UST INC (Form: 10-K, Filing Date: 03/12/1999)pdf.secdatabase.com/2203/0000950123-99-002083.pdfUST Inc. was formed on December 23, 1986 as a Delaware corporation. Pursuant to a reorganization

Business Address100 W PUTNAM AVEGREENWICH CT 068302036611100

Mailing Address100 W PUTNAM AVEGREENWICH CT 06830

SECURITIES AND EXCHANGE COMMISSION

FORM 10-KAnnual report pursuant to section 13 and 15(d)

Filing Date: 1999-03-12 | Period of Report: 1998-12-31SEC Accession No. 0000950123-99-002083

(HTML Version on secdatabase.com)

FILERUST INCCIK:811669| IRS No.: 061193986 | State of Incorp.:DE | Fiscal Year End: 1231Type: 10-K | Act: 34 | File No.: 000-17506 | Film No.: 99563694SIC: 2100 Tobacco products

Copyright © 2012 www.secdatabase.com. All Rights Reserved.Please Consider the Environment Before Printing This Document

http://www.sec.gov/Archives/edgar/data/0000811669/000095012399002083/0000950123-99-002083-index.htm

http://edgar.secdatabase.com/2203/95012399002083/filing-main.htm

http://www.secdatabase.com/CIK/811669

http://www.secdatabase.com/CIK/811669

http://www.secdatabase.com/FileNumber/17506

http://www.secdatabase.com/SIC/2100

http://www.secdatabase.com

1

----------------------------------------------------------------------------------------------------------------------------------------------------------------

FORM 10-K------------------

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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)

<TABLE><S> <C>

DELAWARE 06-1193986(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)

100 WEST PUTNAM AVENUE, GREENWICH, CONNECTICUT 06830(Address of principal executive offices) (Zip Code)

</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 661-1100

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE><CAPTION>

NAME OF EACH EXCHANGE ONTITLE OF EACH CLASS WHICH REGISTERED------------------- ------------------------

<S> <C>COMMON STOCK -- $.50 PAR VALUE NEW YORK STOCK EXCHANGE

PACIFIC EXCHANGE, INC.</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:NONE

-----(TITLE OF CLASS)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTSREQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THEREGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCHFILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THEBEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTSINCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THISFORM 10-K. [ ]



AS OF FEBRUARY 1, 1999, THE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMONSTOCK, $.50 PAR VALUE, HELD BY NON-AFFILIATES OF REGISTRANT (WHICH FOR THISPURPOSE DOES NOT INCLUDE DIRECTORS OR OFFICERS) WAS $5,552,186,929.

AS OF FEBRUARY 1, 1999, THERE WERE 181,533,336 SHARES OF REGISTRANT'S COMMONSTOCK, $.50 PAR VALUE, OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE

CERTAIN SECTIONS OF UST ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCALYEAR ENDED DECEMBER 31, 1998 AND FILED AS AN EXHIBIT AS REQUIRED BYITEM 601(b)(13) OF REGULATION S-K.........................PARTS I & II

CERTAIN PAGES OF UST 1999 NOTICE OF ANNUAL MEETING AND PROXYSTATEMENT.......................................................PART III

----------------------------------------------------------------------------------------------------------------------------------------------------------------

2

PART I

ITEM 1 -- BUSINESS

GENERAL

UST Inc. was formed on December 23, 1986 as a Delaware corporation.Pursuant to a reorganization approved by stockholders at the 1987 AnnualMeeting, United States Tobacco Company (originally incorporated in 1911) becamea wholly owned subsidiary of UST Inc. on May 5, 1987. UST Inc., through itssubsidiaries (collectively "Registrant" unless the context otherwise requires),is engaged in manufacturing and marketing consumer products in the followingoperating segments:

SMOKELESS TOBACCO PRODUCTS: Registrant's primary activities aremanufacturing and marketing smokeless tobacco (snuff and chewing tobacco).

WINE: Registrant produces and markets wine and craft beers.

ALL OTHER OPERATIONS: Registrant's international operation whichmarkets moist smokeless tobacco and its cigar operation which manufacturesand markets premium cigars are included in all other operations.

OPERATING SEGMENT DATA

Registrant hereby incorporates by reference the Consolidated SegmentInformation pertaining to the years 1996 through 1998 set forth on page 23 ofits Annual Report to stockholders for the fiscal year ended December 31, 1998("Annual Report"), which page is included in Exhibit 13.

1

3

SMOKELESS TOBACCO PRODUCTS

PRINCIPAL PRODUCTS

Registrant's principal smokeless tobacco products and brand names are asfollows:

Moist -- COPENHAGEN, SKOAL LONG CUT, SKOAL, COPENHAGEN LONG CUT, SKOALBANDITS, RED SEAL, ROOSTER

Dry -- BRUTON, CC, RED SEAL

It has been claimed that the use of tobacco products, including smokelesstobacco, may be harmful to health. Registrant believes that an unresolvedcontroversy continues to exist among scientists concerning the claims made abouttobacco and health. In 1986, federal legislation was enacted regulatingsmokeless tobacco products by, inter alia, requiring health warning notices on



smokeless tobacco packages and advertising and prohibiting the advertising ofsmokeless tobacco products on electronic media. A federal excise tax was imposedin 1986, which was increased in 1991, 1993 and 1997. Also, in recent years,other proposals have been made at the federal level for additional regulation oftobacco products including, inter alia, the requirement of additional warningnotices, the disallowance of advertising and promotion expenses as deductionsunder federal tax law, a significant increase in federal excise taxes, a ban orfurther restriction of all advertising and promotion, regulation ofenvironmental tobacco smoke and increased regulation of the manufacturing andmarketing of tobacco products by new or existing federal agencies. Substantiallysimilar proposals will likely be considered in 1999. In recent years, variousstate and local governments continued the regulation of tobacco products,including, inter alia, the imposition of significantly higher taxes, samplingand advertising bans or restrictions, ingredients disclosure requirements,regulation of environmental tobacco smoke and anti-tobacco advertisingcampaigns. Additional state and local legislative and regulatory actions willlikely be considered in 1999. Registrant is unable to assess the future effectsthese various actions may have on its smokeless tobacco business.

On August 28, 1996, the Food and Drug Administration ("FDA") publishedregulations asserting unprecedented jurisdiction over nicotine in tobacco as a"drug" and purporting to regulate smokeless tobacco products as a "medicaldevice." Registrant and other smokeless tobacco manufacturers filed suit againstFDA seeking a judicial declaration that FDA has no authority to regulatesmokeless tobacco products. On April 25, 1997, a federal district court ruledthat FDA, as a matter of law, is not precluded from regulating smokeless tobaccoas "medical devices" and implementing certain labeling and access restrictions.The court, granting Registrant's motion for summary judgment, also ruled thatFDA has no authority to implement restrictions on the advertising and promotionof smokeless tobacco products. The court issued an injunction to prohibit mostof the restrictions (labeling, access and advertising/promotion) set for August28, 1997 from taking effect, pending resolution of any appeals and subsequentproceedings; the court also certified the ruling for interlocutory appeal on thegrounds that it involves "controlling questions of law as to which there issubstantial ground for difference of opinion." On August 14, 1998, the FourthCircuit Court of Appeals ruled in favor of Registrant and other tobacco productmanufacturers stating that FDA lacks jurisdiction to regulate tobacco productsand that all of the regulations published by FDA on August 28, 1996 are invalid.On January 19, 1999, FDA filed a petition for certiorari seeking review of theFourth Circuit's ruling by the United States Supreme Court. Registrant is notable to predict the outcome of the appeal, or assess the future effect thatthese FDA regulations, if implemented, may have on its smokeless tobaccobusiness.

2

4

RAW MATERIALS

Except as noted below, raw materials essential to Registrant's business aregenerally purchased in domestic markets under competitive conditions.

Almost all of the tobacco used in Registrant's products is purchased fromdomestic suppliers. Various factors, including the level of domestic tobaccoproduction, can affect the amount of tobacco purchased by Registrant fromdomestic and other sources. Tobaccos used in the manufacture of smokelesstobacco products are processed and aged by Registrant for a period of two tothree years prior to their use.

Registrant or its suppliers purchase certain flavoring components used inRegistrant's tobacco products from foreign sources.

At the present time, Registrant has no reason to believe that future rawmaterial requirements for its tobacco products will not be satisfied. However,the continuing availability and the cost of tobacco is dependent upon a varietyof factors which cannot be predicted, including weather, growing conditions,disease, local planting decisions, overall market demands and other factors.

WORKING CAPITAL

The principal portion of Registrant's operating cash requirements relates



to its need to maintain significant inventories of leaf tobacco, primarily formanufacturing of smokeless tobacco products, to ensure a two to three year agingprocess prior to use.

CUSTOMERS

Registrant markets its moist smokeless tobacco products throughout theUnited States principally to chain stores and tobacco and grocery wholesalers.Approximately 32% of Registrant's gross sales of tobacco products are made tofour customers, one of which, McLane Co. Inc., a national distributor, accountsfor 21% of Registrant's consolidated revenue. Registrant has maintainedsatisfactory relationships with its customers for many years.

COMPETITIVE CONDITIONS

The tobacco manufacturing industry in the United States is composed of atleast four domestic companies larger than Registrant and many smaller ones. Thelarger companies concentrate on the manufacture and marketing of cigarettes, oneof which also manufactures and markets smokeless tobacco products. Registrant isa well established and major factor in the smokeless tobacco sector of theoverall tobacco market. Consequently, Registrant competes actively with bothlarger and smaller companies in the marketing of its tobacco products.Registrant's principal methods of competition in the marketing of its tobaccoproducts include quality, advertising, promotion, sampling, price, productrecognition and distribution.

3

5

WINE

Registrant is an established producer of premium varietal and blendedwines. CHATEAU STE. MICHELLE and COLUMBIA CREST varietal table wines and DOMAINESTE. MICHELLE sparkling wine are produced by Registrant in the state ofWashington and marketed throughout the United States. Registrant also producesand markets two California premium wines under the labels of VILLA MT. EDEN andCONN CREEK and imports, bottles and markets wine from France under the COLOURVOLANT label. Approximately 54% of Registrant's wine sales are made to tendistributors, no one of which accounts for more than 25% of total wine sales.Substantially all wines are sold through state-licensed distributors with whomRegistrant maintains satisfactory relationships.

In addition, Registrant owns and operates a microbrewery located in Yakima,Washington, which produces and markets craft beers primarily under the brandname BERT GRANT'S ALE. Registrant is a minor factor in the total nationwidebusiness of producing craft beers.

It has been claimed that the use of alcohol beverages may be harmful tohealth. Registrant believes that an unresolved controversy continues to existamong scientists concerning the claims made about alcohol beverages and health.In 1988, federal legislation was enacted regulating alcohol beverages byrequiring health warning notices on alcohol beverages. Effective in 1991, thefederal excise tax on wine was increased from $.17 a gallon to $1.07 a gallonfor those manufacturers that produce more than 250,000 gallons a year, such asRegistrant. In recent years at the federal level, proposals were made foradditional regulation of alcohol beverages including, inter alia, an excise taxincrease, modification of the required health warning notices and the regulationof labeling, advertising and packaging. Substantially similar proposals willlikely be considered in 1999. Also in recent years, increased regulation ofalcohol beverages by various states included, inter alia, the imposition ofhigher taxes, the requirement of health warning notices and the regulation ofadvertising and packaging. Additional state and local legislative and regulatoryactions affecting the marketing of alcohol beverages will likely be consideredduring 1999. Registrant is unable to assess the future effects these regulatoryand other actions may have on the sale of its wines and craft beers.

Registrant uses grapes harvested from its own vineyards, as well as grapespurchased from independent growers located primarily in Washington state andpurchased bulk wine from other sources. Total grape tonnage harvested andpurchased in 1998 was slightly higher than in 1997. Due to the outstandingharvest yields experienced in 1998 and 1997, the supply of grapes is adequate to



meet expected demand and thereby eliminate the need for product allocations in1999.

Registrant's principal competition comes from many larger, well-establishednational companies, as well as many smaller wine producers. Registrant'sprincipal methods of competition include quality, price, consumer and trade winetastings, competitive wine judging and advertising. Registrant is a minor factorin the total nationwide business of producing wines.

4

6

ALL OTHER OPERATIONS

All other operations consist of the international operation which marketsmoist smokeless tobacco; cigar operation which manufactures and markets thepremium cigar brands, DON TOMAS, ASTRAL and HABANO PRIMERO. None of the above,singly, constitutes a material portion of Registrant's operations.

It has been claimed that the use of tobacco products, including cigars, maybe harmful to health. Registrant believes that an unresolved controversycontinues to exist among scientists concerning the claims made about tobacco andhealth. The federal excise tax on cigars was last increased in 1993. On August28, 1996, FDA published regulations asserting unprecedented jurisdiction overnicotine in tobacco as a "drug" and purports to regulate cigarettes andsmokeless tobacco products as "medical devices." FDA did not attempt to assertjurisdiction over cigars, and FDA's regulations do not apply to cigars. On July25, 1997, a public health group filed a petition with FDA requesting that theagency initiate proceedings to assert jurisdiction over cigars as "nicotinedelivery systems." In the event FDA attempts to extend its purported tobaccoregulations to cover cigars and the regulations survive a judicial challenge,those regulations would impose severe restrictions on the advertising, marketingand promotion of cigar products and would require Registrant to comply with awide range of labeling, reporting and other requirements with respect to itscigar products. Also, in recent years, other proposals have been made at thefederal level for additional regulation of tobacco products including, interalia, the requirement of warning notices on cigar products, the disallowance ofadvertising and promotion expenses as deductions under federal tax law, asignificant increase in federal excise taxes, a ban or further restriction ofall advertising and promotion, regulation of environmental tobacco smoke andincreased regulation of the manufacturing and marketing of tobacco products bynew or existing federal agencies. Substantially similar proposals will likely beconsidered in 1999. In recent years, various state and local governmentscontinued the regulation of tobacco products, including, inter alia, additionalproposed warning notices on cigar products, the imposition of significantlyhigher taxes, advertising bans and restrictions, constituent disclosurerequirements, regulation of environmental tobacco smoke and anti-tobaccoadvertising campaigns. Additional state and local legislative and regulatoryactions will likely be considered in 1999. Registrant is unable to assess thefuture effects these various actions may have on its cigar business.

ADDITIONAL BUSINESS INFORMATION

ENVIRONMENTAL REGULATIONS

Registrant does not believe that compliance with federal, state and localprovisions regulating the discharge of materials into the environment orotherwise relating to the protection of the environment will have a materialeffect upon the capital expenditures, earnings or competitive position ofRegistrant.

NUMBER OF EMPLOYEES

Registrant's average number of employees during 1998 was 4,924.

TRADEMARKS

Registrant markets consumer products under a large number of trademarks.All of Registrant's trademarks either have been registered or applicationstherefor are pending with the United States Patent and Trademark Office.



SEASONAL BUSINESS

No material portion of the business of any operating segment of Registrantis seasonal.

ORDERS

Backlog of orders is not a material factor in any operating segment ofRegistrant.

5

7

ITEM 2 -- PROPERTIES

Set forth below is information concerning principal facilities and realproperties of Registrant.

<TABLE><CAPTION>

BUILDINGS INAPPROXIMATE

LOCATION SQUARE FEET ACTIVITIES-------- ------------ ----------

<S> <C> <C>Tobacco Facilities:

Nashville, Tennessee.............. 973,000 Office and manufacturing plants formoist and dry smokeless tobaccoproducts, plastic injection moldingoperation for production of cans andlids, manufacturing engineeringdepartment, research and developmentlaboratory and warehouse fordistribution of various products.

Hopkinsville, Kentucky............ 998,500 Office, plants and warehouses fortobacco leaf handling, processingand storage and for manufacture ofdry flour for smokeless tobaccoproducts.

Franklin Park, Illinois........... 505,000 Office and manufacturing plant formoist smokeless tobacco products,fiberboard can operations andwarehouse for distribution ofvarious products.

Wine Facilities:Paterson, Washington.............. 620,000 Winery, distribution and storage

facility, office and retail shop.Woodinville, Washington........... 195,000 Winery, distribution and storage

facility, executive and salesoffices and retail shop.

Grandview, Washington............. 40,000 Winery and storage facility.St. Helena, California............ 19,800 Winery and storage facility.Yakima, Washington................ 26,000 Microbrewery, distribution and

storage facility and office.Other Facilities:

Tampa, Florida.................... 57,000 Office, warehouse and cigardistribution center.

Danli, Honduras, C.A. ............ 134,000 Office, warehouses and manufacturingplant for cigars and boxes.

