<PAGE>
Pursuant to Rule 424(b)(3)
Registration No. 333-31931
PROSPECTUS
NORTH ATLANTIC TRADING COMPANY, INC.
OFFER TO EXCHANGE 11% SENIOR NOTES DUE 2004, SERIES B FOR 11% SENIOR NOTES DUE
2004, SERIES A AND
12% SENIOR EXCHANGE PAYMENT-IN-KIND PREFERRED STOCK FOR 12% SENIOR
PAYMENT-IN-KIND PREFERRED STOCK.
------------------------------
The Exchange Offer will expire at 5:00 P.M., New York City time, on November 3,
1997, unless extended.
------------------------------
North Atlantic Trading Company, Inc., a Delaware corporation (the
'Company'), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the
'Exchange Offer'), to exchange (i) its 11% Senior Notes due 2004, Series B (the
'New Notes') for an equal principal amount of its outstanding 11% Senior Notes
due 2004, Series A (the 'Old Notes'), of which an aggregate principal amount of
$155,000,000 is outstanding as of the date hereof, and (ii) one share of its 12%
Senior Exchange Payment-In-Kind Preferred Stock (the 'New Preferred Stock') for
each outstanding share of its 12% Senior Payment-In-Kind Preferred Stock (the
'Old Preferred Stock'), of which 1,397,176.96 shares (which includes 37,176.96
shares that were paid in a dividend on September 15, 1997) are outstanding as of
the date hereof. The form and terms of each of the New Notes and the New
Preferred Stock will be the same in all material respects as the form and terms
of each of the Old Notes and the Old Preferred Stock, respectively, except that
(i) each of the New Notes and the New Preferred Stock will be registered under
the Securities Act of 1933, as amended (the 'Securities Act'), and hence will
not bear legends restricting the transfer thereof and (ii) holders of each of
the New Notes and the New Preferred Stock will not be entitled to certain rights
of holders of Old Notes under the Registration Rights Agreement dated as of June
25, 1997 (the 'Registration Rights Agreement') and Old Preferred Stock under the
Preferred Stock Registration Rights Agreement dated as of June 25, 1997 (the
'Preferred Stock Registration Rights Agreement,' and together with the
Registration Rights Agreement, the 'Registration Rights Agreements'),
respectively, both of which will terminate upon consummation of the Exchange
Offer. See 'The Exchange Offer--Purpose and Effect of the Exchange Offer.' Each
of the New Notes and the New Preferred Stock will be initially issued as a
single, permanent global certificate. See 'Book-Entry; Delivery and Form' and
'Descriptions of Notes.'
The Old Notes and the Old Preferred Stock were issued and sold in a
transaction exempt from the registration requirements of the Securities Act and
may not be offered or sold in the United States unless so registered or pursuant
to an applicable exemption under the Securities Act. The New Notes and the New
Preferred Stock are being offered herewith in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreements.
Based on no-action letters issued by the staff of the Securities and Exchange
Commission (the 'Commission') to third parties, the Company believes that the
New Notes and the New Preferred Stock to be issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by holders
thereof (other than (i) a broker-dealer who purchases such Exchange Securities
(as defined herein) from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act, or (ii) a person that is an
'affiliate' of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Securities are
acquired in the ordinary course of such holders' business and such holders have
no arrangement with any person to participate in the distribution of such
Exchange Securities. However, the Company has not sought a no-action letter with
respect to the Exchange Offer and there can be no assurance the staff of the
Commission would make a similar determination with respect to the Exchange
Offer. Eligible holders wishing to accept the Exchange Offer must represent to
the Company that such conditions have been met. Each broker-dealer that receives
Exchange Securities for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Securities. The Letter of Transmittal state that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act. A
broker-dealer may nonetheless be deemed to be an 'underwriter' under the
Securities Act notwithstanding such disclaimer. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Securities received in exchange for
Unregistered Securities (as defined herein) where such Unregistered Securities
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, for a period of 180 days
after the Expiration Date (as defined herein), it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
'Plan of Distribution.'
(continued on next page)
------------------------------
SEE 'RISK FACTORS' ON PAGE 24 FOR A DESCRIPTION OF CERTAIN RISKS. HOLDERS
SHOULD CONSIDER CERTAIN TAX RELATED RISKS, INCLUDING THE POSSIBILITY OF
UNPLANNED DIVIDEND INCOME, ORIGINAL ISSUE DISCOUNT AND THE APPLICATION OF THE
MARKET DISCOUNT RULES OF THE INTERNAL REVENUE CODE, BEFORE DECIDING TO TENDER
THEIR UNREGISTERED SECURITIES IN THE EXCHANGE OFFER. SEE 'RISK FACTORS--TAX
CONSEQUENCES OF DISTRIBUTIONS WITH RESPECT TO THE NEW PREFERRED STOCK; POTENTIAL
FOR UNPLANNED DEEMED DIVIDENT INCOME' ON PAGE 24 AND 'CERTAIN U.S. FEDERAL TAX
CONSIDERATIONS' ON PAGE 127.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
The date of this Prospectus September 19, 1997.
<PAGE>
(continued from previous page)
Holders of Old Notes and Old Preferred Stock whose Old Notes and Old
Preferred Stock are not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and Old Preferred Stock and will be entitled to
all the rights and preferences and will be subject to the limitations applicable
thereto under the indenture governing the Old Notes and the New Notes and the
certificate of designation governing the Old Preferred Stock, respectively.
Following consummation of the Exchange Offer, the holders of Old Notes and Old
Preferred Stock will continue to be subject to the existing restrictions upon
transfer thereof and the Company will have no further obligation to such holders
to provide for the registration under the Securities Act of the Old Notes and
Old Preferred Stock held by them. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the indenture (the
'Indenture'), dated as of June 25, 1997, governing the Old Notes and the New
Notes. The Old Notes and the New Notes are sometimes referred to herein
collectively as the 'Notes.' The Old Preferred Stock and the New Preferred Stock
are sometimes referred to herein collectively as the 'Senior Preferred Stock.'
The Old Notes and the Old Preferred Stock are sometimes referred to herein
collectively as the 'Unregistered Securities.' The New Notes and the New
Preferred Stock are sometimes referred to herein collectively as the 'Exchange
Securities.'
The Notes will bear interest at the rate of 11% per annum, payable
semi-annually on June 15 and December 15, commencing December 15, 1997. The
Notes will mature on June 15, 2004. Except as described below, the Company may
not redeem the Notes prior to June 15, 2001. On or after such date, the Company
may redeem the Notes, in whole or in part, at any time, at the redemption prices
set forth herein, together with accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time and from time to time on or prior to
June 15, 2000, the Company may, subject to certain requirements, redeem up to
35% of the aggregate principal amount of the Notes with the cash proceeds of one
or more public Equity Offerings (as defined) at a redemption price equal to
111.0% of the principal amount to be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption, provided, that at least $100.0
million of the aggregate principal amount of the Notes remain outstanding
immediately after each such redemption. The Notes will not be subject to any
sinking fund requirement. Upon the occurrence of a Change of Control (as
defined), the Company will be required to make an offer to repurchase the Notes
at a price equal to 101% of the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of repurchase. There can be no
assurance that the Company will have funds available to repurchase the Notes
upon the occurence of a Change of Control. See 'Description of
Notes--Redemption--Optional Redemption,' '--Repurchase at the Option of
Holders--Change of Control' and 'Risk Factors--Limitation on Change of Control.'
Other than change of control provisions and other restrictive covenants,
including limitations on indebtedness and restricted payments, as applicable,
the Indenture and the Certificate of Designation do not contain any provisions
that afford holders of the Notes and Senior Preferred Stock protection in the
event of a highly leveraged or other transaction that may adversely affect such
holders. See 'Description of Notes,' 'Description of New Preferred Stock,' and
'Risk Factors--Substantial Leverage and Ability to Service Debt,'
'--Restrictions Imposed by the Terms of the Company's Indebtedness and Preferred
Stock,' and '--Limitation on Change of Control.'
The Old Notes are and the New Notes will be senior unsecured obligations of
the Company. The Old Notes rank and the New Notes will rank pari passu in right
of payment with all existing and future senior indebtedness of the Company and
will rank senior in right of payment to any future subordinated indebtedness of
the Company. The Old Notes are and the New Notes will be unconditionally
guaranteed (the 'Guarantees'), jointly and severally, by each of the Company's
subsidiaries on the issue date of such Notes and by each subsidiary (excluding
Unrestricted Subsidiaries (as defined)) of the Company acquired thereafter
(collectively, the 'Guarantors'). The Guarantees are senior unsecured
obligations of the Guarantors and will rank pari passu in right of payment with
all other existing and future senior indebtedness of the respective Guarantors
and senior in right of payment to all existing and future subordinated
indebtedness of the respective Guarantors and may be released upon the
occurrence of certain events. The Notes and the Guarantees will be effectively
subordinated to any secured debt of the Company and the Guarantors, to the
extent of the assets serving as security therefor. As of June 30, 1997 on a pro
2
<PAGE>
forma basis after giving effect to the Old Notes Offering and the Acquisition
(each, as defined), the aggregate principal amount of the Company's outstanding
senior indebtedness to which the Notes would have been effectively subordinated
is approximately $86 million. See 'Description of Notes' and 'Description of
Other Indebtedness.'
