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FORM 10-Q


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459


[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934


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)


(212) 253-8185
--------------
(Registrant's Telephone Number, Including Area Code)


Unchanged
---------
(Former name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 528,241 shares of common stock,
$.01 par value, as of October 31, 2002.


PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)



September 30, December 31,
2002 2001
---- ----
Current assets: (Unaudited)


Cash $ 362 $ 1,130
Accounts receivable 7,640 5,672
Inventory 42,641 43,967
Income taxes receivable 910 910
Other current assets 2,904 1,702
---------------- ----------------

Total current assets 54,457 53,381

Property, plant and equipment, net 5,094 5,233

Deferred income taxes 24,728 26,644

Deferred financing costs 2,989 4,028

Goodwill, net 123,557 123,557

Other assets 3,298 2,718
---------------- ----------------

Total assets $ 214,123 $ 215,561
================ ================

Current liabilities:
Revolving credit facility $ 3,500 $ -
Accounts payable 1,464 2,614
Accrued liabilities 7,988 4,080
Deferred income taxes 9,542 9,542
Current portion of long-term debt 3,125 12,500
---------------- ----------------

Total current liabilities 25,619 28,736

Long-term debt 155,000 155,000
Other long-term liabilities 10,994 10,994
---------------- ----------------

Total liabilities 191,613 194,730
---------------- ----------------

Preferred Stock, net of discount of $0 and $918,
respectively (mandatory redemption value of $55,822) 55,822 57,443
---------------- ----------------

Stockholders' Deficit:
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 9,144 9,144
Loans to stockholders for stock purchase (192) (187)
Accumulated other comprehensive income (348) (348)
Accumulated deficit (41,921) (45,226)
---------------- ----------------

Total stockholders' deficit (33,312) (36,612)
---------------- ----------------

Total liabilities and stockholders' deficit $ 214,123 $ 215,561
================ ================


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


2

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)


Three months Three months
Ended Ended
September 30, September 30,
2002 2001
---------------- -----------------

Net sales $ 26,014 $ 23,302

Cost of sales 10,537 9,916
---------------- -----------------

Gross profit 15,477 13,386

Selling, general and administrative expenses 6,302 6,358
Amortization of goodwill - 1,372
---------------- -----------------

Operating income 9,175 5,656

Interest expense and financing costs, net 4,676 4,903
Other expense (income) 681 (14)
---------------- -----------------

Income before income tax expense (benefit) 3,818 767

Income tax expense (benefit) 1,451 (31)
---------------- -----------------

Net income 2,367 798

Preferred stock dividends (1,630) (1,709)

Net gain on restructuring of preferred stock 5,448 -
---------------- -----------------

Net income (loss) applicable to common shares 6,185 (911)
Add back: goodwill amortization expense, net of tax - 1,022
---------------- -----------------
Adjusted net income applicable to common shares $ 6,185 $ 111
================ =================

Basic earnings per common share:

Net income $ 4.48 $ 1.51
Preferred stock dividends (3.09) (3.24)
Net gain on restructuring of preferred stock 10.31 -
---------------- -----------------
Net income (loss) 11.71 (1.73)
Add back: goodwill amortization expense, net of tax - 1.94
---------------- -----------------
Adjusted net income $ 11.71 $ 0.21
================ =================

Diluted earnings per common share:

Net income $ 3.62 $ 1.51
Preferred stock dividends (2.50) (3.24)
Net gain on restructuring of preferred stock 8.34 -
---------------- -----------------

Net income (loss) 9.46 (1.73)

Add back: goodwill amortization expense, net of tax - 1.94
---------------- -----------------

Adjusted net income $ 9.46 $ 0.21
================ =================

Weighted average common shares outstanding:
Basic 528.2 528.2
Diluted 653.5 528.2

3

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)


Net income $ 2,367 $ 798

Other comprehensive income, net of tax:
Gain on foreign currency hedges - 57
---------------- -----------------

Comprehensive income $ 2,367 $ 855
================ =================






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















4

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)


Nine months Nine months
Ended Ended
September 30, 2002 September 30, 2001
--------------------- --------------------

Net sales $ 66,184 $ 62,314

Cost of sales 27,736 27,418
--------------------- --------------------

Gross profit 38,448 34,896
Selling, general and administrative expenses 17,955 17,586
Amortization of goodwill - 4,117
--------------------- --------------------

Operating income 20,493 13,193
Interest expense and financing costs, net 14,074 14,951
Other expense (income) 1,375 (15)
--------------------- --------------------

Income (loss) before income tax expense (benefit) 5,044 (1,743)

Income tax expense (benefit) 1,917 (1,411)
--------------------- --------------------

Net income (loss) 3,127 (332)

Preferred stock dividends (5,270) (4,965)

Net gain on restructuring of preferred stock 5,448 -
--------------------- --------------------

Net income (loss) applicable to common shares 3,305 (5,297)

Add back: goodwill amortization expense, net of tax - 3,066
--------------------- --------------------

Adjusted net income (loss) applicable to common shares $ 3,305 $ (2,231)
===================== ====================

Basic earnings (loss) per common share:
Net income (loss) $ 5.92 $ (0.63)

Preferred stock dividends (9.98) (9.40)

Net gain on restructuring of preferred stock 10.32 -
--------------------- --------------------

Net income (loss) 6.26 (10.03)

Add back: goodwill amortization expense, net of tax - 5.81
--------------------- --------------------

Adjusted net income (loss) $ 6.26 $ (4.22)
===================== ====================

Diluted earnings (loss) per common share:
Net income (loss) $ 4.79 $ (0.63)

Preferred stock dividends (8.07) (9.40)

Net gain on restructuring of preferred stock 8.34 -
--------------------- --------------------

Net income (loss) 5.06 (10.03)

Add back: goodwill amortization expense, net of tax - 5.81
--------------------- --------------------

Adjusted net income (loss) $ 5.06 $ (4.22)
===================== ====================

Weighted average common shares outstanding:
Basic 528.2 528.2
Diluted 653.5 528.2


CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)

Net income (loss) $ 3,127 $ (332)
Other comprehensive income, net of tax:
Gain on foreign currency hedges - 11
--------------------- --------------------
Comprehensive income (loss) $ 3,127 $ (321)
===================== ====================


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

5

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except per share amounts)
(unaudited)


Nine months Nine months
Ended Ended
September 30, 2002 September 30, 2001
--------------------- --------------------

Cash flows from operating activities:
Net income (loss) $ 3,127 $ (332)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 525 525
Amortization of goodwill - 4,117
Amortization of deferred financing costs 1,039 1,039
Deferred income taxes 1,917 (1,411)
Compensation expense 75 75
Changes in operating assets and liabilities:
Accounts receivable (1,968) (1,045)
Inventory 1,326 4,241
Other current assets (1,202) (151)
Other assets (580) (512)
Accounts payable (1,150) (1,754)
Accrued expenses and other 3,556 4,855
--------------------- --------------------

Net cash provided by operating activities 6,665 9,647
--------------------- --------------------

Cash flows from investing activities:
Capital expenditures (386) (357)
--------------------- --------------------

Net cash used in investing activities (386) (357)
--------------------- --------------------

Cash flows from financing activities:
Proceeds from revolving credit facility 3,500 -
Payments on term loans (9,375) (9,375)
Consent Solicitation expenses (Note 10) (1,166) -
Other (5) -
--------------------- --------------------

Net cash used in financing activities (7,046) (9,375)
--------------------- --------------------

Net decrease in cash (768) (85)

Cash, beginning of period 1,130 1,453
--------------------- --------------------

Cash, end of period $ 362 $ 1,368
===================== ====================




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


6

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

These condensed consolidated financial statements should be read in conjunction
with the financial statements and related notes thereto included in North
Atlantic Trading Company, Inc.'s (the "Company's") Annual Report on Form 10-K
for the fiscal year ended December 31, 2001.

