UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004 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)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 10 shares of common stock, $.01
par value, as of November 12, 2004.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)
September 30, December 31,
2004 2003
---- ----
Current assets:
Cash $ 9,286 $ 304
Accounts receivable, net 10,208 10,384
Inventories 43,181 42,257
Income taxes receivable - 910
Other current assets 10,669 3,594
------------------ ------------------
Total current assets 73,344 57,449
Property, plant and equipment, net 8,952 8,310
Deferred income taxes 20,602 22,549
Deferred financing costs 9,750 5,163
Goodwill 128,945 128,659
Other intangible assets 10,403 10,851
Other assets 15,152 10,663
------------------ ------------------
Total assets $ 267,148 $ 243,644
================== ==================
Current liabilities:
Accounts payable $ 2,287 $ 5,275
Accrued expenses 6,009 6,796
Deferred income taxes 4,654 4,654
Revolving credit facility - 6,300
------------------ ------------------
Total current liabilities 12,950 23,025
Senior notes and long-term debt 200,000 185,686
Senior revolving credit facility 34,800 -
Deferred income taxes 870 1,141
Postretirement benefits 7,071 9,333
Pension benefits and other long-term liabilities 4,118 5,946
------------------ ------------------
Total liabilities 259,809 225,131
------------------ ------------------
Preferred Stock, (mandatory redemption value of $0 and
$65,080, respectively) - 65,080
------------------ ------------------
Stockholders' Equity:
Common stock, voting, $.01 par value authorized shares, 10; issued and
outstanding shares, 10 in 2004; voting, $.01 par value authorized shares,
750,000; issued and outstanding shares, 528,241 in 2003 - 5
Additional paid-in capital 64,095 9,663
Receivable from parent (2,493) -
Loans to stockholders for stock purchase (98) (168)
Accumulated other comprehensive income (loss) (1,229) (1,229)
Accumulated deficit (52,936) (54,838)
------------------ ------------------
Total stockholders' equity (deficit) 7,339 (46,567)
------------------ ------------------
Total liabilities and stockholders' deficit $ 267,148 $ 243,644
================== ==================
The accompanying notes are an integral part of the
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, 2004 September 30, 2003
------------------------ -----------------------
Net sales $ 30,741 $ 28,718
Cost of sales 13,775 11,836
------------------------ -----------------------
Gross profit 16,966 16,882
Selling, general and administrative expenses 5,666 7,886
------------------------ -----------------------
Operating income (loss) 11,300 8,996
Interest expense and financing costs, net 5,279 4,817
Other expense (income) (5,550) 839
------------------------ -----------------------
Income (loss) before income tax expense (benefit) 11,571 3,340
Income tax expense (benefit) 4,397 1,269
------------------------ -----------------------
Net income (loss) 7,174 2,071
Preferred stock dividends - (1,839)
------------------------ -----------------------
Net income (loss) applicable to common shares $ 7,174 $ 232
======================== =======================
Basic earnings per common share:
Net income (loss) $ 717,400.00 $ 3.92
Preferred stock dividends - (3.48)
------------------------ -----------------------
Net income (loss) applicable to common shares $ 717,400.00 $ 0.44
======================== =======================
Diluted earnings per common share:
Net income (loss) $ 717,400.00 $ 3.36
Preferred stock dividends - (2.98)
------------------------ -----------------------
Net income (loss) applicable to common shares $ 717,400.00 $ 0.38
======================== =======================
Weighted average common shares outstanding:
Basic .01 528.2
Diluted .01 616.8
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
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, 2004 September 30, 2003
------------------------ -----------------------
Net sales $ 90,053 $ 73,218
Cost of sales 43,094 32,290
------------------------ -----------------------
Gross profit 46,959 40,928
Selling, general and administrative expenses 27,032 22,352
------------------------ -----------------------
Operating income (loss) 19,927 18,576
Interest expense and financing costs, net 19,294 14,130
Other expense (5,037) 22,857
------------------------ -----------------------
Income (loss) before income tax expense (benefit) 5,670 (18,411)
Income tax expense (benefit) 2,155 (6,996)
------------------------ -----------------------
Net income (loss) 3,515 (11,415)
Preferred stock dividends (1,613) (5,339)
------------------------ -----------------------
Net income (loss) applicable to common shares $ 1,902 $ (16,754)
======================== =======================
Basic and Diluted earnings per common share:
Net income (loss) $ 45.24 $ (21.61)
Preferred stock dividends (20.76) (10.11)
------------------------ -----------------------
Net income (loss) applicable to common shares $ 24.48 $ (31.72)
======================== =======================
Basic and Diluted earnings per common share:
Net income (loss) $ 33.44 $ (21.61)
Preferred stock dividends (15.35) (10.11)
------------------------ -----------------------
Net income (loss) applicable to common shares $ 18.10 $ (31.72)
======================== =======================
Weighted average common shares outstanding:
Basic 77.7 528.2
Diluted 105.1 528.2
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months Nine months
Ended Ended
September 30, 2004 September 30, 2003
------------------------ -----------------------
Cash flows from operating activities:
Net income (loss) $ 3,515 $ (11,415)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 646 375
Amortization of other intangible assets 448 -
Amortization of deferred financing costs 1,270 1,039
Deferred income taxes 1,676 (7,002)
Changes in operating assets and liabilities:
Accounts receivable, net 176 (1,594)
Inventories (924) (1,556)
Other current assets (6,165) (1,044)
Other assets (4,489) (868)
Accounts payable (2,988) 81
Accrued expenses and other (327) 4,594
Other long-term liabilities (4,090) (357)
------------------------ -----------------------
Net cash provided by (used in) operating activities (11,252) (17,747)
------------------------ -----------------------
Cash flows from investing activities:
Capital expenditures (1,288) (1,321)
------------------------ -----------------------
Net cash provided by (used in) investing activities (1,288) (1,321)
------------------------ -----------------------
Cash flows from financing activities:
Capital contribution from parent 53,751 -
Proceeds from revolving credit facility 28,500 (1,000)
Proceeds from issuance of new senior notes 200,000 -
Payment of old senior notes (155,000) -
Payment of financing costs (5,857) -
Payments on notes payable (30,686) -
Redemption of preferred stock (65,080) -
Preferred stock cash dividends (1,613) -
Receivable from parent (2,493) -
Senior Secured Term Loan - 19,000
Other - 297
------------------------ -----------------------
Net cash provided by (used in) financing activities 21,522 18,297
------------------------ -----------------------
Net increase (decrease) in cash 8,982 (771)
Cash, beginning of period 304 805
------------------------ -----------------------
Cash, end of period $ 9,286 $ 34
======================== =======================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
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") Annual Report on Form 10-K for
the year ended December 31, 2003 and its subsequent reports on Form 10-Q for the
periods ended March 31 and June 30, 2004.
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
recorded and were of a normal and 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.
On February 9, 2004, North Atlantic Trading Company, Inc., a Delaware
corporation, consummated a holding company reorganization whereby North Atlantic
Holding Company, Inc., a Delaware corporation (the "Parent"), became the parent
company of the Company. The holding company reorganization was effected pursuant
to an Agreement and Plan of Merger (the "Merger Agreement"), dated February 9,
2004, among the Company, the Parent and NATC Merger Sub, Inc., a Delaware
corporation and a direct wholly-owned subsidiary of the Parent ("Merger Sub").
Pursuant to the Merger Agreement, (i) Merger Sub was merged with and into the
Company (the "Merger"), with the Company as the surviving corporation; (ii) the
Company became a wholly-owned subsidiary of the Parent; (iii) each of the
539,235 issued and outstanding shares of voting common stock of the Company, par
value $0.01 per share, was converted into the right to receive one share of
common stock of the Parent, par value $0.01 per share ("NAHC Common Stock");
(iv) each issued and outstanding share of common stock of Merger Sub was
converted into one issued and outstanding share of common stock of the Company,
par value $0.01 per share (the "Company Common Stock"); and (v) all of the
issued and outstanding shares of NAHC Common Stock held by the Company were
cancelled.
Immediately after the Merger, (i) 539,235 shares of NAHC Common Stock were
issued and outstanding; and (ii) ten (10) shares of the Company Common Stock
were issued and outstanding.
Subsequently, the Parent issued 49,523 shares of NAHC Common Stock upon the
exercise of certain warrants pursuant to a Warrant Agreement (the "Warrant
Agreement"), dated June 25, 1997, between the Parent (as assignee to the
Company's rights and obligations under the Warrant Agreement) and The Bank of
New York, as warrant agent (as successor to the United States Trust Company of
New York). As of September 30, 2004, (i) 588,758 shares of NAHC Common Stock
6
were issued and outstanding; and (ii) ten (10) shares of Company Common Stock
were issued and outstanding.
2. RECAPITALIZATION AND REORGANIZATION:
On February 9, 2004, the Company consummated its general corporate
reorganization in which the Company became a wholly-owned subsidiary to the
Parent. On February 17, 2004, the Company consummated the refinancing of its
existing debt and preferred stock and the Parent issued senior discount notes in
conjunction with the refinancing The refinancing consisted principally of (1)
the offering and sale of $200.0 million principal amount of 9 1/4% senior notes
due 2012 by the Company (the "New Senior Notes"), (2) entering into an amended
and restated loan agreement that provides a $50.0 million senior secured
revolving credit facility to the Company (the "Senior Revolving Credit
Facility") and (3) the concurrent offering and sale of $97.0 million aggregate
principal amount at maturity of 12 1/4% senior discount notes due 2014 of the
Parent (the "Parent Notes"). Both the senior notes and the senior discount notes
were offered pursuant to Rule l44A and Regulation S under the Securities Act of
1933, as amended.
Concurrently with the closing of the refinancing, the Company also called for
the redemption all of its outstanding 11% senior notes due 2004 (the "Old Senior
Notes"), in accordance with the terms of the indenture governing such notes, at
the applicable redemption price of 100.0% of the principal amount thereof, plus
interest accrued to the redemption date of April 2, 2004. At December 31, 2003,
the Company had outstanding $155.0 million aggregate principal amount of its 11%
senior notes due 2004.
The proceeds from the offering of the New Senior Notes, along with borrowings
under the Senior Revolving Credit Facility (see Notes 5 and 6) and the proceeds
from the concurrent offering of the Parent Notes were used to (1) repay $36.6
million in outstanding borrowings under the existing senior credit facility (the
"Old Senior Credit Facility"), including borrowings used to finance the cash
purchase price for the acquisition of Stoker, Inc. (see Note 11), (2) redeem the
Old Senior Notes, (3) redeem the Company's existing 12% senior exchange
payment-in-kind preferred stock on March 18, 2004, (4) pay a $5.0 million pro
rata distribution to stockholders of Parent and make a distribution to certain
holders of warrants of Parent, (5) make $2.1 million in incentive payments to
certain key employees and outside directors, and (6) pay fees and expenses of
$12.8 million incurred in connection with the offerings.
3. 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 $0.9
million and $0.7 million for the three months ended September 30, 2004 and 2003,
respectively, and $2.6 million and $2.0 million for the nine months ended
September 30, 2004 and 2003, respectively.
