FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number 333-31931
NORTH ATLANTIC TRADING COMPANY, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3961898
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
257 Park Avenue South
New York, New York 10010-7304
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 253-8185
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Unchanged
----------------------------------------------------
(Former name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 528,241 shares of common stock,
$.01 par value, as of September 30, 1997.
NYFS10...:\80\64980\0003\1948\FRM9307K.02G
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands except share data)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-----------------------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $2,208 $10,007
Accounts Receivable 3,533 5,476
Inventory 42,020 52,771
Income Taxes Receivable 3,006
Other Current Assets 3,412 2,494
---------- -----------
Total Current Assets 51,173 73,754
Property, Plant & Equipment (Net) 9,006 8,325
Deferred Income Taxes 33,097
Goodwill (Net) 31,448 148,689
Other Assets 4,926 13,235
---------- -----------
Total Assets $96,553 $277,100
========== ===========
Current Liabilities:
Accounts Payable $449 $2,005
Accrued Liabilities 3,754 11,558
Current Portion of Long-Term Debt 21,720 10,000
---------- -----------
Total Current Liabilities 25,923 23,563
Long-Term Debt 48,976 227,500
Deferred Income Taxes 11,158
Other Long-Term Liabilities 5,846 5,846
---------- -----------
Total Liabilities 80,745 268,067
---------- -----------
Preferred Stock (Mandatory Redemption Value of $34,929) 33,462
Preferred Interests 2,738
Warrants 8,195
---------- -----------
Stockholders' Equity:
Common Stock, voting, $.01 par value; authorized
shares, 750,000; issued and outstanding shares,
528,241 at September 30, 1997 5
Common Stock, nonvoting, $.01 par value; authorized
shares, 750,000; issued and outstanding shares,
-0- at September 30, 1997
Warrants 2,410
Additional Paid-In Capital 5,204
Retained Earnings (Accumulated Deficit) 4,875 (32,048)
---------- -----------
Total Stockholders' Equity 4,875 (24,429)
---------- -----------
Total Liabilities and Stockholders' Equity $96,553 $277,100
========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
The
Predecessor The Company
-----------------------------------------------------
Period from Period from Period from
January 1 to May 18, to January 1, to
May 17, 1996 Sept. 30, 1996 Sept. 30, 1997
-----------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Net Sales $19,810 $22,699 $52,962
Cost of Sales 7,847 7,721 18,341
---------- ----------- ----------
Gross Profit 11,963 14,978 34,621
Selling, General & Administrative Expenses 8,018 8,387 18,726
Amortization of Goodwill 365 776 1,924
---------- ----------- ----------
Operating Income 3,580 5,815 13,971
Interest Expense & Financing Costs, Net 2,453 3,319 11,900
Other Income 5 67 58
---------- ----------- ----------
Income Before Income Taxes and
Extraordinary Loss 1,132 2,563 2,129
Income Tax Provision 6,342
---------- ----------- ----------
Income (Loss) Before Extraordinary Loss 1,132 2,563 (4,213)
Extraordinary Loss (Net of Tax Benefit of $3,224) (8,262)
---------- ----------- ----------
Net Income (Loss) $1,132 $2,563 (12,475)
========== ===========
Preferred Stock Dividends 1,149
---------
Net Loss Applicable to Common Shares ($13,624)
=========
Net Loss Before Extraordinary Loss per Common Share ($10.15)
Extraordinary Loss, Net per Common Share (15.64)
---------
Net Loss per Common Share ($25.79)
=========
Weighted Average Common Shares Outstanding 528.2
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months Three months
ended ended
Sept. 30, 1996 Sept. 30, 1997
------------------------------------------
<S> <C> <C>
Net Sales $14,323 $27,024
Cost of Sales 4,748 9,041
----------- ----------
Gross Profit 9,575 17,983
