select from all Eligible Participants those to whom Awards shall be granted under Section 7 and shall determine the nature and amount of each Award. Only Non-Employee Directors shall be eligible to receive Awards under Section 8.
(b) International Participants. Notwithstanding any provision of the Plan to the contrary, in order to foster and promote achievement of the purposes of the Plan or to comply with provisions of laws in other countries in which the Company operates or has employees, the Committee, in its sole discretion, shall have the power and authority to (i) determine which Eligible Participants (if any) employed by the Company outside the United States are eligible to participate in the Plan, (ii) modify the terms and conditions of any Awards made to such Eligible Participants, and (iii) establish subplans and modified Option exercise procedures and other Award terms and procedures to the extent such actions may be necessary or advisable.
5. Shares of Common Stock Subject to the Plan.
(a) Authorized Number of Shares. Unless otherwise authorized by the stockholders of the Company, and subject to the provisions of this Section 5 and the adjustments provided for in Section 10, the maximum aggregate number of shares of Common Stock available for issuance under the Plan shall be (i) 10 million, plus (ii) the number of shares underlying awards under the Prior Plans, which expire or otherwise remain unissued following the cancellation, termination or expiration of such awards after the Effective Date of this Plan. Any of the authorized shares may be used for any of the types of Awards described in the Plan, except:
(A) at least two million (2,000,000) of the authorized shares will be available for issuance in connection with broad-based grants to employees who are not officers;
(B) no more than three million (3,000,000) of the authorized shares may be issued pursuant to Awards other than Options granted with an Option Exercise Price equal to Fair Market Value on the date of grant or SARs with a Strike Price equal to Fair Market Value on the date of grant, and
(C) no more than five hundred thousand (500,000) shares may be issued in the form of ISOs.
(b) Share Counting. The following shall apply in determining the number of shares remaining available for grant under this Plan:
(i) In connection with the granting of an Option or other Award (other than a Performance Unit denominated in dollars or an SAR that may be solely settled in cash), the number of shares of Common Stock available for issuance under this Plan shall be reduced by the number of shares in respect of which the Option or Award is granted or denominated; provided, however, that where a SAR is settled in shares of Common Stock, the number of shares of Common Stock available for issuance under this Plan shall be reduced only by the number of shares issued in such settlement.
(ii) If any Option is exercised by tendering shares of Common Stock to the Company as full or partial payment of the exercise price, the number of shares available for issuance under this Plan shall be increased by the number of shares so tendered.

 

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(iii) Whenever any outstanding Option or other Award (or portion thereof) expires, is cancelled, is settled in cash or is otherwise terminated for any reason without having been exercised, the shares allocable to the expired, cancelled, settled or otherwise terminated portion of the Option or Award may again be the subject of Options or Awards granted under this Plan.
(iv) Awards granted through the assumption of, or in substitution for, outstanding awards previously granted to individuals who become employees as a result of a merger, consolidation, acquisition or other corporate transaction involving the Company as a result of an acquisition will generally not count against the reserve of available shares under this Plan, provided in each case that the requirements for the exemption for mergers and acquisitions under rules promulgated by the New York Stock Exchange have been satisfied.
(c) Shares to be Delivered. The source of shares of Common Stock to be delivered by the Company under this Plan shall be determined by the Committee and may consist in whole or in part of authorized but unissued shares, treasury shares or shares acquired on the open market.
6. Award Limitations.
The maximum number of Options or SARs that can be granted to any Eligible Participant during a single fiscal year of the Company cannot exceed 250,000. The maximum per Eligible Participant, per fiscal year amount of Awards other than Options and SARs shall not exceed Awards covering 100,000 shares of Common Stock. Notwithstanding the foregoing, the maximums set forth above shall be increased to 500,000 shares and 200,000 shares, respectively, in the case of an Eligible Participant’s year of hire. The maximum Award that may be granted to any Eligible Participant for a Performance Period greater than one fiscal year shall not exceed the foregoing annual maximum multiplied by the number of full years in the Performance Period. In the case of Performance Units denominated in dollars, the maximum amount that may be earned in each fiscal year during the Performance Period is $3,000,000.
7. Awards to Eligible Participants.
(a) Options.
(i) Grants. Subject to the terms and provisions of this Plan, Options may be granted to Eligible Participants. Options may consist of ISOs or NQSOs, as the Committee shall determine on the date of grant. Options may be granted alone or in addition to other Awards made under the Plan. With respect to Options granted in tandem with SARs, the exercise of either such Options or such SARs will result in the simultaneous cancellation of the same number of tandem SARs or Options, as the case may be.
(ii) Option Exercise Price. The Option Exercise Price shall be equal to or greater than the Fair Market Value on the date the Option is granted, unless the Option was granted through the assumption of, or in substitution for, outstanding awards previously granted to individuals who became employees of the Company as a result of a merger, consolidation, acquisition or other corporate transaction involving the Company (in which case the assumption or substitution shall be accomplished in a manner that permits the Option to be exempt from Section 409A of the Code).

 

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(iii) Term. The term of Options shall be determined by the Committee in its sole discretion, but in no event shall the term exceed ten (10) years from the date of grant.
(iv) ISO Limits. ISOs may only be granted to employees of the Company and its subsidiaries and may only be granted to employees who, at the time the Option is granted, do not own stock possessing more than ten percent (10%) of the total combined voting power of all classes of Company Common Stock. The aggregate Fair Market Value of all shares with respect to which ISOs are exercisable by a Participant for the first time during any year shall not exceed $100,000. The aggregate Fair Market Value of such shares shall be determined at the time the Option is granted.
(v) Method of Exercise. Options shall be exercised by written notice to the Company accompanied by payment in cash of the full Exercise Price of the portion of such Option being exercised; provided that the Committee may in its discretion approve other methods of exercise, including, if authorized by the Committee, by tendering to the Company, in whole or in part, in lieu of cash, shares of Common Stock owned by such Participant for at least six months prior to the date of exercise, accompanied by the certificates therefor registered in the name of such Participant and properly endorsed for transfer, having a Fair Market Value equal to the cash Exercise Price applicable to the portion of such Option being so exercised.
(vi) No Repricing. Except for adjustments made pursuant to Section 10, the Option Exercise Price for any outstanding Option granted under the Plan may not be decreased after the date of grant nor may any outstanding Option granted under the Plan be surrendered to the Company as consideration for the grant of a new Option with a lower Option Exercise Price without the approval the stockholders of the Company.
(vii) Buy Out of Option Gains. At any time after any Option becomes exercisable, the Committee shall have the right to elect, in its sole discretion and without the consent of the holder thereof, to cancel such Option and to cause the Company to pay to the Participant the excess of the Fair Market Value of the shares of Common Stock covered by such Option over the Option Exercise Price of such Option at the date the Committee provides written notice (the “Buy Out Notice”) of its intention to exercise such right. Buy outs pursuant to this provision shall be effected by the Company as promptly as possible after the date of the Buy Out Notice. Payments of buy out amounts may be made in cash, in shares of Common Stock, or partly in cash and partly in Common Stock, as the Committee deems advisable. To the extent payment is made in shares of Common Stock, the number of shares shall be determined by dividing the amount of the payment to be made by the Fair Market Value of a share of Common Stock at the date of the Buy Out Notice.

 

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(b) Stock Appreciation Rights.
(i) Grants. Subject to the terms and provisions of this Plan, SARs may be granted to Eligible Participants. SARs may be granted either alone or in addition to other Awards made under the Plan. With respect to SARs granted in tandem with Options, the exercise of either such Options or such SARs will result in the simultaneous cancellation of the same number of tandem SARs or Options, as the case may be.
(ii) Strike Price. The Strike Price per share of Common Stock covered by a SAR granted pursuant to this Plan shall be equal to or greater than Fair Market Value on the date the SAR is granted, unless the SAR was granted through the assumption of, or in substitution for, outstanding awards previously granted to individuals who became employees of the Company as a result of a merger, consolidation, acquisition or other corporate transaction involving the Company (in which case the assumption or substitution shall be accomplished in a manner that permits the SAR to be exempt from Section 409A of the Code).
(iii) Term. The term of a SAR shall be determined by the Committee in its sole discretion, but in no event shall the term exceed ten (10) years from the date of grant.
(iv) Form of Payment/ Required Exercise Date. The Committee may authorize payment of a SAR in the form of cash, Common Stock valued at its Fair Market Value on the date of the exercise, a combination thereof, or by any other method as the Committee may determine; provided, however, that the SAR must either (A) become exercisable only upon a date certain (fixed date) occurring no earlier than one year following the date of grant, as determined by the Committee or elected by the Eligible Participant pursuant to rules established by the Committee at the time of grant, or (B) be settled exclusively in Common Stock.
(c) Restricted Stock/ Restricted Stock Units.
(i) Grants. Subject to the terms and provisions of the Plan, Restricted Stock or Restricted Stock Units may be granted to Eligible Participants. Restricted Stock or Restricted Stock Units may be granted either alone or in addition to other Awards made under the Plan.
(ii) Restrictions. The Committee shall impose such terms, conditions and/or restrictions on any Restricted Stock or Restricted Stock Units granted pursuant to the Plan as it may deem advisable including, without limitation: a requirement that Participants pay a stipulated purchase price for each share of Restricted Stock or each Restricted Stock Unit; restrictions based upon the achievement of specific Performance Goals (Company-wide or at the subsidiary and/or individual level); time-based restrictions on vesting; and/or restrictions under applicable Federal or state securities laws. Unless otherwise determined by the Committee at the time of grant, any time-based restriction period shall be for a minimum of one year. To the extent that shares of Restricted Stock or Restricted Stock Units are intended to be deductible under Section 162(m) of the Code, the applicable restrictions shall be based on the achievement of Performance Goals over a Performance Period, as described in Section 7(d) below.
(iii) Payment of Units. Restricted Stock Units that become payable in accordance with their terms and conditions shall be settled in cash, shares of Common Stock, or a combination of cash and shares, as determined by the Committee.

 

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(iv) No Disposition During Restriction Period. During the Restriction Period, Restricted Stock may not be sold, assigned, transferred or otherwise disposed of, or mortgaged, pledged or otherwise encumbered. In order to enforce the limitations imposed upon shares of Restricted Stock, the Committee may (A) cause a legend or legends to be placed on any certificates relating to such shares of Restricted Stock, and/or (B) issue “stop transfer” instructions, as it deems necessary or appropriate.
(v) Dividend and Voting Rights. Unless otherwise determined by the Committee, during the Restriction Period, Participants who hold shares of Restricted Stock and Restricted Stock Units shall have the right to receive or accrue dividends in cash or other property or other distribution or rights in respect of such shares, and Participants who hold shares of Restricted Stock shall have the right to vote such shares as the record owner thereof. The Committee in its sole discretion will determine when and in what form (e.g., cash or Common Stock, in the case of Restricted Stock or Dividend Equivalents, in the case of Restricted Stock Units) any dividends payable to a Participant during the Restriction Period shall be distributed to the Participant. Unless otherwise determined by the Committee, a Dividend Equivalent granted in connection with an Award of Restricted Stock or Restricted Stock Unit shall be subject to the restrictions and risk of forfeiture during the Restriction Period to the same extent as such Award.
(vi) Share Certificates. Each certificate issued for Restricted Stock shall be registered in the name of the Participant and deposited with the Company or its designee. At the end of the Restriction Period, a certificate representing the number of shares to which the Participant is then entitled shall be delivered to the Participant free and clear of the restrictions. No certificate shall be issued with respect to a Restricted Stock Unit unless and until such Restricted Stock Unit is paid in shares of Common Stock.
(vii) Awards of Performance-Based Restricted Stock. The Committee has granted performance-based Restricted Stock awards that provide for contingent rights to receive additional shares of Common Stock in the event that actual performance exceeds target. These contingent rights are subject to the vesting requirements specified in the applicable Award agreements for the corresponding Restricted Stock and will be paid upon vesting, except as specified in Section 7(c)(viii) below with respect to payments at Separation from Service to Specified Employees and Section 11(c) with respect to shares that vest on a Change in Control that may not trigger payment. If vesting is accelerated from when it would apply under the original terms of an Award agreement, such accelerated vesting shall not trigger payment of the contingent rights unless permissible under Section 409A of the Code and contemplated by the acceleration in vesting. These contingent rights will be paid in shares of Common Stock.

 

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(viii) Section 409A Provisions. Notwithstanding any contrary terms in an agreement evidencing a Restricted Stock Unit (including a Restricted Stock Unit that is a contingent right under an Award of Performance-Based Restricted Stock), any Restricted Stock Unit Award that is a 409A Award (as defined in Section 13(a) below) shall be subject to the following:
(A) A Participant’s vested Restricted Stock Units will be paid not later than the date on which the Participant incurs a Separation from Service (as defined below). Any Restricted Stock Units that are not vested on the date on which the Participant incurs a Separation from Service shall be paid later or forfeited, as required by the terms of the applicable agreement and the Plan. For purpose of this paragraph, whether or not a Participant’s Restricted Stock Units are vested on the date on which the Participant incurs a Separation from Service will be determined under the terms of the applicable agreement and the Plan. If vesting is accelerated from when it would apply under the original terms of an Award agreement, such accelerated vesting shall not trigger payment of the contingent rights unless permissible under Section 409A of the Code and contemplated by the acceleration in vesting. If the Participant is determined to be a Specified Employee on the date of the Participant’s Separation from Service, the otherwise applicable payment date related to the Separation from Service (including a retirement) shall be delayed six months after such Separation from Service.
(B) For purposes of determining the time of payment of the Restricted Stock Unit, a Change in Control shall not be deemed to have occurred unless the transaction constitutes a change in the ownership or effective control of a corporation or a change in the ownership of a substantial portion of the assets of a corporation within the meaning of Treasury Regulation §1.409A-3(i)(5). It is expressly intended that a Change in Control may occur for vesting purposes with respect to a Restricted Stock Unit at a different time than when a Change in Control occurs for payment purposes. If a Change in Control occurs for vesting purposes with respect to a Restricted Stock Unit at a time when a Change in Control has not occurred for payment purposes with respect to such Restricted Stock Unit, then payment of such Restricted Stock Unit will be made at the earliest of (i) the date on which payment would have been made if the Participant had remained in employment until vesting without regard to a Change in Control or a Separation from Service, (ii) the date on which the Participant incurs a Separation from Service, (iii) the date on which a Change in Control occurs for payment purposes (as described in this Section 7(c)(viii)(B)), or (iv) the date of the Participant’s death. If payment is made in connection the Participant’s Separation from Service and the Participant is determined to be a Specified Employee on the date of the Participant’s Separation from Service, the payment shall be delayed six months after such Separation from Service.
(C) For purposes of this Section 7(c)(viii), “Specified Employee” has the meaning set out in Section 409A(a)(2)(B)(i) of the Code.
(D) For purposes of this Section 7(c)(viii), “Separation from Service” has the meaning set out in Section 409A(a)(2)(A)(i) of the Code.
(d) Performance Awards.
(i) Grants. Subject to the provisions of the Plan, Performance Awards consisting of Performance Shares or Performance Units may be granted to Eligible Participants. Performance Awards may be granted either alone or in addition to other Awards made under the Plan.

