SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K


   (MARK ONE)

       [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
              EXCHANGE ACT OF 1934

              FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

       [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
              SECURITIES EXCHANGE ACT OF 1934


       FOR THE TRANSITION PERIOD FROM _______________ TO _______________.

COMMISSION FILE NUMBER 333-31931


                      NORTH ATLANTIC TRADING COMPANY, INC.
                      ------------------------------------
             (Exact name of registrant as specified in its charter)


            DELAWARE                                             13-3961898
            --------                                             ----------
 (State or other jurisdiction of                             (I.R.S. Employer
  incorporation or organization)                            Identification No.)


              257 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10010-7304
              ----------------------------------------------------
              (Address of principal executive offices) (Zip Code)


Registrant's telephone number, including area code:  (212) 253-8185

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy materials or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

As of February 28, 1999, the only class of voting or non-voting common equity
issued and outstanding is the Registrant's Voting Common Stock, par value $.01
per share, 100% of which is owned by 38 record holders, 28 of whom are
affiliates or employees of the Registrant. There is no trading market for the
Voting Common Stock.

As of February 28, 1999, 528,241 shares of the Registrant's Voting Common Stock,
par value $.01 per share, and no shares of the Registrant's Non-Voting Common
Stock, par value $.01 per share, were outstanding.

<PAGE>
                      NORTH ATLANTIC TRADING COMPANY, INC.
                          1998 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS
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                                                                                                                PAGE



                                                      PART I
<S>              <C>                                                                                           <C>
    Item 1.       Business........................................................................................1
    Item 2.       Properties.....................................................................................11
    Item 3.       Legal Proceedings..............................................................................12
    Item 4.       Submission of Matters to a Vote of Security Holders............................................14

                                                      PART II

    Item 5.       Market for Registrant's Common Stock and Related Stockholder Matters...........................15
    Item 6.       Selected Financial Data........................................................................15
    Item 7.       Management's Discussion and Analysis of Financial Condition and Results of
                      Operations.................................................................................17
    Item 7A.      Quantitative and Qualitative Disclosures About Market Risk.....................................22
    Item 8.       Financial Statements and Supplementary Data....................................................23
    Item 9.       Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...........23

                                                     PART III

    Item 10.      Directors and Executive Officers of the Registrant.............................................24
    Item 11.      Executive Compensation.........................................................................26
    Item 12.      Security Ownership of Certain Beneficial Owners and Management.................................36
    Item 13.      Certain Relationships and Related Transactions.................................................38

                                                      PART IV

    Item 14.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................39

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                                     PART I

Item 1.    Business

OVERVIEW

         North Atlantic Trading Company, Inc. (the "Company") is a holding
company which was organized under the laws of the State of Delaware. The Company
has two significant wholly-owned subsidiaries, National Tobacco Company, L.P.
("National Tobacco") and North Atlantic Operating Company, Inc. ("NAOC").
National Tobacco is the third largest manufacturer and marketer of loose leaf
chewing tobacco in the United States, selling its products under the brand names
BEECH-NUT REGULAR, BEECH-NUT WINTERGREEN, BEECH-NUT SPEARMINT, TROPHY, HAVANA
BLOSSOM and DURANGO. NAOC is the largest importer and distributor in the United
States of roll-your-own ("RYO") cigarette papers and other tobacco-related
products, which are sold under the ZIG-ZAG brand name pursuant to an exclusive
distribution agreement. NAOC imports and distributes RYO cigarette paper and
related products which are manufactured and distributed pursuant to a long-term
agreement with Bollore Technologies, S.A. ("Bollore").

RECENT EVENTS

         The Company's Board of Directors and senior management has been
restructured. In December 1998, Jack Africk, Jeffrey S. Hay and Ron Beasley
resigned from their respective positions as President and Chief Operating
Officer, Executive Vice President, General Counsel and Director, and Senior Vice
President--Sales. In addition, three management directors were removed from the
Board of Directors, reflecting an agreement with the Company's outside directors
to reduce the size of the Board from nine to five members. Mr. Africk retained
his seat on the Company's Board of Directors and both he and Mr. Beasley
continue to serve the Company as consultants. Upon Mr. Africk's resignation,
Thomas F. Helms, Jr., Chairman and Chief Executive Officer, assumed the
additional position of President of the Company.

         The Company believes that its streamlined management structure will
improve the decision making process and result in operating efficiencies.

BUSINESS SEGMENT INFORMATION

         The Company's business segment information regarding revenues, results
of operations and assets is incorporated herein by reference to Note 19 to the
Consolidated Financial Statements included in Item 8 of Part II of this Annual
Report.

EVOLUTION OF THE COMPANY

         The Company was formed in 1997 to facilitate a corporate reorganization
and related financings in connection with the simultaneous acquisition of NATC
Holdings USA, Inc. ("NATC") and its ZIG-ZAG RYO cigarette paper business (the
"Acquisition"). Prior to the Acquisition, National Tobacco and its corporate
general partner, National Tobacco Finance Corporation ("NTFC"), were
wholly-owned subsidiaries of NTC Holding, LLC, a Delaware limited liability
company ("LLC"). All of the outstanding interests in LLC, together with certain
subordinated debt obligations, were acquired by the Company in connection with

<PAGE>
the Acquisition. LLC transferred all of its assets to the Company, including the
limited and general partnership interests in National Tobacco, and was
subsequently dissolved.

         National Tobacco was originally formed in 1988 by Mr. Helms and an
investor group led by Lehman Brothers to acquire the smokeless tobacco division
of Lorillard, which had introduced the popular BEECH-NUT brand in 1897. Together
with the management team he assembled in connection with this initial buyout,
Mr. Helms participated in two subsequent leveraged buyouts prior to 1997.
Following the Acquisition, the Company's management team increased their equity
interest in the business from 48% to 72.9% of the Company's Common Stock
(assuming the exercise in full of certain outstanding warrants).

         Upon consummation of the Acquisition, NATC and its operating subsidiary
were merged into NAOC. NATC was originally formed by an investor group to
acquire certain assets from UST, Inc. ("UST") in March 1993, including the
exclusive rights to market and distribute ZIG-ZAG RYO cigarette papers in the
United States, Canada and other international markets. UST obtained North
American distribution rights for the ZIG-ZAG brands in 1938 from Bollore, a
major French manufacturer of high-quality and fine papers. The ZIG-ZAG brand was
introduced in France in 1869.

         The Company's principal executive offices are located in New York, New
York at 257 Park Avenue South, 7th Floor, New York, New York 10010, and its
telephone number is (212) 253-8185.

BUSINESS STRATEGY

         The Company's business strategy is to (i) continue to cultivate sales,
marketing and distribution synergies; (ii) capitalize on the brand-name identity
of its products; and (iii) increase operating efficiencies.

INDUSTRY AND MARKETS

         The Company believes that the smokeless tobacco market, including loose
leaf chewing tobacco, and the RYO cigarette paper industry are each
characterized by non-cyclical demand, brand loyalty, significant barriers to
entry, minimal capital expenditure requirements, high profit margins, strong
wholesale prices and the ability to generate strong and consistent free cash
flows. Smokeless tobacco products, including chewing tobacco, have a long,
established tradition of use in the United States dating back to colonial times.
Loose leaf chewing tobacco has generally been most popular in the Southeast,
Southwest, rural Northeast and North Central regions of the United States. An
estimated 7 million Americans are regular users of smokeless tobacco products,
according to the Smokeless Tobacco Council.

Smokeless Tobacco

         The smokeless tobacco industry is comprised of the five product
categories listed below. The Company believes that many consumers of smokeless
tobacco use products in more than one of the following categories. In addition
to the Company, other manufacturers and marketers of smokeless tobacco include:
UST, Pinkerton Tobacco Co., Conwood Corporation and Swisher International Group
Inc. The Company currently offers only loose leaf chewing tobacco products.


                                       2
<PAGE>
         Moist snuff is cured, aged, flavored and finely ground tobacco packaged
in round fiber or plastic cans.

         Loose leaf chewing tobacco is typically made from air-cured leaf
         tobacco, using both domestic and imported tobaccos, aged, flavored and
         packed in foil pouches.

         Plug chewing tobacco is made from air-cured leaf tobacco, heavily
         flavored and pressed into small bricks or blocks.

         Twist chewing tobacco is made of dark, air-cured leaf tobacco, which is
         twisted into strands that are dried and packaged like a dry, pliable
         rope.

         Dry snuff is a powdered tobacco product which is sometimes flavored and
         is packaged in a variety of containers.

         According to information provided by the Smokeless Tobacco Council,
manufacturers' sales for smokeless tobacco were $991 million in 1989 and $1.85
billion in 1997, representing a compound annual growth rate of 7.0%. This
increase is primarily related to the increase in manufacturers' sales of moist
snuff which have grown from $608 million in 1989 to $1.43 billion in 1997,
representing a compound annual growth rate of 9.7%. Manufacturers' sales of
loose leaf chewing tobacco were $280 million in 1989 and $334 million in 1997,
representing a compound annual growth rate of 2.0% during the same period.

Loose Leaf Chewing Tobacco

         Loose leaf chewing tobacco products are typically sold through the
following retail distribution channels (in order of importance): food stores,
mass merchandisers, convenience stores, discount tobacco stores, chain and
independent drug stores. Discount tobacco retailers are an increasingly
important distribution channel for all tobacco products, including loose leaf
chewing tobacco. Certain retailers purchase loose leaf chewing tobacco direct
from manufacturers, although most purchase through wholesale distributors.

RYO Cigarette Paper

         RYO cigarette papers are typically sold through the following retail
distribution channels (in order of importance): convenience stores, chain and
independent drug stores, mass merchandisers, food stores and discount tobacco
stores. Certain retailers purchase RYO cigarette papers direct from
manufacturers, although most purchase through wholesale distributors.

PRODUCTS

         The Company manufactures and markets loose leaf chewing tobacco and
imports and distributes RYO cigarette papers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
net sales of the Company's principal products.


                                       3
<PAGE>
Loose Leaf Chewing Tobacco

         Loose leaf chewing tobacco products can be broadly characterized as
either full-flavored or mild, each accounting for approximately one half of
industry volume. Loose leaf chewing tobacco is made from aged, air-cured tobacco
which is processed and flavored and then packaged in foil pouches. The BEECH-NUT
brands are available in three flavors: Regular, Wintergreen and Spearmint.
BEECH-NUT REGULAR is a full-flavored product and ranks second in sales in the
full-flavored loose leaf chewing tobacco category, and third overall. BEECH-NUT
WINTERGREEN and BEECH-NUT SPEARMINT were introduced by National Tobacco in 1979
and 1989, respectively. National Tobacco introduced its TROPHY brand into the
mild product category of the loose leaf chewing tobacco business in 1992. In
addition to the BEECH-NUT brands and TROPHY, National Tobacco also produces a
regional brand, HAVANA BLOSSOM, sold primarily in West Virginia, Pennsylvania
and Ohio and a new value brand, DURANGO, which was introduced in March 1998.

RYO Cigarette Papers

         RYO cigarette papers are sold in a variety of different widths and
styles, primarily standard width ZIG-ZAG White, ZIG-ZAG 1 1/4 width French
Orange aND ZIG-ZAG Kutcorners, which is designed for easier hand-rolling. Other
products sold under the ZIG-ZAG name are 1 1/2 RYO cigarette papers, Gold
Standard tobacco for roll-your-own-cigarettes, ZIG-ZAG cigarette rollers,
cigarette tubes and tube injectors and a ZIG-ZAG waterproof paper that is sold
in Canada.

SALES AND MARKETING

         Following the Acquisition and as part of the integration of the
National Tobacco and NAOC businesses, the two existing sales organizations were
merged. As a result, National Tobacco currently has a 108 person sales
organization nationwide. National Tobacco and NAOC have entered into a Sales
Representation Agreement, effective as of January 1, 1998, pursuant to which
National Tobacco has agreed to market NAOC's products.

         Historically, NAOC's sales force focused on wholesalers in the large
chain convenience store, drug store and mass merchandising channels without
calling on retail outlets, while National Tobacco's larger sales force called on
both wholesalers and retail merchants in these channels as well as the food
store and discount tobacco store channels. The Company believes that the
resources and longstanding relationships of its combined sales force will enable
the Company to move each of its product lines into geographical markets and
retail channels where they previously had been underrepresented.

         National Tobacco's loose leaf chewing tobacco has historically been
distributed through approximately 1,500 wholesale tobacco and food distributors.
BEECH-NUT REGULAR and TROPHY represent 54% and 25% of National Tobacco's loose
leaf chewing tobacco sales. At the retail level, National Tobacco's loose leaf
chewing tobacco products are promoted through in-store volume and price-discount
programs and the use of innovative, high visibility point-of-purchase floor and
shelf displays, banners and posters. National Tobacco is not reliant upon and
does not conduct any print or media consumer advertising.

         NAOC's RYO cigarette papers have historically been distributed through
approximately 950 wholesale distributors. Sales by NAOC of its ZIG-ZAG White and
ZIG-ZAG French Orange RYO cigarette papers are the most important in terms of
volume, accounting for in excess of 76% of NAOC's sales. The majority of ZIG-ZAG


                                       4
<PAGE>
promotional activity is at the distributor level and consists of distributor
promotions, trade shows and trade advertising.

         The Company's largest customer is McLane Corporation ("McLane"), which
accounted for approximately 10.1% and 8.2% of its loose leaf chewing tobacco and
RYO cigarette paper revenues in fiscal 1998, respectively. No other customer
represents more than 5% of the Company's revenues, and the Company believes that
the loss of any other customer or distributor account would not have a material
impact on the financial condition or operations of the Company.

TRADEMARKS AND TRADE SECRETS

         National Tobacco has numerous registered trademarks relating to its
loose leaf chewing tobacco products, including the trademarks for its BEECH-NUT
and TROPHY products. These trademarks, which are significant to National
Tobacco's business, expire periodically and are renewable for additional 20-year
terms upon expiration. Flavor formulas relating to National Tobacco's loose leaf
chewing tobacco products, which are key assets of its business, are maintained
under strict secrecy. The ZIG-ZAG trade name and trademark are owned by Bollore
and have been licensed to NAOC; however, NAOC does own the ZIG-ZAG trademark
with respect to certain tobacco products.

RAW MATERIALS, PRODUCT SUPPLY AND INVENTORY MANAGEMENT

Loose Leaf Chewing Tobacco
         National Tobacco's loose leaf chewing tobacco is produced from
air-cured leaf tobacco. National Tobacco utilizes tobaccos grown domestically in
Pennsylvania and Wisconsin and imported from many countries, including, but not
limited to, Argentina, Brazil, Columbia, France, Germany, Indonesia, Italy,
Mexico and the Philippines. Management does not believe that it is dependent on
any single country source for tobacco. Pursuant to an agreement with Lancaster
Leaf Tobacco Company of Pennsylvania ("Lancaster"), Lancaster (i) under
instructions from National Tobacco, purchases and processes tobacco on an
exclusive basis, (ii) stores tobacco inventory purchased on behalf of National
Tobacco and (iii) generally maintains a 15- to 24-month supply of National
Tobacco's various tobacco types at its facilities. National Tobacco generally
maintains a one- to two-month operating supply of tobacco in its Louisville
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources."

         Other than raw tobacco, the ingredients used in National Tobacco's
finished loose leaf chewing tobacco products include food grade flavorings
approved by the FDA and other federal agencies. National Tobacco is not
dependent upon any one supplier for those raw materials or for the supply of its
products' packaging.

RYO Cigarette Paper

         Under normal conditions, pursuant to the Distribution Agreements (as
defined), NAOC must purchase its RYO cigarette papers from Bollore. See
"Distribution Agreements." To maintain a steady supply of product: (i) NAOC may
seek third-party suppliers and continue to use of the ZIG-ZAG trademark if
Bollore is unable or unwilling to perform under the Distribution Agreement; and
(ii) Bollore is required to maintain in a public warehouse in the United States
a two-month supply of emergency inventory at Bollore's expense.


                                       5
<PAGE>
         The Distribution Agreements establish the purchase price through 2004,
subject to certain annual adjustments to reflect increases or decreases in the
U.S. and Canadian consumer price indices. Export duties, insurance and shipping
costs are the responsibility of Bollore and import duties and excise taxes are
the responsibility of NAOC. Bollore's terms of sale are 45 days after the bill
of lading date and its invoices are payable in French francs. The Distribution
Agreements reduce catastrophic foreign exchange risk by providing that Bollore
will bear certain exchange rate risks at levels fixed through 2004. The exchange
rate risk allocations set forth in the Distribution Agreements will be
renegotiated in 2004 along with the prices to be paid by NAOC to Bollore for the
RYO cigarette papers.

         NAOC seeks to maintain an adequate supply of product in addition to the
immediately available, two-month emergency inventory on hand at the expense of
Bollore. NAOC also builds inventory outside promotional periods in order to have
adequate inventory to meet increased demand during promotional periods. NAOC's
inventory is maintained at the Company's manufacturing facility in Louisville,
Kentucky and in bonded public warehouses located in Reno, Nevada and Pittsburgh,
Pennsylvania. See "Distribution Agreements."

MANUFACTURING

         National Tobacco manufactures its loose leaf chewing tobacco products
and NAOC contracts for the manufacture of its RYO cigarette papers, cigarette
tubes and tube injectors. The Company believes that National Tobacco's
production, quality control, research and development, facilities and equipment
are vital to maintaining the high-quality brand image and operating efficiency
of its loose leaf tobacco products.

Production and Quality Control

         National Tobacco's production process utilizes proprietary techniques
and is subject to strict quality control. During each production day, National
Tobacco's quality control group periodically tests the quality of the tobacco,
casings (flavorings in syrup form), application of casings and packaging.
National Tobacco utilizes sophisticated quality control and pilot plant
production equipment to test and closely monitor the quality of its products.
The quality of National Tobacco's products is largely the result of using high
grade, air-cured tobacco leaf, food grade flavorings and ongoing analysis of
tobacco cut, flavorings and moisture content.

Research and Development

         National Tobacco has a research and development department that
reformulates existing products in an effort to maintain a high level of product
consistency and to facilitate the use of less costly raw materials without
sacrificing product quality. The Company believes that it will be able to
continue to develop cost effective blends of tobacco and flavorings which reduce
overall costs without compromising the high product quality.

         National Tobacco spent approximately $345,000, $376,500 and $401,600 on
research and development for fiscal years 1996, 1997 and 1998, respectively.
NAOC did not spend any material amount for research and development during this
period.

                                       6
<PAGE>
Facilities and Equipment

         The Louisville, Kentucky plant, which is owned by National Tobacco, was
formerly used by Lorillard for the manufacture of cigarettes, cigars and chewing
tobacco. This approximately 600,000 square foot facility occupies a 26 acre
urban site near downtown Louisville. The majority of the facility's structures
sit on half of the total acres. The facilities are in good condition and have
received regular maintenance and capital improvement. About two-thirds of the
plant is currently utilized, resulting in substantial excess manufacturing and
storage capacity. The existing structures would provide ample space to
accommodate any expansion of the Company's products.

COMPETITION

         National Tobacco is the third largest manufacturer and marketer of
loose leaf chewing tobacco, and NAOC is the largest importer and distributor in
North America of RYO cigarette papers. The other three principal competitors for
loose leaf chewing tobacco sales, which, together with National Tobacco,
generate more than 95% of such sales, are Pinkerton Tobacco Co., Conwood
Corporation and Swisher International Group Inc. NAOC's two major competitors
for RYO cigarette paper sales, which, together with NAOC, generate approximately
95% of such sales, are Republic Tobacco Company and Imperial Tobacco Group plc.
Certain competitors of the Company are better capitalized than the Company and
have greater financial and other resources than those available to the Company.
The Company believes that its strong market positions in each of its principal
product lines is due to the high brand recognition and perceived quality of each
of its products, its manufacturing and operating efficiencies, and its
significant sales, marketing and distribution strengths.

EMPLOYEES

         As of February 28, 1999, the Company employed a total of 260 full-time
employees. All of the Company's operations are non-union, with the exception of
106 manufacturing employees, who are covered by three collective bargaining
agreements. One of these agreements, covering 101 employees, was extended in
December 1998 and will expire in December 2001. The other two agreements will
expire during 1999. The Company does not anticipate any issues in extending
them.

REGULATION

         The tobacco industry, particularly with respect to cigarettes, has been
under public scrutiny for over thirty years. Industry critics include special
interest groups, the Surgeon General and many legislators at the state and
federal levels. Although the smokeless tobacco companies have come under such
scrutiny, much of the focus has been directed at the cigarette industry due to
its large size relative to the smokeless tobacco industry.

         Smokeless tobacco manufacturers, like other producers of tobacco
products, are subject to regulation in the United States at federal, state and
local levels. Together with changing public attitudes towards smoking, a
constant expansion of smoking regulations since the early 1970s has been a major
cause of the overall decline in consumption of tobacco products. Moreover, the
trend is toward increasing regulation of the tobacco industry.

         Federal law has recently required states, in order to receive full
funding for federal substance abuse block grants, to establish the minimum age
of 18 years for the sale of tobacco products together with an appropriate


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<PAGE>
enforcement program. In recent years, a variety of bills relating to tobacco
issues have been introduced in the United States Congress, including bills that
would (i) prohibit the advertising and promotion of all tobacco products and/or
restrict or eliminate the deductibility of such advertising expenses; (ii)
increase labeling requirements on tobacco products to include, among other
things, additional warnings and lists of additives and toxins; (iii) modify
federal preemption of state laws to allow state courts to hold tobacco
manufacturers liable under common law or state statutes; (iv) shift regulatory
control of tobacco products and advertisements from the Federal Trade Commission
to the Food and Drug Administration ("FDA"); (v) increase tobacco excise taxes;
and (vi) require tobacco companies to pay for health care costs incurred by the
federal government in connection with tobacco related diseases. Hearings have
been held on certain of these proposals; however, to date, none of such
proposals have been enacted by Congress. Future enactment of such proposals or
similar bills depending upon their content could have a material adverse effect
on the sales, operations or financial condition of the Company.

         In August 1995, the FDA published proposed rules for regulation of
tobacco and tobacco products, including smokeless tobacco. Following a year of
comment and revision, in August 1996 the FDA promulgated final rules which were
scheduled to take effect in August 1997, except for a portion of the rules
prohibiting the sale of tobacco to persons under 18, which have become effective
already. The FDA's regulations restrict access to tobacco and tobacco products,
regulate tobacco labeling, and limit promotion and advertising of tobacco.

         On April 25, 1997, a federal court in Greensboro, North Carolina ruled
that the FDA has statutory authority to regulate tobacco products. The court
upheld the FDA's rules restricting access to tobacco products and regulating
tobacco labeling. However, the court ruled that the FDA does not have authority
to regulate promotion and advertising of tobacco products. The judge certified
the case for interlocutory appeal to the United States Fourth Circuit Court of
Appeals, which subsequently ruled that the FDA statute does not provide this
authority. The FDA has petitioned the Supreme Court of the United States for a
writ of certiorari.

         The FDA regulations prohibit self-service displays of tobacco,
including smokeless tobacco, and require that a retailer sell cigarettes and
smokeless tobacco only in a direct, face to face exchange between the retailer
and the consumer. Historically, smokeless tobacco has been sold primarily by
allowing customers direct access to the product. Accordingly, there can be no
assurance that prohibiting such direct access would not have an adverse effect
on sales.

         In 1996, Massachusetts enacted a statute which requires tobacco
companies, including smokeless tobacco companies, to disclose information
regarding the ingredients and nicotine content of their products, which
information will, subject to certain conditions, be made publicly available. The
ingredients of National Tobacco's products are proprietary and such disclosure
could result in the manufacture and sale of imitations, which could have a
material adverse effect on its smokeless tobacco business. On December 10, 1997,
U.S. District Judge O'Toole (D. Mass.) entered a preliminary injunction on
behalf of 5 smokeless tobacco companies (including National Tobacco) against the
Attorney General of Massachusetts and the Commissioner of Public Health. The
order bars the officials from taking any steps to enforce the
ingredient-reporting requirements of the Massachusetts statute pending a trial
on the merits. On November 6, 1998, the United States Court of Appeals for the
First Circuit affirmed the injunction. The tobacco companies did not seek an
injunction against the nicotine reporting requirements of the Massachusetts
statute.

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<PAGE>
         The district court set a schedule for the receipt and disposition of
cross motions for summary judgement. The parties filed these motions on February
13, 1998. The cross motions were argued in June 1998.
The district court has not acted with regard to such motions.

         To date regulations have been issued by the Massachusetts Attorney
General affecting point of sale and certain advertising issues with respect to
tobacco products which shall become effective August 1, 1999.

         While there is no current regulation materially and adversely affecting
the sale of RYO cigarette papers, there can be no assurance that federal, state
or local regulations will not be enacted which seek to regulate RYO cigarette
papers. In the event such regulations are enacted, depending upon their
parameters, they could have an adverse effect on the business of National
Tobacco and the financial condition of the Company. Similarly, there can also be
no assurance that the FDA will not attempt to regulate the sale of RYO cigarette
papers.

STATE ATTORNEY GENERAL SETTLEMENT AGREEMENTS

         In November 1998 most of the states, represented by their attorneys
general acting through the National Association of Attorneys General, signed two
contracts: the Master Settlement Agreement ("MSA") and the Smokeless Tobacco
Master Settlement Agreement ("STMSA"). To the best of the Company's knowledge,
the only industry signatories to the MSA have been cigarette manufacturers
and/or distributors and the only signatory to the STMSA has been UST Inc. In the
Company's opinion, the fundamental basis for each agreement is the states'
consents to withdraw all claims for monetary, equitable and injunctive relief
against certain tobacco products manufacturers and others and, in return, the
industry signatories have agreed to certain marketing restrictions and
regulations as well as certain payment obligations. The Company is currently
evaluating the settlement agreements but has not decided whether or not it will
participate in either settlement. There can be no assurance as to whether
entering into one or both settlement agreements or choosing not to do so would
have a material adverse effect on the Company's financial position, results of
operations or cash flows.