7
MASTER SETTLEMENT AGREEMENT ESCROW ACCOUNT: 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 for the current year, as an Other non-current
asset. Each year's obligation is required to be deposited in the escrow account
by April 15 of the following year. As of September 30, 2004 and December 31,
2003, the Company has recorded as an Other non-current asset approximately $12.8
million and $8.3 million, respectively. The approximate $12.8 million, as of
September 30, 2004, contains approximately $3.3 million related to the projected
deposit for 2004 sales, which will be deposited April 15, 2005.
COMPREHENSIVE INCOME: The Company's Comprehensive income for the three and nine
months ended September 30, 2004 and 2003 is equal to the Company's Net income
(loss) for the respective periods.
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on the
last-in, first-out ("LIFO") method for approximately 90% of the inventories.
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.
The impact of LIFO resulted in increased operating income of the Company by
approximately $0.9 million and in decreased operating income by approximately
$0.1 million for the three months ended September 30, 2004 and 2003,
respectively; and increased operating income of the Company by $0.5 million and
increased the operating loss by approximately $0.4 million for the nine months
ended September 30, 2004 and 2003, respectively.
The components of inventories are as follows (in thousands):
9/30/04 12/31/03
---------------- ---------------
Raw materials and work in process $ 4,930 $ 5,996
Leaf tobacco 8,423 8,274
Finished goods - loose leaf tobacco 4,594 6,018
Finished goods - MYO products 8,494 6,323
Other 1,969 1,350
---------------- ---------------
28,410 27,961
LIFO reserve 14,771 14,296
---------------- ---------------
$ 43,181 $ 42,257
================ ===============
8
5. SENIOR NOTES AND LONG-TERM DEBT
The senior notes and long-term debt are as follows (in thousands):
9/30/04 12/31/03
---------------- ----------------
New Senior Notes $ 200,000 $ -
Senior Revolving Credit Facility 34,800 -
Old Senior Notes - 155,000
Notes payable - 30,686
---------------- ----------------
$ 234,800 $ 185,686
================ ================
On February 17, 2004, the Company consummated the refinancing of its existing
debt and preferred stock. The refinancing consisted principally of (1) the
offering and sale of the New Senior Notes, (2) entering into the Senior
Revolving Credit Facility, (3) the concurrent sale of the Parent Notes and (4)
the repayment of $30.7 million in notes payable relating principally to the
acquisition of Stoker, Inc. (see Note 11).
The New Senior Notes are senior unsecured obligations of the Company and will
mature on March 1, 2012. The New Senior Notes bear interest at the rate of 9
1/4% per annum from the date of issuance, or from the most recent date to which
interest has been paid or provided for, and is payable semiannually on March 1
and September 1 of each year, commencing on September 1, 2004. Each of the
Company's existing subsidiaries jointly and severally guarantees the New Senior
Notes on a senior unsecured basis. Each of the Company's future subsidiaries
(other than those designated unrestricted subsidiaries) will jointly and
severally guarantee the New Senior Notes on a senior unsecured basis. The
Company is not required to make mandatory redemptions or sinking fund payments
prior to the maturity of the New Senior Notes.
On and after March 1, 2008, the New Senior Notes will be redeemable, at the
Company's option, subject to meeting certain requirements in the New Credit
Agreement (as defined in Note 6 below), in whole at any time or in part from
time to time, upon not less than 30 nor more than 60 days prior notice at the
following redemption prices (expressed in percentages of principal amount), if
redeemed during the 12-month period commencing March 1 of the years set forth
below, plus accrued and unpaid interest to the redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date):
YEAR REDEMPTION PRICE
---- ----------------
2008 104.625%
2009 102.313%
2010 and thereafter 100.000%
In addition, prior to March 1, 2008, the Company may redeem the New Senior
Notes, subject to meeting certain requirements in the New Credit Agreement, at
its option, in whole at any time or in part from time to time, upon not less
than 30 nor more than 60 days prior notice at a redemption price equal to 100%
9
of the principal amount of the New Senior Notes redeemed plus a "make-whole"
premium based on U.S. Treasury rates as of, and accrued and unpaid interest to,
the applicable redemption date.
Further, at any time prior to March 1, 2007, the Company may, at its option,
subject to meeting certain requirements in the New Credit Agreement, redeem up
to 35% of the aggregate principal amount of the New Senior Notes with the net
cash proceeds of one or more equity offerings by Parent or the Company, subject
to certain conditions, at a redemption price equal to 109.250% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided, however, that after any such redemption at least 65% of
the aggregate principal amount of the New Senior Notes issued under the
Indenture remains outstanding. In order to affect the foregoing redemption with
the proceeds of any equity offering, the Company shall make such redemption not
more than 60 days after the consummation of any such equity offering.
Concurrently with the offering of the New Senior Notes, Parent issued $97.0
million aggregate amount at maturity of the Parent Notes. Proceeds of
approximately $53.8 million from this issuance were used to make a capital
contribution to the Company. The Parent Notes are Parent's senior obligations
and are unsecured. The Parent Notes are not guaranteed by the Company or any of
its subsidiaries and are structurally subordinated to all of the Company's and
its subsidiaries' obligations, including the New Senior Notes and the Senior
Revolving Credit Facility. Parent is not required to make mandatory redemptions
or sinking fund payments prior to the maturity of the Parent Notes.
Parent is dependent on the Company's cash flows to service its debt. The amount
of cash interest to be paid by the Parent during the next five years is as
follows: $0 in each of 2004, 2005, 2006, 2007 and March 1, 2008; $5,941 payable
on September 1, 2008 and $5,941 payable on each of March 1 and September 1
thereafter until maturity.
The receivable from Parent of approximately $2.5 million at September 30, 2004,
relates principally to the assumption of certain obligations, including warrants
and stock options referred to above, net of deferred financing costs transferred
to Parent.
6. REVOLVING CREDIT FACILITY
In connection with the refinancing, the Company also amended and restated its
Old Senior Credit Facility, entering into the new Senior Revolving Credit
Facility of $50.0 million (reducing to $40.0 million in August 2005) with Bank
One, N.A., as agent (the "Agent Bank"), and LaSalle Bank, National Association.
The credit agreement (the "New Credit Agreement") governing the new senior
revolving credit facility includes a letter of credit sublimit of $25.0 million
and terminates three years from the closing date. The Company intends to use the
Senior Revolving Credit Facility for working capital and general corporate
purposes. As of September 30, 2004, the Company had borrowed $34.8 million under
the Senior Revolving Credit Facility. As of December 31, 2003, the Company had
borrowed $6.3 million under the Old Senior Credit Facility.
Indebtedness under the New Credit Agreement is guaranteed by each of the
Company's current and future direct and indirect subsidiaries, and is secured by
a first perfected lien on substantially all of the Company's and the Company's
direct and indirect subsidiaries' current and future assets and property. The
collateral includes a pledge by Parent of its equity interest in the Company and
10
a first priority lien on all equity interests and intercompany notes held by the
Company and each of its subsidiaries.
Each advance under the New Credit Agreement will bear interest at variable rates
plus applicable margins, based, at the Company's option, on either the prime
rate or LIBOR. The New Credit Agreement provides for voluntary prepayment,
subject to certain exceptions, of loans. In addition, without the prior written
consent of the Agent Bank, the Company will not allow a Change in Control (as
defined in the New Credit Agreement), the sale of any material part of its
assets and the assets of its subsidiaries on a consolidated basis or, subject to
certain exceptions, the issuance of equity or debt. As of September 30, 2004,
the weighted average interest rate on borrowings under the New Credit Agreement
was approximately 4.8%.
Under the New Credit Agreement, the Company is required to pay an annual
commitment fee in variable amounts ranging from 0.50% to 0.65% of the difference
between the commitment amount and the average usage of the facility, payable on
a quarterly basis, on the undrawn and unused portion of the credit facility.
The New Credit Agreement requires the Company and its subsidiaries to meet
certain financial tests: a minimum consolidated Adjusted EBITDA for the six
months ending June 30, 2004 and the nine months ending September 30, 2004 and
beginning December 31, 2004, a four-quarter rolling minimum fixed charge
coverage ratio, as defined in the New Credit Agreement. The New Credit Agreement
also contains covenants which, among other things, limit the incurrence of
additional indebtedness, dividends, transactions with affiliates, asset sales,
acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances
and other matters customarily restricted in such agreements. In addition, the
New Credit Agreement requires that certain members of executive management
remain active in the day-to-day operation and management of the Company and its
subsidiaries during the term of the facility.
The New Credit Agreement contains customary events of default, including payment
defaults, breach of representations and warranties, covenant defaults,
cross-acceleration, cross-defaults to certain other indebtedness, certain events
of bankruptcy and insolvency, the occurrence of a Change in Control and judgment
defaults.
The Company satisfied the minimum consolidated Adjusted EBITDA financial
covenant test for the nine months ending September 30, 2004.
Looking forward, due to the lower than anticipated operating performance of the
Company's core businesses, increased expenses resulting from the Company's
decision to proceed more quickly with developmental activities relating to
Zig-Zag Premium Cigarettes and the Company's decision to proceed more slowly
with the integration of the operations of Stoker, Inc. (acquired in November
2003) with a view toward achieving greater overall cost savings, the Company
currently anticipates that it will not likely meet the fixed charge coverage
ratio test contained in the New Credit Agreement for the rolling three-month
periods ended March 31 and June 30, 2005. The Company is currently engaged in
discussions with the lenders under the New Credit Agreement with a view towards
amending the fixed charge coverage ratio test in order to enable the Company to
remain in compliance therewith. Although there can be no assurance, the Company
believes that it will be able to negotiate such an amendment on terms reasonably
acceptable to the Company. However, if such an amendment or waiver is not able
to be obtained and the covenant is breached, then the Company would be in
11
default under the New Credit Agreement and the lenders thereunder would have the
right to accelerate payment of all obligations thereunder. Such an acceleration
would also trigger an event of default under the indentures governing the Senior
Notes and the Parent Notes. In the case of both the Senior Notes and the Parent
Notes, the trustee or the holders of at least 25% in principal amount at
maturity of such notes would have the right, following an event of default, to
declare the obligations thereunder, including accrued and unpaid interest, to be
due and payable immediately. In the event of an acceleration of its obligations
under either the New Credit Agreement or Senior Notes, the Company would not be
able to satisfy its obligations and would likely be required to seek protection
from its creditors under applicable laws.
7. PROVISION FOR INCOME TAXES
The provision for income taxes for the nine months ended September 30, 2004 and
September 30, 2003 was computed based on the estimated annual effective income
tax rate of 38.0%.
8. PENSION AND POSTRETIREMENT BENEFIT PLANS
The components of Net Periodic Benefit Cost for the nine months ended September
30 are as follows (in thousands):
PENSION BENEFITS OTHER BENEFITS
------------------------------------- -------------------------------------------
2004 2003 2004 2003
----------------- --------------- -------------------- ------------------
Service cost $ 221 $ 414 $ (2,481) $ 168
Interest cost 587 603 134 187
Expected return of plan assets (711) (442) - -
Amortization of net (gain) loss 91 63 204 95
----------------- --------------- -------------------- ------------------
Net periodic pension cost $ 188 $ 638 $ (2,143) $ 450
================= =============== ==================== ==================
Effective December 31, 2003, the Company froze the defined benefit retirement
plan for its salaried employees. Effective June 30, 2004 and July 31, 2004, the
Company also froze the defined benefit retirement plan for the respective hourly
employees of its three collective bargaining units.