Dividends on the Senior Preferred Stock will be payable quarterly on each
March 15, June 15, September 15 and December 15, beginning the earlier of
September 15, 1997 or such dividend payment date first occuring subsequent to
the consummation of the Exchange Offer and accumulating from the most recent
date on which dividends have been paid on the Old Preferred Stock, or if no
dividends have been paid on the Old Preferred Stock, from June 25, 1997, at a
rate per annum of 12% of the liquidation preference per share. Dividends may be
paid, at the Company's option, on any dividend payment date occurring on or
prior to June 15, 2002 either in cash or by the issuance of additional shares of
Senior Preferred Stock with a liquidation preference equal to the amount of such
dividends; thereafter, dividends shall be paid in cash. The liquidation
preference of the Senior Preferred Stock is $25 per share. At any time and from
time to time on or prior to June 15, 2000 the Company may, subject to certain
requirements, redeem up to 35% of the aggregate liquidation value of the Senior
Preferred Stock with cash proceeds from one or more Equity Offerings (as
defined) at a redemption price equal to 112% of the liquidation preference
thereof, plus accumulated and unpaid dividends to the date of redemption. After
June 15, 2000 and prior to June 15, 2002, the Senior Preferred Stock is not
redeemable. On or after June 15, 2002, the Senior Preferred Stock is redeemable,
at the option of the Company, in whole or in part, at the redemption prices set
forth herein, plus accumulated and unpaid dividends to the date of redemption.
The Company is required, subject to certain limitations, to redeem all of the
Senior Preferred Stock outstanding on June 15, 2007 at a redemption price equal
to 100% of the liquidation preference thereof plus accumulated and unpaid
dividends to the date of redemption. Upon the occurrence of a Change of Control
(as defined), the Company will, subject to certain conditions, be required to
make an offer to purchase all of the outstanding shares of Senior Preferred
Stock at a price equal to 101% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of purchase. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases. Even if sufficient funds are available, the terms of the
New Senior Secured Facilities (as defined) prohibit the Company's repurchase of
the Senior Preferred Stock following a Change of Control.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Old Notes or any minimum number of shares of Senior Payment-In-Kind
Preferred Stock being tendered for exchange. The Company will accept for
exchange any and all validly tendered Unregistered Securities not withdrawn
prior to 5:00 p.m., New York City time, on November 3, 1997 unless extended by
the Company (the 'Expiration Date'). Tenders of Unregistered Securities may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is
subject to certain customary conditions. See 'The Exchange Offer--Conditions.'
The Company has agreed to pay all expenses incident to the Exchange Offer. The
Company will not receive any proceeds from the Exchange Offer.
The Unregistered Securities consitute securities for which there is no
established trading market. Any Unregistered Securities not tendered and
accepted in the Exchange Offer will remain outstanding. The Company does not
currently intend to list the Exchange Securities on any securities exchange. To
the extent that any Unregistered Securities are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Unregistered Securities
could be adversely affected. No assurances can be given as to the liquidity of
the trading market for either the Unregistered Securities or the Exchange
Securities.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES OR OLD PREFERRED STOCK IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
3
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Securities offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to the Company and
the Exchange Securities offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. The Registration Statement (and the
exhibits and schedules thereto), as well as the periodic reports and other
information filed by the Company with the Commission, may be inspected and
copied at the public reference section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, Suite 1300, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Such information can also be reviewed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System which is publicly available through the
Commission's Web Site (http:www.sec.gov). Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified by such reference.
Pursuant to the Indenture and the Certificate of Designation (as defined)
relating to the Notes and Senior Preferred Stock, respectively, the Company has
agreed to furnish to United States Trust Company of New York, as trustee (the
'Trustee'), and to registered holders of the Notes and Senior Preferred Stock,
without cost to the Trustee or such registered holders, copies of all reports
and other information that would be required to be filed by the Company with the
Commission under the Securities Exchange Act of 1934, as amended (the 'Exchange
Act'), whether or not the Company is then required to file reports with the
Commission.
4
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements with respect to
the Company's business, financial condition and results of operations. The words
'estimate,' 'project,' 'intend,' 'expect,' 'anticipate' and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. For a discussion of such risks, see 'Risk Factors.' Investors are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Following the consummation of the Exchange
Offer, the Company undertakes no obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
CERTAIN MARKET INFORMATION
Information provided herein regarding the sizes and growth rates of the
markets for smokeless tobacco and its moist snuff and loose leaf chewing tobacco
categories was compiled by an independent third party for the Smokeless Tobacco
Council, a Washington, D.C. based trade organization. The Smokeless Tobacco
Council aggregates and reports manufacturers' sales, as reported to it by the
manufacturers. Loose leaf chewing tobacco industry volume is expressed in
pounds; such volume information included herein is taken from reports issued by
the United States Department of Agriculture. Manufacturers' price per pound
information provided herein is derived from the Company's and other major
competitors' price lists. All references herein to market size and market share
for roll-your-own ('RYO') cigarette paper are estimates derived from reports of
1995 import data, by weight, released by the United States Department of
Commerce.
TRADEMARKS
National Tobacco (as defined) has registered trademarks on the following
brand names: BEECH-NUT(REGISTERED), TROPHY(REGISTERED) AND HAVANA
BLOSSOM(REGISTERED). NAOC (as defined) licenses from Bollore Technologies, S.A.,
a corporation organized under the laws of the Republic of France ('Bollore'),
the ZIG-ZAG(REGISTERED) trade name and trademark for use in RYO cigarette paper
and owns the ZIG-ZAG(REGISTERED) trademark with respect to certain tobacco
products.
5
<PAGE>
IMPORTANT
To properly tender Unregistered Securities, the following procedures must
be followed:
o Each beneficial owner owning interests in Unregistered Securities ('Beneficial
Owner') through a DTC Participant (as defined) must instruct such DTC
Participant to cause Unregistered Securities to be tendered in accordance with
the procedures set forth in this Prospectus and in the applicable Letter of
Transmittal.
o Each participant (a 'DTC Participant') in the Depository Trust Company ('DTC')
holding Unregistered Securities through DTC must (i) electronically transmit
its acceptance to DTC through the DTC Automated Tender Offer Program ('ATOP'),
for which the transaction will be eligible, and DTC will then edit and verify
the acceptance, execute a book-entry delivery to the account of United States
Trust Company of New York (the 'Exchange Agent') at DTC and send an Agent's
Message (as defined) to the Exchange Agent for its acceptance, or (ii) comply
with the guaranteed delivery procedures set forth under 'Exchange
Offer--Guaranteed Delivery Procedures.' By tendering through ATOP, DTC
Participants will expressly acknowledge receipt of the accompanying Letter of
Transmittal and agree to be bound by its terms and the Company will be able to
enforce such agreement against such DTC participants.
o Each registered owner of certificated Unregistered Securities (a 'Holder')
must (i) complete and sign the accompanying Letter of Transmittal, and mail or
deliver such Letter of Transmittal, and all other documents required by the
Letter of Transmittal, together with certificate(s) representing all tendered
Unregistered Securities, to the Exchange Agent at its address set forth under
'Exchange Offer-- Exchange Agent,' or (ii) comply with the guaranteed delivery
procedures set forth under 'Exchange Offer--Guaranteed Delivery Procedures.'
For purposes of this Prospectus, 'Tendering Holder' shall mean (i) each DTC
Participant that has properly transmitted (and not properly withdrawn) its
acceptance through ATOP and in respect of which DTC has sent an Agent's Message,
(ii) each Holder that has timely delivered to the Exchange Agent (and not
properly withdrawn) a properly completed and duly executed Letter of
Transmittal, and any other documents required by the Letter of Transmittal,
together with certificate(s) representing all tendered Unregistered Securities,
or (iii) each DTC Participant or Holder that has complied with the guaranteed
delivery procedures set forth herein.
The information in this Prospectus concerning DTC and their book-entry
systems has been obtained by the Company from sources that the Company believes
to be reliable, and the Company takes no responsibility for the accuracy
thereof.
6
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus and is qualified in its entirety by the more detailed
information and financial statements and the related notes thereto appearing
elsewhere in this Prospectus. Prospective investors are urged to read this
Prospectus in its entirety before investing in the Exchange Securities. Unless
otherwise stated in this Prospectus, references to (a) the 'Company' shall mean
North Atlantic Trading Company, Inc. and its wholly owned National Tobacco,
National Tobacco Finance Corporation and NAOC subsidiaries; (b) 'National
Tobacco' shall mean National Tobacco Company, L.P. and its predecessors, a
Delaware limited partnership that manufactures and markets loose leaf chewing
tobacco, primarily under the BEECH-NUT brand name; and (c) 'NAOC' shall mean
North Atlantic Operating Company, Inc., a subsidiary of the Company into which
NATC Holdings USA, Inc., a holding company ('NATC'), and its wholly owned
subsidiary, an importer and distributor of roll-your-own ('RYO') cigarette
papers under the ZIG-ZAG brand name, were merged, and each of their respective
predecessors. NATC was acquired by NAOC on June 25, 1997 (the 'Acquisition').