Selling, General & Administrative Expenses 5,583 7,135
Amortization of Goodwill 445 1,458
----------- ----------
Operating Income 3,547 9,390
Interest Expense & Financing Costs, Net 2,284 6,705
Other Income 53 14
----------- ----------
Income Before Income Taxes 1,316 2,699
Income Tax Provision 1,322
----------- ----------
Net Income $1,316 1,377
===========
Preferred Stock Dividends 1,091
----------
Net Income Applicable to Common Shares and Common Share Equivalents $286
==========
Net Income per Common Share and Common Share Equivalents $0.48
==========
Weighted Average Common Shares and Common Share Equivalents Outstanding 600.2
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
The
Predecessor The Company
-----------------------------------------------
Period from Period from Period from
January 1 to May 18, to January 1, to
May 17, 1996 Sept. 30, 1996 Sept. 30, 1997
-----------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities: $1,132 $2,563 ($12,475)
Net Income (Loss)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By
(Used In) Operating Activities:
Depreciation 454 641 1,363
Amortization of Intangible Assets 365 301 1,926
Amortization of Deferred Financing Fees 258 446 1,552
Extraordinary Loss, Net of Tax Benefit of $3,244 8,262
Recognition of Deferred Income Taxes 5,017
Changes in Operating Assets and Liabilities:
Accounts Receivable (335) (815) (1,107)
Inventory (898) 2,661 2,204
Other Current Assets (647) 680 2,725
Accounts Payable 1,262 (1,200) 1,242
Borrowings Under Inventory Financing Agreement 2,797 6,565
Payments on Borrowings Under Inventory
Financing Agreement (2,285) (2,306) (23,526)
Accrued Expenses and Other (931) 949 (9,821)
----------- ---------- ------------
Net Cash Provided By (Used In)
Operating Activities 1,172 3,920 (16,073)
----------- ---------- ------------
Cash Flows From Investing Activities:
Acquisition of Business, Net of Cash Acquired
of $597 and $2,602, Respectively (72,145) (156,818)
Capital Expenditures (144) (127) (520)
----------- ---------- ------------
Net Cash Used In Investing Activities (144) (72,272) (157,338)
----------- ---------- ------------
Cash Flows from Financing Activities:
Proceeds from Revolving Loans 450 1,550
Payments on Revolving Loans (450) (1,550)
Proceeds from Senior Notes 155,000
Proceeds from Term Loans, Net of Discount
of $1,173 at September 30, 1996 43,827 85,000
Payments on Term Loans (3,125) (43,250)
Proceeds from Working Capital Loan 20,056
Payments on Working Capital Loan (19,022)
Proceeds from Subordinated Notes Payable,
Net of Discount of $6,503 at September 30, 1996 13,497 576
Payments on Subordinated Notes Payable (21,082)
Payment on Capital Lease (9)
Payments on Other Notes Payable and Long-Term Debt (2,011) (205)
Proceeds from Issue of Preferred Stock and Warrants 34,000
Proceeds from Preferred Interest 2,640
Proceeds from Warrants 8,195
Redemption of Warrants (27,000)
Increase in Preferred Interest 198
Redemption of Preferred Interest (2,935)
Capital Contributions 4,492 712
----------- ---------- ------------
Net Cash Provided By (Used In)
Financing Activities (977) 69,321 181,210
----------- ---------- ------------
Net Increase In Cash 51 969 7,799
Cash, Beginning of Period 128 2,208
----------- ---------- ------------
Cash, End of Period $179 $969 $10,007
=========== ========== ============
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE PRESENTED IN
ACCORDANCE WITH THE REQUIREMENTS OF FORM 10-Q AND CONSEQUENTLY DO NOT INCLUDE
ALL THE DISCLOSURES NORMALLY REQUIRED BY GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES. THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED
IN ACCORDANCE WITH NORTH ATLANTIC TRADING COMPANY, INC.'S (THE "COMPANY'S")
CUSTOMARY ACCOUNTING PRACTICES AND HAVE NOT BEEN AUDITED. IN THE OPINION OF
MANAGEMENT, ALL ADJUSTMENTS NECESSARY TO FAIRLY PRESENT THE RESULTS OF
OPERATIONS FOR THE REPORTED INTERIM PERIODS HAVE BEEN MADE AND WERE OF A NORMAL
RECURRING NATURE.