Effective September 30, 2004, the Company terminated its postretirement benefit
plan for its salaried employees. Accordingly, the Company recognized a reduction
in the postretirement benefit plan liability of $2,856. The Company had
previously disclosed in its financial statements for the year ended December 31,
2003 that it expected to contribute $500 to its postretirement plan in 2004 for
the payment of benefits. Plan contributions and benefits have amounted to $455
for the nine months ended September 30, 2004. Based upon the above decision,
management believes that any future contribution will not be material.
12
9. RECONCILIATION OF INCOME (LOSS) PER COMMON SHARE
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
THREE MONTHS ENDED SEPTEMBER 30, 2004
- -------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------------ -------------------
Basic:
Net income 7,174
-----------------
Net income applicable to common shares $ 7,174 .01 $717,400.00
================= ================== ===================
Diluted:
Net income 7,174
-----------------
Net income applicable to common shares $ 7,174 .01 $717,400.00
================= ================== ===================
THREE MONTHS ENDED SEPTEMBER 30, 2003
- -------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------------
Basic:
Net income $ 2,071
Less: preferred stock dividends (1,839)
-----------------
Net income applicable to common shares $ 232 528.2 $ 0.44
================= =================== ===================
Diluted:
Net income $ 2,071
Less: preferred stock dividends (1,839)
-----------------
Net income applicable to common shares $ 232 616.8 $ 0.38
================= =================== ===================
NINE MONTHS ENDED SEPTEMBER 30, 2004
- ------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------------
Basic:
Net income $ 3,515
Less: preferred stock dividends (1,613)
-----------------
Net income applicable to common shares $ 1,902 77.7 $ 24.48
================= =================== ===================
Diluted:
Net income $ 3,515
Less: preferred stock dividends (1,613)
-----------------
Net income applicable to common shares $ 1,902 105.1 $ 18.10
================= =================== ===================
NINE MONTHS ENDED SEPTEMBER 30, 2003
- ------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------------
Basic and diluted:
Net loss $ (11,415)
Less: preferred stock dividends (5,339)
-----------------
Net loss applicable to common shares $ (16,754) 528.2 $ (31.72)
================= =================== ===================
13
On February 9, 2004, in connection with the Merger, all the common shares of the
Company were cancelled. Immediately after the Merger, ten (10) shares of the
Company's common stock, par value $0.01 per share, were issued and outstanding.
The earnings per share 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 63,490 shares were excluded from
the computations for the nine months ended September 30, 2003 and common stock
equivalent shares from stock options representing 95,300 shares were excluded
from the computations for the nine months ended September 30, 2003, as their
effects are antidilutive. There were no warrants or options outstanding at
September 30, 2004.
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS 150 relating to mandatorily redeemable non-controlling
interests associated with finite-lived subsidiaries as amended by FASB Staff
Position 150-3, has been deferred, for an indefinite period. The provisions of
SFAS 150 relating to all other financial instruments apply immediately to all
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The implementation of SFAS 150 is delayed for nonpublic companies with
fiscal periods beginning after December 15, 2003. In accordance with the
foregoing, the Company does not anticipate any impact from the adoption of SFAS
150 on its financial statements.
In December 2003, the FASB issued revised Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). FIN 46 provides guidance on how to
identify a variable interest entity ("VIE") and determine when the assets,
liabilities, non-controlling interest, and results of operations of a VIE need
to be included in a company's consolidated financial statements. FIN 46 also
requires additional disclosures by primary beneficiaries and other significant
variable interest holders. Application of FIN 46 is required for interest in
special-purpose entities for years ending after December 15, 2003. Currently,
the Company has no special-purpose entities. Application of FIN 46 is required
for all other types of VIEs effective January 1, 2005. Although the Company does
not expect FIN 46 to have a material impact on the Company's financial condition
or results of operations, it is continuing to evaluate this complex
interpretation.
In December 2003, the FASB issued a revision of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," to improve
financial statement disclosures for benefit plans. The project was initiated by
14
the FASB in 2003 in response to concerns raised by investors and other users of
financial statements about the need for greater transparency of pension
information. SFAS No. 132R requires that companies provide more details about
their plan assets, benefit obligations, cash flows, benefit costs, and other
relevant information. SFAS No. l32R is effective for years ending after December
15, 2003. The Company adopted SFAS No. l32R as of December 31, 2003 and has
provided the required interim disclosures in Note 8, "Pension and Postretirement
Benefit Plans."
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Act"), which introduces a Medicare prescription drug benefit,
as well as a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to the Medicare
benefit, was enacted. In May 2004, the FASB issued Financial Staff Position No.
106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP 106-2") to
discuss certain accounting and disclosure issues raised by the Act. FSP 106-2
addresses accounting for the federal subsidy for the sponsors of single employer
defined benefit postretirement healthcare plans and disclosure requirements for
plans for which the employer has not yet been able to determine actuarial
equivalency. Except for certain nonpublic entities, FSP 106-2 is effective for
the first interim or annual period beginning after June 15, 2004 (the quarter
ending September 30, 2004 for the Company).
The Company has not yet determined whether the prescription drug benefits
provided under the postretirement plan are actuarially equivalent to the
Medicare benefit as necessary to qualify for the subsidy. The reported net
periodic benefit costs of the postretirement plan in the accompanying Financial
Statements and Notes to the Financial Statements do not reflect the effect of
the Act. Adoption of FSP 106-2 could require revisions to previously reported
information. While the Company may be eligible for benefits under the Act based
on the prescription drug benefits provided in the postretirement plan, the
Company does not believe such benefits will have a material impact on the
Financial Statements.
In addition, specific authoritative guidance on the accounting for the federal
subsidy, one of the provisions of the Act, is pending, and that guidance, when
issued, could require the Company to change previously reported information.
However, it is the Company's current opinion that the impact of any change
presently under discussion due to the accounting for the federal subsidy would
be immaterial.
In accordance with the enactment of the American Job Creation Act of 2004, FASB
has not issued its final statement regarding the accounting treatment. FASB
expects its statement to be finalized in early December 2004. The Company will
evaluate the impact on its financial statements upon issuance of the final
statement by FASB.
11. STOKER ACQUISITION
On November 17, 2003, the Company acquired the common stock of Stoker, Inc.
("Stoker"). Stoker, headquartered in Dresden, Tennessee, manufactures and
markets smokeless tobacco and make-your-own ("MYO") tobacco and related products
under various brand names.
15
The purchase price of $22.5 million in cash was financed with borrowings under
the Old Senior Credit Facility. The acquisition has been accounted for under the
purchase method, and the results of Stoker have been included in the Company's
consolidated results from the date of acquisition.
On June 15, 2004, the Company announced plans to cease manufacturing operations
at the Stoker facility in Dresden, Tennessee and consolidate the production into
the Company's current operations in Louisville, Kentucky. In connection with
this consolidation, the Company plans to terminate approximately 85 employee
positions currently located at Stoker during the fourth quarter of 2004. In
connection therewith, severance costs of approximately $0.1 million have been
accrued. With the consolidation of manufacturing facilities, the Company is
expanding its manufacturing at the Louisville facility, including the relocation
of certain equipment from Dresden to Louisville. The Company has also accrued
approximately $0.3 million relating to the removal and temporary storage of
certain Stoker equipment. The above noted costs have been included in the
purchase price allocated to the Stoker acquisition resulting in an increase to
goodwill of $0.3 million, net of deferred taxes.
12. TERMINATED ASSET PURCHASE AGREEMENT
On February 18, 2003, the Company entered into an asset purchase agreement (the
"Star Cigarette Asset Purchase Agreement") with Star Scientific, Inc. ("Star
Scientific"), and Star Tobacco, Inc., a wholly-owned subsidiary of Star
Scientific ("Star Tobacco" and, together with Star Scientific, "Star"). Pursuant
to the Star Cigarette Asset Purchase Agreement, the Company was to purchase
substantially all of the assets of Star relating to the manufacturing, marketing
and distribution of four discount cigarette brands in the United States (the
"Star Cigarette Assets"). The purchase price for the Star Cigarette Assets was
to have been $80.0 million in cash, subject to certain closing adjustments and
the assumption of certain liabilities related to the Star Cigarette Assets.
On July 15, 2003, the Company and Star reached a mutual agreement to terminate
the Star Cigarette Asset Purchase Agreement. Pursuant to the termination
agreement, Star Scientific retained a $2.0 million earnest money deposit that
had been placed into escrow by the Company and the parties executed releases of
any liabilities arising out of the Star Cigarette Asset Purchase Agreement.
Through June 30, 2003, the Company incurred $2.9 million of direct costs,
including the $2.0 million earnest money deposit referred to above, in
connection with this transaction. These costs have been expensed during the
quarter ended June 30, 2003 and are included in Other expenses.
13. CONTINGENCIES
LITIGATION WITH REPUBLIC TOBACCO
On July 15, 1998, North Atlantic Operating Company, Inc. ("NAOC") and National
Tobacco Company, L.P. ("NTC") filed a complaint (the "Kentucky Complaint")
against Republic Tobacco, Inc. and its affiliates ("Republic Tobacco") in
Federal District Court for the Western District of Kentucky. Republic Tobacco
imports and sells Roll-Your-Own ("RYO") premium cigarette papers under the brand
16
names JOB and TOP as well as other brand names. The Kentucky Complaint alleges,
inter alia, that Republic Tobacco's use of exclusivity agreements, rebates,
incentive programs, buy-backs and other activities related to the sale of
premium cigarette papers in the southeastern United States violate federal and
state antitrust and unfair competition laws and that Republic Tobacco defaced
and directed others to deface NAOC's point of purchase vendor displays for
premium cigarette papers by covering up the ZIG-ZAG brand name and advertising
material with advertisements for Republic Tobacco's RYO cigarette paper brands.
The Kentucky Complaint alleges that these activities constitute unfair
competition under federal and state laws.
On June 30, 1998, Republic Tobacco filed a complaint against the Company, NAOC
and NTC in the U.S. District Court of the Northern District of Illinois (the
"Illinois Complaint") and served it on the Company after the institution of the
Kentucky action. In the Illinois Complaint, Republic Tobacco seeks declaratory
relief with respect to the Company's claims. In addition, the Illinois Complaint
alleges that certain actions taken by the Company to inform its customers of its
claims against Republic Tobacco constitute tortuous 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 but in its amended
complaint, Republic Tobacco alleged that the Company has unlawfully monopolized
and attempted to monopolize the market on a national and regional basis for
premium cigarette papers. Republic sought unspecified compensatory damages,
injunctive relief and attorneys fees and costs.