The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and accordingly do not include all
the disclosures normally required by generally accepted accounting principles.
The condensed consolidated financial statements have been prepared in accordance
with the Company's customary accounting practices and have not been audited. In
the opinion of management, all adjustments necessary to fairly present the
results of operations for the reported interim periods have been made and were
of a normal recurring nature. The year-end balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. Certain prior period amounts have been
reclassified to conform to current period presentation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REVENUE RECOGNITION: The Company recognizes revenues and the related costs upon
transfer of title and risk of loss to the customer.

SHIPPING COSTS: The Company records shipping costs incurred as a component of
selling, general and administrative expenses. Shipping costs incurred were
$599,000 and $754,000 for the three months ended September 30, 2002 and 2001,
respectively, and $1,863,000 and $1,939,000 for the nine months ended September
30, 2002 and 2001, respectively.

CASH: Pursuant to the Master Settlement Agreement (the "MSA") entered into in
November 1998 by most states (represented by their attorneys general acting
through the National Association of Attorneys General) and subsequent states'
statutes, a "cigarette manufacturer" (which is defined to include a manufacturer
of make-your-own cigarette tobacco) has the option of either becoming a
signatory to the MSA or opening, funding and maintaining an escrow account to
have funds available for certain potential tobacco-related liabilities, with
sub-accounts on behalf of each settling state. The Company has chosen to open
and fund an escrow account as its method of compliance. It is the Company's
policy to record amounts on deposit in the escrow account for prior years, as
well as cash on hand to fund its projected deposit based on its monthly sales
activity for the current year, as an other non-current asset. Each year's
obligation will be deposited in the escrow account by April 15 of the following
year. As of September 30, 2002, the Company has recorded as a non-current asset
approximately $662,000 related to its projected deposit for 2002.


7

3. INVENTORIES

The Company uses the last-in, first-out (LIFO) method for valuing its
inventories.

The reduction of LIFO inventory quantities decreased net income of the Company
by approximately $0.2 million and $0.1 million for the three months ended
September 30, 2002 and 2001, respectively, and approximately $0.7 million and
$0.4 million for the nine months ended September 30, 2002 and 2001,
respectively.

The components of inventories are as follows (in thousands):



9/30/02 12/31/01
--------------------- --------------------

Raw material and work in progress $ 2,367 $ 2,125
Leaf tobacco 9,688 12,404
Finished goods - loose leaf tobacco 3,452 2,431
Finished goods - MYO products 5,958 4,694
Other 744 681
--------------------- --------------------

22,209 22,335
LIFO reserve 20,432 21,632
--------------------- --------------------
$ 42,641 $ 43,967
===================== ====================


4. PROVISION FOR INCOME TAXES

The provision for income taxes for the nine months ended September 30, 2002 and
September 30, 2001 was computed based on the estimated annual effective income
tax rate of 38% and 81%, respectively. The primary difference between the
effective income tax rate and the statutory income tax rate is certain goodwill
amortization, which is not deductible for income tax purposes. Pursuant to the
adoption of Financial Accounting Standards Board ("FASB") Statement No. 142,
"Goodwill and Other Intangible Assets" ("Statement 142"), on January 1, 2002,
the Company ceased its amortization of goodwill. See note 8, "Recently Issued
Accounting Pronouncement" below for a discussion of Statement No. 142.

5. NOTES PAYABLE AND LONG-TERM DEBT

North Atlantic Trading Company, Inc. is a holding company with no operations and
assets consisting primarily of its investment in subsidiaries, deferred income
tax assets related to the differences between the book and tax basis of its
investment in National Tobacco Company, L.P., a subsidiary of the Company, and
deferred financing costs related to its debt. All of the Company's subsidiaries
are wholly owned and guarantee the Company's debt on a full, unconditional and
joint and several basis. In management's opinion, separate financial statements
of the subsidiaries are not meaningful and are not included in these financial
statements. The following is unaudited parent-only summarized financial
information of the Company (in thousands):


8



9/30/02 12/31/01
--------------------- --------------------

Current assets $ - $ -
Noncurrent assets 195,302 195,462
Current liabilities 18,433 20,164
Noncurrent liabilities 155,000 155,000
Redeemable preferred stock 55,822 57,433


For the three months ended September 30: 2002 2001
--------------------- --------------------

Equity in earnings of subsidiaries $ 5,869 $ 866
Interest expense (4,709) (4,949)
Income tax benefit 1,222 4,892
--------------------- --------------------
Net income before preferred
stock dividends $ 2,382 $ 809
===================== ====================


For the nine months ended September 30: 2002 2001
--------------------- --------------------

Equity in earnings of subsidiaries $ 14,173 $ 6,134
Interest expense (14,185) (15,100)
Income tax benefit 3,196 8,679
--------------------- --------------------
Net income loss before preferred
stock dividends $ 3,184 $ (287)
===================== ====================



6. FINANCIAL INSTRUMENTS

Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting standards
requiring that every derivative financial instrument be recorded on the balance
sheet at its fair value. The statement further requires that the gains and
losses related to changes in the fair value of the derivative financial
instruments be recorded in the income statement unless certain hedge criteria
are met. Gains and losses for qualifying hedges can be deferred in accumulated
"other comprehensive income" and recognized in the income statement along with
the related results of the hedged item. The statement requires that the Company
formally document, designate and assess the effectiveness of such transactions
in order to qualify for such hedge accounting treatment.

The Company purchases certain inventory on terms of net 45 days in Euros which
creates exposure to potentially adverse movement in foreign currency rates. The
Company often uses short-term forward currency contracts to hedge the risk in
foreign currency exchange rates. In addition, the supplier of such inventory
provides a contractual hedge against a substantial downward currency movement
pursuant to its agreement with the Company. The Company does not use derivative
financial instruments for speculative trading purposes, nor does the Company
hedge its foreign currency exposure in a manner that entirely offsets the
effects of changes in foreign exchange rates.