Unless otherwise indicated, financial information presented herein for the
fiscal year ended December 31, 1996 for National Tobacco reflects pro forma
financial information adjusted to give effect to the May 17, 1996
recapitalization as if it had occurred on January 1, 1996. See 'Unaudited Pro
Forma Condensed Consolidated Financial Statements.'
THE COMPANY
Through its subsidiaries, the Company is a leading marketer of high-quality
loose leaf chewing tobacco, RYO cigarette papers and other tobacco-related
products. National Tobacco is the third largest manufacturer and marketer of
loose leaf chewing tobacco in the United States, selling its products under the
brand names BEECH-NUT REGULAR, BEECH-NUT WINTERGREEN, BEECH-NUT SPEARMINT,
TROPHY and HAVANA BLOSSOM. NAOC is the largest importer and distributor in the
United States of RYO cigarette papers, which are sold under the ZIG-ZAG brand
name pursuant to an exclusive distribution agreement. The BEECH-NUT and ZIG-ZAG
brands date back approximately 100 years and 130 years, respectively, and are
well established among the Company's extensive base of wholesale and retail
customers and loyal consumers. The Company estimates that its domestic shares
(by unit volume) in the loose leaf chewing tobacco and RYO cigarette paper
markets were approximately 21% and 49%, respectively, ranking the Company third
and first, respectively, in these markets. For the year ended December 31, 1996
('fiscal 1996'), the Company's pro forma net sales, net income, and EBITDA (as
defined) were $102.1 million, $3.7 million, and $41.3 million, respectively. See
'Unaudited Pro Forma Condensed Consolidated Financial Statements.'
National Tobacco produces all of its loose leaf chewing tobacco products in
its manufacturing facilities in Louisville, Kentucky. National Tobacco's net
sales, net income, and EBITDA were $55.9 million, $1.5 million, and $15.5
million, respectively, in fiscal 1996.
NAOC imports and distributes RYO cigarette paper and related products which
are manufactured pursuant to a long-term, formula-priced agreement with Bollore
Technologies, S.A. ('Bollore'). NAOC reported net sales, net income, and EBITDA
of $46.1 million, $9.3 million, and $25.8 million, respectively, in fiscal 1996.
The Company was formed in 1997 to effect the acquisition of NATC and its
ZIG-ZAG RYO cigarette paper business. The Company believes the combination of
the ZIG-ZAG RYO cigarette paper business with National Tobacco's BEECH-NUT loose
leaf chewing tobacco business will produce substantial benefits and synergies,
as summarized below:
o Greater product line diversification with leading brand names;
o Improved product mix due to higher-margin RYO cigarette papers;
o Sales growth opportunities through:
--Complementary distribution channels,
-- Strengthened regional market penetration for the ZIG-ZAG brand,
7
<PAGE>
--Continued aggressive promotional strategies; and
o Management team with extensive industry experience.
The Company's near-term strategy is to cultivate these sales, marketing and
distribution synergies through the combination of its loose leaf chewing tobacco
and RYO cigarette paper businesses. The Company believes that National Tobacco's
long-term investment in its 105-person sales force will be instrumental in
realizing this near-term strategy. Prior to the Acquisition, the predecessor
which was ultimately merged into the recently formed NAOC marketed its products
without the benefit of a sales organization that calls on individual retail
outlets. The Company's sales organization will merchandise the ZIG-ZAG brand in
thousands of key retail locations, especially in the Southeast which has
historically been an underdeveloped market for NAOC. The Company believes that
National Tobacco's sales force will be able to enhance the distribution and
increase the sales of its ZIG-ZAG RYO cigarette papers.
Over the long term, the Company's primary strategy for building equity
value is to reduce debt. The Company also intends to continue to identify and
pursue opportunities for profitable growth through new product introductions and
strategic acquisitions.
The Company's principal executive offices are located at 257 Park Avenue
South, New York, New York 10010-7304 and its telephone number is (212) 253-8185.
8
<PAGE>
The following chart illustrates the complementary aspects of its two
primary business segments and summarizes the Company's structure following the
Acquisition. See 'The Transactions' for a structural organization chart.
[CHART]
--------------------------------------------
| North Atlantic Trading Company, Inc. |
| (the "Company") |
--------------------------------------------
|
--------------------------------------------
| |
------------------------ ------------------------
| National Tobacco | | NAOC |
------------------------ ------------------------
<TABLE>
<S> <C> <C>
1996 NET SALES: $55.9 million $46.1 million
1996 NET INCOME: $1.5 million $9.3 million
1996 EBITDA: $15.5 million $25.8 million
KEY PRODUCTS: Loose leaf chewing tobacco RYO cigarette papers
SELECTED BRANDS: BEECH-NUT REGULAR ZIG-ZAG WHITE
BEECH-NUT WINTERGREEN ZIG-ZAG FRENCH ORANGE
BEECH-NUT SPEARMINT ZIG-ZAG KUTCORNERS
TROPHY
U.S. MARKET SHARE / RANK: 21% / #3 49% / #1
PRIMARY DISTRIBUTION CHANNELS: Food stores Convenience stores
Mass merchandisers Chain and independent drug
Convenience stores stores
Discount tobacco stores Mass merchandisers
Chain and independent drug Food stores
stores Discount tobacco stores
CORE U.S. MARKETS: Southeast West
Southwest Southwest
Rural Northeast North Central
Rural North Central
PRE-ACQUISITION SALESFORCE: 105 sales representatives 6 sales representatives
and managers and managers
CUSTOMER FOCUS: Retailers Wholesalers
PRIMARY MARKETING STRATEGY: 'Pull' strategy through 'Push' strategy through
point-of-sale promotions to volume promotions to
consumers at the retail wholesalers
level
</TABLE>
9
<PAGE>
BUSINESS STRENGTHS
LEADING BRAND NAMES
BEECH-NUT and ZIG-ZAG are among the most widely recognized brand names in
the loose leaf chewing tobacco and RYO cigarette paper industries, respectively.
The Company believes that the strength of these brand names has created a loyal
consumer base and significant barriers to competition. The Company believes
BEECH-NUT has been one of the leading loose leaf chewing tobacco brands in the
United States since its inception in 1897. Similarly, the Company believes
ZIG-ZAG has been the number-one selling domestic RYO cigarette paper brand since
UST, Inc.'s ('UST') introduction of the brand in the United States in 1938.
HIGH-QUALITY PRODUCTS
Management seeks to ensure the quality of the Company's products through
its focus on quality control, research and development and its use of its highly
efficient, well maintained loose leaf chewing tobacco manufacturing facilities.
The Company imports all of its ZIG-ZAG RYO cigarette papers under its strict
quality requirements from Bollore, a major French manufacturer of high-quality
and fine papers.
EXPERIENCED SALES ORGANIZATION
National Tobacco has made a substantial long-term investment in its
105-person sales organization. The Company believes it can successfully
merchandise ZIG-ZAG RYO cigarette papers through thousands of key retail
outlets, especially in the Southeast which has historically been an
underdeveloped market for NAOC, by selling the ZIG-ZAG product line through
National Tobacco's sales force and complementary distribution channels.
CONSISTENT CASH FLOWS
The Company and its predecessors have had a long history of consistent cash
flows from operations. Although there can be no assurance, the Company believes
that this trend will continue, enabling the Company to promptly and
significantly reduce its debt.
MINIMAL CAPITAL EXPENDITURE REQUIREMENTS
The Company's subsidiaries require minimal capital expenditures. National
Tobacco maintains a highly efficient loose leaf chewing tobacco manufacturing
facility. NAOC contracts for the manufacturing of all of its RYO cigarette paper
and related products. The Company's combined capital expenditures averaged
$377,000 annually for the fiscal years 1994 through 1996.
SUCCESSFUL HISTORY OF MANAGEMENT BUYOUTS
The Company's management team has a long and successful history in
profitably operating a business with a leveraged balance sheet. Led by Mr.
Thomas F. Helms, Jr., Chairman, President and Chief Executive Officer of the
Company, substantially all of the Company's current management team have been
with National Tobacco or its predecessors since the initial buyout with Shearson
Lehman Hutton Inc. ('Lehman Brothers') of the interest of Lorillard, Inc.
('Lorillard') in 1988. This same management team participated in two subsequent
management buyouts in April 1992 and in May 1996. Since the initial Lorillard
buyout, National Tobacco has cumulatively repaid approximately $60 million of
National Tobacco's indebtedness. As part of these buyouts, management has
reinvested its equity to increase its ownership from approximately 13% in 1988
to 25% in 1992 to 48% in 1996. After giving effect to the Transactions,
management beneficially owns approximately 72.9% of the Company's Common Stock
(assuming the exercise in full of certain outstanding warrants).
EXPERIENCED AND COMMITTED MANAGEMENT TEAM
The Company's management team is highly experienced in the tobacco
industry. The Company has experienced little management turnover and continues
to be strengthened through the recruitment of additional talented professionals.