 

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(ii) Performance Goals. Unless otherwise determined by the Committee, Performance Awards shall be conditioned on the achievement of Performance Goals (which shall be based on one or more objective business criteria, as determined by the Committee) over a Performance Period. The Performance Period shall be no less than one year, unless otherwise determined by the Committee. The business criteria to be used for purposes of Performance Awards will be determined in the sole discretion of the Committee and may be described in terms of objectives that are related to the individual Participant or objectives that are Company wide or related to a subsidiary, division, department, region, function or business unit of the Company in which the Participant is employed, and may consist of one or more or any combination of the following pre-established criteria: (A) net earnings; (B) earnings per share; (C) dividend ratio; (D) net sales growth; (E) net income (before taxes); (F) net operating profit; (G) return measures (including, but not limited to return on assets, capital, equity or sales); (H) cash flow (including, but not limited to, operating cash flow and free cash flow); (I) earnings before or after taxes, interest , depreciation and/or amortization; (J) productivity ratios; (K) share price (including, but not limited to, growth measures and total shareholder return); (L) expense targets; (M) operating efficiency; (N) customer satisfaction; (O) working capital targets; (P) any combination of or a specified increase in any of the foregoing; (Q) the achievement of certain target levels of discovery and/or development of products; or (R) the formation of joint ventures or the completion of other corporate transactions. Without limiting the generality of the foregoing, the Committee shall have the authority to make equitable adjustments to any Performance Goal in recognition of unusual or non-recurring events affecting the Company in response to changes in applicable laws or regulations or to account for items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business or related to a change in accounting principles. Performance Goals based on business criteria listed above may be made relative to the performance of other corporations.
(iii) Committee Discretion. Notwithstanding the achievement of any Performance Goal established under this Plan, the Committee has the discretion, by Participant, to reduce some or all of a Performance Award that would otherwise be paid. If a Participant who is not a Covered Employee is promoted, demoted or transferred to a different business unit of the Company during a Performance Period, then, to the extent the Committee determines the Performance Goals or Performance Period are no longer appropriate, the Committee may adjust, change or eliminate the Performance Goals or the applicable Performance Period as it deems appropriate in order to make them appropriate and comparable to the initial Performance Goals or Performance Period.
(iv) Interpretation. With respect to any Award that is intended to satisfy the conditions for the Performance-Based Exception under Section 162(m) of the Code: (A) the Committee shall interpret the Plan and this Section 7 in light of Section 162(m) of the Code and the regulations thereunder; (B) the Committee shall have no discretion to amend the Award or adjust any Performance Goal in any way that would adversely affect the treatment of the Award under Section 162(m) of the Code and the regulations thereunder; and (C) such Award shall not be paid until the Committee shall first have certified that the Performance Goals applicable to the Award have been achieved.

 

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(v) Timing and Form of Payment of Performance Awards. Subject to the provisions of the Plan, after the applicable Performance Period has ended, the holder of Performance Units or Performance Shares shall be entitled to receive a payout based on the number and value of Performance Units or Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding Performance Goals have been achieved. Except as provided in Section 7(c)(viii) with respect to payments at Separation from Service to Specified Employees and Section 11(c) with respect to shares that vest on a Change in Control that may not trigger payment, payment of earned Performance Units or Performance Shares shall be made in a lump sum within 2 1/2 months following the end of the taxable year in which the applicable Performance Period closes. To carry out the purposes of the prior sentence, Section 7(c)(viii) shall apply to a Performance Award without regard to whether it is a Restricted Stock Unit. The Committee may pay earned Performance Units or Performance Shares in the form of cash or in shares of Common Stock (or in a combination thereof) which have an aggregate Fair Market Value equal to the value of the earned Performance Units or Performance Shares at the close of the applicable Performance Period. Such shares may be granted subject to any restrictions deemed appropriate by the Committee. The form of payout of such Awards shall be set forth in the Award agreement pertaining to the grant of the Award. As determined by the Committee, a Participant may be entitled to receive any dividends declared with respect to shares of Common Stock which have been earned in connection with grants of Performance Units or Performance Shares but not yet distributed to the Participant.
8. Awards to Non-Employee Directors.
(a) Awards. Non-Employee Directors are eligible to receive any and all types of Awards under this Plan other than ISOs.
(b) Grants of Awards. The number of shares of Common Stock that will be awarded or covered by an Option or Other Stock Based Award; the restrictions on transfer or the possibility of forfeiture which may be imposed on an Award; and the time at which the Award (or any portion of it) first will become exercisable or no longer subject to any restriction, and the latest date on which an Option may be exercised will be determined in the Board’s sole discretion.
(c) Death, Total Disability and Retirement. In the event of the death, Total Disability or Retirement of a Non-Employee Director prior to the granting of an Award in respect of the fiscal year in which such event occurred, an Award may, in the discretion of the Committee, be granted in respect of such fiscal year to the retired or disabled Non-Employee Director or his or her estate. In the event that a Non-Employee Director ceases to be a member of the Board due to Total Disability, death or Retirement, his or her rights to any outstanding Award will become fully vested and exercisable, as applicable. If any Non-Employee Director ceases to be a member of the Board for any reason other than death, Total Disability or Retirement, his or her rights to any Award in respect of the fiscal year during which such cessation occurred will terminate unless the Board determines otherwise.

 

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9. Deferred Payments.
Subject to the terms of this Plan, the Committee may determine that all or a portion of any Award to a Participant, whether it is to be paid in cash, shares of Common Stock or a combination thereof, shall be deferred or may, in its sole discretion, approve deferral elections made by Participants. Deferrals shall be for such periods and upon such terms as the Committee may determine in its sole discretion, which terms shall be designed to comply with Section 409A of the Code. Notwithstanding the foregoing, deferral of Option or SAR gains shall not be permitted under the Plan.
10. Dilution and Other Adjustments.
If any change in corporate capitalization, such as a stock split, reverse stock split, or stock dividend; or any corporate transaction such as a reorganization, reclassification, merger or consolidation or separation, including a spin-off, of the Company or sale or other disposition by the Company of all or a portion of its assets, any other change in the Company’s corporate structure, or any distribution to shareholders (other than a cash dividend that is not an extraordinary cash dividend) results in the outstanding shares of Common Stock, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares or other securities of the Company, or for shares of stock or other securities of any other corporation (or new, different or additional shares or other securities of the Company or of any other corporation being received by the holders of outstanding shares of Common Stock), or a material change in the value of the outstanding shares of Common Stock as a result of the change, transaction or distribution, then the Committee shall make equitable adjustments, as it determines are necessary and appropriate, in:
  (i) the number and type of securities (or other property) with respect to which Awards may be granted;
 
  (ii) the limitations on the aggregate number of shares of Common Stock that may be awarded to any one single Participant under various Awards;
 
  (iii) the number and type of securities (or other property) subject to outstanding Awards (provided the number of shares of any class subject to any Award shall always be a whole number); and
 
  (iv) the terms, conditions or restrictions of outstanding Awards and/or Award Agreements, including but not limited to the grant, exercise or purchase prices with respect to outstanding Awards;
provided, however, that all such adjustments made in respect of each ISO shall be accomplished so that such Option shall continue to be an incentive stock option within the meaning of Section 422 of the Code and that any adjustment of an Option or SAR under this Section 10 shall be accomplished in a manner that permits the Option or SAR to be exempt from Section 409A of the Code. Any and all such adjustments shall be conclusive and binding for all purposes of the Plan.

 

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11. Change in Control.
Unless otherwise determined by the Committee, upon a Change in Control, the following shall occur:
(a) Options. Effective on the date of such Change in Control, all outstanding and unvested Options granted under the Plan shall immediately vest and become exercisable, and all Options then outstanding under the Plan shall remain outstanding in accordance with their terms. Notwithstanding anything to the contrary in this Plan, in the event that any Option granted under the Plan becomes unexercisable during its term on or after a Change in Control because: (i) the individual who holds such Option is involuntarily terminated (other than for Cause) within two (2) years after the Change in Control; (ii) such Option is terminated or adversely modified; or (iii) Common Stock is no longer issued and outstanding, or no longer traded on a national securities exchange, then the holder of such Option shall immediately be entitled to receive a lump sum cash payment equal to the gain on such Option. For purposes of the preceding sentence, the gain on an Option shall be calculated as the excess (if any) of the value of the consideration that would be received per share of Common Stock in the Change in Control or, if no consideration is to be received by the Company’s stockholders in connection with the Change in Control, the Fair Market Value of a share of Common Stock on the date of the Change in Control, in either case over the Option Exercise Price (except that such payment shall be limited as necessary to prevent the Option from being subject to Section 409A of the Code).
(b) Stock Appreciation Rights. Effective on the date of such Change in Control, all outstanding and unvested SARs granted under the Plan shall immediately vest and become exercisable, and all SARs then outstanding under the Plan shall remain outstanding in accordance with their terms. In the event that any SAR granted under the Plan becomes unexercisable during its term on or after a Change in Control because: (i) the individual who holds such SAR is involuntarily terminated (other than for Cause) within two (2) years after the Change in Control; (ii) such SAR is terminated or adversely modified; or (iii) Common Stock is no longer issued and outstanding, or no longer traded on a national securities exchange, then the holder of such SAR shall immediately be entitled to receive a lump sum cash payment equal to the gain on such SAR, calculated as of the Determination Date. For purposes of the preceding sentence, the gain on a SAR shall be calculated as the excess (if any) of the value of the consideration that would be received per share of Common Stock in the Change in Control or, if no consideration is to be received by the Company’s stockholders in connection with the Change in Control, the Fair Market Value of a share of Common Stock on the date of the Change in Control, in either case over the Strike Price per share of Common Stock covered by the SAR (except that such payment shall be limited as necessary to prevent the SAR from being subject to Section 409A of the Code).

 

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(c) Restricted Stock/ Restricted Stock Units.
(i) Subject to limitations in an Award agreement, upon a Change of Control all Restricted Stock and Restricted Stock Units shall immediately vest and be released from restriction or paid out to Participants, as applicable, effective as of the date of the Change of Control (but only if the Change in Control constitutes a change in control within the meaning of Section 409A of the Code in the case of Restricted Stock Units that are subject to Section 409A). The Committee has granted performance-based Restricted Stock awards that provide for contingent rights to receive additional shares of Common Stock in the event that actual performance exceeds target. The original Award agreements evidencing these contingent rights provide for accelerated vesting of the Awards in the event of certain Change in Control events or certain employment terminations following certain other Change in Control events. For purposes of the accelerated vesting provisions set forth in the original Award agreements evidencing Awards granted for performance periods beginning in 2008 and 2009, if a Change in Control occurs in the first year of the performance period, “target” shall mean that exactly 100% of the EPS target specified in the applicable Notice of Grant of Restricted Stock was achieved for such year; if the Change in Control occurs in the second year of the performance period, “target” means that the dividend thresholds specified in the Notice of Grant of Restricted Stock were achieved for both the second and third years in the performance period; and if the if the Change in Control occurs in the third year of the performance period, “target” means that the dividend threshold specified in the Notice of Grant of Restricted Stock was achieved for the third year in the performance period.
(ii) The Committee shall be entitled to cancel any and all shares of Restricted Stock and Restricted Stock Units outstanding at the time of a Change in Control in exchange for a lump sum cash payment per outstanding share of Restricted Stock or outstanding Restricted Stock Unit, as applicable, equal to the value of the consideration that would be received per share of Common Stock in the Change in Control or, if no consideration is to be received by the Company’s stockholders in connection with the Change in Control, the Fair Market Value of a share of Common Stock on the date of the Change in Control.
(d) Performance Awards. Each Performance Award granted under the Plan that is outstanding on the date of the Change in Control shall immediately vest and the holder of such Performance Award shall be entitled to a lump sum cash payment equal to the amount of such Performance Award that would have been payable at the end of the Performance Period as if 100% of the Performance Goals have been achieved.
(e) Other Stock Based Awards. The Committee shall be entitled to cancel any and all Other Stock Based Awards outstanding at the time of a Change in Control in exchange for a lump sum cash payment per share of Common Stock represented by outstanding Other Stock Based Awards equal to the value of the consideration that would be received per share of Common Stock in the Change in Control or, if no consideration is to be received by the Company’s stockholders in connection with the Change in Control, the Fair Market Value of a share of Common Stock on the date of the Change in Control.
(f) Timing of Payment. Any amount required to be paid pursuant to this Section 11 shall be paid as soon as practical after the date such amount becomes payable.

 

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(g) Definition. “Change in Control” means the occurrence of any of the following events:
(i) 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 (A) the Company, (B) any “person” who on the date hereof is a director or officer of the Company, (C) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, (D) an underwriter temporarily holding securities pursuant to an offering of such securities, or (E) 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 UST Inc. representing 20% or more of the combined voting power of UST Inc.’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (iii)(1) below; or
(ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of UST Inc.) whose appointment or election by the Board or nomination for election by UST Inc.’s stockholders was approved or recommended by a vote of at least two-thirds ( 2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(iii) there is consummated a merger or consolidation of UST Inc. with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of UST Inc. outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 80% of the combined voting power of the securities of UST Inc. or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of UST Inc. (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of UST Inc. representing 20% or more of the combined voting power of UST Inc.’s then outstanding securities; or
(iv) the stockholders of UST Inc. approve a plan of complete liquidation or dissolution of UST Inc. or there is consummated an agreement for the sale or disposition by UST Inc. of all or substantially all of UST Inc.’s assets, other than a sale or disposition by UST Inc. of all or substantially all of its assets to an entity, at least 80% of the combined voting power of the voting securities of which are owned by stockholders of UST Inc. in substantially the same proportions as their ownership of UST Inc. immediately prior to such sale.