9

The Company's policy is to designate its forward currency contracts as cash flow
hedges of its anticipated purchases in Euros. Gains and losses on contracts that
are recorded in "other comprehensive income" will be reclassified to cost of
goods sold for the periods in which the related inventory is sold.

The Company recorded a cumulative-effect deferred net gain adjustment of $28,000
(net of tax expense of $17,000) in accumulated other comprehensive income to
recognize the fair value of these contracts upon adoption of SFAS 133 on January
1, 2001. The Company reclassified this net gain from "other comprehensive
income" to cost of goods sold in the first quarter of 2001. In addition, the
Company reclassified the June 30, 2001 net gain of $49,000 (net of tax benefit
of $30,000) recorded in accumulated "other comprehensive income" in a similar
manner during the third quarter of 2001. At September 30, 2002, there were no
forward currency contracts outstanding.

7. RECONCILIATION OF INCOME (LOSS) PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):



THREE MONTHS ENDED SEPTEMBER 30, 2002
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------- --------------------- ---------------------

Basic:
Net income $ 2,367
Less: preferred stock dividends (1,630)
Plus net gain on restructuring of preferred stock 5,448
-----------------------

Net income applicable to common shares $ 6,185 528,241 $ 11.71
======================= ===================== =====================


Diluted:
Net income $ 2,367
Less: preferred stock dividends (1,630)
Plus: net gain on restructuring of preferred stock 5,448
-----------------------

Net income applicable to common shares $ 6,185 653,541 $ 9.46
======================= ===================== =====================


THREE MONTHS ENDED SEPTEMBER 30, 2001
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------- --------------------- ---------------------

Basic and Diluted:
Net income $ 798
Less: preferred stock dividends (1,709)
-----------------------

Net loss applicable to common shares $ (911) 528,241 $ (1.73)

Add back: goodwill amortization expense, net of
tax 1,022 1.94
----------------------- --------------------- ---------------------

Adjusted net income applicable to common shares $ 111 528,241 $ 0.21
======================= ===================== =====================


10

NINE MONTHS ENDED SEPTEMBER 30, 2002
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------- --------------------- ---------------------

Basic:
Net income $ 3,127
Less: preferred stock dividends (5,270)
Plus: net gain on restructuring of preferred stock 5,448
-----------------------

Net income applicable to common shares $ 3,305 528,241 $ 6.26
======================= ===================== =====================

Diluted:
Net income $ 3,127
Less: preferred stock dividends (5,270)
Plus: net gain on restructuring of preferred stock 5,448
-----------------------

Net income applicable to common shares $ 3,305 635,541 $ 5.06
======================= ===================== =====================

NINE MONTHS ENDED SEPTEMBER 30, 2001
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------- --------------------- ---------------------

Basic and Diluted:
Net loss $ (332)
Less: preferred stock dividends (4,965)
-----------------------

Net loss applicable to common shares $ (5,297) 528,241 $ (10.03)

Add back: goodwill amortization expense, net of
tax 3,066 5.81
----------------------- --------------------- ---------------------

Adjusted net loss applicable to common shares $ (2,231) 528,241 $ (4.22)
======================= ===================== =====================



The calculations are based on the weighted average number of shares of common
stock outstanding during the respective periods. Common stock equivalent shares
from warrants representing 63,500 shares and from stock options representing
61,800 shares were excluded from the computation for the three months and nine
months ended September 30, 2001, as their effect is antidilutive.

8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

During 2001, the Emerging Issues Task Force issued: 1) EITF No. 00-14,
"Accounting for Certain Sales Incentives", addressing the recognition,
measurement and statement of earnings classification of certain sales incentives
and 2) EITF No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products", addressing the
statement of earnings classification of consideration from a vendor to an entity
that purchases the vendor's products for resale. The Company adopted EITF 00-14
and EITF 00-25 in the first quarter of 2002. As a result of this adoption,
certain expenses have been reclassified from selling, general and administrative
expenses to allowances in determining net sales and to cost of goods sold for
the three months and nine months ended September 30, 2001. Due to adopting EITF
00-14 and EITF 00-25, for the three months ended September 30, 2001, net sales
decreased by $1.23 million, cost of goods sold increased by $1.07 million and
selling, general and administrative expenses were reduced by $2.30 million from


11

the previously reported figures. For the nine months period ended September 30,
2001, net sales decreased by $2.70 million, cost of goods sold increased by
$3.01 million and selling, general and administrative expenses were reduced by
$5.71 million from the previously reported figures. The adoption of EITF 00-14
and EITF 00-25 had no impact on the Company's net income for either of these
periods.

In June 2001, FASB, issued Statement No. 141, "Business Combinations"
("Statement 141") and Statement 142. Statement 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method as use of the pooling-of-interest method is no longer permitted.
Statement 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed at least annually for impairment using a two-step process.
The first step is a test for potential impairment, and the second measures the
amount of impairment, if any. Impairment losses that arise from completing a
transitional impairment test during 2002 are to be reported as the cumulative
effect of a change in accounting principle as of the beginning of the year.
Subsequent impairments, if any, will be classified as an operating expense. In
addition, Statement 142 specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill.

Upon adopting Statement 142 on January 1, 2002, the Company ceased amortizing
goodwill. Statement 142 required completion of the first step of the
transitional impairment test by June 30, 2002. In completing the transitional
impairment test for fiscal 2002, the Company reported that it had incurred no
impairment.

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligation" ("SFAS 143"). SFAS 143 requires that obligations
associated with the retirement of a tangible long-lived asset be recorded as a
liability when those obligations are incurred, with the amount of the liability
initially measured at fair value. Upon initially recognizing a liability for an
asset-retirement obligation ("ARO"), an entity must capitalize the cost by
recognizing an increase in the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS 143 will be
effective for financial statements for fiscal years beginning after June 15,
2002. The Company will adopt the provisions of SFAS 143 in fiscal 2003. SFAS 143
is not expected to have an impact on the Company's financial statements.

On January 1, 2002, the Company adopted FASB Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("Statement 144"). Statement
144 develops a single accounting model for long-lived assets to be disposed of
by sale, and addresses significant implementation issues related to previous
guidance. Statement 144 requires that long-lived assets to be disposed of by
sale be measured at the lower of their carrying amount or fair value less cost
to sell, whether reported in continuing operations or in discontinued
operations. Statement 144 also broadens the reporting of discontinued operations
by potentially qualifying more disposal transactions for discontinued operations
reporting. The adoption of Statement 144 does not have an impact on the
Company's financial statements.

12

In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This Statement eliminates the automatic classification of gain or
loss on extinguishment of debt as an extraordinary item of income and requires
that such gain or loss be evaluated for extraordinary classification under the
criteria of Accounting Principles Board No. 30, "Reporting Results of
Operations." This Statement also requires sales-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical corrections to
existing pronouncements. This Statement will be effective for the Company for
the year ending 2003. The adoption of the Statement is not expected to have an
impact on the Company's financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 sets forth various
modifications to existing accounting guidance which prescribes the conditions
which must be met in order for costs associated with contract terminations,
facility consolidations, employee relocations and terminations to be accrued and
recorded as liabilities in financial statements. The provisions of SFAS 146, as
related to exit or disposal activities will be effective for fiscal 2003. SFAS
146 is not expected to have an impact on the Company's financial statements.