The Company's seven senior executives have an average of approximately 25 years
of experience in the tobacco industry. Mr. Helms, Chief Executive Officer of the
Company, has 14 years of tobacco industry experience. In addition, Mr. Jack
Africk, one of the Company's consultants,
10
<PAGE>
has 49 years of tobacco industry experience. The Company's management team is
highly motivated to build value over the long term because of its beneficial
equity ownership of approximately 72.9% of the Company's Common Stock (assuming
the exercise in full of certain warrants).
HIGHLY EFFICIENT INFRASTRUCTURE
The Company's infrastructure is highly efficient. National Tobacco has
consistently sought to improve its manufacturing processes as well as its
product formulation and raw material procurement. National Tobacco's gross
margins have improved from 48.5% in fiscal 1993 to 58.4% in fiscal 1996. The
Company believes it is the low-cost manufacturer of loose leaf chewing tobacco.
NAOC had a fiscal 1996 gross margin of 64.3%, complementing National Tobacco's
high gross margins.
ATTRACTIVE MARKET DYNAMICS
The Company believes that the smokeless tobacco market, including loose
leaf chewing tobacco, and the RYO cigarette paper industry are each
characterized by non-cyclical demand, brand loyalty, significant barriers to
entry, minimal capital expenditure requirements, high profit margins, consistent
price increases at the wholesale level as well as the ability to generate strong
and consistent free cash flows.
STRONG CUSTOMER RELATIONSHIPS
Historically, both National Tobacco and NAOC have enjoyed strong
relationships with their respective customers by virtue of their leading brands,
significant market shares and experienced sales and marketing organizations. By
combining these two businesses' leading brands, management teams and sales
organizations, the Company expects to strengthen its customer relationships and
become a more important source of product supply to major distributors and
retailers. The combination of the National Tobacco and NAOC sales forces will
enable the Company to develop a valuable retail-oriented focus for the ZIG-ZAG
brand.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The
Company was formed in connection with the Acquisition, a corporate
reorganization and the related financings (collectively, the 'Transactions').
The financings consisted principally of (i) the offering of the Old Notes (the
'Old Notes Offering'), (ii) the establishment of the New Senior Secured
Facilities including an $85 million senior secured term loan (the 'Term
Facility') and a $25 million senior secured revolving credit facility (the
'Revolver') and (iii) a concurrent offering of 1,360 Units (the 'Units'), for
aggregate gross proceeds of $34.0 million, consisting of an aggregate of
1,360,000 shares of 12% senior preferred stock of the Company with a liquidation
preference of $25 per share (the Old Preferred Stock, as defined) and warrants
to purchase an aggregate of 44,440 shares of Common Stock (the 'Warrants'),
representing 7.0% of the Company's Common Stock on a fully diluted basis.
The Company used the $155.0 million of gross proceeds from the Old Notes
Offering, together with $85.0 million of floating rate borrowings and $0.8
million of revolver borrowings under the New Senior Secured Facilities, $34.0
million of aggregate gross proceeds from the concurrent offering of the Units,
$0.7 million from equity investments from certain employees and a consultant of
the Company, to (i) finance the $159.4 million cash portion of the aggregate
purchase price of $162.6 million for the Acquisition, (ii) refinance $56.5
million principal amount outstanding senior indebtedness and accrued interest
(net of deposits) of National Tobacco, (iii) repurchase all of the outstanding
subordinated indebtedness and preferred interests of NTC Holding LLC, a Delaware
limited liability company and former parent of National Tobacco ('LLC'),
together with warrants to purchase membership interests in LLC, for an aggregate
purchase price of approximately $47.5 million, (iv) pay $12.1 million of
estimated fees and expenses associated with the Transactions.
11
<PAGE>
THE EXCHANGE OFFER
Old Notes..................... The Old Notes were sold by the Company on
June 25, 1997, to NatWest Capital Markets
Limited ('NatWest') and CIBC Wood Gundy
Securities Corp. (collectively, the 'Initial
Purchasers') pursuant to a Purchase
Agreement, dated June 18, 1997 (the 'Note
Purchase Agreement'). The Initial Purchasers
subsequently resold the Notes to qualified
institutional buyers pursuant to Rule 144A
under the Securities Act or institutional
'accredited investors' (as defined in Rule
501 (a)(1), (2), (3) or (7) of Regulation D
under the Securities Act) or outside the
United States in compliance with Regulation S
under the Securities Act.
Registration Rights
Agreement................... Pursuant to the Note Purchase Agreement, the
Company and the Initial Purchasers entered
into the Registration Rights Agreement, which
grants the holders of the Old Notes certain
exchange and registration rights. The
Exchange Offer is intended to satisfy such
exchange and registration rights which
terminate upon the consummation of the
Exchange Offer.
Old Preferred Stock........... Units, which were comprised in part of the
Old Preferred Stock, were sold by the Company
on June 25, 1997, to NatWest pursuant to a
Purchase Agreement dated June 18, 1997 (the
'Units Purchase Agreement', and together with
the Note Purchase Agreement, the 'Purchase
Agreements'). NatWest subsequently resold the
Units to qualified institutional buyers
pursuant to Rule 144A under the Securities
Act or institutional 'accredited investors'
(as defined in the Rule 501 (a)(1), (2), (3)
or (7) of Regulation D under the Securities
Act) or outside the United States in
compliance with Regulation S under the
Securities Act.
Preferred Stock
Registration Rights
Agreement................... Pursuant to the Units Purchase Agreement, the
Company and NatWest entered into the
Preferred Stock Registration Rights
Agreement, which grants the holders of the
Old Preferred Stock certain exchange and
registration rights. The Exchange Offer is
intended to satisfy such exchange and
registration rights which terminate upon the
consummation of the Exchange Offer.
Securities Offered............ $155,000,000 aggregate principal amount of
11% Senior Notes due 2004, Series B (the 'New
Notes') and 1,397,176.96 shares of 12% Senior
Exchange Payment-In-Kind Preferred Stock (the
'New Preferred Stock').
The Exchange Offer............ The Company is offering to exchange (i)
$1,000 principal amount of New Notes for each
$1,000 principal amount of Old Notes that are
properly tendered and accepted and (ii) one
share of New Preferred Stock for each share
of Old Preferred Stock properly tendered and
accepted. The Company will issue Exchange
Securities on or promptly after the
Expiration Date. As of the date hereof, there
is $155,000,000 aggregate principal amount of
Old Notes outstanding and 1,397,176.96 shares
(which includes 37,176.96 shares that were
paid in a dividend on September 15, 1997) of
Old Preferred Stock outstanding. The
12
<PAGE>
terms of the Exchange Securities are
identical in all material respects to the
terms of the Unregistered Securities for
which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange
Securities are freely transferable by holders
thereof (other than as provided herein), and
are not subject to any covenant restricting
transfer absent registration under the
Securities Act. See 'The Exchange Offer.' The
Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old
Notes or any minimum number of shares of Old
Senior Preferred Stock being tendered for
exchange.
Based on no-action letters issued by the
staff of the Commission to third parties with
respect to similar transactions, the Company
believes that the Exchange Securities issued
pursuant to the Exchange Offer in exchange
for Unregistered Securities may be offered
for resale, resold and otherwise transferred
by holders thereof (other than (i) a
broker-dealer who purchases such Exchange
Securities from the Company to resell
pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a
person that is an 'affiliate' of the Company
within the meaning of Rule 405 of the
Securities Act) without compliance with the
registration and prospectus delivery
requirements of the Securities Act, provided
that such Exchange Securities are acquired in
the ordinary course of such holders' business
and such holders are not engaged in, have no
arrangement or understanding with any person
to participate in, and do not intend to
engage in, any distribution of the Exchange
Securities. However, the Company has not
sought a no-action letter with respect to the
Exchange Offer and there can be no assurance
that the staff of the Commission would make a
similar determination with respect to the
Exchange Offer. Each holder of Exchange
Securities, other than a broker-dealer, must
represent that such conditions have been met.
In addition, each broker-dealer that receives
Exchange Securities for its own account
pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus
in connection with any resale of such
Exchange Securities. The Letter of
Transmittal accompanying this Prospec-tus
states that by so acknowledging and by
delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
'underwriter' within the meaning of the
Securities Act. A broker-dealer may
nonetheless be deemed to be an 'underwriter'
under the Securities Act notwithstanding such
disclaimer. This Prospectus, as it may be
amended or supplemented from time to time,
may be used by a broker-dealer in connection
with resales of Exchange Securities received
in exchange for Unregistered Securities where
such Unregistered Securities were acquired by
such broker-dealer as a result of
market-making activities or other trading
activities. Pursuant to the Registration
Rights Agreements, the Company has agreed
that, for a period of 180 days after the
Expiration Date, it will make this Prospectus
available to any broker-dealer for use in
connection with any such resale. See 'The
Exchange Offer-- Purpose and Effect of the
Exchange Offer' and 'Plan of Distribution.'
13
<PAGE>
Any holder who tenders in the Exchange Offer
with the intention to participate, or for the
purpose of participating, in a distribution
of the Exchange Securities could not rely on
the position of the staff of the Commission
enunciated in no-action letters and, in the
absence of an applicable exemption, must
comply with the registration and prospectus
delivery requirements of the Securities Act
in connection with any resale transaction.