 

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12. Miscellaneous Provisions.
(a) Forfeiture. The terms and conditions applicable to Awards with respect to the termination for any reason of a Participant’s employment or service with the Company and its Subsidiaries shall be determined by the Committee in its discretion and shall be set forth in the agreement evidencing such Award. Notwithstanding the generality of foregoing, any Award and/or the proceeds of any Award shall be forfeited, as follows: Except as otherwise provided in agreements covering Awards hereunder, a Participant shall forfeit all rights in his or her outstanding Awards under the Plan, and all such outstanding Awards shall automatically terminate and lapse, if the Committee determines that such Participant has (i) used for profit or disclosed to unauthorized persons, confidential information or trade secrets of the Company, (ii) breached any contract with or violated any fiduciary obligation to the Company, including without limitation, a violation of any Company code of conduct, (iii) engaged in unlawful trading in the securities of the Company or of another company based on information gained as a result of that Participant’s employment or other relationship with the Company, or (iv) committed a felony or other serious crime.
(b) Claw-Back Provision. If (1) the employment of the Participant is terminated for Cause, or (2) after the Participant’s termination of employment with the Company other than for Cause, the Company discovers the occurrence of an act or failure to act by the Participant that would have enabled the Company to terminate the Participant’s employment for Cause had the Company known of such act or failure to act at the time of its occurrence, or (3) subsequent to his termination of employment, the Grantee commits an act described in Section 12(a)(i) above, in each case, if such Act is discovered by the Company within three years of its occurrence, then, unless otherwise determined by the Committee,
(i) any and all outstanding Awards held by such Grantee as of the date of such termination or discovery (whether or not then vested) shall terminate and be forfeited; and
(ii) the Participant (or, in the event of the Participant’s death following the commission of such act, his beneficiaries or estate) shall (A) to the extent such Award was paid in the form of shares of Common Stock, sell back to the Company all shares that are held, as of the date of such termination or discovery, by the Participant (or, if applicable, his beneficiaries or estate) and that were acquired upon the grant, exercise or vesting of any Award on or after the date which is 180 days prior to the Participant’s termination of employment (the “Acquired Shares”), for a per share price equal to the price paid by the Participant (or, if applicable his beneficiaries or estate) for such shares (or, if no consideration was paid for such shares, the shares shall be immediately returned to the Company for no consideration), (B) to the extent Acquired Shares have previously been sold or otherwise disposed of by the Participant (other than by reason of death) or, if applicable, by his beneficiaries or estate, repay to the Company the excess of the aggregate Fair Market Value of such Acquired Shares on the date of such sale or disposition over the aggregate price paid for such Acquired Shares and (C) to the extent such Award was paid in the form of cash, repay to the Company the aggregate cash received by such Participant (or, if applicable, his beneficiaries or estate) upon the exercise or vesting of any Award on or after the date which is 180 days prior to the Participant’s termination of employment.
(c) Rights as Stockholder. Except as otherwise provided herein, a Participant shall have no rights as a holder of Common Stock with respect to Awards hereunder, unless and until certificates for shares of Common Stock are issued to the Participant.

 

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(d) Assignment or Transfer. Unless the Committee shall specifically determine otherwise, no Award under the Plan or any rights or interests therein shall be transferable other than by will or the laws of descent and distribution and shall be exercisable, during the Participant’s lifetime, only by the Participant. Once awarded, the shares of Common Stock received by Participants may be freely transferred, assigned, pledged or otherwise subjected to lien, subject to the restrictions imposed by the Securities Act of 1933, Section 16 of the Securities Exchange Act of 1934 and the Company’s Insider Trading Policy, each as amended from time to time.
(e) Withholding Taxes. The Company shall have the right to deduct from all Awards paid in cash (and any other payment hereunder) any federal, state, local or foreign taxes required by law to be withheld with respect to such Awards and, with respect to Awards paid in stock or upon exercise of Options, to require the payment (through withholding from the Participant’s salary or otherwise) of any such taxes. In addition, if determined by the Committee, a Participant may elect the withholding by the Company of a portion of the shares of Common Stock subject to an Award upon the exercise of such Award, upon the Award being earned or upon Restricted Stock becoming non-forfeitable or Restricted Stock Units becoming non-forfeitable and payable (each, a “Taxable Event”) having a Fair Market Value equal to the minimum amount necessary to satisfy the required withholding liability attributable to the Taxable Event. The Company’s obligation to make delivery of Awards in cash or Common Stock shall be subject to currency or other restrictions imposed by any government.
(f) No Rights to Awards. Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company or any of its subsidiaries, divisions or affiliates. Except as set forth herein, no employee or other person shall have any claim or right to be granted an Award under the Plan. By accepting an Award, the Participant acknowledges and agrees (i) that the Award will be exclusively governed by the terms of the Plan, including the right reserved by the Company to amend or cancel the Plan at any time without the Company incurring liability to the Participant (except for Awards already granted under the Plan), (ii) that Awards shall be subject to such rules and limitations as are established by the Committee for the proper administration of the Plan, such as minimums and restrictions on the number of Options that may be exercised during a specified period of time, (iii) that Awards are not a constituent part of salary, wages or compensation for purposes of determining any pension, retirement, death benefit or other benefit under any employee benefit plan of the Company or any subsidiary or for purposes of any agreement between the Participant and the Company unless expressly provided in such agreement, (iv) that the Participant is not entitled, under the terms and conditions of employment, or by accepting or being granted Awards under this Plan to require Awards to be granted to him or her in the future under this Plan or any other plan, (v) that the value of Awards received under the Plan will be excluded from the calculation of termination indemnities or other severance payments, and (vi) that the Participant will seek all necessary approval under, make all required notifications under and comply with all laws, rules and regulations applicable to the ownership of Options and Common Stock and the exercise of Options, including, without limitation, currency and exchange laws, rules and regulations.

 

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(g) Beneficiary Designation. To the extent allowed by the Committee, each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named on a contingent or successive basis) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Unless the Committee shall determine otherwise, each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.
(h) Costs and Expenses. The cost and expenses of administering the Plan shall be borne by the Company and not charged to any Award or to any Participant.
(i) Fractional Shares. Fractional shares of Common Stock shall not be issued or transferred under an Award, but the Committee may pay cash in lieu of a fraction or round the fraction, in its discretion.
(j) Funding of Plan. The Company shall not be required to establish or fund any special or separate account or to make any other segregation of assets to assure the payment of any Award under the Plan.
(k) Indemnification. Provisions for the indemnification of officers and directors of the Company in connection with the administration of the Plan shall be as set forth in the Company’s Certificate of Incorporation and Bylaws as in effect from time to time.
(l) Successors. All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
(m) Compliance with Code Section 409A. At all times, this Plan shall be interpreted and operated (i) with respect to 409A Awards (as defined in Section 13(a) below), in accordance with the requirements of Section 409A of the Code, unless an exemption is available and applicable, (ii) to maintain the exemptions from Section 409A of the Code of Options, SARs and Restricted Stock and awards designed to meet the short-deferral exception under Section 409A of the Code, and (iii) to preserve the status of deferrals made prior to the effective date of Section 409A of the Code (“ Prior Deferrals”) as exempt from Section 409A of the Code, i.e., to preserve the grandfathered status of Prior Deferrals. To the extent there is a conflict between the provisions of the Plan relating to compliance with Section 409A of the Code and the provisions of any award agreement issued under the Plan, the provisions of the Plan control.

 

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13. Effective Date, Governing Law, Amendments and Termination.
(a) Effective Date. The Plan was approved by the Board on February 17, 2005 and became effective on the date it was approved by the Company’s stockholders (the “Effective Date”) and was amended effective December 7, 2006 (with respect to the dilution and adjustment provisions of Section 10), and August 2, 2007 (with respect to the definition of Fair Market Value). This amendment and restatement of the Plan is generally effective as of the Effective Date, in order to ensure compliance with Section 409A of the Code in the case of “409A Awards,” i.e., all Plan awards that were not both earned and vested as of December 31, 2004, and all Plan awards that were materially modified after October 3, 2004, determined in each case within the meaning of Section 409A of the Code.
(b) Amendments. The Board may at any time terminate or from time to time amend the Plan in whole or in part, but no such action shall adversely affect any rights or obligations with respect to any Awards granted prior to the date of such termination or amendment without the consent of the affected Participants except to the extent that the Committee reasonably determines that such termination or amendment is necessary or appropriate to comply with applicable law (including the provisions of Section 409A of the Code and the regulations thereunder pertaining to the deferral of compensation) or the rules and regulations of any stock exchange on which Common Stock is listed or quoted. Notwithstanding the foregoing, unless the Company’s stockholders shall have first approved the amendment, no amendment of the Plan shall be effective which would (i) increase the maximum number of shares of Common Stock which may be delivered under the Plan or to any one individual (except to the extent such amendment is made pursuant to Section 10 hereof), (ii) extend the maximum period during which Awards may be granted under the Plan, (iii) add to the types of awards that can be made under the Plan, (iv) except as permitted by Section 7(d), change the Performance Goals pursuant to which Performance Awards are earned, (v) modify the requirements as to eligibility for participation in the Plan, or (vi) otherwise require shareholder approval under the listing requirement of the New York Stock Exchange or other law, rule or regulation to be effective. With the consent of the Participant affected, the Committee may amend outstanding agreements evidencing Awards under the Plan in a manner not inconsistent with the terms of the Plan.
(c) Governing Law. All questions pertaining to the construction, interpretation, regulation, validity and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of Delaware without giving effect to conflict of laws principles.
(d) Termination. No Awards shall be made under the Plan after the tenth anniversary of the Effective Date.

 

21

Exhibit 10.4
UST INC.
OFFICERS’ SUPPLEMENTAL RETIREMENT PLAN
409A Document
(January 1, 2005 Restatement, as Amended Through September 2008)

 

 


 

UST INC
OFFICERS’ SUPPLEMENTAL RETIREMENT PLAN
409A Document
(January 1, 2005 Restatement, as Amended Through September 2008)
In order to provide additional retirement benefits for certain officers (“Eligible Employees”) of the Company whose anticipated pension under the Company’s qualified retirement plan is deemed not to be commensurate with their current earnings or responsibilities, the Board of Directors of the Company (the “Board”) has authorized the establishment of this Officers’ Supplemental Retirement Plan (the “Plan”) as set forth below. The Board authorized the adoption of the Plan effective as of November 20, 1980; has authorized a subsequent amendment and restatement of the Plan, effective as of January 1, 1984; has authorized a further amendment and restatement of the Plan, generally effective as of May 5, 1987, to reflect certain recent corporate changes; has authorized a further amendment and restatement of the Plan, effective as of February 1, 1985, which change the Plan’s eligibility and participation requirements; has authorized a further amendment and restatement of the Plan, effective as of September 27, 1988, which contain additional change-in-control provisions; has authorized a further amendment and restatement of the Plan, effective as of January 1, 1989, and adopted on March 22, 1989, which contain technical provisions relating to the Company’s Benefit Restoration Plan; has authorized a further amendment and restatement of the Plan, effective as of July 1, 1991, and adopted on June 27, 1991, which further change the Plan’s eligibility requirements and add provisions regarding medical benefits; has authorized a further amendment and restatement of the Plan, effective as of December 1, 1992, which contain technical revisions to Sections 3(a)(ii), 3(b)(ii) and 3(c)(ii) and expand the definition of “Company”; has authorized a further amendment and restatement of the Plan, effective as of September 22, 1994, which expands the definition of “Compensation”; has authorized a further amendment of the Plan, effective as of March 25, 1999, which further changes the Plan’s participation requirements and which provides for forfeiture of benefits under the Plan in connection with a termination for “cause”; has authorized a further amendment, effective as of January 1, 2001, to revise the actuarial assumptions to be applied in the determination of the present value of benefits payable under Section 8 of the Plan, and to revise the amount of both the total benefit and the offset in the calculation of any benefit payable under Section 3 of the Plan, and to provide for a lump sum payment for all retirees in the event of a change-in-control; and has authorized a further amendment and restatement of the Plan, effective as of January 1, 2003 to incorporate all prior amendments and to freeze the benefits provided by Section 9 of the Plan Medical Benefits and make such benefits available solely to Participants who have a vested benefit under the Plan as of January 1, 2003.
Effective January 1, 2005, the terms of the Plan became set forth in two separate plan documents. The first plan document consists of the Plan as originally effective on November 20, 1980 and as subsequently amended through October 3, 2004; that plan document applies to all benefits under the Plan that were earned and vested on or before December 31, 2004. The second plan document – the 409A document set forth in this document – applies to all benefits under the Plan that are earned or vested after December 31, 2004.

 

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1. Definitions
(a) Except as otherwise expressly provided herein, or as otherwise required by the context, all words and phrases used herein which are defined in the UST Inc. Retirement Income Plan for Salaried Employees (the “RIP”) shall have the same meaning as in the RIP.
(b) “Accrued Benefit” shall mean the Normal Retirement Income, in the form of a life annuity, accrued under the RIP, to commence on a Participant’s Normal Retirement Date, determined as of any date on or before such Participant’s Retirement Date, which is equal to his Normal Retirement Income computed under the RIP up to any such date, including any amount payable under the Company’s Excess Retirement Benefit Plan, the Company’s Benefit Restoration Plan or, with respect to an individual who becomes a Participant on or after January 1, 2001, any other defined benefit pension plan, regardless of whether said plan is qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, maintained by the Company or any Affiliated Company. For purposes of the preceding sentence, the Normal Retirement Income under the RIP and the amounts payable under the Company’s Excess Retirement Benefit Plan and the Benefit Restoration Plan shall be determined without regard to any offset determined under Section 4.8 of the RIP.
(c) “BRP 409A Benefit” means the portion of a Participant’s Section 409A Benefits that accrue under the UST Inc. Benefit Restoration Plan.
(d) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time. All references herein to particular Code sections shall also refer to any successor provisions and shall include all related regulations, interpretations and other guidance.
(e) “Compensation” shall mean the monthly salary paid by the Company or, with respect to an individual who becomes a Participant on or after January 1, 2001, paid by an Affiliated Company to the Participant, plus 25% of any amount paid to the Participant in any month under the Company’s Incentive Compensation Plan (or successor thereto). “Final Compensation” shall mean the monthly salary paid by the Company or, with respect to an individual who becomes a Participant on or after January 1, 2001, paid by an Affiliated Company to the Participant during the consecutive twelve-month period ending on the date of Retirement (or the last day of the immediately preceding month if Retirement shall not be on the last day of a month), plus 25% of the largest Incentive Compensation Plan bonus paid, in whole or in part, to the Participant after the Participant’s Retirement.
(f) “Company” shall mean (i) prior to May 5, 1987, United States Tobacco Company, (ii) after May 4, 1987, and prior to February 1, 1988, UST Inc., (iii) on and after February 1, 1988, and prior to January 1, 1993, UST Inc., United States Tobacco Company, UST Enterprises Inc., and International Wine & Spirits Ltd., and (iv) on and after January 1, 1993, UST Inc., United States Tobacco Company, UST Enterprises Inc., International Wine & Spirits Ltd. and UST International Inc.
(g) “Eligible Employee” shall mean:
  (i)   any individual who is an Officer of the Company on November 20, 1980,
 
  (ii)   any individual who is an Officer of the Company on May 4, 1987, or
 
  (iii)   any other individual who becomes an Officer after May 4, 1987.