On October 20, 2000, Republic Tobacco filed a motion to dismiss, stay, or
transfer the Kentucky Complaint to the Illinois Court. On December 19, 2000, the
Court denied Republic Tobacco's motion, holding that it was premature. The Court
noted also that it had communicated with the Court in Illinois and that it had
concluded that Republic Tobacco may not be entitled to any preference on forum
selection, which would ordinarily be given because it was first to file. The
Kentucky complaint is still on file.
Prior to the completion of discovery, the Court dismissed Republic Tobacco's
antitrust claims against the Company. After discovery was completed in 2001,
both parties moved for summary judgment on the others claims. In April 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 and its affiliates, except for Republic Tobacco's claim of defamation
per se against the Company, on which it granted summary judgment on liability in
favor of Republic Tobacco, and a Lanham Act false advertising claim, based on
the same facts as the defamation claim, for equitable relief. In February 2003,
the District Court granted Republic's motion for summary judgment on the
Company's counterclaim that Republic tortuously interfered with the Company's
business relationships and economic advantage. The only claim that remained to
be tried was Republic's Lanham Act claim and damages on the defamation claim on
which the Court previously ruled that Republic could only obtain equitable
relief if successful.
On July 8, 2003, following a four-day trial, an Illinois jury returned a verdict
in favor of Republic on the defamation claims of $8.4 million in general damages
and $10.2 million in punitive damages, for a total damage award of $18.6
million. The Company recorded an $18.8 million charge during the second quarter
2003 relating to this transaction. The Company filed post-trial motions for a
new trial and, in the alternative, for a reduction of the awards. On August 1,
2003, the Company posted a judgment bond in the amount of $18.8 million with the
17
U.S. District Court. This was accomplished by obtaining a $19.0 million senior
secured term loan pursuant to a July 31, 2003 amendment to the Company's
existing credit facility. On November 20, 2003, the court ruled that the awards
were excessive and reduced the awards by approximately 60%, with the award of
compensatory damages being reduced to $3.36 million and the award of punitive
damages being reduced to $4.08 million, for a total of $7.44 million. On
December 18, 2003, Republic accepted these reduced awards. The Company reversed
$11.16 million during the fourth quarter 2003 due to this court ruling.
On January 8, 2004, the Company appealed the final judgment, including the
finding of liability in this case as well as the amount of the award. On January
22, 2004, Republic filed a general notice of cross appeal and argued in its
appellate briefs that the judgment should be affirmed and also asserted, in its
cross-appeal, that the original judgment should be reinstated despite its
acceptance of the District Court's order reducing the judgment amount.
On September 1, 2004, the Court of Appeals issued its ruling affirming the
finding of liability against the Company for defamation, but reducing the amount
of the damage award to $3.0 million. The Court of Appeals also affirmed the
dismissal of the Company's antitrust claim against Republic and the dismissal of
Republic's motion to re-instate the original jury award of $18.8 million. As a
result of these rulings, in October 2004 the Company received approximately $4.5
million relating to the cash bond it had posted with the Court in 2003. This
amount was included in Other income as of September 30, 2004.
The Company has also applied to the Court of Appeals for an order awarding the
Company approximately $1.0 million for the difference in the expense of the
original bond of $18.8 million and the subsequent reduced bond of $7.0 million,
on the one hand, and the lesser expense the Company would have incurred to bond
the final $3.0 million judgment, on the other hand. That motion has been fully
briefed and the parties are waiting for the Court to rule.
LITIGATION RELATED TO COUNTERFEITING
Texas Infringing Products Litigation. In Bollore, S.A. v. Import Warehouse,
Inc., Civ. No. 3-99-CV-1196-R (N.D. Texas), Bollore, the Company's Licensor of
ZIG-ZAG brand premium cigarette papers, obtained a sealed order allowing it to
conduct a seizure of infringing and counterfeit ZIG-ZAG products in the United
States. On June 7, 1999, seizures of products occurred in Michigan and Texas.
Subsequently, all named defendants have been enjoined from buying and selling
such infringing or counterfeit goods. Bollore and the Company negotiated
settlements with all defendants. These defendants included Import Warehouse,
Ravi Bhatia, Tarek Makki and Adham Makki. Those settlements included a consent
injunction against distribution of infringing or counterfeit goods.
On May 18, 2001, the Company, in conjunction with Bollore, conducted raids on
the businesses and homes of certain defendants previously enjoined (including
Tarek Makki and Adham Makki) from selling infringing or counterfeit ZIG-ZAG
brand products in the Bollore S.A. v. Import Warehouse litigation. Evidence was
uncovered that showed that these defendants and certain other individuals were
key participants in importing and distributing counterfeit ZIG-ZAG premium
cigarette papers. After a two day hearing in the U.S. District Court for the
Northern District of Texas, on May 30, 2001, the Court held the previously
enjoined defendants in contempt of court, and enjoined the additional new
18
defendants, including Ali Makki, from selling infringing or counterfeit ZIG-ZAG
premium cigarette papers.
The Company entered into a settlement with the 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
$11.0 million from the civil contempt order and an agreement to forbear from
enforcing that $11.0 million money judgment until such time in the future that
the defendants violate the terms of the permanent injunction. Two of the
defendants, Tarek Makki and Adham Makki, 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.
On February 17, 2004, the Company and Bollore filed a motion in the U.S.
District Court for the Northern District of Texas, which had issued the original
injunctions against the infringing defendants, seeking, with respect to
respondents Adham Makki, Tarek Makki and Ali Makki, to have the $11.0 million
judgment released from the forbearance agreement and to have the named
respondents held in contempt of court. The motion alleged that the three
respondents had trafficked in counterfeit ZIG-ZAG cigarette papers after the
execution of the settlement, citing evidence that all three had been charged in
the United States District Court for the Eastern District of Michigan with
criminal violations of the United States counterfeiting laws by trafficking in
counterfeit ZIG-ZAG cigarette papers, which trafficking occurred after the
settlement agreement.
On April 13, 2004, the Court entered an order (the "Contempt 2 Order"), finding
Ali Mackie, Tarek Makki, Adham Mackie and their companies Best Price Wholesale
(the "Makki Defendants") and Harmony Brands LLC in civil contempt, freezing all
of their assets, releasing the July 12, 2002 Final Judgment of $11.0 million
from the forbearance agreement as to the Makki Defendants, and again referring
the matter to the United States Attorney for Criminal Prosecution. Subsequent to
the entry of the Contempt 2 Order, the Company settled with defendant Harmony
Brands and its members for the amount of $750,000 and the entry of a permanent
injunction. The Company is seeking to execute on the outstanding $11.0 million
judgment against the remaining Makki Defendants and those efforts are currently
underway.
Pursuant to the U.S. Distribution Agreement and a related agreement between
Bollore and the Company, any collections on the judgments issued in the Bollore
v. Import Warehouse case are to be divided evenly between Bollore and the
Company after the payment of all expenses.
On February 7, 2002, Bollore, NAOC and the Company filed a motion with the
District Court in the Texas action seeking to hold Ravi Bhatia and Import
Warehouse Inc. in contempt of court for violating the terms of the consent order
and injunction entered against those defendants. The Company alleges that Mr.
Bhatia and Import Warehouse sold counterfeit goods to at least three different
companies over an extended period of time. On June 27, 2003, the Court found
Import Warehouse and Mr. Bhatia in contempt of court for violating an existing
injunction barring those parties from distributing infringing ZIG-ZAG cigarette
paper products. The Court requested that the Company and Bollore (the Company's
co-plaintiff in the case) file a submission detailing the damages incurred. The
Company and Bollore filed their submission on July 25, 2003 which reported and
requested damages of $2.4 million.
19
On July 1, 2004, the Court issued an Order awarding approximately $2.5 million
in damages to the Company for the damages incurred by the Company as a result of
the Import Warehouse Defendants' civil contempt. On July 15, 2004, the Court
entered a Final Judgment in that amount for which defendants Import Warehouse,
Inc. and Ravi Bhatia are jointly and severally liable. After the Company and
Bollore commenced collection proceedings, Import Warehouse paid the Company and
Bollore an amount equal to the entire judgment plus the expenses incurred in
collection. Accordingly, approximately $1.2 million has been recorded in Other
income as of September 30, 2004. The Import Warehouse Defendants filed a notice
of appeal on July 24, 2004. No briefing schedule has been established.
LITIGATION RELATED TO ALLEGED PERSONAL INJURY
Trial of the West Virginia complaints against the smokeless tobacco defendants
has been postponed indefinitely, as described below. On October 6, 1998 NTC was
served with a summons and complaint on behalf of 65 individual plaintiffs 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-240l). On November 13, 1998, NTC was served with a second summons and
complaint on behalf of 18 plaintiffs 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). The complaints
are identical in most material respects. In the Allen case, the plaintiffs have
specified the defendant companies for each of the 65 cases. NTC is named in only
one action. One Akers plaintiff alleged use of an NTC product, alleging lung
cancer.
On September 14, 2000, NTC was served with a summons and complaint on behalf of
539 separate plaintiffs filed in Circuit Court of Ohio County, West Virginia,
entitled Linda Adams, et al. v. Philip Morris Inc., et al. (Civil Action Nos.
00-C-373 to 00-C-911). Only one of these plaintiffs alleged use of a product
currently manufactured by NTC. The time period during which this plaintiff
allegedly used the product has not yet been specified. Thus, it is not yet known
whether NTC is a proper defendant in this case.
On September 19, 2000, NTC was served with a second summons and complaint on
behalf of 561 separate plaintiffs filed in Circuit Court of Ohio County, West
Virginia, entitled Ronald Accord, et al. v. Philip Morris Inc., et al. (Civil
Action Nos. 00-C-923 to 00-C-1483). A total of five of these plaintiffs alleged
use of a product currently manufactured by NTC. One of these plaintiffs does not
specify the time period during which the product was allegedly used. Another
alleges use that covers, in part, a period when NTC did not manufacture the
product. On motion by cigarette company defendants, this claim was dismissed on
February 11, 2004, for failure to follow the case management order. Of the
remaining three, one alleges consumption of a competitor's chewing tobacco from
1966 to 2000 and NTC's Beech-Nut chewing tobacco from 1998 to 2000; another
alleges a twenty-four year smoking history ending in 1995 and consumption of
Beech-Nut chewing tobacco from 1990 to 1995; and the last alleges a thirty-five
year smoking history ending in 2000, and consumption of NTC's Durango Ice
chewing tobacco from 1990 to 2000 (although Durango Ice did not come onto the
market until 1999).
In November 2001, NTC was served with an additional four separate summons and
complaints in actions filed in the Circuit Court of Ohio County, West Virginia.
The actions are entitled Donald Nice v. Philip Morris Incorporated, et al.
(Civil Action No. 01-C-479), Korene S. Lantz v. Philip Morris Incorporated, et
20
al. (Civil Action No. 01-C-480), Ralph A. Prochaska, et al. v. Philip Morris,
Inc., et al. (Civil Action No. 01-C-481), and Franklin Scott, et al. v. Philip
Morris, Inc., et al., (Civil Action No. 0l-C-482).