Talanga, Honduras, C.A. .......... 107,000 Office, warehouse and barns.Santiago, Dominican Republic...... 16,000 Office and manufacturing plant for

cigars.Headquarters:

Greenwich, Connecticut............ 208,000 Executive, sales and general officesin several buildings.

</TABLE>

<TABLE><CAPTION>

LAND INAPPROXIMATE



LOCATION ACRES ACTIVITIES-------- ----------- ----------

<S> <C> <C>Yakima and Benton Counties,

Washington..................... 3,390 Vineyards.Grant and Benton Counties,

Washington..................... 10,864 Other, including agriculturalproperties.

</TABLE>

Such principal properties in Registrant's operations were utilized only inconnection with Registrant's business operations. Registrant believes that theabove properties at December 31, 1998 were suitable and adequate for thepurposes for which they were used, and were operated at satisfactory levels ofcapacity.

All principal properties are owned in fee by Registrant.

6

8

ITEM 3 -- LEGAL PROCEEDINGS

Registrant has been named in certain health care cost reimbursement/thirdparty recoupment/class action litigation against the major domestic cigarettecompanies and others seeking damages and other relief. The complaints in thesecases on their face predominantly relate to the usage of cigarettes; within thatcontext, certain complaints contain a few allegations relating specifically tosmokeless tobacco products. These actions are in varying stages of pretrialactivities.

Registrant believes that these pending litigation matters will not resultin any material liability for a number of reasons, including the fact thatRegistrant has had only limited involvement with cigarettes and Registrant'scurrent percentage of total tobacco industry sales is relatively small. Prior to1986, Registrant manufactured some cigarette products which had a de minimismarket share. From May 1, 1982 to August 1, 1994, Registrant distributed a smallvolume of imported cigarettes and is indemnified against claims relating tothose products.

On November 23, 1998, Registrant entered into the Smokeless Tobacco MasterSettlement Agreement (the "Settlement Agreement") with attorneys general ofvarious states and U.S. territories to resolve the remaining health care costreimbursement cases initiated by various attorneys general against Registrant.The Settlement Agreement requires Registrant to adopt various marketing andadvertising restrictions and make payments expected to total between $100 andapproximately $200 million over ten years -- depending on various factors -- forprograms to reduce youth usage of tobacco and combat youth substance abuse andfor enforcement purposes.

Registrant has been named in three actions brought by individualplaintiffs, all of whom are represented by the same Louisiana attorney, againsta number of smokeless tobacco manufacturers, cigarette manufacturers and certainother organizations seeking damages and other relief in connection with injuriesallegedly sustained as a result of tobacco usage, including smokeless tobaccoproducts.

Registrant is named in an action in Illinois seeking damages and otherrelief brought by an individual plaintiff and purporting to state a class action"on behalf of himself and all other persons similarly situated" alleging thathis use of Registrant's smokeless tobacco products "resulted in his addiction tonicotine, increased use of Defendant's products and gum deterioration."

Registrant has also been served with a Summons and Complaint in an actionentitled Roger L. Campbell v. American Tobacco Company, et al., (File No.98CVS10642), General Court of Justice, Superior Court Division, Guilford County,North Carolina, on November 13, 1998. This action is brought by an individualplaintiff who alleges that he developed bladder cancer as a result of his use ofsmokeless tobacco manufactured by Registrant. Plaintiff seeks unspecifieddamages in excess of $10,000.



In Morgan v. United States Tobacco Company, et al., (No. 68655B), TenthJudicial District Court for the Parish of Natchitoches, State of Louisiana, theaction was dismissed by court Order dated November 6, 1997. On November 5, 1998,the same plaintiff, now in his individual capacity only, commenced anotheraction against Registrant, entitled David Chris Morgan v. United States TobaccoCompany, et al., (No. 70723A), Tenth Judicial District Court, Parish ofNatchitoches, State of Louisiana. The petition alleged that plaintiff has"developed a lesion on his lower lip" and "is addicted to the nicotine containedin smokeless tobacco" as a result of his use of Registrant's smokeless tobaccoproducts. Plaintiff sought unspecified compensatory and punitive damages andother general, special and equitable relief in an amount not to exceed $50,000.On December 18, 1998, the court entered an Order dismissing this action.

In The City and County of San Francisco, on Behalf of the People of theState of California, and Environmental Law Foundation, on Behalf of the GeneralPublic v. United States Tobacco Company, et al., (No. 993992), Superior Court ofthe State of California, County of San Francisco, plaintiffs allege defendants'violation of The Safe Drinking Water and Toxic Enforcement Act of 1986, Healthand Safety Code sec.sec.25249.6, et seq. ("Proposition 65"), claiming "theunlawful marketing and sale by defendants of tobacco snuff and chewing tobacco .. . to children and adolescents without providing a 'clear and reasonable'

warning that their use results in multiple exposures to substances known to theState of California to cause cancer, birth defects and reproductive harm."Plaintiffs further allege defendants' statutory violation of the Unfair

7

9

Competition Act, Business and Professions Code sec.sec.17200, et seq. The actionseeks unspecified compensatory damages, injunctive relief, restitution,attorneys fees and costs.

In Conwood Company, L.P. and Conwood Sales Company, L.P. v. United StatesTobacco Company, United States Tobacco Sales and Marketing Company Inc., UnitedStates Tobacco Manufacturing Company Inc. and UST Inc. (Case No. 5:98CV-108-R),United States District Court, Western District of Kentucky, Paducah Division,Plaintiffs allege, among other things, Registrant's violation of federalantitrust and advertising laws in connection with the marketing and sale of itsmoist snuff brands, and alleges various violations of tort and state law. Thecomplaint seeks an injunction against alleged "anticompetitive conduct," morethan $400 million in "actual damages" before trebling, and punitive damages.Registrant believes that the complaint contains numerous misstatements of factand that the allegations are without merit. Registrant intends to defend thisaction vigorously.

Registrant believes, and has been so advised by counsel handling thesecases, that it has a number of meritorious defenses to all such pendinglitigation. Except as to Registrant's willingness to consider alternativesolutions for resolving certain regulatory and litigation issues, all such casesare, and will continue to be, vigorously defended. Registrant believes that theultimate outcome of all such pending litigation will not have a material adverseeffect on the consolidated financial position of Registrant, but may have amaterial impact on Registrant's consolidated financial results for a particularreporting period in which resolved.

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to instruction 3 to Item 401(b) of Regulation S-K, the name,office, age and business experience of each executive officer of Registrant asof February 1, 1999 is set forth below:

<TABLE><CAPTION>

NAME OFFICE AGE---- ------ ---

<S> <C> <C>Vincent A. Gierer, Jr........................... Chairman of the Board, Chief 51



Executive Officer and PresidentRobert E. Barrett............................... Executive Vice President and 60

President -- UST Enterprises Inc.Richard H. Verheij.............................. Executive Vice President and General 40

CounselAllen C. Shoup.................................. President -- International Wine & 55

Spirits Ltd.A. Gary Smith................................... President -- United States Tobacco 50

CompanyRobert T. D'Alessandro.......................... Senior Vice President and Controller 45</TABLE>

None of the executive officers of Registrant has any family relationship toany other executive officer or director of Registrant.

After election, all executive officers serve until the next annualorganization meeting of the Board of Directors and until their successors areelected and qualified.

Mr. Gierer has served as Chairman of the Board and Chief Executive Officersince December 1, 1993 and has served as President since September 27, 1990. Mr.Gierer has been employed by Registrant since March 16, 1978.

Mr. Barrett has served as Executive Vice President since October 7, 1991.He also has served as President of UST Enterprises Inc. since July 1, 1991. Mr.Barrett has been employed by Registrant since January 1, 1991.

Mr. Verheij has served as Executive Vice President and General Counselsince May 7, 1996. Mr. Verheij served as Senior Vice President and GeneralCounsel from December 1, 1994 to May 6, 1996, as Senior Vice President andAssociate General Counsel from April 4, 1994 to November 30, 1994 and as VicePresident and

8

10

Associate General Counsel from December 17, 1992 to April 3, 1994. Mr. Verheijhas been employed by Registrant since November 24, 1986.

Mr. Shoup has served as President of International Wine & Spirits Ltd.since February 19, 1987. He has been employed by Registrant since December 3,1980.

Mr. Smith has served as President of United States Tobacco Company sinceJune 25, 1998. He served as Executive Vice President of United States TobaccoCompany from January 1, 1998 to June 24, 1998 and as Senior Vice President ofUnited States Tobacco Company from December 17, 1992 to December 31, 1997. Mr.Smith has been employed by Registrant since September 18, 1972.

Mr. D'Alessandro has served as Senior Vice President and Controller sinceJanuary 1, 1996. He has served as Controller since December 19, 1991. Mr.D'Alessandro has been employed by Registrant since May 4, 1981.

PART II

ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Registrant hereby incorporates by reference the information with respect tothe market for its common stock, $.50 par value ("Common Stock"), and relatedsecurity holder matters set forth on page 37 of its Annual Report, which page isincluded in Exhibit 13. Registrant's Common Stock is listed on the New YorkStock Exchange and the Pacific Exchange, Inc. As of February 1, 1999, there wereapproximately 9,500 stockholders of record of its Common Stock.

ITEM 6 -- SELECTED FINANCIAL DATA

Registrant hereby incorporates by reference the Consolidated SelectedFinancial Data -- 11 Years set forth on pages 42 and 43 of its Annual Report,which pages are included in Exhibit 13.

ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND



RESULTS OF OPERATIONS

Registrant hereby incorporates by reference the Management's Discussion andAnalysis of Results of Operations and Financial Condition set forth on pages15-22 of its Annual Report, which pages are included in Exhibit 13.

ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to the potential effects of unfavorable changes incertain prices and rates on Registrant's financial results and condition,primarily foreign currency exchange rates, interest rates on borrowings andprices of leaf tobacco and grapes. Registrant does not utilize derivativeinstruments in managing its exposure to such changes.

Registrant does not believe that near-term changes in foreign currencyexchange rates, interest rates or leaf tobacco and grape prices will have amaterial effect on its future earnings, fair values or cash flows.

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Registrant hereby incorporates by reference the report of independentauditors and the information contained in the consolidated financial statements,including the notes thereto set forth on pages 23-41 of its Annual Report, whichpages are included in Exhibit 13.

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE

Not applicable.

9

11

PART III

ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Registrant hereby incorporates by reference the information with respect tothe names, ages and business histories of the directors of Registrant which iscontained in Table I and the accompanying text set forth under the caption"Election of Directors" in its Notice of 1999 Annual Meeting and ProxyStatement. Information concerning executive officers of Registrant is set forthherein following Item 4 of this Report.

ITEM 11 -- EXECUTIVE COMPENSATION

Registrant hereby incorporates by reference the information with respect toexecutive compensation which is contained in Tables II through V (including thenotes thereto) and the accompanying text set forth under the caption"Compensation of Executive Officers" in its Notice of 1999 Annual Meeting andProxy Statement.

ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Registrant hereby incorporates by reference the information with respect tothe security ownership of management which is contained in Table I and theaccompanying text set forth under the caption "Election of Directors" in itsNotice of 1999 Annual Meeting and Proxy Statement.

ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Registrant hereby incorporates by reference information with respect toindebtedness of management which is contained in Table VI and the accompanyingtext set forth under the caption "Indebtedness of Management" in its Notice of1999 Annual Meeting and Proxy Statement.

PART IV

ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as part of this Report:



(1) The following consolidated financial statements of Registrant includedin the Annual Report are incorporated by reference in Item 8 and included inExhibit 13:

Consolidated Statement of Earnings -- Years ended December 31, 1998,1997 and 1996

Consolidated Statement of Financial Position -- December 31, 1998 and1997

Consolidated Statement of Cash Flows -- Years ended December 31, 1998,1997 and 1996

Consolidated Statement of Changes in Stockholders' Equity -- Years endedDecember 31, 1998, 1997 and 1996

Notes to Consolidated Financial Statements

(2) All other schedules for which provision is made in the applicableaccounting regulation of the Securities and Exchange Commission are not requiredunder the related instructions or are inapplicable, and therefore have beenomitted.

10

12

(3) The following exhibits are filed by Registrant pursuant to Item 601 ofRegulation S-K:

<TABLE><C> <C> <S>3.1 -- Restated Certificate of Incorporation dated May 5, 1992,

incorporated by reference to Exhibit 3.1 to Form 10-Q forthe quarter ended March 31, 1992.

3.2 -- By-Laws adopted on December 23, 1986, and amended andrestated effective October 22, 1998, incorporated byreference to Exhibit 3.2 to Form 10-Q for the quarter endedSeptember 30, 1998.

10.1* -- Form of Employment Agreement entered into on July 23, 1987between Registrant and Vincent A. Gierer, Jr., an ExecutiveOfficer, incorporated by reference to Exhibit 10.1 to Form10-Q for the quarter ended September 30, 1986.

10.2* -- Form of Severance Agreement dated October 27, 1986 betweenRegistrant and certain officers, incorporated by referenceto Exhibit 10.2 to Form 10-Q for the quarter ended September30, 1986.

10.3* -- 1982 Stock Option Plan restated as of March 22, 1989,incorporated by reference to Exhibit 4.1 to Form S-8Registration Statement filed on April 14, 1989.

10.4* -- 1992 Stock Option Plan, as amended and restated as ofDecember 12, 1996, incorporated by reference to Exhibit 10.6to Form 10-K for the fiscal year ended December 31, 1996.

10.5* -- Incentive Compensation Plan, as amended and restated as ofJanuary 1, 1996, incorporated by reference to Exhibit 10.7to Form 10-K for the fiscal year ended December 31, 1996.

10.6* -- Amendment to Incentive Compensation Plan, effectiveSeptember 25, 1997, incorporated by reference to Exhibit10.6 to Form 10-K for the fiscal year ended December 31,1997.

10.7* -- Officers' Supplemental Retirement Plan, as restated as ofDecember 1, 1992, incorporated by reference to Exhibit 10.7to Form 10-K for the fiscal year ended December 31, 1992.

10.8* -- Nonemployee Directors' Retirement Plan, as amended andrestated as of January 1, 1998, incorporated by reference toExhibit 10.8 to Form 10-K for the period ended December 31,1997.

10.9 -- Directors' Supplemental Medical Plan, as amended andrestated as of February 16, 1995, incorporated by referenceto Exhibit 10.10 to Form 10-K for the fiscal year endedDecember 31, 1994.



10.10* -- Nonemployee Directors' Stock Option Plan effective May 2,1995, incorporated by reference to Exhibit A to 1995 Noticeof Annual Meeting and Proxy Statement dated March 24, 1995.

10.11* -- Nonemployee Directors' Restricted Stock Award Plan effectiveJanuary 1, 1999.

13 -- Pages 15-43 of the Annual Report, but only to the extent setforth in Items 1, 5, 6, 7 and 8 hereof.

21 -- Subsidiaries of UST.23 -- Consent of Independent Auditors.27 -- Financial Data Schedules.</TABLE>

---------------(b) On November 25, 1998, Registrant filed a Current Report on Form 8-K which

reported the execution by its subsidiary, United States Tobacco Company, ofthe Smokeless Tobacco Master Settlement Agreement with attorneys general ofvarious states and U.S. territories to resolve health care costreimbursement claims.

* Management contract or compensatory plan or arrangement required to be filedas an exhibit pursuant to Item 14(c) of the rules governing the preparationof this Report.

11

13

SIGNATURE PAGE

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITSBEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

UST Inc.Date: February 17, 1999

By: /s/ VINCENT A. GIERER, JR.

----------------------------------VINCENT A. GIERER, JR.

CHAIRMAN OF THE BOARD, CHIEFEXECUTIVE

OFFICER AND PRESIDENT

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THISREPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANTAND IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE><S> <C> <C>

Chairman of the Board,Chief Executive Officerand President (Principal

February 17, 1999 Executive Officer) /s/ VINCENT A. GIERER, JR.--------------------------------------------------------

VINCENT A. GIERER, JR.

Senior Vice Presidentand Controller

(Principal AccountingOfficer and Principal

February 17, 1999 Financial Officer) /s/ ROBERT T. D'ALESSANDRO--------------------------------------------------------

ROBERT T. D'ALESSANDRO

February 17, 1999 Director /s/ JAMES W. CHAPIN--------------------------------------------------------

JAMES W. CHAPIN

February 17, 1999 Director /s/ JOHN P. CLANCEY--------------------------------------------------------

JOHN P. CLANCEY



February 17, 1999 Director /s/ EDWARD H. DEHORITY, JR.--------------------------------------------------------

EDWARD H. DEHORITY, JR.