 

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(h) “ERP 409A Benefit” means the portion of a Participant’s Section 409A Benefit accrued under the UST Inc. Excess Retirement Benefit Plan.
(i) “FICA Amount” means the Participant’s share of the Federal Insurance Contributions Act (FICA) tax imposed on the Total Benefit of the Participant under Code Sections 3101, 3121(a) and 3121(v)(2).
(j) “Nonqualified Plans” means collectively the UST Inc. Benefit Restoration Plan, the UST Inc. Officers’ Supplemental Retirement Plan, and the UST Inc. Excess Retirement Benefit Plan.
(k) “Officer” shall mean an officer of the Company, including, as of July I, 1991, an assistant officer, who is elected by the Board of Directors of the Company.
(l) “Participant” shall mean an Eligible Employee who meets the requirements for participation set forth in Section 2 hereof.
(m) “Plan” shall mean the UST Inc. Officers’ Supplemental Retirement Plan; except where the context indicates to the contrary, any reference herein to the “Plan” shall be a reference to the terms of the Plan as set forth in this 409A Document, as it may be amended from time to time.
(n) “Retirement” shall mean termination of a Participant’s employment with the Company (or any subsidiary or affiliate of the Company) for any reason, provided, however, that such termination must comply with the definition of “Separation from service”, as defined in Section 1 of this Plan.
(o) “Section 409A Benefit” means the portion of a Participant’s Total Benefit that accrues or becomes vested after December 31, 2004.
(p) “Separation from Service” means a Participant’s separation from service with the Company, within the meaning of Code Section 409A(a)(2)(A)(i). The term may also be used as a verb (i.e., “Separates from Service”) with no change in meaning. Notwithstanding the preceding sentence, a Participant’s transfer to an entity owed 20% or more by the Company will not constitute a Separation of Service to the extent permitted by Code Section 409A.
(q) “Single Life Annuity” means a level monthly annuity payable to a Participant for his life only, with no survivor benefits to any person (including but not limited to any spouse).
(r) “SOP 409A Benefit” means the portion of a Participant’s Section 409A Benefits accrued under the UST Inc. Officers’ Supplemental Retirement Plan.
(s) “Total Benefit” means the sum of a Participant’s benefits under the UST Inc. Benefit Restoration Plan, the UST Inc. Officers’ Supplemental Retirement Plan and the UST Inc. Excess Retirement Benefit Plan.

 

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2. Participation
Effective as of March 25, 1999, each individual who became an Eligible Employee on or after February 1, 1988 and who has (a) attained the age of 55, (b) completed at least 10 Years of Service, and (c) completed at least 5 Years of Service as an Officer shall become a Participant under the Plan, and shall remain a Participant hereunder until his Retirement; provided, however, that such Eligible Employee must be an Officer at or after the time he satisfies the requirements of clauses (a) and (b) of this sentence; and further provided, however, that for purposes of clause (c) of this sentence, Years of Service shall include service rendered as an assistant officer prior to July 1, 1991.
Each individual who became an Eligible Employee on or after February 1, 1988 and who, prior to March 25, 1999, has (a) attained the age of 50, (b) completed at least 10 Years of Service, and (c) completed at least 5 Years of Service as an Officer shall become a Participant under the Plan, and shall remain a Participant hereunder until his Retirement; provided, however, that such Eligible Employee must be an Officer at or after the time he satisfies the requirements of clauses (a) and (b) of this sentence; and further provided, however, that for purposes of clause (c) of this sentence, Years of Service shall include service rendered as an assistant officer prior to July 1, 1991.
Each individual who became an Eligible Employee prior to February 1, 1988 and who has both (x) attained the age of 50, and (y) completed at least 5 Years of Service shall become a Participant under the Plan, and shall remain a Participant hereunder until his Retirement; provided, however, that in the case of an Eligible Employee described in Section 1(f)(iii), such Eligible Employee must be an Officer at or after the time he satisfies the requirements of (x) and (y) hereof.
An individual who satisfies the foregoing requirements shall continue to participate in the Plan (whether or not he remains an Officer) so long as he remains an employee of the Company or subsidiary or division thereof.
3. Supplemental Retirement Benefits
(a) 409A Supplemental Retirement Benefit
The benefit of a Participant pursuant to the terms of this 409A Document shall be referred to as the Participant’s 409A Supplemental Retirement Benefit. A Participant’s 409A Supplemental Retirement Benefit shall equal the excess, if any, of:
  (i)   The Supplemental Retirement Benefit (as calculated under subsection (b), (c) or (d) below, whichever is applicable, expressed in the form of a Single Life Annuity), over
 
  (ii)   The Grandfathered Supplemental Retirement Benefit.
(b) Normal Retirement
Upon the Retirement of a Participant on or after his Normal Retirement Date (the first day of the month coinciding with or next following his 65th birthday), he shall be entitled to receive an annual Supplemental Retirement Benefit payable in twelve (12) equal monthly installments in the form of a life annuity (except as otherwise provided in Section 3(e)) equal to the greater of:
  (i)   one hundred ten percent (110%) of his Accrued Benefit; or
 
  (ii)   50% of his total Compensation paid during the consecutive twelve-month period ending on the date of Retirement (or the last day of the immediately preceding month if Retirement shall not be on the last day of a month), or either of the two immediately preceding consecutive twelve-month periods, whichever such period yields the highest total Compensation, provided, however, that if bonuses are paid under the Company’s Incentive Compensation Plan more than once during any such twelve-month period, only the greatest such bonus shall be taken into account; or, if greater, 50% of Final Compensation;

 

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      (i) or (ii) reduced by:
 
  (iii)   the amount of Normal Retirement Income (determined as of the first month of such payment), expressed as a life annuity, then payable to such Participant pursuant to the RIP (inclusive of the Excess Retirement Benefit Plan and the Benefit Restoration Plan) or, with respect to an individual who becomes a Participant on or after January 1, 2001, any other defined benefit pension plan, regardless of whether said plan is qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, maintained by the Company or any Affiliated Company.
(c) Retirement On or After Age 60, but Before Normal Retirement Date
Upon the Retirement of a Participant on or after age 60, but before his Normal Retirement Date, he shall be entitled to receive an annual Supplemental Retirement Benefit payable in twelve (12) equal monthly installments in the form of a life annuity (except as otherwise provided in Section 3(e)) equal to the greater of:
  (i)   one hundred ten percent (110%) of his Accrued Benefit; or
 
  (ii)   50% of his total Compensation paid during the consecutive twelve-month period ending on the date of Retirement (or the last day of the immediately preceding month if Retirement shall not be on the last day of a month), or either of the two immediately preceding consecutive twelve-month periods, whichever such period yields the highest total Compensation; provided, however, that if bonuses are paid under the Company’s Incentive Compensation Plan more than once during any such twelve-month period, only the greatest such bonus shall be taken into account;
 
      (i) or (ii) reduced by:
 
  (iii)   the amount of Retirement Income, expressed as a life annuity, then payable to such Participant pursuant to the RIP (inclusive of the Excess Retirement Benefit Plan and the Benefit Restoration Plan) or, with respect to an individual who becomes a Participant on or after January 1, 2001, any other defined benefit pension plan, regardless of whether said plan is qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, maintained by the Company or any Affiliated Company, assuming payment of such Retirement Income commenced as of the date of Retirement.

 

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(d) Retirement On or After Age 55, but Prior to Age 60
Upon the Retirement of a Participant on or after age 55 (age 50 in the case of any Participant with respect to whom the age condition for becoming a Participant is age 50), but prior to age 60, he shall be entitled to receive an annual Supplemental Retirement Benefit payable in twelve (12) equal monthly installments in the form of a life annuity (except as otherwise provided in Section 3(e)) equal to the greater of:
  (i)   that percentage of his Accrued Benefit set forth in Column A below (corresponding to his age at Retirement); or
 
  (ii)   that percentage set forth in Column B below (corresponding to his age at Retirement), of his total Compensation paid during the consecutive twelve-month period ending on the date of Retirement (or the last day of the immediately preceding month if Retirement shall not be on the last day of a month), or either of the two immediately preceding consecutive twelve-month periods, whichever such period yields the highest total Compensation; provided, however, that if bonuses are paid under the Company’s Incentive Compensation Plan more than once during any such twelve-month period, only the greatest such bonus shall be taken into account:
                 
Attained            
Age   Column A     Column B  
 
               
59
    109 %     49 %
58
    108 %     48 %
57
    107 %     47 %
56
    106 %     46 %
55
    105 %     45 %
54
    104 %     44 %
53
    103 %     43 %
52
    102 %     42 %
51
    101 %     41 %
50
    100 %     40 %
      (i) or (ii) reduced by:
 
  (iii)   the amount of Retirement Income, expressed as a life annuity, then payable to such Participant pursuant to the RIP (inclusive of the Excess Retirement Benefit Plan and the Benefit Restoration Plan) or, with respect to an individual who becomes a Participant on or after January 1, 2001, any other defined benefit pension plan, regardless of whether said plan is qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, maintained by the Company or any Affiliated Company, assuming payment of such Retirement Income commenced as of the later of (x) the Participant’s attainment of age fifty-five (55), or (y) the date of Retirement; provided, however, that the foregoing shall not be construed to require a reduction with respect to any Supplemental Retirement Benefit paid prior to the Participant’s attainment of age fifty-five (55).

 

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(e) Grandfathered Supplemental Retirement Benefit
A Participant’s Grandfathered Supplemental Retirement Benefit is the portion of the Participant’s Supplemental Retirement Benefit determined pursuant to the requirements of Treasury Regulation Section 1.409A-6(a)(3)(i) and expressed in the form of a Single Life Annuity commencing at the time of payment specified at Section 4, below.
(f) Retirement Prior to May 5, 1987
Notwithstanding any provision herein to the contrary, any Participant whose Retirement occurred prior to May 5, 1987, shall continue to receive a Supplemental Retirement Benefit pursuant to the terms of the Plan as in effect on the date of his Retirement.
(g) Optional Form of Payment
The forms of payment that are available under this Plan are the annuity forms of payment that are available under the RIP (provided that such annuity either was available under the Retirement Income Plan as of January 1, 2005, or is actuarially equivalent to the annuities available as of such date). If a Participant is to be paid in a form other than a Single Life Annuity, then such form shall be the actuarial equivalent of the Participant’s benefit calculated for the Participant in the form of a Single Life Annuity. For all purposes under this Plan, unless otherwise specified, actuarial equivalence shall be determined using the factors specified under the RIP.
(h) Offsets
The amount otherwise payable under the Plan, but only with respect to benefits accrued on or after January 1, 2001, shall be reduced by all or part of any amount paid or payable to or on account of any Participant under the provisions of any present or future law, pension, or benefit scheme of any sovereign government (including Workers’ Compensation), or any of its political subdivisions, on account of which contributions have been made or premiums or taxes have been paid by the Company. If such amount is payable in the form of a lump sum, the 409A Supplemental Retirement Benefit payable to or on account of a Participant shall be reduced by a monthly benefit which is the “Equivalent Actuarial Value” (as defined in the RIP) of the lump sum. However, the preceding sentences shall have no applicability to benefits payable under Title II of the Social Security Act, which are to be used to reduce the benefits otherwise provided in Article 4 of the RIP.
(i) Death Prior to Commencement
Effective December 1, 2006, if a married Participant dies prior to the date payment otherwise would commence under Section 4, the Participant’s surviving spouse shall be paid a monthly benefit for life, beginning on the first day of the month following the Participant’s date of death, equal to 50% of the 409A Supplemental Retirement Benefit that would have been paid to the Participant had he or she terminated employment with the Company on the first day of the month of his or her death and received a 409A Supplemental Retirement Benefit as provided in Section 3, in the form of a life annuity. The benefit paid to a surviving spouse under this Section 3(g) shall be in lieu of any survivor benefit that might otherwise have been paid to the surviving spouse pursuant to an election by the Participant prior to his or her death of an optional form of payment under Section 3(e).

 

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4. Time of Payment
(a) In General
Subject to the provisions of subsection (b) below, a Participant’s 409A Supplemental Retirement Benefit shall commence on the first day of the calendar month coinciding with or next following a Participant’s Retirement.
(b) Six-Month Delay for Specified Employees
In the event the Participant is a “specified employee” on the date that a Participant’s 409A supplemental Retirement Benefit would begin, determined without regard to this subsection (a Participant’s “Regular Commencement Date”), with specified employee status determined by the Company in accordance with rules established by the Company in writing in advance of the “specified employee identification date” that relates to the Regular Commencement Date of, if later, by December 31, 2008, such payments shall be delayed until the date that is six months after the Regular Commencement Date with the lump sum value of all payments that are so delayed paid on the date this six months after the Regular Commencement Date (if the Participant dies after the Regular Commencement Date but before payment of all payments due, the remaining payments will be paid to the Participant’s estate as a lump sum and without regard to any six-month delay that otherwise applies to specified employees).
5. Funding
The Company shall not be required to fund 409A Supplemental Retirement Benefits hereunder. The obligations which the Company incurs hereunder may be satisfied only out of its general corporate assets, and satisfaction of such obligations shall be subject to any claims of the Company’s other creditors having priority as to the Company’s assets. Nothing contained herein, and no action taken pursuant to the provisions hereof, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company, any Participant, or any other person.
6. Nonalienability
Except as to withholding of any tax under the laws of the United States or any state or locality, no 409A Supplemental Retirement Benefit payable at any time hereunder shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment or other legal process, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such 409A Supplemental Retirement Benefit, whether currently or thereafter payable, shall be void. Except as otherwise specifically provided by law, no 409A Supplemental Retirement Benefit shall, in any manner, be liable for or subject to the debts or liabilities of any Participant or any other person entitled to such benefits.

 

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7. Miscellaneous
(a) This Plan shall not be construed as providing any Participant with the right to be retained in the Company’s employ or to receive any benefit not specifically provided hereunder.
(b) Nothing contained herein shall exclude or in any manner modify or otherwise affect any existing or future rights of any Participant to participate in and receive the benefits of any compensation, bonus, pension, life insurance, medical and hospitalization insurance or other employee benefit plan or program to which he otherwise might be or become entitled as an officer and/or employee of the Company. Notwithstanding anything to the contrary contained herein, during the period that clause (ii) of Section 8(b) hereof is in effect, Section 8 hereof may not be amended in any manner that would adversely affect the rights of any Eligible Employee thereunder.
(c) This Plan shall not be deemed to constitute an amendment to, or a part of, the RIP. All references hereunder to the RIP shall include any amended or successor plan or plans maintained by the Company, the terms of which may be applicable at any time to a Participant’s Retirement. However, if the RIP terminates, merges with, or is superseded by a successor plan, and as a result thereof the amount of 409A Supplemental Retirement Benefit to be paid to any Participant hereunder would be reduced or calculated on a different basis, or commence at a later date or dates, such 409A Supplemental Retirement Benefit shall not be less than an amount calculated pursuant to the provisions of this Plan and in accordance with the terms of the RIP as in effect on the date on which occurs any such termination, merger or supersession.
(d) This Plan shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to its conflicts of law principles.
(e) If the Company shall find that any Participant is unable to care for his affairs because of illness or accident, any 409A Supplemental Retirement Benefit payment due hereunder (unless a prior claim therefor shall have been made by a duly appointed guardian, committee, or other legal representative) may be paid to such Participant’s spouse, child, brother or sister, or to any person deemed by the Company to have incurred expense for such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liabilities of the Company hereunder.
(f) Notwithstanding any other provision hereof, in the event any proceedings under the Bankruptcy Act are instituted by or against the Company, or the Company makes a general assignment for the benefit of creditors, a Participant shall be entitled to prove a claim for any unpaid portion of the benefit provided hereunder and, if the claim is not discharged in full in any such proceeding, or assignment, it will survive any discharge of the Company under any such proceeding or assignment.
(g) The Company shall have the right, at any time and from time to time, to amend in whole or in part, or to terminate any of the provisions of this Plan, and such amendment or termination shall be binding upon all Participants and parties in interest; provided, however, that no such amendment or termination shall violate Code Section 409A or impair any rights which have accrued to Participants hereunder to the date of such amendment or termination (except as necessary to comply with Code Section 409A).