9. CONTINGENCIES

Except as described below, there have not been any significant developments with
respect to legal proceedings and pending litigation or any change to the
Company's position as previously disclosed in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001 and the Company's
Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2002 and
June 30, 2002.

Kentucky & Illinois Complaints.

On April 5, 2002 the District Court for the Northern District of Illinois
decided the summary judgment motions by dismissing all claims of both the
Company and Republic Tobacco, Inc. and its affiliates ("Republic"), except for
Republic's claim of defamation per se against the Company, Republic's unfair
competition claim for injunctive relief against the Company and the Company's
claim against Republic for tortious interference with prospective business
advantage. The Court also granted Republic leave to move for summary judgment on
the Company's tortious interference claim. On April 29, 2002, Republic made a
motion for summary judgment with respect to the Company's tortious interference
claim. The briefings have been completed and the parties are awaiting the
Court's decision.

Minnesota Complaint.

In Tuttle v. Lorillard Company, et al. (Case No. C2-99-7105) the plaintiff
alleges that plaintiff's decedent was injured as a result of using National
Tobacco's (and, prior to the formation of National Tobacco, Lorillard's)
Beech-Nut brand and Pinkerton Tobacco Company's Red Man brand loose-leaf chewing
tobacco. Plaintiff asserted theories of liability, breach or warranty, fraud,
and variations on fraud and misrepresentation. Motions to dismiss were filed on
all counts except for negligence. Plaintiff reasserted its claims based on fraud


13

allegations in an amended complaint. Those claims survived a motion to dismiss.
The Court had ordered that the case be ready for trial in February 2003. Due to
extensions of discovery deadlines, the Company believes that this case will not
be ready for trial until April 2004.

Texas Infringing Products Litigation.

In Bollore S.A. v. Import Warehouse, Inc. Civ. No. 3-99CV-1196-R (N.D. Texas),
the Company entered into a settlement with the remaining defendants, the
principal terms of which included a cash payment, an agreed permanent
injunction, the withdrawal of the defendants' appeal of the civil contempt
order, an agreed judgment of $11 million from the civil contempt order and an
agreement to forbear from enforcing that $11 million money judgment until such
time in the future that the defendants violate the terms of the permanent
injunction. Two of the defendants also agreed to provide complete information
concerning the counterfeiting conspiracy as well as information on other parties
engaged in the purchase and distribution of infringing Zig-Zag premium cigarette
papers.

Subsequent to such settlement, the Company instituted a contempt proceeding
against Ravi Bhatia, individually, and Import Warehouse, Inc. for violation of
the civil contempt order and a hearing was held on April 10, 2002. After
evidence related to this matter was discovered by plaintiffs and upon
plaintiffs' application, another hearing was held on August 1, 2002. The Court
allowed the defendants three weeks to supplement the record with additional
evidence and suggested that it may request further argument. The parties are
awaiting the Court's decision.

California Infringing Products Litigation.

On April 15, 2002, Downey Wholesale and L.A. International, defendants in the
A&A Smart Shopping litigation, moved for summary judgment. On May 3, 2002, the
Court made a tentative ruling, denying Downey's motion in all respects, holding
that the plaintiffs had shown genuine issues of material fact on all claims,
including the paper quality contained in the counterfeit booklets, cartons and
cases. However, the Court tentatively granted L.A. International's motion for
summary judgment, holding that the plaintiffs had not provided sufficient proof
that the involved paper was a different quality.

After a subsequent hearing on the summary judgment motion on May 15, 2002, the
Court affirmed its ruling against Downey Wholesale. The Court also reversed its
tentative ruling granting L.A. International's summary judgment and, in its
final ruling, denied L.A. International's motions in all respects.

On June 5, 2002, the Court granted the plaintiffs' application to consolidate
the A&A Smart Shopping and the Buy Rite Wholesale cases for trial purposes. In
an effort to better manage this case for trial, the plaintiffs settled against
certain defendants and obtained judgments for damages and permanent injunctions
against all of the settling defendants. A trial of the plaintiffs' claims
against the remaining defendants, Downey Wholesale and Fadel El-Shahawi,
Downey's principal, began October 1, 2002. On October 15, 2002, after a two week
jury trial, the jury found for the plaintiffs on all counts. The plaintiffs were
awarded a total of $2,000,000 in damages, and the jury found that defendant
Downey and defendant Fadel El-Shahawi acted willfully and with fraud, oppression
or malice. As a result, plaintiffs are entitled to request the Court to award


14

them their reasonable attorney fees and expenses and are currently preparing
their application for attorney fees and expenses, recognizing that the Court
enjoys substantial discretion in setting that award. The verdict also allows the
Court, in its discretion, to apply a multiple of up to three times the verdict
amount in order to adequately compensate plaintiffs and also, to award punitive
damages. The parties settled the punitive damages and multiplier portions of the
case for $500,000, of which half will be paid by November 15, 2002 and the
remainder will be paid in equal monthly installments over the next two year
period, commencing on December 1, 2002. All recoveries from this litigation will
be shared equally by North Atlantic Operating Company and Bollore. Defendants
have filed a new trial motion, which plaintiffs intend to vigorously oppose.

On June 6, 2002, the plaintiffs moved for contempt sanctions against JT Saniya
Inc., asserting that JT Saniya had violated the terms of the preliminary
injunction issued against it by selling 38 cases of counterfeit product. JT
Saniya failed to dispute the allegations and a default judgment of $420,369.09
was entered against JT Saniya on July 23, 2002. The plaintiffs have commenced
collection proceedings.

10. PREFERRED STOCK

On July 1, 2002, the Company commenced a consent solicitation (the "Consent
Solicitation") from registered holders of its 12% Senior Exchange
Payment-in-Kind Preferred Stock, par value $0.01 per share ("Preferred Stock"),
for certain amendments to the certificate of incorporation of the Company which
would amend the terms of the Preferred Stock. The proposed amendments required
the consent of the holders of a majority of the issued and outstanding shares of
common stock of the Company and the consent of the holders of a majority of the
issued and outstanding shares of Preferred Stock. A consent by the holders of a
majority of the Company's outstanding common stock was executed on June 28,
2002. On July 29, 2002, the Consent Solicitation was successfully completed,
with the Company receiving consents from the holders of more than 99% of the
outstanding shares of Preferred Stock.