February 17, 1999 Director /s/ ELAINE J. EISENMAN--------------------------------------------------------

ELAINE J. EISENMAN

February 17, 1999 Director /s/ EDWARD T. FOGARTY--------------------------------------------------------

EDWARD T. FOGARTY

February 17, 1999 Chairman of the Board /s/ VINCENT A. GIERER, JR.--------------------------------------------------------

VINCENT A. GIERER, JR.

February 17, 1999 Director /s/ P.X. KELLEY--------------------------------------------------------

P.X. KELLEY

February 17, 1999 Director /s/ PETER J. NEFF--------------------------------------------------------

PETER J. NEFF

February 17, 1999 Director /s/ LOWELL P. WEICKER, JR.--------------------------------------------------------

LOWELL P. WEICKER, JR.</TABLE>

12

14

EXHIBIT INDEX

<TABLE><C> <S> <C>3.1 -- Restated Certificate of Incorporation dated May 5, 1992,

incorporated by reference to Exhibit 3.1 to Form 10-Q forthe quarter ended March 31, 1992.

3.2 -- By-Laws adopted on December 23, 1986, and amended andrestated effective October 22, 1998, incorporated byreference to Exhibit 3.2 to Form 10-Q for the quarter endedSeptember 30, 1998.

10.1* -- Form of Employment Agreement entered into on July 23, 1987between Registrant and Vincent A. Gierer, Jr., an ExecutiveOfficer, incorporated by reference to Exhibit 10.1 to Form10-Q for the quarter ended September 30, 1986.

10.2* -- Form of Severance Agreement dated October 27, 1986 betweenRegistrant and certain officers, incorporated by referenceto Exhibit 10.2 to Form 10-Q for the quarter ended September30, 1986.

10.3* -- 1982 Stock Option Plan restated as of March 22, 1989,incorporated by reference to Exhibit 4.1 to Form S-8Registration Statement filed on April 14, 1989.

10.4* -- 1992 Stock Option Plan, as amended and restated as ofDecember 12, 1996, incorporated by reference to Exhibit 10.6to Form 10-K for the fiscal year ended December 31, 1996.

10.5* -- Incentive Compensation Plan, as amended and restated as ofJanuary 1, 1996, incorporated by reference to Exhibit 10.7to Form 10-K for the fiscal year ended December 31, 1996.

10.6* -- Amendment to Incentive Compensation Plan, effectiveSeptember 25, 1997, incorporated by reference to Exhibit10.6 to Form 10-K for the fiscal year ended December 31,1997.

10.7* -- Officers' Supplemental Retirement Plan, as restated as ofDecember 1, 1992, incorporated by reference to Exhibit 10.7to Form 10-K for the fiscal year ended December 31, 1992.

10.8* -- Nonemployee Directors' Retirement Plan, as amended andrestated as of January 1, 1998, incorporated by reference toExhibit 10.8 to Form 10-K for the period ended December 31,



1997.10.9 -- Directors' Supplemental Medical Plan, as amended and

restated as of February 16, 1995, incorporated by referenceto Exhibit 10.10 to Form 10-K for the fiscal year endedDecember 31, 1994.

10.10* -- Nonemployee Directors' Stock Option Plan effective May 2,1995, incorporated by reference to Exhibit A to 1995 Noticeof Annual Meeting and Proxy Statement dated March 24, 1995.

10.11* -- Nonemployee Directors' Restricted Stock Award Plan effectiveJanuary 1, 1999.

13 -- Pages 15-43 of the Annual Report, but only to the extent setforth in Items 1, 5, 6, 7 and 8 hereof.

21 -- Subsidiaries of UST.23 -- Consent of Independent Auditors.27 -- Financial Data Schedules.</TABLE>

---------------* Management contract or compensatory plan or arrangement required to be filed

as an exhibit pursuant to Item 14(c) of the rules governing the preparation ofthis Report.



1

EXHIBIT 10.11

ADOPTED BY BOARD OF DIRECTORS ON DECEMBER 10, 1998EFFECTIVE JANUARY 1, 1999

UST INC.

NONEMPLOYEE DIRECTORS' RESTRICTED STOCK AWARD PLAN

1. PURPOSE

1.1 The UST Inc. Nonemployee Directors' Restricted Stock Award Plan (the"Plan") is intended to increase the alignment of the interests ofnonemployee members of the Board with the interests of stockholders of theCompany by providing further opportunity for ownership of the Company'sstock, and to increase their incentive to contribute to the success of theCompany's business through the award of Restricted Stock on the terms andconditions set forth herein.

2. DEFINITIONS

2.1 "Board" shall mean the Board of Directors of the Company.

2.2 "Change in Control" shall have the meaning ascribed to it in Section 5.2.4.

2.3 "Committee" shall have the meaning ascribed to it in Section 3 hereof.

2.4 "Company" shall mean UST Inc., a Delaware corporation.

2.5 "Date of Award" shall mean the day on which Restricted Stock Awards aregranted pursuant to Section 5.1

2.6 "Eligible Director" shall mean each member of the Board who is not anemployee of the Company or any subsidiary of the Company.

2.7 "Fair Market Value" of a share of Stock on any given day shall be theaverage of the high and low sales prices per share of Stock as reported onthe New York Stock Exchange Composite Tape for such date, or if there wasno trading of Stock on such date, for the next preceding date on whichthere was such trading.

2.8 "Grantee" shall mean the individual who has been awarded Restricted Stockunder the Plan.

2.9 "Plan" shall mean the UST Inc. Nonemployee Directors' Restricted StockAward Plan.



2.10 "Restricted Stock" shall mean stock awarded on such terms and conditions asare set forth in the Plan.

2.11 "Restricted Stock Agreement" shall mean the written agreement between theCompany and the Grantee evidencing an award of Restricted Stock under thePlan.

2.12 "Rule 16b-3" shall mean Rule 16b-3 promulgated under Section 16 of theSecurities Exchange Act of 1934, as amended.

2.13 "Restricted Stock Award" shall have the meaning ascribed to it in Section5.1.

2.14 "Stock" shall mean shares of common stock, par value $.50 per share, of theCompany.

3. ADMINISTRATION

3.1 Committee. The Plan shall be administered by the Nominating andCompensation Committee of the Board (the "Committee"). Members of theCommittee shall be appointed by the Board.

3.2 Authority of the Committee. The Committee shall determine, consistent withthe terms of the Plan, the terms and conditions of awards grantedhereunder. The Committee may make such rules and establish such proceduresfor the administration of the Plan as it deems appropriate to carry out thepurpose of the Plan. All questions of interpretation, administration andapplication of the Plan shall be determined by a majority of the members ofthe Committee then in office, except that the Committee may authorize any

2

one or more of its members, or any officer of the Company, to execute anddeliver documents on its behalf. The determination of such majority shallbe final and binding in all matters relating to the Plan.

4. SHARES OF STOCK SUBJECT TO THIS PLAN

4.1 Shares Reserved. Subject to adjustment as provided in Section 4.2 hereof,a maximum of 200,000 shares of Stock shall be reserved for issuance inaccordance with the terms of the Plan. Shares of Stock that may be issuedshall be issued shares that have been reacquired by the Company and areheld in its treasury. If any outstanding Restricted Stock under the Planfor any reason expires or is cancelled or otherwise terminated withouthaving vested in full, the shares of Common Stock allocable to the unvestedportion of such Restricted Stock shall (unless the Plan shall have beenterminated) become available for subsequent awards of Restricted Stockunder the Plan.

4.2 Capital Adjustments. If any change in the outstanding shares of CommonStock occurs or takes effect through declaration of stock or other



dividends or distributions with respect to such shares, throughrestructuring, recapitalization or other similar event or through stocksplits, change in par value, combination or exchange of shares, or thelike, then the number and kind of shares reserved for Restricted StockAwards, the number and kind of shares subject to outstanding RestrictedStock, as appropriate, of such Restricted shares shall be adjusted asnecessary to reflect equitably such change; provided, however, that anyfractional shares resulting from such adjustment shall be eliminated.

5. RESTRICTED STOCK

5.1 Awards. Each Eligible Director shall automatically be awarded 50 shares ofRestricted Stock pursuant to the Plan for his or her attendance at eachmeeting of the Board and 40 shares of Restricted Stock for his or herattendance at each meeting of any Committee of the Board ("Restricted StockAwards").

5.2 Terms and Conditions of Awards. Each Restricted Stock Award shall beevidenced by a Restricted Stock Agreement in such form as the Committeeshall prescribe from time to time in accordance with the Plan. RestrictedStock shall be subject to such restrictions on transferability and otherrestrictions, if any, as the Committee may impose at the date of grant orthereafter and shall comply with the terms and conditions set forth belowin this Section 5.2, subject to such exceptions as may be determined by theCommittee.

5.2.1 Vesting of Awards. Each Restricted Stock Award shall, subject tothe provisions of Section 5.2.4, become fully vested andnonforfeitable upon the third anniversary of the Date of the Awardor, if earlier, upon the date of the Grantee's retirement fromservice as a member of the Board pursuant to the Company's policy ofage-related retirement from the Board. If, prior to such thirdanniversary, a Grantee shall die while a member of the Board, or ifthe Grantee's service on the Board shall terminate by reason of"disability," as such term is defined by the Committee, or if aChange in Control occurs pursuant to Section 5.2, all RestrictedStock Awards held by the Grantee shall become fully vested andnonforfeitable as of the date of death or disability of the Granteeor the occurrence of the Change in Control.

5.2.2 Forfeiture of Awards. Subject to such exceptions as may bedetermined by the Committee, if the Grantee's continuous service asa member of the Board shall terminate by reason of the Grantee'sresignation prior to retirement or refusal to stand for reelectionor the Board's removal of the Grantee for "cause," as such term isdefined by the Committee, prior to the vesting of the RestrictedStock Award in accordance with Section 5.2.4, all shares subject tosuch nonvested Restricted Stock Award shall thereupon be forfeitedby the Grantee and transferred to, and reacquired by, the Company atno cost to the Company; provided, however, that (i) the Committeemay provide, by rule or regulation or in any Restricted Stock



Agreement, or may determine in any individual case, that forfeitureconditions relating to Restricted Stock will be waived in whole orin part in the event of terminations resulting from specifiedcauses, and (ii) the Committee may in other cases waive in whole orin part the forfeiture of Restricted Stock.

3

5.2.3 Restrictions on Transfer of Shares. Shares of Restricted Stock maynot be sold, assigned, transferred, pledged, hypothecated orotherwise disposed of, except by will or the laws of descent anddistribution, or, if then permitted under Rule 16b-3, pursuant to aqualified domestic relations order as defined in Title I of theEmployee Retirement Income Security Act of 1974, as amended, at anytime while the Grantee is a member of the Board, unless otherwisedetermined by the Committee. Certificates for shares of Common Stockissued pursuant to awards of Restricted Stock shall bear anappropriate legend referring to such restrictions, and any attemptto dispose of any such shares of Common Stock in contravention ofsuch restrictions shall be null and void and without effect. Uponthe termination of the Grantee's service as a member of the Board,all such restrictions upon transfer shall expire with respect toshares subject to Restricted Stock Awards that have theretofore, oras a result of such termination, become vested and nonforfeitable.Prior to expiration of the restrictions upon transfer, thecertificates evidencing the Restricted Stock Award may be retainedby the Company or held in escrow by an agent appointed by theCommittee.

5.2.4 Definition of Change in Control. For purposes of the Plan, a changein control of the Company ("Change in Control") shall be deemed tohave occurred if:

5.2.4.1 any "person" (as such term is used in Sections 13(d) and14(d) of the Securities Exchange Act of 1934, as amended (the"Exchange Act")), other than (1) the Company or any of itssubsidiaries, (2) any "person" who on the date hereof is adirector or officer of the Company, (3) any trustee or otherfiduciary holding securities under an employee benefit planof the Company, or (4) any corporation owned, directly orindirectly, by the stockholders of the Company insubstantially the same proportions as their ownership ofstock of the Company (a "Person"), is or becomes the"beneficial owner" (as defined in Rule 13d-3) under theExchange Act (a "Beneficial Owner")), directly or indirectly,of securities of the Company (not including in the securitiesbeneficially owned by such Person any securities acquireddirectly from the Company or its affiliates) representing 20%or more of the combined voting power of the Company's thenoutstanding securities; or



5.2.4.2 during any period of two consecutive years, individuals whoat the beginning of such period constitute the Board, and anynew director (other than a director designated by a personwho has entered into an agreement with the Company to effecta transaction described in Sections 5.2.4.1 or 5.2.4.3 whoseelection by the Board or nomination for election by theCompany's stockholders was approved by a vote of at leasttwo-thirds ( 2/3) of the directors then still in office whoeither were directors at the beginning of the period or whoseelection or nomination for election was previously soapproved, cease for any reason to constitute at least amajority thereof; or

5.2.4.3 the stockholders of the Company approve a merger orconsolidation of the Company with any other corporation,other than a merger or consolidation which would result inthe voting securities of the Company outstanding immediatelyprior thereto continuing to represent (either by remainingoutstanding or by being converted into voting securities ofthe surviving entity) more than 80% of the combined votingpower of the voting securities of the Company or suchsurviving entity outstanding immediately after such merger orconsolidation, or the stockholders of the Company approve aplan of complete liquidation of the Company or an agreementfor the sale or disposition by the Company of all orsubstantially all of the Company's assets.

5.3 Rights as a Stockholder. Except to the extent restricted under theRestricted Stock Agreement, a Grantee shall have all of the rights of astockholder including, without limitation, the right to vote RestrictedStock and the right to receive dividends thereon.

5.4 Rights of Grantees. Nothing in the Plan or in any Restricted StockAgreement shall confer upon an individual any right to continue service onthe Board or interfere in any way with the right of the Company toterminate such service. Except as expressly provided in the Plan, theGrantee shall have no

4

rights by reason of any subdivision or consolidation of shares of stock ofany class or the payment of any stock dividend or any other increase ordecrease in the number of shares of stock of any class or by reason of anydissolution, liquidation, merger, or consolidation or spin-off of assets orstock of another corporation, and any issuance by the Company of shares ofstock of any class, or securities convertible into shares of stock of anyclass, shall not affect, and no adjustment by reason thereof shall be madewith respect to, the Restricted Stock. The award of Restricted Stockpursuant to the Plan shall not affect in any way the right or power of theCompany to make adjustments, reclassifications, reorganizations or changesof its capital or business structures or to merge or to consolidate or to



dissolve, liquidate or sell, or transfer all or part of its business orassets.

6. EFFECTIVE DATE; TERM OF PLAN

6.1 Effective Date. The Plan, as adopted by the Board on December 10, 1998shall be effective as of January 1, 1999.

6.2 Duration of Plan. Restricted Stock may be awarded pursuant to the Planfrom time to time within a period of ten years from the date the Plan isadopted by the Board. The Plan shall remain in effect until all RestrictedStock Awards under the Plan have been satisfied by the issuance of shares,or terminated under the terms of the Plan.

7. NONASSIGNABILITY AND NONTRANSFERABILITY

7.1 Restricted Stock awards under the Plan shall not be assignable ortransferable by the Eligible Director except by will or the laws of descentand distribution.

8. AMENDMENT: TERMINATION

8.1 The Board may at any time and from time to time alter, amend, suspend, orterminate the Plan in whole or in part. The termination or any modificationor amendment of the Plan shall not, without the consent of a director,affect his or her rights under an Award.

9. MISCELLANEOUS

9.1 Governing Law. The Plan and all rights hereunder shall be construed inaccordance with and governed by the laws of the State of Delaware.

9.2 Headings. The headings of sections and subsections herein are includedsolely for convenience of reference and shall not affect the meaning of anyof the provisions of the Plan.



1

EXHIBIT 13(ITEMS 1 AND 8)

USTCONSOLIDATED SEGMENT INFORMATION

(IN THOUSANDS)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31--------------------------------------

1998 1997 1996---------- ---------- ----------

<S> <C> <C> <C>NET SALES TO UNAFFILIATED CUSTOMERS

Tobacco.............................................. $1,245,552 $1,181,789 $1,167,532Wine................................................. 148,512 145,048 122,458All other............................................ 29,182 74,881 81,715

---------- ---------- ----------NET SALES.................................... $1,423,246 $1,401,718 $1,371,705

========== ========== ==========

OPERATING PROFIT (LOSS)Tobacco.............................................. $ 720,622 $ 700,395 $ 745,558Wine................................................. 22,090 28,178 17,884All other............................................ 1,712 (1,270) 60

---------- ---------- ----------OPERATING PROFIT............................. 744,424 727,303 763,502

Corporate expenses................................... (12,146) (15,995) (12,612)Interest income (expense), net....................... 2,187 (7,451) (6,364)

---------- ---------- ----------EARNINGS BEFORE INCOME TAXES................. $ 734,465 $ 703,857 $ 744,526

========== ========== ==========

IDENTIFIABLE ASSETS AT DECEMBER 31Tobacco.............................................. $ 497,623 $ 467,972 $ 458,162Wine................................................. 277,249 230,896 194,917All other............................................ 87,197 102,157 91,569Corporate............................................ 51,250 25,338 61,929

---------- ---------- ----------$ 913,319 $ 826,363 $ 806,577========== ========== ==========

CAPITAL EXPENDITURESTobacco.............................................. $ 27,696 $ 29,410 $ 29,199Wine................................................. 25,646 20,135 12,033All other............................................ 2,470 6,134 2,671Corporate............................................ 454 2,480 810

---------- ---------- ----------$ 56,266 $ 58,159 $ 44,713========== ========== ==========

DEPRECIATIONTobacco.............................................. $ 16,100 $ 16,266 $ 15,816Wine................................................. 11,953 10,423 8,909All other............................................ 1,653 1,836 1,792Corporate............................................ 1,665 1,611 1,626

---------- ---------- ----------$ 31,371 $ 30,136 $ 28,143========== ========== ==========

</TABLE>

See Notes to Consolidated Financial Statements.