 

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(h) Subject to Section 7(i),
  (i)   a Participant whose employment with the Company is terminated for “cause” shall not be entitled to a 409A Supplemental Retirement Benefit under this Plan;
 
  (ii)   if, subsequent to the Participant’s termination of employment with the Company other than for “cause,” the Company discovers the occurrence of an act or failure to act by the Participant that would have enabled the Company to terminate the Participant’s employment for “cause” had the Company known of such act or failure to act at the time of its occurrence, the Participant (and his beneficiaries) shall forfeit the right to any future 409A Supplemental Retirement Income hereunder and shall repay (including without limitation by means of offset against any amount owed to the Participant) to the Company all amounts received hereunder subsequent to the date on which occurred the act or failure to act constituting “cause”; and
 
  (iii)   any Participant who, subsequent to his termination other than for “cause,” violates such Employee and Secrecy Agreement or such noncompetition agreement shall forfeit his (and his beneficiaries’) right to any future 409A Supplemental Retirement Income hereunder and shall repay (including without limitation by means of offset against any amount owed to the Participant) all amounts received hereunder subsequent to the date on which occurred such violation.
For the purposes of Sections 7(h) and 7(i), “cause” shall mean (A) prior to the expiration of any Employee and Secrecy Agreement or any agreement containing noncompetition provisions between the Participant and the Company, the violation of either such agreement; (B) the willful and continued failure by a Participant to substantially perform his job duties (other than any such failure resulting from the Participant’s incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Participant has not substantially performed his duties; or (C) the willful engaging by the Participant in misconduct that is materially injurious to the Company, monetarily or otherwise. Any offset under subsection (h) above shall comply with Code Section 409A, to the extent applicable.
(i) The provisions of Section 7(h) shall not (i) apply to benefits that have accrued to a Participant as of March 24, 1999 and (ii) apply in respect of acts or omissions that give rise to “cause” which occur subsequent to a “Change in Control of the Company” (as defined in Section 8(d)).
8. Change in Control of the Company
(a) Notwithstanding any other provision of this Plan, in the event of a “Change in Control of the Company” (as defined below), (i) the 409A Supplemental Retirement Benefit of a Participant whose Retirement occurs prior to the date of the Plan’s termination and within two years after the date of such Change in Control of the Company shall not be less than his 409A Supplemental Retirement Benefit determined as of the date immediately preceding the Change in Control of the Company (in accordance with the terms of the Plan in effect as of such date); provided, however, that for purposes of computing the percentages set forth in clauses (i) and (ii) of Section 3(c) hereof, there shall be utilized such Participant’s age at the date of his

 

11


 

Retirement, and (ii) if this Plan shall be terminated within two years after such Change in Control of the Company, then each Participant as of the date of termination shall have a vested right to receive, upon the date provided in section 4 herein, a 409A Supplemental Retirement Benefit which is not less than his 409A Supplemental Retirement Benefit determined as of the date immediately preceding the Change in Control of the Company (in accordance with the terms of the Plan in effect as of such date); provided, however, that for purposes of computing the percentages set forth in clauses (i) and (ii) of Section 3(c) hereof, there shall be utilized such Participant’s age as of the second anniversary of the date of the Change in Control of the Company.
(b) Notwithstanding any other provision of this Plan, upon the occurrence of a Change in Control of the Company (as defined below), (i) each Eligible Employee who is employed by the Company and who has not on the date of the Change in Control of the Company become a Participant (determined without regard to this Section 8(b)) shall, effective as of the date immediately preceding the date of the Change in Control of the Company, become a Participant under the Plan and shall remain a Participant hereunder until his Retirement; provided, however, that the 409A Supplemental Retirement Benefits of any such Participant who does not become entitled to payment under clause (ii) of this Section 8(b) shall be paid in accordance with Sections 3 and 4 of the Plan, except that payment shall in no event commence prior to the Participant’s attainment of age 55 (age 50 in the case of any Participant with respect to whom the age condition for becoming a Participant is age 50); and (ii) if the Retirement of a Participant (determined with regard to this Section 8(b)) occurs during the two-year period following a Change in Control of the Company (or, in the case of Participants who have entered into employment agreements with the Company, the period ending with the expiration of such agreement), unless such Retirement is (A) because of the Participant’s death or Disability (as defined below), (B) by the Company for Cause (as defined below) or (C) by the Participant other than for Good Reason (as defined below) (such Retirement of a Participant being hereinafter referred to as a “Qualifying Termination”), then the Participant’s 409A Supplemental Retirement Benefit shall fully vest on the day of the Participant’s Qualifying Termination; notwithstanding any other provision of the Plan, if, during the two-year period following a “change in control” of the Company (as “change in control” is defined at Treasury Regulation 1.409A-3(i)(5) (hereafter, a “409A change in control”)), a Participant who is entitled to a 409A Supplemental Retirement Benefit Separates from Service, then the Company shall pay to the Participant, no later than the fifth day following the date of the Participant’s Separation from Service, a lump-sum amount equal to the present value of the Participant’s annual 409A Supplemental Retirement Benefit, under a single life annuity form of payment, determined as of the date of the Separation from Service (but subject to the six-month delay for specified employees provided for by Section 4(b)). For purposes of clause (ii) of the preceding sentence, (w) it shall be assumed that a Participant’s annual 409A Supplemental Retirement Benefit hereunder would otherwise commence at the earliest possible benefit commencement date under this Plan, (x) solely for purposes of determining Compensation, it shall be assumed that the date of Retirement for purposes of Section 3 is the date of the Change in Control of the Company if such date yields a higher total Compensation than does the date of the Qualifying Termination, (y) the present value of such annual amount shall be determined by using the mortality table prescribed by the Secretary of the Treasury under Code Section 417(e)(3)(A)(ii)(I), as in effect on the date of the Qualifying Termination, and the annual rate of interest on 30-year Treasury Securities as specified by the Commissioner of Internal Revenue for the second full month preceding the month in which the Qualifying Termination occurs, and (z) with respect to any Participant who has entered into an employment agreement with the Company, annual 409A Supplemental Retirement Benefit shall include any increment to such Benefit that is payable under the terms of such agreement.

 

12


 

(c) Notwithstanding any other provision of this Plan, upon the occurrence of a 409A change in control of the Company (as defined above), with respect to each then former employee of the Company who on the date of his Retirement was a Participant and who had not received a complete distribution of his 409A Supplemental Retirement Benefit on the date of the 409A change in control of the Company, the Company shall pay, no later than the fifth day following the occurrence of such 409A change in control (“409A Change of Control Date”), a lump-sum amount equal to the present value of the undistributed portion of the Participant’s 409A Supplemental Retirement Benefit, under a single life form of payment or such other form previously selected by the Participant pursuant to Section 3(e) hereof, determined as of the 409A Change of Control Date. For purposes of the preceding sentence, present value shall be determined in accordance with the provisions, to the extent applicable, of the final sentence of Section 8(b) hereof.
(d) For purposes of the Plan, a “Change in Control of the Company” shall be deemed to have occurred if (i) 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 the Company, any “person” who on the date hereof is a director or officer of the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i) or (iii) of this Section) whose election by the Board of Directors 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 (iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that 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 shareholders 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.
(e) As used herein, the term “Disability” shall mean, as a result of a Participant’s incapacity due to physical or mental illness, his absence from the full-time performance of his duties with the Company for six (6) consecutive months, and his failure to return to the full-time performance of his duties within thirty (30) days after written notice of termination is given.

 

13


 

(f) As used in Section 8, the term “Cause” shall mean an act or acts of dishonesty constituting a felony under the laws of the United States or any State thereof and resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company. Notwithstanding the foregoing, a termination for Cause shall not be deemed to have occurred unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to the Participant and an opportunity for him, together with his counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors the Participant was guilty of conduct set forth above in this Section 8(f) and specifying the particulars thereof in detail.
(g) As used herein, the term “Good Reason” shall mean, without the express written consent of the Participant, the occurrence after a Change in Control of the Company of any of the following circumstances unless, in the case of paragraph (i), (v) or (vi), such circumstances are fully corrected prior to the date of termination specified in a notice of termination given in respect thereof:
  (i)   the assignment to the Participant of any duties inconsistent with the position in the Company that he held immediately prior to the Change in Control of the Company, or a significant adverse alteration in the nature or status of his responsibilities from those in effect immediately prior to such change;
 
  (ii)   a reduction by the Company in the Participant’s annual base salary as in effect on the date hereof or as the same may be increased from time to time;
 
  (iii)   the relocation of the Company’s principal executive offices to a location outside the Greenwich Metropolitan Area (or, if different, the metropolitan area in which such offices are located immediately prior to the Change in Control of the Company) or the Company’s requiring the Participant to be based anywhere other than the Company’s principal executive offices except for required travel on the Company’s business to an extent substantially consistent with the Participant’s present business travel obligations;
 
  (iv)   the failure by the Company to pay to the Participant any portion of his current compensation except pursuant to an across-the-board compensation deferral similarly affecting all officers of the Company and all officers of any person whose actions resulted in a Change in Control of the Company or any person affiliated with the Company or such person, or to pay to the Participant any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due;

 

14


 

  (v)   the failure by the Company to continue in effect any compensation plan in which the Participant participates immediately prior to the Change in Control of the Company which is material to the Participant’s total compensation, including but not limited to the Company’s Retirement Income Plan for Salaried Employees, Employees’ Savings Plan, Incentive Compensation Plan, and 1982 Stock Option Plan, or any substitute plans adopted prior to the Change in Control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Participant’s participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Participant’s participation relative to other participants, as existed at the time of the Change in Control of the Company; or
 
  (vi)   the failure by the Company to continue to provide the Participant with benefits substantially similar to those enjoyed by him under any of the Company’s life insurance, medical, health and accident, or disability plans in which he was participating at the time of the Change in Control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Participant of any material fringe benefit enjoyed by him at the time of the Change in Control of the Company, or the failure by the Company to provide the Participant with the number of paid vacation days to which he is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the time of the Change in Control of the Company;
provided, however, that, in the case of a Participant who has entered into an employment agreement with the Company, “Good Reason” shall have the meaning set forth in such employment agreement.
9. Medical Benefits
Each Participant whose employment with the Company (or any subsidiary or affiliate of the Company) terminates prior to the Participant’s attainment of age 65 shall be treated as a “retired officer” for purposes of continuing medical coverage (until attainment of age 65) under the Company’s group insurance program. Notwithstanding the foregoing, no Eligible Employee who first satisfies the requirements set forth in Section 2 hereof for participation in the Plan after January 1, 2003 shall become eligible for, or otherwise entitled to, the benefits contemplated by the immediately preceding sentence.
10. Successors
The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume the Company’s obligations hereunder in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in the Plan, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 10 or which otherwise becomes bound by all the terms and provisions of the Plan by operation of law.

 

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11. Payment of FICA Taxes
(a) Payment of FICA and Related Income Taxes. As provided in subsections (a) through (d) below, a portion of a Participant’s Section 409A Benefit shall be paid as a single lump sum and remitted directly to the Internal Revenue Service (“IRS”) in satisfaction of the Participant’s FICA Amount and the related withholding of income tax at source on wages (imposed under Code Section 3401 or the corresponding withholding provisions of the applicable state, local or foreign tax laws as a result of the payment of the FICA Amount) and the additional withholding of income tax at source on wages that is attributable to the pyramiding of wages and taxes. Notwithstanding the prior sentence, in the event the Participant is due to be paid a bonus between (1) the date the Participant’s Total Benefit is taken into account as a FICA wages, and (2) the date that income taxes related to the lump sum payment are deposited with the IRS, the related income taxes shall be satisfied (to the extent possible) from the Participant’s bonus, and the amount of the lump sum payment provided for in the prior sentence shall be reduced accordingly. Payment of related income taxes out of such a bonus is referred to below as “Bonus Withholding.”
(b) Timing of Payment. Upon the date that the Participant’s FICA Amount and related income tax withholding are due to be deposited with the IRS, a lump sum payment equal to the Participant’s FICA Amount and any related income tax withholding, after taking into account any Bonus Withholding, shall be paid from the Participant’s Section 409A Benefit and remitted to the IRS (or other applicable tax authority) in satisfaction of such FICA Amount and income tax withholding. The classification of a Participant as a “specified employee” under Code Section 409A shall have no effect on the timing of the lump sum payment under this subsection (b).
(c) Reduction of Section 409A Benefit. To reflect the payment of a Participant’s FICA Amount and any related income tax liability, after taking into account any Bonus Withholding, as provided in subsection (a) above, the Participant’s Section 409A Benefit shall be reduced on an equal and consistent basis, effective as of the date for payment of the lump sum in accordance with subsection (b) above, with such reduction being the actuarial equivalent of the lump sum payment used to satisfy the Participant’s FICA Amount and related income tax withholding, and with actuarial equivalence determined using the applicable year-end disclosure rate and related factors for the year in which the Participant Separates from Service. It is expressly contemplated that this reduction may occur effective as of a date that is after the date payment of a Participant’s BRP Pension, SOP Pension or ERP Pension commences. The reduction of the Participant’s Section 409A Benefit shall be made according to the ordering rules of subsection (d) below.
(d) Order of Payment from the Nonqualified Plans. The reduction under subsection (c) above shall apply first to the Participant’s BRP 409A Benefit. To the extent the BRP 409A Benefit is insufficient to satisfy the reduction, the Participant’s SOP 409A Benefit shall be reduced next. To the extent the Participant’s BRP 409A Benefit and SOP 409A Benefit are insufficient to satisfy the reduction, the Participant’s ERP 409A Benefit shall be reduced next. To the extent the Participant’s total Section 409A Benefit is insufficient to satisfy the reduction, the Participant shall be responsible for paying the difference to the Company.