The amendments to the Preferred Stock, among other things: (i) accelerated the
mandatory redemption date of the Preferred Stock from June 15, 2007 to June 15,
2005, which will require the Company to redeem the Preferred Stock at an earlier
date, (ii) reduced the liquidation preference from $25.00 to $22.00 per share,
which will lower the Company's cost of redeeming the Preferred Stock and will
lower the amount of dividends payable thereon (which dividends are equal to 12%
of the liquidation preference per annum), (iii) eliminated any redemption
premium, which will lower the Company's potential cost of redeeming the
Preferred Stock prior to June 15, 2005, (iv) reduced the repurchase price that
the Company must offer the holders of Preferred Stock upon a change of control
from 101% to 100% of the liquidation preference, which will lower the Company's
potential cost of any such repurchase obligation, (v) permitted future dividends
to be paid through the issuance of additional shares of preferred stock, which
will provide the Company with greater flexibility in financing its operations,
and (vi) included a definition for the term "Permitted Investments", which
definition was inadvertently omitted from the Certificate of Designation
pursuant to which the Preferred Stock was created.

As consideration for these amendments, the Company paid each registered holder
of Preferred Stock that consented thereto $0.40 per share in cash. A total of


15

$984,642 in consent fees was paid. The Company paid an additional $181,767 in
legal and other fees related to the Consent Solicitation.

The Company has recorded the Preferred Stock at its current value in the
accompanying Balance Sheet. The resulting gain, net of the consent and other
fees described above, has been recognized in the accompanying Statements of
Operations.

11. SEGMENT INFORMATION

In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", the Company has 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
make-your-own segment imports and distributes premium cigarette papers and
contract manufactures and distributes cigarette tobaccos and related products
primarily through wholesale distributors in the United States.

The accounting policies of the segments are the same as those of the Company.
Segment data includes a charge allocating all corporate costs to each operating
segment. Elimination and Other includes the assets of the Company 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 non-cash charges and other income and expenses (Adjusted EBITDA).

The table below presents financial information about reported segments for the
three months and nine months ended September 30, 2002 and 2001, respectively (in
thousands):



FOR THE THREE MONTHS ENDED ELIMINATIONS
SEPTEMBER 30, 2002 SMOKELESS TOBACCO MAKE-YOUR-OWN AND OTHER TOTAL
- --------------------------------- -------------------- -------------------- -------------------- --------------------

Net Sales $ 8,743 $ 17,271 $ - $ 26,014
Adjusted EBITDA 2,079 7,921 - 10,000
Assets 66,409 245,765 (98,051) 214,123

SEPTEMBER 30, 2001
- ---------------------------------

Net Sales $ 9,509 $ 13,793 $ - $ 23,302
Adjusted EBITDA 2,104 5,899 - 8,003
Assets 69,042 225,119 (72,872) 221,289


FOR THE NINE MONTHS ENDED ELIMINATIONS
SEPTEMBER 30, 2002 SMOKELESS TOBACCO MAKE-YOUR-OWN AND OTHER TOTAL
- --------------------------------- -------------------- -------------------- -------------------- --------------------

Net Sales $ 27,798 $ 38,386 $ - $ 66,184
Adjusted EBITDA 7,797 15,321 - 23,118
Assets 66,409 245,765 (98,051) 214,123

SEPTEMBER 30, 2001
- ---------------------------------

Net Sales $ 29,295 $ 33,019 $ - $ 62,314
Adjusted EBITDA 7,862 12,874 - 20,736
Assets 69,042 225,119 (72,872) 221,289



16

A reconciliation of Adjusted EBITDA to total consolidated operating income for
the three months and nine months ended September 30, 2002 and 2001,
respectively, is as follows (in thousands):



FOR THE THREE MONTHS ENDED: FOR THE THREE MONTHS ENDED:
SEPTEMBER 30 SEPTEMBER 30
-------------------------------------------- ---------------------------------------------
2002 2001 2002 2001
-------------------- -------------------- -------------------- --------------------

Adjusted EBITDA $ 10,000 $ 8,003 $ 23,118 $ 20,736
Depreciation expense (175) (175) (525) (525)
Amortization expense - (1,372) - (4,117)
LIFO adjustment (350) (500) (1,200) (2,001)
Stock option expense (25) (25) (75) (75)
Postretirement/Pension expense (275) (275) 825) (825)
-------------------- -------------------- -------------------- --------------------

Operating income $ 9,175 $ 5,656 $ 20,493 $ 13,193
==================== ==================== ==================== ====================


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The Company competes in two distinct markets: (1) the smokeless tobacco market
and (2) the Make-Your-Own ("MYO") cigarette market. The smokeless tobacco market
includes the loose leaf chewing tobacco segment, and the MYO cigarette market is
comprised of the MYO premium cigarette papers category and the MYO cigarette
tobaccos and related products category. The Company manufactures and markets
loose leaf chewing tobacco and imports and distributes MYO premium cigarette
papers, and contract manufactures and markets MYO cigarette tobaccos and related
products.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

Net Sales. Net sales for the three months ended September 30, 2002 were $26.0
million, an increase of 11.6% or $2.7 million from the corresponding period of
the prior year. Net sales of the smokeless tobacco segment for the current
period decreased 8.1% or $0.8 million from the corresponding period of the prior
year. This segment's volume for the current period decreased by 8.8% as compared
with the prior period, tracking the declining industry trend in the loose leaf
category of the smokeless tobacco segment. The Company's decline was partially
offset by a manufacturer's price increase. Net sales of the Company's MYO
segment increased 25.2% or $3.5 million in comparison to the corresponding
period of the prior year. This increase was due to the continuing growth of the
MYO cigarette tobacco products category, driven primarily by increased state and
local taxes on ready-made cigarettes, and to a recovery in the Company's MYO
premium cigarette paper category, which had been adversely impacted by illicit
counterfeiting activity. Overall, the MYO premium cigarette paper volume of the
Summer 2002 Promotion exceeded that of the Summer 2001 Promotion by 6.3%.
Because these results are generally consistent with those of the Winter 2001 and
Spring 2002 Promotions, management believes that this category continues to
benefit from the reduction in illicit counterfeiting activity.


17

Gross Profit. Gross profit for the three months ended September 30, 2002 was
$15.5 million, an increase of $2.1 million or 15.6% from the corresponding
period of the prior year. Gross profit of the smokeless tobacco segment for the
current period was flat compared to the corresponding period of the prior year,
as this segment's gross margin increased to 48.4% of net sales for the current
period from 44.6% in the corresponding period of the prior year. This increase
was due to a manufacturer's price increase, an improvement in manufacturing
efficiencies and a reduction in the non-cash LIFO inventory adjustment of $0.2
million for the three months ended September 30, 2002, each of which positively
impacted the gross margin of this segment. If the non-cash LIFO adjustment were
to be disregarded, the smokeless tobacco segment's gross margin percentage would
have been 52.4% of net sales for the current period in comparison to 49.8% for
the corresponding period of the prior year. Due to its strong increase in net
sales, gross profit of the MYO segment for the current period increased $2.1
million or 23.0% over the prior year. The gross margin of the MYO segment
declined to 65.1% of net sales for the current period in comparison to 66.3% for
the prior period. This reduction in gross margin was due to the growth in the
MYO cigarette tobacco and related products category, which generally has a lower
gross margin than the MYO premium cigarette paper category.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2002 were $6.3
million, a reduction of 0.9% compared to the corresponding period of the prior
year. During the second quarter of 2002, the Company undertook a review of its
sales and marketing organization and activities. Based on this review and during
the third quarter, the Company's National Tobacco subsidiary commenced a program
of organizational renewal, aimed at revitalizing its sales efforts with the goal
of better penetrating larger accounts, such as the major convenience store
chains. This initiative is expected to adversely affect selling, general and
administrative expenses in the fourth quarter.