Failure to comply with such requirements in
such instance may result in such holder
incurring liability under the Securities Act
for which the holder is not indemnified by
the Company.
Expiration Date............... 5:00 p.m., New York City time, on November 3,
1997, unless the Exchange Offer is extended,
in which case the term 'Expiration Date'
means the latest date and time to which the
Exchange Offer is extended. See 'The Exchange
Offer--Expiration Date; Extensions;
Amendments'.
Accrued Interest or
Accumulated Dividends on the
Exchange Securities......... Each Exchange Security will bear interest or
be entitled to dividends from the most recent
date to which interest or dividends have been
paid on the Unregistered Securities or, if no
interest or dividends have been paid on such
Unregistered Securities, from June 25, 1997.
Exchange Date................. As soon as practicable after the close of the
Exchange Offer, the Issuer will accept for
exchange all Unregistered Securities properly
tendered and not validly withdrawn prior to
5:00 p.m., New York City time, on the
Expiration Date. See 'The Exchange
Offer--Withdrawal of Tenders.'
Conditions to the Exchange
Offer....................... The Exchange Offer is subject to customary
conditions, certain of which may be waived by
the Issuer. The Issuer reserves the right to
terminate or amend the Exchange Offer at any
time prior to the Expiration Date upon the
occurrence of any such condition. The
Exchange Offer is not conditioned on any
minimum aggregate principal amount of
Existing Notes being tendered for exchange.
See 'The Exchange Offer-- Conditions.'
Consequences of Failure to
Exchange.................... Any Unregistered Securities not tendered
pursuant to the Exchange Offer will remain
outstanding and continue to accrue interest
or accumulate dividends. Such Unregistered
Securities will remain 'restricted
securities' under the Securities Act, subject
to the transfer restrictions described
herein. As a result, the liquidity of the
market for such Unregistered Securities could
be adversely affected upon completion of the
Exchange Offer. See 'Risk
Factors--Consequences of Failure to Exchange'
and 'The Exchange Offer--Consequences of
Failure to Exchange.'
Certain Federal Income Tax
Considerations.............. The exchange pursuant to the Exchange Offer
should not be a taxable event for federal
income tax purposes. See 'Certain U.S.
Federal Income Tax Considerations.'
Use of Proceeds............... There will be no cash proceeds to the Company
from the Exchange Offer. See 'Use of
Proceeds.'
14
<PAGE>
PROCEDURES FOR TENDERING UNREGISTERED SECURITIES
Tendering Unregistered
Securities.................. Each beneficial owner owning interests in
Unregistered Securities ('Beneficial Owner')
through a DTC Participant (as defined) must
instruct such DTC Participant to cause
Unregistered Securities to be tendered in
accordance with the procedures set forth in
this Prospectus and in the applicable Letter
of Transmittal. See 'The Exchange
Offer--Procedures for Tendering--Unregistered
Securities held by DTC.'
Each participant (a 'DTC Participant') in the
Depository Trust Company ('DTC') holding
Unregistered Securities through DTC must (i)
electronically transmit its acceptance to DTC
through the DTC Automated Tender Offer
Program ('ATOP'), for which the transaction
will be eligible, and DTC will then edit and
verify the acceptance, execute a book-entry
delivery to the Exchange Agent's account at
DTC and send an Agent's Message (as defined
herein) to the Exchange Agent for its
acceptance, or (ii) comply with the
guaranteed delivery procedures set forth in
this Prospectus and in the Letter of
Transmittal. By tendering through ATOP, DTC
Participants will expressly acknowledge
receipt of the accompanying Letter of
Transmittal and agree to be bound by its
terms and the Company will be able to enforce
such agreement against such DTC participants.
See 'The Exchange Offer--Procedures for
Tendering--Unregistered Securities held by
DTC,' and '--Guaranteed Delivery Procedures--
Unregistered Securities held by DTC.'
Each Holder must (i) complete and sign a
Letter of Transmittal, and mail or deliver
such Letter of Transmittal, and all other
documents required by the Letter of
Transmittal, together with certificate(s)
representing all tendered Unregistered
Securities, to the Exchange Agent at its
address set forth in this Prospectus and in
the Letter of Transmittal, or (ii) comply
with the guaranteed delivery procedures set
forth in this Prospectus. See 'The Exchange
Offer--Procedures for Tendering,' '--Exchange
Agent,' and '--Guaranteed Delivery
Procedures--Unregistered Securities held by
Holders.'
By tendering, each holder will represent to
the Company that, among other things, (i) it
is not an affiliate of the Company, (ii) it
is not a broker-dealer tendering Unregistered
Securities acquired directly from the Company
for its own account, (iii) the Exchange
Securities acquired pursuant to the Exchange
Offer are being obtained in the ordinary
course of business of such holder and (iv) it
has no arrangements or understandings with
any person to participate in the Exchange
Offer for the purpose of distributing the
Exchange Securities. See 'The Exchange
Offer--Procedures for Tendering.'
Guaranteed Delivery
Procedures.................. DTC Participants holding Unregistered
Securities through DTC who wish to cause
their Unregistered Securities to be tendered,
but who cannot transmit their acceptances
through ATOP prior to the Expiration Date,
may effect a tender in accordance with the
procedures set forth in this Prospectus and
in the Letter of Transmittal. See 'Exchange
Offer--Guaranteed Delivery
15
<PAGE>
Procedures.' Holders who wish to tender their
Unregistered Securities but (i) whose
Unregistered Securities are not immediately
available and will not be available for
tendering prior to the Expiration Date, or
(ii) who cannot deliver their Unregistered
Securities, the Letter of Transmittal, or any
other required documents to the Exchange
Agent prior to the Expiration Date, may
effect a tender in accordance with the
procedures set forth in this Prospectus. See
'The Exchange Offer--Guaranteed Delivery
Procedures.'
Withdrawal Rights............. The tender of Unregistered Securities
pursuant to the Exchange Offer may be
withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date, in
accordance with the procedures set forth in
this Prospectus. See 'The Exchange
Offer--Withdrawal of Tenders.'
Exchange Agent................ United States Trust Company of New York is
serving as Exchange Agent in connection with
the Exchange Offer. See 'The Exchange
Offer--Exchange Agent.'
Shelf Registration
Statement................... Under certain circumstances described in the
Registration Rights Agreements, certain
holders of Unregistered Securities (including
holders who are not permitted to participate
in the Exchange Offer or who may not freely
resell Exchange Securities received in the
Exchange Offer) may require the Company to
file and use best efforts to cause to become
effective, a shelf registration statement
under the Securities Act, which would cover
resales of Unregistered Securities by such
holders. See 'Exchange Offer--Purpose and
Effect of the Exchange Offer.'
16
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions relating to the Old Notes.
The New Notes will bear interest from the most recent date to which interest has
been paid on the Old Notes or, if no interest has been paid on the Old Notes,
from June 25, 1997. Accordingly, registered holders of New Notes on the relevant
record date for the first interest payment date following the consummation of
the Exchange Offer will receive interest accruing from the most recent date to
which interest has been paid on the Old Notes or, if no interest has been paid,
from June 25, 1997. Old Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
whose Old Notes are accepted for exchange will not receive any payment in
respect of interest on such Old Notes otherwise payable on any interest payment
date the record date for which occurs on or after consummation of the Exchange
Offer.
MATURITY...................... June 15, 2004. The New Notes will bear
interest at the rate of 11% per annum.
INTEREST PAYMENT DATES........ June 15 and December 15 of each year,
commencing on December 15, 1997 (the
'Interest Payment Dates').
OPTIONAL REDEMPTION........... Except as described below and under 'Change
of Control', the Company may not redeem the
Notes prior to June 15, 2001. On or after
such date, the Company may redeem the Notes,
in whole or in part, at any time at the
redemption prices set forth herein, together
with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any
time and from time to time on or prior to
June 15, 2000, the Company may, subject to
certain requirements, redeem up to 35% of the
aggregate principal amount of the Notes with
the cash proceeds received from one or more
Equity Offerings at a redemption price equal
to 111.0% of the principal amount to be
redeemed, together with accrued and unpaid
interest, if any, to the date of redemption,
provided that at least $100.0 million of the
aggregate principal amount of the Notes
remain outstanding immediately after each
such redemption. See 'Description of
Notes--Redemption.'
CHANGE OF CONTROL............. Upon the occurrence of a Change of Control,
the Company will be required to make an offer
to repurchase the Notes at a price equal to
101% of the principal amount thereof,
together with accrued and unpaid interest, if
any, to the date of repurchase. See
'Description of Notes--Repurchase at the
Option of the Holders--Change of Control.'
RANKING....................... The Old Notes are and the New Notes will be
senior unsecured obligations of the Company
and will rank pari passu in right of payment
with all existing and future senior
indebtedness of the Company and senior in
right of payment to all existing and future
subordinated indebtedness of the Company.
Holders of secured indebtedness of the
Company will, however, have claims that are
prior to the claims of the holders of Notes
to the extent of the assets securing such
other indebtedness. See 'Description of
Notes--Ranking.'