 

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(e) No Effect on Commencement of Section 409A Benefit. The Participant’s Section 409A Benefit shall commence in accordance with the terms of the Nonqualified Plans. The lump sum payment to satisfy the Participant’s FICA Amount and related income tax withholding shall not affect the time of payment of the Participant’s actuarially reduced Section 409A Benefit, including not affecting any required delay in payment to a Participant who is classified as a “specified employee” under Section 409A.
(f) Notwithstanding anything else in the Plan to the contrary, the Section 409A Benefit of the Participants listed below shall initially be paid without regard to the actuarial reduction for the lump sum payment to satisfy such Participant’s FICA Amount and related income tax withholding. Effective March 1, 2007, the Participant’s remaining Section 409A Benefit payments shall be actuarially reduced as provided above at Article 7 to the extent necessary to recover the lump sum payment for the payment of such Participant’s FICA Amount and any related income tax withholding, after taking into account any Bonus Withholding. This transitional rule applies to the following Participants:
     
Name   Retirement Date
Robert Fitzmaurice
  June 1, 2006
Valerie Held
  June 1, 2006
Vincent Gierer
  January 1, 2007
12. Compliance with Code section 409A
It is the intention of the Company that the Plan shall be construed in accordance with the applicable requirements of Code section 409A. In the event that the Plan shall be deemed not to comply with Code Section 409A, then neither the Company, the Board, nor its or their designees or agents shall be liable to any Participant or other persons for actions, decisions or determinations made in good faith.
13. Claims Procedure
The Board, or any committee appointed by the Board to administer the Plan (“Plan Committee”) shall have the exclusive discretionary authority to construe and interpret the Plan, to decide all questions of eligibility for benefits and to determine the amount of such benefits, and its decisions on such matters are final and conclusive. As a result, benefits under this Plan will be paid only if the Plan Committee decides in its discretion that the person claiming such benefits (a “claimant” ) is entitled to them. This discretionary authority is intended to be absolute, and in any case where the extent of this discretion is in question, the Plan Committee is to be accorded the maximum discretion possible. Any exercise of this discretionary authority shall be reviewed by a court, arbitrator or other tribunal under the arbitrary and capricious standard (i.e., the abuse of discretion standard). If, pursuant to the discretionary authority provided for above, an assertion of any right to a benefit by or on behalf of a claimant is wholly or

 

17


 

partially denied, the Plan Committee, or a party designated by the Plan Committee, will provide such claimant the claims review process described in this section. The Plan Committee has the discretionary right to modify the claims process described in this section in any manner so long as the claims review process, as modified, includes the steps described below. Within a 90-day response period following the receipt of the claim by the Plan Committee, the Plan Committee will notify the claimant of:
(a) The specific reason or reasons for the denial;
(b) Specific reference to pertinent Plan provisions on which the denial is based;
(c) A description of any additional material or information necessary for the claimant to submit to perfect the claim and an explanation of why such material or information is necessary; and
(d) A description of the claims review process (including the time limits applicable to such process and a statement of the claimant’s right to bring a civil action under ERISA following a further denial on review).
If the Plan Committee determines that special circumstances require an extension of time for processing the claim, it may extend the response period from 90 to 180 days. If this occurs, the Plan Committee will notify the claimant before the end of the initial 90-day period, indicating the special circumstances requiring the extension and the date by which the Plan Committee expects to make the final decision. Further review of a claim is available upon request by the claimant to the Plan Committee made in writing or such other form as is acceptable to the Plan Committee within 60 days after the claimant receives the denial of the claim. Upon review, the Plan Committee shall provide the claimant a full and fair review of the claim, including the opportunity to submit to the Plan Committee comments, documents, records and other information relevant to the claim and the Plan Committee’s review shall take into account such comments, documents, records and information regardless of whether it was submitted or considered at the initial determination. The decision on review shall be made within 60 days after receipt of the request for review, unless circumstances warrant an extension of time not to exceed an additional 60 days. If this occurs, notice of the extension will be furnished to claimant before the end of the initial 60-day period, indicating the special circumstances requiring the extension and the date by which the Plan Committee expects to make the final decision. The final decision shall be drafted in a manner calculated to be understood by the claimant, and shall include the specific reasons for the decision with references to the specific Plan provisions on which the decision is based. Any claim referenced in this section that is reviewed by a court, arbitrator, or any other tribunal shall be reviewed solely on the basis of the record before the Plan Committee. In addition, any such review shall be conditioned on the claimant’s having fully exhausted all rights under this section. Any notice or other notification that is required to be sent to a claimant under this section may be sent pursuant to any method approved under Department of Labor Regulation section 2520.104b-1 or other applicable guidance.

 

18


 

14. Construction
(a) Gender and Number. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary.
(b) Compounds of the Word “Here”: The words “hereof”, “hereunder” and other similar compounds of the word “here” shall mean and refer to the entire Plan, not to any particular provision or section.
(c) Subdivisions of the Plan Document. This Plan document is divided and subdivided using the following progression: section, subsections, and paragraphs. Sections are designated by Arabic numerals that do not contain a decimal point. Subsections are designated by lower-case letters in parentheses. Paragraphs are designated by lower-case roman numerals in parentheses. Any reference in a section to a subsection (with no accompanying section reference) shall be read as a reference to the subsection with the specified designation contained in that same section. A similar rule shall apply with respect to paragraph references within a subsection.
(d) Invalid Provisions. If any provision of this Plan is, or is hereafter declared to be void, voidable, invalid or otherwise unlawful, the remainder of the Plan shall not be affected thereby.
(e) Interpreting Subsection 7(g). In all circumstances, the provisions of Subsection 7(g) shall be interpreted in the manner that imposes the least limitation on the Company’s claimed right of amendment or termination (or both). In this regard, it is specifically intended that any ambiguities in the Plan are to be resolved in the manner that minimizes the limitation on any right to amendment or termination that is claimed directly or indirectly against one or more Participants or Beneficiaries.

 

19

Exhibit 10.5
UST INC.
BENEFIT RESTORATION PLAN
409A Document
(January 1, 2005 Restatement, as Amended Through September 2008)

 

 


 

TABLE OF CONTENTS
         
PREAMBLE
    ii  
 
       
ARTICLE 1. DEFINITIONS
    1  
 
       
ARTICLE 2. AMOUNT OF BENEFITS; FORM AND TIME OF PAYMENT OF BENEFITS
    5  
 
       
ARTICLE 3. FINANCING THE PLAN
    9  
 
       
ARTICLE 4. EMPLOYEE PLANS ADMINISTRATION COMMITTEE
    10  
 
       
ARTICLE 5. AMENDMENT OR TERMINATION
    13  
 
       
ARTICLE 6. SPECIAL TERMINATION BENEFIT
    13  
 
       
ARTICLE 7. PAYMENT OF FICA TAXES
    20  
 
       
ARTICLE 8. COMPLIANCE WITH CODE SECTION 409A
    22  
 
       
ARTICLE 9. CLAIMS PROCEDURE
    23  
 
       
ARTICLE 10. CONSTRUCTION OF THE PLAN
    25  
 
       
APPENDIX A
    A-1  
 
       
ARTICLE 1. APPLICABILITY
    A-1  
 
       
ARTICLE 2. APPLICABLE RULES FOR PAYMENT OF TRANSITION BENEFITS
    A-1  
 
       
ARTICLE 3. APPLICABLE RULES FOR NON-DISTRIBUTED TRANSITION BENEFITS
    A-1  
 
       
ARTICLE 4. TRANSITION RULE FOR PARTICIPANTS WHOSE BENEFITS COMMENCE PRIOR TO MARCH 31, 2007
    A-2  

 

i


 

PREAMBLE
The Plan is an unfunded nonqualified plan that is established to provide for the payment of excess retirement income benefits and/or excess survivor income benefits directly to any Participant in the UST Inc. Retirement Income Plan for Salaried Employees or the Survivor Income Plan for Employees of UST Inc. whose benefits are reduced because of the limitation on compensation under Code Section 401(a)(17) or 505(b)(7). The Plan shall benefit those Employees who participate in the Plan on or after January 1, 1989.
The Plan was originally effective January 1, 1989. It was amended in 2001 to change the mortality table and interest rate specified at section 6.1 and to add a new section 6.1(b), providing for a lump-sum distribution to participants in current pay status in the event of a change in control. The Plan was amended in February of 2007 to add provisions providing for accelerated payments from the Plan (as well as the UST Inc. Officers’ Supplemental Retirement Plan and the UST Inc. Excess Retirement Benefit Plan) in order to pay any taxes due under FICA, in compliance with the requirements of Code Section 409A.
Effective January 1, 2005, the terms of the Plan became set forth in two separate plan documents. The first plan document consists of the Plan as originally effective on January 1, 1989 and as amended in 2001; that plan document applies to all benefits under the Plan that were earned and vested on or before December 31, 2004. The second plan document — the 409A document set forth in this document — applies to all benefits under the Plan that are earned and vested after December 31, 2004.

 

ii


 

UST INC.
BENEFIT RESTORATION PLAN
409A Document
(January 1, 2005 Restatement, as Amended Through September 2008)
ARTICLE 1. DEFINITIONS
The following words and phrases as used herein (including the Preamble) shall, for the purpose of this Plan and any subsequent amendment thereof, have the following meanings unless a different meaning is plainly required by the context:
1.1   “Beneficiary” means a person eligible to receive a benefit under the Survivor Income Plan or to receive a benefit under the Retirement Income Plan in the event of the death of the Participant.
 
1.2   “Board of Directors” means the Board of Directors of UST Inc. as constituted from time to time.
 
1.3   “BRP 409A Benefit” means the portion of a Participant’s Section 409A Benefits that accrue under the UST Inc. Benefit Restoration Plan.
 
1.4   “Code” means the Internal Revenue Code of 1986, as amended from time to time. All references herein to particular Code Sections shall also refer to any successor provisions and shall include all related regulations, interpretations and other guidance.
 
1.5   “Company” means UST Inc., a Delaware corporation, any division of the Company to which the Plan is extended by the Board of Directors, United States Tobacco Company (a wholly owned subsidiary of UST Inc.), and any other subsidiary or affiliated corporation which, with the approval of the Board of Directors and subject to such conditions as it may impose, adopts this Plan, and any successor or successors of any of them.

 

1


 

1.6   “Distribution Date” shall mean the day on which the Participant is to receive the first payment of his Post-2008 409A Excess Retirement Income Benefit under this Plan, determined in accordance with Section 2.2.
 
1.7   “Effective Date” means January 1, 1989.
 
1.8   “Eligible Spouse” means the spouse of a Participant to whom the Participant is married on the earlier of the Participant’s Distribution Date or the date of the Participant’s death.
 
1.9   “Employee” means any person who is an Employee under the terms of the Retirement Income Plan and/or the Survivor Income Plan.
 
1.10   “Employee Plans Administration Committee” means the committee referred to in Article 4 hereof. Said committee shall be comprised of the same membership as the committee established pursuant to Article 10 of the Retirement Income Plan.
 
1.11   “ERISA” means the Employee Retirement Income Security Act of 1974, including any amendments thereto, any similar subsequent federal laws, and any rules and regulations from time to time in effect under any of such laws.
 
1.12   “ERP 409A Benefit” means the portion of a Participant’s Section 409A Benefit accrued under the UST Inc. Excess Retirement Benefit Plan.
 
1.13   “Excess Benefit Plan” means the UST Inc. Excess Retirement Benefit Plan, as it may be amended from time to time.
 
1.14   “FICA Amount” means the Participant’s share of the Federal Insurance Contributions Act (FICA) tax imposed on the Total Benefit of the Participant under Code Sections 3101, 3121(a) and 3121(v)(2).

 

2


 

1.15   “Nonqualified Plans” means collectively the UST Inc. Benefit Restoration Plan, the UST Inc. Officers’ Supplemental Retirement Plan, and the UST Inc. Excess Retirement Benefit Plan.
 
1.16   “Participant” means an Employee who is covered by the Retirement Income Plan or Survivor Income Plan whose benefits thereunder are reduced because of the compensation limits contained in Code Section 401(a)(17) or 505(b)(7).
 
1.17   “Post-2008 409A Excess Retirement Income Benefit” means an Excess Retirement Income Benefit due under the terms of this Plan to a Participant who is not entitled to a Transition Benefit under this Plan.
 
1.18   “Plan” means the UST Inc. Benefit Restoration Plan; except where the context indicates to the contrary, any reference herein to the “Plan” shall be a reference to the terms of the Plan as set forth in this 409A Document, as it may be amended from time to time.
 
1.19   “Pre-409A Document” means the UST Inc. Benefit Restoration Plan as it existed on October 3, 2004, with certain changes adopted thereafter that are intended to conform that document to the two-plan-document structure that applies to the Plan effective as of January 1, 2005.
 
1.20   “Qualified Joint and Survivor Annuity” means an annuity that is payable to the Participant for life with 50 percent of the amount of such annuity payable after the Participant’s death to his surviving Eligible Spouse for life. If the Eligible Spouse predeceases the Participant, no survivor benefit under the Qualified Joint and Survivor Annuity shall be payable to any person.
 
1.21   “Retirement Income Plan” means UST Inc. Retirement Income Plan for Salaried Employees, as it may be amended from time to time.

 

3


 

1.22   “Section 409A Benefit” means the portion of a Participant’s Total Benefit that accrues or becomes vested after December 31, 2004.
 
1.23   “Separation from Service” means a Participant’s separation from service with the Company, within the meaning of Code Section 409A(a)(2)(A)(i). The term may also be used as a verb (i.e., “Separates from Service”) with no change in meaning. Notwithstanding the preceding sentence, a Participant’s transfer to an entity owed 20% or more by the Company will not constitute a Separation of Service to the extent permitted by Code Section 409A.
 
1.24   “Single Life Annuity” means a level monthly annuity payable to a Participant for his life only, with no survivor benefits to his Eligible Spouse or any other person.
 
1.25   “SOP 409A Benefit” means the portion of a Participant’s Section 409A Benefits accrued under the UST Inc. Officers’ Supplemental Retirement Plan.
 
1.26   “Survivor Income Plan” means the Survivor Income Plan for Employees of UST Inc., as it may be amended from time to time.
 
1.27   “Total Benefit” means the sum of a Participant’s benefits under the UST Inc. Benefit Restoration Plan, the UST Inc. Officers’ Supplemental Retirement Plan and the UST Inc. Excess Retirement Benefit Plan.
 
1.28   “Transition Benefit” means the benefit that is subject to Code Section 409A and that is due to a Participant under the terms of this Plan on account of the Participant’s entitlement to distribution under the terms of the Retirement Income Plan on or prior to December 31, 2008. Calculation and payment of a Transition Benefit are made under Appendix A.

 

4


 

1.29   “Trust Agreement” means the Indentures of Trust between the Company and the Trustee under (i) the Retirement Income Plan and (ii) the Survivor Income Plan.
 
1.30   “Trust Fund” means all such money or other property that shall be held by the Trustee pursuant to the terms of the Trust Agreement.
 
1.31   “Trustee” means the trustee or trustees acting as such under the Trust Agreement, including any successor or successors.
ARTICLE 2.   AMOUNT OF BENEFITS; FORM AND TIME OF PAYMENT OF BENEFITS
2.1   Excess Retirement Income Benefit. An individual who is a Participant in the Plan pursuant to the terms of this 409A Document shall be entitled to an Excess Retirement Income Benefit that is either (i) a Transition Benefit or (ii) a Post-2008 409A Excess Retirement Income Benefit. If a Participant is entitled to a Transition Benefit, the rules in Appendix A apply for determining the amount, the form of payment, and the time of payment of the Transition Benefit. If a Participant is entitled to a Post-2008 409A Excess Retirement Income Benefit, the amount of the Post-2008 409A Excess Retirement Income Benefit shall be determined under section 2.2.
 