Amortization of Goodwill. Amortization of goodwill was eliminated for the three
months ended September 30, 2002 compared to an expense of $1.4 million for the
corresponding period of the prior year. Effective January 1, 2002, the Company
ceased amortizing goodwill in accordance with FASB Statement 142.

Interest Expense and Financing Costs. Interest expense and financing costs
declined $0.2 million or 4.6% to $4.7 million for the three months ended
September 30, 2002 as compared to the three months ended September 30, 2001.
This reduction was the result of a lower average term loan balance, coupled with
a lower average interest rate on the Company's variable rate debt.

Other Expense (Income). Other expense was $0.7 million for the three months
ended September 30, 2002 as compared with income of $0.01 million during the
corresponding period of the prior year. Other expense in 2002 represents legal,
investigative and related expenses with respect to the Texas and California
Infringing Products Litigations involving Zig-Zag(R) premium cigarette papers,
which are detailed in Part II, Item 1 under "Legal Proceedings."

Income Tax Benefit (Expense). Income tax expense was $1.5 million for the three
months ended September 30, 2002 compared to a benefit of $0.03 million for the
corresponding period of the prior year due, in part, to the improved operating
results in 2002. In addition, the effective income tax rate was reduced to 38%
for the three months ended September 30, 2002 from 81% for the corresponding


18

prior year's period due to the elimination of goodwill amortization, in
accordance with the adoption of FASB Statement 142.

Net Income. Due to the factors described above, the net income for the three
months ended September 30, 2002 was $2.4 million compared to a net income of
$0.8 million for the corresponding period of the prior year.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

Net Sales. Net sales for the nine months ended September 30, 2002 were $66.2
million, an increase of 6.2% or $3.9 million from the corresponding period of
the prior year. Net sales of the smokeless tobacco segment for the current
period decreased $1.5 million or 5.1% from the corresponding period of the prior
year. This reduction was primarily the result of a volume decline of 8.1%,
tracking the overall declining industry trend of the loose leaf category of the
smokeless tobacco segment. The Company's decline was partially offset by a
manufacturer's price increase. Net sales of the Company's MYO segment increased
$5.4 million or 16.3% for the nine months ended September 30, 2002 in comparison
to the corresponding period of the prior year. This increase was due to the
continuing growth of the MYO cigarette tobacco products category and to a
recovery in the MYO premium cigarette paper category, which had been adversely
impacted by illicit counterfeiting activity. Overall, the MYO premium cigarette
paper volume of the Spring and Summer 2002 Promotions exceeded that of the
Spring and Summer 2001 Promotions by 7.5%. Because of these results, management
believes that this category continues to benefit from a reduction in illicit
counterfeiting activity.

Gross Profit. Gross profit for the nine months ended September 30, 2002 was
$38.4 million, an increase of $3.6 million or 10.2% from the prior year's
corresponding period. Gross profit of the smokeless tobacco segment for the
current period increased $0.6 million or 4.3% as this segment's gross margin
increased to 49.0% of net sales for the current period from 44.6% for the prior
year's corresponding period. This increase was due to a manufacturer's price
increase and to a reduction in the non-cash LIFO inventory adjustment of $0.8
million for the nine months ended September 30, 2002. If the non-cash LIFO
adjustments were to be disregarded, the smokeless tobacco segment's gross margin
would have been 53.3% of net sales for the current period in comparison to 51.4%
for the prior period. Due to its strong increase in net sales, gross profit of
the MYO segment for the current period increased $3.0 million or 13.7% over the
prior period. The gross margin of the MYO segment declined to 64.7% of net sales
from 66.1% of net sales in the prior period. This reduction in gross margin was
due to the growth in the MYO cigarette tobacco and related products category,
which generally has a lower gross margin than the MYO premium cigarette paper
category.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 2002 were $18.0
million, an increase of 2.0% from the corresponding period of the prior year.
This was due primarily to increases in overall compensation costs, including
benefits, and to an increase in marketing costs to drive the growth in the MYO
segment.

Amortization of Goodwill. Amortization of goodwill was eliminated for the nine
months ended September 30, 2002 compared to an expense of $4.1 million for the


19

corresponding period of the prior year. Effective January 1, 2002, the Company
ceased amortizing goodwill in accordance with FASB Statement 142.

Interest Expense and Financing Costs. Interest expense and financing costs
decreased $0.9 million or 5.9% to $14.1 million for the nine months ended
September 30, 2002 as compared with the nine months ended September 30, 2001.
This reduction was the result of a lower average term loan balance coupled with
a lower average interest rate environment.

Other Expense (Income). Other expense was $1.4 million for the nine months ended
September 30, 2002 as compared with income of $0.02 million during the
corresponding period of the prior year. Other expense in 2002 represents legal,
investigative and related expenses with respect to the Texas and California
Infringing Products Litigations involving Zig-Zag(R) premium cigarette papers
which are detailed in Part II, Item 1 under "Legal Proceedings."

Income Tax Expense (Benefit). Income tax expense was $1.9 million for the nine
months ended September 30, 2002 compared to a benefit of $1.4 million for the
corresponding period of the prior year due primarily to an increase in taxable
income as a result of improved operating performance. In addition, the effective
income tax rate was reduced to 38% for the nine months ended September 30, 2002
from 81% for the corresponding period of the prior year due to the elimination
of goodwill amortization, in accordance with the adoption of FASB Statement 142.

Net Income (Loss). Due to the factors described above, the net income for the
nine months ended September 30, 2002, was $3.1 million compared to a net loss of
$0.3 million for the corresponding period of the prior year.

LIQUIDITY AND CAPITAL REQUIREMENTS

At September 30, 2002, working capital was $28.8 million compared to $24.6
million at December 31, 2001. The improved working capital position was the
result of increases in accounts receivable due to increased sales and in other
current assets coupled with a reduction in current liabilities due to scheduled
payments of the term loan, which were partially offset by borrowings under of
the revolving credit facility. The Company expects to continue to fund its
seasonal working capital requirements through its operating cash flows and, if
needed, bank borrowings under the revolving credit facility. As of September 30,
2002, the Company had an undrawn availability of $5.5 million under its
committed $10.0 million revolving credit facility.