All of the West Virginia smokeless tobacco actions have been consolidated before
the West Virginia Mass Litigation Panel for discovery and trial of certain
issues. Trial of these matters was planned in two phases. In the initial phase,
a trial was to be held to determine whether tobacco products, including all
forms of smokeless tobacco, cigarettes, cigars and pipe and roll-your-own
tobacco, can cause certain specified diseases or conditions. In the second
phase, individual plaintiffs would attempt to prove that they were in fact
injured by tobacco products. Fact and expert discovery in these cases has
closed, however, in the cigarette cases the Court has allowed additional
discovery.
The claims against NTC in the various consolidated West Virginia actions include
negligence, strict liability, fraud in differing forms, conspiracy, breach of
warranty and violations of the West Virginia consumer protection and antitrust
acts. The complaints in the West Virginia cases request unspecified compensatory
and punitive damages.
The manufacturers of smokeless tobacco products (as well as the manufacturers of
cigarettes) moved to sever the claims against the smokeless tobacco manufacturer
defendants from the claims against the cigarette manufacturer defendants. That
motion was granted and the trial date on the smokeless tobacco claims has now
been postponed indefinitely.
The trial court has now vacated the initial trial plan in its entirety because
of concerns that its provisions violated the dictates of the United States
Supreme Court's decision in State Farm Mutual Automobile Insurance Company v.
Campbell, 538 U.S. 408 (2003). A new trial plan has not yet been implemented
with regard to the consolidated claims against the cigarette manufacturer
defendants. The claims against the smokeless tobacco manufacturer defendants
remain severed and indefinitely stayed.
Minnesota Complaint. On September 24, 1999, NTC was served with a complaint in a
case entitled Tuttle v. Lorillard Tobacco Company, et al. (Case No. C2-99-7105),
brought in Minnesota. The other manufacturing defendants are Lorillard and The
Pinkerton Tobacco Company. The Complaint alleges that plaintiff's decedent was
injured as a result of using NTC's (and, prior to the formation of NTC,
Lorillard's) Beech-Nut brand and Pinkerton's Red Man brand of loose-leaf chewing
tobacco. Plaintiff asserts theories of liability, breach of warranty, fraud, and
variations on fraud and misrepresentation. Plaintiff specifically requests in
its complaint an amount of damages in excess of fifty thousand dollars ($50,000)
along with costs, disbursements and attorneys' fees, and ". . . an order
prohibiting defendants from disseminating in Minnesota further misleading
advertising and making further untrue, deceptive and/misleading statements about
the health effects and/or addictive nature of smokeless tobacco products. . . ."
After discovery, summary judgment motions were filed on behalf of all
defendants. On March 3, 2003, the Court granted defendants' motions, dismissing
all claims against all defendants and the Court has since denied the plaintiff's
motion for reconsideration. Plaintiff has appealed the dismissal. Briefing has
been completed. Oral argument before the Court of Appeals was held on February
11, 2004. On July 30, 2004, the Court of Appeals affirmed the dismissal of all
of the claims.
21
14. SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," the Company has three 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
premium cigarette segment distributes contract manufactured cigarettes through
wholesale distributors in the United States.
The accounting policies of these segments are the same as those of the Company.
Segment data includes a charge allocating all corporate costs to each operating
segment. Eliminations 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, 2004 and 2003, respectively (in
thousands):
FOR THE MAKE PREMIUM
THREE MONTHS ENDED: SMOKELESS YOUR MANUFACTURED ELIMINATIONS
SEPTEMBER 30, 2004 TOBACCO OWN CIGARETTES AND OTHER TOTAL
- ------------------------------ ----------------- --------------- -------------------- ------------------ -----------------
Net sales $ 12,231 $ 18,244 $ 42 $ 224 $ 30,741
Operating income 4,293 8,158 (1,118) (33) 11,300
Adjusted EBITDA 3,050 6,196 (1,077) (30) 8,139
Assets 71,514 285,572 4,100 (94,038) 267,148
SEPTEMBER 30, 2003
- ------------------------------
Net sales $ 9,097 $ 19,595 $ 26 $ - $ 28,718
Operating income 3,075 7,498 (1,577) - 8,996
Adjusted EBITDA 3,581 7,745 (1,577) - 9,749
Assets 64,785 264,761 1,508 (106,260) 224,794
FOR THE MAKE PREMIUM
NINE MONTHS ENDED: SMOKELESS YOUR MANUFACTURED ELIMINATIONS
SEPTEMBER 30, 2004 TOBACCO OWN CIGARETTES AND OTHER TOTAL
- ------------------------------ ----------------- --------------- -------------------- ------------------ -----------------
Net sales $ 37,782 $ 51,307 $ 165 $ 799 $ 90,053
Operating income 10,174 13,431 (3,624) (54) 19,927
Adjusted EBITDA 10,925 13,173 (3,518) (30) 20,550
Assets 71,514 285,572 4,100 (94,038) 267,148
SEPTEMBER 30, 2003
- ------------------------------
Net sales $ 26,715 $ 46,477 $ 26 $ - $ 73,218
Operating income 6,843 13,310 (1,577) - 18,576
Adjusted EBITDA 8,466 13,857 (1,577) - 20,746
Assets 64,785 264,761 1,508 (106,260) 224,794
22
The table set forth below is a reconciliation of the Company's Net income (loss)
to Adjusted EBITDA for the three months and nine months ended September 30, 2004
and 2003, respectively (in thousands):
FOR THE THREE MONTHS ENDED: FOR THE NINE MONTHS ENDED:
SEPTEMBER 30 SEPTEMBER 30
-------------------------------------- -----------------------------------
2004 2003 2004 2003
----------------- ---------------- --------------- ----------------
Net income (loss) $ 7,174 $ 2,071 $ 3,515 $(11,415)
Interest expense, net and amortization
of deferred financing fees 5,279 4,817 19,294 14,130
Income tax expense (benefit) 4,397 1,269 2,155 (6,996)
Depreciation 217 125 646 375
Other expense (5,550) 839 (5,037) 22,857
LIFO adjustment (925) (50) (475) 400
Stock option compensation expense 100 184 300 307
Postretirement/pension expense (2,553) 494 (1,955) 1,088
Incentive payments in conjunction with reorganization - - 2,107 -
----------------- ---------------- --------------- ----------------
Adjusted EBITDA $ 8,139 $ 9,749 $ 20,550 $ 20,746
================= ================ =============== ================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company, a wholly-owned subsidiary of North Atlantic Holding Company, Inc.
("Parent"), competes, in three distinct markets: (1) the smokeless tobacco
market; (2) the Make-Your-Own ("MYO") cigarette market; and (3) the premium
manufactured cigarette market. The smokeless tobacco market includes the loose
leaf chewing tobacco sector. The MYO cigarette market is comprised of the MYO
premium cigarette papers sector and the MYO cigarette tobaccos and related
products sector. The Company's subsidiaries manufacture and market loose leaf
chewing tobacco, import and distribute MYO premium cigarette papers, contract
manufacture and market MYO cigarette tobaccos and related products, and contract
manufacture and market premium manufactured cigarettes. To date, the Company's
premium manufactured cigarette segment continues in its development phase and
net sales of this segment has not been significant.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Net Sales. Net sales for the three months ended September 30, 2004 were $30.7
million, an increase of $2.0 million or 7.0% from the corresponding period of
the prior year.
Net sales of the smokeless tobacco segment for the current period increased $3.1
million or 34.4% from the corresponding period of the prior year, with the
Stoker acquisition (see Note 11 to the Consolidated Financial Statements
contained herein) accounting for $3.9 million of such net sales. The volume of
the Company's NTC brands declined 16.9% in net pounds and the acquired Stoker
brands increased 6.7%, generating an aggregate reduction in net pounds of 8.1%
for the period. Net sales were favorably impacted by two price increases of
23
approximately 5% each on the Company's NTC brands, which were initiated in the
third quarters of 2003 and 2004.
Net sales of the Company's MYO segment decreased $1.4 million or 7.1% in
comparison to the corresponding period of the prior year despite a $2.0 million
gain due to the Stoker acquisition. Within the MYO segment, premium cigarette
paper sales decreased $2.3 million or 15.3% from the corresponding period of the
prior year due to a reduction in promotional activity in the third quarter of
2004 as the Company focused on maintaining prices to enhance its longer term
profitability of this mature sector. The MYO cigarette tobaccos and related
product sales increased $0.9 million or 19.6% in comparison to the corresponding
period of the prior year, with the Stoker acquisition accounting for $2.0
million of such net sales. Despite this overall net sales increase, aggregate
volume in net pounds declined 15.0% due to increased competition coupled with
associated price reductions or discounting, which the Company chose not to fully
match.
Gross Profit. Gross profit for the three months ended September 30, 2004 totaled
$17.0 million, an increase of $0.1 million or 0.6% from the corresponding period
of the prior year.
Gross profit of the smokeless tobacco segment increased $0.8 million or 15.1%
from the corresponding period of the prior year due to increased sales
associated with the Stoker acquisition. Gross margin for this segment decreased
to 49.6% of net sales for the current period from 58.2% in the corresponding
period of the prior year due principally to greater sales of lower margin Stoker
products coupled with higher manufacturing costs per case, both of which were
partially offset by the Company's two price increases on NTC's brands of
approximately 5% each.
Gross profit of the MYO segment for the current period decreased $0.7 million or
6.0% in comparison to the corresponding period of the prior year. The gross
margin of the MYO segment increased to 59.9% of net sales for the current period
in comparison to 59.2% for the corresponding period of the prior year. This
increase in gross margin was due principally to a favorable impact on cost of
goods sold due to the LIFO inventory adjustment.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses for the three months ended September 30, 2004 were $5.7
million, a decrease of $2.2 million or 27.8% in comparison to the corresponding
period of the prior year. Of this decrease, $2.9 million resulted from the
termination of the post-retirement benefit plan for salaried employees, $0.8
million to reduced compensation accruals and $0.4 million to a reduction in
health care cost accruals, all of which were partially offset by increased
expenses of $1.1 million related to the continuing development of the premium
manufactured cigarette segment and by $0.9 million in expenses relating to the
integration of Stoker's operations, which were acquired on November 17, 2003.
Interest Expense and Amortization of Financing Costs. Interest expense and
financing costs increased $0.5 million or 9.6% to $5.3 million for the three
months ended September 30, 2004 as compared to the corresponding period of the
prior year. This increase was due principally to higher average outstanding
indebtedness resulting from the recapitalization and reorganization consummated
in February 2004, as more fully described in Note 2 to the Financial Statements
contained herein.
24
Other Income (Expense). Other income of $5.6 million for the three months ended
September 30, 2004 resulted from recoveries relating to the Illinois Complaint
described in Note 13 to the Financial Statements contained herein and recoveries
associated with counterfeiting litigation (as also described in Note 13). The
expense of $0.8 million for the three months ended September 30, 2003 related to
funding costs of the judgment bond associated with the Illinois Complaint.
Income Tax Benefit (Expense). Income tax expense was $4.4 million for the three
months ended September 30, 2004 compared to $1.3 million for the corresponding
period of the prior year due to the higher operating results in 2004. The
effective income tax rate used for both periods was 38.0%.