2.2   Post-2008 409A Excess Retirement Income Benefit. A Participant’s Post-2008 409A Excess Retirement Income Benefit that is payable under this Plan shall equal:
  (1)   The Post-2008 Excess Retirement Income Benefit, reduced by
 
  (2)   The Grandfathered Excess Retirement Income Benefit.

 

5


 

2.3   Post-2008 Excess Retirement Income Benefit. A Participant’s Post-2008 Excess Retirement Income Benefit shall be the excess, if any, of the amount determined under subparagraph (A) over the amounts determined under subparagraphs (B) and (C):
  (A)   The amount that would have been payable to the Participant (or his Beneficiary) under the Retirement Income Plan but for the effects of the limitations in the Retirement Income Plan pursuant to Code Sections 401(a)(17) and 415, expressed in the form of a Single Life Annuity beginning on the Distribution Date.
 
  (B)   The amount payable to the Participant (or his Beneficiary) under the Retirement Income Plan, expressed in the form of a Single Life Annuity beginning on the Distribution Date.
 
  (C)   The amount payable to the Participant (or his Beneficiary) under the Excess Benefit Plan, expressed in the form of a Single Life Annuity beginning on the Distribution Date.
2.4   Grandfathered Excess Retirement Income Benefit. A Participant’s Grandfathered Excess Retirement Income Benefit is the portion of the Participant’s Post-2008 Excess Retirement Income Benefit determined pursuant to the requirements of Treasury Regulation Section 1.409A-6(a)(3)(i) and expressed in the form of a Single Life Annuity commencing at the Distribution Date.
 
2.5   Time of Payment of the Post-2008 409A Excess Retirement Income Benefit. Payment of the Post-2008 409A Excess Retirement Income Benefit shall begin on the first day of the month following the month in which occurs the later of the following: (i) a Participant’s Separation from Service or (ii) a Participant’s attainment of age 55. Such date shall be the Distribution Date for such benefit.

 

6


 

2.6   Form of Payment of the Post-2008 409A Excess Retirement Income Benefit. The form of payment of the Post-2008 409A Excess Retirement Income Benefit shall be determined under subsections (A) and (B) below.
  (A)   If (i) as of the day prior to the commencement of the Participant’s benefit under the Retirement Income Plan (the “Prior Day”), the Participant’s benefit under the Retirement Income Plan is scheduled to commence on the same date as the Participant’s Post-2008 409A Excess Retirement Income Benefit under this Plan (as specified in Section 2.5 above) and (ii) the Participant has on file, on the Prior Day, with the Administrator of the Retirement Income Plan, a valid election form with respect to the form of the Participant’s Retirement Income Plan benefit, then such elected form shall be the form of payment for the Participant’s Post-2008 409A Excess Retirement Income Benefit. For purposes of the preceding sentence, the validity of the form shall be determined under the terms of the Retirement Income Plan, but disregarding any requirement to have the election remain in effect to a date beyond the Prior Day.
 
  (B)   A Participant’s benefit under the Plan that is not paid under (A) above shall be paid in the form elected by the Participant under this Plan, or if no such election is validly submitted by the day before the Distribution Date, then as a Qualified Joint and Survivor Annuity if the Participant is married on the day prior to the Distribution Date or a Single Life Annuity if he is not married on the day prior to the Distribution Date.
2.7   Forms of Payment and Actuarial Equivalence. The forms of payment that are available under this Plan are the annuity forms of payment that are available under the Retirement Income Plan (provided that such annuity either was available under the Retirement Income Plan as of January 1, 2005, or is actuarially equivalent to the annuities available as of such date). If a Participant is to be paid in a form other than a Single Life Annuity, then such form shall be the actuarial equivalent of the Participant’s benefit calculated for the Participant in the form of a Single Life Annuity. For all purposes under this Plan, unless otherwise specified, actuarial equivalence shall be determined using the factors specified under the Retirement Income Plan.

 

7


 

2.8   Excess Survivor Income Benefit. A Beneficiary of a Participant shall receive, in any month, the excess, if any, of the amount determined under subsection (A) over the amount determined under subsection (B):
  (A)   The amount that would have been payable to the Beneficiary under the Survivor Income Plan in such month but for the effects of the limitations in the Survivor Income Plan pursuant to Code Section 505(b)(7).
 
  (B)   The amount payable to the Beneficiary under the Survivor Income Plan in such month.
2.9   Time of Payment of Excess Survivor Income Benefit. The Excess Survivor Income Benefit shall be paid on the first day of the calendar month next following the Participant’s death.
 
2.10   Form of Payment of Excess Survivor Income Benefit. The Excess Survivor Income Benefit shall be paid in monthly installments for the life of the Beneficiary if the Participant’s spouse is the Beneficiary; provided, however, that if the spouse/Beneficiary dies prior to payment of 120 monthly installments, then monthly installment payments will continue to any other Beneficiary named by the Participant to receive such benefits until at least 120 monthly installment payments (including monthly installment payments made to a Beneficiary-spouse) have been made. If the Beneficiary is not the spouse of the Participant at the Participant’s death, all payments after 120 monthly installments shall be forfeited. If the form of payment provided above in this section 2.10 is not permissible under Code Section 409A, then the Excess Survivor Income Benefit shall be paid in monthly installments for the life of the Beneficiary, irrespective of whether the Beneficiary is the spouse of the Participant; provided, however that at least 120 monthly installment payments will be made to such Beneficiary or any secondary Beneficiary named by the Participant.

 

8


 

ARTICLE 3. FINANCING THE PLAN
3.1   The Plan shall be administered as an unfunded nonqualified plan that is maintained primarily for the purpose of providing deferred compensation or benefits for a select group of management or highly compensated employees. The Plan is not intended to meet the qualification requirements of Section 401 of the Code or of any similar provisions of subsequent revenue laws, and is exempt from Title IV and Parts 4 (only the benefit provided under section 2.1), 2, and 3 of Title I of ERISA, as well as certain provisions of Part 1.
 
3.2   There shall be no contributions to the Trust Fund or to any other fund to prefund or otherwise cover the cost of the Plan.
 
3.3   No Participant or his Beneficiary shall be entitled to receive any payments due under this Plan from the Retirement Income Plan, the Excess Benefit Plan or the Survivor Income Plan.
 
3.4   Benefits provided under the Plan shall be paid by the Company directly to any Participant or his Beneficiary from the general assets of the Company.

 

9


 

ARTICLE 4. EMPLOYEE PLANS ADMINISTRATION COMMITTEE
4.1   The Employee Plans Administration Committee shall consist of not less than three persons, to be appointed by the Board of Directors. Any member of the Employee Plans Administration Committee may resign or be removed by the Board of Directors and new members may be appointed by the Board of Directors.
 
4.2   Any member of the Employee Plans Administration Committee may resign by delivering his written resignation to the Board of Directors in care of the Secretary of the Company, and such resignation shall become effective upon delivery or upon any date specified therein.
 
4.3   The Board of Directors shall select a Chairman and a Secretary (which Secretary may, but need not, be a member of the Employee Plans Administration Committee) to keep its records or to assist it in the doing of any act or thing to be done or performed by the Employee Plans Administration Committee.
 
4.4   A majority of the members of the Employee Plans Administration Committee at the time in office shall constitute a quorum for the transaction of business at any meeting. Any determination or action of the Employee Plans Administration Committee may be made or taken by a majority of members present at any meeting thereof, or without a meeting by a resolution or written memorandum concurred in by a majority of the members then in office.

 

10


 

4.5   The Employee Plans Administration Committee shall administer the Plan and shall have the power and the duty to take all action and to make all decisions necessary or proper to carry out the Plan, including without limitation the discretionary authority to determine eligibility for benefits or to construe the terms of the Plan. The determination of the Employee Plans Administration Committee as to any question involving the general administration and interpretation of the Plan shall be final, conclusive and binding. Any discretionary actions to be taken under the Plan by the Employee Plans Administration Committee with respect to the classification of Employees, Participants, or benefits, shall be uniform in their nature and applicable to all persons similarly situated. Without limiting the generality of the foregoing, the Employee Plans Administration Committee shall have the following powers and duties:
  (A)   To require any person to furnish such information as it may request for the purpose of the proper administration of the Plan as a condition to receiving any benefit under the Plan;
 
  (B)   To make and enforce such rules and regulations and prescribe the use of such forms as it shall deem necessary for the efficient administration of the Plan;
 
  (C)   To interpret the Plan, and to resolve ambiguities, inconsistencies and omissions;
 
  (D)   To decide on questions concerning the Plan and the eligibility of any Employee to participate in the Plan, in accordance with the provisions of the Plan; and
 
  (E)   To determine the amount of benefits that shall be payable to any person in accordance with the provisions of the Plan.
4.6   The Employee Plans Administration Committee or any person to whom it may delegate any duty or power in connection with administering the Plan shall maintain accounts showing fiscal transactions under the Plan and shall keep in convenient form such data as may be necessary with respect to the operation and administration of the Plan.

 

11


 

4.7   The Employee Plans Administration Committee and any person to whom it may delegate any duty or power in connection with administering the Plan, and the Company and the officers, directors and employees thereof, shall be entitled to rely conclusively upon, and shall be fully protected in any action taken or suffered by them in good faith in reliance upon (1) any actuary, accountant, counsel, other specialist or other person selected by the Employee Plans Administration Committee, or (ii) any tables, valuations, certificates, opinions or reports that shall be furnished by any of the persons mentioned in (i) or by the Trustee. No member of the Employee Plans Administration Committee nor the Company nor the officers nor directors thereof shall be liable for any neglect, omission or wrongdoing of the Trustee.
 
4.8   In administering the Plan, neither the Employee Plans Administration Committee nor any person to whom it may delegate any duty or power in connection with administering the Plan, nor the Company, nor its officers, directors, or employees, shall be liable for any action or failure to act except for its or his own gross negligence or willful misconduct, nor shall anyone other than the Company be liable for the payment of any benefit amount under the Plan. No member of the Employee Plans Administration Committee shall be personally liable under any contract, agreement, bond or other instrument made or executed by him on his behalf as a member of the Employee Plans Administration Committee; nor for any mistake of judgment made by him on his behalf as a member of the Employee Plans Administration Committee nor for any action, failure to act, or loss unless resulting from his own gross negligence or willful misconduct; nor for the neglect, omission or wrongdoing of any other member of the Employee Plans Administration Committee.
4.9   Unless otherwise agreed to by the Company, the members of the Employee Plans Administration Committee shall serve without compensation for their services as such, but all reasonable expenses incurred in the performance of their duties shall be paid by the Company. Unless otherwise determined by the Board of Directors, no member of the Employee Plans Administration Committee shall be required to give any bond or other security in any jurisdiction.

 

12


 

ARTICLE 5. AMENDMENT OR TERMINATION
5.1   Amendment. The Board of Directors reserves the right at any time and from time to time to modify or amend in whole or in part any or all of the provisions of the Plan; provided, however, that no such amendment or modification violates Code Section 409A, or makes it possible to deprive any Participant or Beneficiary of a Participant of a previously acquired vested or accrued right (except as necessary to comply with Code Section 409A).
 
5.2   Termination. While the Company intends to continue the Plan indefinitely, nevertheless, it assumes no contractual obligation as to its continuance. The Plan may be terminated for any reason at any time by the Board of Directors.
ARTICLE 6. SPECIAL TERMINATION BENEFIT
6.1 (A)   Notwithstanding any other provision of the Plan, if, during the two-year period following a “Change in Control of the Company” (as defined at subsection 6.2(A) below), the employment of a Participant who is entitled to a benefit under section 2.1 of the Plan (the “Excess Retirement Income Benefit”) is terminated, unless such termination is (i) because of the Participant’s death or Disability (as defined below), (ii) by the Company for Cause (as defined below) or (iii) by the Participant other than for Good Reason (as defined below), then the Participant’s Post-2008 409A Excess

 

13


 

      Retirement Income Benefit shall fully vest on the day of the Participant’s termination. Notwithstanding any other provision of the Plan, if, during the two-year period following a “change in control” of the Company (as “change in control” is defined at Treasury Regulation 1.409A-3(i)(5) (hereafter, a “409A change in control”)), the employment of a Participant who is entitled to an Excess Retirement Income Benefit is terminated, the Company shall pay to the Participant, no later than the fifth day following the date of such termination of employment, a lump-sum amount equal to the present value of the Excess Retirement Income Benefit. For purposes of determining such present value (1) it shall be assumed that a Participant’s Excess Retirement Income Benefit would otherwise commence at the earliest possible benefit commencement date under section 2.5 or Appendix A (whichever is applicable), and (2) the present value of such annual amount shall be determined by using the mortality table prescribed by the Secretary of the Treasury under Code Section 417(e)(3)(A)(ii)(1), as in effect on the date the Participant terminates employment, and the annual rate of interest on 30-year Treasury Securities as specified by the Commissioner of Internal Revenue for the second full month preceding the month in which the Participant terminates employment.
  (B)   Notwithstanding any other provision of the Plan, if a Participant who is in current receipt of a benefit from the Plan on the date of a 409A change in control of the Company shall not have received a complete distribution of his Excess Retirement Income Benefit on the date of the occurrence of a 409A change in control, the Company shall pay, no later than the fifth day following the occurrence of such 409A change in control, a lump-sum amount equal to the present value of the undistributed portion of the Participant’s Excess Retirement Income Benefit, determined as of the date of such 409A change in control. For purposes of the preceding sentence, present value shall be determined in accordance with provisions, to the extent applicable, of the final sentence of section 6.1(A) hereof.

 

14


 

6.2   The following definitions apply to the terms used in this Article:
  (A)   Change in Control of the Company” shall be deemed to have occurred if (i) 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 the Company, any “person” who on the date hereof is a director or officer of the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i) or (iii) of this section) whose election by the Board of Directors 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 (iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that 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 shareholders 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.

 

15


 

  (B)   Disability.” If as a result of the Participant’s incapacity due to physical or mental illness, he shall have been absent from the full—time performance of his duties with the Company for six (6) consecutive months, and within thirty (30) days after written notice of termination is given he shall not have returned to the full—time performance of his duties, his employment may be terminated for “Disability.”
 
  (C)   Cause.” Termination by the Company of the Participant’s employment for “cause” shall mean termination upon an act or acts of dishonesty constituting a felony under the laws of the United States or any State thereof and resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company. Notwithstanding the foregoing, the Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to him and an opportunity for him, together with his counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors he was guilty of conduct set forth above in this subsection and specifying the particulars thereof in detail.