The Company is currently operating under a Loan Agreement (the "Loan
Agreement"), dated December 31, 2000, with Bank One, Kentucky, N.A. as Agent
(the "Agent"), and the banks named therein, which provided for a $25 million
term loan and a $10 million revolving credit facility. Borrowings under the Loan
Agreement bear interest at variable rates based, at the Company's option, on
prime or LIBOR rates. The term loan is payable in eight (8) quarterly
installments of $3,125,000 each plus accrued interest, which commenced on March
31, 2001. Both the term loan and the revolving credit facility mature on
December 31, 2002. As part of the revolving credit facility, the lenders agreed
to issue up to $10 million of standby letters of credit. The Company's
obligations under the Loan Agreement are guaranteed by the Company's
subsidiaries. In addition, the Company's obligations are secured by all of the
Company's assets and the Company's equity in its subsidiaries. The average
interest rate on borrowings under the Loan Agreement was 4.17% at September 30,


20

2002. In addition, the Company must pay a quarterly commitment fee of 0.5% per
annum of the average unused portion of the revolving line of credit. The Company
has initiated discussions with its bank and it is the Company's intention to
renew or replace its revolving credit facility on or before December 31, 2002.

On June 25, 1997, the Company issued $155.0 million of 11% Senior Notes due 2004
(the "Senior Notes"). The Senior Notes mature and are payable on June 15, 2004.
The Notes bear interest at the fixed rate of 11% per annum, payable semiannually
on June 15 and December 15. At the present time, the Company projects that it
will not have sufficient funds to effect repayment in full at maturity in the
absence of a refinancing. The Company intends to refinance this debt in advance
of its maturity date. The ability to do so will depend, among other things, on
the financial performance of the Company and the availability of funds from the
capital markets. Although the Company believes it will be able to effect such a
refinancing, there can be no assurance that such a refinancing will be obtained.

The Loan Agreement and the Senior Notes 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 Loan Agreement also requires the
Company to meet a fixed charge coverage test. At September 30, 2002, the Company
was in compliance with all provisions of the Loan Agreement and Senior Notes.

On July 29, 2002, the Company successfully completed a consent solicitation (the
"Consent Solicitation") from registered holders of its 12% Senior Exchange
Payment-in-Kind Preferred stock, par value $0.01 per share ("Preferred Stock"),
for certain amendments to the certificate of incorporation of the Company
relating to the terms of the Preferred Stock. See Note 10 to the Financial
Statements and "Item 2. Changes in Securities and Use of Proceeds" for
information concerning changes to the terms of the Preferred Stock.

As a result of amendments to the Company's certificate of incorporation
resulting from the Consent Solicitation, among other things, dividends on the
Company's Preferred Stock are payable either in cash or through the issuance of
additional shares of Preferred Stock. The Company's future ability to make
dividend payments in cash will depend upon the availability of funds and whether
the Company has satisfied the "restricted payments" provision under the
Indenture pursuant to which the Senior Notes were issued. Currently, the Company
can satisfy that provision. Additionally, the Company has sufficient authorized
and unissued shares of Preferred stock to make its dividend payments through the
issuance of additional shares. For the dividend payment on September 15, 2002,
the Company chose to make this payment in kind.

The Company believes that it maintains adequate inventories based on its past
and projected future sales activity and that it will be able to source its
inventory requirements for the foreseeable future. In the event that growth in
any area outstrips the Company's projections, the Company will incur a temporary
out-of-stock situation, which may result in a loss of sales.

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
equal to or greater than that of inflation and believes that it will continue to
be able to do so for the foreseeable future. In addition, the Company has been


21

able to maintain a relatively stable variable cost structure for its products
due, in part, to its successful procurement and reformulation activities with
regard to its tobacco products and, in part, to its existing contractual
agreement for the purchase of its premium cigarette papers.

Given its current operation, the Company believes that its capital expenditure
requirements for 2002 will be less than $750,000. Through September 30, 2002,
the Company had funded capital expenditures of $386,000. Currently, the Company
believes that its operating cash flows, together with its revolving credit
facility and any renewal or replacement of such facility, should be adequate to
satisfy its reasonably foreseeable capital requirements (other than the
refinancing of its Senior Notes, as discussed above). The financing of any
significant future products, business or property acquisitions would likely
require additional debt or equity financing.

FORWARD-LOOKING STATEMENTS

The Company cautions the reader that certain statements in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
as well as elsewhere in this Form 10-Q 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 or
achievement implied by these statements. Among the factors that could effect 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, federal, state and/or local regulations and taxes;
competitive pressures; changes in consumer preferences; consumer acceptance of
new product introductions and other marketing initiatives; access to sufficient
quantities of raw material or inventory to meet demand; wholesale ordering
patterns; product liability litigation and any disruption in access to capital
necessary to achieve the Company's business strategy.

The Company cautions the reader 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 3. NOT APPLICABLE

ITEM 4. CONTROLS AND PROCEDURES.

(a) The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's filings
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the Securities
and Exchange Commission. Such information is accumulated and communicated to the
Company's management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required


22

disclosure. The Company's management, including the principal executive officer
and the principal financial officer, recognizes that any set of controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.

Within 90 days prior to the filing date of this quarterly report on Form 10-Q,
the Company has carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.

(b) There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date of their evaluation in connection with the preparation of
this quarterly report on Form 10-Q.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Except as described below, there have not been any significant developments with
respect to legal proceedings and pending litigation or any change to the
Company's position as previously disclosed in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001 and the Company's
Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2002 and
June 30, 2002.

Kentucky & Illinois Complaints.

On April 5, 2002 the District Court for the Northern District of Illinois
decided the summary judgment motions by dismissing all claims of both the
Company and Republic Tobacco, Inc. and its affiliates ("Republic"), except for
Republic's claim of defamation per se against the Company, Republic's unfair
competition claim for injunctive relief against the Company and the Company's
claim against Republic for tortious interference with prospective business
advantage. The Court also granted Republic leave to move for summary judgment on
the Company's tortious interference claim. On April 29, 2002, Republic made a
motion for summary judgment with respect to the Company's tortious interference
claim. The briefings have been completed and the parties are awaiting the
Court's decision.

Minnesota Complaint.

In Tuttle v. Lorillard Company, et al. (Case No. C2-99-7105) the plaintiff
alleges that plaintiff's decedent was injured as a result of using National
Tobacco's (and, prior to the formation of National Tobacco, Lorillard's)
Beech-Nut brand and Pinkerton Tobacco Company's Red Man brand loose-leaf chewing
tobacco. Plaintiff asserted theories of liability, breach or warranty, fraud,
and variations on fraud and misrepresentation. Motions to dismiss were filed on
all counts except for negligence. Plaintiff reasserted its claims based on fraud
allegations in an amended complaint. Those claims survived a motion to dismiss.


23

The Court had ordered that the case be ready for trial in February 2003. Due to
extensions of discovery deadlines, the Company believes that this case will not
be ready for trial until April 2004.

Texas Infringing Products Litigation.