17
<PAGE>
GUARANTEES.................... The Old Notes are and the New Notes will be
unconditionally guaranteed, jointly and
severally, by each of the Guarantors. The
Guarantees will be senior unsecured
obligations of the Guarantors and will rank
pari passu in right of payment with all other
existing and future senior indebtedness of
the respective Guarantors and senior in right
of payment to all existing and future
subordinated indebtedness of the respective
Guarantors and may be released upon the
occurrence of certain events. The Guarantees
will be effectively subordinated to the
obligations under the New Senior Secured
Facilities and to any other secured debt of
the Guarantors to the extent of the assets
serving as security therefor. See
'Description of Notes--Ranking' and
'--Guarantees.'
RESTRICTIVE COVENANTS......... The indenture under which the Old Notes have
been, and the New Notes will be, issued (the
'Indenture') contains certain covenants that,
among other things, limit (i) the incurrence
of additional indebtedness by the Company and
its subsidiaries, (ii) the payment of
dividends on, and redemption of, capital
stock of the Company and the redemption of
certain subordinated obligations of the
Company, (iii) investments, (iv) sales of
assets and subsidiary stock, (v) transactions
with affiliates and (vi) consolidations,
mergers and transfers of all or substantially
all the assets of the Company. The Indenture
also prohibits certain restrictions on
distributions from subsidiaries. However, all
of these limitations and prohibitions are
subject to a number of important
qualifications and exceptions. See
'Description of Notes--Certain Covenants.'
EXCHANGE OFFER AND
REGISTRATION RIGHTS......... Pursuant to the Registration Rights
Agreement, the Company agreed to (i) file,
within 30 days after the date of original
issuance of the Old Notes (the 'Issue Date')
(the 'Filing Date'), a registration statement
with respect to the Exchange Offer for the
New Notes, (ii) use its best efforts to cause
such registration statement to be declared
effective within 90 days after the Filing
Date and (iii) use its best efforts to
consummate the Exchange Offer within 120 days
after the Filing Date. In the event that the
Company does not comply with certain
covenants set forth in the Registration
Rights Agreement, as the sole remedy
therefor, the Company will be obligated to
pay certain liquidated damages to the holders
of the Old Notes under certain circumstances.
See 'The Exchange Offer.'
For a more complete description of the New
Notes, see 'Description of Notes.'
18
<PAGE>
SUMMARY DESCRIPTION OF THE NEW PREFERRED STOCK
The terms of the New Preferred Stock and the Old Preferred Stock are
identical in all material respects, except for certain transfer restrictions
relating to the Old Preferred Stock. The New Preferred Stock will be entitled to
dividends from the most recent date to which dividends have been paid on the Old
Preferred Stock or, if no dividends have been paid on the Old Preferred Stock,
from June 25, 1997. Accordingly, registered holders of New Preferred Stock on
the relevant record date for the first dividend payment date following the
consummation of the Exchange Offer will receive dividends accumulating from the
most recent date to which dividends have been paid on the Old Preferred Stock
or, if no dividends have been paid, from June 25, 1997. Old Preferred Stock
accepted for exchange will cease to accumulate dividends from and after the date
of consummation of the Exchange Offer. Holders whose Old Preferred Stock is
accepted for exchange will not receive any payment in respect of dividends on
such Old Preferred Stock otherwise payable on any dividend payment date the
record date for which occurs on or after consummation of the Exchange Offer.
LIQUIDATION PREFERENCE........ $25.00 per share, plus accumulated and unpaid
dividends.
OPTIONAL REDEMPTION........... At any time and from time to time on or prior
to June 15, 2000, the Company may, subject to
certain requirements, redeem up to 35% of the
Senior Preferred Stock with cash proceeds
from one or more Equity Offerings at a
redemption price equal to 112.0% of the
liquidation preference thereof, plus
accumulated and unpaid dividends to the date
of redemption. After June 15, 2000 and prior
to June 15, 2002, the Senior Preferred Stock
is not redeemable. On or after June 15, 2002,
the Senior Preferred Stock will be
redeemable, at the option of the Company, in
whole or in part at any time, at the
following redemption prices (expressed as a
percentage of liquidation preference) if
redeemed during the twelve month period
commencing on June 15, of the applicable year
set forth below plus, without duplication, an
amount in cash equal to all accumulated and
unpaid dividends to the redemption date:
YEAR PERCENTAGE
---- ----------
2002............................. 106.00%
2003............................. 104.00%
2004............................. 102.00%
2005 and thereafter.............. 100.00%
(See 'Description of New Preferred
Stock--Redemption-- Optional Redemption'.)
MANDATORY REDEMPTION.......... The Company is required, subject to certain
conditions,
to redeem all of the Senior Preferred Stock
outstanding on June 15, 2007 at a redemption
price equal to 100% of the liquidation
preference thereof, plus accumulated and
unpaid dividends to the date of redemption.
(See 'Description of
New Preferred Stock--Redemption--Mandatory
Redemption'.)
DIVIDENDS..................... At a rate equal to 12% per annum of the
liquidation preference per share, payable
quarterly beginning the earlier of September
15, 1997 or such dividend payment date first
occuring subsequent to the consummation of
the Exchange Offer and
19
<PAGE>
accumulating from the most recent date to
which dividends have been paid on the Old
Preferred Stock, or if no dividends have been
paid on the Old Preferred Stock, from June
25, 1997. See 'Description of New Preferred
Stock--Dividends.'
DIVIDEND PAYMENT DATES........ March 15, June 15, September 15 and December
15, commencing on the earlier of September
15, 1997 or such dividend payment date first
occuring subsequent to the consummation of
the Exchange Offer. See 'Description of New
Preferred Stock--Dividends.'
VOTING........................ The New Preferred Stock will be non-voting,
except as otherwise required by law and
except in certain circumstances described
herein, including (i) amending certain rights
of the holders of the New Preferred Stock and
(ii) the issuance of any class of equity
securities that ranks on a parity with or
senior to the New Preferred Stock. In
addition, if the Company (i) after June 15,
2002 fails to pay cash dividends in any
dividend period, (ii) fails to make a
mandatory redemption or an offer to purchase
upon a Change of Control, or (iii) fails to
comply with certain covenants or make certain
payments on its Indebtedness, holders of a
majority of the shares of the Senior
Preferred Stock, voting as a class, will be
entitled to elect two directors to the
Company's Board of Directors. See
'Description of New Preferred Stock-- Voting
Rights.'
RANKING....................... The Old Preferred Stock ranks, and the New
Preferred Stock will rank, with respect to
dividend rights and rights on liquidation,
winding-up and dissolution of the Company,
senior to all classes of common stock and to
all other classes of preferred stock of the
Company subject to certain exceptions. See
'Description of New Preferred
Stock--Ranking.'
CHANGE OF CONTROL............. In the event of a Change of Control, the
Company will, subject to certain conditions,
be required to make an offer to purchase all
outstanding shares of Senior Preferred Stock
at a purchase price equal to 101% of the
liquidation preference thereof, plus
accumulated and unpaid dividends to the date
of purchase. There can be no assurance that
the Company will have sufficient funds to
purchase all of the Senior Preferred Stock in
the event of a Change of Control or that the
Company would be able to obtain financing for
such purpose on favorable terms, if at all.
See 'Description of New Preferred
Stock--Change of Control Offer.'
CERTAIN RESTRICTIVE
PROVISIONS.................. The certificate of designation with respect
to the Old Preferred or the New Preferred, as
applicable (the 'Certificate of
Designation'), contains certain restrictive
provisions that, among other things, limit
the ability of the Company and its
subsidiaries to: (i) incur additional
Indebtedness; (ii) issue preferred stock of
subsidiaries; (iii) pay dividends or make
certain other restricted payments; (iv) enter
into transactions with affiliates; or (v)
merge or consolidate with or sell all or
substantially all of their assets to any
other person. See 'Description of New
Preferred Stock-- Certain Covenants.'
20
<PAGE>
EXCHANGE OFFER AND
REGISTRATION RIGHTS......... Pursuant to the Preferred Stock Registration
Rights Agreement the Company agreed to (i)
file, within 30 days after the Filing Date, a
registration statement with respect to the
Exchange Offer for the New Preferred Stock,
(ii) use its best efforts to cause such
registration statement to be declared
effective within 90 days after the Filing
Date and (iii) use its best efforts to
consummate the Exchange Offer for the New
Preferred Stock within 120 days after the
Filing Date. In the event that the Company
does not comply with certain covenants set
forth in the Preferred Stock Registration
Rights Agreement, as the sole remedy
therefor, the Company will be obligated to
pay certain liquidated damages to the holders
of the Old Preferred Stock under certain
circumstances. See 'Exchange Offer--Purpose
and Effect of the Exchange Offer.'
For a more complete description of the New Preferred Stock, see 'Description of
New Preferred Stock.'
RISK FACTORS
Prospective purchasers of the New Notes and the New Preferred Stock should
consider carefully all of the information set forth in this Prospectus and, in
particular, should evaluate the specific factors set forth under 'Risk Factors'
for risks involved with an investment in the New Notes and the New Preferred
Stock.
21
<PAGE>
SUMMARY OF HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following table presents summary financial data of National Tobacco and
NAOC on a historical and unaudited pro forma basis for the periods indicated.