2

EXHIBIT 13 -- (CONTINUED)

(ITEM 6)

UST

CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE><CAPTION>

1998 1997 1996 1995 1994 1993---------- ---------- ---------- ---------- ---------- ----------



<S> <C> <C> <C> <C> <C> <C>SUMMARY OF OPERATIONS for the year ended December

31Net sales......................................... $1,423,246 $1,401,718 $1,371,705 $1,305,796 $1,203,951 $1,097,533Cost of products sold (includes excise taxes)..... 283,516 291,942 272,756 262,203 251,944 246,445Selling, advertising and administrative

expenses........................................ 407,452 398,468 348,059 335,824 311,279 286,336---------- ---------- ---------- ---------- ---------- ----------

Operating income.................................. 732,278 711,308 750,890 707,769 640,728 564,752Other (income) expense:

Interest (income) expense, net.................. (2,187) 7,451 6,364 3,179 92 (2,004)Gain on disposal of product line................ -- -- -- -- -- (35,029)

---------- ---------- ---------- ---------- ---------- ----------Earnings before income taxes and cumulative effect

of accounting changes........................... 734,465 703,857 744,526 704,590 640,636 601,785---------- ---------- ---------- ---------- ---------- ----------

Income taxes...................................... 279,186 264,719 280,527 274,830 253,110 232,893---------- ---------- ---------- ---------- ---------- ----------

Earnings before cumulative effect of accountingchanges......................................... 455,279 439,138 463,999 429,760 387,526 368,892

Cumulative effect of accounting changes (net ofincome tax benefit)............................. -- -- -- -- -- 19,846

---------- ---------- ---------- ---------- ---------- ----------Net earnings...................................... $ 455,279 $ 439,138 $ 463,999 $ 429,760 $ 387,526 $ 349,046

========== ========== ========== ========== ========== ==========PER SHARE DATABasic earnings per share before cumulative effect

of accounting changes........................... $2.45 $2.39 $2.48 $2.21 $1.92 $1.77Basic earnings per share.......................... 2.45 2.39 2.48 2.21 1.92 1.67Diluted earnings per share before cumulative

effect of accounting changes.................... 2.44 2.37 2.44 2.17 1.88 1.73Diluted earnings per share........................ 2.44 2.37 2.44 2.17 1.88 1.64Dividends per share............................... 1.62 1.62 1.48 1.30 1.12 .96Market price per share:

High............................................ 36 7/8 36 15/16 35 7/8 36 31 1/2 32 3/4Low............................................. 24 9/16 25 1/2 28 1/4 26 5/8 23 5/8 24 3/8

FINANCIAL CONDITION at December 31Current assets.................................... $507,213 $441,844 $450,570 $425,555 $381,937 $334,996Current liabilities............................... 197,316 166,519 306,553 280,723 160,755 106,642Working capital................................... 309,897 275,325 144,017 144,832 221,182 228,354Ratio of current assets to current liabilities.... 2.6:1 2.7:1 1.5:1 1.5:1 2.4:1 3.1:1Total assets...................................... 913,319 826,363 806,577 783,976 741,236 706,195Long-term debt.................................... 100,000 100,000 100,000 100,000 125,000 40,000Total debt........................................ 100,000 110,000 250,000 200,000 125,000 40,000Stockholders' equity.............................. 468,293 436,795 281,206 292,781 361,669 462,972OTHER DATAStock repurchased................................. $151,617 $ 45,719 $237,759 $274,783 $298,843 $236,704Dividends paid on shares.......................... $301,145 $298,059 $277,302 $252,388 $225,715 $199,725Dividends paid as a percentage of net earnings.... 66.1% 67.9% 59.8% 58.7% 58.2% 57.2%Return on net sales............................... 32.0% 31.3% 33.8% 32.9% 32.2% 31.8%Return on average assets.......................... 52.3% 53.8% 58.3% 56.4% 53.5% 50.6%Return on average stockholders' equity............ 100.6% 122.3% 161.7% 131.3% 94.0% 71.3%Percentage of long-term debt to stockholders'

equity.......................................... 21.4% 22.9% 35.6% 34.2% 34.6% 8.6%Percentage of total debt to stockholders'

equity.......................................... 21.4% 25.2% 88.9% 68.3% 34.6% 8.6%Average number of shares (in

thousands) -- basic............................. 185,544 183,931 187,386 194,374 201,995 208,469Average number of shares (in

thousands) -- diluted........................... 186,880 185,602 190,067 197,613 205,699 213,412</TABLE>

---------------

See Management's Discussion and Analysis and Notes to Consolidated FinancialStatements.All share data have been adjusted to reflect the two-for-one stock splitsdistributed on January 27, 1992 and 1989.

3

UST

CONSOLIDATED SELECTED FINANCIAL DATA -- 11 YEARS -- (CONTINUED)(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE><CAPTION>

1992 1991 1990 1989 1988---------- -------- -------- -------- --------

<S> <C> <C> <C> <C> <C>SUMMARY OF OPERATIONS for the year ended December 31Net sales............................................ $1,032,172 $898,436 $756,435 $673,852 $611,878



Cost of products sold (includes excise taxes)........ 256,796 227,546 191,824 185,464 174,560Selling, advertising and administrative expenses..... 274,613 247,085 215,621 189,963 177,103

---------- -------- -------- -------- --------Operating income..................................... 500,763 423,805 348,990 298,425 260,215Other (income) expense:

Interest (income) expense, net..................... (1,866) (2,279) (3,203) (3,190) (1,068)Gain on disposal of product line................... -- -- -- -- --

---------- -------- -------- -------- --------Earnings before income taxes and cumulative effect of

accounting changes................................. 502,629 426,084 352,193 301,615 261,283---------- -------- -------- -------- --------

Income taxes......................................... 190,071 160,179 128,918 111,128 99,133---------- -------- -------- -------- --------

Earnings before cumulative effect of accountingchanges............................................ 312,558 265,905 223,275 190,487 162,150

Cumulative effect of accounting changes (net ofincome tax benefit)................................ -- -- -- -- --

---------- -------- -------- -------- --------Net earnings......................................... $ 312,558 $265,905 $223,275 $190,487 $162,150

========== ======== ======== ======== ========PER SHARE DATABasic earnings per share before cumulative effect of

accounting changes................................. $1.49 $1.26 $1.04 $.87 $.74Basic earnings per share............................. 1.49 1.26 1.04 .87 .74Diluted earnings per share before cumulative effect

of accounting changes.............................. 1.43 1.20 .99 .83 .71Diluted earnings per share........................... 1.43 1.20 .99 .83 .71Dividends per share.................................. .80 .66 .55 .46 .37Market price per share:

High............................................... 35 3/8 33 7/8 18 1/4 15 3/8 10 1/2Low................................................ 25 3/8 16 3/8 12 3/8 9 5/8 6

FINANCIAL CONDITION at December 31Current assets....................................... $ 330,208 $305,430 $265,854 $275,954 $291,006Current liabilities.................................. 81,208 95,455 68,660 66,643 69,935Working capital...................................... 249,000 209,975 197,194 209,311 221,071Ratio of current assets to current liabilities....... 4.1:1 3.2:1 3.9:1 4.1:1 4.2:1Total assets......................................... 673,965 656,513 622,595 630,155 597,955Long-term debt....................................... -- -- 3,060 6,789 21,828Total debt........................................... -- 1,250 4,849 14,469 30,763Stockholders' equity................................. 516,606 482,875 473,873 482,254 453,253OTHER DATAStock repurchased.................................... $ 212,581 $184,424 $151,259 $ 97,517 $ 67,356Dividends paid on shares............................. $ 167,951 $139,670 $118,295 $101,197 $ 81,672Dividends paid as a percentage of net earnings....... 53.7% 52.5% 53.0% 53.1% 50.4%Return on net sales.................................. 30.3% 29.6% 29.5% 28.3% 26.5%Return on average assets............................. 47.0% 41.6% 35.6% 31.0% 28.3%Return on average stockholders' equity............... 62.5% 55.6% 46.7% 40.7% 38.0%Percentage of long-term debt to stockholders'

equity............................................. -- -- .6% 1.4% 4.8%Percentage of total debt to stockholders' equity..... -- .3% 1.0% 3.0% 6.8%Average number of shares (in thousands) -- basic..... 209,803 211,603 215,156 219,820 220,550Average number of shares (in thousands) -- diluted... 218,674 221,458 224,522 230,164 228,579</TABLE>

4

EXHIBIT 13 -- (CONTINUED)(ITEM 7)

UST

MANAGEMENT'S DISCUSSION AND ANALYSIS

COMPARATIVE INFORMATION

The comparison of results for the three years presented was affected by anumber of factors which are reflected in the analysis of Results of Operationsand Financial Condition. During the fourth quarter of 1998, the Company enteredinto the Smokeless Tobacco Master Settlement Agreement (the "SettlementAgreement") with attorneys general of various states and U.S. territories toresolve the remaining health care cost recovery cases pending against theCompany. Subject to final court approval in the respective states, theSettlement Agreement requires the Company to make payments expected to totalbetween $100 and approximately $200 million over ten years, depending on variousfactors, for programs to reduce youth usage of tobacco and combat youthsubstance abuse and for enforcement purposes. In addition, the SettlementAgreement provides for payment by the Company of legal costs in the amount of $5million. Settlement Agreement charges recorded by the Company in the fourthquarter of 1998 totaled $15.3 million; including $4.3 million for payments tothe enforcement fund, $5 million for the payment of legal fees and $6 millionrepresenting the first on-going payment to the public education fund due inMarch of 1999. The balance of the future on-going payments related to theCompany's market share will be charged to expense in the period the related



shipments occur. In addition, included in 1998 results is a charge of $16.4million versus $3 million in 1997, resulting from the Company's portion of thefunding for pilot programs, primarily to reduce youth access to tobaccoproducts, and related expenses as part of the settlements with the states ofTexas, Florida and Washington in connection with their health care costreimbursement litigation. Tobacco settlement charges negatively impacted dilutedearnings per share by 10 cents in 1998 versus 1 cent in 1997, and 8 cents forthe fourth quarter of 1998 versus no effect in the fourth quarter of 1997.

At December 31, 1998, the Company adopted Statement of Financial AccountingStandards No. 131, "Disclosures about Segments of an Enterprise and RelatedInformation," which required the restatement of segment information prior to1998.

In addition, due to the shipping pattern of the Tobacco segment, there wasan additional shipping day that occurred in 1996 which affected both the unitvolume and financial result comparisons for 1997 versus 1996.

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

1998 COMPARED WITH 1997

Consolidated net sales rose 2 percent to $1.423 billion while net earningsincreased 4 percent to $455.3 million and diluted earnings per share increased 3percent to $2.44.

Over the last three years, net sales have increased 9 percent at an averageannual rate of 2.9 percent, net earnings have increased 5.9 percent at anaverage annual rate of 2.1 percent; and diluted earnings per share haveincreased 12.4 percent at an average annual rate of 4.2 percent.

Results for the Tobacco segment increased 2.9 percent as higher sellingprices for moist smokeless tobacco were offset by the tobacco settlement chargesand higher spending for marketing and sales initiatives, partially off set bythe absence of a 1997 charge relating to recording the present value of anemployment contract for a former executive officer.

Wine segment results declined as a result of competitive pricing in themarketplace.

Results for all other operations improved as gains recorded on dispositionsof a business and certain agricultural properties were offset by the continuedweakness in the premium cigar business.

5

Corporate expenses were lower in 1998 versus 1997 due to the absence of acharge related to another employment contract for a former executive officer.

Interest, net, resulted in income in 1998 versus expense in 1997 due tohigher income on cash equivalent investments and lower average debt levelsduring the year.

Pretax margins increased to 51.6 percent on earnings before income taxes of$734.5 million. Over the last three years, pretax margins have averaged 52percent while earnings before income taxes have increased 4.2 percent at anaverage annual rate of 1.5 percent.

The effective tax rate increased slightly in 1998 as compared to 1997.

Future net earnings and earnings per share growth may be affected by theCompany's ability to address competitive pressures, the overall growth rate ofthe moist smokeless tobacco category, continued growth in other businesses andthe effects of potential regulatory actions.


Consolidated net sales rose 2 percent to $1.402 billion, net earningsdecreased 5 percent to $439.1 million and diluted earnings per share declined 3percent to $2.37.

Tobacco segment results were lower due to an additional shipping day in1996, along with higher spending for marketing and sales initiatives to addresscompetition, increased expenses relating to legal and regulatory issues and acharge relating to an employment contract for a former executive officer.

Results for the Wine segment were substantially higher due to increasedcase volume and higher selling prices for premium varietal wines.

All other operations recorded a small loss for the year.



Corporate expenses increased primarily due to the recording of anotheremployment contract for a former executive officer.

Interest expense increased due to higher average levels of debt outstandingduring the year.

Pretax margins declined to 50.2 percent on earnings before income taxes of$703.9 million.

The effective tax rate remained stable from year to year.

TOBACCO SEGMENT


Tobacco segment sales increased 5.4 percent to $1.246 billion and accountedfor 87.5 percent of consolidated revenue.

Higher selling prices for moist smokeless tobacco was the primary reasonfor the increase. Domestic unit volume for moist smokeless tobacco products wasslightly higher, rising 0.2 percent to 625.3 million cans as compared to 1997.For the year, unit volume results were unfavorably affected by higher returnedgoods resulting from several large promotions run in the latter part of 1997which impacted regular stock at retail in 1998, and the implementation inmid-1997 of a program to enhance product freshness by accelerating the rotationof moist smokeless tobacco products at retail. During 1998, the Companyfine-tuned its promotional activities by focusing on the number and distributionof promotional units. As a result, the Company believes that the returned goodscomparison should stabilize going forward and therefore have less of an impacton reported net unit volume. Fourth quarter unit volume increased 1.6 percent to157.3 million cans compared with the similar 1997 period which reflects growthin both the premium priced and price/value brands, as well as lower returnedgoods.

The national introduction at mid-year of Rooster, the Company's premiummid-tier priced brand, continued targeted growth of Red Seal, the Company'sprice/value brand, and better management of promotional activity during the yearall had a favorable impact on unit volume results for the fourth quarter andyear.

6

Gross profit for the segment rose 5.6 percent during 1998. Higher sellingprices on premium brands more than offset higher volume for lower pricedpromotional and price/value products resulting in a slight increase in the grossprofit percentage for the Tobacco segment.

Selling and advertising expenses increased in 1998 approximately 7 percent.Selling expenses were significantly higher as the Company introduced anincentive program for wholesalers and retailers to build partnerships with thetrade in support of the Company's smokeless tobacco brands. Spending was alsohigher on consumer focused activities, market research, additional sales andsupport personnel and higher salary related costs. Overall, advertising expenseswere favorable, resulting from the absence of a major consumer promotion whichran in the prior year. Spending, however, was redirected and resulted inincreased print advertising and direct marketing efforts in support of premiumbrands.

Administrative expenses were significantly higher due to the tobaccosettlement charges, partially offset by the absence of a charge relating to anemployment contract with a former executive officer.

Operating profit for the Tobacco segment increased 2.9 percent to $720.6million for 1998. Absent tobacco settlement charges operating profit for theTobacco segment would have increased approximately 7 percent.

The Company continued to face competitive pressures in the marketplace in1998. Marketing and sales initiatives over the past two years seem to haveslowed the rate of segment share loss experienced in prior years. Competitivepressures, as well as the rate of growth of the moist smokeless tobacco categoryand the effects of potential regulatory actions will continue to impact unitvolume and operating results for the Tobacco segment in the future.