In Bollore S.A. v. Import Warehouse, Inc. Civ. No. 3-99CV-1196-R (N.D. Texas),
the Company entered into a settlement with the remaining defendants, the
principal terms of which included a cash payment, an agreed permanent
injunction, the withdrawal of the defendants' appeal of the civil contempt
order, an agreed judgment of $11 million from the civil contempt order and an
agreement to forbear from enforcing that $11 million money judgment until such
time in the future that the defendants violate the terms of the permanent
injunction. Two of the defendants also agreed to provide complete information
concerning the counterfeiting conspiracy as well as information on other parties
engaged in the purchase and distribution of infringing Zig-Zag premium cigarette
papers.

Subsequent to such settlement, the Company instituted a contempt proceeding
against Ravi Bhatia, individually, and Import Warehouse, Inc. for violation of
the civil contempt order and a hearing was held on April 10, 2002. After
evidence related to this matter was discovered by plaintiffs and upon
plaintiffs' application, another hearing was held on August 1, 2002. The Court
allowed the defendants three weeks to supplement the record with additional
evidence and suggested that it may request further argument. The parties are
awaiting the Court's decision.

California Infringing Products Litigation.

On April 15, 2002, Downey Wholesale and L.A. International, defendants in the
A&A Smart Shopping litigation, moved for summary judgment. On May 3, 2002, the
Court made a tentative ruling, denying Downey's motion in all respects, holding
that the plaintiffs had shown genuine issues of material fact on all claims,
including the paper quality contained in the counterfeit booklets, cartons and
cases. However, the Court tentatively granted L.A. International's motion for
summary judgment, holding that the plaintiffs had not provided sufficient proof
that the involved paper was a different quality.

After a subsequent hearing on the summary judgment motion on May 15, 2002, the
Court affirmed its ruling against Downey Wholesale. The Court also reversed its
tentative ruling granting L.A. International's summary judgment and, in its
final ruling, denied L.A. International's motions in all respects.

On June 5, 2002, the Court granted the plaintiffs' application to consolidate
the A&A Smart Shopping and the Buy Rite Wholesale cases for trial purposes. In
an effort to better manage this case for trial, the plaintiffs settled against
certain defendants and obtained judgments for damages and permanent injunctions
against all of the settling defendants. A trial of the plaintiffs' claims
against the remaining defendants, Downey Wholesale and Fadel El-Shahawi,
Downey's principal, began October 1, 2002. On October 15, 2002, after a two week
jury trial, the jury found for the plaintiffs on all counts. The plaintiffs were
awarded a total of $2,000,000 in damages, and the jury found that defendant
Downey and defendant Fadel El-Shahawi acted willfully and with fraud, oppression
or malice. As a result, plaintiffs are entitled to request the Court to award


24

them their reasonable attorney fees and expenses and are currently preparing
their application for attorney fees and expenses, recognizing that the Court
enjoys substantial discretion in setting that award. The verdict also allows the
Court, in its discretion, to apply a multiple of up to three times the verdict
amount in order to adequately compensate plaintiffs and also, to award punitive
damages. The parties settled the punitive damages and multiplier portions of the
case for $500,000, of which half will be paid by November 15, 2002 and the
remainder will be paid in equal monthly installments over the next two year
period, commencing on December 1, 2002. All recoveries from this litigation will
be shared equally by North Atlantic Operating Company and Bollore. Defendants
have filed a new trial motion, which plaintiffs intend to vigorously oppose.

On June 6, 2002, the plaintiffs moved for contempt sanctions against JT Saniya
Inc., asserting that JT Saniya had violated the terms of the preliminary
injunction issued against it by selling 38 cases of counterfeit product. JT
Saniya failed to dispute the allegations and a default judgment of $420,369.09
was entered against JT Saniya on July 23, 2002. The plaintiffs have commenced
collection proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

Upon the approval of the requisite number of holders of its common stock and
Preferred Stock as described below, on July 30, 2002, the Company amended its
certificate of incorporation to amend the terms of the Preferred Stock.

The amendments to the Preferred Stock, among other things, (i) accelerated the
mandatory redemption date of the Preferred Stock from June 15, 2007 to June 15,
2005, which will require the Company to redeem the Preferred Stock at an earlier
date, (ii) reduced the liquidation preference from $25.00 to $22.00 per share,
which will lower the Company's cost of redeeming the Preferred Stock and will
lower the amount of dividends payable thereon (which dividends are equal to 12%
of the liquidation preference per annum), (iii) eliminated any redemption
premium, which will lower the Company's potential cost of redeeming the
Preferred Stock prior to June 15, 2005, (iv) reduced the repurchase price that
the Company must offer the holders of Preferred Stock upon a change of control
from 101% to 100% of the liquidation preference, which will lower the Company's
potential cost of any such repurchase obligation, (v) permitted future dividends
to be paid through the issuance of additional shares of preferred stock, which
will provide the Company with greater flexibility in financing its operations,
and (vi) included a definition for the term "Permitted Investments", which
definition was inadvertently omitted from the Certificate of Designation
pursuant to which the Preferred Stock was created.

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

On July 1, 2002, the Company began soliciting consents from the registered
holders of its Preferred Stock to amendments to the certificate of incorporation
of the Company that amended the terms of the Preferred Stock. Upon completion of
the consent solicitation, on July 29, 2002, the Company received consents from
holders of more than 99% of the issued and outstanding shares of Preferred
Stock.

25

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

Exhibit
-------

3.1 Certificate of Amendment to the Certificate of Incorporation
of North Atlantic Trading Company, Inc., dated July 30, 2002
(incorporated herein by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K filed on July 31,
2002).

99.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C.ss. 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.

99.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C.ss. 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.

b. Reports on Form 8-K.

(i) Form 8-K, filed on July 1, 2002, reporting under Item 5 "Other
Events".

(ii) Form 8-K filed on July 31, 2002 reporting under Item 5 "Other
Events" and including an amendment to the certificate of
incorporation of the Company as an Exhibit under Item 7
"Financial Statements, Pro Forma Information and Exhibits."




26

SIGNATURES

The Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.



NORTH ATLANTIC TRADING COMPANY, INC.

Date: November 14, 2002 /s/ Thomas F. Helms, Jr.
-----------------------------------------
Thomas F. Helms, Jr.
Chief Executive Office


/s/ David I. Brunson
-----------------------------------------
David I. Brunson
Chief Financial Office








27

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas F. Helms, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of North
Atlantic Trading Company, Inc.;

2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

28

6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.




Date: November 14, 2002


/s/ Thomas F. Helms, Jr.
- -------------------------------------
Name: Thomas F. Helms, Jr.
Title: Chief Executive Officer














29

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David I. Brunson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of North
Atlantic Trading Company, Inc.;

2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

30

6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.




Date: November 14, 2002


/s/ David I. Brunson
- --------------------------------------
Name: David I. Brunson
Title: Chief Financial Officer















31