Net Income (Loss). Due to the factors described above, net income for the three
months ended September 30, 2004 was $7.2 million compared to $2.1 million for
the corresponding period of the prior year.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Net Sales. Net sales for the nine months ended September 30, 2004 were $90.0
million, an increase of $16.8 million or 23.0% from the corresponding period of
the prior year.
Net sales of the smokeless tobacco segment for the current period increased
$11.1 million or 41.6% from the corresponding period of the prior year, with the
Stoker acquisition accounting for $11.3 million of such net sales. The impact of
an 8.1% volume decline in net pounds of NTC's brands in the Company's smokeless
tobacco segment was partially offset by an 8.9% volume gain in net pounds of
Stoker brands and by the two price increases on the Company's NTC brands
described above.
Net sales of the Company's MYO segment increased $4.8 million or 10.3% in
comparison to the corresponding period of the prior year. Within the MYO
segment, premium cigarette paper sales decreased $0.2 million or 0.6% from the
corresponding period of the prior year due to a reduction in promotional
activity and a focus on maintaining prices to enhance the longer-term
profitability. The MYO cigarette tobacco and related products net sales
increased by $5.0 million or 40.3% in comparison to the corresponding period of
the prior year, with the Stoker acquisition accounting for $5.8 million of such
net sales.
Gross Profit. Gross profit for the nine months ended September 30, 2004 totaled
$46.9 million, an increase of $6.0 million or 14.7% from the corresponding
period of the prior year due to the increase in net sales described above.
Gross profit of the smokeless tobacco segment increased $3.8 million or 26.6%
from the corresponding period of the prior year due principally to the Stoker
acquisition. Gross margin for this segment decreased 5.7% to 47.9% of net sales
for the current period from the corresponding period of the prior year due
principally to greater sales of lower margin Stoker products coupled with higher
manufacturing costs per case which, together, were partially offset by the
Company's two price increases on NTC's brands of approximately 5% each, which
occurred in the third quarters of 2003 and 2004.
Gross profit of the MYO segment for the current period increased $2.1 million or
7.9%, compared to the corresponding period of the prior year due primarily to
the increase in net sales associated with the Stoker acquisition. The gross
margin of the MYO segment decreased 1.3% to 55.9% of net sales for the current
25
period in comparison to the corresponding period of the prior year. This
reduction in gross margin was due principally to additional sales of the
relatively lower margin Stoker MYO cigarette tobacco and related products
coupled with higher manufacturing costs per case and, to a lesser extent, a
stronger Euro in comparison to the U.S. dollar.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses for the nine months ended September 30, 2004 were $27.0
million, an increase of $4.7 million or 21.1% compared to the corresponding
period of the prior year. Of this increase, $2.1 million was attributable to the
continuing investment in the development of the premium manufactured cigarette
segment, $2.1 to employee incentive payments made in connection with the
recapitalization and reorganization, $2.8 million relating to the integration of
Stoker's operations which were acquired on November 17, 2003 and $0.3 million
for employee recruitment costs, all of which were partially offset by the $2.9
million benefit due to the termination of the post-retirement benefit plan for
salaried employees.
Interest Expense and Amortization of Financing Costs. Interest expense and
financing costs were $19.3 million, an increase of $5.2 million or 36.5% for the
nine months ended September 30, 2004, as compared to the corresponding period of
the prior year. This increase was due principally to higher weighted average
outstanding indebtedness resulting from the previously detailed recapitalization
and reorganization.
Other Income (Expense). Other income of $5.0 million for the nine months ended
September 30, 2004 were attributable to recoveries relating to the Illinois
Complaint and to recoveries and awards associated with counterfeiting
litigation. Other expenses of $22.9 million for the nine months ended September
30, 2003 were due to the costs of $2.9 million associated with the termination
of the Star Cigarette Asset Purchase Agreement (see Note 12 to the Consolidated
Financial Statements contained herein) and to the incurrence of $18.8 million in
costs associated with the bonding of the verdict in the Illinois Complaint.
Income Tax Expense (Benefit). Income tax expense was $2.1 million for the nine
months ended September 30, 2004 compared to a benefit of $7.0 million for the
corresponding period of the prior year due primarily to the other income of $5.0
million, described above. The effective income tax rate for both periods was
38.0%.
Net Income (Loss). Due to the factors described above, the net income for the
nine months ended September 30, 2004 was $3.5 million compared to a net loss of
$11.4 million for the corresponding period of the prior year.
LIQUIDITY AND CAPITAL REQUIREMENTS
At September 30, 2004, working capital was $60.4 million compared to $34.4
million at December 31, 2003. The higher working capital position was the result
of higher cash balances and increased other current assets relating to
recoveries in connection with the Illinois verdict (see Note 13 to the Financial
Statements contained herein) and to recoveries associated with the
counterfeiting litigation (also see Note 13) and the refinancing of the
revolving credit facility (see Note 6 to the Financial Statements contained
herein), which were partially offset by lower accounts payable and accrued
expenses.
26
As more fully discussed below (under "Senior Revolving Credit Facility/New
Credit Agreement") and in Note 6 to the Consolidated Financial Statements
contained in Item 1 of this report, the Company anticipates that it will not
likely meet its fixed charge ratio requirement under the New Credit Agreement
(as defined below) for the rolling four quarter periods to end March 31 and June
30, 2005. The Company is engaged in discussions with the lenders under the New
Credit Agreement with a view toward an amendment of the fixed charge coverage
ratio requirement that would enable the Company to be in compliance therewith.
Although there can be no assurance, the Company believes that it will be able to
negotiate a satisfactory amendment. However, if a satisfactory amendment is not
achieved and the covenant is not satisfied, the Company would be in default
under the New Credit Agreement and the lenders thereunder would have the right
to accelerate payment of all obligations thereunder. Such acceleration would
also trigger an event of default under the indentures governing the Senior Notes
(as defined in Note 2 to the Financial Statements contained herein) and the
Parent Notes (as defined in Note 2 to the Financial Statements contained herein)
and potential acceleration of the obligations thereunder. In the event of an
acceleration of the obligations under either the New Credit Agreement or Senior
Notes, the Company would not be able to satisfy its obligations and would likely
be required to seek protection from its creditors under applicable laws.
The Company expects to be able to fund its seasonal working capital requirements
through its operating cash flows and, if needed and subject to its ability to be
in compliance with the New Credit Agreement, bank borrowings under the Senior
Revolving Credit Facility (as defined in Note 2 to the Financial Statements
contained herein). As of September 30, 2004, the Company had additional
availability of $15.2 million under its committed $50.0 million Senior Revolving
Credit Facility.
For the nine months ending September 30, 2004, capital expenditures totaled
approximately $1.3 million. The Company believes that its capital expenditure
requirements for 2004 will be approximately $6.0 million due to costs associated
with the consolidation of its manufacturing locations, the purchasing of certain
manufacturing equipment and the continuing investment in data and related
systems.
The Company believes that it will be able to fund its capital expenditure
requirements from operating cash flows and, if needed and subject to its ability
to be in compliance with the New Credit Agreement, borrowings under the Senior
Revolving Credit Facility, should be adequate to satisfy its reasonably
foreseeable operating capital requirements.
On February 17, 2004, the Company consummated the refinancing of its existing
debt and preferred stock. The refinancing consisted principally of (1) the
offering and sale of the New Senior Notes, (2) entering into the Senior
Revolving Credit Facility, (3) the concurrent sale of the Parent Notes and (4)
the repayment of $30.7 million in notes payable relating principally to the
acquisition of Stoker, Inc. (see Note 11 to the Financial Statements contained
herein).
NEW SENIOR NOTES
The New Senior Notes are senior unsecured obligations of the Company and will
mature on March 1, 2012. The New Senior Notes bear interest at the rate of 9
1/4% per annum from the date of issuance, or from the most recent date to which
interest has been paid or provided for, and is payable semiannually on March 1
and September 1 of each year, commencing on September 1, 2004. Each of the
Company's existing subsidiaries jointly and severally guarantees the New Senior
27
Notes on a senior unsecured basis. Each of the Company's future subsidiaries
(other than those designated unrestricted subsidiaries) will jointly and
severally guarantee the New Senior Notes on a senior unsecured basis. The
Company is not required to make mandatory redemptions or sinking fund payments
prior to the maturity of the New Senior Notes.
On and after March 1, 2008, the New Senior Notes will be redeemable, at the
Company's option, subject to meeting certain requirements in the New Credit
Agreement, in whole at any time or in part from time to time, upon not less than
30 nor more than 60 days prior notice at the following redemption prices
(expressed in percentages of principal amount), if redeemed during the 12-month
period commencing March 1 of the years set forth below, plus accrued and unpaid
interest to the redemption date (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant interest
payment date):
YEAR REDEMPTION PRICE
---- ----------------
2008 104.625%
2009 102.313%
2010 and thereafter 100.000%
In addition, prior to March 1, 2008, the Company may redeem the New Senior
Notes, at its option, subject to meeting certain requirements in the New Credit
Agreement, in whole at any time or in part from time to time, upon not less than
30 nor more than 60 days prior notice at a redemption price equal to 100% of the
principal amount of the New Senior Notes redeemed plus a "make-whole" premium
based on U.S. Treasury rates as of, and accrued and unpaid interest to, the
applicable redemption date.
Further, at any time prior to March 1, 2007, the Company may, at its option,
subject to meeting certain requirements in the New Credit Agreement, redeem up
to 35% of the aggregate principal amount of the New Senior Notes with the net
cash proceeds of one or more equity offerings by Parent or the Company, subject
to certain conditions, at a redemption price equal to 109.250% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided, however, that after any such redemption at least 65% of
the aggregate principal amount of the New Senior Notes issued under the
Indenture remains outstanding. In order to affect the foregoing redemption with
the proceeds of any equity offering, the Company shall make such redemption not
more than 60 days after the consummation of any such equity offering.
PARENT NOTES
Concurrently with the offering of the New Senior Notes, Parent issued $97.0
million aggregate amount at maturity of the Parent Notes. The net proceeds of
approximately $53.8 million from this issuance were used to make a capital
contribution to the Company. The Parent Notes are Parent's senior obligations
and are unsecured. The Parent Notes are not guaranteed by the Company or any of
its subsidiaries and are structurally subordinated to all of the Company and its
subsidiaries' obligations, including the New Senior Notes and the Senior
28
Revolving Credit Facility. Parent is not required to make mandatory redemptions
or sinking fund payments prior to the maturity of the Parent Notes.
Parent is dependent on the Company's cash flows to service its debt. The amount
of cash interest to be paid by the Parent during the next five years is as
follows: $0 in each of 2004, 2005, 2006, 2007 and March 1, 2008; $5,941 payable
on September 1, 2008 and $5,941 payable on each of March 1 and September 1
thereafter until maturity.
SENIOR REVOLVING CREDIT FACILITY / NEW CREDIT AGREEMENT
In connection with the refinancing, the Company also amended and restated its
existing credit facility, creating the new Senior Revolving Credit Facility of
$50.0 million (reducing to $40.0 million in August 2005) with Bank One, N.A., as
agent (the "Agent Bank"), and LaSalle Bank, National Association. The credit
agreement (the "New Credit Agreement") governing the new Senior Revolving Credit
Facility includes a letter of credit sublimit of $25.0 million and terminates
three years from the closing date. The Company intends to use the Senior
Revolving Credit Facility for working capital and general corporate purposes. As
of September 30, 2004, the Company had borrowed $34.8 million under the Senior
Revolving Credit Facility. As of December 31, 2003, the Company had borrowed
$6.3 million under the prior revolving credit facility.