The comparison of results for the Tobacco segment was affected by anadditional shipping day in 1996 as well as an increase in returned goodsresulting from a program implemented during the second half of 1997 to enhanceproduct freshness by accelerating the rotation of moist smokeless tobaccoproducts at retail. In addition, due to increasing competition in the moistsmokeless tobacco category, additional initiatives were implemented during theyear which increased expenses. Accordingly, Tobacco segment results were lowerfor the year as higher selling prices were more than offset by slightly lower



unit volume for moist smokeless tobacco products and higher spending.

Domestic unit volume for moist smokeless tobacco products decreased 1.5percent in 1997 to 623.8 million cans, as compared with 1996, which contained anadditional shipping day. On an equivalent shipping day basis, unit volumestabilized, reversing a downward trend that began in the fourth quarter of 1996.

Selling and advertising expenses for the year increased in support of newbrand introductions, promotions and other targeted consumer initiatives, as wellas increased market research.

Administrative expenses were also significantly higher due to costsassociated with legal and regulatory issues, and a charge resulting from anemployment contract with a former executive officer.

Accordingly, operating profit for the Tobacco segment decreased 6.1 percentto $700.4 million in 1997.

WINE SEGMENT


Wine segment revenue increased 2.4 percent to $148.5 million and accountedfor 10.4 percent of consolidated sales. Competitive pricing in the marketplacehad an unfavorable effect on premium case sales during the year. In addition,due to anticipated shortages of red wines resulting from the low harvest yieldsin 1996, the Company began 1998 with certain varieties on allocation. TheCompany took action by removing the allocations on red wines in the secondquarter and reduced prices in the second half of the year in an effort toincrease case volume. Premium case volume decreased slightly in 1998 versus1997. However, as a result of the actions taken, premium case volume for thefourth quarter increased approximately 12 percent as compared to the similarperiod in the prior year. Chateau Ste. Michelle and Columbia Crest, theCompany's two leading brands of premium wine, accounted for approximately 73percent of total Wine segment revenue.

7

Unit costs were higher in 1998 as a result of higher average costsassociated with the 1996 and 1997 harvests. As a result of the competitivepricing issues in the marketplace and higher unit costs, gross profit for theWine segment decreased 1.2 percent in 1998.

The Company's wines are produced using grapes both harvested from its ownvineyards and purchased from regional growers as well as purchased bulk wine.The demand for premium varietal wine continues to increase. Given theoutstanding harvest yields experienced over the last two years, the supply ofgrapes is adequate to meet expected demand and thereby eliminate the need forproduct allocations in 1999.

Selling, advertising and administrative expenses were higher in 1998.Selling expenses were higher and were focused on promotional activities toaddress the competitive marketplace. Overall, advertising expenses weresignificantly lower; however, spending was focused on specific premium varietalbrands. Administrative and other expenses were significantly higher primarilydue to expenses incurred in improving information systems, salary and relatedcosts and professional fees.

The Wine segment recorded an operating profit of $22.1 million, a decreaseof 21.6 percent.

The Company believes that competitive pricing will continue in themarketplace in 1999. In order to increase profitability, the Company willcontinue to monitor current pricing levels and take the necessary actions toremain competitive at the appropriate margin level, introduce new products andfocus on higher margin products.


Wine segment revenue increased 18.4 percent to $145 million and accountedfor 10.3 percent of consolidated sales. Higher premium wine case volume andselling prices were the primary reasons for the increase. Case volume forpremium wine increased 9.6 percent. Chateau Ste. Michelle and Columbia Crest,the Company's two leading brands of premium wine, accounted for approximately 70percent of total Wine segment revenue.

Unit costs increased slightly in 1997 as a result of higher average costsassociated with lower harvest yields experienced in 1996. Total grape tonnageharvested and purchased in 1997 was significantly higher than in 1996 but atrelatively stable average costs.

Gross profit for the Wine segment increased 25.2 percent, as the lowharvest yields and increased demand for premium varietal wines caused a grape



shortage in the wine industry in 1997, allowing the Company to raise prices.

Selling, advertising and administrative expenses were higher in 1997.Selling expenses were stable while advertising expenses were significantlyhigher in promoting brand awareness of premium wines, primarily Columbia Crest.

Administrative and other expenses were significantly higher, primarily dueto salary and related expenses and higher spending in other areas.

The Wine segment recorded an operating profit of $28.2 million in 1997.

ALL OTHER OPERATIONS


All other sales decreased 61 percent to $29.2 million and accounted for 2.1percent of consolidated sales. The primary reason for the decrease was thedisposition of the Company's video entertainment subsidiary in the first quarterof 1998 and a significant decline in the cigar operations due to the weakness inthe premium cigar market. 1998 results include a gain of $10.7 million resultingfrom the sale of certain commercial agricultural properties and the Company'svideo entertainment subsidiary. This gain was offset by unfavorable results forthe cigar operations, while spending in the international operation was lower.Overall, all other operations recorded a small operating profit of $1.7 million.

8


All other sales decreased 8.4 percent to $74.9 million and accounted for5.3 percent of consolidated sales. Increased revenues for the cigar operationswere more than offset by the absence of revenues from businesses sold in 1996.In 1997, the Company incurred a $24.1 million write-down of production costs andprepaid royalties for its entertainment business. This charge was offset by a$25.7 million prepayment of royalties received in connection with a previousdivestiture. Favorable results from the cigar operations were more than offsetby higher expenditures associated with developing international markets, whileresults for other businesses were mixed. Overall, all other operations recordedan operating loss of $1.3 million.

FINANCIAL CONDITION

SOURCES AND USES OF CASH -- OPERATIONS

Cash provided by operating activities, primarily earnings generated by theTobacco segment, is the major source of funds available to the Company. Cashprovided by operating activities was $465.6 million in 1998 as compared to$412.6 million in 1997 and $439.4 million in 1996.

Net cash provided by operating activities in 1998 increased 12.9 percent ascompared to 1997. The increase was due to higher earnings generated by theTobacco segment, partially offset by lower earnings generated by the Winesegment.

Significant inventories of leaf tobacco are required in connection with theCompany's smokeless tobacco products and cigars. During the last three years,$217.8 million was used for the purchase of leaf tobacco and related costs forsmokeless tobacco. In addition, the cost of grapes harvested and purchased andthe cost of bulk wine totaled $92.1 million over the last three years.

INVESTING ACTIVITIES

Net cash used in investing activities was $15.4 million in 1998. Purchasesof property, plant and equipment over the last three years totaled $159.1million.

Major areas of capital spending from 1996 through 1998 were:

Tobacco segment

- Building additions and renovations- Manufacturing, processing and packaging equipment- Computer equipment and software

Wine segment

- Storage capacity- Vineyard expansion and development- Building additions and renovations- Computer equipment and software

Other



- Cigar distribution facility and manufacturing capacity expansion- Equipment

In 1999, the Company's capital program is expected to approximate $65million and will primarily include improvements to the tobacco processing andmanufacturing operations, information systems, and expansion of storagefacilities, related equipment and vineyard development for the wine operation.

In 1998, the Company received $14.6 million from the disposition of certaincommercial agricultural properties and $20.2 million resulting from a sale of abusiness. In 1997, the Company received $25.7 million resulting from aprepayment of royalties in connection with a previous divestiture and in 1996received cash proceeds of $6.3 million from the sale of two businesses.

9

FINANCING ACTIVITIES

Other significant sources and uses of cash over the last three years haveincluded borrowings, the issuance of common stock, cash dividends, stockrepurchases and the repayment of borrowings.

Common stock was issued upon the exercise of options granted under theCompany's stock option plans. The Company receives income tax benefits upon theexercise of certain of these options. Since 1995, funds received primarily fromthe exercise of options, together with these tax benefits, totaled $133.6million.

It is the Company's philosophy that its stockholders should benefitdirectly from the financial strength of its operations. Accordingly, the Companyhas increased dividend payments as earnings have risen. In 1998 however, theCompany did not increase its quarterly dividend rate and its stock repurchaseprogram had been suspended since June 1997 in view of the proposed resolution ofregulatory and litigation issues affecting the tobacco industry. In December1998, upon the execution of the Settlement Agreement, the Company resumed itsstock repurchase program. Also in December, the Board of Directors approved afirst quarter 1999 dividend of 42 cents per share. This equates to an indicatedannual rate of $1.68, and represents an increase of 3.7 percent.

Since 1995, the dividend rate has increased 24.6 percent reflecting anaverage annual increase of 7.8 percent. Total cash dividends paid by the Companyin 1998 were $301.1 million or 66.1 percent of net earnings. Cash dividends paidto stockholders have exceeded 50 percent of net earnings in each of the lastthree years. It is the Company's intention to moderate dividend increases in thefuture to better align the payout ratio closer to 50 percent of net earnings.The Company has paid cash dividends without interruption since 1912. Futuredividends depend on many factors, including internal estimates of futureperformance and the Company's need for funds. During the last three years, cashdividends distributed to stockholders amounted to $876.5 million, totaling 64.5percent of net earnings for the period.

The current stock repurchase program, as approved by the Board ofDirectors, began in 1996 and authorizes the Company to repurchase up to 20million shares of its common stock from time to time in open market ornegotiated transactions to be used in connection with employee benefit andcompensation plans and other corporate purposes. In December 1998, the Companyrepurchased 4.4 million shares at a cost of $151.6 million. As of December 31,1998, 13.6 million shares remained to be repurchased under the current program.

As a result of the suspension of the stock repurchase program forsubstantially all of 1998, the Company used excess cash to repay borrowings.Over the last three years the Company had net repayments on borrowings of $100million.

LIQUIDITY AND CAPITAL RESOURCES

In 1998, sources of cash exceeded uses of cash by $26.3 million. Cashgenerated from operating activities and proceeds received from the sale ofcertain commercial agricultural properties and a business, along with cash onhand at December 31, 1997 were used to meet the Company's cash requirements.These requirements were for raw material inventory, primarily seasonal purchasesof leaf tobacco for moist smokeless tobacco and cigars, as well as grapesharvested and purchased for the wine operations, quarterly dividend payments,capital projects and the stock repurchase program.

The Company currently maintains two revolving credit agreements totaling$350 million with a group of banks. The terms of these agreements provide for afive-year revolving credit facility in the amount of $262.5 million and a364-day revolving credit facility in the amount of $87.5 million. Thesefacilities will be used primarily as support for commercial paper issuances andcan also be used as direct bank financing. Of the $350 million available underits credit facilities, the Company has allocated $100 million to supportoutstanding commercial paper at December 31, 1998.



The ratio of current assets to current liabilities (current ratio) atDecember 31, 1998 was 2.6 to 1 and has averaged 2.3 to 1 over the last threeyears. The current ratio remained stable as compared to 1997 as increases ininventories were offset by higher accrued expenses. The Company's liquidityposition is enhanced by the fact that leaf inventories are carried at costscomputed under the last-in, first-out (LIFO) method. The

10

average costs of these inventories are $50.9 million more than the amount atwhich they are carried in the Consolidated Statement of Financial Position atDecember 31, 1998.

In 1999, projected leaf tobacco purchases will be slightly higher thanamounts expended in 1998. In addition, significant levels of cash will berequired for the stock repurchase program, dividend payments and capitalprojects.

In December 1998, the Board of Directors approved borrowing up to $1billion over five years to augment the Company's stock repurchase program andfor other corporate purposes. Additional credit facilities will be required inthe future to cover these additional borrowings and the Company is currentlyanalyzing appropriate additional debt financing vehicles. The Company intends tomaintain appropriate facilities to ensure access to credit markets providingsufficient financial resources and operational flexibility.

The percentage of total debt outstanding to stockholders' equity decreasedto 21.4 percent at December 31, 1998, from 25.2 percent at December 31, 1997.Slightly lower debt levels and an increase in stockholders' equity caused thepercentage to decline.

The Company anticipates that its operating cash requirements will be met byamounts generated from operating activities augmented by borrowings.

Stockholders' equity increased in 1998, as net earnings and common stockissued under the Company's stock option plans were partially offset by theeffects of dividend payments and the stock repurchase program.

At December 31, 1998, the return on average stockholders' equity declinedto 100.6 percent from 122.3 percent at December 31, 1997. In 1997 and 1996 thissame return was higher due to the level of stock repurchases in those years.

YEAR 2000 ISSUE

The year 2000 issue relates to computer system programs which may notproperly recognize the change in date years from 1999 to 2000. As a result ofthis time sensitivity of existing software, any business entity is at risk forpossible system failure or miscalculations causing disruptions of operations,including, among other things, a temporary inability to process transactions,send invoices, or engage in similar normal business activities.

Based on a risk assessment, the Company has developed plans to address theyear 2000 issue and is currently modifying or replacing critical computersystems to become year 2000 compliant. The Company's year 2000 plan includesboth information technology (IT) systems and non-IT systems and a riskassessment of its major vendors and customers. Major vendors and customers weresurveyed to determine their state of readiness and the potential implicationsthey may have on the Company's business. Site visits are being planned forcritical vendors and customers. Remediation and testing of critical business ITsystems are currently in process and these systems are expected to be year 2000compliant by June 30, 1999. The Company's most critical business system wasreplaced with year 2000 compliant software in the fourth quarter of 1998.Remediation and testing of non-IT systems will also continue, as necessary,during the first half of 1999.

Based on current information available, the Company estimates that the costto become year 2000 compliant will not be material.

Incomplete or untimely resolution of the year 2000 issue by the Company orcritically important customers or vendors could cause delays in the Company'sability to manufacture and ship its products, process transactions or engage insimilar normal business activities, which would have a material financial impacton the Company's operations. With the implementation of its year 2000 plan, theCompany believes the year 2000 issue should not pose any significant operationalproblems.

The Company is developing contingency plans in order to minimize thepotential disruption of business operations that may result if the Company, itsvendors or customers fail to become year 2000 compliant. The contingency plansmay include stockpiling or securing alternate sources of manufacturing supplies.



11

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 ("the Act") provides asafe harbor for forward-looking information made on behalf of the Company. Allstatements, other than statements of historical facts, which address activities,actions or new brand introductions that the Company expects or anticipates willor may occur in the future, including such things as expansion and growth of theCompany's operations and other such matters are forward-looking statements. Totake advantage of the safe harbor provided by the Act, the Company isidentifying certain factors that could cause actual results to differ materiallyfrom those expressed in any forward-looking statements made by the Company.

Any one, or a combination, of these factors could materially affect theresults of the Company's operations. These factors include competitivepressures, changes in consumer preferences, wholesaler ordering patterns,consumer acceptance of new product introductions and other marketing and salesinitiatives, legal and regulatory initiatives (including those described underItems 1 and 3 of the Company's Annual Report on Form 10-K and in the Form 8-Ksand in the quarterly Form 10-Qs), and conditions in the capital markets.Forward-looking statements made by the Company are based on knowledge of itsbusiness and the environment in which it operates, but because of the factorslisted above, as well as other factors beyond the control of the Company, actualresults may differ from those in the forward-looking statements.

GRAPHICAL INFORMATION INCLUDED IN EXHIBIT 13 (ITEM 7) IS DESCRIBED BELOW:

(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS AND PERCENTAGES)

The following are bar graphs:

Consolidated Net Sales: 1996 -- $1,372, 1997 -- $1,402 and1998 -- $1,423

Pretax Margins: 1996 -- 54.3%, 1997 -- 50.2% and 1998 -- 51.6%

Diluted Earnings Per Share: 1996 -- $2.44, 1997 -- $2.37 and1998 -- $2.44

Tobacco Sales: 1996 -- $1,168, 1997 -- $1,182 and 1998 -- $1,246

Wine Sales: 1996 -- $122, 1997 -- $145 and 1998 -- $149

Other Sales: 1996 -- $82, 1997 -- $75 and 1998 -- $29

Net Cash Provided by Operating Activities: 1996 -- $439, 1997 -- $413and 1998 -- $466

Return on Average Stockholders' Equity: 1996 -- 161.7%, 1997 -- 122.3%and 1998 -- 100.6%

Total Debt to Stockholders' Equity: 1996 -- 88.9%, 1997 -- 25.2% and1998 -- 21.4%

Dividends Per Share: 1996 -- $1.48, 1997 -- $1.62 and 1998 -- $1.62

The following bar graph illustrates the relationship between net earningsand dividends paid:

Net Earnings: 1996 -- $464, 1997 -- $439 and 1998 -- $455

Dividends Paid: 1996 -- $277, 1997 -- $298 and 1998 -- $301

A pie chart illustrating the percentage of capital expenditures byoperating unit for 1996 -- 1998:

Tobacco 54%, Wine 36% and Other 10%.