ON MAY 17, 1996, CERTAIN MEMBERS OF MANAGEMENT OF THE NATIONAL TOBACCO COMPANY,
L.P. (THE "PREDECESSOR") CAUSED THE PREDECESSOR TO BE RECAPITALIZED IN A
TRANSACTION ACCOUNTED FOR AS THE FORMATION OF A NEW ENTITY UNDER THE PURCHASE
METHOD OF ACCOUNTING. THE NEW ENTITY, NTC HOLDING, LLC AND SUBSIDIARIES WAS THEN
RECAPITALIZED AND REORGANIZED ON JUNE 25, 1997 IN CONJUNCTION WITH THE
ACQUISITION DESCRIBED BELOW, RESULTING IN THE FORMATION OF THE COMPANY.
2. ACQUISITION
ON JUNE 25, 1997, THE COMPANY ACQUIRED NATC HOLDINGS, USA, INC. ("NATC") FOR A
PURCHASE PRICE OF $162.6 MILLION. THE EXCESS OF THE PURCHASE PRICE OVER THE
ACQUIRED NET ASSETS OF $119.0 MILLION WAS RECORDED AS GOODWILL AND IS BEING
AMORTIZED OVER 25 YEARS. THE ACQUISITION WAS RECORDED UNDER THE PURCHASE METHOD
OF ACCOUNTING AND ACCORDINGLY, THE RESULTS OF OPERATIONS OF NATC SINCE THE DATE
OF ACQUISITION HAVE BEEN INCLUDED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS.
3. INVENTORIES
THE COMPANY USES THE LAST-IN, FIRST-OUT (LIFO) METHOD FOR VALUING ITS
INVENTORIES.
<TABLE>
<CAPTION>
(IN THOUSANDS)
9/30/97 12/31/96
------------ -------------
<S> <C> <C>
RAW MATERIALS AND WORK IN PROCESS $1,403 $1,756
LEAF TOBACCO 34,095 36,825
FINISHED GOODS - TOBACCO 4,260 3,439
FINISHED GOODS - CIGARETTE PAPERS 13,013
------------ -------------
$52,771 $42,020
============ =============
</TABLE>
4. PROVISION FOR INCOME TAXES
PRIOR TO JUNE 25, 1997, THE COMPANY WAS A LIMITED LIABILITY COMPANY AND PRIOR TO
MAY 17, 1996, THE PREDECESSOR WAS A PARTNERSHIP, NEITHER OF WHICH WERE SUBJECT
TO STATE OR FEDERAL INCOME TAXES. EFFECTIVE JUNE 25, 1997, THE COMPANY BECAME A
TAXABLE CORPORATION AND RECORDED A ONE-TIME NON-CASH PROVISION FOR INCOME TAXES
OF APPROXIMATELY $5.0 MILLION IN ORDER TO RECORD ITS PREVIOUSLY UNRECORDED
DEFERRED INCOME TAX ASSETS OF $3.1 MILLION AND LIABILITIES OF $8.1 MILLION.
THE ADDITIONAL PROVISION FOR INCOME TAXES FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1997 HAS BEEN COMPUTED BASED ON THE ESTIMATED EFFECTIVE INCOME TAX RATE FOR
THE PERIOD FROM JUNE 25, 1997 THROUGH DECEMBER 31, 1997, WHICH IS EXPECTED TO BE
49%. THE PRIMARY DIFFERENCE BETWEEN THE EFFECTIVE INCOME TAX RATE AND THE
STATUTORY INCOME TAX RATE IS GOODWILL AMORTIZATION RELATED TO THE NATC
ACQUISITION WHICH IS NOT DEDUCTIBLE FOR INCOME TAX PURPOSES.
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT
NORTH ATLANTIC TRADING COMPANY, INC. IS A HOLDING COMPANY WITH NO OPERATIONS AND
NO ASSETS OTHER THAN ITS INVESTMENT IN SUBSIDIARIES, INCOME TAX RECEIVABLES,
DEFERRED INCOME TAX ASSETS RELATED TO THE DIFFERENCES BETWEEN THE BOOK AND TAX
BASIS OF ITS INVESTMENT IN THE PARTNERSHIP AND DEFERRED FINANCING COSTS RELATED
TO ITS DEBT. ALL OF THE COMPANY'S SUBSIDIARIES ARE WHOLLY-OWNED AND GUARANTEE
THE COMPANY'S DEBT ON A FULL, UNCONDITIONAL AND JOINT AND SEVERAL BASIS. IN
MANAGEMENT'S OPINION, SEPARATE FINANCIAL STATEMENTS OF THE SUBSIDIARIES ARE NOT
MEANINGFUL TO INVESTORS AND ARE NOT INCLUDED IN THESE FINANCIAL STATEMENTS.