Indebtedness under the New Credit Agreement is guaranteed by each of the
Company's current and future direct and indirect subsidiaries, and is secured by
a first perfected lien on substantially all of the Company's and the Company's
direct and indirect subsidiaries' current and future assets and property. The
collateral includes a pledge by Parent of its equity interest in the Company and
a first priority lien on all equity interests and intercompany notes held by the
Company and each of its subsidiaries.
Each advance under the New Credit Agreement will bear interest at variable rates
plus applicable margins, based, at the Company's option, on either the prime
rate or LIBOR. The New Credit Agreement provides for voluntary prepayment,
subject to certain exceptions, of loans. In addition, without the prior written
consent of the Agent Bank, the Company will not allow a Change in Control (as
defined in the New Credit Agreement), the sale of any material part of its
assets and the assets of its subsidiaries on a consolidated basis or, subject to
certain exceptions, the issuance of equity or debt. As of September 30, 2004,
the weighted average interest rate on borrowings under the New Credit Agreement
was approximately 4.8%.
Under the New Credit Agreement, the Company is required to pay an annual
commitment fee in variable amounts ranging from 0.50% to 0.65% of the difference
between the commitment amount and the average usage of the facility, payable on
a quarterly basis, on the undrawn and unused portion of the credit facility.
The New Credit Agreement requires the Company and its subsidiaries to meet
certain financial tests: a minimum consolidated Adjusted EBITDA for the six
months ending June 30, 2004 and the nine months ending September 30, 2004 and
beginning December 31, 2004, a four-quarter rolling minimum fixed charge
coverage ratio, as defined in the new Credit Agreement. The New Credit Agreement
also contains covenants which, among other things, limit the incurrence of
additional indebtedness, dividends, transactions with affiliates, asset sales,
acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances
and other matters customarily restricted in such agreements. In addition, the
29
New Credit Agreement requires that certain members of executive management
remain active in the day-to-day operation and management of the Company and its
subsidiaries during the term of the facility.
The New Credit Agreement contains customary events of default, including payment
defaults, breach of representations and warranties, covenant defaults,
cross-acceleration, cross-defaults to certain other indebtedness, certain events
of bankruptcy and insolvency, the occurrence of a Change in Control and judgment
defaults.
The receivable from Parent of approximately $2.5 million at September 30, 2004,
relates principally to the assumption of certain obligations, including warrants
and stock options, net of deferred financing costs transferred to Parent.
The Company satisfied the minimum consolidated Adjusted EBITDA financial
covenant test for the nine months ending September 30, 2004.
Looking forward, due to the lower than anticipated operating performance of the
Company's core businesses, increased expenses resulting from the Company's
decision to proceed more quickly with developmental activities relating to
Zig-Zag Premium Cigarettes and the Company's decision to proceed more slowly
with the integration of the operations of Stoker, Inc. (acquired in November
2003) with a view toward achieving greater overall cost savings, the Company
currently anticipates that it will not likely meet the fixed charge coverage
ratio test contained in the New Credit Agreement for the rolling three-month
periods ended March 31 and June 30, 2005. The Company is currently engaged in
discussions with the lenders under the New Credit Agreement with a view towards
amending the fixed charge coverage ratio test in order to enable the Company to
remain in compliance therewith. Although there can be no assurance, the Company
believes that it will be able to negotiate such an amendment on terms reasonably
acceptable to the Company. However, if such an amendment or waiver is not able
to be obtained and the covenant is breached, then the Company would be in
default under the New Credit Agreement and the lenders thereunder would have the
right to accelerate payment of all obligations thereunder. Such an acceleration
would also trigger an event of default under the indentures governing the Senior
Notes and the Parent Notes. In the case of both the Senior Notes and the Parent
Notes, the trustee or the holders of at least 25% in principal amount at
maturity of such notes would have the right, following an event of default, to
declare the obligations thereunder, including accrued and unpaid interest, to be
due and payable immediately. In the event of an acceleration of its obligations
under either the New Credit Agreement or Senior Notes, the Company would not be
able to satisfy its obligations and would likely be required to seek protection
from its creditors under applicable laws.
CONTRACTUAL CASH OBLIGATIONS
The following table summarizes the Company's contractual cash obligations,
excluding interest expenses, at September 30, 2004, after giving effect to the
refinancing of the Company's existing debt and preferred stock (in thousands):
30
CONTRACTUAL CASH LESS AFTER
OBLIGATIONS TOTAL THAN 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- ----------------------------------- ----------------- ----------------- -------------- -------------- -----------------
New Senior Notes $ 200,000 $ - $ - $ - $ 200,000
Senior Revolving Credit Facility 34,800 - 34,800 - -
Operating leases 3,862 760 1,161 614 1,327
----------------- ----------------- -------------- -------------- -----------------
$ 238,662 $ 760 $35,961 $ 614 $ 201,327
================= ================= ============== ============== =================
The Company believes that its operating cash flows, together with the Senior
Revolving Credit Facility, should be adequate to satisfy its reasonably
foreseeable operating capital requirements. As indicated above, availability of
the Senior Revolving Credit Facility will be subject to the Company's ability to
be in compliance with the New Credit Agreement.
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; prevailing changes in consumer preferences; consumer
acceptance of new product introductions and other marketing initiatives; market
acceptance of the Company's distribution programs; access to sufficient
quantities of raw material or inventory to meet any sudden increase in demand;
disruption to historical 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have not been any significant changes with respect to quantitative and
qualitative disclosures about market risk from that previously disclosed in the
Company's Form 10-K for the year ended December 31, 2003.
31
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of September 30, 2004. Based on their evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of September 30,
2004.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15-d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended September 30, 2004, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LITIGATION WITH REPUBLIC TOBACCO
On July 15, 1998, North Atlantic Operating Company, Inc. ("NAOC") and National
Tobacco Company, L.P. ("NTC") filed a complaint (the "Kentucky Complaint")
against Republic Tobacco, Inc. and its affiliates ("Republic Tobacco") in
Federal District Court for the Western District of Kentucky. Republic Tobacco
imports and sells Roll-Your-Own ("RYO") premium cigarette papers under the brand
names JOB and TOP as well as other brand names. The Kentucky Complaint alleges,
inter alia, that Republic Tobacco's use of exclusivity agreements, rebates,
incentive programs, buy-backs and other activities related to the sale of
premium cigarette papers in the southeastern United States violate federal and
state antitrust and unfair competition laws and that Republic Tobacco defaced
and directed others to deface NAOC's point of purchase vendor displays for
premium cigarette papers by covering up the ZIG-ZAG brand name and advertising
material with advertisements for Republic Tobacco's RYO cigarette paper brands.
The Kentucky Complaint alleges that these activities constitute unfair
competition under federal and state laws.
On June 30, 1998, Republic Tobacco filed a complaint against the Company, NAOC
and NTC in the U.S. District Court of the Northern District of Illinois (the
"Illinois Complaint") and served it on the Company after the institution of the
Kentucky action. In the Illinois Complaint, Republic Tobacco seeks declaratory
relief with respect to the Company's claims. In addition, the Illinois Complaint
alleges that certain actions taken by the Company to inform its customers of its
claims against Republic Tobacco constitute tortuous 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 but in its amended
complaint, Republic Tobacco alleged that the Company has unlawfully monopolized
and attempted to monopolize the market on a national and regional basis for
32
premium cigarette papers. Republic sought unspecified compensatory damages,
injunctive relief and attorneys fees and costs.
On October 20, 2000, Republic Tobacco filed a motion to dismiss, stay, or
transfer the Kentucky Complaint to the Illinois Court. On December 19, 2000, the
Court denied Republic Tobacco's motion, holding that it was premature. The Court
noted also that it had communicated with the Court in Illinois and that it had
concluded that Republic Tobacco may not be entitled to any preference on forum
selection, which would ordinarily be given because it was first to file. The
Kentucky complaint is still on file.
Prior to the completion of discovery, the Court dismissed Republic Tobacco's
antitrust claims against the Company. After discovery was completed in 2001,
both parties moved for summary judgment on the others claims. In April 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 and its affiliates, except for Republic Tobacco's claim of defamation
per se against the Company, on which it granted summary judgment on liability in
favor of Republic Tobacco, and a Lanham Act false advertising claim, based on
the same facts as the defamation claim, for equitable relief. In February 2003,
the District Court granted Republic's motion for summary judgment on the
Company's counterclaim that Republic tortuously interfered with the Company's
business relationships and economic advantage. The only claim that remained to
be tried was Republic's Lanham Act claim and damages on the defamation claim on
which the Court previously ruled that Republic could only obtain equitable
relief if successful.
On July 8, 2003, following a four-day trial, an Illinois jury returned a verdict
in favor of Republic on the defamation claims of $8.4 million in general damages
and $10.2 million in punitive damages, for a total damage award of $18.6
million. The Company recorded an $18.8 million charge during the second quarter
2003 relating to this transaction. The Company filed post-trial motions for a
new trial and, in the alternative, for a reduction of the awards. On August 1,
2003, the Company posted a judgment bond in the amount of $18.8 million with the
U.S. District Court. This was accomplished by obtaining a $19.0 million senior
secured term loan pursuant to a July 31, 2003 amendment to the Company's
existing credit facility. On November 20, 2003, the court ruled that the awards
were excessive and reduced the awards by approximately 60%, with the award of
compensatory damages being reduced to $3.36 million and the award of punitive
damages being reduced to $4.08 million, for a total of $7.44 million. On
December 18, 2003, Republic accepted these reduced awards. The Company reversed
$11.16 million during the fourth quarter 2003 due to this court ruling.
On January 8, 2004, the Company appealed the final judgment, including the
finding of liability in this case as well as the amount of the award. On January
22, 2004, Republic filed a general notice of cross appeal and argued in its
appellate briefs that the judgment should be affirmed and also asserted, in its
cross-appeal, that the original judgment should be reinstated despite its
acceptance of the District Court's order reducing the judgment amount.
On September 1, 2004, the Court of Appeals issued its ruling affirming the
finding of liability against the Company for defamation, but reducing the amount
of the damage award to $3.0 million. The Court of Appeals also affirmed the
dismissal of the Company's antitrust claim against Republic and the dismissal of
Republic's motion to re-instate the original jury award of $18.8 million. As a
result of these rulings, in October 2004 the Company received approximately $4.5
33
million relating to the cash bond it had posted with the Court in 2003. This
amount was included in Other income as of September 30, 2004.
The Company has also applied to the Court of Appeals for an order awarding the
Company approximately $1.0 million for the difference in the expense of the
original bond of $18.8 million and the subsequent reduced bond of $7.0 million,
on the one hand, and the lesser expense the Company would have incurred to bond
the final $3.0 million judgment, on the other hand. That motion has been fully
briefed and the parties are waiting for the Court to rule.