The financial data used in the preparation of the summary historical financial
data has been derived from the audited financial statements for the year ended
December 31, 1996 and from the unaudited condensed financial statements for the
six-month period ended June 30, 1997. The pro forma financial data has been
derived from the Unaudited Pro Forma Condensed Consolidated Financial
Statements. This financial data is qualified by and should be read in
conjunction with the historical financial statements and the related notes
thereto and the other financial information contained in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED
----------------------------------------- JUNE 30, 1997
NATIONAL -------------------------
TOBACCO THE COMPANY THE THE COMPANY
PRO FORMA (1) NAOC PRO FORMA (2) COMPANY PRO FORMA (2)
------------- ------- ------------- -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................. $55,936 $46,139 $ 102,075 $ 25,938 $ 43,444
Cost of sales......................................... 23,254 16,453 39,707 9,300 15,585
------------- ------- ------------- -------- -------------
Gross profit.......................................... 32,682 29,686 62,368 16,638 27,859
Selling, general and administrative expense........... 21,455 3,980 25,435 11,591 14,682
Amortization of intangible assets..................... 870 5,078 5,633 468 2,848
------------- ------- ------------- -------- -------------
Operating income...................................... 10,357 20,628 31,300 4,579 10,329
Interest expense...................................... 11,813 4,976 26,171 5,194 13,245
Financial advisory fee expense (3).................... -- 1,178 -- -- --
Other expense (income)................................ (122) -- (122) (44) (250)
------------- ------- ------------- -------- -------------
Income (loss) from continuing operations before income
taxes and extraordinary loss........................ (1,334) 14,474 5,251 (571) (2,666)
Provision for income taxes............................ -- 5,130 1,556 5,017 (1,338)
------------- ------- ------------- -------- -------------
Income (loss) from continuing operations before
extraordinary loss.................................. (1,334) 9,344 3,695 (5,588) (1,328)
Extraordinary loss (net of income tax of $3,224)........ -- -- -- (8,262) --
------------- ------- ------------- -------- -------------
Net income (loss)....................................... (1,334) (9,344) 3,695 (13,850) (1,328)
Preferred stock dividends............................. -- -- 4,325 58 2,468
------------- ------- ------------- -------- -------------
Income (loss) applicable to common stock.............. $(1,334) $ 9,344 $ (630) $(13,908) $ (3,796)
------------- ------- ------------- -------- -------------
------------- ------- ------------- -------- -------------
Net income (loss) per common share.................... -- $698.25 $ (1.19) $ (26.33) $ (7.19)
------------- ------- ------------- -------- -------------
------------- ------- ------------- -------- -------------
Weighted average number of common shares outstanding
(000) (4)........................................... -- 13.4 528.2 528.2 528.2
------------- ------- ------------- -------- -------------
------------- ------- ------------- -------- -------------
OTHER DATA:
Ratio of earnings to combined fixed charges and preferred stock dividends (7).... 1.03 --
Ratio of earnings to fixed charges (8)........................................... 1.20 --
Cash flows from operating activities.................. $ 8,145 $18,268 $(25,862)
Cash flows from investing activities.................. (72,445) (8,053) (157,260)
Cash flows from financing activities.................. 66,561 (5,142) 184,460
EBITDA (5)............................................ 15,521 25,768 41,289 5,947 14,077
EBITDA margin......................................... 27.7% 55.8% 40.4% 22.9% 32.4%
Depreciation and amortization of intangible assets.... $ 2,358 $ 5,140 $ 7,183 $ 1,366 $ 3,748
LIFO adjustment....................................... 2,806 -- 2,806 -- --
Capital expenditures.................................. 300 55 442 442 442
Ratio of EBITDA to interest expense (6).......................................... 1.72x 1.16x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................................................................... $ 49,199
Total assets...................................................................................... 274,527
Total debt, including current maturities.......................................................... 240,750
Preferred stock................................................................................... 32,371
Stockholders' Equity (deficit).................................................................... (24,715)
</TABLE>
- ------------------------
(1) Pro forma to reflect the May 17, 1996 recapitalization as if it had occurred
on January 1, 1996.
(2) Pro forma to reflect the Transactions as if they had occurred on January 1,
1996.
(3) Represents salaries, expenses and financial advisory fees paid to previous
owners.
(4) Net income (loss) per common share is based on weighted average number of
shares of common stock outstanding during the period. Stock options and
warrants have not been included in the calculation due to their antidilutive
effect.
(5) 'EBITDA' represents operating income plus depreciation and amortization of
intangible assets plus the recurring non-cash LIFO adjustment, where
applicable. Information regarding EBITDA is presented because management
believes that EBITDA is useful as an indicator of an issuer's historical
cash flow available to service its debt. EBITDA should not be considered as
an alternative to, or more meaningful than, net income
22
<PAGE>
(as determined in accordance with GAAP) as a measure of the Company's
operating results or cash flows (as determined in accordance with GAAP) as a
measure of the Company's liquidity.
Following is a reconciliation of net income to EBITDA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDING DECEMBER 31, 1996 JUNE 30, 1997
--------------------------------- ----------------------
THE THE
NATIONAL COMPANY COMPANY
TOBACCO PRO THE PRO
PRO FORMA NAOC FORMA(2) COMPANY FORMA(2)
--------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income.............................................. $ (1,334) $ 9,344 $ 3,695 $ (13,850) $ (1,328)
Interest expense, net................................... 11,813 4,976 26,171 5,194 13,245
Income taxes............................................ -- 5,130 1,556 5,017 (1,338)
Depreciation............................................ 1,488 62 1,550 900 900
Amortization of intangibles............................. 870 5,078 5,633 468 2,848
Financial advisory fee expense.......................... -- 1,178 --
Other income............................................ (122) -- (122) (44) (250)
LIFO adjustment......................................... 2,806 -- 2,806 -- --
Extraordinary loss, net of income tax benefit of
$3,224................................................ -- -- -- 8,262 --
--------- ------- --------- --------- ---------
EBITDA.................................................. $ 15,521 $25,768 $ 41,289 $ 5,947 $ 14,077
--------- ------- --------- --------- ---------
--------- ------- --------- --------- ---------
</TABLE>
(6) For purposes of calculating this ratio, interest expense excludes
amortization of deferred financing costs and dividends on preferred stock.
Management believes this ratio is useful as an indicator of an issuer's
historical cash flow available to service its debt. EBITDA should not be
considered as an alternative to, or more meaningful than, net income (as
determined in accordance with GAAP) as a measure of the Company's operating
results or cash flows (as determined in accordance with GAAP) as a measure
of the Company's liquidity.
(7) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings represent income (loss) before
income taxes plus combined fixed charges and preferred stock dividends.
Combined fixed charges and preferred stock dividends consist of interest
expense (including amortization of deferred financing costs) plus one-third
(the portion deemed to be representative of interest) of rent expense, plus
the pre-tax earnings which would be required to cover preferred stock
dividends (preferred stock dividends divided by 100% minus the relationship
of the provision for income taxes to the income (loss) before income taxes).
The Company had pro forma earnings which were inadequate to cover combined
fixed charges and preferred stock dividends by approximately $5,134 for the
six months ended June 30, 1997.
(8) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) before income taxes plus fixed charges. Fixed
charges consist of interest expense (including amortization of deferred
financing costs) plus one-third (the portion deemed to be representative of
the interest portion) of rent expense. The Company had pro forma earnings
which were inadequate to cover fixed charges by approximately $2,666 for the
six months ended June 30, 1997.
23
<PAGE>
RISK FACTORS
Prospective investors should carefully review the information set forth
below, together with the information and financial data set forth elsewhere in
this Prospectus, before making an investment decision.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
As a result of the Old Notes Offering and the New Senior Secured
Facilities, the Company is highly leveraged. After giving pro forma effect to
the Transactions, the Company would have had total indebtedness at June 30, 1997
of approximately $240.8 million (96.7% of total capitalization). See 'Summary of
Historical and Unaudited Pro Forma Financial Data,' 'Capitalization,' and
'Unaudited Pro Forma Condensed Consolidated Financial Statements.'
This degree of leverage could have important consequences, including the
following: (i) the ability of the Company to obtain additional financing for
working capital, capital expenditures, debt service requirements or other
purposes may be impaired (see 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources'); (ii) a
substantial portion of the Company's cash flow from operations will be required
to pay the Company's debt service; (iii) the Company may be more highly
leveraged than companies with which it competes, which may place it at a
competitive disadvantage; (iv) the Company may be particularly vulnerable in the
event of a downturn in its business or in the economy generally; and (v) to the
extent of any borrowings incurred by the Company under the New Senior Secured
Facilities, the Company will be vulnerable to increases in interest rates.
As a result of the Transactions, a significant portion of the Company's
cash flow will be required to service indebtedness and will not be available for
other purposes. After giving pro forma effect to the Transactions as if they had
been consummated on January 1, 1996, the ratio of the Company's earnings to its
fixed charges for the year ended December 31, 1996 would have been 1.20 to 1 and
for the six months ended June 30, 1997 would have been inadequate to cover fixed
charges by approximately $2,666. In the absence of adequate operating results
and cash flows, the Company may be required to dispose of material assets or
operations or refinance its indebtedness to meet its debt service obligations.