FOLLOWING IS UNAUDITED PARENT-ONLY SUMMARIZED FINANCIAL INFORMATION OF THE
COMPANY:
AS OF SEPTEMBER 30, 1997:
CURRENT ASSETS $1,916
NONCURRENT ASSETS 258,357
CURRENT LIABILITIES 14,880
NONCURRENT LIABILITIES 235,606
REDEEMABLE PREFERRED STOCK 33,462
FROM INCEPTION ON JUNE 25, 1997 THROUGH SEPTEMBER 30, 1997:
EQUITY IN EARNINGS OF SUBSIDIARIES $6,032
LOSS BEFORE EXTRAORDINARY LOSS (1,155)
6. NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT
NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT FOR THE THREE MONTH
PERIOD ENDED SEPTEMBER 30, 1997 IS BASED ON THE WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING DURING THE PERIOD, AFTER GIVING EFFECT TO THE ASSUMED
EXERCISE OF ALL DILUTIVE STOCK OPTIONS AND WARRANTS USING THE TREASURY STOCK
METHOD. NET LOSS PER COMMON SHARE FOR THE PERIOD JANUARY 1, 1997 THROUGH
SEPTEMBER 30, 1997 IS BASED ON THE WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD, EXCLUDING THE STOCK OPTIONS AND WARRANTS DUE TO
THEIR ANTI-DILUTIVE EFFECT.
7. CONTINGENCY
THE PARTNERSHIP HAS BEEN NAMED AS A DEFENDANT IN A PURPORTED CLASS ACTION FILED
ON JUNE 30, 1997 IN THE 33RD JUDICIAL DISTRICT COURT IN THE STATE OF LOUISIANA,
PARISH OF ALLEN, ENTITLED DOYLE V. UNITED STATES TOBACCO COMPANY, ET AL. THE
PETITION NAMED AS DEFENDANTS THE PARTNERSHIP, THREE OTHER MANUFACTURERS OF
SMOKELESS TOBACCO PRODUCTS AND A SUBSIDIARY OF ONE OF THE MANUFACTURERS. THE
ACTION HAS BEEN REMOVED TO THE UNITED STATES DISTRICT COURT FOR THE WESTERN
DISTRICT OF LOUISIANA, ALEXANDRIA DIVISION.
THE PETITION ALLEGES THAT THE PLAINTIFF, DOYLE, HAS BEEN ADDICTED TO TOBACCO
PRODUCTS AND, AS A RESULT OF THIS ADDICTION, HAS SUSTAINED ALLEGED
TOBACCO-RELATED ILLNESSES. THE PETITION DEFINES THE PROPOSED CLASS, IN PART, AS
"ALL LOUISIANA RESIDENTS OR FORMER LOUISIANA RESIDENTS WHO ARE OR WHO WERE
SMOKELESS TOBACCO USERS" OF PRODUCTS MANUFACTURED BY THE DEFENDANTS AND "WHO
DESIRE TO PARTICIPATE IN A PROGRAM DESIGNED TO ASSIST THEM IN THE CESSATION OF
USING SMOKELESS TOBACCO PRODUCTS AND/OR TO MONITOR THE MEDICAL CONDITION OF
CLASS MEMBERS TO ASCERTAIN WHETHER THEY MAY BE SUFFERING FROM DISEASES CAUSED
BY, CONTRIBUTED TO, OR EXACERBATED BY THE HABIT OF SMOKELESS TOBACCO USE."
THE PETITION SEEKS AN ORDER CERTIFYING THE PROPOSED CLASS, AND THE ESTABLISHMENT
OF A MEDICAL MONITORING FUND TO MONITOR THE HEALTH OF THE PLAINTIFFS AND CLASS
MEMBERS FOR THOSE DISEASES AND HEALTH RISKS ASSOCIATED WITH THE USE OF SMOKELESS
TOBACCO PRODUCTS AS WELL AS RECOVERY OF COSTS ASSOCIATED WITH SEEKING MENTAL
HEALTH COUNSELING AND/OR PSYCHIATRIC CARE TO ASSIST IN BREAKING THE NICOTINE
ADDICTION.