LITIGATION RELATED TO COUNTERFEITING
Texas Infringing Products Litigation. In Bollore, S.A. v. Import Warehouse,
Inc., Civ. No. 3-99-CV-1196-R (N.D. Texas), Bollore, the Company's Licensor of
ZIG-ZAG brand premium cigarette papers, obtained a sealed order allowing it to
conduct a seizure of infringing and counterfeit ZIG-ZAG products in the United
States. On June 7, 1999, seizures of products occurred in Michigan and Texas.
Subsequently, all named defendants have been enjoined from buying and selling
such infringing or counterfeit goods. Bollore and the Company negotiated
settlements with all defendants. These defendants included Import Warehouse,
Ravi Bhatia, Tarek Makki and Adham Makki. Those settlements included a consent
injunction against distribution of infringing or counterfeit goods.
On May 18, 2001, the Company, in conjunction with Bollore, conducted raids on
the businesses and homes of certain defendants previously enjoined (including
Tarek Makki and Adham Makki) from selling infringing or counterfeit ZIG-ZAG
brand products in the Bollore S.A. v. Import Warehouse litigation. Evidence was
uncovered that showed that these defendants and certain other individuals were
key participants in importing and distributing counterfeit ZIG-ZAG premium
cigarette papers. After a two day hearing in the U.S. District Court for the
Northern District of Texas, on May 30, 2001, the Court held the previously
enjoined defendants in contempt of court, and enjoined the additional new
defendants, including Ali Makki, from selling infringing or counterfeit ZIG-ZAG
premium cigarette papers.
The Company entered into a settlement with the 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
$11.0 million from the civil contempt order and an agreement to forbear from
enforcing that $11.0 million money judgment until such time in the future that
the defendants violate the terms of the permanent injunction. Two of the
defendants, Tarek Makki and Adham Makki, 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.
On February 17, 2004, the Company and Bollore filed a motion in the U.S.
District Court for the Northern District of Texas, which had issued the original
injunctions against the infringing defendants, seeking, with respect to
respondents Adham Makki, Tarek Makki and Ali Makki, to have the $11.0 million
judgment released from the forbearance agreement and to have the named
respondents held in contempt of court. The motion alleged that the three
respondents had trafficked in counterfeit ZIG-ZAG cigarette papers after the
execution of the settlement, citing evidence that all three had been charged in
the United States District Court for the Eastern District of Michigan with
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criminal violations of the United States counterfeiting laws by trafficking in
counterfeit ZIG-ZAG cigarette papers, which trafficking occurred after the
settlement agreement.
On April 13, 2004, the Court entered an order (the "Contempt 2 Order"), finding
Ali Mackie, Tarek Makki, Adham Mackie and their companies Best Price Wholesale
(the "Makki Defendants") and Harmony Brands LLC in civil contempt, freezing all
of their assets, releasing the July 12, 2002 Final Judgment of $11.0 million
from the forbearance agreement as to the Makki Defendants, and again referring
the matter to the United States Attorney for Criminal Prosecution. Subsequent to
the entry of the Contempt 2 Order, the Company settled with defendant Harmony
Brands and its members for the amount of $750,000 and the entry of a permanent
injunction. The Company is seeking to execute on the outstanding $11.0 million
judgment against the remaining Makki Defendants and those efforts are currently
underway.
Pursuant to the U.S. Distribution Agreement and a related agreement between
Bollore and the Company, any collections on the judgments issued in the Bollore
v. Import Warehouse case are to be divided evenly between Bollore and the
Company after the payment of all expenses.
On February 7, 2002, Bollore, NAOC and the Company filed a motion with the
District Court in the Texas action seeking to hold Ravi Bhatia and Import
Warehouse Inc. in contempt of court for violating the terms of the consent order
and injunction entered against those defendants. The Company alleges that Mr.
Bhatia and Import Warehouse sold counterfeit goods to at least three different
companies over an extended period of time. On June 27, 2003, the Court found
Import Warehouse and Mr. Bhatia in contempt of court for violating an existing
injunction barring those parties from distributing infringing ZIG-ZAG cigarette
paper products. The Court requested that the Company and Bollore (the Company's
co-plaintiff in the case) file a submission detailing the damages incurred. The
Company and Bollore filed their submission on July 25, 2003 which reported and
requested damages of $2.4 million.
On July 1, 2004, the Court issued an Order awarding approximately $2.5 million
in damages to the Company for the damages incurred by the Company as a result of
the Import Warehouse Defendants' civil contempt. On July 15, 2004, the Court
entered a Final Judgment in that amount for which defendants Import Warehouse,
Inc. and Ravi Bhatia are jointly and severally liable. After the Company and
Bollore commenced collection proceedings, Import Warehouse paid the Company and
Bollore an amount equal to the entire judgment plus the expenses incurred in
collection. Accordingly, approximately $1.2 million has been recorded in Other
income as of September 30, 2004. The Import Warehouse Defendants filed a notice
of appeal on July 24, 2004. No briefing schedule has been established.
LITIGATION RELATED TO ALLEGED PERSONAL INJURY
Trial of the West Virginia complaints against the smokeless tobacco defendants
has been postponed indefinitely, as described below. On October 6, 1998 NTC was
served with a summons and complaint on behalf of 65 individual plaintiffs 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-240l). On November 13, 1998, NTC was served with a second summons and
complaint on behalf of 18 plaintiffs 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). The complaints
35
are identical in most material respects. In the Allen case, the plaintiffs have
specified the defendant companies for each of the 65 cases. NTC is named in only
one action. One Akers plaintiff alleged use of an NTC product, alleging lung
cancer.
On September 14, 2000, NTC was served with a summons and complaint on behalf of
539 separate plaintiffs filed in Circuit Court of Ohio County, West Virginia,
entitled Linda Adams, et al. v. Philip Morris Inc., et al. (Civil Action Nos.
00-C-373 to 00-C-911). Only one of these plaintiffs alleged use of a product
currently manufactured by NTC. The time period during which this plaintiff
allegedly used the product has not yet been specified. Thus, it is not yet known
whether NTC is a proper defendant in this case.
On September 19, 2000, NTC was served with a second summons and complaint on
behalf of 561 separate plaintiffs filed in Circuit Court of Ohio County, West
Virginia, entitled Ronald Accord, et al. v. Philip Morris Inc., et al. (Civil
Action Nos. 00-C-923 to 00-C-1483). A total of five of these plaintiffs alleged
use of a product currently manufactured by NTC. One of these plaintiffs does not
specify the time period during which the product was allegedly used. Another
alleges use that covers, in part, a period when NTC did not manufacture the
product. On motion by cigarette company defendants, this claim was dismissed on
February 11, 2004, for failure to follow the case management order. Of the
remaining three, one alleges consumption of a competitor's chewing tobacco from
1966 to 2000 and NTC's Beech-Nut chewing tobacco from 1998 to 2000; another
alleges a twenty-four year smoking history ending in 1995 and consumption of
Beech-Nut chewing tobacco from 1990 to 1995; and the last alleges a thirty-five
year smoking history ending in 2000, and consumption of NTC's Durango Ice
chewing tobacco from 1990 to 2000 (although Durango Ice did not come onto the
market until 1999).
In November 2001, NTC was served with an additional four separate summons and
complaints in actions filed in the Circuit Court of Ohio County, West Virginia.
The actions are entitled Donald Nice v. Philip Morris Incorporated, et al.
(Civil Action No. 01-C-479), Korene S. Lantz v. Philip Morris Incorporated, et
al. (Civil Action No. 01-C-480), Ralph A. Prochaska, et al. v. Philip Morris,
Inc., et al. (Civil Action No. 01-C-481), and Franklin Scott, et al. v. Philip
Morris, Inc., et al., (Civil Action No. 0l-C-482).
All of the West Virginia smokeless tobacco actions have been consolidated before
the West Virginia Mass Litigation Panel for discovery and trial of certain
issues. Trial of these matters was planned in two phases. In the initial phase,
a trial was to be held to determine whether tobacco products, including all
forms of smokeless tobacco, cigarettes, cigars and pipe and roll-your-own
tobacco, can cause certain specified diseases or conditions. In the second
phase, individual plaintiffs would attempt to prove that they were in fact
injured by tobacco products. Fact and expert discovery in these cases has
closed, however, in the cigarette cases the Court has allowed additional
discovery.
The claims against NTC in the various consolidated West Virginia actions include
negligence, strict liability, fraud in differing forms, conspiracy, breach of
warranty and violations of the West Virginia consumer protection and antitrust
acts. The complaints in the West Virginia cases request unspecified compensatory
and punitive damages.
The manufacturers of smokeless tobacco products (as well as the manufacturers of
cigarettes) moved to sever the claims against the smokeless tobacco manufacturer
defendants from the claims against the cigarette manufacturer defendants. That
36
motion was granted and the trial date on the smokeless tobacco claims has now
been postponed indefinitely.
The trial court has now vacated the initial trial plan in its entirety because
of concerns that its provisions violated the dictates of the United States
Supreme Court's decision in State Farm Mutual Automobile Insurance Company v.
Campbell, 538 U.S. 408 (2003). A new trial plan has not yet been implemented
with regard to the consolidated claims against the cigarette manufacturer
defendants. The claims against the smokeless tobacco manufacturer defendants
remain severed and indefinitely stayed.
Minnesota Complaint. On September 24, 1999, NTC was served with a complaint in a
case entitled Tuttle v. Lorillard Tobacco Company, et al. (Case No. C2-99-7105),
brought in Minnesota. The other manufacturing defendants are Lorillard and The
Pinkerton Tobacco Company. The Complaint alleges that plaintiff's decedent was
injured as a result of using NTC's (and, prior to the formation of NTC,
Lorillard's) Beech-Nut brand and Pinkerton's Red Man brand of loose-leaf chewing
tobacco. Plaintiff asserts theories of liability, breach of warranty, fraud, and
variations on fraud and misrepresentation. Plaintiff specifically requests in
its complaint an amount of damages in excess of fifty thousand dollars ($50,000)
along with costs, disbursements and attorneys' fees, and ". . . an order
prohibiting defendants from disseminating in Minnesota further misleading
advertising and making further untrue, deceptive and/misleading statements about
the health effects and/or addictive nature of smokeless tobacco products. . . ."
After discovery, summary judgment motions were filed on behalf of all
defendants. On March 3, 2003, the Court granted defendants' motions, dismissing
all claims against all defendants and the Court has since denied the plaintiff's
motion for reconsideration. Plaintiff has appealed the dismissal. Briefing has
been completed. Oral argument before the Court of Appeals was held on February
11, 2004. On July 30, 2004, the Court of Appeals affirmed the dismissal of all
of the claims.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
31.1 Certification by the Chief Executive Officer pursuant to
rule 13-14(a) or 15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to
rule 13-14(a) or 15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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) None
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH ATLANTIC TRADING COMPANY, INC.
Date: November 15, 2004 /s/ Thomas F. Helms, Jr.
----------------------------------------
Thomas F. Helms, Jr.
Chief Executive Officer
/s/ David I. Brunson
----------------------------------------
David I. Brunson
Chief Financial Officer
38