EXCISE TAXES

         Smokeless tobacco products and RYO cigarette papers have long been
subject to federal, state and local excise taxes, and such taxes have frequently
been increased or proposed to be increased, in some cases significantly, to fund
various legislative initiatives. Since 1986, smokeless tobacco (including dry
and moist snuff and chewing tobacco) has been subject to federal excise tax.
Smokeless tobacco is taxed by weight (in pounds or fractional parts thereof)
manufactured or imported. From July 1, 1986 through December 31, 1990, the
excise tax on chewing tobacco was $0.08 per pound. Effective January 1, 1991 the
federal excise tax on chewing tobacco was increased to $0.10 per pound, and
again increased to $0.12 per pound effective January 1, 1993.

         The excise tax on RYO cigarette paper is $.0075 per fifty papers.
Future enactment of increases in excise taxes could have a material adverse
effect on the business of National Tobacco. The Company is unable to predict the
likelihood of the passage or the enactment of future increases in excise taxes.
Tobacco products and RYO cigarette papers are also subject to certain state and
local taxes. Budget deficit concerns at the state level continue to exert
pressure to increase tobacco excise taxes. From time to time, the imposition of
state and local taxes has had limited impact on the National Tobacco's sales


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regionally. Any enactment of new state excise taxes or increase in existing
excise taxes is likely to have an increasingly adverse effect on regional sales.

ENVIRONMENTAL REGULATIONS

         The Company believes that it is currently in substantial compliance
with all material environmental regulations and pollution control laws.

DISTRIBUTION AGREEMENTS

         As part of the acquisition of the ZIG-ZAG RYO cigarette paper business,
NAOC entered into three long-term distribution and licensing agreements with
Bollore with respect to sales of RYO cigarette papers in the United States,
Canada and Hong Kong, Singapore, Dubai, Qatar, Oman and Jordan (respectively,
the "U.S. Distribution Agreement," the "Canada Distribution Agreement" and the
"Other Countries Distribution Agreement," and, collectively, the "Distribution
Agreements"). Under the Distribution Agreements, Bollore has granted NAOC the
exclusive right to purchase RYO cigarette papers bearing the ZIG-ZAG brand name
from Bollore for resale in the countries noted above. NAOC has the sole right to
determine the price and other terms upon which NAOC may resell any products
purchased from Bollore, including the right to determine the distributors of
such products within the countries noted above.

         The Distribution Agreements establish the purchase price through 2004,
subject to certain annual adjustments to reflect increases or decreases in the
U.S. and Canadian Consumer Price Index. Export duties, insurance and shipping
costs are the responsibility of Bollore and import duties and excise taxes are
the responsibility of NAOC. Bollore's terms of sale are 45 days after the bill
of lading date and its invoices are payable in French francs. The Distribution
Agreements reduce catastrophic foreign exchange risk by providing that Bollore
will bear certain exchange rate risks at levels fixed through 2004. The exchange
rate risk allocations set forth in the Distribution Agreements will be
renegotiated in 2004 along with the prices to be paid by NAOC to Bollore for the
RYO cigarette papers.

         According to NAOC's Distribution Agreements with Bollore, NAOC, under
normal conditions, must purchase the finished product only from Bollore.
Conversely, Bollore is required by such agreements to provide NAOC the
quantities and quality of the products that it desires. The Distribution
Agreements provide NAOC with safeguards in order for NAOC to maintain a steady
supply of product. Such safeguards include (i) granting NAOC the right to seek
third party suppliers with continued use of the ZIG-ZAG trademark if Bollore is
unable or unwilling to perform its obligations under the Distribution Agreements
and (ii) maintaining a two month supply of emergency inventory in the United
States at Bollore's expense.

         Under the Distribution Agreements, NAOC has agreed for the term of the
Distribution Agreements and for a period of five years after termination of such
Distribution Agreements not to engage, directly or indirectly, in the
manufacturing, selling, distributing, marketing or otherwise promoting in the
countries identified above RYO cigarette paper or RYO cigarette paper booklets
of a competitor without Bollore's consent, except for certain de minimis
acquisitions of debt or equity securities of such competitor and certain
activities with respect to an alternative supplier used by NAOC as permitted
under the Distribution Agreements.


                                       10
<PAGE>
         Each of the Distribution Agreements became effective on November 30,
1992. Each of the U.S. Distribution Agreement and the Canada Distribution
Agreement was for an initial term of twenty years commencing from the effective
date of such agreement and will be renewed automatically for successive twenty
year terms unless sooner terminated in accordance with the provisions of such
agreement. The Other Countries Distribution Agreement was for an initial term of
ten years commencing from the effective date of such agreement and will be
renewed automatically for successive ten year terms unless sooner terminated in
accordance with the provisions of such agreement. Each of the Distribution
Agreements permits Bollore to terminate such agreement (i) if certain minimum
purchases (which were exceeded in 1998 by a factor of 3.4 times in the U.S.;
such minimum purchases are not applicable with respect to the Other Countries
Distribution Agreement until the last three years of the initial term of such
agreement) of RYO cigarette paper booklets have not been made by the Company for
resale in the jurisdiction covered by such agreement within a calendar year,
(ii) if the Company assigns such agreement without the consent of Bollore (other
than certain permissible assignments to wholly owned subsidiaries of the
Company), (iii) upon a change of control of the NAOC or any parent of NAOC
without the consent of Bollore, (iv) upon certain acquisitions of equity
securities of NAOC or any parent of NAOC by a competitor of NAOC or certain
investments by significant stockholders of the Company in a competitor of NAOC
and (v) certain material breaches, including NAOC's agreement not to promote,
directly or indirectly, RYO cigarette paper or RYO cigarette paper booklets of a
competitor. Additionally, each of the Canada Distribution Agreement and the
Other Countries Distribution Agreement is terminable by either NAOC or Bollore
upon the termination of the U.S. Distribution Agreement.

Item 2.    Properties

         As of December 31, 1998, the Company operated manufacturing,
distribution, office and warehouse space in the United States with a total floor
area of approximately 610,351 square feet. Of this footage, approximately 10,351
square feet are leased and approximately 600,000 are owned.

         To provide a cost-efficient supply of products to its customers, the
Company maintains centralized management of nationwide manufacturing and
distribution facilities. National Tobacco has one manufacturing and distribution
facility located in Louisville, Kentucky and five other public warehouse
distribution facilities in other locations throughout the United States.

         The following table describes the principal properties of the Company
(other than sales service centers, sales office space or warehouse space) as of
December 31, 1998.

                                                         Square     Owned or 
        Location              Principal Use               Feet       Leased
        --------              -------------               ----       ------
                     
      New York, NY       Corporate headquarters          10,351      Leased

     Louisville, KY      Loose leaf chewing tobacco      600,000     Owned(1)
                         manufacturing and R&D


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

(1) Encumbered by a mortgage securing all obligations and liabilities under the
    New Senior Secured Facilities.

                                       11
<PAGE>
Item 3.    Legal Proceedings

         Proposition 65. On March 30, 1998, an action was filed in California
State Court, in the City and County of San Francisco, against defendants United
States Tobacco Company, Inc., Conwood Company, L.P., Pinkerton Tobacco Company,
Inc., National Tobacco, Swisher International Group, Inc., Brown & Williamson
Tobacco Corporation, Merrill Reese, Inc., Lucky Stores, Inc., Quick Stop
Markets, Inc., Raley's, Inc., Save Mart Supermarkets, Inc., Sav-On Drug Stores,
Inc., The Southland Corporation, Circle K Stores, Inc., Longs Drug Stores
Corporation, Walgreen Co., Safeway, Inc. and DOES 1-500. The plaintiffs amended
their complaint on June 10, 1998 and subsequently served the complaint on
National Tobacco. The complaint purports to be brought by The City and County of
San Francisco on behalf of the People of the State of California and by the
Environmental Law Foundation on behalf of the general public.

         Plaintiffs claim that the defendants violated the California Safe
Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code
ss.ss.25249.6 ("Proposition 65") by "knowingly and intentionally" exposing
California consumers to carcinogens and reproductive toxins in smokeless tobacco
products while failing to provide a "clear and reasonable" warning that
smokeless tobacco products contain substances that are "known to the state to
cause cancer" and "known to the state to cause reproductive toxicity."
Plaintiffs further claim that the defendants violated California's Unfair
Competition Act, Business & Professions Code ss.ss.17200, et seq., by marketing
smokeless tobacco products to children, and by fraudulently concealing from the
public the alleged adverse consequences and addiction allegedly associated with
smokeless tobacco products.

         The complaint seeks a preliminary and permanent injunction preventing
defendants from selling smokeless tobacco products without a "clear and
reasonable" warning, as well as an injunction ordering defendants to undertake a
court-approved public information campaign to instruct children that the use of
smokeless tobacco products results in exposures to substances known to the State
of California to cause cancer and reproductive harm. The plaintiffs also seek an
award of statutory penalties and damages for each violation of Proposition 65
and the Unfair Competition Act, disgorgement of profits from the sale of
smokeless tobacco products, and attorneys' fees and costs. National Tobacco
intends to defend the action vigorously.

         Kentucky and Illinois Complaints. On July 15, 1998, NAOC and National
Tobacco filed a complaint against Republic Tobacco, Inc. and its affiliates
("Republic Tobacco") in Federal District Court for the Western District of
Kentucky. This complaint was subsequently amended on August 18, 1998
(collectively, the complaint and the amended complaint are referred to herein as
the "Kentucky Complaint"). Republic Tobacco imports and sells RYO cigarette
paper under the JOB(R) and TOP(R) brand names. The Kentucky Complaint alleges,
inter alia, that Republic Tobacco's use of exclusivity agreements, rebates,
incentive programs, buy-backs and other activities relating to the sale of RYO
cigarette papers in the southeastern United States violate federal and state
antitrust and unfair competition laws. The Kentucky Complaint also alleges that
Republic Tobacco has defaced and directed others to deface NAOC's and National
Tobacco's point or purchase vendor displays for RYO cigarette papers by covering
up the Zig-Zag(R) brand name and advertising material with advertisements for
Republic Tobacco's RYO cigarette brands. The Kentucky Complaint alleges that
these activities constitute acts of unfair competition under federal and state
law.

         Republic Tobacco on June 30, 1998 filed a complaint against the Company
and NAOC in the United States District Court of the Northern District of


                                       12
<PAGE>
Illinois. Republic Tobacco did not serve this complaint or otherwise notify the
Company of its existence until after the filing and service of the Kentucky
Complaint. The Company believes that this complaint was filed in anticipation of
the filing of the Kentucky Complaint. This complaint was amended by Republic
Tobacco on September 16, 1998 (collectively, the complaint and amended complaint
are referred to herein as the "Illinois Complaint"). In the Illinois Complaint,
Republic Tobacco seeks declaratory relief that Republic Tobacco's actions in
defacing the Company's point of purchase display vendors do not violate federal
or state laws and that Republic Tobacco's trade practices do not violate federal
or state antitrust or unfair competition laws. In addition, the Illinois
Complaint alleges that certain actions taken by the Company to inform its
customers of its claims against Republic Tobacco constitute tortious
interference with customer relationships, false advertising, violations of
Uniform Deceptive Trade Practices and Consumer Fraud Acts, defamation and unfair
competition. In addition, although not included in its original complaint, in
its amended complaint Republic Tobacco alleges that the Company has unlawfully
monopolized and attempted to monopolize the market for RYO cigarette papers.

         The Company has alleged that Republic Tobacco's trade practices in the
southeastern United States have unlawfully restricted the Company's ability to
expand the distribution of Zig-Zag RYO cigarette papers in the Southeast, where
sales of Zig-Zag have been historically underdeveloped.

         The Company intends to vigorously pursue its claims set forth in the
Kentucky Complaint. With respect to the claims contained in the Illinois
Complaint, the Company has filed a Motion to Dismiss concerning a substantial
portion of Republic Tobacco's claims against the Company, and believes that
Republic Tobacco's claims against the Company are without merit. The Company
intends to vigorously defend the Illinois Complaint.

         West Virginia Complaints. On October 6, 1998, the Company was served
with a summons and complaint in an action in the Circuit Court of Kanawha
County, West Virginia, entitled Kelly Allen, et al. v. Philip Morris
Incorporated, et al. (Civil Action Nos. 98-C-2401). While the Company was served
with a single summons and complaint, the caption of the complaint lists 65
separate plaintiffs, each with an individual case number.

         On November 13, 1998, the Company was served with a summons and
complaint in an action in the Circuit Court of Kanawha County, West Virginia,
entitled Billie J. Akers, et al. v. Philip Morris Incorporated, et al. (Civil
Action Nos. 98-C-2696 to 98-C-2713). While the Company was served with a single
summons and complaint, the caption of the complaint lists 18 separate
plaintiffs, each with an individual case number. This action was filed by the
same plaintiffs' attorney who filed the Allen action and the complaint is
identical in most material respects.

         These two actions were commenced by separate plaintiffs, "individually
and/or as the personal representatives of the various decedents named herein
[who] are residents of the State of West Virginia and/or smoked cigarettes or
used other tobacco products, manufactured, promoted, advertised, marked, sold
and/or distributed by all defendants." The complaints contain no specific
allegations relating to any individual plaintiff. These two actions were brought
against major manufacturers of cigarettes, smokeless tobacco products (including
the Company) and other tobacco products, and certain other organizations.

         The complaints allege that "plaintiffs and plaintiffs' decedents
suffer/had suffered from a form of cancer of vascular disease and other injuries
due wholly or in part to defendants' products and/or activities." The complaints
further allege that the actions "arise from decades of intentionally wrongful


                                       13
<PAGE>
conduct by the defendants who have manufactured, promoted, and sold cigarettes
and both smokeless and loose tobacco to the plaintiffs and plaintiffs' decedents
and millions of Americans while knowing, but denying and concealing that their
products caused diseases, including but not limited to esophageal, laryngeal,
pharyngeal, mouth and throat cancers and Buerger's Disease." The complaints do
not identify which plaintiffs, if any, allege injury as a result of the use of
smokeless tobacco.

         The complaints assert 24 unspecified counts and seek referral to the
West Virginia Mass Litigation Panel, because the actions allegedly "involve
multiple plaintiffs pursuing related claims or actions involving one or more
common questions of act or law and the plaintiffs seek damages caused by some
"product." The complaints seek unspecified compensatory damages. The Company
intends to vigorously defend against each such complaint.

         For a description of other industry litigation in which the Company is
a party, see Part I, Item 1. "Business--Regulation."

Item 4.    Submission of Matters to a Vote of Security Holders

         By Written Consent dated December 18, 1998, the Voting Trust created
under that certain Voting Trust Agreement among Helms Management Corp., Thomas
F. Helms, Jr., David I. Brunson and Jeffrey S. Hay, approved the removal of
Maurice Langston, Jay Martin and Alan Minsterketter from the Board of Directors
and fixed the number of directors constituting the entire Board at five.







                                       14
<PAGE>
                                     PART II

Item 5.    Market for Registrant's Common Stock and Related Stockholder Matters

         There is no trading market for the Company's Voting Common Stock, par
value $.01 per share (the "Common Stock"), and, as of February 28, 1999, such
stock was held by 38 stockholders of records, 28 of whom are affiliates or
employees of the Company.

         There have been no dividends declared on the Company's Common Stock.
The current policy of the Company's Board of Directors is to retain any future
earnings to provide funds for the operation and expansion of the Company's
business; however, the Board of Directors will review the dividend policy
periodically to determine whether the declaration of dividends is appropriate.
In addition, the payment of dividends by the Company is subject to certain
restrictions contained in (i) the Company's senior secured credit facility and
(ii) the indenture and certificate of designation, respectively, in respect of
the Company's outstanding senior notes and preferred stock.

Item 6.    Selected Financial Data

                      CONSOLIDATED SELECTED FINANCIAL DATA
                (Amounts in thousands, except per share amounts)

         The following table sets forth the consolidated selected statement of
operations, other and balance sheet data for the Company and its predecessor for
the periods indicated. The selected data is derived from the audited
consolidated financial statements of the Company and its predecessor for such
years. As described in the consolidated financial statements, the Company
completed an acquisition of NATC and a recapitalization of the Company on June
25, 1997. Additionally, as described in the notes to the consolidated financial
statements, the Company's predecessor was recapitalized on May 17, 1996 in
connection with the formation of the Company. As such, the selected data of the
Company and its predecessor are not comparable in certain respects due to the
purchase accounting effect of this acquisition and these recapitalizations. This
selected data should be read in conjunction with, and is qualified by reference
to, the consolidated financial statements of the Company and its predecessor,
and the related notes thereto, and the Management Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this Form
10-K.





                                       15
<PAGE>
<TABLE>
<CAPTION>
                                                      The Company                           The Predecessor
                                       ---------------------------------------- ---------------------------------------
                                                                     Period       Period 
                                               Year Ended             from         from             Year Ended
                                               December 31,        5/17/96 to    1/1/96 to          December 31,
                                            1998        1997(1)     12/31/96      5/16/96       1995          1994
                                            ----        -------     --------      -------       ----          ----
<S>                                     <C>          <C>           <C>           <C>           <C>          <C>
STATEMENT OF OPERATIONS DATA:
   Net Sales.......................       $93,081      $84,430       $36,126       $19,810     $52,630      $51,376
   Income (loss) from continuing
     operations (net of preferred
stock
     dividends of $4,751 in 1998 and
     $2,268 in 1997) applicable to         (3,744)       5,146           383         1,132      2,628         5,812
     common shares(2)..............
   Net income (loss) applicable to
     common shares (2).............        (3,744)      (1,975)          383         1,132      2,505         5,812
   Income from continuing operations
     attributable to common shares
     per common share:
   Basic...........................         (7.09)        9.75          --             --         --            --
   Diluted.........................         (7.09)        8.42          --             --         --            --
   Net income (loss) attributable to
     common shares per common share:
   Basic...........................         (7.09)       (3.73)         --             --         --            --
   Diluted.........................         (7.09)       (3.23)         --             --         --            --
BALANCE SHEET DATA (AT END OF
PERIOD):
   Total assets....................       260,307      273,083        96,553        81,887     80,517        82,136
   Total debt, including current
     maturities....................       215,586      230,000        70,696        48,388     48,782        54,888
   Mandatorily redeemable preferred
     stock.........................        39,332       34,581            --            --         --            --
OTHER DATA:
   Adjusted EBITDA(3)..............        38,503       32,668        10,885         4,810     13,939        10,489

</TABLE>

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

(1)    The selected data for the year ended December 31, 1997 includes the
       results of operations of NAOC since its acquisition on June 25, 1997.

(2)    Net income (loss) attributable to common shares for the year ended
       December 31, 1997 includes an extraordinary loss of $7,121 (net of income
       tax benefit of $4,365) related to the write-off of debt discounts and
       deferred financing costs upon the occurrence of the recapitalization of
       the Company on June 25, 1997. Income (loss) from continuing operations
       and net income (loss) applicable to common shares for the periods prior
       to June 25, 1997 does not include income tax expense because the Company
       and the Predecessor were a limited liability company and a partnership,
       respectively, prior to June 25, 1997, and did not incur any federal or
       state income taxes for such periods. Income (loss) from continuing
       operations and net income (loss) applicable to common shares for the year
       ended 1995 includes a one-time charge of $1,561 for abandoned debt
       issuance costs. Income (loss) from continuing operations and net income
       (loss) applicable to common shares for the year ended December 31, 1994
       includes a one-time charge of $352 for abandoned debt issuance costs and
       one-time benefits of $812 and $2,267 to adjust the reserves for asbestos
       removal and postretirement benefits, respectively.

(3)    Adjusted EBITDA represents operating income plus depreciation,
       amortization and certain non-cash charges and expenses. Adjusted EBITDA
       is presented because management believes that Adjusted EBITDA is useful
       as an indicator of the Company's historical cash flow available to
       service its debt. Adjusted EBITDA should not be considered as an
       alternative to, or more meaningful than, net income (as determined in
       accordance with generally accepted accounting principles (GAAP)) as a
       measure of the Company's operating results or cash flows (as determined
       in accordance with GAAP) as a measure of the Company's liquidity.


                                       16
<PAGE>
Following is a reconciliation of net income to Adjusted EBITDA:

<TABLE>
<CAPTION>
                                                      The Company                           The Predecessor
                                       ---------------------------------------- ---------------------------------------
                                                                     Period       Period 
                                               Year Ended             from         from             Year Ended
                                               December 31,        5/17/96 to    1/1/96 to          December 31,
                                            1998         1997       12/31/96      5/16/96       1995          1994
                                            ----         ----       --------      -------       ----          ----
<S>                                     <C>          <C>           <C>           <C>           <C>          <C>
Net income (loss)..................       $ 1,007   $      293    $      383       $ 1,132     $ 2,505      $ 5,812
   Interest expense, net...........        24,927       18,361         6,398         2,453       7,239        6,834
   Income tax expense..............         3,213          852            --            --          --           --
   Depreciation....................         1,687        1,619         1,034           454       1,073        1,038
   Amortization....................         5,490        3,213           504           365         973        1,038
   Other (income) expense..........           (46)         (34)         (117)           (5)      1,336       (2,875)
   Financial advisory fee expense..            --           --            --           114         300          300
   LIFO adjustment.................           904         (129)        2,619           187         (53)         609
   Stock option compensation expense          819          900            --            --          --           --
   Postretirement expense (benefit)           502          472            64           110         443       (2,267)
   Cumulative effective of accounting
     change........................            --           --            --            --         123           --
   Extraordinary loss, net of income
     tax benefit...................            --        7,121            --            --          --           --
                                          -------      -------       -------       -------     -------      -------
Adjusted EBITDA....................       $38,503      $32,668       $10,885       $ 4,810     $13,939      $10,489
                                          =======      =======       =======       =======     =======      =======
</TABLE>


Item 7.    Management's Discussion and Analysis of Financial Condition and 
           Results of Operations

RESULTS OF OPERATIONS

         The discussion set forth below relates to the consolidated results of
operations and financial condition of the Company for the years ended December
31, 1998, 1997 and 1996. The following table sets forth certain statement of
operations data and the related percentage of net sales (dollars in thousands):

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                         ------------------------------------------------------------------------
                                                  1998                      1997                    1996(1)
                                         ---------------------     ---------------------    ---------------------
<S>                                      <C>         <C>           <C>          <C>         <C>          <C>
Net Sales..........................        $93,081       100.0%      $84,430       100.0%     $55,936       100.0%
Cost of sales......................         32,222        34.6        27,665        32.8       23,254        41.6
                                         ---------    --------     ---------    --------    ---------    --------
Gross Profit.......................         60,859        65.4        56,765        67.2       32,682        58.4
Selling, general and
   administrative expenses.........         26,268        28.2        26,959        31.9       21,569        38.6
Amortization of goodwill...........          5,490         5.9         3,213         3.8          869         1.5
                                         ---------    --------     ---------    --------    ---------    --------
Operating income...................         29,101        31.3        26,593        31.5       10,244        18.3
Interest expense & financing costs, net     24,927        26.8        18,361        21.7        8,851        15.8
Other expense (income).............            (46)         --           (34)         --         (122)        (.2)
                                         ---------    --------     ---------    --------    ---------    --------
Income before income tax expense
   and extraordinary loss..........          4,220         4.5         8,266         9.8        1,515         2.7
Income tax expense.................          3,213         3.4           852         1.0           --          --
                                         ---------    --------     ---------    --------    ---------    --------
Income before extraordinary loss...          1,007         1.1         7,414         8.8        1,515         2.7
Extraordinary loss.................             --          --        (7,121)        8.4           --          --
                                         ---------    --------     ---------    --------    ---------    --------
Net income.........................        $ 1,007         1.1%      $   293          .4%     $ 1,515         2.7%
                                         =========    ========     =========    ========    =========    ========
</TABLE>

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

(1)  The results of operations for the year ended December 31, 1996, include the
     Company's results from May 17, 1996 through December 31, 1996 and its
     predecessor's results from January 1, 1996 through May 16, 1996.


                                       17
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997

         Net Sales. For the year ended December 31, 1998, consolidated sales
were $93.1 million, an increase of 10.3% or $8.7 million from the prior year. On
June 25, 1997, the Roll-Your-Own segment was acquired and its operating results
have been included thereafter. Sales of the Roll-Your-Own segment were $42.3
million for the year ended December 31, 1998, an increase of $11.7 million or
38.2% from the prior year. Sales of the Smokeless Tobacco segment for the year
ended December 31, 1998, decreased 5.6% or $3.0 million from the prior year,
reflecting a 7.0% volume decrease and the implementation of a cents-off pricing
strategy, which were partially offset by manufacturers' price increases during
1998.

         Gross Profits. Gross profit for the year ended December 31, 1998,
increased $4.1 million or 7.2% from the prior year, while gross profit
percentage declined to 65.4% from 67.2%. Gross profit and gross profit
percentage of the Roll-Your-Own segment increased to $29.7 million or 70.3% of
net sales from $21.2 million or 69.0% of net sales for the prior year. Gross
profit and gross profit percentage of the Smokeless Tobacco segment decreased to
$31.1 million or 61.3% of net sales from $35.6 million or 66.2% for the prior
year due to LIFO Inventory adjustments and the implementation of a cents-off
pricing strategy. If the non-cash LIFO Inventory adjustments were disregarded,
gross profit percentage for the year ended December 31, 1998 would have been
64.1% of net sales compared to 65.3% for the prior year.

         Currency. Currency movements and price increases are the primary
adjustment factors for changes in costs of goods sold for NAOC. NAOC purchases
cigarette papers from Bollore on terms of net 45 days in French francs. Thus,
NAOC bears certain foreign exchange risks in its inventory purchases. To hedge
this risk, NAOC utilizes short-term forward currency contracts, through which
NAOC secures French francs in order to provide payment for its monthly purchases
of inventory. In addition, Bollore provides a contractual hedge against
substantial currency fluctuation in its agreement with NAOC. For the year ended
December 31, 1998, currency rates were favorable due to the strength of the U.S.
dollar against the French franc and the Company was able to hedge its currency
risk by utilizing short-term forward currency contracts through which NAOC
purchases French francs. In the event that the strength of the French franc
increases against the U.S. dollar, the Company may have to reassess its currency
strategy.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1998 decreased 2.6% to
$26.3 million from last year's $27.0 million. This decrease was due to an
overall reduction in marketing and management bonus expenses. Due to the fact
that selling, general and administrative expenses were only allocated to both
segments for the year ended December 31, 1998, it is not practical to compare
such expenses by segment.