THE COMPANY BELIEVES THE CASE IS WITHOUT MERIT AND INTENDS TO DEFEND THIS ACTION
VIGOROUSLY.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
On June 25, 1997, the Company acquired all of the issued and outstanding
capital stock of NATC Holdings USA, Inc. ("NATC") (the "Acquisition"), at which
time NATC and its subsidiaries were merged into North Atlantic Operating
Company, Inc. ("NAOC"), a wholly-owned subsidiary of the Registrant. The
Acquisition was accounted for under the purchase method of accounting. The
aggregate acquisition purchase price of $162.6 million was allocated to the
acquired net assets based on the fair market value of such net assets.
RESULTS OF OPERATIONS
COMPARISON OF NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE AND
THREE MONTHS ENDED SEPTEMBER 30, 1996.
Net Sales. For the nine months ended September 30, 1997, consolidated
sales were $53.0 million, an increase of 24.6%, or $10.5 million, from the prior
year period. For the quarter ended September 30, 1997 consolidated sales were
$27.0 million, an increase of 88.7%, or $12.7 million from the prior year
period.
On June 25, 1997, the Company acquired NAOC and its operating results have been
included thereafter. Sales of NAOC since June 25, 1997 and for the quarter ended
September 30, 1997 were 23.9% and 46.6%, respectively, of the Company's
consolidated sales.
Sales of smokeless tobacco products for the nine months ended September 30, 1997
and the quarter ended September 30, 1997 decreased 5.2% and increased 0.9%,
respectively, reflecting a volume decrease of 8.7% and a volume increase of
0.5%, respectively, both of which were benefitted by price increases.
Gross Profits. Gross profit and gross profit percentage for
the nine months ended September 30, 1997 increased to $34.6
million or 65.4% of net sales compared to $26.9 million or 63.4%
<PAGE>
of net sales for the prior year's period. Gross profit and gross profit
percentage for the quarter ended September 30, 1997 were $18 million or 66.5% of
net sales, representing an 87.8% increase in gross profit from $9.6 million but
a slight decrease in gross profit percentage from 66.9%.
Currency. Currency movements are the primary adjustment factor for changes
in costs of goods sold for NAOC. NAOC purchases cigarette papers from Bollore,
on terms of net 45 days in French francs. Thus, NAOC bears certain foreign
exchange risks in its inventory purchases. To hedge this risk, NAOC began
utilizing the short-term forward currency market in 1997, through which NAOC
secures French francs in order to provide payment for its monthly purchases of
inventory. From June 30, 1997 to September 30, 1997, these forward purchases
have reduced NAOC's cost of goods sold by approximately $295,880. In addition,
Bollore provides a contractual hedge against substantial currency fluctuation in
its agreement with NAOC.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 1997 increased
14.1% to $18.7 million from last year's $16.4 million. Selling, general and
administrative expenses for the quarter ended September 30, 1997 increased 27.8%
to $7.1 million from $5.6 million. These increases were due to the addition of
three new members of senior management, an increase in legal fees, costs
associated with the relocation of the Company's executive offices and expenses
associated with the Company's membership in the Smokeless Tobacco Council.
Amortization of Intangible Assets. Amortization of intangible assets for
the nine months ended September 30, 1997 was $1.9 million compared to $1.1
million for the prior year's period and was $1.5 million for the quarter ended
September 30, 1997 compared to $0.5 million for the prior year's period. These
increases were due to the increase in intangible assets as a result of the
Acquisition.
Interest Expense and Financing Costs. Interest expense and financing costs
increased to $11.9 million for the nine months ended September 30, 1997 from
$5.8 million for the prior year period and to $6.7 million for the quarter ended
September 30, 1997 from $2.3 million for the prior year's period. These
increases were the result of additional indebtedness incurred in connection with
the Acquisition and related recapitalization.
Income Taxes. The income tax provision reflects the application of the
estimated effective tax rate of 49% based on
<PAGE>
projected earnings from June 25, 1997 to December 31, 1997. In addition, to
reflect the conversion of the ownership structure from a limited partnership to
a corporation, the income tax provision includes $5.0 million to record the
Company's net deferred tax liabilities as of June 25, 1997.