12

EXHIBIT 13 - (CONTINUED)(ITEMS 5 AND 8)

QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE><CAPTION>

FIRST SECOND THIRD FOURTH YEAR-------- -------- -------- -------- ----------

<S> <C> <C> <C> <C> <C>1998Net sales.......................... $340,164 $357,390 $354,146 $371,546 $1,423,246Gross profit....................... 272,296 288,285 285,313 293,836 1,139,730



Net earnings....................... 111,977 119,140 117,753 106,409 455,279Basic earnings per share........... .60 .64 .63 .57 2.45Diluted earnings per share......... .60 .64 .63 .57 2.44Dividends per share................ .40 1/2 .40 1/2 .40 1/2 .40 1/2 1.62Market price per share:

High............................. 36 7/8 31 7/88 31 5/16 35 5/8 36 7/88Low.............................. 31 7/8 24 9/16 25 5/16 28 5/8 24 9/16

----------------------------------------------------------

1997Net sales.......................... $334,616 $355,764 $360,582 $350,756 $1,401,718Gross profit....................... 269,526 284,406 286,008 269,836 1,109,776Net earnings....................... 101,206 116,889 114,222 106,821 439,138Basic earnings per share........... .55 .64 .62 .58 2.39Diluted earnings per share......... .54 .63 .62 .57 2.37Dividends per share................ .40 1/2 .40 1/2 .40 1/2 .40 1/2 1.62Market price per share:

High............................. 34 1/2 30 1/8 31 3/4 36 15/16 36 15/16Low.............................. 26 3/4 25 1/2 26 1/8 28 1/8 25 1/28

</TABLE>

---------------

The first quarter of 1998 includes a pretax gain of $10.7 million (4 cents perdiluted share) from the sale of certain commercial agricultural properties andthe Company's video entertainment subsidiary.

The first, third and fourth quarters of 1998 include pretax charges of $4.6million, $3.1 million and $24 million (2 cents, 1 cent and 8 cents per dilutedshare), respectively, associated with the settlement of health care costreimbursement litigation. (See Contingencies Note.)

The first quarter of 1997 includes a pretax charge of $6.6 million (2 cents perdiluted share) for the present value of future obligations arising underemployment contracts with two former executive officers.

The third quarter of 1997 includes a pretax charge of $3 million (1 cent perdiluted share) resulting from the Company's settlement with the state of Floridaregarding health care cost reimbursement litigation.

The Company's shares trade on the New York Stock Exchange and the PacificExchange, ticker symbol -- UST. The number of stockholders of record at December31, 1998 was 9,668.

13

EXHIBIT 13 -- (CONTINUED)(ITEM 8)

USTCONSOLIDATED STATEMENT OF EARNINGS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31,--------------------------------------

1998 1997 1996---------- ---------- ----------

<S> <C> <C> <C>NET SALES.............................................. $1,423,246 $1,401,718 $1,371,705COSTS AND EXPENSES

Cost of products sold................................ 257,155 265,193 246,381Excise taxes......................................... 26,361 26,749 26,375Selling, advertising and administrative.............. 407,452 398,468 348,059Interest (income) expense, net....................... (2,187) 7,451 6,364

---------- ---------- ----------TOTAL COSTS AND EXPENSES............................... 688,781 697,861 627,179

---------- ---------- ----------EARNINGS BEFORE INCOME TAXES........................... 734,465 703,857 744,526

---------- ---------- ----------INCOME TAXES........................................... 279,186 264,719 280,527

---------- ---------- ----------NET EARNINGS........................................... $ 455,279 $ 439,138 $ 463,999

========== ========== ==========NET EARNINGS PER SHARE

Basic................................................ $2.45 $2.39 $2.48Diluted.............................................. $2.44 $2.37 $2.44

AVERAGE NUMBER OF SHARESBasic................................................ 185,544 183,931 187,386Diluted.............................................. 186,880 185,602 190,067

</TABLE>




14

UST

CONSOLIDATED STATEMENT OF FINANCIAL POSITION(IN THOUSANDS)

<TABLE><CAPTION>

DECEMBER 31------------------------

1998 1997---------- ----------

<S> <C> <C>ASSETSCurrent assets

Cash and cash equivalents................................. $ 33,210 $ 6,927Accounts receivable....................................... 63,269 67,702Inventories............................................... 372,634 319,666Prepaid expenses and other current assets................. 24,653 31,753Deferred income taxes..................................... 13,447 15,796

---------- ----------Total current assets................................... 507,213 441,844

---------- ----------Property, plant and equipment, net.......................... 338,695 326,709Other assets................................................ 67,411 57,810

---------- ----------Total assets...................................... $ 913,319 $ 826,363

========== ==========LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities

Short-term obligations.................................... $ -- $ 10,000Accounts payable and accrued expenses..................... 156,699 119,345Income taxes.............................................. 40,617 37,174

---------- ----------Total current liabilities......................... 197,316 166,519

---------- ----------Long-term debt.............................................. 100,000 100,000Postretirement benefits other than pensions................. 78,567 73,868Other liabilities........................................... 69,143 49,181Contingencies (see note).................................... -- --

---------- ----------Total liabilities................................. 445,026 389,568

---------- ----------STOCKHOLDERS' EQUITY

Capital stock............................................. 104,048 103,307Additional paid-in capital................................ 512,089 474,661Retained earnings......................................... 684,489 536,014Accumulated other comprehensive loss...................... (18,420) (8,632)

---------- ----------1,282,206 1,105,350

Less cost of shares in treasury........................... 813,913 668,555---------- ----------

Total stockholders' equity........................ 468,293 436,795---------- ----------

Total liabilities and stockholders' equity........ $ 913,319 $ 826,363========== ==========

</TABLE>


15

UST

CONSOLIDATED STATEMENT OF CASH FLOWS(IN THOUSANDS)

<TABLE><CAPTION>

YEAR ENDED DECEMBER 31-----------------------------------

1998 1997 1996--------- --------- ---------

<S> <C> <C> <C>OPERATING ACTIVITIES

Net earnings........................................ $ 455,279 $ 439,138 $ 463,999Adjustments to reconcile net earnings to cash

provided by operating activities:Depreciation and amortization.................... 31,726 30,491 28,318



Deferred income taxes............................ 236 (8,779) 2,412Prepayment of royalties.......................... -- (25,732) --Write-down of production costs and prepaid

assets......................................... -- 24,089 --Gain on sale of property, plant and equipment.... (7,840) -- --Gain on sale of a business....................... (2,820) -- --Changes in operating assets and liabilities:

Accounts receivable............................ (2,918) 8,430 (11,128)Inventories.................................... (57,087) (56,146) (18,494)Prepaid expenses and other assets.............. 2,084 (1,884) (9,576)Accounts payable, accrued expenses and other

liabilities................................. 43,538 8,743 9,895Income taxes payable........................... 3,443 (5,744) (26,038)

--------- --------- ---------Net cash provided by operating activities... 465,641 412,606 439,388

--------- --------- ---------INVESTING ACTIVITIES

Purchases of property, plant and equipment.......... (56,266) (58,159) (44,713)Dispositions of property, plant and equipment....... 20,749 2,409 7,964Proceeds from the prepayment of royalties........... -- 25,732 --Proceeds from the sale of businesses................ 20,152 -- 6,256

--------- --------- ---------Net cash used in investing activities....... (15,365) (30,018) (30,493)

--------- --------- ---------FINANCING ACTIVITIES

Proceeds from borrowings............................ -- 10,000 150,000Repayment of borrowings............................. (10,000) (150,000) (100,000)Proceeds from the issuance of stock................. 38,769 53,665 41,215Dividends paid...................................... (301,145) (298,059) (277,302)Stock repurchased................................... (151,617) (45,719) (237,759)

--------- --------- ---------Net cash used in financing activities....... (423,993) (430,113) (423,846)

--------- --------- ---------Increase (decrease) in cash and cash

equivalents............................... 26,283 (47,525) (14,951)Cash and cash equivalents at beginning of

year...................................... 6,927 54,452 69,403--------- --------- ---------

Cash and cash equivalents at end of year.... $ 33,210 $ 6,927 $ 54,452========= ========= =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the year for:

Income taxes..................................... $266,745 $268,158 $290,024Interest......................................... 5,935 8,718 7,151

</TABLE>


16

UST

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE><CAPTION>

ACCUMULATEDADDITIONAL OTHER TOTAL

COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'STOCK CAPITAL EARNINGS LOSS STOCK EQUITY

-------- ---------- --------- ------------- --------- -------------<S> <C> <C> <C> <C> <C> <C>Balance at December 31, 1995.............. $101,040 $373,935 $ 208,238 $ (5,355) $(385,077) $ 292,781Comprehensive income:

Net earnings............................ -- -- 463,999 -- -- 463,999Other comprehensive loss, net of tax:

Foreign currency translationadjustment.......................... -- -- -- (38) -- (38)

Minimum pension liabilityadjustment.......................... -- -- -- (1,851) -- (1,851)

---------Other comprehensive loss................ (1,889)

---------Comprehensive income.................. 462,110

Cash dividends -- $1.48 per share......... -- -- (277,302) -- -- (277,302)Exercise of stock options -- 2,075,500

shares.................................. 1,037 25,895 -- -- -- 26,932Income tax benefits, net of increase in

receivables from exercise of stockoptions................................. -- 13,709 -- -- -- 13,709

Stock repurchased fortreasury -- 7,405,800 shares............ -- -- -- -- (237,759) (237,759)



Put option proceeds and obligations....... -- 735 -- -- -- 735-------- -------- --------- -------- --------- ---------

Balance at December 31, 1996.............. 102,077 414,274 394,935 (7,244) (622,836) 281,206Comprehensive income:







shares.................................. 1,230 36,645 -- -- -- 37,875Income tax benefits and decrease in



Put option obligations, net of proceeds... -- 7,786 -- -- -- 7,786-------- -------- --------- -------- --------- ---------

Balance at December 31, 1997.............. 103,307 474,661 536,014 (8,632) (668,555) 436,795Comprehensive income:







shares.................................. 841 29,759 -- -- -- 30,600Income tax benefits, net of increase in



Retirement of treasury stock -- 200,000shares.................................. (100) (500) (5,659) -- 6,259 --

-------- -------- --------- -------- --------- ---------Balance at December 31, 1998.............. $104,048 $512,089 $ 684,489 $(18,420) $(813,913) $ 468,293

======== ======== ========= ======== ========= =========</TABLE>


17

UST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements have been prepared in accordance withgenerally accepted accounting principles and, as such, include amounts based onjudgments and estimates made by management, which may differ from actualresults. The consolidated financial statements include the accounts of theCompany and all of its subsidiaries after the elimination of intercompanyaccounts and transactions. An investment in a limited partnership is accountedfor by the equity method and is carried at an amount equal to the Company'sequity in the underlying net assets of the limited partnership.

Prior year financial statements have been revised to conform to the 1998presentation.

REVENUE RECOGNITION

Revenue from sales of smokeless tobacco products are recognized when titlepasses, which is when products are received by the customer. Revenue from salesof wine products are recognized when title passes to the customer, which is whenproducts are shipped.



CASH AND CASH EQUIVALENTS

Cash equivalents are amounts invested in highly liquid instruments withmaturities of three months or less when acquired.

INVENTORIES

Inventories are stated at lower of cost or market. The major portion ofleaf tobacco costs is determined by the last-in, first-out (LIFO) method. Thecost of the remaining inventories is determined by the first-in, first-out(FIFO) and average cost methods. Leaf tobacco and wine inventories are includedin current assets as a standard industry practice, notwithstanding the fact thatsuch inventories are carried for several years for the purpose of curing andaging.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost. Depreciation is computedby the straight-line method based on the estimated useful lives of the assetswhich range from 5 to 40 years. Long-lived assets are reviewed for impairmentwhenever facts and circumstances indicate that the carrying amount may not berecoverable.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of amounts reported in the consolidated financialstatements have been determined by using available market information andappropriate valuation methodologies. All current assets and current liabilitiesare carried at their fair value, which approximates market value, because oftheir short-term nature. The fair value of long-term assets and long-termliabilities approximates their carrying value.

STOCK OPTIONS

The Company applies the recognition and measurement provisions ofAccounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issuedto Employees," and the disclosure provisions of Statement of FinancialAccounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"in reporting for stock options.

18UST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

Income taxes are provided on all revenue and expense items included in theConsolidated Statement of Earnings, regardless of the period in which such itemsare recognized for income tax purposes, adjusted for items representingpermanent differences between pretax accounting income and taxable income.Deferred income taxes result from the future tax consequences associated withtemporary differences between the carrying amounts of assets and liabilities fortax and financial reporting purposes.

EARNINGS PER SHARE

Basic earnings per share is calculated by dividing net earnings by theweighted-average number of common shares outstanding during the period. Thediluted earnings per share computation includes the effect of shares which wouldbe issuable upon the exercise of outstanding stock options, reduced by thenumber of shares which are assumed to be purchased by the Company from theresulting proceeds at the average market price during the period.

INVENTORIES

<TABLE><CAPTION>

DECEMBER 31--------------------

1998 1997-------- --------

<S> <C> <C>Leaf tobacco................................................ $178,078 $152,869Products in process......................................... 110,752 96,314Finished goods.............................................. 66,688 52,406Other materials and supplies................................ 17,116 18,077

-------- --------$372,634 $319,666======== ========

</TABLE>



At December 31, 1998 and 1997, $150.3 million and $136.9 million,respectively, of leaf tobacco inventories were valued using the LIFO method. Theaverage costs of these inventories are greater than the amounts at which theseinventories are carried in the Consolidated Statement of Financial Position by$50.9 million and $47.4 million, respectively.

PROPERTY, PLANT AND EQUIPMENT, NET

<TABLE><CAPTION>

DECEMBER 31--------------------

1998 1997-------- --------

<S> <C> <C>Land........................................................ $ 22,828 $ 29,586Buildings................................................... 234,559 224,889Machinery and equipment..................................... 332,603 310,019

-------- --------589,990 564,494

Less allowances for depreciation............................ 251,295 237,785-------- --------$338,695 $326,709======== ========

</TABLE>

Depreciation expense was $31.4 million for 1998, $30.1 million for 1997 and$28.1 million for 1996.

The Company also leases certain property and equipment under variousoperating lease arrangements. Annual commitments under these leases, whichaverage $4.3 million per year through the year 2003, extend through 2030 andtotal $37.1 million. Lease expense for the years 1998, 1997 and 1996 was $9.5million, $6.4 million and $5.7 million, respectively.

19UST


OTHER ASSETS

<TABLE><CAPTION>

DECEMBER 31------------------1998 1997

------- -------<S> <C> <C>Prepaid pension costs....................................... $28,884 $27,947Limited partnership investment.............................. 11,166 11,177Deferred income taxes....................................... 9,178 1,795Other....................................................... 18,183 16,891

------- -------$67,411 $57,810======= =======

</TABLE>

The limited partnership investment owns and leases a cogeneration facility.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE><CAPTION>

DECEMBER 31--------------------

1998 1997-------- --------

<S> <C> <C>Trade accounts payable...................................... $ 37,281 $ 34,150Employee compensation and benefits.......................... 57,415 58,192Settlement charges.......................................... 18,703 --Other accrued expenses...................................... 43,300 27,003

-------- --------$156,699 $119,345======== ========

</TABLE>

REVOLVING CREDIT AGREEMENTS

The Company has two revolving credit agreements totaling $350 million withvarious banks. The terms of the agreements provide for a five-year revolvingcredit facility in the amount of $262.5 million, which expires in November 2001,



and a 364-day revolving credit facility, renewed in November 1998 in the amountof $87.5 million, which expires in November 1999. The Company may borrow fundsand elect to pay interest under the "Base Rate," "Competitive Bid" or"Eurodollar" interest rate provisions of the agreements. Principal repaymentsare optional during the revolving credit periods. The agreements requirefacility fees which are not significant, as well as maintenance of certainfinancial ratios.

At December 31, 1998, the Company had $100 million outstanding undercommercial paper borrowings, all of which was classified as long-term debt. TheCompany's revolving credit agreements support these borrowings which areintended to be refinanced on a long-term basis, either through continuedcommercial paper borrowings or its revolving credit facilities. Commercial paperborrowings at December 31, 1998 had a weighted-average interest rate of 5.9percent. At December 31, 1997, the Company had $110 million outstanding undercommercial paper borrowings, of which $100 million was classified as long-termdebt. Commercial paper borrowings at December 31, 1997 had a weighted-averageinterest rate of 5.8 percent.

OTHER LIABILITIES

Other liabilities include the noncurrent portion of the pension liabilitiesat December 31, 1998 and 1997 of $65.1 million and $45.5 million, respectively.(See Employee Benefit and Compensation Plans Note.)