         Amortization of Goodwill. Amortization of goodwill for the year ended
December 31, 1998 increased $2.3 million or 71.9% from the prior year.
Substantially all of the increase was related to the Roll-Your-Own segment as a
result of having a full year's amortization in 1998 compared to only a partial
year in 1997.

         Interest Expense and Financing Costs. Interest expense and financing
costs increased to $24.9 million for the year ended December 31, 1998 from $18.4
million for the prior year. This increase was due to having a full year's
interest expense in 1998 compared to only a partial year in 1997, subsequent to
the Acquisition and related recapitalization.


                                       18
<PAGE>
         Income Tax Expense. Income tax expense increased to $3.2 million for
the year ended December 31, 1998 from $0.8 million for the prior year. This
increase was due primarily to the recording of a one-time income tax benefit of
$3.6 million in 1997 to reflect the Company's deferred tax assets and
liabilities which had not previously been recorded due to its prior tax status.

         Extraordinary Loss. The Company recorded an extraordinary loss of $7.1
million (net of income tax benefit of $4.4 million) for the year ended December
31, 1997, related to the write-off of deferred financing costs and the debt
discount due to the recapitalization of the Company on June 25, 1997.

         Net Income. Due to the factors described above, there was net income of
$1.0 million for the year ended December 31, 1998 compared to net income for the
prior year of $0.3 million.

COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996

         Net Sales. For the year ended December 31, 1997, consolidated sales
were $84.4 million, an increase of 50.9% or $28.5 million from the prior year.
On June 25, 1997, the Company acquired the Roll-Your-Own segment and its
operating results have been included thereafter. Sales of the Roll-Your-Own
segment from the date of the Acquisition were 36.3% of the Company's
consolidated sales or $30.6 million. Sales of smokeless tobacco products for the
year ended December 31, 1997 decreased 3.8% or $2.1 million, reflecting a volume
decrease of 5.0% which was partially offset by a manufacturers' price increase
of 3.6% that occurred in July, 1997.

         Gross Profits. Gross profit and gross profit percentage for the year
ended December 31, 1997 increased to $56.8 million or 67.2% of net sales
compared to $32.7 million or 58.4% of net sales for the prior year. Gross profit
of the Roll-Your-Own segment since the date of the Acquisition was 37.3% of the
Company's consolidated gross profit or $21.2 million. Gross profit of smokeless
tobacco products for the year ended December 31, 1997 increased 8.9% or $2.9
million, of which $3.2 million was due to LIFO inventory adjustments.
Disregarding LIFO adjustments, gross profit of smokeless tobacco products
decreased 1.0%.

         Currency. For the year ended December 31, 1997, currency rates were
favorable due to the strength of the U.S. dollar against the French franc and
the Company was able to hedge its currency risk by utilizing short-term forward
currency contracts through which NAOC purchases French francs.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1997 increased 25.0% to
$27.0 million from the prior year's $21.6 million. This increase was due to the
addition of three new members of senior management, an increase in legal fees,
costs associated with the relocation of the Company's executive offices and
expenses associated with the Company's membership in the Smokeless Tobacco
Council. In addition, selling, general and administrative expenses of the
Roll-Your-Own segment since the date of the Acquisition were $1.8 million, or
8.4% of the aggregate increase.

         Amortization of Goodwill. Amortization of goodwill for the year ended
December 31, 1997 was $3.2 million compared to $0.9 million for the prior year.
This increase was due to the increase in intangible assets as a result of the
Acquisition.


                                       19
<PAGE>
         Interest Expense and Financing Costs. Interest expense and financing
costs increased to $18.4 million for the year ended December 31, 1997 from $8.9
million for the prior year. This increase was the result of additional
indebtedness incurred in connection with the Acquisition and related
recapitalization.

         Income Tax Expense. LLC and National Tobacco were a limited liability
company and a partnership, respectively, for federal and state income tax
purposes through June 25, 1997 and, accordingly, did not incur any income taxes
prior to such date. The income tax provision of $0.8 million for the year ended
December 31, 1997 includes a current provision of $4.4 million, and an income
tax benefit for the initial set-up of deferred income taxes of $3.6 million. The
initial set-up of deferred income taxes was necessary to record the Company's
deferred income tax assets and liabilities as of June 25, 1997, which had not
been previously recorded due to its prior tax status.

         Extraordinary Loss. The Company recorded an extraordinary loss of $7.1
million (net of income tax benefit of $4.4 million) related to the write-off of
deferred financing costs and the debt discount due to the recapitalization of
the Company on June 25, 1997.

         Net Income. Due to the factors described above, there was net income of
$0.3 million for the year ended December 31, 1997 compared to net income for the
prior year of $1.5 million.

LIQUIDITY AND CAPITAL REQUIREMENTS

         Working capital was $42.0 million at December 31, 1998 compared to
$48.8 million at December 31, 1997. The Company funds its seasonal working
capital requirements through its operating cash flows, and, if needed, bank
borrowings. As of December 31, 1998, the Company had an undrawn availability of
$24 million under its committed $25 million revolving credit facility.

         The tobacco for loose leaf chewing tobacco requires aging of
approximately two years before being processed into finished products. The
Company believes that National Tobacco maintains sufficient tobacco inventories
to ensure proper aging as well as an adequate supply based on its historical
sales activity. The Company also believes that NAOC maintains adequate
inventories and that the supply of such inventory will remain stable for the
foreseeable future.

         The Company believes that any effect of inflation at current levels
will be minimal. Historically, the Company has been able to increase prices at a
rate greater than that of inflation and believes that it will be able to do so
in the foreseeable future. In addition, the Company has been able to maintain a
stable variable cost structure for its smokeless tobacco products due in part to
its procurement and reformulation activities.

         For 1998, the Company spent $495,000 in capital expenditures. Given its
current operation, the Company believes that its annual capital expenditure
requirements for 1999 will be in the $750,000 range.

         The Company believes that its operating cash flows, together with its
revolving credit facility, should be adequate to satisfy its reasonably
foreseeable capital requirements. The financing of any significant future
products, business or property acquisitions may require additional debt or
equity financing.


                                       20
<PAGE>
YEAR 2000 PROJECT

         During fiscal 1997, the Company assessed the steps necessary to address
matters related to "Year 2000" issues. This assessment included a review of all
of the Company's hardware and software requirements. The Company developed and
implemented a strategy for attaining "Year 2000" compliance for its internal
systems, which included modifying existing software, purchasing new software and
acquiring new hardware. As of March 1999, the Company had completed its internal
compliance with its "Year 2000" project. The aggregate cost for compliance was
approximately $350,000.

         The Company has identified significant service providers, vendors,
suppliers and customers that are critical to its business operation and is
assessing potential vulnerabilities arising from these third parties. Steps are
being undertaken in an attempt to reasonably ascertain their stage of readiness
through interviews and other means. To the extent these third parties are not
compliant, the Company will request a description of their plans to become Year
2000 compliant. To the extent that these third parties fail to certify by June
30, 1999 that they are Year 2000 compliant, the Company will assess the possible
impact of that failure on the Company's business and take appropriate
remediation action to the extent feasible. The Company believes that there is
minimal exposure in these areas due to the limited reliance on electronic
components involved in the manufacturing process, the small number of major
suppliers and the preponderance of customers that are relatively unimpacted in
terms of electronic data interchange. The Company expects to complete this final
assessment by July 31, 1999.

         Due to the general uncertainty inherent in Year 2000 problems,
resulting in part from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the Company is unable to fully determine, at this time,
whether the consequences of Year 2000 failures will have a material impact on
the Company's results of operations, liquidity or financial condition. The
Company believes that, with the implementation of the new business systems and
the completion of the project as scheduled, the possibility of significant
interruptions of normal operations will be mitigated. If the present efforts to
address the Company's Year 2000 compliance arrangement are not successful or if
the Company's significant service providers, vendors, suppliers and customers do
not successfully address their issues, the Company's results of operation,
liquidity and financial condition could be materially and adversely affected.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income," No. 131, "Disclosures about
Segments of an Enterprise and Related Information," and No. 132, "Disclosures
about Pensions and other Postretirement Benefits," became effective in 1998 and
are reflected in the accompanying consolidated financial statements.

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company will adopt this statement in the Company's first quarter 2000 reporting
as required. Management is currently evaluating the impact of this statement on
the Company's future financial reporting.


                                       21
<PAGE>
FORWARD-LOOKING STATEMENTS

         The Company cautions you that certain statements in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
and elsewhere in this Form 10-K are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties and other important factors, including the risks discussed below.
The Company's actual future results, performance or achievement of results may
differ materially from any such results, performance, achievement implied by
these statements. Among the factors that could affect the Company's actual
results and could cause results to differ from those anticipated in the
forward-looking statements contained herein is the Company's ability to
implement its business strategy successfully, which will be dependent on
business, financial, and other factors beyond the Company's control, including,
among others, competitive pressures, prevailing changes in consumer preferences,
consumer acceptance of new product introductions and other marketing
initiatives, access to sufficient quantities of raw material or inventory,
wholesale ordering patterns, product liability litigation and changes in tobacco
products regulation.

         The Company cautions you not to put undue reliance on any
forward-looking statements. In addition, the Company does not have any intention
or obligation to update the forward-looking statements in this document. The
Company claims the protection of the safe harbor for forward-looking statements
contained in Section 21E of the Securities Exchange Act of 1934.

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk

         Interest Rate Sensitivity. The Company has exposure to interest rate
volatility primarily relating to interest rate changes applicable to term and
revolving loans under its senior secured credit facility. The Company's credit
facility bears interest at rates which vary with changes in (i) the London
Interbank Offered Rate (LIBOR) or (ii) a rate of interest announced publicly by
the Federal Reserve or National Westminster Bank plc. The Company does not
speculate on the future direction of interest rates. As of December 31, 1998,
approximately $60.6 million of the Company's debt bore interest at variable
rates. The Company believes that the effect, if any, of reasonably possible
near-term changes in interest rates on the Company's consolidated financial
position, results of operations or cash flows would not be significant.

         Foreign Currency Sensitivity. NAOC purchases inventory from Bollore on
terms of net 45 days in French francs. Accordingly, exposure exists to
potentially adverse movement in foreign currency rates. NAOC uses short-term
forward currency contracts to hedge the risk in foreign currency exchange rates.
In addition, Bollore provides a contractual hedge against substantial currency
fluctuation in its agreement with NAOC. NAOC does not use derivative financial
instruments for speculative trading purposes, nor does NAOC hedge its foreign
currency exposure in a manner that entirely offsets the effects of changes in
foreign exchange rates.

         NAOC regularly reviews its hedging programs and may as part of this
review determine at any time to change its hedging policy. As of December 31,
1998, NAOC did not have any outstanding commitment under forward currency
contracts.

                                       22
<PAGE>
Item 8.    Financial Statements and Supplementary Data

         The Company's Consolidated Financial Statements and Notes to
Consolidated Financial Statements, and the report of PricewaterhouseCoopers LLP,
independent accountants, with respect thereto, referred to in the Index to
Consolidated Financial Statements and Financial Statement Schedules of the
Company contained in Item 14(a), appear on pages F-1 through F-28 of this Form
10-K and are incorporated herein by reference thereto. Information required by
schedules called for under Regulation S-X is either not applicable or is
included in the Consolidated Financial Statements or Notes thereto.

Item 9.    Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure

         None.








                                       23
<PAGE>
                                    PART III

Item 10.   Directors and Executive Officers of the Registrant

BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

         The following table sets forth the name, position with the Company and
age of each member of the Board of Directors and each executive officer of the
Company. See "Election of Directors."

<TABLE>
<CAPTION>
Name                                      Age    Position
----                                      ---    --------
<S>                                      <C>     <C>
Thomas F. Helms, Jr................       58     Chief Executive Officer, President and Chairman of the Board
David I. Brunson...................       48     Executive Vice President--Finance and Administration, Chief
                                                 Financial Officer, Treasurer, Secretary  and Director
Jack Africk........................       70     Director
Kim S. Fennebresque................       49     Director
Arnold Sheiffer....................       66     Director

</TABLE>

         Thomas F. Helms, Jr. Thomas F. Helms, Jr. has been Chief Executive
Officer, Chairman of the Board and the sole member of the Administration
Committee of the Company since June 1997 and a member of the Company's Executive
Committee since December 1997. On January 1, 1999, Mr. Helms assumed the
additional responsibilities of President of the Company. He had previously held
the position of President of the Company and its subsidiaries (other than
International Flavors and Technology, Inc. ("IFT")) prior to January 1998. He
currently serves as Chairman of the Board of each of the Company's corporate
subsidiaries. He has been Chief Executive Officer of National Tobacco and NTFC
since 1988 and has held the same office with NAOC and IFT since October 1997.
Mr. Helms also served as President and Chief Executive Officer of Culbro
Corporation's smokeless tobacco division from 1983 until shortly prior to its
sale to American Maize-Products Company in March 1986. From 1979 to 1982, Mr.
Helms was General Manager of the Etherea Cosmetics and Designer Fragrances
Division of Revlon, Inc. Prior to that time, Mr. Helms was employed in marketing
and sales positions in various divisions of Revlon Consumer Products
Corporation.

         David I. Brunson. David I. Brunson has been Executive Vice
President--Finance and Administration, Chief Financial Officer and a Director of
the Company since June 1997 and a member of the Company's Executive Committee
since December 1997. He has held the same offices with National Tobacco and NTFC
(since April 1997), NAOC (since October and June 1997, respectively) and IFT
(since October 1997). In December 1998, Mr. Brunson was also appointed to the
offices of Treasurer and Secretary of the Company and Secretary of IFT. In
addition, he currently holds the offices of Treasurer and Assistant Secretary
with each of the Company's subsidiaries (other than IFT). Mr. Brunson has also
served as a member of the Board of the Directors of each of the Company's
corporate subsidiaries since October 1997 (or, in the case of NAOC, since June
1997). Prior to joining the Company, from November 1992 until April 1997, he was
employed as a Managing Director at Societe Generale and established and was
President of Societe Generale Investment Corporation. From July 1979 until
November 1992, he was employed at The First National Bank of Chicago, lastly as
a Managing Director in the Investment Banking Division.


                                       24
<PAGE>
         Jack Africk. Jack Africk has been a Director and a member of the
Executive Committee of the Company since October and December 1997,
respectively. In December 1998 he resigned from his positions as President and
Chief Operating Officer of the Company and each of its subsidiaries (other than
IFT), having held those positions since January 1998. From February to December
1998, Mr. Africk was also a Director of each of the Company's corporate
subsidiaries. Beginning in 1996 and until the consummation of the Acquisition,
he was Chief Executive Officer of NATC. Prior to that time, from 1993 to 1996,
Mr. Africk was a consultant and Director of NATC. Mr. Africk is a former Vice
Chairman of UST. From 1979 until 1993, Mr. Africk held various positions with
UST, including Vice Chairman and Executive Vice President, as well as positions
with subsidiary organizations including President of an international division,
and President and Chief Executive Officer of United States Tobacco Company. Mr.
Africk also currently serves as Chairman of the Board of Evolution Partners and
as a Director of Duty Free International, Target Factory Outlets, Crown Central
Petroleum and Transmedia Networks.

         Kim S. Fennebresque. Kim S. Fennebresque has been a Director of the
Company since October 1997. He has also served as Chairman of the Audit and
Compensation Committees of the Board of Directors since November and December
1997, respectively. Since March 1998, he has held the position of Managing
Director of SG Cowen. From July 1994 to January 1998, Mr. Fennebresque was a
Managing Director of UBS Securities LLC, and prior to that, a partner of Lazard
Freres & Co.

         Arnold Sheiffer. Arnold Sheiffer has served as a Director of the
Company since June 1997. He has also served as a member of the Audit and
Compensation Committees of the Board of Directors since November and December
1997, respectively. Mr. Sheiffer has been a Director of Spanish Broadcasting
System, Inc. since 1994 and a Managing Director of Shenkman Capital Management,
Inc. since 1995. From 1990 to 1994, he was President and Chief Operating Officer
of Katz Media Corp., and prior to that, Managing Partner of A. Sheiffer and
Company, Certified Public Accountants.

ELECTION OF DIRECTORS

         Pursuant to the terms of an Exchange and Stockholders' Agreement, dated
as of June 25, 1997, among the Company and certain of the stockholders of the
Company (the "Stockholders' Agreement"), Mr. Helms has the ability to elect all
of the directors of the Company unless dividends are not paid in cash to the
holders of the Company's Senior Preferred Stock when such dividends are required
to be paid in cash, in which event such holders have the right to elect two
directors. Messrs. Helms and Brunson have served as directors of the Company
since June 17, 1997 following the formation of the Company. Mr. Scheiffer has
served as a director since June 25, 1997, the date the Acquisition was
consummated. Messers. Africk and Fennebresque have served as directors since
October 1997. Each director is to serve until the next annual meeting of
shareholders (or written consent in lieu thereof) and until his successor is
elected and duly qualified.

         None of the present directors is a director of any company with a class
of securities registered pursuant to Section 12 of the Securities Exchange Act
of 1934 or subject to the requirements of Section 15(d) of that Act or any
company registered as an investment company under the Investment Company Act of
1940, except as indicated above. No family relationships exist between any
director or executive officer of the Company.


                                       25
<PAGE>
COMMITTEES OF THE BOARD

         During 1998, the Board of Directors appointed four committees: an
Executive Committee, an Audit Committee, a Compensation Committee and an
Administration Committee. The members of the Executive Committee for 1998 were
Messrs. Helms, Brunson, Africk and Hay. In view of the fact that the size of the
Company's Board of Directors has been reduced from nine to five directors, the
Board has decided to disband the Executive Committee effective March 31, 1999.
The members of the Audit and Compensation Committees for fiscal 1998 were
Messrs. Fennebresque and Sheiffer. The sole member of the Administration
Committee, which administers the Company's 1997 Share Incentive Plan, was Thomas
F. Helms, Jr.

Item 11.     Executive Compensation

         The following table summarizes the compensation paid by the Company and
its subsidiaries, as well as certain other compensation paid or accrued, to the
Chief Executive Officer of the Company and the other four most highly
compensated executive officers of the Company who earned in excess of $100,000
for the Company's (or its subsidiaries') fiscal years ended December 31, 1996,
1997 and 1998 (each person appearing in the table is referred to as a "Named
Executive"):

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                  Annual Compensation         All Other
NAME AND PRINCIPAL POSITION                         Year        Salary ($)    Bonus ($)(1)    Compensation ($)
---------------------------                         ----        ----------    ---------       ----------------
<S>                                               <C>          <C>            <C>            <C>
Thomas F.  Helms, Jr. .........................     1996          $297,462     $134,820         $50,274(2)
     Chief Executive Officer and President          1997           343,172       79,372         37,901 (3)
                                                    1998           441,108      175,000         163,799(4)
David I. Brunson...............................     1996               N/A          N/A                N/A
     Executive Vice President--Finance and          1997           200,099           --         62,253 (5)
     Administration and Chief Financial Officer     1998           333,339      450,000          13,980(6)
Jack Africk (7)................................     1996               N/A          N/A                 --
                                                    1997               N/A          N/A         132,500(8)
                                                    1998           358,013       65,000          19,500(9)
Jeffrey S. Hay (10)............................     1996               N/A          N/A                N/A
                                                    1997           101,060           --                 --
                                                    1998           270,490      197,000          5,660(11)
Jay Martin (12)................................     1996               N/A          N/A         65,433(13)
                                                    1997           195,995           --                 --
                                                    1998           209,969       40,000

</TABLE>

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

(1)    Annual bonus compensation reflects the payment in fiscal 1998 of bonuses
       that had accrued during fiscal 1997.


                                       26
<PAGE>
(2)    Includes insurance premiums of $41,738 paid by the Company with respect
       to term life insurance and contributions by the Company of $4,800 to a
       defined contribution plan.

(3)    Includes insurance premiums of $33,151 paid by the Company with respect
       to term life insurance and contributions by the Company of $4,750 to a
       defined contribution plan.

(4)    Includes insurance premiums of $34,132 paid by the Company with respect
       to term life insurance, contributions by the Company of $4,800 to a
       defined contribution plan, and payment of a $124,867 non-cash bonus in
       satisfaction of an employee loan.

(5)    Includes insurance premiums of $9,180 paid by the Company with respect to
       term life insurance and a payment of $37,333 pursuant to an employment
       contract.

(6)    Includes insurance premiums of $9,180 paid by the Company with respect to
       term life insurance and contributions by the Company of $4,800 to a
       defined contribution plan.

(7)    From January to December 1998, Mr. Africk held the positions of President
       and Chief Operating Officer.

(8)    Includes consulting fees of $125,000 and Automobile and Office allowances
       of $7,500.

(9)    Includes $19,500 paid by the Company for Automobile and Office
       allowances.

(10)   From July 1997 to December 1998, Mr. Hay held the positions of Executive
       Vice President and General Counsel.

(11)   Includes insurance premiums of $860 paid by the Company with respect to
       term life insurance and contributions by the Company of $4,800 to a
       defined contribution plan.

(12)   From January to December 1998, Mr. Martin held the position of Executive
       Vice President--Governmental Relations and Trade Development.

(13)   Includes consulting fees paid by the Company.


                                  STOCK OPTIONS

         The following table contains information concerning the grant of stock
options to the Named Executives during the Company's last fiscal year:

                        OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                            Shares of       % of Total                   Grant Date
                          Common Stock       Options                   Fair Value of                Grant Date
                           Underlying       Granted to     Exercise       Common                      Present
                             Options       Employees in      Price         Stock        Expiration    Value(2)
   Name                     Granted         Fiscal Year       ($/Sh)      ($/Sh)            Date        ($)
   ----                   ------------     -------------   ----------    -----------    ----------    --------
<S>                      <C>               <C>            <C>          <C>             <C>           <C>
   Jack Africk               14,962            100           18.19           40         7/28/2012      396,643

</TABLE>



                                       27
<PAGE>
(1)      See "Employment and Consulting Agreements--Jack Africk" for a
         description of tax reimbursement provisions contained in the stock
         option agreements pursuant to which Mr. Africk's options were granted.

(2)      The grant date present value was determined as the difference between
         the grant date fair value of the common stock and the present value of
         the exercise price over the expected life, assumed to be five years, at
         a risk free interest rate of 6.0% with no assumed dividend yield.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Thomas F. Helms, Jr. is the sole member of the Company's Administration
Committee and was, until October 1997, the sole director of the Board of
Directors of NTFC. As such, he performed the equivalent function of a
compensation committee for these entities. Mr. Helms's relationship with NTFC,
National Tobacco and the Company is set forth under "Board of Directors and
Executive Officers." On April 26, 1988 and December 15, 1988, Thomas F. Helms,
Jr., President and Chief Executive Officer of the Company, borrowed $75,000 and
$45,000, respectively, in connection with the purchase of a portion of his
partnership interests in National Tobacco and executed two separate notes,
payable to the Company. On April 14, 1998, Helms Management Corp. issued a
promissory note to the Company in the aggregate principal amount of $886,900,
representing the principal on the notes discussed above, plus an additional loan
by the Company in the amount of $766,686.30 to cover certain income tax
liabilities of Helms Management Corp. resulting from the conversion of LLC to a
"C" corporation in connection with the Acquisition. Upon execution of the
$886,900 note, the prior notes issued by Mr. Helms were cancelled. The current
note bears interest at the rate of 6.5% per annum and has a final maturity on
March 31, 2003. On January 4, 1999, Mr. Helms issued a promissory note to the
Company, in the principal amount of $150,000, for an additional loan by the
Company to cover certain tax liabilities of Helms Management Corp. resulting
from the above-mentioned conversation of LLC. This note bears interest at the
rate of 6.5% per annum and has a final maturity on December 31, 2003. As of
January 24, 1999, the aggregate amount outstanding under the above notes was
approximately $1,036,900.

COMPENSATION OF DIRECTORS

         Generally, directors who do not receive compensation as officers,
employees or consultants of the Company or any of its affiliates will be paid an
annual retainer fee of $25,000, plus reasonable out-of-pocket expenses, for
their services on the Board and its committees. In addition to compensation he
receives as a consultant, Jack Africk receives additional compensation of
$25,000 in his capacity as a member of the Company's Board of Directors. Kim S.
Fennebresque also received compensation of $25,000 in his capacity as Chairman
of the Company's Audit and Compensation Committees and compensation of $25,000
for his services as an ad hoc member of the Executive Committee.

EMPLOYMENT AND CONSULTING AGREEMENTS

THOMAS F. HELMS, JR.

         Thomas F. Helms, Jr., Chief Executive Officer of the Company, has an
employment agreement with the Company (the "Helms Employment Agreement")
pursuant to which Mr. Helms is entitled to receive an annual base salary of
$350,000 to be reviewed annually, plus a bonus in accordance with the Company's
Executive Plan (as defined). In March 1998, the Company's Compensation Committee


                                       28
<PAGE>
approved an increase in Mr. Helms annual base salary to $425,000. The Helms
Employment Agreement provides for a three-year term, renewable annually, and is
terminable at will except with respect to severance. In addition, Mr. Helms will
receive various other benefits, including life insurance and health,
hospitalization, disability and pension benefits and other perquisites. The
Helms Employment Agreement includes a non-compete provision for a minimum of
twelve months following the termination of Mr. Helms's employment as well as for
any period during which severance is paid to Mr. Helms. Mr. Helms is entitled to
twelve months' severance and a continuation of benefits following a termination
of his employment by the Company without cause, except that the bonus received
shall be only for the year in which the termination occurred and shall be
prorated.