Net Income (Loss). Due to various costs incurred in connection with the
Acquisition and the recapitalization of the Company there was a net loss of
$12.5 million for the nine months ended September 30, 1997 compared to net
income for the prior year's period of $3.7 million. Net income increased to $1.4
million for the quarter ended September 30, 1997 from the prior year's period of
$1.3 million.
Extraordinary Item. The Company recorded an extraordinary loss of $8.3
million (net of income tax benefit of $3.2 million) related to the write-off of
deferred financing cost and the debt discount due to the recapitalization of the
Company on June 25, 1997.
LIQUIDITY AND CAPITAL REQUIREMENTS
At September 30, 1997, working capital was $50.2 million compared to $25.3
million at December 31, 1996. The Company will fund its seasonal working capital
requirements through its operating cash flows, and, if needed, bank borrowings.
The Company has an undrawn $25 million committed revolving credit facility.
The tobacco for loose leaf chewing tobacco requires aging of approximately
two years before being processed into finished products. The Company believes
that its National Tobacco Company, L.P. subsidiary maintains sufficient tobacco
inventories to ensure proper aging as well as an adequate supply based on its
historical sales activity. The Company also believes that its NAOC subsidiary
maintains adequate inventories and that the supply of such inventory will remain
stable for the foreseeable future.
The Company believes that any effect of inflation at current levels will
be minimal. Historically, the Company has been able to increase prices at a rate
greater than that of inflation and believes that it will be able to do so in the
foreseeable future. In addition, the Company has been able to maintain a stable
variable cost structure for its smokeless tobacco products in significant part
due to its procurement and reformulation activities.
Given its current operation, the Company believes that its capital
expenditure requirements will remain within the $400,000 to $500,000 range for
the next several years.
The Company believes that its operating cash flows, together with its
revolving credit facility, should be adequate to satisfy its reasonably
forseeable capital requirements. The financing of any significant future
products, business or property acquisitions may require additional debt or
equity financing.
<PAGE>
ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards No. 128
"Earnings per Share" for the year ended December 31, 1997. This accounting
pronouncement requires the disclosure of basic and diluted earnings per share.
The Company believes that, upon adoption, diluted earnings per share will
approximate earnings per share as previously reported. Because the concept of
basic earnings per share does not include the impact of common stock
equivalents, such as stock options and warrants, basic earnings per share will
be significantly higher than diluted earnings per share.
ITEM 3. Not Applicable
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
By written consent dated September 2, 1997, Helms Management Corporation,
as majority stockholder, approved the adoption of the Registrant's 1997 Share
Incentive Plan.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
b. Reports on Form 8-K
There were no reports on Form 8-K in the Third Quarter of 1997.
SIGNATURES
The Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1997 NORTH ATLANTIC TRADING COMPANY, INC.
/s/ Thomas F. Helms, Jr.
-----------------------------------------
Thomas F. Helms, Jr.
President & Chief Executive Officer
Date: November 14, 1997 /s/ David I. Brunson
-----------------------------------------
David I. Brunson
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from
the financial statements contained in the body of the accompanying
Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,007
<SECURITIES> 0
<RECEIVABLES> 5,476
<ALLOWANCES> 0
<INVENTORY> 52,771
<CURRENT-ASSETS> 73,754
<PP&E> 10,723
<DEPRECIATION> 2,398
<TOTAL-ASSETS> 277,100
<CURRENT-LIABILITIES> 23,563
<BONDS> 0
33,462
0
<COMMON> 5
<OTHER-SE> (24,434)
<TOTAL-LIABILITY-AND-EQUITY> 277,100
<SALES> 52,962
<TOTAL-REVENUES> 52,962
<CGS> 18,341
<TOTAL-COSTS> 18,341
<OTHER-EXPENSES> (58)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,900
<INCOME-PRETAX> 2,129
<INCOME-TAX> 6,342
<INCOME-CONTINUING> (4,213)
<DISCONTINUED> 0
<EXTRAORDINARY> (8,262)
<CHANGES> 0
<NET-INCOME> (12,475)
<EPS-PRIMARY> (25.79)
<EPS-DILUTED> 0
</TABLE>