In 1997, the Company had sold put options which entitled the holder to sella specific number of shares of common stock to the Company at a predeterminedprice. The Company's put option program was suspended during 1997, and theCompany had no liability or shares outstanding under its put option program atDecember 31, 1998 or 1997.

20UST


CAPITAL STOCK

The Company has two classes of capital stock, preferred stock and commonstock. Preferred stock carries a par value of $.10 and no shares have beenissued. Common stock carries a $.50 par value. Authorized preferred stock is 10million shares and authorized common stock is 600 million shares.

In 1998 and 1997, the Company repurchased 4.4 million and 1.5 millionshares, respectively, pursuant to its stock repurchase program authorized by theBoard of Directors in 1996. The program allows the Company to repurchase up to20 million shares of its common stock from time to time in open market ornegotiated transactions for use in connection with employee benefit programs andother corporate purposes. As of December 31, 1998, 6.4 million shares of the 20million authorized have been repurchased. The Company had suspended its stockrepurchase program from June 1997 through November 1998, due to the proposedresolution of regulatory and litigation issues affecting the tobacco industry.

Common stock issued at December 31, 1998 and 1997 was 208,095,836 sharesand 206,614,236 shares, respectively. Treasury shares held at December 31, 1998and 1997 was 26,008,500 shares and 21,825,000 shares, respectively.

In December 1998, the Board of Directors approved the NonemployeeDirectors' Restricted Stock Award Plan. Under this Plan, up to 0.2 millionshares of the Company's common stock may be granted to nonemployee directors inaccordance with the provisions of the Plan, and accordingly, 0.2 million sharesof the Company's treasury stock has been cancelled and reserved for use uponissuance of stock for this Plan.

Events causing changes in the issued and outstanding shares are describedin the Consolidated Statement of Changes in Stockholders' Equity.

STOCK OPTIONS

The Company maintains three stock option plans, the 1992 and 1982 StockOption Plans and a Nonemployee Directors' Stock Option Plan. The Companyaccounts for stock options in accordance with APB Opinion No. 25. Under theCompany's current plans, options may be granted at not less than the fair marketvalue on the date of grant and therefore no compensation expense is recognizedfor the stock options granted.

The Black-Scholes option pricing model was developed for use in estimatingthe fair value of traded options which have no vesting restrictions and arefully transferable. In addition, option pricing models require the input ofhighly subjective assumptions including the expected stock price volatility.Because the Company's employee stock options have characteristics significantlydifferent from those of traded options and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management's



opinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its stock options.

21UST


Consistent with the method described in SFAS No. 123, if compensationexpense for the Company's plans had been determined based on the fair value atthe grant dates for awards under its plans, net earnings and earnings per sharewould have been reduced to the pro forma amounts indicated below:

<TABLE><CAPTION>

1998 1997 1996-------- -------- --------

<S> <C> <C> <C>Net earnings:

As reported.............................................. $455,279 $439,138 $463,999Pro forma................................................ $449,445 $436,106 $461,059

Basic earnings per share:As reported.............................................. $2.45 $2.39 $2.48Pro forma................................................ $2.42 $2.37 $2.46

Diluted earnings per share:As reported.............................................. $2.44 $2.37 $2.44Pro forma................................................ $2.41 $2.35 $2.42

</TABLE>

In accordance with the provisions of SFAS No. 123, the pro formadisclosures include only the effect of stock options granted since 1995.

The fair value of each option grant, for pro forma disclosure purposes, wasestimated on the date of grant using the modified Black-Scholes option pricingmodel with the following weighted-average assumptions:

<TABLE><CAPTION>

1998 1997 1996--------- --------- ---------

<S> <C> <C> <C>Expected dividend yield............................ 4.6% 4.4% 4.4%Risk-free interest rate............................ 5.6% 5.9% 6.6%Expected volatility................................ 22.0% 29.7% 18.0%Expected life of option............................ 6.5 years 6.5 years 6.5 years</TABLE>

Under the 1992 Stock Option Plan, 10.4 million shares were authorized forgrant and options first become exercisable, in ratable installments orotherwise, over a period of one to five years from the date of grant and may beexercised up to a maximum of ten years from the date of grant using variouspayment methods. Under the Nonemployee Directors' Stock Option Plan, 0.2 millionshares were authorized for grant and options first become exercisable six monthsfrom the date of grant and may be exercisable up to a maximum of ten years fromthe date of grant and must be paid in full at the time of the exercise.

At December 31, 1998, 1,712,200 shares were available for grant under the1992 Stock Option Plan and 156,500 shares were available for grant under theNonemployee Directors' Stock Option Plan, while no shares were available underthe 1982 Stock Option Plan.

Receivables from the exercise of options in the amount of $10.6 million in1998, $9.5 million in 1997 and $12.1 million in 1996 have been deducted fromstockholders' equity.

22UST


The following table presents a summary of the Company's stock optionactivity and related information for the years ended December 31:

<TABLE><CAPTION>

1998 1997 1996----------------------------- ----------------------------- -----------------------------

NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGEOF EXERCISE OF EXERCISE OF EXERCISE

OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE---------- ---------------- ---------- ---------------- ---------- ----------------

<S> <C> <C> <C> <C> <C> <C>Outstanding at



beginning ofyear............... 14,886,800 $26.78 15,782,600 $24.57 16,321,700 $22.20

Granted.............. 1,359,500 30.64 1,861,600 31.39 1,567,800 33.93Exercised............ (1,681,600) 18.20 (2,459,500) 15.40 (2,075,500) 12.98Forfeited............ (109,300) 31.81 (297,900) 32.45 (30,600) 29.61Expired.............. (800) 7.69 -- -- (800) 4.23

---------- ------ ---------- ------ ---------- ------Outstanding at end of

year............... 14,454,600 $28.10 14,886,800 $26.78 15,782,600 $24.57========== ====== ========== ====== ========== ======

Exercisable at end ofyear............... 11,637,500 $27.31 11,932,700 $25.49 13,020,600 $22.96

========== ====== ========== ====== ========== ======Weighted-average fair

value of optionsgranted during theyear............... $ 5.42 $ 7.58 $ 5.95

====== ====== ======</TABLE>

The following table summarizes information about stock options outstandingat December 31, 1998:

<TABLE><CAPTION>

OPTIONS OUTSTANDING OPTIONS EXERCISABLE------------------------------------------------ ------------------------------

NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGERANGE OF OF REMAINING EXERCISE OF EXERCISE

EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS PRICE--------------- ---------- ---------------- ---------------- ---------- ----------------<S> <C> <C> <C> <C> <C>$13.78 -- 18.28 1,439,100 1.3 years $14.48 1,439,100 $14.4824.19 -- 35.25 13,015,500 5.7 years 29.60 10,198,400 29.12

---------- ----------$13.78 -- 35.25 14,454,600 5.3 years $28.10 11,637,500 $27.31

========== ====== ========== ======</TABLE>

EMPLOYEE BENEFIT AND COMPENSATION PLANS

In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures AboutPensions and Other Postretirement Benefits," which changed the Company'sreporting requirements for its pension and postretirement welfare benefit plans.

The Company and its subsidiaries maintain a number of noncontributorydefined benefit pension plans covering substantially all employees over age 21with at least one year of service.

The Company and certain of its subsidiaries also maintain a number ofpostretirement welfare benefit plans which provide certain medical and lifeinsurance benefits to substantially all full-time employees who have attainedcertain age and service requirements upon retirement. The health care benefitsare subject to deductibles, co-insurance and in some cases flat dollarcontributions which vary by plan, age and service at retirement. All lifeinsurance coverage is noncontributory.

23UST


The following table represents a reconciliation of the plans at December31:

<TABLE><CAPTION>

DECEMBER 31------------------------------------------------

POSTRETIREMENT BENEFITSPENSION PLANS OTHER THAN PENSIONS

-------------------- ------------------------1998 1997 1998 1997

-------- -------- ---------- ----------<S> <C> <C> <C> <C>CHANGE IN BENEFIT OBLIGATION

Benefit obligation at beginning of year....... $284,164 $246,081 $ 59,951 $ 58,016Service cost.................................. 10,195 8,744 3,349 2,857Interest cost................................. 20,833 18,761 4,384 4,003Plan participants' contributions.............. -- -- 71 99Plan amendments............................... -- 102 -- --Actuarial loss/(gain)......................... 42,063 24,377 9,481 (2,734)Benefits paid................................. (15,243) (13,901) (2,680) (2,290)



-------- -------- -------- --------Benefit obligation at end of year............. $342,012 $284,164 $ 74,556 $ 59,951

-------- -------- -------- --------CHANGE IN PLAN ASSETS

Fair value of plan assets at beginning ofyear....................................... $279,733 $242,230 -- --

Actual return on plan assets.................. 25,868 47,687 -- --Employer contributions........................ 5,377 4,387 -- --Benefits paid................................. (15,243) (13,901) -- --Administrative expenses....................... (574) (670) -- --

-------- -------- -------- --------Fair value of plan assets at end of year...... $295,161 $279,733 -- --

-------- -------- -------- --------FUNDED STATUS

Funded status at end of year.................. $(46,851) $ (4,431) $(74,556) $(59,951)Unrecognized actuarial loss/(gain)............ 36,567 (1,061) (3,684) (13,557)Unrecognized prior service cost............... (1,174) (1,287) (327) (360)Unrecognized transition obligation............ 21 (226) -- --

-------- -------- -------- --------Accrued benefit cost.......................... $(11,437) $ (7,005) $(78,567) $(73,868)

-------- -------- -------- --------AMOUNTS RECOGNIZED IN THE CONSOLIDATED STATEMENT

OF FINANCIAL POSITION:Prepaid benefit cost.......................... $ 28,884 $ 27,947 $ -- $ --Accrued benefit liability..................... (69,768) (49,561) (78,567) (73,868)Intangible asset.............................. 3,783 3,076 -- --Accumulated other comprehensive loss.......... 25,664 11,533 -- --

-------- -------- -------- --------Net amount recognized......................... $(11,437) $ (7,005) $(78,567) $(73,868)

======== ======== ======== ========</TABLE>

The weighted-average assumptions used for the year ended December 31 were:

<TABLE><CAPTION>


-------------------- ------------------------1998 1997 1998 1997

-------- -------- ---------- ----------<S> <C> <C> <C> <C>Discount rate................................... 6.50% 7.25% 6.50% 7.25%Expected return on plan assets.................. 8.75% 9.25% -- --Rate of compensation increase................... 5.00% 5.00% -- --</TABLE>

The rate of increase in per capita costs of covered health care benefits isassumed to be 8.3 percent for 1999 and to decrease gradually to 4.5 percent bythe year 2005 and remain at that level thereafter.

24UST


Net periodic benefit cost for the year ended December 31 includes thefollowing components:

<TABLE><CAPTION>


-------------------------------- --------------------------1998 1997 1996 1998 1997 1996

-------- -------- -------- ------ ------ ------<S> <C> <C> <C> <C> <C> <C>Service cost................... $ 10,195 $ 8,744 $ 8,594 $3,349 $2,857 $2,989Interest cost.................. 20,833 18,761 17,098 4,384 4,003 4,162Expected return on plan

assets....................... (23,036) (21,110) (19,608) -- -- --Amortization of unrecognized

transition obligation........ (247) (247) (247) -- -- --Amortization of prior service

cost......................... (113) (133) (142) (33) (33) --Recognized actuarial

loss/(gain).................. 2,176 1,254 1,192 (392) (747) (190)-------- -------- -------- ------ ------ ------

Net periodic benefit cost...... $ 9,808 $ 7,269 $ 6,887 $7,308 $6,080 $6,961======== ======== ======== ====== ====== ======

</TABLE>

The projected benefit obligation, the accumulated benefit obligation and



the fair value of plan assets for the pension plans with accumulated benefitobligations in excess of plan assets were $82.4 million, $72.8 million and $5million, respectively, as of December 31, 1998, and $63.4 million, $51.4 millionand $4 million, respectively, as of December 31, 1997.

The assumed health care cost trend rates have a significant effect on theamounts reported for the health care plans. To illustrate, a one-percentagepoint increase in the assumed health care cost trend rate would increase theaccumulated postretirement benefit obligation as of December 31, 1998 byapproximately $11 million and increase the service and interest cost componentsof expense by approximately $1.4 million. A one-percentage point decrease in theassumed health care trend rate would have decreased the accumulatedpostretirement benefit obligation at December 31, 1998 by approximately $9.2million and decreased the service and interest components of expense byapproximately $1.2 million.

Plan assets of the Company's pension plans include marketable equitysecurities, including common stock of the Company, and corporate and governmentdebt securities. At December 31, 1998 and 1997, the fund held 1.3 million sharesof the Company's common stock having a market value of $44.6 million as ofDecember 31, 1998 and $47.3 million as of December 31, 1997. Dividends paid onshares held by the fund were $2.1 million in 1998 and 1997.

The Company sponsors a defined contribution plan (Employees' Savings Plan)covering substantially all of its employees. The Plan requires one year ofservice prior to eligibility for participation. Company contributions are basedupon participant contributions. The expense was $4.4 million in 1998, $4 millionin 1997 and $3.9 million in 1996.

The Company has an Incentive Compensation Plan which provides for incentivepayments to designated employees based on stated percentages of net earnings asdefined in the Plan. Expenses under the Plan amounted to $38.5 million in 1998,$36.9 million in 1997 and $39 million in 1996.

25UST


INCOME TAXES

The income tax provision (benefit) consists of the following:

<TABLE><CAPTION>

1998 1997 1996-------- -------- --------

<S> <C> <C> <C>Current:

Federal.......................................... $247,526 $247,224 $245,386State and local.................................. 31,424 26,274 32,729

-------- -------- --------Total current............................ 278,950 273,498 278,115

-------- -------- --------Deferred:

Federal.......................................... 346 (6,807) 1,927State and local.................................. (110) (1,972) 485

-------- -------- --------Total deferred........................... 236 (8,779) 2,412

-------- -------- --------$279,186 $264,719 $280,527======== ======== ========

</TABLE>

The 1998, 1997 and 1996 current tax provisions reflect the reversal ofcertain tax reserves. The 1996 current federal tax provision included a taxbenefit from the sale of a subsidiary. In addition, the current tax provisionsdo not reflect $9.3 million, $13.4 million and $14.5 million for 1998, 1997 and1996, respectively, of tax benefits arising from the exercise of stock options.These amounts were credited directly to additional paid-in capital.

The deferred tax provision (benefit) amounts for 1998, 1997 and 1996 do notreflect the tax effects resulting from the additional minimum pension liabilityadjustments required by SFAS No. 87, "Employers' Accounting for Pensions" andSFAS No. 52, "Foreign Currency Translation."

Deferred income taxes arise from temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes.

Significant components of deferred tax assets and liabilities as ofDecember 31 are as follows:



<TABLE><CAPTION>

1998 1997------- -------

<S> <C> <C>Deferred tax assets:

Postretirement benefits other than pensions............... $27,498 $25,854Other accrued liabilities................................. 24,747 28,629Accrued pension liabilities............................... 24,419 17,346All other, net............................................ 5,235 4,633

------- -------Total deferred tax assets......................... 81,899 76,462

------- -------Deferred tax liabilities:

Depreciation.............................................. 42,798 41,593Investment in limited partnerships........................ 6,367 7,497Prepaid pension assets.................................... 10,109 9,781

------- -------Total deferred tax liabilities.................... 59,274 58,871

------- -------Net deferred tax assets..................................... $22,625 $17,591

======= =======</TABLE>

26UST


Differences between the Company's effective tax rate and the U.S. federalstatutory income tax rate are explained as follows:

<TABLE><CAPTION>

1998 1997 1996----- ----- -----

<S> <C> <C> <C>U.S. federal statutory income tax rate...................... 35.0% 35.0% 35.0%State and local taxes, net of federal benefit............... 2.8 2.2 2.9Other, net.................................................. .2 .4 (.2)

----- ----- -----38.0% 37.6% 37.7%

===== ===== =====</TABLE>

ADVERTISING COSTS

The Company expenses the production costs of advertising in the period inwhich they are incurred. Advertising expenses were $68.7 million in 1998, $75.7million in 1997 and $66 million in 1996. At December 31, 1998 and 1997, $5million and $8.2 million, respectively, of advertising related costs areincluded in prepaid expenses and other current assets.

INTEREST (INCOME) EXPENSE, NET

Interest (income) expense, net, is comprised of income from cashequivalents and capitalized interest and expense associated with short-termobligations and long-term debt.