DAVID I. BRUNSON

         David I. Brunson, Executive Vice President--Finance and Administration,
Chief Financial Officer, Treasurer and Secretary of the Company, entered into an
amended and restated employment agreement with the Company on April 30, 1998 (as
so amended and restated, the "Brunson Employment Agreement"). Pursuant to the
Brunson Employment Agreement, Mr. Brunson is entitled to receive an annual base
salary of $330,000 to be reviewed annually, plus a bonus in accordance with the
Company's Executive Plan. The Brunson Employment Agreement provides for a term
ending on the later of April 30, 2002 or the second anniversary of the date
notice of termination is first given, and is terminable at will except with
respect to severance. Mr. Brunson received signing and stay bonuses, each in the
amount of $300,000, upon the execution of the Brunson Employment Agreement and
on February 28, 1999, respectively. In addition, Mr. Brunson will receive
various other benefits, including life insurance and medical, disability,
pension benefits, club memberships, stock options and reimbursements of certain
expenses. The Brunson Employment Agreement includes a non-compete provision for
a minimum of twelve months following the termination of Mr. Brunson's employment
and for any subsequent period during which severance is paid to Mr. Brunson.

         In the event Mr. Brunson resigns for good reason or is terminated
without cause, he is entitled to receive his annual base salary and a pro rated
bonus (based on the highest bonus paid to Mr. Brunson during the preceding two
years) for the remainder of the term of employment. Any options or shares of
restricted stock granted to Mr. Brunson vest in full as of the date of such
termination. In addition, Mr. Brunson would also have the option to require the
Company to repurchase at fair market value all or a portion of his shares of the
Company's common stock. In the event of his termination within twelve months
following the occurrence of a change of control of the Company, Mr. Brunson will
receive a lump sum cash payment equal to three times the sum of (a) his current
annual base salary and (b) the highest bonus paid to Mr. Brunson pursuant to the
Executive Plan during the preceding two years. If Mr. Brunson's employment is
terminated for any other reason, he will receive his accrued and unpaid salary
and bonus to the date of termination.

         Pursuant to a non-qualified stock option agreement, Mr. Brunson was
granted options to purchase 30,928 shares of Common Stock of the Company.
One-third of these options were vested as of the closing of the Acquisition and
one-third of these options will vest on each of the first two anniversaries of
the date of his employment, April 23, 1997. In connection with the exercise of
such options and subject to certain limitations, including a requirement that
Mr. Brunson shall not leave, resign or be terminated for cause, the Company has
agreed to pay Mr. Brunson an amount equal to the sum of (i) the difference
between ordinary income and long-term capital gain tax liability for reportable
income resulting from any exercise of the options, plus (ii) a "gross-up" to
compensate for the additional ordinary income tax liability resulting from the
payment of such amount.


                                       29
<PAGE>
         Mr. Brunson also reached an agreement with Mr. Helms that provided for
payment to Mr. Brunson in the event of a sale of substantially all the equity or
assets of the Company or upon the occurrence of certain recapitalization
transactions, provided he is either an employee at the time payment is due or
has been terminated other than for cause no more than eighteen months prior to
the time such payment is due. In connection with the negotiation of the Brunson
Employment Agreement, Mr. Brunson agreed to relinquish his rights under the
foregoing agreement and accept in lieu thereof options to purchase 6,536 shares
of the Company's Common Stock from Helms Management Corp. The option is
exercisable until April 30, 2013 at an exercise price of $10.00 per share.

JEFFREY S. HAY

         Jeffrey S. Hay resigned as Executive Vice President, General Counsel
and Secretary of the Company on December 31, 1998. Prior to his resignation, he
entered into an amended and restated employment agreement with the Company on
April 30, 1998 (as so amended and restated, the "Hay Employment Agreement").
Pursuant to the Hay Employment Agreement, Mr. Hay received an annual base salary
of $275,000, plus a bonus in accordance with the Company's Executive Plan.
Effective upon his resignation, the Company's obligation to pay his base salary
and bonus ceased, except to the extent accrued and unpaid as of January 15,
1999. The non-compete provision of the Hay Employment Agreement will remain in
effect for a period of twelve months following the termination of Mr. Hay's
employment and for any subsequent period, if any, during which Mr. Hay is
entitled to receive any payment thereunder.

         Pursuant to a non-qualified stock option agreement with the Company,
Mr. Hay was granted options to purchase 15,966 shares of Common Stock of the
Company. In connection with Mr. Hay's resignation, the Company agreed to extend
until July 28, 2012 the exercise period for Mr. Hay's vested options with
respect to 8,870 shares, provided that the Company will not be obligated to
reimburse Mr. Hay for any tax liability incurred in connection with the exercise
of such options. The remaining unvested options with respect to 7,096 shares
expired on January 15, 1998 in accordance with the terms of Mr. Hay's
non-qualified stock option agreement.

         In connection with the renegotiation of the Hay Employment Agreement,
Mr. Hay entered into an agreement with Helms Management Corp. granting him an
option to purchase 3,000 shares of the Company's Common Stock from Helms
Management Corp. The option is exercisable until April 30, 2013 at an exercise
price of $10.00 per share.

JACK AFRICK

         Jack Africk, the former President and Chief Operating Officer of the
Company, terminated his employment agreement with the Company (the "Africk
Employment Agreement") effective December 31, 1998, but continues to serve as a
member of the Company's Board of Directors and, as described below, as a
consultant to the Company. Pursuant to the Africk Employment Agreement, Mr.
Africk received an annual base salary of $325,000, plus a bonus in accordance
with the Company's Executive Plan. Mr. Africk was not entitled to severance or
continuation of benefits in connection with the termination of his employment,
other than with respect to the possible reinstatement of his consulting
agreement with the Company in the manner described below.

         In June 1997, Mr. Africk entered into a consulting agreement with the
Company (the "1997 Consulting Agreement"), pursuant to which Mr. Africk would be
entitled to receive an annual consulting fee of $300,000 plus a minimum bonus of


                                       30
<PAGE>
$75,000 per annum in accordance with the Company's existing Bonus Program if
certain financial targets were met. Pursuant to the Africk Employment Agreement,
all rights and obligations under the 1997 Consulting Agreement were suspended
and, effectively, terminated, except in the event of a termination of Mr.
Africk's by the Company without cause or by Mr. Africk for good reason (in which
case the Africk Consulting Agreement would be reinstated in accordance with its
terms from the date of such termination until the later of June 30, 1999 or
ninety days following the effective date of such termination). In connection
with Mr. Africk's resignation, he and the Company agreed to enter into a new
consulting agreement (the "1999 Consulting Agreement") in lieu of reinstatement
of the 1997 Consulting Agreement. Pursuant to the 1999 Consulting Agreement, Mr.
Africk is to provide consulting services to the Company on an as needed basis
during 1999 at the rate of $75,000 per annum. The 1999 Consulting Agreement is
subject to annual renewals on 90 days notice.

         Pursuant to a non-qualified stock option agreement, Mr. Africk was
granted options to purchase 14,962 shares of Common Stock of the Company, all of
which were vested in full as of December 31, 1998. In connection with Mr.
Africk's resignation, the Company agreed to extend the exercise period for these
options until their expiration date on July 28, 2012. The Company also agreed
that, as had been previously provided in the Africk Employment Agreement, the
Company would pay Mr. Africk an amount equal to the sum of (i) the difference
between ordinary income and long-term capital gain tax liability for reportable
income resulting from any exercise of the options, plus (ii) a "gross-up" to
compensate for the additional ordinary income tax liability resulting from the
payment of such amount.

JAY MARTIN

         Jay Martin, Executive Vice President and Chief Operating Officer of the
Company, had an employment agreement with the Company (the "Martin Employment
Agreement") that expired on December 31, 1998. The Company determined not to
renew the agreement, but Mr. Martin has continued his employment with the
Company as an employee at will. The Martin Employment Agreement included
confidentiality and non-compete provisions extending twelve months from and
after the termination of Mr. Martin's employment.

RETIREMENT PLAN

         The table below illustrates the approximate amounts of annual normal
retirement benefits payable under the Company's Retirement Plan (as defined
herein).

<TABLE>
<CAPTION>
                                                             Annual Benefits at Retirement with
                     Average                                     Years of Credited Service(a)
                  Compensation         10             15              20             25             30              35
                  ------------     ----------     ----------      ----------     ----------     ----------      -----------
<S>                                <C>            <C>            <C>            <C>            <C>             <C>
                    $125,000        $ 15,000       $ 22,500        $ 30,000       $ 37,500       $ 45,000        $ 52,500
                     150,000          18,000         27,000          36,000         45,000         54,000          63,000
                     175,000          21,000         31,500          42,000         52,500         63,000          73,500
                     200,000          24,000         36,000          48,000         60,000         72,000          84,000
                     225,000          27,000         40,500          54,000         67,500         81,000          94,500
                     250,000          30,000         45,000          60,000         75,000         90,000         105,000
                     300,000          36,000         54,000          72,000         90,000        108,000         126,000
                     400,000          48,000         72,000          96,000        120,000        144,000         168,000
                     450,000          54,000         81,000         108,000        135,000        162,000         189,000
                     500,000          60,000         90,000         120,000        150,000        180,000         210,000

</TABLE>


                                       31
<PAGE>
------------------------------
(a)      Actual amounts paid under the Retirement Plan may be less than the
         amounts set forth on the table due to IRC limitations.

         The Company has a noncontributory, defined benefit retirement plan (the
"Retirement Plan"), which covers all full-time employees, including officers,
upon completing one year of service.

         A participant in the Retirement Plan becomes fully vested prior to
normal retirement at age 65 upon the completion of five years of service.
Benefits are also provided under the Retirement Plan in the event of early
retirement at or after age 55 and the completion of at least ten years of
service (or special early retirement after completion of 30 years of service)
and in the event of retirement for disability after completion of five years of
service. The amount of the contribution, payment or accrual with respect to a
specified person is not and cannot readily be separately or individually
calculated by the actuaries for the Retirement Plan. Benefits under the
Retirement Plan are based upon application of a formula to the specified average
compensation and years of credited service at normal retirement age.
Compensation covered by the Retirement Plan consists of the average annual
salary during any five consecutive calendar years in the last ten years of an
employee's service which affords the highest salary, or, if employed for less
than five years, the average annual salary for the years employed. The benefits
are not subject to any deduction for social security payments. Estimated
credited years of service under the Retirement Plan for the Named Executives
(other than Messrs. Africk and Hay) are as follows: Thomas F. Helms, Jr., 11
years; and David I. Brunson, 1 year.

BONUS PLANS

         In March 1998, the Compensation Committee of the Company's Board of
Directors adopted the 1998 Executive Committee Bonus Plan (the "Executive
Plan"), the 1998 Management Bonus Plan (the "Management Plan") and the 1998
Discretionary Bonus Plan (the "Discretionary Plan"). The Executive Plan provides
members of the Company's Executive Committee with the opportunity to receive
bonus pay based on the Company's annual EBITDA performance, subject to the
Management Committee's right, acting on advice of the Compensation Committee, to
make discretionary bonus payments to one or more participants in the Executive
Plan. The Management Plan provides certain members of senior management with the
opportunity to receive bonus pay based on the Company's annual EBITDA
performance as well as individual performance of participants, subject to the
Executive Committee's right, acting on advice of the Compensation Committee, to
make discretionary bonus payments. Under the Discretionary Bonus Plan, the
Executive Committee may provide discretionary bonus payments to employees who
are not participants in any other bonus plan established by the Company based on
individual levels of performance.

1997 SHARE INCENTIVE PLAN

         The Board of Directors of the Company has adopted, and the Company's
stockholders have approved, the North Atlantic Trading Company, Inc. 1997 Share
Incentive Plan (the "Incentive Plan").

         The Incentive Plan is intended to provide incentives which will attract
and retain highly competent persons as key employees of the Company and its
subsidiaries, by providing them opportunities to acquire shares of stock or to
receive monetary payments based on the value of such shares pursuant to the
Benefits (as defined) described herein.


                                       32
<PAGE>
Awards

         The Company has granted options to purchase 30,928, 15,966 and 14,962
shares of Common Stock to David I. Brunson, Jeffrey S. Hay and Jack Africk,
respectively. Two-thirds of the options granted to Mr. Brunson were vested as of
April 23, 1998 and one-third of these options will vest on April 23, 1999. Upon
Mr. Hay's resignation, options with respect to 8,870 shares had vested and the
remaining unvested options were forfeited in accordance with Mr. Hay's stock
option agreement. As of December 31, 1998, all of Mr. Africk's options were
fully vested.

Shares Available

         The Incentive Plan makes available for Benefits an aggregate amount of
61,856 shares of Common Stock (all of which have been granted as described
above), subject to certain adjustments. Any shares of Common Stock subject to a
stock option or stock appreciation right which for any reason is cancelled or
terminated without having been exercised, and subject to limited exceptions, any
shares subject to stock awards, performance awards or stock units which are
forfeited, any shares subject to performance awards settled in cash or any
shares delivered to the Company as part of full payment for the exercise of a
stock option or stock appreciation right shall again be available for Benefits
under the Incentive Plan.

Administration

         The Incentive Plan provides for administration by a committee (the
"Administration Committee") appointed by the Board of Directors from among its
members. Currently, the sole member of the Administration Committee is Thomas F.
Helms, Jr. The Administration Committee is authorized, subject to the provisions
of the Incentive Plan, to establish such rules and regulations as it deems
necessary for the proper administration of the Incentive Plan and to make such
determinations and interpretations and to take such action in connection with
the Incentive Plan and any Benefits granted as it deems necessary or advisable.
Thus, among the Administration Committee's powers are the authority to select
officers and other key employees of the Company and its subsidiaries to receive
Benefits, and determine the form, amount and other terms and conditions of
Benefits. The Administration Committee also has the power to modify or waive
restrictions on Benefits, to amend Benefits and to grant extensions and
accelerations of Benefits.

Eligibility for Participation

         Key employees of the Company or any of its subsidiaries are eligible to
participate in the Incentive Plan. The selection of participants from eligible
key employees is within the discretion of the Administration Committee. All
employees are currently eligible to participate in the Incentive Plan. The
Incentive Plan provides for the grant of any or all of the following types of
benefits: (1) stock options, including incentive stock options and non-qualified
stock options; (2) stock appreciation rights; (3) stock awards, including
restricted stock; (4) performance awards; and (5) stock units (collectively, the
"Benefits"). Benefits may be granted singly, in combination, or in tandem as
determined by the Administration Committee. Stock awards, performance awards and
stock units may, as determined by the Administration Committee in its
discretion, constitute Performance-Based Awards, as described below.


                                       33
<PAGE>
Stock Options

         Under the Incentive Plan, the Administration Committee may grant awards
in the form of options to purchase shares of Common Stock. Options may be either
incentive stock options, qualifying for special tax treatment, or non-qualified
stock options. The exercise price may be paid in cash or, in the discretion of
the Administration Committee, by the delivery of shares of Common Stock of the
Company then owned by the participant, by the withholding of shares of Common
Stock for which a stock option is exercisable, or by a combination of these
methods. In the discretion of the Administration Committee, payment may also be
made by delivering a properly executed exercise notice to the Company together
with a copy of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds to pay the exercise price. The
Administration Committee may prescribe any other method of paying the exercise
price that it determines to be consistent with applicable law and the purpose of
the Incentive Plan. In determining which methods a participant may utilize to
pay the exercise price, the Administration Committee may consider such factors
as it determines are appropriate.

Stock Appreciation Rights (SARs)

         The Incentive Plan authorizes the Administration Committee to grant an
SAR either in tandem with a stock option or independent of a stock option. An
SAR is a right to receive a payment, in cash or Common Stock, equal to the
excess of (x) the fair market value, or other specified valuation (which shall
not be greater than the fair market value), of a specified number of shares of
Common Stock on the date the right is exercised over (y) the fair market value,
or other specified valuation (which shall not be less than fair market value),
of such shares of Common Stock on the date the right is granted, all as
determined by the Administration Committee. Each SAR shall be subject to such
terms and conditions as the Administration Committee shall impose from time to
time.

Stock Awards

         The Incentive Plan authorizes the Administration Committee to grant
awards in the form of restricted or unrestricted shares of Common Stock ("Stock
Awards"), which includes mandatory stock bonus incentive compensation and which
may constitute Performance-Based Awards. Such awards will be subject to such
terms, conditions, restrictions, and/or limitations, if any, as the
Administration Committee deems appropriate including, but not by way of
limitation, restrictions on transferability, continued employment and
performance goals established by the Administration Committee over a designated
period of time.

Performance Awards

         The Incentive Plan allows for the grant of performance awards which may
take the form of shares of Common Stock or stock units, or any combination
thereof and which may constitute Performance-Based Awards. Such awards will be
contingent upon the attainment over a period to be determined by the
Administration Committee of certain performance goals. The length of the
performance period, the performance goals to be achieved and the measure of
whether and to what degree such goals have been achieved will be determined by
the Administration Committee. Payment of earned performance awards will be made
in accordance with terms and conditions prescribed or authorized by the
Administration Committee. The participant may elect to defer, or the


                                       34
<PAGE>
Administration Committee may require the deferral of, the receipt of performance
awards upon such terms as the Administration Committee deems appropriate.

Stock Units

         The Administration Committee may, in its discretion, grant Stock Units
to participants, which may constitute Performance-Based Awards. A "Stock Unit"
means a notational account representing one share of Common Stock. The
Administration Committee determines the criteria for the vesting of Stock Units
and whether a participant granted a Stock Unit shall be entitled to Dividend
Equivalent Rights (as defined in the Incentive Plan). Upon vesting of a Stock
Unit, unless the Administration Committee has determined to defer payment with
respect to such unit or a participant has elected to defer payment, shares of
Common Stock representing the Stock Units will be distributed to the participant
unless the Administration Committee, with the consent of the participant,
provides for the payment of the Stock Units in cash, or partly in cash and
partly in shares of Common Stock, equal to the value of the shares of Common
Stock which would otherwise be distributed to the participant.

Other Terms of Benefits

         The Incentive Plan provides that Benefits shall not be transferable
other than by will or the laws of descent and distribution. The Administration
Committee shall determine the treatment to be afforded to a participant in the
event of termination of employment for any reason including death, disability or
retirement. Notwithstanding the foregoing, other than with respect to incentive
stock options, the Administration Committee may permit the transferability of an
award by a participant to members of the participant's immediate family or
trusts for the benefit of such person or family partnerships. Upon the grant of
any Benefit under the Incentive Plan, the Administration Committee may, by way
of an agreement with the participant, establish such other terms, conditions,
restrictions and/or limitations covering the grant of the Benefit as are not
inconsistent with the Incentive Plan. No Benefit shall be granted under the
Incentive Plan after June 25, 2007. The Board of Directors reserves the right to
amend, suspend or terminate the Incentive Plan at any time, subject to the
rights of participants with respect to any outstanding Benefits.

         The Incentive Plan contains provisions for equitable adjustment of
Benefits in the event of a merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, reverse stock split, split up,
spinoff, combination of shares, exchange of shares, dividend in kind or other
like change in capital structure or distribution (other than normal cash
dividends) to stockholders of the Company.



                                       35
<PAGE>
Item 12.     Security Ownership of Certain Beneficial Owners and Management

         The table below sets forth certain information regarding the beneficial
ownership of Common Stock as of February 28, 1998 by (i) each person or entity
who beneficially owns five percent or more of the Common Stock, (ii) each
Director and Named Executives of the Company and (iii) all Directors and
executive officers of the Company as a group. Unless otherwise indicated, each
beneficial owner's address is c/o North Atlantic Trading Company, Inc., 257 Park
Avenue South, 7th Floor, New York, New York 10010-7304.

<TABLE>
<CAPTION>
                                                                                          Percent Owned(a)
                                                                                ----------------------------------
                                                                                 Before Exercise    After Exercise
           Beneficial Owner                               Number of Shares         of Warrants        of Warrants
           ----------------                               ----------------       -------------      -------------
<S>                                                        <C>                   <C>                <C> 
           Thomas F. Helms, Jr. (b)(c)...............          462,636                 87.6%              78.2%
               Helms Management Corp.
           David I. Brunson(d).......................          309,478                 55.4               49.7
           Jeffrey S. Hay(e).........................           15,246                  2.8                2.5
           Maurice R. Langston(b)....................           37,038                  7.0                6.3
               Langston Enterprises, Inc.
           Alan R. Minsterketter(b)..................           27,613                  5.2                4.7
               Alan M. Inc.
           Kim S. Fennebresque.......................           20,000                  3.8                3.4
               Ivory Capital
           Clifford D. Ray(b)........................           17,728                  3.4                3.0
               C.D. Ray, Inc.
           Jay Martin(b).............................           12,137                  2.3                2.1
               J. Martin Associates, Inc.
           Jack Africk(f)............................           21,212                  3.9                3.5
           Arnold Sheiffer...........................           11,225                  2.1                1.9
           Chris Kounnas(b)..........................           10,002                  1.9                1.7
               CNK Enterprises, Inc.
           Herbert Morris(b).........................           37,990                  7.2                6.4
               Flowing Velvet Productions, Inc.
               3 Points of View
               Warwick, New York 10990
           DIRECTORS AND EXECUTIVE OFFICERS
               AS A GROUP (11 PERSONS) (C) (D) (E) (F)         549,747                 94.3%              85.0%
</TABLE>

------------------------------
(a)  The percentages assume, in the column entitled "Before Exercise of
     Warrants," that none of the outstanding warrants to purchase an aggregate
     of 63,490 shares at an exercise price of $.01 per share is exercised and,
     in the column entitled "After Exercise of Warrants," that all of such
     warrants will be exercised.

(b)  Reflects shares held by the corporation listed below the name of such
     natural person. Such natural person owns all of the issued and outstanding
     shares of capital stock of the corporation listed below the name of such
     natural person.

(c)  Helms Management Corp. owns 276,300 shares of voting Common Stock, which
     represents approximately 52.3% of the outstanding shares assuming that none
     of the outstanding warrants are exercised, or 46.7% of the outstanding
     shares that all such warrants are exercised. The 276,300 shares owned by
     Helms Management Corp. are subject to a voting trust agreement pursuant to
     which Mr. Helms and David I. Brunson exercise certain voting powers and
     which may result in each of them being deemed a beneficial owner of such
     shares. See "Voting Trust Agreement." Because of Mr. Helms' ability to vote
     an additional 148,346 shares of Common Stock held by members of the
     Company's management in respect of the election of the Company's directors


                                       36
<PAGE>
     pursuant to the Stockholders' Agreement, he may be deemed to be the
     beneficial owner of such additional shares. See "Stockholders' Agreement."
     In addition, Mr. Helms may be deemed the beneficial owner of 37,990 shares
     that are subject to a voting agreement between Helms Management Corp. and
     Flowing Velvet Productions, Inc. See "Voting Agreement."

(d)  Includes 30,928 shares subject to currently exercisable stock options and
     276,300 shares owned by Helms Management Corp. that are subject to a voting
     trust agreement pursuant to which Mr. Brunson exercises certain voting
     powers and which may result in his being deemed a beneficial owner of such
     additional shares. See "Voting Trust Agreement." In addition, Mr. Brunson
     has the right to acquire 6,536 shares currently owned by Helms Management
     Corp.

(e)  Includes 8,870 shares subject to currently exercisable stock options and
     1,126 shares over which Mr. Hay has voting power. In addition, Mr. Hay has
     the right to acquire 3,000 shares currently owned by Helms Management Corp.

(f)  Includes 14,962 shares subject to currently exercisable stock options.

STOCKHOLDERS' AGREEMENT

         The Company and certain stockholders of the Company are parties to the
Stockholders' Agreement, setting forth among other things, the manner in which
directors of the Company are to be selected. See "Management--Election of
Directors." The Stockholders' Agreement also sets forth certain restrictions on
the transfer of shares of Common Stock by existing stockholders and on the
acquisition by existing stockholders of investments in competitors of Bollore.
In addition, the Stockholders' Agreement provides the existing stockholders with
certain "tag-along" rights to participate ratably in sales of Common Stock to
third parties and requires existing stockholders to participate ratably in
certain sales of Common Stock to third parties. Subject to the terms of all
applicable debt agreements of the Company and its subsidiaries and to the rights
of holders of the Company's preferred stock, the Stockholders' Agreement
provides that the Company may maintain insurance on the lives of the members of
its management officers and, in the event of the death of any such person, for
the mandatory repurchase by the Company of all of such person's Common Stock at
the fair market value thereof (which will be determined by an independent
investment banking firm if the parties cannot otherwise agree upon such value)
to the extent of available insurance proceeds, and the optional repurchase of
additional shares of such person's Common Stock at such fair market value to the
extent of available cash. Subject to the terms of all applicable debt agreements
of the Company and its subsidiaries, and to the rights of holders of the
Company's preferred stock, the Company also has the right to repurchase the
shares of Common Stock held by members of management if their employment
terminates, in the event of certain bankruptcy proceedings relating to such
persons or upon an involuntary transfer of their shares by court order or
otherwise in each case at the fair market value of such shares.

VOTING TRUST AGREEMENT

         Thomas F. Helms, Jr. and David I. Brunson are voting trustees under a
Voting Trust Agreement with Helms Management Corp. Helms Management Corp. owns
276,300 shares of Common Stock in the Company, all of which are subject to the
Voting Trust Agreement. Pursuant to the Voting Trust Agreement, the voting
trustees have the power to vote the shares owned by HMC in connection with the
election of directors and any other matters. The holder of the voting trust
certificate may remove at any time any of the voting trustees and replace any of
them with a successor. As voting trustees under the Voting Trust Agreement,
Messrs. Helms and Brunson are entitled to three votes and one vote,
respectively. Unless terminated by the certificate holder, the Voting Trust
Agreement will terminate on December 17, 2012.


                                       37
<PAGE>
VOTING AGREEMENT

         Helms Management Corp. and Flowing Velvet Products, Inc. ("Flowing
Velvet") are parties to a voting agreement, setting forth among other things the
agreement by Flowing Velvet to vote in all matters submitted to a vote of
Stockholders in such manner as Flowing Velvet may be directed by Thomas F.
Helms, Jr., the President of Helms Management Corp.

Item 13.     Certain Relationships and Related Transactions

         On March 24, 1998, each of Messrs. Brunson and Hay purchased 2,250
shares of Common Stock from the Company at a price of $40 per share. As part of
the purchase price, Messrs. Brunson and Hay issued separate notes to the
Company, each in the aggregate principal amount of $60,000. The notes bear
interest at 6.5% per annum and have a final maturity on March 31, 2003.