 

16


 

  (D)   Good Reason.” The Participant shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, “Good Reason” shall mean, without the Participant’s express written consent, the occurrence after a Change in Control of the Company of any of the following circumstances unless, in the case of paragraphs (1), (5), (6) or (7), such circumstances are fully corrected prior to the Participant’s date of termination specified in his notice of termination given in respect thereof:
  (1)   the assignment to the Participant of any duties inconsistent with the position in the Company that he held immediately prior to the Change in Control of the Company, or a significant adverse alteration in the nature or status of his responsibilities from those in effect immediately prior to such change;
 
  (2)   a reduction by the Company in his annual base salary as in effect on the date hereof or as the same may be increased from time to time;

 

17


 

  (3)   the relocation of the Company’s principal executive offices to a location outside the Greenwich Metropolitan Area (or, if different, the metropolitan area in which such offices are located immediately prior to the Change in Control of the Company) or the Company’s requiring the Participant to be based anywhere other than the Company’s principal executive offices except for required travel on the Company’s business to an extent substantially consistent with his present business travel obligations;
 
  (4)   the failure by the Company to pay him any portion of his current compensation except pursuant to an across-the-board compensation deferral similarly affecting all officers of the Company and all officers of any person whose actions resulted in a Change of Control of the Company or any person affiliated with the Company or such person, or to pay to him any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due;
 
  (5)   the failure by the Company to continue in effect any compensation plan in which he participates immediately prior to the Change in Control of the Company that is material to his total compensation, including but not limited to the Company’s Retirement Income Plan for Salaried Employees, Employees’ Savings Plan, Officers’ Supplemental Retirement Plan, Incentive Compensation Plan, 1982 Stock Option Plan, Excess Retirement Benefit Plan, Survivor Income Plan, or any substitute plans adopted prior to the Change in Control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue his participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of his participation relative to other participants, as existed at the time of the Change in Control of the Company;

 

18


 

  (6)   the failure by the Company to continue to provide him with benefits substantially similar to those he enjoyed under any of the Company’s life insurance, medical, health and accident, or disability plans in which he was participating at the time of the Change in Control of the Company, the taking of any action by the Company that would directly or indirectly materially reduce any of such benefits or deprive him of any material fringe benefit he enjoyed at the time of the Change of Control of the Company, or the failure by the Company to provide him with the number of paid vacation days to which he is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the time of the Change in Control of the Company; or
 
  (7)   the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to pay benefits under this Plan. Notwithstanding the above, in the case of a Participant who has entered into an employment agreement with the Company, “Good Reason” shall have the meaning set forth in such employment agreement.

 

19


 

ARTICLE 7. PAYMENT OF FICA TAXES
7.1   Payment of FICA and Related Income Taxes. As provided in subsections (A) through (D) below, a portion of a Participant’s Section 409A Benefit shall be paid as a single lump sum and remitted directly to the Internal Revenue Service (“IRS”) in satisfaction of the Participant’s FICA Amount and the related withholding of income tax at source on wages (imposed under Code Section 3401 or the corresponding withholding provisions of the applicable state, local or foreign tax laws as a result of the payment of the FICA Amount) and the additional withholding of income tax at source on wages that is attributable to the pyramiding of wages and taxes. Notwithstanding the prior sentence, in the event the Participant is due to be paid a bonus between (1) the date the Participant’s Total Benefit is taken into account as a FICA wages, and (2) the date that income taxes related to the lump sum payment are deposited with the IRS, the related income taxes shall be satisfied (to the extent possible) from the Participant’s bonus, and the amount of the lump sum payment provided for in the prior sentence shall be reduced accordingly. Payment of related income taxes out of such a bonus is referred to below as “Bonus Withholding.”
  (A)   Timing of Payment. Upon the date that the Participant’s FICA Amount and related income tax withholding are due to be deposited with the IRS, a lump sum payment equal to the Participant’s FICA Amount and any related income tax withholding, after taking into account any Bonus Withholding, shall be paid from the Participant’s Section 409A Benefit and remitted to the IRS (or other applicable tax authority) in satisfaction of such FICA Amount and income tax withholding. The classification of a Participant as a “specified employee” under Code Section 409A shall have no effect on the timing of the lump sum payment under this subsection (A).

 

20


 

  (B)   Reduction of Section 409A Benefit. To reflect the payment of a Participant’s FICA Amount and any related income tax liability, after taking into account any Bonus Withholding, as provided in subsection (A) above, the Participant’s Section 409A Benefit shall be reduced on an equal and consistent basis, effective as of the date for payment of the lump sum in accordance with subsection (A) above, with such reduction being the actuarial equivalent of the lump sum payment used to satisfy the Participant’s FICA Amount and related income tax withholding, and with actuarial equivalence determined using the applicable year-end disclosure rate and related factors for the year in which the Participant Separates from Service. It is expressly contemplated that this reduction may occur effective as of a date that is after the date payment of a Participant’s BRP Pension, SOP Pension or ERP Pension commences. The reduction of the Participant’s Section 409A Benefit shall be made according to the ordering rules of subsection (C) below.
 
  (C)   Order of Payment from the Nonqualified Plans. The reduction under subsection (B) above shall apply first to the Participant’s BRP 409A Benefit. To the extent the BRP 409A Benefit is insufficient to satisfy the reduction, the Participant’s SOP 409A Benefit shall be reduced next. To the extent the Participant’s BRP 409A Benefit and SOP 409A Benefit are insufficient to satisfy the reduction, the Participant’s ERP 409A Benefit shall be reduced next. To the extent the Participant’s total Section 409A Benefit is insufficient to satisfy the reduction, the Participant shall be responsible for paying the difference to the Company.

 

21


 

  (D)   No Effect on Commencement of Section 409A Benefit. The Participant’s Section 409A Benefit shall commence in accordance with the terms of the Nonqualified Plans. The lump sum payment to satisfy the Participant’s FICA Amount and related income tax withholding shall not affect the time of payment of the Participant’s actuarially reduced Section 409A Benefit, including not affecting any required delay in payment to a Participant who is classified as a “specified employee” under Section 409A.
ARTICLE 8. COMPLIANCE WITH CODE SECTION 409A
8.1   Specified Employee. With respect to Participants who are “specified employees” (as defined in Code Section 409A), a distribution due to Separation from Service may not be made before the date that is six months after the date of Separation from Service (or, if earlier, the date of death of the Participant), except as may be otherwise permitted pursuant to Code Section 409A. Notwithstanding the foregoing sentence, a Participant who is due Transition Benefits and who commences distribution of those benefits on or before December 31, 2008 in accordance with the linked-plan transition rules contained in Notice 2007-86 shall not be subject to this section 8.1. To the extent that a Participant is subject to this section and a distribution is to be paid in installments, through an annuity, or in some other manner where payment will be periodic, the Participant shall be paid, during the seventh month following Separation from Service, the aggregate amount of payments he would have received but for the application of this section; all remaining payments shall be made in their ordinary course.
8.2   In General. It is the intention of the Company that the Plan shall be construed in accordance with the applicable requirements of Code Section 409A. Further, in the event that the Plan shall be deemed not to comply with Code Section 409A, then neither the Company, the Board of Directors, the Employee Plans Administration Committee nor its or their designees or agents shall be liable to any Participant or other persons for actions, decisions or determinations made in good faith.

 

22


 

ARTICLE 9. CLAIMS PROCEDURE
The Employee Plans Administration Committee (“Plan Committee”) shall have the exclusive discretionary authority to construe and interpret the Plan, to decide all questions of eligibility for benefits and to determine the amount of such benefits, and its decisions on such matters are final and conclusive. As a result, benefits under this Plan will be paid only if the Plan Committee decides in its discretion that the person claiming such benefits (a “claimant” ) is entitled to them. This discretionary authority is intended to be absolute, and in any case where the extent of this discretion is in question, the Plan Committee is to be accorded the maximum discretion possible. Any exercise of this discretionary authority shall be reviewed by a court, arbitrator or other tribunal under the arbitrary and capricious standard (i.e., the abuse of discretion standard). If, pursuant to the discretionary authority provided for above, an assertion of any right to a benefit by or on behalf of a claimant is wholly or partially denied, the Plan Committee, or a party designated by the Plan Committee, will provide such claimant the claims review process described in this section. The Plan Committee has the discretionary right to modify the claims process described in this section in any manner so long as the claims review process, as modified, includes the steps described below. Within a 90-day response period following the receipt of the claim by the Plan Committee, the Plan Committee will notify the claimant of:
  (a).   The specific reason or reasons for the denial;
 
  (b).   Specific reference to pertinent Plan provisions on which the denial is based;

 

23


 

  (c).   A description of any additional material or information necessary for the claimant to submit to perfect the claim and an explanation of why such material or information is necessary; and
 
  (d).   A description of the claims review process (including the time limits applicable to such process and a statement of the claimant’s right to bring a civil action under ERISA following a further denial on review).
If the Plan Committee determines that special circumstances require an extension of time for processing the claim, it may extend the response period from 90 to 180 days. If this occurs, the Plan Committee will notify the claimant before the end of the initial 90-day period, indicating the special circumstances requiring the extension and the date by which the Plan Committee expects to make the final decision. Further review of a claim is available upon request by the claimant to the Plan Committee made in writing or such other form as is acceptable to the Plan Committee within 60 days after the claimant receives the denial of the claim. Upon review, the Plan Committee shall provide the claimant a full and fair review of the claim, including the opportunity to submit to the Plan Committee comments, documents, records and other information relevant to the claim and the Plan Committee’s review shall take into account such comments, documents, records and information regardless of whether it was submitted or considered at the initial determination. The decision on review shall be made within 60 days after receipt of the request for review, unless circumstances warrant an extension of time not to exceed an additional 60 days. If this occurs, notice of the extension will be furnished to claimant before the end of the initial 60-day period, indicating the special circumstances requiring the extension and the date by which the Plan Committee expects to make the final decision. The final decision shall be drafted in a manner calculated to be understood by the claimant, and shall include the specific reasons for the decision with references to the specific Plan provisions on which the decision is based. Any claim referenced in this section that is reviewed by a court, arbitrator, or any other tribunal shall be reviewed solely on the basis of the record before the Plan Committee. In addition, any such review shall be conditioned on the claimant’s having fully exhausted all rights under this section. Any notice or other notification that is required to be sent to a claimant under this section may be sent pursuant to any method approved under Department of Labor Regulation Section 2520.104b-1 or other applicable guidance.

 

24


 

ARTICLE 10. CONSTRUCTION OF THE PLAN
The terms of the Plan shall be construed in accordance with this Article.
10.1   Gender and Number. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary.
 
10.2   Compounds of the Word “Here”: The words “hereof”, “hereunder” and other similar compounds of the word “here” shall mean and refer to the entire Plan, not to any particular provision or section.
 
10.3   Subdivisions of the Plan Document. This Plan document is divided and subdivided using the following progression: articles, section, subsections, and paragraphs. Articles are designated by the word “ARTICLE” in all-capital letters and Arabic numerals that do not contain a decimal point. Sections are designated by Arabic numerals containing a decimal point. Subsections are designated by upper-case letters in parentheses. Paragraphs are designated by Arabic numerals in parentheses. Any reference in a section to a subsection (with no accompanying section reference) shall be read as a reference to the subsection with the specified designation contained in that same section. A similar rule shall apply with respect to paragraph references within a subsection.

 

25


 

10.4   Invalid Provisions. If any provision of this Plan is, or is hereafter declared to be void, voidable, invalid or otherwise unlawful, the remainder of the Plan shall not be affected thereby.
 
10.5   Interpreting Article 5. In all circumstances, the provisions of Article 5 shall be interpreted in the manner that imposes the least limitation on the Company’s claimed right of amendment or termination (or both). In this regard, it is specifically intended that any ambiguities in the Plan are to be resolved in the manner that minimizes the limitation on any right to amendment or termination that is claimed directly or indirectly against one or more Participants or Beneficiaries.

 

26


 

APPENDIX A
ARTICLE 1. APPLICABILITY
This Appendix sets forth the rules applicable to Transition Benefits. As specified in section 1.28 above, Transition Benefits are Plan benefits subject to Code Section 409A that are due a Participant who was entitled to commence distribution of his benefits under the Retirement Income Plan from January 1, 2005 through December 31, 2008. This Appendix sets forth rules for payment of any Plan benefits due a Participant who was due Transition Benefits and commenced or commences his benefits on or before December 31, 2008; those rules are set forth in Article 2 of this Appendix A. This Appendix also sets forth rules for payment of any Plan benefits due a Participant who was due Transition Benefits but did not commence distribution of his benefit on or before December 31, 2008 (“Non-Distributed Transition Benefits”).
ARTICLE 2. APPLICABLE RULES FOR PAYMENT OF TRANSITION BENEFITS
With respect to the payment of Transition Benefits that commenced on or prior to December 31, 2008, the Plan operated and complied with Code Section 409A pursuant to the transition rules for so-called “linked plans.” Accordingly, for such Transition Benefits, the Plan operated as it did prior to January 1, 2005 (under the terms of the Pre-409A Document), except as otherwise required to comply with Code Section 409A.
ARTICLE 3. APPLICABLE RULES FOR NON-DISTRIBUTED TRANSITION BENEFITS
Non-Distributed Transition Benefits shall be paid beginning on January 1, 2009. The form of payment for Participants who are married on December 31, 2008 shall be a Qualified Joint and Survivor Annuity and the form of payment for Participants who are not married on December 31, 2008 shall be a Single Life Annuity.

 

A-1


 

ARTICLE 4.   TRANSITION RULE FOR PARTICIPANTS WHOSE BENEFITS COMMENCE PRIOR TO MARCH 31, 2007
Notwithstanding anything else in the Plan to the contrary, the Section 409A Benefit of the Participants listed below shall initially be paid without regard to the actuarial reduction for the lump sum payment to satisfy such Participant’s FICA Amount and related income tax withholding. Effective March 1, 2007, the Participant’s remaining Section 409A Benefit payments shall be actuarially reduced as provided above at Article 7 to the extent necessary to recover the lump sum payment for the payment of such Participant’s FICA Amount and any related income tax withholding, after taking into account any Bonus Withholding. The transitional rule in this Appendix A, Article 4 applies to the following Participants:
         
Name   Retirement Date  
Robert Fitzmaurice
  June 1, 2006
Valerie Held
  June 1, 2006
Vincent Gierer
  January 1, 2007

 

A-2

Exhibit 31.1
UST Inc.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Murray S. Kessler, Chairman of the Board, Chief Executive Officer and President of UST Inc. (“Company”), certify that:
  1.  
I have reviewed this quarterly report on Form 10-Q of the Company;
 
  2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
 
  4.  
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
  (a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  (c)  
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (d)  
Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
  5.  
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
  (a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
 
  (b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
         
Date: November 3, 2008  /s/ MURRAY S. KESSLER    
  Murray S. Kessler   
  Chairman of the Board, Chief Executive Officer
and President 
 
 

 

 

Exhibit 31.2
UST Inc.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Raymond P. Silcock, Senior Vice President and Chief Financial Officer of UST Inc. (“Company”), certify that:
  1.  
I have reviewed this quarterly report on Form 10-Q of the Company;
 
  2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
 
  4.  
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
  (a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  (c)  
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (d)  
Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
  5.  
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
  (a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
 
  (b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
         
Date: November 3, 2008  /s/ RAYMOND P. SILCOCK    
  Raymond P. Silcock   
  Senior Vice President and
Chief Financial Officer