<TABLE><CAPTION>

1998 1997 1996------- ------- ------

<S> <C> <C> <C>Income from cash equivalents........................... $(6,602) $ (951) $ (921)Capitalized interest................................... (1,119) (342) --

------- ------- ------(7,721) (1,293) (921)

------- ------- ------Short-term obligations................................. 16 3,112 1,853Long-term debt......................................... 5,518 5,632 5,432

------- ------- ------$(2,187) $ 7,451 $6,364======= ======= ======

</TABLE>

ACCUMULATED OTHER COMPREHENSIVE LOSS

In 1998, the Company adopted SFAS No. 130, "Reporting ComprehensiveIncome," which establishes rules for the reporting of comprehensive income andits components. The main components of comprehensive income that relate to theCompany are net earnings, foreign currency translation adjustments, andadditional minimum pension liability adjustments, all of which are presented in



the Consolidated Statement of Changes in Stockholders' Equity. Prior toadoption, the pension adjustment was included in stockholders' equity and thetranslation adjustment was included in other assets. The Consolidated Statementsof Financial Position and Changes in Stockholders' Equity have been revised toconform to the requirements of SFAS No. 130.

27UST


Accumulated other comprehensive loss consists of the following components,net of taxes:

<TABLE><CAPTION>

FOREIGN MINIMUMCURRENCY PENSION

TRANSLATION LIABILITYADJUSTMENT ADJUSTMENT----------- ----------

<S> <C> <C>Balance at December 31, 1995................................ $ (776) $ (4,579)

Net change for the year................................... (38) (1,851)------- --------

Balance at December 31, 1996................................ (814) (6,430)Net change for the year................................... (322) (1,066)

------- --------Balance at December 31, 1997................................ (1,136) (7,496)

Net change for the year................................... (602) (9,186)------- --------

Balance at December 31, 1998................................ $(1,738) $(16,682)======= ========

</TABLE>

The net change for the year in foreign currency translation adjustment isreflected net of tax benefits of $.3 million, $.2 million and $.02 million in1998, 1997 and 1996, respectively. The net change for the year in minimumpension liability adjustment is reflected net of tax benefits of $4.9 million,$.6 million and $1 million in 1998, 1997 and 1996, respectively.

EARNINGS PER SHARE

The following table presents the computation of basic and diluted earningsper share:

<TABLE><CAPTION>

1998 1997 1996-------- -------- --------

<S> <C> <C> <C>Numerator:

Net earnings..................................... $455,279 $439,138 $463,999======== ======== ========

Denominator:Denominator for basic earnings per share -- 185,544 183,931 187,386

weighted-average shares.......................Dilutive effect of employee stock options.......... 1,336 1,671 2,681

-------- -------- --------Denominator for diluted earnings per share....... 186,880 185,602 190,067

======== ======== ========Basic earnings per share........................... $2.45 $2.39 $2.48Diluted earnings per share......................... $2.44 $2.37 $2.44</TABLE>

Options to purchase 2.2 million shares, 2.3 million shares and 1.9 millionshares of common stock, outstanding as of December 31, 1998, 1997 and 1996,respectively, were not included in the computation of diluted earnings per sharebecause their exercise prices were greater than the average market price of thecommon shares and, therefore, would be antidilutive.

SEGMENT INFORMATION

In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments ofan Enterprise and Related Information," which changed the method the Companyuses in reporting information about its operating segments. As a result of theadoption, segment information for 1997 and 1996 has been restated to conform tothe 1998 presentation.

The Company's reportable segments are Tobacco and Wine. The Companyoperates predominantly in the tobacco industry as a producer of moist smokelesstobacco products. The Company also produces and markets premium wines. Thosebusiness units that do not meet quantitative reportable thresholds are included



in the all other category. This category is comprised of the internationaloperations, cigar operations and discontinued businesses and product lines.Tobacco segment sales are principally to a large number of

28UST


wholesalers and chain stores which are widely dispersed. In 1998, net sales toone customer accounted for approximately 23 percent of Tobacco segment netsales.

The Company operates primarily in the United States; foreign operations andexport sales are not significant. Net sales and operating profit are reflectednet of intersegment sales and profits.

Operating profit is revenue less operating expenses and an allocation ofcorporate expenses. Tobacco settlement charges for both 1998 and 1997 areincluded in the operating results for the Tobacco segment. Included in theoperating results for all other operations in 1998 are the gains on the sale ofcertain commercial agricultural properties and the video entertainmentsubsidiary and in 1997 the write-down of production costs and prepaid royaltiesat the entertainment subsidiary and the income received from the prepayment ofroyalties from a previous divestiture. Corporate assets consist primarily ofcash and cash equivalents and other long-term investments. Corporate capitalexpenditures and depreciation expense include amounts which have been allocatedto each reportable segment and all other operations for purposes of reportingoperating profit and identifiable assets. Consolidated Segment Informationappears on page 23.

CONTINGENCIES

The Company and/or its subsidiary, United States Tobacco Company(hereinafter "the Company") has been named in certain health care costreimbursement/third party recoupment/class action litigation against the majordomestic cigarette companies and others seeking damages and other relief. Thecomplaints in these cases on their face predominantly relate to the usage ofcigarettes; within that context, certain complaints contain a few allegationsrelating specifically to smokeless tobacco products. These actions are invarying stages of pretrial activities.

The Company believes these pending litigation matters will not result inany material liability for a number of reasons, including the fact that theCompany has had only limited involvement with cigarettes and the Company'scurrent percentage of total tobacco industry sales is relatively small. Prior to1986, the Company manufactured some cigarette products which had a de minimismarket share. From May 1, 1982 to August 1, 1994, the Company distributed asmall volume of imported cigarettes and is indemnified against claims relatingto those products.

On November 23, 1998, the Company entered into a Smokeless Tobacco MasterSettlement Agreement (the "Settlement Agreement") with attorneys general ofvarious states and U.S. territories to resolve the remaining health care costreimbursement cases initiated against the Company. The Settlement Agreementrequires the Company to adopt various marketing and advertising restrictions andmake payments expected to total between $100 and approximately $200 million overten years -- depending on various factors -- for programs to reduce youth usageof tobacco and combat youth substance abuse and for enforcement purposes.

Included in 1998 results is a charge of $15.3 million relating to theSettlement Agreement, which represents $4.3 million to fund the States'Anti-Trust/Consumer Protection Tobacco Enforcement Fund, $5 million forattorneys' fees for outside counsel retained by the settling states and $6million for the first on-going payment due in March 1999 based on 1998shipments. Also included in 1998 results is a charge of $16.4 million resultingfrom the Company's portion of the funding for pilot programs, primarily toreduce youth access to tobacco products, and attorneys' fees and other costsassociated with the settlement of health care cost reimbursement litigationinitiated on behalf of the states of Florida, Texas and Washington.

The Company has been named in three actions brought by individualplaintiffs, all of whom are represented by the same Louisiana attorney, againsta number of smokeless tobacco manufacturers, cigarette manufacturers and certainother organizations seeking damages and other relief in connection with injuriesallegedly sustained as a result of tobacco usage, including smokeless tobaccoproducts.

The Company is named in an action in Illinois seeking damages and otherrelief brought by an individual plaintiff and purporting to state a class action"on behalf of himself and all other persons similarly situated"



29UST


alleging that his use of the Company's smokeless products "resulted in hisaddiction to nicotine, increased use of Defendant's products and gumdeterioration."

The Company is named in an action in North Carolina seeking unspecifieddamages brought by an individual plaintiff who alleges that he developed bladdercancer as a result of his usage of smokeless tobacco manufactured by theCompany.

The Company is named in an action in San Francisco, California along withother smokeless tobacco manufacturers and others seeking unspecified damages andother relief brought by the City and County of San Francisco and theEnvironmental Law Foundation purportedly on behalf of "the residents of SanFrancisco County and the general public" alleging violation of The Safe DrinkingWater and Toxic Enforcement Act of 1986, Health and Safety Code sec.sec.25249.6,et seq. ("Proposition 65") and the California Unfair Competition Act, Businessand Professions Code sec.sec.17200, et seq. The action alleges, among otherthings, that the defendants sold smokeless tobacco products in Californiawithout providing a ". . . 'clear and reasonable' warning that their use resultsin multiple exposures to substances known to the State of California to causecancer, birth defects and reproductive harm."

The Company is named in an action in Kentucky seeking injunctive relief,more than $400 million in "actual damages" before trebling and punitive damagesbrought by one of the Company's competitors alleging that certain actions andpractices of the Company violate federal antitrust and advertising laws inconnection with the marketing and sale of its moist snuff brands and alsoalleges various violations of tort and state law.

The Company believes, and has been so advised by counsel handling thesecases, that it has a number of meritorious defenses to all such pendinglitigation. Except as to the Company's willingness to consider alternativesolutions for resolving certain regulatory and litigation issues, all such casesare, and will continue to be, vigorously defended, and the Company believes thatthe ultimate outcome of all such pending litigation will not have a materialadverse effect on the consolidated financial position of the Company, but mayhave a material impact on the Company's consolidated financial results for aparticular reporting period in which resolved.

On August 28, 1996, the Food and Drug Administration (FDA) publishedregulations asserting unprecedented jurisdiction over nicotine in tobacco as a"drug" and purporting to regulate smokeless tobacco products as a "medicaldevice." The Company and other smokeless tobacco manufacturers filed suitagainst FDA seeking a judicial declaration that FDA has no authority to regulatesmokeless tobacco products. On April 25, 1997, a federal district court ruledthat FDA, as a matter of law, is not precluded from regulating smokeless tobaccoas "medical devices" and implementing certain labeling and access restrictions.The court, granting the Company's motion for summary judgment, also ruled thatFDA has no authority to implement restrictions on the advertising and promotionof smokeless tobacco products. The court issued an injunction to prohibit mostof the restrictions (labeling, access and advertising/promotion) set for August28, 1997 from taking effect, pending resolution of any appeals and subsequentproceedings; the court also certified the ruling for interlocutory appeal on thegrounds that it involves "controlling questions of law as to which there issubstantial ground for difference of opinion." On August 14, 1998, the FourthCircuit Court of Appeals ruled in favor of the Company and other tobacco productmanufacturers stating that FDA lacks jurisdiction to regulate tobacco productsand that all of the regulations published by FDA on August 28, 1996 are invalid.On January 19, 1999, FDA filed a petition for certiorari seeking review of theFourth Circuit's ruling by the United States Supreme Court. The Company is notable to predict the outcome of the appeal, or assess the future effect thatthese FDA regulations, if implemented, may have on its smokeless tobaccobusiness.

30

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Directors and Stockholders UST Inc.

We have audited the accompanying consolidated statement of financialposition of UST Inc. as of December 31, 1998 and 1997, and the relatedconsolidated statements of earnings, changes in stockholders' equity, and cashflows for each of the three years in the period ended December 31, 1998. Thesefinancial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits.



We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial position ofUST Inc. at December 31, 1998 and 1997, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 1998, in conformity with generally accepted accounting principles.

Stamford, ConnecticutFebruary 8, 1999

ERNST & YOUNG LLP



1

EXHIBIT 21

PARENT AND SUBSIDIARIES

UST is an independent corporation without parent. It had the followingsignificant subsidiaries as of December 31, 1998:

<TABLE><CAPTION>

PERCENTAGE OFOWNERSHIP BYUST OR ITS

JURISDICTION OF WHOLLY OWNEDNAME OF SUBSIDIARY OR AFFILIATE INCORPORATION SUBSIDIARIES------------------------------- --------------- -------------<S> <C> <C>International Wine & Spirits Ltd. .......................... Delaware 100%

Stimson Lane Ltd. ........................................ Washington 100%United States Tobacco Company............................... Delaware 100%

United States Tobacco Manufacturing Company Inc. ......... Delaware 100%United States Tobacco Sales and Marketing Company Inc. ... Delaware 100%

UST Enterprises Inc. ....................................... Delaware 100%UST International Inc. ..................................... Delaware 100%</TABLE>

---------------Certain subsidiaries have been omitted since, if considered in the aggregate asa single subsidiary, they would not constitute a significant subsidiary.



1

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual Report (Form10-K) of UST Inc. of our report dated February 8, 1999, included in the 1998Annual Report to stockholders of UST Inc.

We also consent to the incorporation by reference in Post-EffectiveAmendment No. 4 to the Registration Statement (Form S-8 No. 2-72410) pertainingto the UST Inc. Employees' Savings Plan, the Registration Statement (Form S-8No. 33-28137) pertaining to the 1982 Stock Option Plan, the RegistrationStatement (Form S-8 No. 33-48828) pertaining to the 1992 Stock Option Plan andthe Registration Statement (Form S-8 No. 33-59229) pertaining to the NonemployeeDirectors' Stock Option Plan, of our report dated February 8, 1999, with respectto the consolidated financial statements of UST Inc. incorporated by referencein this Annual Report (Form 10-K) for the year ended December 31, 1998.

Stamford, ConnecticutMarch 12, 1999

ERNST & YOUNG LLP



<TABLE> <S> <C>

<ARTICLE> 5<LEGEND>This schedule contains summary financial information extracted from Registrant'scondensed consolidated statement of financial position and condensedconsolidated statement of earnings and is qualified in its entirety by referenceto such financial statements. (In thousands, except per share amounts).</LEGEND><MULTIPLIER> 1,000

<S> <C><PERIOD-TYPE> YEAR<FISCAL-YEAR-END> DEC-31-1998<PERIOD-START> JAN-01-1998<PERIOD-END> DEC-31-1998<CASH> 33,210<SECURITIES> 0<RECEIVABLES> 63,269<ALLOWANCES> 0<INVENTORY> 372,634<CURRENT-ASSETS> 507,213<PP&E> 589,990<DEPRECIATION> 251,295<TOTAL-ASSETS> 913,319<CURRENT-LIABILITIES> 197,316<BONDS> 100,000<PREFERRED-MANDATORY> 0<PREFERRED> 0<COMMON> 104,048<OTHER-SE> 364,245<TOTAL-LIABILITY-AND-EQUITY> 913,319<SALES> 1,423,246<TOTAL-REVENUES> 1,423,246<CGS> 283,516<TOTAL-COSTS> 283,516<OTHER-EXPENSES> 0<LOSS-PROVISION> 0<INTEREST-EXPENSE> (2,187)<INCOME-PRETAX> 734,465<INCOME-TAX> 279,186<INCOME-CONTINUING> 455,279<DISCONTINUED> 0<EXTRAORDINARY> 0<CHANGES> 0<NET-INCOME> 455,279<EPS-PRIMARY> 2.45<F1><EPS-DILUTED> 2.44<F1><FN><F1>Note: Item number 5-03(b)(20) amounts for earnings per share of $2.45 and $2.44represent earnings per share -- basic and earnings per share -- diluted,



respectively.</FN>

</TABLE>



<TABLE> <S> <C>

<ARTICLE> 5<LEGEND>This schedule contains restated summary financial information extracted fromRegistrant's condensed consolidated statement of financial position andcondensed consolidated statement of earnings and is qualified in its entirety byreference to such financial statements. (In thousands, except per shareamounts).</LEGEND><RESTATED><MULTIPLIER> 1,000

<S> <C> <C> <C><PERIOD-TYPE> YEAR YEAR YEAR<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995<CASH> 6,927 54,452 69,403<SECURITIES> 0 0 0<RECEIVABLES> 67,702 77,855 69,598<ALLOWANCES> 0 0 0<INVENTORY> 319,666 271,425 256,101<CURRENT-ASSETS> 441,844 450,570 425,555<PP&E> 564,494 514,313 492,165<DEPRECIATION> 237,785 213,428 197,359<TOTAL-ASSETS> 826,363 806,577 783,976<CURRENT-LIABILITIES> 166,519 306,553 280,723<BONDS> 100,000 100,000 100,000<PREFERRED-MANDATORY> 0 0 0<PREFERRED> 0 0 0<COMMON> 103,307 102,077 101,040<OTHER-SE> 333,488 179,129 191,741<TOTAL-LIABILITY-AND-EQUITY> 826,363 806,577 783,976<SALES> 1,401,718 1,371,705 1,305,796<TOTAL-REVENUES> 1,401,718 1,371,705 1,305,796<CGS> 291,942 272,756 262,203<TOTAL-COSTS> 291,942 272,756 262,203<OTHER-EXPENSES> 0 0 0<LOSS-PROVISION> 0 0 0<INTEREST-EXPENSE> 7,451 6,364 3,179<INCOME-PRETAX> 703,857 744,526 704,590<INCOME-TAX> 264,719 280,527 274,830<INCOME-CONTINUING> 439,138 463,999 429,760<DISCONTINUED> 0 0 0<EXTRAORDINARY> 0 0 0<CHANGES> 0 0 0<NET-INCOME> 439,138 463,999 429,760<EPS-PRIMARY> 2.39 2.48 2.21<EPS-DILUTED> 2.37 2.44 2.17

</TABLE>