         See "Compensation Committee Interlocks and Insider Participation."











                                       38
<PAGE>
                                     PART IV

Item 14.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K

         (a)      1.       Financial Statements:

                           The following consolidated financial statements of 
North Atlantic Trading Company, Inc. and subsidiaries are filed as part of this
Form 10-K and are incorporated by reference in Item 8:

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
NORTH ATLANTIC TRADING COMPANY, INC.                                                                     PAGE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<S>                                                                                                   <C>
Report of Independent Accountants.............................................................           F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997..................................           F-2
Consolidated Statements of Operations for the
     years ended December 31, 1998 and 1997 and the periods May 17, 1996
     to December 31, 1996 and January 1, 1996 to May 16, 1996.................................           F-3
Consolidated Statements of Cash Flows for the
     years ended December 31, 1998 and 1997 and  the periods May 17, 1996
     to December 31, 1996 and January 1, 1996 to May 16, 1996.................................           F-5
Consolidated Statements of Changes in Stockholders' Deficit for the
     years ended December 31, 1998 and 1997 and the periods May 17, 1996
     to December 31, 1996 and January 1, 1996 to May 16, 1996,................................           F-6
Notes to Consolidated Financial Statements....................................................           F-7

</TABLE>

         2. Financial Statement Schedules:

         All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.

         3. See the accompanying Index to Exhibits which precedes the Exhibits
filed with this Form 10-K.



                                       39
<PAGE>
                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                                          DESCRIPTION
------                                                          -----------
<S>             <C>
3.1(a)           Restated Certificate of Incorporation of North Atlantic Trading Company, Inc., filed
                 February 19, 1998 (incorporated herein by reference to Exhibit 3.1(a)(i) the Registrant's
                 Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

3.1(b)           Certificate of Incorporation of North Atlantic Operating Company, Inc., filed June 9 1997
                 (incorporated herein by reference to Exhibit 3.1(b)(i) to the Registrant's Annual Report on
                 Form 10-K for the fiscal year ended December 31, 1997).

3.1(c)           Certificate of Amendment of Certificate of Incorporation of North Atlantic Operating Company,
                 Inc., filed June 17, 1997 (incorporated herein by reference to Exhibit 3.1(b)(ii) to
                 Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the
                 Commission on September 3, 1997).

3.1(d)           Restated Certificate of Incorporation of National Tobacco Finance Corporation, filed
                 April 24, 1996 (incorporated herein by reference to Exhibit 3.1(c) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

3.1(e)           Amended and Restated Certificate of Limited Partnership of National Tobacco Company, L.P.,
                 filed May 17, 1996 (incorporated herein by reference to Exhibit 3.1(d) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

3.1(f)           Certificate of Incorporation of International Flavors and Technology, Inc., filed August 7,
                 1997 (incorporated herein by reference to Exhibit 3.1(e)(i) to the Registrant's Annual Report
                 on Form 10-K for the fiscal year ended December 31, 1997).

3.1(g)           Certificate of Amendment of Certificate of Incorporation of International Flavors and
                 Technology, Inc., filed February 19, 1998 (incorporated herein by reference to Exhibit
                 3.1(e)(ii) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).

3.2(a)           Amended and Restated Bylaws of North Atlantic Trading Company, Inc. (incorporated herein by
                 reference to Exhibit 3.2(a) to the Registrant's Report on Form 10-Q for the fiscal quarter
                 ended March 31, 1998).

3.2(b)           Bylaws of North Atlantic Operating Company, Inc. (incorporated herein by reference to Exhibit
                 3.2(b) to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission
                 on September 3, 1997).


                                       40
<PAGE>
3.2(c)           Bylaws of National Tobacco Finance Corporation  (incorporated herein by reference to Exhibit
                 3.2(c) to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission
                 on September 3, 1997).

3.2(d)           Third Amended and Restated Agreement of Limited Partnership of National Tobacco Company,
                 L.P., effective May 17, 1996 (incorporated herein by reference to Exhibit 3.2(d)(i) to
                 Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the
                 Commission on September 3, 1997).

3.2 (e)          Amendment No. 1 to Third Amended and Restated Agreement of Limited Partnership of National
                 Tobacco Company, L.P., effective June 25, 1997 (incorporated herein by reference to Exhibit
                 3.2(d)(ii) to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4
                 filed with the Commission on September 3, 1997).

3.2(f)           Bylaws of International Flavors and Technology, Inc. (incorporated herein by reference to
                 Exhibit 3.2(e) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).

3.3              Certificate of Designation of 12% Senior Exchange Payment-In-Kind Preferred Stock of North
                 Atlantic Trading Company, Inc., filed July 22, 1997 (incorporated herein by reference to
                 Exhibit 3.3(b) to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4
                 filed with the Commission on September 3, 1997).

4.1              Indenture, dated as of June 25, 1997, among North Atlantic Trading Company, Inc., as issuer,
                 National Tobacco Company, L.P., North Atlantic Operating Company, Inc. and National Tobacco
                 Finance Corporation, as guarantors, and United States Trust Company of New York, as trustee
                 (incorporated herein by reference to Exhibit 4.1 to Amendment No. 1 to Registration Statement
                 (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

4.2              First Supplemental Indenture, dated as of February 26, 1998, among North Atlantic Trading
                 Company, Inc., National Tobacco Company, L.P., National Tobacco Finance Corporation,
                 International Flavors and Technology, Inc. and The United States Trust Company of New York
                 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Annual Report on Form
                 10-K for the fiscal year ended December 31, 1997).

9.1              Exchange and Stockholders' Agreement, dated as of June 25, 1997, by and between North
                 Atlantic Trading Company, Inc. and those stockholders signatory thereto (incorporated herein
                 by reference to Exhibit 9 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                 on Form S-4 filed with the Commission on September 3, 1997).


                                       41
<PAGE>
9.2              Voting Trust Agreement, dated as of December 17, 1997, among Thomas F. Helms, Jr., David I.
                 Brunson and Jeffrey S. Hay, as voting trustees, and Helms Management Corp. (incorporated
                 herein by reference to Exhibit 9.2 to the Registrant's Annual Report on Form 10-K for the
                 fiscal year ended December 31, 1997).

10.1             Third Amended and Restated Purchasing and Processing Agreement, dated as of June 25, 1997,
                 between National Tobacco Company, L.P. and Lancaster Leaf Tobacco Company of Pennsylvania
                 (incorporated herein by reference to Exhibit 10.1 to Amendment No. 1 to Registration
                 Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.2+            Amended and Restated Distribution and License Agreement, dated as of November 30, 1992,
                 between Bollore Technologies, S.A. and North Atlantic Trading Company, Inc., a Delaware
                 corporation and predecessor to North Atlantic Operating Company, Inc. [United States]
                 (incorporated herein by reference to Exhibit 10.2 to Amendment No. 2 to Registration
                 Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.3+            Amended and Restated Distribution and License Agreement, dated as of November 30, 1992,
                 between Bollore Technologies, S.A. and North Atlantic Trading Company, Inc., a Delaware
                 corporation and predecessor to North Atlantic Operating Company, Inc. [Asia] (incorporated
                 herein by reference to Exhibit 10.3 to Amendment No. 2 to Registration Statement (Reg. No.
                 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.4+            Amended and Restated Distribution and License Agreement, dated as of November 30, 1992,
                 between Bollore Technologies, S.A. and North Atlantic Trading Company, Inc., a Delaware
                 corporation and predecessor to North Atlantic Operating Company, Inc. [Canada] (incorporated
                 herein by reference to Exhibit 10.4 to Amendment No. 2 to Registration Statement (Reg. No.
                 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.5+            Restated Amendment, dated as of June 25, 1997, between Bollore Technologies, S.A. and North
                 Atlantic Operating Company, Inc. (incorporated herein by reference to Exhibit 10.5 to
                 Amendment No. 2 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the
                 Commission on September 3, 1997).

10.6             Warrant Agreement, dated as of June 25, 1997, between North Atlantic Trading Company, Inc.
                 and United States Trust Company of New York, as warrant agent (incorporated herein by
                 reference to Exhibit 10.12 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                 on Form S-4 filed with the Commission on September 3, 1997).


                                       42
<PAGE>
10.7++           1997 Share Incentive Plan of North Atlantic Trading Company, Inc. (incorporated herein by
                 reference to Exhibit 10.12 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                 on Form S-4 filed with the Commission on September 3, 1997).

10.8++           Employment Agreement, dated May 17, 1996, between North Atlantic Trading Company, Inc. and
                 Thomas F. Helms, Jr. (incorporated herein by reference to Exhibit 10.17 to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.9 ++          Employment Agreement, dated April 14, 1997, between National Tobacco Company, Inc. and David
                 I. Brunson (incorporated herein by reference to Exhibit 10.18(a) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.10++          Letter Agreement, dated April 23, 1997, between Thomas F. Helms, Jr. and David I. Brunson
                 (incorporated herein by reference to Exhibit 10.18(b) to Amendment No. 1 to Registration
                 Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.11++          Nonqualified Stock Option Agreement, dated as of June 25, 1997, between North Atlantic
                 Trading Company, Inc. and David I. Brunson (incorporated herein by reference to Exhibit
                 10.18(c) to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                 with the Commission on September 3, 1997).

10.12++          Amendment No. 1, dated and effective September 2, 1997, to the Nonqualified Stock Option
                 Agreement, dated as of June 25, 1997, between North Atlantic Trading Company, Inc. and David
                 I. Brunson (incorporated herein by reference to Exhibit 10.18(d) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.13++          Amendment No. 2, dated as of December 31, 1997, to the Nonqualified Stock Option Agreement,
                 dated as of June 25, 1997, between North Atlantic Trading Company, Inc. and David I. Brunson
                 (incorporated herein by reference to Exhibit 10.18(e) to the Registrant's Annual Report on
                 Form 10-K for the fiscal year ended December 31, 1997).

10.14++          Employment Agreement, dated January 1, 1997, between North Atlantic Trading Company, Inc. and
                 Jay Martin (incorporated herein by reference to Exhibit 10.18(a) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).


                                       43
<PAGE>
10.15++          Consulting Agreement, dated as of June 25, 1997, between North Atlantic Trading Company, Inc.
                 and Jack Africk (incorporated herein by reference to Exhibit 10.20 to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.16            Credit Agreement, dated as of June 25, 1997, among North Atlantic Trading Company, Inc., the
                 various lending institutions referenced therein, Gleacher NatWest, Inc., as arranging agent,
                 and National Westminster Bank plc, as administrative agent (incorporated herein by reference
                 to Exhibit 10.21 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form
                 S-4 filed with the Commission on September 3, 1997).

10.17            Subsidiary Guaranty, dated as of June 25, 1997, made by North Atlantic Operating Company,
                 Inc., National Tobacco Finance Corporation, and National Tobacco Company, L.P. in favor of
                 National Westminster Bank plc, as administrative agent for certain lending institutions
                 (incorporated herein by reference to Exhibit 10.22 to Amendment No. 1 to Registration
                 Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.18            Security Agreement, dated as of June 25, 1997, among North Atlantic Trading Company, Inc.,
                 North Atlantic Operating Company, Inc., National Tobacco Finance Corporation, National
                 Tobacco Company, L.P., and National Westminster Bank plc, as collateral agent for certain
                 secured creditors (incorporated herein by reference to Exhibit 10.23 to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.19            Pledge Agreement, dated as of June 25, 1997, made by North Atlantic Trading Company, Inc.,
                 North Atlantic Operating Company, Inc., National Tobacco Finance Corporation, and National
                 Tobacco Company, L.P., in favor of National Westminster Bank plc, as collateral agent for
                 certain secured creditors (incorporated herein by reference to Exhibit 10.24 to Amendment
                 No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.20++          National Tobacco Company Management Bonus Program (incorporated herein by reference to
                 Exhibit 10.25 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4
                 filed with the Commission on September 3, 1997).

10.21++          Amended and Restated Nonqualified Stock Option Agreement, dated as of December 31, 1997,
                 between North Atlantic Trading Company, Inc. and Jeffrey S. Hay (incorporated herein by
                 reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year
                 ended December 31, 1997).


                                       44
<PAGE>
10.22++          Employment Agreement, dated as of July 28, 1997, between North Atlantic Trading Company, Inc.
                 and Jeffrey S. Hay (incorporated herein by reference to Exhibit 10.27 to the Registrant's
                 Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

10.23++          Amended and Restated Nonqualified Stock Option Agreement, dated as of January 12, 1998,
                 between North Atlantic Trading Company, Inc. And Jack Africk (incorporated herein by
                 reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the fiscal year
                 ended December 31, 1997).

10.24++          Employment Agreement, dated as of December 15, 1997, between North Atlantic Trading Company,
                 Inc. and Jack Africk (incorporated herein by reference to Exhibit 10.29 to the Registrant's
                 Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

10.25++          Assignment and Assumption, dated as of January 1, 1998, between National Tobacco Company,
                 L.P. and North Atlantic Trading Company, Inc. (incorporated herein by reference to Exhibit
                 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
                 1997).

10.26+           Amendment, dated October 27, 1997, to Amended and Restated Distribution and License
                 Agreements, between Bollore and North Atlantic Operating Company, Inc. (incorporated herein
                 by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the fiscal
                 year ended December 31, 1997).

10.27            Sales Representative Agreement, effective as of January 1, 1998, between National Tobacco
                 Company, L.P. and North Atlantic Operating Company, Inc. (incorporated herein by reference to
                 Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).

10.28++          Separation Agreement, dated as of October 29, 1997, among National Tobacco Company, L.P.,
                 North Atlantic Trading Company, Inc. and Maurice Langston (incorporated herein by reference
                 to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).

10.29++          First Amendment to Separation Agreement, dated as of January 30, 1998, among National Tobacco
                 Company, L.P., North Atlantic Trading Company, Inc. and Maurice Langston (incorporated herein
                 by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal
                 year ended December 31, 1997).

10.30++          Consulting Agreement, dated as of October 29, 1997, between National Tobacco Company, L.P.
                 and Maurice Langston (incorporated herein by reference to Exhibit 10.35 to the Registrant's
                 Annual Report on Form 10-K for the fiscal year ended December 31, 1997).


                                       45
<PAGE>
10.31++          Release Agreement, dated as of October 29, 1997, among National Tobacco Company, L.P., North
                 Atlantic Trading Company, Inc. And Maurice Langston (incorporated herein by reference to
                 Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).

10.32++          North Atlantic Trading Company, Inc. 1998 Executive Committee Bonus Plan (incorporated herein
                 by reference to Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal
                 year ended December 31, 1997).

10.33++          North Atlantic Trading Company, Inc. 1998 Management Bonus Plan (incorporated herein by
                 reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the fiscal year
                 ended December 31, 1997).

10.34            Amendment to Credit Agreement, dated as of  June 5, 1998, among North Atlantic Trading
                 Company, Inc., the various lending institutions referenced therein, and National  Westminster
                 Bank plc, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.35++          Amended and Restated Employment Agreement, dated as of April 30, 1998, between North Atlantic
                 Trading Company, Inc. And David I. Brunson (incorporated herein by reference to Exhibit 10.2
                 to the Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.36++          Amended and Restated Employment Agreement, dated as of April 30, 1998, between North Atlantic
                 Trading Company, Inc. and Jeffrey S. Hay (incorporated herein by reference to Exhibit 10.3 to
                 the Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.37++          Amendment No. 1, dated as of April 30, 1998, to the Amended and Restated Nonqualified Stock
                 Option Agreement, dated as of December 31, 1997, between North Atlantic Trading Company, Inc.
                 And Jeffrey S. Hay (incorporated herein by reference to Exhibit 10.4 to the Registrant's
                 Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.38            Option Grant Letter, dated April 30, 1998, from Helms Management Corp. to David I. Brunson
                 (incorporated herein by reference to Exhibit 10.5 to the Registrant's Report on 10-Q for the
                 fiscal quarter ended June 30, 1998).

10.39            Option Grant Letter, dated April 30, 1998, from Helms Management Corp. to Jeffrey S. Hay
                 (incorporated herein by reference to Exhibit 10.6 to the Registrant's Report on 10-Q for the
                 fiscal quarter ended June 30, 1998).


                                       46
<PAGE>
10.40            Promissory Note, dated April 14, 1998, issued by Helms Management Corp. in favor of North
                 Atlantic Trading Company, Inc. (incorporated herein by reference to Exhibit 10.7 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.41            Amendment, dated as of February 1, 1998, among North Atlantic Trading Company, Inc., the
                 various lending institutions referenced therein and National Westminster Bank plc, as
                 administrative agent (incorporated herein by reference to Exhibit 10.39 to the Registrant's
                 Report on 10-Q for the fiscal quarter ended March 31, 1998).

10.42            Consent, dated as of March 12, 1998, among North Atlantic Trading Company, Inc., the various
                 lending institutions referenced therein and National Westminster Bank plc, as administrative
                 agent (incorporated herein by reference to Exhibit 10.40 to the Registrant's Report on 10-Q
                 for the fiscal quarter ended March 31, 1998).

10.43            Securities Redemption Agreement, dated as of March 24, 1998, between North Atlantic Trading
                 Company, Inc., Langston Enterprises, Inc. and Maurice Langston (incorporated herein by
                 reference to Exhibit 10.41 to the Registrant's Report on 10-Q for the fiscal quarter ended
                 March 31, 1998).

10.44            Subscription Agreement, dated as of March 24, 1998, between North Atlantic Trading Company,
                 Inc. and David I. Brunson (incorporated herein by reference to Exhibit--10.42 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended March 31, 1998).

10.45            Subscription Agreement, dated as of March 24, 1998, between North Atlantic Trading Company,
                 Inc. and Jeffrey S. Hay (incorporated herein by reference to Exhibit 10.43 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended March 31, 1998).

10.46            Promissory Note, dated March 24, 1998, issued by David I. Brunson in favor of North Atlantic
                 Trading Company, Inc. (incorporated herein by reference to Exhibit 10.44 to the Registrant's
                 Report on 10-Q for the fiscal quarter ended March 31, 1998).

10.47            Promissory Note, dated March 24, 1998, issued by Jeffrey S. Hay in favor of North Atlantic
                 Trading Company, Inc. (incorporated herein by reference to Exhibit 10.45 to the Registrant's
                 Report on Form 10-Q for the fiscal quarter ended March 31, 1998).

10.48            Promissory Note, dated April 14, 1998, issued by Helms Management Corp. in favor of North
                 Atlantic Trading Company, Inc. (incorporated herein by reference to Exhibit 10.7 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

21               Subsidiaries of North Atlantic Trading Company, Inc.

27               Financial Data Schedules.

</TABLE>

         (b)      Reports on Form 8-K.

                  No reports on Form 8-K were filed during the quarter ended
December 31, 1998.


                                       47
<PAGE>
         SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE SECURITIES EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT.

         Subsequent to the filing of this Annual Report, copies thereof will be
sent to the holders of the Registrant's senior notes and preferred stock. No
proxy material will be sent to the Company's security holders.


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

+      Portions of this agreement have been omitted pursuant to Rule 406 under
       the Securities Act of 1933, as amended, and have been filed
       confidentially with the Securities and Exchange Commission.

++     Management contract or compensatory plan or arrangement required to be
       filed as an exhibit pursuant to Item 14(c) of the rules governing the
       preparation of this Report.







                                       48
<PAGE>
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date: March 31, 1999             NORTH ATLANTIC TRADING COMPANY, INC.

                                 By: /s/ Thomas F. Helms, Jr.
                                     ------------------------------------------
                                     Thomas F. Helms, Jr.
                                     Chairman and Chief Executive Officer

                  Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

        SIGNATURE                          TITLE                       DATE

/s/ Thomas F. Helms, Jr.        Chairman of the Board             March 31, 1999
----------------------------    and Chief Executive Officer
Thomas F. Helms, Jr.            (Principal Executive Officer)


/s/ David I. Brunson            Director, Executive Vice          March 31, 1999
----------------------------    President Finance and 
David I. Brunson                Administration, Chief Financial
                                Officer (Principal Financial and 
                                Accounting Officer)


/s/ Jack Africk                 Director                          March 31, 1999
----------------------------
Jack Africk


/s/ Kim S. Fennebresque         Director                          March 31, 1999
----------------------------
Kim S. Fennebresque


/s/ Arnold Sheiffer             Director                          March 31, 1999
----------------------------
Arnold Sheiffer




                                       49
<PAGE>
                                  EXHIBIT INDEX

                                       TO

                      NORTH ATLANTIC TRADING COMPANY, INC.

                           ANNUAL REPORT ON FORM 10-K

                     FOR FISCAL YEAR ENDED December 31, 1998

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                                          DESCRIPTION
------                                                          -----------
<S>             <C>
3.1(a)           Restated Certificate of Incorporation of North Atlantic Trading Company, Inc., filed
                 February 19, 1998 (incorporated herein by reference to Exhibit 3.1(a)(i) the Registrant's
                 Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

3.1(b)           Certificate of Incorporation of North Atlantic Operating Company, Inc., filed June 9 1997
                 (incorporated herein by reference to Exhibit 3.1(b)(i) to the Registrant's Annual Report on
                 Form 10-K for the fiscal year ended December 31, 1997).

3.1(c)           Certificate of Amendment of Certificate of Incorporation of North Atlantic Operating Company,
                 Inc., filed June 17, 1997 (incorporated herein by reference to Exhibit 3.1(b)(ii) to
                 Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the
                 Commission on September 3, 1997).

3.1(d)           Restated Certificate of Incorporation of National Tobacco Finance Corporation, filed
                 April 24, 1996 (incorporated herein by reference to Exhibit 3.1(c) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

3.1(e)           Amended and Restated Certificate of Limited Partnership of National Tobacco Company, L.P.,
                 filed May 17, 1996 (incorporated herein by reference to Exhibit 3.1(d) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

3.1(f)           Certificate of Incorporation of International Flavors and Technology, Inc., filed August 7,
                 1997 (incorporated herein by reference to Exhibit 3.1(e)(i) to the Registrant's Annual Report
                 on Form 10-K for the fiscal year ended December 31, 1997).

3.1(g)           Certificate of Amendment of Certificate of Incorporation of International Flavors and
                 Technology, Inc., filed February 19, 1998 (incorporated herein by reference to Exhibit
                 3.1(e)(ii) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).


                                      E-1
<PAGE>
3.2(a)           Amended and Restated Bylaws of North Atlantic Trading Company, Inc. (incorporated herein by
                 reference to Exhibit 3.2(a) to the Registrant's Report on Form 10-Q for the fiscal quarter
                 ended March 31, 1998).

3.2(b)           Bylaws of North Atlantic Operating Company, Inc. (incorporated herein by reference to Exhibit
                 3.2(b) to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission
                 on September 3, 1997).

3.2(c)           Bylaws of National Tobacco Finance Corporation  (incorporated herein by reference to Exhibit
                 3.2(c) to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission
                 on September 3, 1997).

3.2(d)           Third Amended and Restated Agreement of Limited Partnership of National Tobacco Company,
                 L.P., effective May 17, 1996 (incorporated herein by reference to Exhibit 3.2(d)(i) to
                 Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the
                 Commission on September 3, 1997).

3.2 (e)          Amendment No. 1 to Third Amended and Restated Agreement of Limited Partnership of National
                 Tobacco Company, L.P., effective June 25, 1997 (incorporated herein by reference to Exhibit
                 3.2(d)(ii) to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4
                 filed with the Commission on September 3, 1997).

3.2(f)           Bylaws of International Flavors and Technology, Inc. (incorporated herein by reference to
                 Exhibit 3.2(e) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).

3.3              Certificate of Designation of 12% Senior Exchange Payment-In-Kind Preferred Stock of North
                 Atlantic Trading Company, Inc., filed July 22, 1997 (incorporated herein by reference to
                 Exhibit 3.3(b) to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4
                 filed with the Commission on September 3, 1997).

4.1              Indenture, dated as of June 25, 1997, among North Atlantic Trading Company, Inc., as issuer,
                 National Tobacco Company, L.P., North Atlantic Operating Company, Inc. and National Tobacco
                 Finance Corporation, as guarantors, and United States Trust Company of New York, as trustee
                 (incorporated herein by reference to Exhibit 4.1 to Amendment No. 1 to Registration Statement
                 (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

4.2              First Supplemental Indenture, dated as of February 26, 1998, among North Atlantic Trading
                 Company, Inc., National Tobacco Company, L.P., National Tobacco Finance Corporation,
                 International Flavors and Technology, Inc. and The United States Trust Company of New York
                 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Annual Report on Form
                 10-K for the fiscal year ended December 31, 1997).


                                      E-2
<PAGE>
9.1              Exchange and Stockholders' Agreement, dated as of June 25, 1997, by and between North
                 Atlantic Trading Company, Inc. and those stockholders signatory thereto (incorporated herein
                 by reference to Exhibit 9 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                 on Form S-4 filed with the Commission on September 3, 1997).

9.2              Voting Trust Agreement, dated as of December 17, 1997, among Thomas F. Helms, Jr., David I.
                 Brunson and Jeffrey S. Hay, as voting trustees, and Helms Management Corp. (incorporated
                 herein by reference to Exhibit 9.2 to the Registrant's Annual Report on Form 10-K for the
                 fiscal year ended December 31, 1997).

10.1             Third Amended and Restated Purchasing and Processing Agreement, dated as of June 25, 1997,
                 between National Tobacco Company, L.P. and Lancaster Leaf Tobacco Company of Pennsylvania
                 (incorporated herein by reference to Exhibit 10.1 to Amendment No. 1 to Registration
                 Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.2+            Amended and Restated Distribution and License Agreement, dated as of November 30, 1992,
                 between Bollore Technologies, S.A. and North Atlantic Trading Company, Inc., a Delaware
                 corporation and predecessor to North Atlantic Operating Company, Inc. [United States]
                 (incorporated herein by reference to Exhibit 10.2 to Amendment No. 2 to Registration
                 Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.3+            Amended and Restated Distribution and License Agreement, dated as of November 30, 1992,
                 between Bollore Technologies, S.A. and North Atlantic Trading Company, Inc., a Delaware
                 corporation and predecessor to North Atlantic Operating Company, Inc. [Asia] (incorporated
                 herein by reference to Exhibit 10.3 to Amendment No. 2 to Registration Statement (Reg. No.
                 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.4+            Amended and Restated Distribution and License Agreement, dated as of November 30, 1992,
                 between Bollore Technologies, S.A. and North Atlantic Trading Company, Inc., a Delaware
                 corporation and predecessor to North Atlantic Operating Company, Inc. [Canada] (incorporated
                 herein by reference to Exhibit 10.4 to Amendment No. 2 to Registration Statement (Reg. No.
                 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.5+            Restated Amendment, dated as of June 25, 1997, between Bollore Technologies, S.A. and North
                 Atlantic Operating Company, Inc. (incorporated herein by reference to Exhibit 10.5 to
                 Amendment No. 2 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the
                 Commission on September 3, 1997).


                                      E-3
<PAGE>
10.6             Warrant Agreement, dated as of June 25, 1997, between North Atlantic Trading Company, Inc.
                 and United States Trust Company of New York, as warrant agent (incorporated herein by
                 reference to Exhibit 10.12 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                 on Form S-4 filed with the Commission on September 3, 1997).

10.7++           1997 Share Incentive Plan of North Atlantic Trading Company, Inc. (incorporated herein by
                 reference to Exhibit 10.12 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                 on Form S-4 filed with the Commission on September 3, 1997).

10.8++           Employment Agreement, dated May 17, 1996, between North Atlantic Trading Company, Inc. and
                 Thomas F. Helms, Jr. (incorporated herein by reference to Exhibit 10.17 to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.9 ++          Employment Agreement, dated April 14, 1997, between National Tobacco Company, Inc. and David
                 I. Brunson (incorporated herein by reference to Exhibit 10.18(a) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.10++          Letter Agreement, dated April 23, 1997, between Thomas F. Helms, Jr. and David I. Brunson
                 (incorporated herein by reference to Exhibit 10.18(b) to Amendment No. 1 to Registration
                 Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.11++          Nonqualified Stock Option Agreement, dated as of June 25, 1997, between North Atlantic
                 Trading Company, Inc. and David I. Brunson (incorporated herein by reference to Exhibit
                 10.18(c) to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                 with the Commission on September 3, 1997).

10.12++          Amendment No. 1, dated and effective September 2, 1997, to the Nonqualified Stock Option
                 Agreement, dated as of June 25, 1997, between North Atlantic Trading Company, Inc. and David
                 I. Brunson (incorporated herein by reference to Exhibit 10.18(d) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.13++          Amendment No. 2, dated as of December 31, 1997, to the Nonqualified Stock Option Agreement,
                 dated as of June 25, 1997, between North Atlantic Trading Company, Inc. and David I. Brunson
                 (incorporated herein by reference to Exhibit 10.18(e) to the Registrant's Annual Report on
                 Form 10-K for the fiscal year ended December 31, 1997).



                                      E-4
<PAGE>
10.14++          Employment Agreement, dated January 1, 1997, between North Atlantic Trading Company, Inc. and
                 Jay Martin (incorporated herein by reference to Exhibit 10.18(a) to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.15++          Consulting Agreement, dated as of June 25, 1997, between North Atlantic Trading Company, Inc.
                 and Jack Africk (incorporated herein by reference to Exhibit 10.20 to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.16            Credit Agreement, dated as of June 25, 1997, among North Atlantic Trading Company, Inc., the
                 various lending institutions referenced therein, Gleacher NatWest, Inc., as arranging agent,
                 and National Westminster Bank plc, as administrative agent (incorporated herein by reference
                 to Exhibit 10.21 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form
                 S-4 filed with the Commission on September 3, 1997).

10.17            Subsidiary Guaranty, dated as of June 25, 1997, made by North Atlantic Operating Company,
                 Inc., National Tobacco Finance Corporation, and National Tobacco Company, L.P. in favor of
                 National Westminster Bank plc, as administrative agent for certain lending institutions
                 (incorporated herein by reference to Exhibit 10.22 to Amendment No. 1 to Registration
                 Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on September 3, 1997).

10.18            Security Agreement, dated as of June 25, 1997, among North Atlantic Trading Company, Inc.,
                 North Atlantic Operating Company, Inc., National Tobacco Finance Corporation, National
                 Tobacco Company, L.P., and National Westminster Bank plc, as collateral agent for certain
                 secured creditors (incorporated herein by reference to Exhibit 10.23 to Amendment No. 1 to
                 Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.19            Pledge Agreement, dated as of June 25, 1997, made by North Atlantic Trading Company, Inc.,
                 North Atlantic Operating Company, Inc., National Tobacco Finance Corporation, and National
                 Tobacco Company, L.P., in favor of National Westminster Bank plc, as collateral agent for
                 certain secured creditors (incorporated herein by reference to Exhibit 10.24 to Amendment
                 No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                 September 3, 1997).

10.20++          National Tobacco Company Management Bonus Program (incorporated herein by reference to
                 Exhibit 10.25 to Amendment No. 1 to Registration Statement (Reg. No. 333-31931) on Form S-4
                 filed with the Commission on September 3, 1997).


                                      E-5
<PAGE>
10.21++          Amended and Restated Nonqualified Stock Option Agreement, dated as of December 31, 1997,
                 between North Atlantic Trading Company, Inc. and Jeffrey S. Hay (incorporated herein by
                 reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year
                 ended December 31, 1997).

10.22++          Employment Agreement, dated as of July 28, 1997, between North Atlantic Trading Company, Inc.
                 and Jeffrey S. Hay (incorporated herein by reference to Exhibit 10.27 to the Registrant's
                 Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

10.23++          Amended and Restated Nonqualified Stock Option Agreement, dated as of January 12, 1998,
                 between North Atlantic Trading Company, Inc. And Jack Africk (incorporated herein by
                 reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the fiscal year
                 ended December 31, 1997).

10.24++          Employment Agreement, dated as of December 15, 1997, between North Atlantic Trading Company,
                 Inc. and Jack Africk (incorporated herein by reference to Exhibit 10.29 to the Registrant's
                 Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

10.25++          Assignment and Assumption, dated as of January 1, 1998, between National Tobacco Company,
                 L.P. and North Atlantic Trading Company, Inc. (incorporated herein by reference to Exhibit
                 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
                 1997).

10.26+           Amendment, dated October 27, 1997, to Amended and Restated Distribution and License
                 Agreements, between Bollore and North Atlantic Operating Company, Inc. (incorporated herein
                 by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the fiscal
                 year ended December 31, 1997).

10.27            Sales Representative Agreement, effective as of January 1, 1998, between National Tobacco
                 Company, L.P. and North Atlantic Operating Company, Inc. (incorporated herein by reference to
                 Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).

10.28++          Separation Agreement, dated as of October 29, 1997, among National Tobacco Company, L.P.,
                 North Atlantic Trading Company, Inc. and Maurice Langston (incorporated herein by reference
                 to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).

10.29++          First Amendment to Separation Agreement, dated as of January 30, 1998, among National Tobacco
                 Company, L.P., North Atlantic Trading Company, Inc. and Maurice Langston (incorporated herein
                 by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal
                 year ended December 31, 1997).


                                      E-6
<PAGE>
10.30++          Consulting Agreement, dated as of October 29, 1997, between National Tobacco Company, L.P.
                 and Maurice Langston (incorporated herein by reference to Exhibit 10.35 to the Registrant's
                 Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

10.31++          Release Agreement, dated as of October 29, 1997, among National Tobacco Company, L.P., North
                 Atlantic Trading Company, Inc. And Maurice Langston (incorporated herein by reference to
                 Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1997).

10.32++          North Atlantic Trading Company, Inc. 1998 Executive Committee Bonus Plan (incorporated herein
                 by reference to Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal
                 year ended December 31, 1997).

10.33++          North Atlantic Trading Company, Inc. 1998 Management Bonus Plan (incorporated herein by
                 reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the fiscal year
                 ended December 31, 1997).

10.34            Amendment to Credit Agreement, dated as of  June 5, 1998, among North Atlantic Trading
                 Company, Inc., the various lending institutions referenced therein, and National  Westminster
                 Bank plc, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.35++          Amended and Restated Employment Agreement, dated as of April 30, 1998, between North Atlantic
                 Trading Company, Inc. And David I. Brunson (incorporated herein by reference to Exhibit 10.2
                 to the Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.36++          Amended and Restated Employment Agreement, dated as of April 30, 1998, between North Atlantic
                 Trading Company, Inc. and Jeffrey S. Hay (incorporated herein by reference to Exhibit 10.3 to
                 the Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.37++          Amendment No. 1, dated as of April 30, 1998, to the Amended and Restated Nonqualified Stock
                 Option Agreement, dated as of December 31, 1997, between North Atlantic Trading Company, Inc.
                 And Jeffrey S. Hay (incorporated herein by reference to Exhibit 10.4 to the Registrant's
                 Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.38            Option Grant Letter, dated April 30, 1998, from Helms Management Corp. to David I. Brunson
                 (incorporated herein by reference to Exhibit 10.5 to the Registrant's Report on 10-Q for the
                 fiscal quarter ended June 30, 1998).


                                      E-7
<PAGE>
10.39            Option Grant Letter, dated April 30, 1998, from Helms Management Corp. to Jeffrey S. Hay
                 (incorporated herein by reference to Exhibit 10.6 to the Registrant's Report on 10-Q for the
                 fiscal quarter ended June 30, 1998).

10.40            Promissory Note, dated April 14, 1998, issued by Helms Management Corp. in favor of North
                 Atlantic Trading Company, Inc. (incorporated herein by reference to Exhibit 10.7 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

10.41            Amendment, dated as of February 1, 1998, among North Atlantic Trading Company, Inc., the
                 various lending institutions referenced therein and National Westminster Bank plc, as
                 administrative agent (incorporated herein by reference to Exhibit 10.39 to the Registrant's
                 Report on 10-Q for the fiscal quarter ended March 31, 1998).

10.42            Consent, dated as of March 12, 1998, among North Atlantic Trading Company, Inc., the various
                 lending institutions referenced therein and National Westminster Bank plc, as administrative
                 agent (incorporated herein by reference to Exhibit 10.40 to the Registrant's Report on 10-Q
                 for the fiscal quarter ended March 31, 1998).

10.43            Securities Redemption Agreement, dated as of March 24, 1998, between North Atlantic Trading
                 Company, Inc., Langston Enterprises, Inc. and Maurice Langston (incorporated herein by
                 reference to Exhibit 10.41 to the Registrant's Report on 10-Q for the fiscal quarter ended
                 March 31, 1998).

10.44            Subscription Agreement, dated as of March 24, 1998, between North Atlantic Trading Company,
                 Inc. and David I. Brunson (incorporated herein by reference to Exhibit--10.42 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended March 31, 1998).

10.45            Subscription Agreement, dated as of March 24, 1998, between North Atlantic Trading Company,
                 Inc. and Jeffrey S. Hay (incorporated herein by reference to Exhibit 10.43 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended March 31, 1998).

10.46            Promissory Note, dated March 24, 1998, issued by David I. Brunson in favor of North Atlantic
                 Trading Company, Inc. (incorporated herein by reference to Exhibit 10.44 to the Registrant's
                 Report on 10-Q for the fiscal quarter ended March 31, 1998).

10.47            Promissory Note, dated March 24, 1998, issued by Jeffrey S. Hay in favor of North Atlantic
                 Trading Company, Inc. (incorporated herein by reference to Exhibit 10.45 to the Registrant's
                 Report on Form 10-Q for the fiscal quarter ended March 31, 1998).

10.48            Promissory Note, dated April 14, 1998, issued by Helms Management Corp. in favor of North
                 Atlantic Trading Company, Inc. (incorporated herein by reference to Exhibit 10.7 to the
                 Registrant's Report on 10-Q for the fiscal quarter ended June 30, 1998).

21               Subsidiaries of North Atlantic Trading Company, Inc.


                                      E-8
<PAGE>
27               Financial Data Schedules.

</TABLE>


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

+      Portions of this agreement have been omitted pursuant to Rule 406 under
       the Securities Act of 1933, as amended, and have been filed
       confidentially with the Securities and Exchange Commission.

++     Management contract or compensatory plan or arrangement required to be
       filed as an exhibit pursuant to Item 14(c) of the rules governing the
       preparation of this Report.















                                      E-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors
North Atlantic Trading Company, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows, and changes in stockholders'
deficit present fairly, in all material respects, the financial position of
North Atlantic Trading Company, Inc. and Subsidiaries (the Company) at December
31, 1998 and 1997 and the results of their operations and their cash flows for
the years ended December 31, 1998 and 1997, and the period from May 17, 1996 to
December 31, 1996, in conformity with generally accepted accounting principles.
Additionally, the accompanying statements of operations, cash flows, and changes
in stockholders' deficit present fairly, in all material respects, the results
of operations and cash flows of National Tobacco Company, L.P. (the Predecessor)
for the period from January 1, 1996 to May 16, 1996. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.







February 3, 1999






                                      F-1
<PAGE>
North Atlantic Trading Company, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
(dollars in thousands except share data)

<TABLE>
<CAPTION>
                                  ASSETS                                   1998                   1997
                                                                    -------------------   ---------------------
<S>                                                                 <C>                   <C>
Cash                                                                      $      2,817           $       4,087
Accounts receivable                                                              5,486                   4,633
Inventories                                                                     58,487                  56,110
Income taxes receivable                                                              -                   5,326
Other current assets                                                             1,274                   1,321
                                                                    -------------------   ---------------------

   Total current assets                                                         68,064                  71,477
   Property, Plant and Equipment, net                                            7,031                   8,251
   Deferred Income Taxes                                                        32,937                  34,091
   Deferred Financing Costs                                                     11,232                  13,506
   Goodwill, net                                                               140,027                 145,517
   Other assets                                                                  1,016                     241
                                                                    -------------------   ---------------------

   Total assets                                                              $ 260,307               $ 273,083
                                                                    ===================   =====================

       LIABILITIES AND STOCKHOLDERS' DEFICIT


Accounts payable                                                                 $ 458                   $ 659
Accrued expenses                                                                 3,696                   5,873
Deferred income taxes                                                            8,903                   6,721
Current portion of notes payable and long-term debt                             12,983                    9375
                                                                    -------------------   ---------------------

   Total current liabilities                                                    26,040                  22,628
   Notes Payable and Long Term Debt                                            202,603                 220,625
   Other Long Term Liabilities                                                   7,700                   7,486
                                                                    -------------------   ---------------------

   Total liabilities                                                           236,343                 250,739
                                                                    -------------------   ---------------------


Preferred stock net of unamortized discount of $1,400 in 1998 and $1,600
in 1997; mandatory redemption value of  $40,500 in 1998 and $36,000
in 1997                                                                         39,332                  34,581
                                                                    -------------------   ---------------------


Common stock, voting, $.01 par value; authorized shares, 750,000;
   issued and outstanding shares, 528,241                                            5                       5
Common stock, nonvoting, $.01 par value; authorized shares, 750,000;
   issued and outstanding shares, -0-                                                -                       -
Additional paid-in capital                                                       9,020                   8,316
Loans to stockholders for stock purchases                                         (247)                   (156)
Accumulated deficit                                                            (24,146)                (20,402)
                                                                    -------------------   ---------------------
   Total stockholders' deficit                                                 (15,368)                (12,237)
                                                                    -------------------   ---------------------

        Total liabilities and stockholders' deficit                          $ 260,307               $ 273,083
                                                                    ===================   =====================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                  The Company                     The Predecessor
                                                                  -----------                     ---------------
                                               Year Ended      Year Ended        Period from        Period from
                                                December 31,   December 31,       May 17 to         January 1 to
                                                  1998            1997           December 31, 1996  May 16, 1996
                                               ------------    ------------ ---------------------- --------------
<S>                                            <C>             <C>          <C>                     <C>
Net sales                                         $ 93,081       $  84,430          $  36,126          $  19,810
Cost of sales                                       32,222          27,665             15,407              7,847
                                               ------------    ------------     --------------      -------------

      Gross profit                                  60,859          56,765             20,719             11,963

Selling, general and
      administrative expenses                       26,268          26,959             13,551              8,018
Amortization of goodwill                             5,490           3,213                504                365
                                               ------------    ------------     --------------      -------------

      Operating income                            $ 29,101       $  26,593              6,664           $  3,580

Interest expense and financing costs                24,927          18,361              6,398              2,453
Other income                                            46              34                117                  5
                                               ------------    ------------     --------------      -------------

      Income before income tax
        expense and extraordinary loss               4,220           8,266                383              1,132

Income tax expense (1)                               3,213             852                  -                  -
                                               ------------    ------------     --------------      -------------

      Income before extraordinary loss               1,007           7,414                383              1,132

Extraordinary loss, net of income
    tax benefit of $4,365                                -           7,121                  -                  -
                                               ------------    ------------     --------------      -------------

      Net income                                     1,007             293           $    383           $  1,132
                                                                                ==============      =============

Preferred stock dividends                            4,751           2,268
                                               ------------    ------------

      Net loss applicable to
        common shares                            $  (3,744)      $  (1,975)
                                               ============    ============

Basic earnings per common share:
    Income (loss) before extraordinary loss        $ (7.09)         $ 9.75
    Extraordinary loss                                   -          (13.48)
                                               ------------    ------------

    Net loss                                       $ (7.09)        $ (3.73)
                                               ============    ============

Diluted earnings per common share:
    Income (loss) before extraordinary loss        $ (7.09)         $ 8.42
    Extraordinary loss                                   -          (11.65)
                                               ------------    ------------

    Net loss                                       $ (7.09)        $ (3.23)
                                               ============    ============

Weighted average common shares outstanding:
    Basic                                          528,241         528,241
    Diluted                                        528,241         610,911

</TABLE>

                                      F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
(dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                               The Company          The Predecessor
                                                                               -----------          ---------------
                                                                                  Period from         Period from
                                                              Year Ended           May 17 to         January 1 to
                                                          December 31, 1997   December 31, 1996       May 16, 1996
                                                          -----------------   -----------------       ------------
<S>                                                       <C>                 <C>                  <C> 
Supplemental unaudited financial data:
    Historical income before income taxes
      and extraordinary  loss                                    $   8,266            $     383          $     1,132

Pro forma income tax expense (2)                                       730                  153                  453
                                                            ---------------     ----------------   ------------------

Pro forma income before extraordinary loss                           7,536                  230                  679

Extraordinary loss                                                   7,121                    -                    -
                                                            ---------------     ----------------   ------------------

Pro forma net income                                                   415                  230                  679

Preferred stock dividends                                            2,268                    -                    -
                                                            ---------------     ----------------   ------------------

Pro forma net income (loss) applicable
    to common shares                                            $   (1,853)           $     230           $      679
                                                            ===============     ================   ==================

Pro forma basic earnings per common share:
    Income before extraordinary loss                                $ 9.97
    Extraordinary loss                                              (13.48)
                                                            ---------------

Pro forma net loss                                                 $ (3.51)
                                                            ===============

Pro forma diluted earnings per common share:
    Income before extraordinary loss                                $ 8.62
    Extraordinary loss                                              (11.65)
                                                            ---------------

    Pro forma net loss                                             $ (3.03)
                                                            ===============
</TABLE>

(1) The Company and the Predecessor were a limited liability company and
    partnership, respectively, for federal and state tax purposes through June
    25, 1997 and, accordingly, did not incur any federal or state income taxes
    prior to such date.

(2) Pro forma income taxes have been calculated as if the Company and the
    Predecessor were taxable entities for the entire periods presented using a
    statutory tax rate of 40% (34% federal and 6% state).


The accompanying notes are an integral part of the consolidated financial
statements.



                                      F-4
<PAGE>
Consolidated Statements of Cash Flows
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                        The Company                         The Predecessor
                                                                        -----------                         ---------------
                                                                         Year Ended        Period From        Period from
                                                         December 31,    December 31,       May 17 to          Janaury 1 to
                                                             1998           1997        December 31, 1996     May 16, 1996
                                                         -------------- -------------  -------------------  -----------------
<S>                                                      <C>            <C>           <C>                  <C>
Cash flows from operating activities:
    Net income                                               $   1,007      $    293         $    383           $     1,132
    Adjustments to reconcile net income to net
      cash provided by operating activities:
Extraordinary loss, net of income tax benefit of $4,365              -         7,121                -                     -
Depreciation                                                     1,687         1,619            1,034                   454
Amortization of goodwill                                         5,490         3,213              504                   365
Amortization of deferred financing costs
    and debt discount                                            2,274         2,104            1,139                   258
Deferred interest                                                    -             -              555                     -
Preferred interest                                                   -             -              237                     -
Change in accrued pension liabilities                              190           167              128                     -
Change in accrued postretirement liabilities                       502           472               64                   110
Compensation expense                                               819           900                -                     -
Deferred income taxes                                            3,336          (922)               -                     -
Changes in operating assets and liabilities:
    Accounts receivable                                           (853)         (264)              27                  (335)
    Inventories                                                 (2,377)       (1,135)           3,167                  (898)
    Other current assets                                            47         3,565              125                  (641)
    Income tax receivable                                        5,326         1,144                -                     -
    Other assets                                                  (775)          (50)              (2)                   (2)
    Accounts payable                                              (201)          896           (1,388)                1,262
    Borrowings under inventory financing agreement                   -         6,565            5,286                 2,797
    Payments on borrowings under inventory
      financing agreement                                            -       (10,622)          (4,400)               (2,285)
    Accrued expenses and other                                  (2,770)       (2,543)            (181)                 (741)
                                                         -------------- -------------    -------------    ------------------

       Net cash provided by operating activities                13,702        12,523            6,678                 1,476
                                                         -------------- -------------    -------------    ------------------

Cash flows from investing activities:
    Acquisition of business, net of cash acquired
       of $597 and $2,602, respectively                              -      (156,818)         (72,145)                    -
Capital expenditures, net                                         (467)         (704)            (156)                 (144)
                                                         -------------- -------------    ------------- ---------------------

       Net cash used in investing activities                      (467)     (157,522)         (72,301)                 (144)
                                                         -------------- -------------    ------------- ---------------------

Cash flows from financing activities:
    Payments on senior term loans                              (14,414)      (50,750)               -                     -
    Proceeds from term loans                                         -        85,000                -                     -
    Proceeds from senior notes                                       -       155,000                -                     -
    Proceeds from debt associated with the  acquisition,                                                   
      net of amount allocated to warrants of $7,895                  -             -           57,556                     -
Payments on revolving loans                                          -        (1,550)            (450)                    -
Proceeds from revolving loans                                        -         1,550                -                     -
Payments on term loans                                               -             -           (4,250)                    -
Payments on subordinated notes payable                               -             -             (205)                    -
Proceeds from working capital loan                                   -             -                -                20,056
Payments on working capital loan                                     -             -                -               (19,022)
Proceeds from subordinated notes payable                             -           576                -                    41
Payments on subordinated notes payable                               -       (21,082)               -                     -
Payments on inventory financing agreements                           -       (12,904)               -                     -
Payments of deferred financing costs                                 -       (13,917)               -                     -
Payment on capital lease                                             -            (9)               -                     -
Payments on other notes payable and long-term debt                   -             -                                 (2,011)
Proceeds from issuance of preferred stock and warrants               -        34,000                -                     -
Proceeds from preferred interest                                     -             -            2,500                     -
Proceeds from warrants                                               -             -            8,195                     -
Redemption of warrants                                               -       (27,000)               -                     -
Increase in preferred interest                                       -           198                -                     -
Redemption of preferred interest                                     -        (2,935)               -                     -
Capital contributions                                                -           712            4,492                     -
Net loans to stockholders for stock purchases                      (91)          (11)              (7)                   (4)
Increase in intangible assets                                        -             -                -                  (341)
                                                         -------------- -------------    -------------    ------------------

       Net cash provided by (used in)
             financing activities                              (14,505)      146,878           67,831                (1,281)
                                                         -------------- -------------    -------------    ------------------

Net increase (decrease) in cash                                 (1,270)        1,879            2,208                    51
Cash, beginning of period                                        4,087         2,208                -                   128
                                                         -------------- -------------    -------------    ------------------

Cash, end of period                                          $   2,817     $   4,087        $   2,208            $      179
                                                         ============== =============    =============    ==================

Supplemental disclosures of cash flow information:
    Cash paid during the period for interest                 $  23,126     $  16,730        $   3,140           $     2,013
                                                         ============== =============    =============    ==================

    Cash paid during the period for income taxes               $    75      $    193                -                     -
                                                         ============== =============    =============    ==================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                                 Loans to                Amount Related
                                          Common    Additional                 Stockholders                to Minimum     Total
                                          Stock,      Paid-In     Contributed   for Stock    Accumulated    Pension    Stockholders'
                                          Voting      Capital        Equity     Purchases      Deficit      Liability     Deficit
                                         ---------  ------------  -----------  -----------  ------------ ------------  -------------
<S>                                     <C>        <C>           <C>          <C>           <C>          <C>           <C>
The Predecessor:
    Beginning balance,
      Janaury 1, 1996                           -       $   684    $  10,955     $   (134)     $  9,082     $   (251)      $ 20,336
    Net loans to stockholders for 
      stock purchases                           -             -            -           (4)            -            -             (4)
    Net income                                  -             -            -            -         1,132            -          1,132
                                         ---------  ------------  -----------  -----------  ------------ ------------  -------------

    Ending balance, May 16, 1996                -       $   684    $  10,955     $   (138)     $ 10,214     $   (251)      $ 21,464
                                         =========  ============  ===========  ===========  ============ ============  =============

    The Company:
      Beginning balance, May 17, 1996
        (inception)                             -             -                      (138)            -            -       $   (138)
    Equity contributions                        -      $  8,195    $   4,492            -             -            -       $ 12,687
    Net loans to stockholders for 
      stock purchases                           -             -            -           (7)            -            -             (7)
    Net income                                  -             -            -            -       $   383            -            383
                                         ---------  ------------  -----------  -----------  ------------ ------------  -------------

    Ending balance,
      December 31, 1996                         -         8,195        4,492         (145)          383            -         12,925
    Distribution to warrant holders             -        (8,195)           -            -       (18,810)           -        (27,005)
    Issuance of common stock in exchange
      for membership interest               $   5         4,492       (4,492)           -             -            -              5
    Issuance of common stock                    -           712            -            -             -            -            712
    Issuance of warrants                        -         2,410            -            -             -            -          2,410
    Compensation expense                        -           702            -            -             -            -            702
    Net loans to stockholders for 
      stock purchases                           -             -            -          (11)  -                      -            (11)
    Preferred stock dividend                    -             -            -            -        (2,268)           -         (2,268)
    Net income                                  -             -            -            -           293            -            293
                                         ---------  ------------  -----------  -----------  ------------ ------------  -------------

    Ending balance, December 31, 1997           5         8,316            -         (156)      (20,402)           -        (12,237)
    Compensation expense                        -           704            -            -             -            -            704
    Net loans to stockholders for 
      stock purchases                           -             -            -          (91)            -            -            (91)
    Preferred stock dividend                    -             -            -            -        (4,751)           -         (4,751)
    Net income                                  -             -            -            -         1,007            -          1,007
                                         ---------  ------------  -----------  -----------  ------------ ------------  -------------

    Ending balance, December 31, 1998       $   5      $  9,020            -     $   (247)    $ (24,146)           -      $ (15,368)
                                         =========  ============  ===========  ===========  ============ ============  =============

</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                      F-6
<PAGE>
Notes to Consolidated Financial Statements



 1.      BASIS OF PRESENTATION:

       North Atlantic Trading Company, Inc. and Subsidiaries (the Company)
       manufactures and distributes tobacco and related products through its
       smokeless tobacco and roll-your-own operating segments. The smokeless
       tobacco segment manufactures and distributes smokeless tobacco products
       under the Beech-Nut, Durango, Trophy and Havana Blossom brand names. The
       roll-your-own segment imports and distributes cigarette rolling papers,
       tobacco and related accessories under the Zig-Zag brand name.

       National Tobacco Company, L.P. (a limited partnership) was formed and
       acquired the smokeless tobacco division of Lorillard, Inc. in 1988. On
       April 14, 1992, the general partner and majority owner and certain
       limited partners sold their partnership interest to a new general
       partner. Accordingly, the April 1992 transaction was accounted for as the
       formation of a new entity, National Tobacco Company, L.P. (the
       Predecessor).

       Certain members of management of the Predecessor formed NTC Holding, LLC
       (the Holding Company), a limited liability company with a finite life
       expiring December 31, 2100, and caused the Holding Company to form
       National Tobacco Finance Corporation (the Finance Corporation), a
       wholly-owned subsidiary of the Holding Company. On May 17, 1996, National
       Tobacco Company, L.P. (the Partnership) was recapitalized and the Holding
       Company acquired a 99% limited partnership interest in the Partnership
       and the Finance Corporation became the sole general partner and owner of
       the remaining 1% interest of the Partnership.

       Accordingly, this transaction was accounted for as the formation of a new
       entity under the purchase method of accounting.

       On May 19, 1997, certain members of management and holders of membership
       interests in the Holding Company formed a corporation named North
       Atlantic Trading Company, Inc. (the Corporation). On June 25, 1997, the
       Corporation acquired the membership interests in the Holding Company and
       the Holding Company transferred all of its assets, including its limited
       partnership interest in the Partnership, all of the capital stock of the
       Finance Corporation, and its rights to acquire NATC Holdings USA, Inc.
       (NATC) as described in Note 3. The Corporation then formed North Atlantic
       Operating Company, Inc. (NAOC), a Delaware corporation and wholly-owned
       subsidiary of the Corporation. NAOC then exercised its rights to acquire
       all of the outstanding capital stock of NATC. NATC and its wholly-owned
       subsidiary were then merged into NAOC.

       As described in Note 9, on June 25, 1997 the Corporation obtained new
       financing in the form of $155.0 million in 11% Senior Notes due 2004,
       $34.0 million in 12% Senior Payment-in-Kind (PIK) Preferred Stock, and
       $85.8 million under a new credit agreement. The proceeds of such
       financing were used to repay all of the outstanding debt of the Holding
       Company and the Partnership, finance the acquisition of NATC described in
       Note 3, repay outstanding debt and other assumed liabilities of NATC, and
       pay the transaction costs associated with the financing and acquisition.


                                      F-7
<PAGE>
Notes to Consolidated Financial Statements, Continued



 2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

       CONSOLIDATION: The consolidated financial statements include the
       consolidated accounts of the Corporation, the Finance Corporation, the
       Partnership and NAOC. All intercompany accounts have been eliminated.

       REVENUE RECOGNITION: The Company recognizes revenues and the related
       costs upon shipment of product to the customer.

       INVENTORIES: Inventories are stated at the lower of cost or market. Cost
       is determined on the last-in, first-out (LIFO) method. Leaf tobacco is
       presented in current assets in accordance with standard industry
       practice, notwithstanding the fact that such tobaccos are carried longer
       than one year for the purpose of curing.

       FIXED ASSETS: Fixed assets are stated at cost less accumulated
       depreciation. Depreciation is provided using the straight-line method
       over the estimated useful lives of the related assets (4 to 7 years for
       machinery, equipment and furniture, and 25 years for buildings).
       Expenditures for repairs and maintenance are charged to expense as
       incurred. The costs of major renewals and betterments are capitalized and
       depreciated over their estimated useful lives. Upon disposition of fixed
       assets, the costs and related accumulated depreciation amounts are
       relieved and any resulting gain or loss is reflected in operations during
       the period of disposition.

       GOODWILL: The excess of purchase price over fair value of net assets
       acquired is amortized using the straight-line method over 40 years and 25
       years for the Partnership and NAOC, respectively.

       The Company periodically reviews the appropriateness of the remaining
       life of its intangible assets considering whether any events have
       occurred or conditions have developed which may indicate that the
       remaining life or the amortization method requires adjustment. After
       reviewing the appropriateness of the remaining life and the pattern of
       usage of the intangible assets, the Company then assesses the overall
       recoverability of intangible assets by determining if the unamortized
       balance can be recovered through undiscounted future operating cash
       flows.

       DEFERRED FINANCING COSTS: Deferred financing costs are amortized over the
       terms of the related debt obligations using the interest method.

       INCOME TAXES: Prior to June 25, 1997, the Holding Company and the
       Predecessor were a limited liability company and a partnership,
       respectively; therefore, no provision for income taxes was recorded since
       earnings or losses were reported by the partners or members on their
       individual income tax returns.

       On June 25, 1997, the Company was reorganized as a corporation subject to
       federal and state income taxes. Accordingly, on June 25, 1997 the Company
       began recording the effects of income taxes under the liability method in
       which deferred income tax assets and liabilities are recognized based on
       the difference between the financial and tax basis of assets and
       liabilities using the enacted tax rates in effect for the years in which
       the differences are expected to reverse.


                                      F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

       ADVERTISING AND PROMOTION: Advertising and promotion costs are expensed
       as incurred.

       FINANCIAL INSTRUMENTS: The Company enters into foreign currency forward
       contracts to hedge its exposure to changes in foreign currency exchange
       rates on inventory purchase commitments. Gains and losses on these
       contracts are included in income as the related inventories are sold.

       STOCK-BASED COMPENSATION: The Company accounts for compensation expense
       related to the stock options described in Note 13 under the provisions of
       Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
       for Stock-Based Compensation."

       In the fourth quarter of 1997 the Company changed its method for
       measuring stock compensation costs from the intrinsic value based method
       to the fair value based method which is the preferred method under SFAS
       No. 123. Under the intrinsic method, compensation cost for stock options
       is measured as the excess, if any, of the market value of the Company's
       stock at the measurement date over the exercise price. The fair value
       based method requires compensation cost for stock options to be
       recognized based on the fair value of stock options granted. This change
       did not have a material effect on the Company's results of operations for
       1997 or the results of operations for any interim quarter during 1997.

       COMPUTATION OF NET LOSS PER COMMON SHARE: Basic net loss per common share
       has been computed by dividing the net loss applicable to common shares by
       the weighted average number of common shares outstanding during the
       period.

       Diluted net loss per share has been computed by dividing the net loss
       applicable to common shares by the weighted average number of common and
       common equivalent shares (warrants and stock options) outstanding during
       the period.

       RISKS AND UNCERTAINTIES: Smokeless tobacco companies, like other
       manufacturers and sellers of tobacco products, are subject to regulation
       at the federal, state and local levels. Such regulations include labeling
       requirements, limitations on advertising, and prohibition of sales to
       minors. The trend in recent years has been toward increased regulation of
       the tobacco industry. There can be no assurance as to the ultimate
       content, timing or effect of any regulation of tobacco products by any
       federal, state or local legislative or regulatory body, nor can there be
       any assurance that any such legislation or regulation would not have a
       material adverse effect on the Company's financial position, results of
       operations or cash flows.


                                      F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

       RISKS AND UNCERTAINTIES, CONTINUED: The tobacco industry has experienced
       and is experiencing significant product liability litigation. Most
       tobacco liability lawsuits have been brought against manufacturers and
       sellers of cigarettes for injuries allegedly caused by smoking or by
       exposure to smoke. However, several lawsuits have been brought against
       manufacturers and sellers of smokeless tobacco for injuries to health
       allegedly caused by use of smokeless tobacco. Typically, such claims
       assert that use of smokeless tobacco is addictive and causes oral cancer.
       As discussed in Note 17, the Partnership was named as a defendant in such
       a lawsuit. There can be no assurance that the Company will not sustain
       losses in connection with such lawsuits and that such losses will not
       have a material adverse effect on the Company's financial position,
       results of operations or cash flows or that additional lawsuits will not
       be brought against the Company.

       Further, in November 1998 most of the states, represented by their
       attorneys general acting through the National Association of Attorneys
       General (NAAG), signed two contracts: the Master Settlement Agreement
       (MSA) and the Smokeless Tobacco Master Settlement Agreement (STMSA). To
       the best of the Company's knowledge, the only industry signatories to the
       MSA have been cigarette manufacturers and/or distributors and the only
       signatory to the STMSA has been UST Inc. In the Company's opinion, the
       fundamental basis for each agreement is the states' consents to withdraw
       all claims resulting from their litigation asserting various claims for
       monetary, equitable and injunctive relief against certain tobacco
       products manufacturers and others and, in return, the industry
       signatories have agreed to certain marketing restrictions and regulations
       as well as certain payment obligations. The Company is currently
       evaluating the settlement agreements but has not decided whether or not
       it will participate in either settlement. There can be no assurance as to
       whether entering into one or both settlement agreements or choosing not
       to do so would have a material adverse effect on the Company's financial
       position, results of operations or cash flows.


       USE OF ESTIMATES: The preparation of financial statements in conformity
       with generally accepted accounting principles requires management to make
       estimates and assumptions that affect the reported amounts of assets and
       liabilities, disclosure of contingent assets and liabilities at the dates
       of the financial statements and the reported amounts of revenues and
       expenses during the reporting periods. Actual results could differ from
       those estimates.

       CONCENTRATION OF CREDIT RISK: At December 31, 1998 and 1997, the Company
       had bank deposits in excess of federally insured limits of approximately
       $2.9 million and $4.6 million, respectively.


                                      F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

       CONCENTRATION OF CREDIT RISK, CONTINUED: The Company sells its products
       to distributors and retail establishments throughout the United States.
       The Company's largest customer accounted for 10.1% and 16.4% of its
       smokeless tobacco revenues and 8.2% and 12.4% of its roll-your-own
       revenues in 1998 and 1997, respectively. The Company performs periodic
       credit evaluations of its customers and generally does not require
       collateral on trade receivables. Historically, the Company has not
       experienced significant credit losses.

       RECLASSIFICATIONS: Certain prior period amounts have been reclassified to
       conform to current year presentation.


 3.    ACQUISITION:

       On June 25, 1997, NAOC acquired all of the outstanding capital stock of
       NATC for a purchase price of $162.6 million. This acquisition was
       accounted for using the purchase method of accounting under which the
       purchase price was allocated to the net tangible assets, with the excess
       recorded as goodwill which is being amortized over 25 years. The results
       of operations of NAOC have been included in the Company's consolidated
       statement of operations since the date of acquisition.

       Following is the allocation of the purchase price to the fair value of
       the net assets acquired (in thousands):

         Cash                                                $     2,602
         Accounts receivable                                         836
         Inventory                                                12,956
         Other current assets                                         74
         Income tax receivable                                     6,475
         Deferred income tax assets                               26,457
         Fixed assets                                                131
         Other assets                                                248
         Accounts payable                                           (312)
         Accrued expenses                                         (4,256)
         Deferred income tax liabilities                          (3,052)
         Debt assumed                                           (159,421)
                                                             -----------
                        Amount allocated to goodwill         $  (117,262)
                                                             ===========


                                      F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 3.      ACQUISITION, CONTINUED:

       Following are the unaudited pro forma results of operations as if the
       June 25, 1997 transaction had occurred on January 1, 1996 (in thousands,
       except per share and share amounts):

<TABLE>
<CAPTION>
                                                                                                Year Ended
                                                                                                December 31,
                                                                                                ------------
                                                                                          1997                1996
                                                                                    -----------------   -----------------
<S>                                                                                 <C>                 <C>
         Net sales                                                                        $  101,936          $  102,075
                                                                                    =================   =================

         Income before extraordinary loss                                                      2,701               3,459
         Extraordinary loss                                                                        -              (7,121)
                                                                                    -----------------   -----------------

         Net income (loss)                                                                     2,701              (3,662)
         Preferred stock dividends                                                             4,513               4,513
                                                                                    -----------------   -----------------

         Net loss applicable to common shares                                             $   (1,812)          $  (8,175)
                                                                                    =================   =================

         Basic and diluted earnings per common share:
            Loss before extraordinary loss per common share                                  $ (3.43)            $ (2.00)
            Extraordinary loss, net, per common share                                              -              (13.48)
                                                                                    -----------------   -----------------

         Net loss per common share                                                           $ (3.43)           $ (15.48)
                                                                                    =================   =================

         Weighted average common shares outstanding:                                         528,241             528,241
            Basic and diluted
</TABLE>

       This unaudited pro forma financial information is not necessarily
       indicative of the operating results that would have occurred had the
       transaction been consummated as of January 1, 1996, nor is it necessarily
       indicative of future operating results.



 4.    FAIR VALUE OF FINANCIAL INSTRUMENTS:

       The following disclosure of the estimated fair value of financial
       instruments is made in accordance with the requirements of SFAS No. 107,
       "Disclosure About Fair Value of Financial Instruments," as amended by
       SFAS No. 126. The estimated fair value amounts have been determined by
       the Company using the methods and assumptions described below. However,
       considerable judgment is required to interpret market data to develop
       estimates of fair value. Accordingly, the estimates presented herein are
       not necessarily indicative of the amounts the Company could realize in a
       current market exchange. The use of different market assumptions and/or
       estimation methodologies may have a material effect on the estimated fair
       value amounts.

          CASH AND CASH EQUIVALENTS: Cash and cash equivalents are by definition
          short-term and the carrying amount is a reasonable estimate of fair
          value.

          ACCOUNTS RECEIVABLE: The fair value of accounts receivable
          approximates their carrying value.

          NOTES PAYABLE AND LONG-TERM DEBT: The fair value of the notes payable
          and long-term debt approximates their carrying value.


                                      F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 5.    INVENTORIES:

       The reduction of LIFO inventory quantities (decreased) increased net
       income of the Company by approximately $(0.2 million) and $1.5 million
       for the year ended December 31, 1997 and the period May 17, 1996 to
       December 31, 1996, respectively.

       The components of inventories at December 31 are as follows (in 
       thousands):
<TABLE>
<CAPTION>
                                                                                  1998                  1997
                                                                            ------------------   -------------------
<S>                                                                         <C>                  <C>
         Raw materials and work in process                                          $   1,960            $    1,492
         Leaf tobacco                                                                  19,679                18,598
         Finished goods - tobacco                                                       3,074                 2,955
         Finished goods - cigarette papers                                              6,470                 4,948
         Other                                                                            381                   291
                                                                            ------------------   -------------------

                                                                                       31,564                28,284
         LIFO reserve                                                                  26,923                27,826
                                                                            ------------------   -------------------

                                                                                   $   58,487            $   56,110
                                                                            ==================   ===================


       The LIFO inventory value is in excess of its current estimated
       replacement cost by the amount of the LIFO reserve.


 6.      PROPERTY, PLANT AND EQUIPMENT:

       Property, plant and equipment at December 31 consists of (in thousands):

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

        Land                                                                       $    654                  654
        Buildings and improvements                                                    3,338                3,211
        Machinery and equipment                                                       5,470                5,319
        Furniture and fixtures                                                        1,909                1,720
                                                                        --------------------   ------------------

                                                                                     11,371               10,904

        Accumulated depreciation                                                     (4,340)               2,653
                                                                        --------------------   ------------------

                                                                                  $   7,031            $   8,251
                                                                        ====================   ==================
</TABLE>

                                      F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 7.    GOODWILL:

       Goodwill at December 31 consists of (in thousands):

<TABLE>
<CAPTION>
                                                                                        1998                  1997
                                                                                  ------------------    -----------------
<S>                                                                               <C>                   <C>
        Partnership goodwill, net of accumulated amortization of $2,106
         and $1,307 at December 31, 1998 and 1997, respectively                          $   29,846            $  30,645

        NAOC goodwill, net of accumulated amortization of $7,081
         and $2,390 at December 31, 1998 and 1997, respectively                             110,181              114,872
                                                                                  ------------------    -----------------

                                                                                         $  140,027              145,517
                                                                                  ==================    =================
</TABLE>

 8.      DEFERRED FINANCING COSTS:

       Deferred financing costs at December 31 consist of (in thousands):

<TABLE>
<CAPTION>
                                                                                                 1998            1997
                                                                                             ------------    ------------
<S>                                                                                          <C>             <C>
        Deferred financing costs, net of accumulated amortization of
           $3,408 and $1,134 at December 31, 1998 and 1997,
           respectively                                                                          $11,232         $13,506
                                                                                             ============    ============
</TABLE>

 9.      NOTES PAYABLE AND LONG-TERM DEBT:

       Notes payable and long-term debt at December 31 consists of (in
thousands):

<TABLE>
<CAPTION>
                                                                              1998                 1997
                                                                       -----------------    -----------------
<S>                                                                    <C>                  <C>
       Senior notes                                                          $  155,000           $  155,000
       Term borrowings under credit agreement                                    60,586               75,000
                                                                       -----------------    -----------------

                                                                                215,586              230,000
       Less current portion                                                      12,983                9,375
                                                                       -----------------    -----------------

                                                                             $  202,603           $  220,625
                                                                       =================    =================
</TABLE>

       On June 25, 1997, the Corporation issued $155.0 million of 11% Senior
       Notes due 2004 (the Notes). The Notes are unsecured senior obligations of
       the Corporation which mature on June 15, 2004. The Notes bear interest at
       11% per annum, payable semiannually on June 15 and December 15, to
       holders of record at the close of business on the June 1 or December 1
       immediately preceding the interest payment date.

       The Notes have no mandatory redemption requirements; however, they are
       redeemable at the option of the Corporation at a redemption price of
       105.5%, 102.75%, or 100.0%, plus accrued interest, on or after June 15,
       2001, 2002, and 2003 and thereafter, respectively. In addition, in the
       event of a change in control of the Corporation, as defined, the holders
       have the right to require the Corporation to repurchase the Notes at a
       purchase price of 101.0% plus accrued interest.


                                      F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 9.    NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED:

       On June 25, 1997, the Corporation entered into a credit agreement (the
       Credit Agreement) with a lender which provided borrowings of $85.0
       million under a term facility and a revolver with available credit of up
       to $25 million, including a letter of credit sublimit of $10.0 million.
       The borrowings under the term facility are subject to quarterly principal
       payments over the five-year period through the maturity date of June 25,
       2002, while the revolver may be repaid and reborrowed as necessary, with
       any unpaid amounts due and payable upon its termination date of June 25,
       2002.

       Borrowings under the term facility and revolver bear interest per annum
       at variable rates based on prime, federal funds or LIBOR rates at the
       Corporation's option. The interest rate on borrowings under the term
       facility ranged from 8.12% to 8.75% at December 31, 1998. In addition,
       the Corporation must pay a quarterly commitment fee of 0.5% per annum of
       the unused portion of the revolver.

       The Notes and the Credit Agreement include cross default provisions and
       limit the incurrence of additional indebtedness, dividends, transactions
       with affiliates, asset sales, acquisitions, mergers, prepayments of
       indebtedness, liens and encumbrances, and other matters. The Credit
       Agreement also includes covenants which require the Corporation to meet
       certain financial tests, including minimum interest coverage, maximum
       leverage ratio, fixed charges coverage and minimum earnings before
       interest, taxes, depreciation and amortization.

       Scheduled maturities (exclusive of future mandatory prepayments, if any)
       of the Corporation's notes payable and long-term debt are as follows (in
       thousands):

       Through December 31, 1999                    $  12,983
       Through December 31, 2000                       15,146
       Through December 31, 2001                       19,473
       Through December 31, 2002                       12,984
       Through December 31, 2003                            -
       Thereafter                                     155,000
                                             -----------------
                                                   $  215,586
                                             =================

10.    INCOME TAXES:

       The Company and the Predecessor were a limited liability company and a
       partnership, respectively, for federal and state income tax purposes
       through June 25, 1997 and, accordingly, did not incur any income taxes
       prior to such date. Upon the occurrence of the transactions on June 25,
       1997 as described in Note 1, the Company became a taxable corporation and
       recorded a one-time income tax benefit of $3.6 million in the statement
       of operations for the six-month period ended June 30, 1997. This
       provision was necessary to record the Company's deferred tax assets and
       liabilities of $5.7 million and $2.1 million, respectively, which had not
       previously been recorded due to its nontaxable status.


                                      F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


10.    INCOME TAXES, CONTINUED:

       The provision for income taxes for the years ended December 31, 1998 and
       1997 consists of the following components (in thousands):

<TABLE>
<CAPTION>
                                                         1998                1997
                                                   -----------------   -----------------
<S>                                                <C>                 <C>
       Current:
         Federal                                                  -                   -
         State and local                                   $    200            $    300
                                                   -----------------   -----------------
                                                                200                 300
                                                   -----------------   -----------------

       Deferred:
         Federal                                              2,943               3,675
         State and local                                         70                 432
                                                   -----------------   -----------------
                                                              3,013               4,107
                                                   -----------------   -----------------

       Initial setup of deferred taxes:
         Federal                                                  -              (3,181)
         State and local                                          -                (374)
                                                   -----------------   -----------------
                                                                  -              (3,555)
                                                   -----------------   -----------------

                                                          $   3,213            $    852
                                                   =================   =================
</TABLE>

       Deferred tax assets and liabilities at December 31, 1998 and 1997 consist
       of (in thousands).

<TABLE>
<CAPTION>
                                                            1998                                 1997
                                                 Assets           Liabilities         Assets           Liabilities
                                               ------------       ------------     -------------       ------------
<S>                                            <C>                <C>              <C>                 <C>
Inventory                                                -           $  8,903                 -           $  6,721
Property, plant and equipment                      $   458                  -          $    440                  -
Goodwill                                            23,553                  -            27,213                  -
Accrued pension and postretirement costs             2,914                  -             2,387                  -
NOL carryforward                                     5,179                  -             3,594                  -
Other                                                  833                  -               457                  -
                                               ------------       ------------     -------------       ------------

Deferred income taxes                             $ 32,937           $  8,903         $  34,091           $  6,721
                                               ============       ============     =============       ============

</TABLE>

       At December 31, 1998, the Company had NOL carryforwards for income tax
       purposes of $13,629, of which $9,459 expires in 2012 and $4,170 in 2018.

       The Company has determined that at December 31, 1998 its ability to
       realize future benefits of net deferred tax assets meets the "more likely
       than not" criteria in SFAS No. 109, "Accounting for Income Taxes";
       therefore, no valuation allowance has been recorded.


                                      F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


10.    INCOME TAXES, CONTINUED:

       Reconciliation of the federal statutory rate and the effective income tax
       rate is as follows:

<TABLE>
<CAPTION>
                                                                                                      Period from
                                                                             Year Ended            June 25, 1997 to
                                                                            December 31,              December 31,
                                                                                1998                     1997
                                                                          ------------------       ------------------
<S>                                                                       <C>                      <C> 
             Federal statutory rate                                                 35.0 %                 35.0  %
             State taxes                                                             3.0                    2.3
             Initial set-up of deferred taxes                                          -                  (43.0)
             Goodwill amortization                                                  39.5                   10.2
             Other                                                                  (1.4)                   5.8
                                                                          ---------------------    -------------------

             Effective income tax rate                                              76.1 %                  10.3 %
                                                                          =====================    ===================
</TABLE>

11.    PENSION AND POSTRETIREMENT BENEFIT PLANS:

       The Company has defined benefit pension plans covering substantially all
       of its employees. Benefits for the hourly employees' plan are based on a
       stated benefit per year of service, reduced by amounts earned in a
       previous plan. Benefits for salaried employees are based on years of
       service and the employees' final compensation.

       The Company sponsors two defined benefit postretirement plans that cover
       both salaried and hourly employees. One plan provides medical and dental
       benefits, and the other provides life insurance benefits. The
       postretirement health care plan is contributory, with retiree
       contributions adjusted annually; the life insurance plan is
       noncontributory.




                                      F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


11.    PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:

       The following tables provide a reconciliation of the changes in the
       plans' benefit obligations and fair value of assets over the two-year
       period ended December 31, 1998, and a statement of the funded status as
       of December 31 (in thousands):

<TABLE>
<CAPTION>
                                                               Pension Benefits                   Postretirement Benefits
                                                            1998              1997              1998              1997
                                                       ----------------  ----------------  ---------------  ----------------
<S>                                                    <C>               <C>                   <C>             <C>
       Reconciliation of benefit obligation:
          Benefit obligation at January 1                   $    7,478        $    6,754        $    5,283        $    4,524
          Service cost                                             541               544               304               269
          Interest cost                                            554               491               317               334
          Liability increase due to amendment                        -                12                 -                 -
          Actuarial loss (gain)                                    653              (112)             (664)              287
          Benefit  paid                                           (339)             (211)             (114)             (131)
                                                       ----------------  ----------------  ----------------  ----------------

       Benefit obligation at December 31                    $    8,887        $    7,478        $    5,126        $    5,283
                                                       ================  ================  ================  ================

       Reconciliation of fair value of plan assets:
          Fair value of plan assets at January 1            $    6,738        $    5,219         $       -         $       -
          Actual return on plan assets                           1,364             1,135                 -                 -
           Employer contributions                                  375               595                 -                 -
          Benefit  paid                                           (339)             (211)                -                 -
                                                       ----------------  ----------------  ----------------  ----------------

       Fair value of plan assets at December 31             $    8,138        $    6,738         $       -         $       -
                                                       ================  ================  ================  ================

       Funded status:
          Funded status at December 31                      $     (749)       $     (740)      $    (5,126)       $   (5,283)
          Unrecognized prior service cost                           10                11                 0                 -
          Unrecognized net (gain) loss                          (1,301)           (1,121)             (502)              157
                                                       ----------------  ----------------  ----------------  ----------------

       Accrued benefit cost                                $    (2,040)      $    (1,850)      $    (5,628)       $   (5,126)
                                                       ================  ================  ================  ================

       The following table provides the amounts recognized in the balance sheets
as of December 31 (in thousands):

                                                                Pension Benefits               Postretirement Benefits
                                                            1998              1997              1998              1997
                                                       ----------------  ----------------  ----------------  ----------------

       Accrued benefit cost at January 1                   $    (1,850)      $    (1,812)       $   (5,126)       $   (4,654)
       Net periodic benefit cost                                  (564)             (633)             (616)             (603)
       Contributions                                               374               595               114               131
                                                       ----------------  ----------------  ----------------  ----------------

       Accrued benefit cost at December 31                 $    (2,040)      $    (1,850)       $   (5,628)       $   (5,126)
                                                       ================  ================  ================  ================

</TABLE>
                                      F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


11.    PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:

       The following table provides the components of net periodic pension and
       postretirement benefit costs for the plans for the years ended December
       31 (in thousands):

<TABLE>
<CAPTION>
                                                                  Pension Benefits          Postretirement Benefits
                                                                1998            1997          1998          1997
                                                             -----------     -----------  -----------    ------------
<S>                                                          <C>             <C>          <C>            <C>
         Service cost                                           $   541          $   544       $ 304         $   269
         Interest cost                                              554              491         317             334
         Expected return on plan assets                            (508)          (1,135)          -               -
         Amortization of gains and losses                           (23)             733          (5)              -
                                                             -----------     ------------   ---------    ------------

         Net periodic benefit cost                              $   564          $   633       $ 616         $   603
                                                             ===========     ============   =========    ============


       The weighted average assumptions used in the measurement of the Company's
       benefit obligation are as follows:

                                                                    Pension Benefits          Postretirement Benefits
                                                                1998            1997           1998          1997
                                                             -----------     ------------     -------    ------------

            Discount rate                                           7.0 %            7.5  %      7.0  %          7.0 %
            Expected return on plan assets                          8.5 %            7.5  %        -  %            - %
            Rate of compensation increase                           4.0 %            4.0  %        -  %            - %

</TABLE>

       For measurement purposes, the assumed health care cost trend rate for
       participants under age 65 as of December 31, 1998 and 1997 was 9% and
       9.5%, respectively, and for participants age 65 and over the rate was 8%
       and 8.5%, respectively. The health care cost trend rate was assumed to
       decline gradually to 5% for pre-age 65 and for post-age 65 costs over 27
       years.

       Assumed health care cost trend rates have a significant effect on the
       amounts reported for the postretirement benefit plans. A 1% change in
       assumed health care cost trend rates would have the following effects:

<TABLE>
<CAPTION>
                                                                                               1998          1997
                                                                                            ---------    ------------
<S>                                                                                         <C>          <C>
         Effect on total of service and interest cost components of
            net periodic postretirement benefit cost                                          $2,000        $  2,000

         Effect on the health care component of the accumulated
            postretirement benefit obligation                                                 23,000          23,000
</TABLE>

       The Company also sponsors a voluntary retirement savings plan (401(k)).
       Eligible employees may elect to contribute up to 10% of their annual
       earnings subject to certain limitations. The Company matches 50% of each
       eligible participant's contribution up to 6% of the participant's
       compensation for the plan year. Company matching is subject to a vesting
       schedule. Additional discretionary matching contributions by the Company
       are determined annually by the Board of Directors. Company matching
       contributions to this plan were approximately $0.2 million, $0.2 million,
       $0.1 million, and $44,000 for the years ended December 31, 1998 and 1997,
       and the periods from May 17, 1996 to December 31, 1996 and from January
       1, 1996 to May 16, 1996, respectively.


                                      F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


12.    MANDATORILY REDEEMABLE PREFERRED STOCK:

       On December 31, 1998 and 1997, the Company had authorized 12 million
       shares of 12% Senior Payment-In-Kind Preferred Stock (the Preferred
       Stock) of which 1.62 million shares and 1.44 million shares,
       respectively, were issued and outstanding. Each share of Preferred Stock
       has a par value of $.01 and a liquidation preference of $25, for total
       liquidation values of approximately $40.5 million and $36.0 million at
       December 31, 1998 and 1997, respectively. Prior to June 2002, holders of
       the Preferred Stock are entitled to receive dividends at an annual rate
       of 12% of the liquidation preference, payable quarterly in cash or by the
       issuance of additional shares of Preferred Stock having an aggregate
       liquidation preference equal to the amount of the dividends, at the
       Company's option. Following June 15, 2002, dividends must be paid in
       cash. Preferred stock dividends, including the interest accretion
       described below, for the year ended December 31, 1998 and the period from
       June 25, 1997 through December 31, 1997 were $4.8 million and $2.4
       million, respectively, were recorded as an increase in the carrying value
       of the Preferred Stock.

       On June 25, 1997, the holders of the Preferred Stock were issued
       warrants, with an original fair value of $1.7 million, to purchase 44,440
       shares of common stock of the Company for $0.01 per share, exercisable
       immediately. The original fair value of these warrants has been recorded
       in equity, with a corresponding amount recorded as a discount on the
       carrying value of the Preferred Stock. This discount is being amortized
       under the interest method over the 10-year term of the Preferred Stock as
       a part of the annual preferred stock dividend requirement. Amortization
       of the discount was $0.1 million for the period from June 25, 1997
       through December 31, 1997 and $0.2 million for the year ended December
       31, 1998.

       Prior to June 15, 2000, the Company may, subject to certain restrictions,
       redeem up to 35% of the Preferred Stock out of the net cash proceeds from
       any one or more public equity offerings of the Company, for 112% of the
       liquidation preference plus all accumulated and unpaid dividends. The
       Preferred Stock is not redeemable from June 16, 2001 to June 15, 2002.
       The Preferred Stock is then redeemable, at the Company's option, on or
       after the following dates at the indicated redemption prices (expressed
       as a percentage of the liquidation preference) plus all accumulated and
       unpaid dividends: June 15, 2002 - 106%; June 15, 2003 - 104%; June 15,
       2004 - 102%; and June 15, 2005 - 100%. The Preferred Stock is mandatorily
       redeemable on June 15, 2007 at a price equal to the liquidation
       preference plus all accumulated and unpaid dividends. The Preferred Stock
       is also redeemable, at the option of the holders, upon a change in
       control of the Company, as defined, at a price equal to 101% of the
       liquidation preference plus all accumulated and unpaid dividends.

       Persons affiliated with the initial purchases of the Preferred Stock were
       also issued warrants, with an original fair value of $0.7 million, to
       purchase 19,050 shares of common stock of the Company for $0.01 per
       share, exercisable immediately. The original fair value of these warrants
       has been recorded in equity, with a corresponding amount capitalized and
       included in deferred financing costs.


                                      F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


13.    SHARE INCENTIVE PLAN:

       On June 25, 1997, the Company implemented a share incentive plan covering
       certain key employees which provides for the grant of options to purchase
       common stock of the Company and other stock related benefits. As of
       December 31, 1998, no benefits other than the stock options described
       below had been granted. The total number of shares available for granting
       under the plan is 61,856. Stock option activity is summarized below:

<TABLE>
<CAPTION>
                                                                                       Weighted             Weighted
                                                                                        Average              Average
                                                                   Incentive           Exercise            Grant Date
                                                                    Shares               Price             Fair Value
                                                                 --------------     ----------------    ------------------
<S>                                                              <C>                <C>                 <C>
         Outstanding December 31, 1996                                       -                    -                     -
         Granted                                                        46,894              $ 18.19               $ 26.51
         Exercised                                                           -                    -                     -
         Forfeited                                                           -                    -                     -
                                                                 --------------     ----------------    ------------------

         Outstanding December 31, 1997                                  46,894                18.19                 26.51

         Granted                                                        14,962                18.19                 26.51
         Exercised                                                                                -                     -
         Forfeited                                                      (7,096)              (18.19)               (26.51)
                                                                 --------------     ----------------    ------------------

         Outstanding December 31, 1998                                  54,760              $ 18.19               $ 26.51
                                                                 ==============     ================    ==================
</TABLE>

       Of the stock options outstanding on December 31, 1998, 44,451 were
       exercisable, with an additional 10,309 becoming exercisable on April 23,
       1999. All stock options expire 15 years from the grant date. The Company
       estimates that all of the stock options granted will be exercised and
       that the expected life of all stock options is five years from the date
       of grant. The weighted average fair value of the options was determined
       as the difference between the fair value of the common stock on the grant
       date and the present value of the exercise price over the expected life
       of five years at a risk free interest rate of 6%, with no assumed
       dividend yield.

       A significant percentage of the stock options described above includes a
       provision under which the Company will reimburse the employee for the
       difference between their ordinary income tax liability and the liability
       computed using the capital gains rate in effect upon exercise of the
       options. The effect of this provision is accounted for as a variable
       portion of the option plan.




                                      F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


13.    SHARE INCENTIVE PLAN, CONTINUED:

       The Company has recorded compensation expense related to the options
       based on the provisions of SFAS No. 123 under which the fixed portion of
       such expense is determined as the fair value of the options on the date
       of grant and amortized over the vesting period. The variable portion of
       the compensation expense is remeasured on each reporting date with the
       expense amount adjusted for changes in the fair value of the company
       stock on that date. Compensation expense of $819,000 and $900,000
       ($508,000 and $558,000 net of deferred income tax benefit) has been
       recognized in the statements of operations for the years ended December
       31, 1998 and 1997, respectively.



14.    INCOME BEFORE EXTRAORDINARY LOSS PER COMMON SHARE RECONCILIATION:

<TABLE>
<CAPTION>
                                                                          For the Year Ended December 31, 1998
                                                                 ----------------------------------------------------
                                                                    Income              Shares           Per Share
                                                                    (Numerator)      (Denominator)         Amount
                                                                    -----------      -------------         ------
<S>                                                              <C>                <C>                <C>
         Net income                                                   $  1,007
         Less: Preferred stock dividends                                (4,751)
                                                                 --------------

         Basic and diluted:
           Loss available to common stockholders                      $ (3,744)             528,241          $ (7.09)
                                                                 ==============     ================    =============


       The calculations are based on the weighted average number of shares of
       common stock outstanding during the year. Common equivalent shares from
       stock options of 23,546 and warrants of 63,490 are excluded from
       computations as their effect is antidilutive.


                                                                           FOR THE YEAR ENDED DECEMBER 31, 1997
                                                                 -----------------------------------------------------
                                                                    INCOME              SHARES           PER SHARE
                                                                  (Numerator)        (Denominator)         AMOUNT
                                                                 --------------     ----------------    -------------

         Income before extraordinary loss                            $   7,414
          Less: Preferred stock dividends                               (2,268)
                                                                 --------------

         Basic:
           Income available to common stockholders                       5,146              528,241        $    9.75
                                                                                                        =============


          Effect of dilutive securities:
           Warrants                                                          -             $ 63,490
           Stock options                                                     -               19,180
                                                                 --------------     ----------------

         Diluted:
           Income available to common stockholders
             and assumed conversions                                 $   5,146              610,911        $    8.42
                                                                 ==============     ================    =============
</TABLE>

                                      F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


15.    EXTRAORDINARY LOSS:

       Upon the repayment of the Company's debt on June 25, 1997 as described in
       Note 1, the Company recorded an extraordinary loss of $7.1 million (net
       of tax benefit of $4.4 million) for the write-off of deferred financing
       costs of $4.4 million and debt discount of $7.1 million.



16.    FOURTH QUARTER ADJUSTMENT:

       The fourth quarter of 1997 includes an adjustment of $8.7 million to
       increase the income tax benefit which results from the final
       determination by tax counsel in the fourth quarter of the income tax
       treatment of certain payments made related to the recapitalization which
       occurred in the second quarter of 1997.



17.    CONTINGENCIES:

       PROPOSITION 65: On March 30, 1998, an action was filed in California
       State Court, in the City and County of San Francisco, against defendants
       United States Tobacco Company, Inc., Conwood Company, L.P., Pinkerton
       Tobacco Company, Inc., the Partnership, Swisher International Group,
       Inc., Brown & Williamson Tobacco Corporation, Merrill Reese, Inc., Lucky
       Stores, Inc., Quick Stop Markets, Inc., Raley's, Inc., Save Mart
       Supermarkets, Inc., Sav-on Drug Stores, Inc., The Southland Corporation,
       Circle K Stores, Inc., Longs Drug Stores Corporation, Walgreen Co.,
       Safeway, Inc. and DOES 1-500. The plaintiff's amended their complaint on
       June 10, 1998 and subsequently served the complaint on the Partnership.
       The complaint purports to be brought on behalf of the City and County of
       San Francisco, on behalf of the People of the State of California and the
       Environmental Law Foundation on behalf of the general public.

       Plaintiffs claim that the defendants violated the California Safe
       Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code
       ss.ss.25249.6 ("Proposition 65") by "knowingly and intentionally"
       exposing California consumers to carcinogens and reproductive toxins in
       smokeless tobacco products while failing to provide a "clear and
       reasonable" warning that smokeless tobacco products contain substances
       that are "known to the state to cause cancer" and "known to the state to
       cause reproductive toxicity." Plaintiffs further claim that the
       defendants violated California's Unfair Competition Act, Business &
       Professions Code ss.ss.17200, et seq., by marketing smokeless tobacco
       products to children, and by fraudulently concealing from the public the
       alleged adverse consequences and addiction allegedly associated with
       smokeless tobacco products.


                                      F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.    CONTINGENCIES, CONTINUED:

       The complaint seeks a preliminary and permanent injunction preventing
       defendants from selling smokeless tobacco products without a "clear and
       reasonable" warning, as well as an injunction ordering defendants to
       undertake a court-approved public information campaign to instruct
       children that the use of smokeless tobacco products results in exposure
       to substances known to the State of California to cause cancer and
       reproductive harm. The plaintiffs also seek an award of statutory
       penalties and damages for each violation of Proposition 65 and the Unfair
       Competition Act, disgorgement of profits from the sale of smokeless
       tobacco products, and attorneys' fees and costs. The Partnership intends
       to defend the action vigorously.

       KENTUCKY AND ILLINOIS COMPLAINTS: On July 15, 1998, NAOC and the
       Partnership filed a complaint against Republic Tobacco, Inc. and its
       affiliates ("Republic Tobacco") in Federal District Court for the Western
       District of Kentucky. This complaint was subsequently amended on August
       18, 1998 (collectively, the complaint and the amended complaint are
       referred to herein as the "Kentucky Complaint"). Republic Tobacco imports
       and sells roll-your-own ("RYO") cigarette paper under the JOB(R) and
       Top(R) brand names. The Kentucky Complaint alleges inter alia, that
       Republic Tobacco's use of exclusivity agreements, rebates, incentive
       programs, buy-backs and other activities relating to the sale of RYO
       cigarette papers in the southeastern United States violate federal and
       state antitrust and unfair competition laws. The Kentucky Complaint also
       alleges that Republic Tobacco has defaced and directed others to deface
       NAOC's and the Partnership's point of purchase vendor displays for RYO
       cigarette papers by covering up the Zig-Zag(R) brand name and advertising
       material with advertisements for Republic Tobacco's RYO cigarette brands.
       The Kentucky Complaint alleges that these activities constitute acts of
       unfair competition under federal and state law.

       Republic Tobacco on June 30, 1998 filed a complaint against the Company
       and NAOC in the United States District Court of the Northern District of
       Illinois. Republic Tobacco did not serve this complaint or otherwise
       notify the Company of its existence until after the filing and service of
       the Kentucky Complaint. The Company believes that this complaint was
       filed in anticipation of the filing of the Kentucky Complaint. This
       complaint was amended by Republic Tobacco on September 16, 1998
       (collectively, the complaint and amended complaint are referred to herein
       as the "Illinois Complaint"). In the Illinois Complaint, Republic Tobacco
       seeks declaratory relief that Republic Tobacco's actions in defacing the
       Company's point of purchase display vendors do not violate federal or
       state laws and that Republic Tobacco's trade practices do not violate
       federal or state antitrust or unfair competition laws. In addition, the
       Illinois Complaint alleges that certain actions taken by the Company to
       inform its customers of its claims against Republic Tobacco constitute
       tortious interference with customer relationships, false advertising,
       violations of Uniform Deceptive Trade Practices and Consumer Fraud Acts,
       defamation and unfair competition. In addition, although not included in
       its original complaint, in its amended complaint Republic Tobacco alleges
       that the Company has unlawfully monopolized and attempted to monopolize
       the market for RYO cigarette papers.


                                      F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.    CONTINGENCIES, CONTINUED:

       The Company has alleged that Republic Tobacco's trade practices in the
       southeastern United States have unlawfully restricted the Company's
       ability to expand the distribution of Zig-Zag RYO cigarette papers in the
       Southeast, where sales of Zig-Zag have been historically underdeveloped.

       The Company intends to vigorously pursue its claims set forth in the
       Kentucky Complaint. With respect to the claims contained in the Illinois
       Complaint, the Company has filed a Motion to Dismiss concerning a
       substantial portion of Republic Tobacco's claims against the Company, and
       believes that Republic Tobacco's claims against the Company are without
       merit. The Company intends to vigorously defend the Illinois Complaint.

       WEST VIRGINIA COMPLAINTS: On October 6, 1998, the Company was served with
       a summons and complaint in an action in the Circuit Court of Kanawha
       County, West Virginia, entitled Kelly Allen, et al. v. Philip Morris
       Incorporated, et al. (Civil Action No. 98-C-2401). While the Company was
       served with a single summons and complaint, the caption of the complaint
       lists 65 separate plaintiffs, each with an individual case number.

       On November 19, 1998, the Company was served with a summons and complaint
       in an action in the Circuit Court of Kanawha County, West Virginia,
       entitled Billie J. Akers, et al. v. Philip Morris Incorporated, et al.
       (Civil Action Nos. 98-C-2696 to 98-C-2713). While the Company was served
       with a single summons and complaint, the caption of the complaint lists
       18 separate plaintiffs, each with an individual case number. This action
       was filed by the same plaintiffs' attorney who filed the Allen action and
       the complaint is identical in most material respects.

       These two actions were commenced by separate plaintiffs, "individually
       and/or as the personal representatives of the various decedents named
       herein [who] are residents of the State of West Virginia and/or smoked
       cigarettes or used other tobacco products, manufactured, promoted,
       advertised, marked, sold and/or distributed by all defendants." The
       complaints contain no specific allegations relating to any individual
       plaintiff. These two actions were brought against major manufactures of
       cigarettes, smokeless tobacco products (including the Company) and other
       tobacco products, and certain other organizations.

       The complaints allege that "plaintiffs and plaintiffs' decedents
       suffer/had suffered from a form of cancer or vascular disease and other
       injuries due wholly or in part to defendants' products and/or
       activities." The complaints further allege that the actions "arise from
       decades of intentionally wrongful conduct by the defendants who have
       manufactured, promoted, and sold cigarettes and both smokeless and loose
       tobacco to the plaintiffs and plaintiffs' decedents and millions of
       Americans while knowing, but denying and concealing that their products
       caused diseases, including but not limited to esophageal, laryngeal,
       pharyngeal, mouth and throat cancers and Buerger's Disease." The
       complaints do not identify which plaintiffs, if any, allege injury as a
       result of the use of smokeless tobacco.


                                      F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.    CONTINGENCIES, CONTINUED:

       The complaints assert 24 unspecified counts and seek referral to the West
       Virginia Mass Litigation Panel, because the actions allegedly "involve
       multiple plaintiffs pursuing related claims or actions involving one or
       more common questions of act or law and the plaintiffs seek damages
       caused by some "product." The complaints seek unspecified compensatory
       damages. The Company intends to vigorously defend against each such
       complaint.



18.    PARENT-ONLY FINANCIAL INFORMATION:

       The Corporation is a holding company with no operations and no assets
       other than its investments in its subsidiaries, income tax receivables,
       deferred income tax assets related to the differences between the book
       and tax basis of its investment in the Partnership, and deferred
       financing costs related to its debt.

       All of the Corporation's subsidiaries are wholly-owned and guarantee the
       debt of the Corporation on a full, unconditional, and joint and several
       basis. In management's opinion, separate financial statements of the
       subsidiaries are not meaningful to investors and have not been included
       in these financial statements.

       Following is unaudited parent-only summarized financial information of
       the Corporation (in thousands):

<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                 -------------------------------------
                                                                                       1998                 1997
                                                                                 -----------------   -----------------
<S>                                                                              <C>                 <C>
       Noncurrent assets                                                               $  241,228          $  258,031
       Current liabilities                                                                 19,965              14,325
       Noncurrent liabilities                                                             202,602             220,625
        Redeemable preferred stock                                                         39,332              34,581


                                                                                                       PERIOD FROM
                                                                                                      JUNE 25, 1997
                                                                                    YEAR ENDED              TO
                                                                                   DECEMBER 31,        DECEMBER 31,
                                                                                       1998                1997
                                                                                 -----------------   -----------------
       Equity in earnings of subsidiaries                                               $  13,707           $  20,598
       Income before extraordinary loss and preferred stock dividends                       4,549               7,396

</TABLE>

                                      F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


19.    SEGMENT INFORMATION:

       In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
       an Enterprise and Related Information." The Company is organized
       primarily on the basis of product lines which comprise its two reportable
       segments. The Smokeless Tobacco segment manufactures smokeless tobacco
       products which are distributed primarily through wholesale and food
       distributors in the United States. The Roll-Your-Own segment imports and
       distributes cigarette papers and related products through wholesale
       distributors in the United States.

       The accounting policies of the segments are the same as those described
       in the "Summary of Significant Accounting Policies." Segment data
       includes a charge allocating all corporate costs to each operating
       segment. Eliminations and Other includes the assets of the Corporation
       not assigned to segments and the elimination of intercompany accounts
       between segments. The Company evaluates the performance of its segments
       and allocates resources to them based on earnings before interest, taxes,
       depreciation, amortization, certain noncash charges and other income and
       expenses (Adjusted EBITDA).

       The table below presents financial information about reported segments
       for 1998, 1997 and 1996 (in thousands):

<TABLE>
<CAPTION>
                                                      SMOKELESS                                ELIMINATIONS
                                                       TOBACCO           ROLL-YOUR-OWN          AND OTHER             TOTAL
                                                   -----------------  ---------------------  -----------------   -----------------
<S>                                                <C>                <C>                    <C>                 <C>
         THE COMPANY 1998

              Net sales                                $   50,803.0         $       42,278                  -         $    93,081
              Adjusted EBITDA                                18,077                 20,426                  -              38,503
              Assets                                         87,908                193,713       $    (21,314)            260,307

         THE COMPANY 1997

              Net sales                                      53,787                 30,643                  -              84,430
              Adjusted EBITDA                                12,912                 19,756                  -              32,668
              Assets                                         87,485                181,129              4,469             273,083

         THE COMPANY 1996

              Net sales                                       36126                      -                  -              36,126
              Adjusted EBITDA                                 10885                      -                  -              10,885
              Assets                                         96,553                      -                  -              96,553

         THE PREDECESSOR 1996

              Net sales                                      19,810                      -                  -              19,810
              Adjusted EBITDA                                 4,810                      -                  -               4,810
              Assets                                         81,887                      -                  -              81,887

</TABLE>

                                      F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


19.    SEGMENT INFORMATION, CONTINUED:

       A reconciliation of Adjusted EBITDA to total consolidated operating
       income for 1998, 1997 and 1996 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         THE COMPANY                            THE PREDECESSOR
                                                                         -----------                            ---------------
                                                         1998                 1997                 1996                1996
                                                   -----------------  ---------------------  -----------------   -----------------
<S>                                                <C>                <C>                    <C>                 <C> 
         Adjusted EBITDA                                  $  38,503            $    32,668          $  10,885           $   4,810
         Depreciation expense                                (1,687)                (1,619)            (1,034)               (454)
         Amortization expense                                (5,490)                (3,213)              (504)               (365)
         LIFO adjustment                                       (904)                   129             (2,619)               (187)
         Stock option expense                                  (819)                  (900)                 -                   -
         Postretirement expense                                (502)                  (472)               (64)               (110)
         Financial advisory fee                                   -                      -                  -                (114)
                                                   -----------------  ---------------------  -----------------   -----------------

         Operating income                                 $  29,101            $    26,593          $   6,664           $   3,580
                                                   =================  =====================  =================   =================
</TABLE>


20.    NEW ACCOUNTING STANDARDS:

       In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
       No. 130, "Reporting Comprehensive Income," No. 131, "Disclosures about
       Segments of an Enterprise and Related Information," and No. 132,
       "Disclosures about Pensions and other Postretirement Benefits," all of
       which are effective in 1998 and are appropriately reflected in the
       accompanying consolidated financial statements.

       In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
       Instruments and Hedging Activities." This statement establishes
       accounting and reporting standards for derivative instruments and hedging
       activities. The Company will adopt this statement in the Company's first
       quarter 2000 reporting as required. Management is currently evaluating
       the impact of this statement on the Company's future financial reporting.







                                      F-28