There can be no assurance that the Company will be successful in this regard
should such actions become necessary.
LIMITATIONS ON ABILITY TO PAY DIVIDENDS
The Indenture limits the amount of cash dividends that may be paid on
shares of preferred stock of the Company. However, for all dividend dates
through and including June 15, 2002, the Company may, at its option, pay
dividends in additional shares of New Preferred Stock in lieu of paying cash
dividends.
In addition to the limitations imposed on the payment of dividends by the
Indenture, under Delaware law the Company is permitted to pay dividends on its
capital stock, including the New Preferred Stock, only out of its surplus or, in
the event that it has no surplus, out of its net profits for the year in which a
dividend is declared or for the immediately preceding fiscal year. Surplus is
defined as the excess of a company's total assets over the sum of its total
liabilities plus the par value of its outstanding capital stock. In order to pay
dividends in cash, the Company must have surplus or net profits equal to the
full amount of the cash dividend at the time such dividend is declared.
In determining the Company's ability to pay dividends, Delaware law permits
the Board of Directors of the Company to revalue the Company's assets and
liabilities from time to time to their fair market values in order to create
surplus. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay cash dividends on the New
Preferred Stock.
TAX CONSEQUENCES OF DISTRIBUTIONS WITH RESPECT TO THE NEW PREFERRED STOCK;
POTENTIAL FOR UNPLANNED DEEMED DIVIDEND INCOME
If the redemption price of the New Preferred Stock exceeds its issue price
by more than a de minimis amount, such excess may be treated as a constructive
distribution with respect to the New Preferred Stock of additional stock over
the term of the New Preferred Stock using a constant interest rate method
similar to that used for accruing original issue discount. As a result of the
allocation of a portion of the purchase price of the Units to the Warrants, the
New Preferred Stock will have a redemption price that exceeds its issue price by
more than a de minimis amount, resulting in such constructive distributions. In
addition, because the issue price of the New Preferred Stock distributed in lieu
of payments of cash dividends will be equal to the fair market value of the New
Preferred Stock at the time of distribution, it is possible, depending on its
fair market value at that time, that such New Preferred Stock will be issued
with a redemption premium
24
<PAGE>
large enough to be considered a constructive distribution as described above. In
such event holders would be required to include such premium in income as a
distribution over some period in advance of receiving the cash attributable to
such income, and such New Preferred Stock might trade separately, which might
adversely affect the liquidity of the New Preferred Stock.
EXTENSIVE AND INCREASING REGULATION OF PRODUCTS
Smokeless tobacco companies, like other manufacturers, distributors and
sellers of tobacco products, are subject to regulation at the federal, state and
local levels. Such regulations include labeling requirements, limitations on
advertising, and prohibition of sales to minors. The trend in recent years has
been toward increased regulation of the tobacco industry. There can be no
assurance as to the ultimate content, timing or effect of any regulation of
tobacco products by any federal, state or local legislative or regulatory body,
nor can there be any assurance that any such legislation or regulation would not
have a material adverse effect on the Company's business.
In August 1995, the United States Food and Drug Administration ('FDA')
published proposed rules for regulation of tobacco and tobacco products,
including smokeless tobacco. Following a year of comment and revision, in August
1996 the FDA promulgated final rules which were scheduled to take effect in
August 1997, except for a portion of the rules prohibiting the sale of tobacco
to persons under 18, which have already become effective. The FDA's regulations
restrict access to tobacco and tobacco products, regulate tobacco labeling, and
limit promotion and advertising of tobacco.
On April 25, 1997, a federal court in Greensboro, North Carolina ruled that
the FDA has statutory authority to regulate tobacco products. The court upheld
the FDA's rules restricting access to tobacco products and regulating tobacco
labeling. However, the court ruled that the FDA does not have authority to
regulate promotion and advertising of tobacco products. The judge certified the
case for interlocutory appeal to the United States Fourth Circuit Court of
Appeals, and both the tobacco companies and the government have indicated their
intent to appeal this ruling.
The FDA regulations will prohibit self-service displays of tobacco,
including smokeless tobacco, and require that a retailer sell cigarettes and
smokeless tobacco only in a direct, face to face exchange between the retailer
and the consumer. Historically, smokeless tobacco has been sold primarily by
allowing customers self service access to the product, and there can be no
assurance that prohibiting such access will not have an adverse effect on sales.
In 1996, the Commonwealth of Massachusetts enacted a statute which requires
tobacco companies, incuding smokeless tobacco companies, to disclose information
regarding the ingredients and nicotine content of their products. On February 7,
1997, a federal court in Massachusetts ruled that this statute is not preempted
by federal law. The case has been certified for immediate appeal to the United
States First Circuit Court of Appeals. If tobacco companies are required to
disclose ingredient information, this may risk disclosure of trade secrets,
which may have a material adverse effect on their businesses.
While there is no current regulation materially and adversely affecting the
sale of RYO cigarette papers, there can be no assurance that federal, state or
local regulations will not be enacted which seek to regulate RYO cigarette
papers and which would have a material adverse effect on the business of the
Company. There can also be no assurance that the FDA will not attempt to
regulate the sale of RYO cigarette papers. See 'Business--Regulation.'
TOBACCO INDUSTRY PRODUCT LIABILITY LITIGATION
The tobacco industry, primarily the cigarette segment, has experienced and
is experiencing significant product liability litigation. Numerous class action
and individual lawsuits have been brought against tobacco companies (primarily
the cigarette companies) for health-related injuries allegedly caused by use of
or exposure to tobacco products. Many of these lawsuits seek punitive damages in
addition to compensatory damages. In addition to individual and class action
product liability lawsuits, approximately 40 states and at least ten cities and
counties have sued tobacco companies (primarily the cigarette companies) to
recover substantial medical costs allegedly incurred by such states, cities and
counties in treating tobacco-related illnesses and diseases. The total amount of
damages which may be at risk in these various lawsuits is presently unknown, but
could be material.
Several events have occurred within the past few years which make it likely
that tobacco liability lawsuits will be pursued vigorously against tobacco
companies (primarily the cigarette companies) in the near future, including the
following: in August 1996, a Florida jury awarded, in a verdict which is
currently under appeal, $750,000 in compensatory damages in favor of an
individual plaintiff who claimed he was
25
<PAGE>
injured as a result of smoking cigarettes; documents have been obtained in
discovery from several tobacco companies, which plantiffs allege show that such
companies concealed information regarding the health risks and addictive effects
of nicotine and tobacco; testimony has been given and statements have been made
by present or former tobacco executives regarding possibly harmful and addictive
effects of nicotine and tobacco; at least 25 statewide class actions have been
brought by a well organized and well financed group of plaintiffs' class action
lawyers; approximately 40 states and at least ten cities and counties have
brought lawsuits seeking to recover costs incurred in treating tobacco-related
illnesses and diseases; and Liggett & Myers recently broke ranks with other
major tobacco companies and agreed to reach a separate settlement of its tobacco
liability litigation, pursuant to which it agreed to produce documents and
cooperate with plaintiffs.
Most tobacco liability lawsuits have been brought against manufacturers and
sellers of cigarettes for injuries allegedly caused by smoking or by exposure to
smoke. However, several lawsuits have been brought against manufacturers and
sellers of smokeless tobacco, principally moist snuff, for injuries to health
allegedly caused by use of smokeless tobacco. Historically, such claims have
asserted that use of smokeless tobacco is addictive and causes oral cancer.
These cases include recent purported class actions brought in Louisiana and
Illinois; several of the 40 health care reimbursement actions brought by the
state attorneys general; and four individual actions brought in Louisiana and
Texas. One additional purported class action seeking 'the establishment of a
medical monitoring fund to monitor the health of plaintiffs and class members
for those diseases and health risks associated with the use of smokeless tobacco
products' was filed on June 30, 1997 against National Tobacco and other
manufacturers of smokeless tobacco products. There can be no assurance that in
the future National Tobacco will not be named as a defendant in one or more
additional lawsuits or, if so named, that such lawsuits will not have a material
adverse effect on the Company's business. See 'Legal Proceedings.' In addition,
National Tobacco, as a member of Smokeless Tobacco Council, Inc., a trade
organization ('STC'), which is a defendant in certain of these cases, is
responsible for 5% of the STC's operating expenses, including litigation costs.
See 'Business-- Product Liability and Litigation.'
POSSIBLE NATIONAL SETTLEMENT OF TOBACCO LIABILITY CLAIMS
There has been widespread publicity and speculation recently about a
possible national settlement of tobacco liability claims. Although the proposed
settlement has neither been enacted by the Congress nor has its
constitutionality been tested in the courts, its terms were made public on June
21, 1997. If enacted in its present form, the proposed settlement would expand
the FDA's authority to regulate the manufacture, marketing and distribution of
nicotine-containing tobacco products (e.g., advertising, warning labels,
manufacture, display and sale of tobacco products) and to require disclosure of
previously non-public or confidential tobacco industry files. If enacted in its
present form, the settlement would also create and finance public health
programs and education campaigns as well as establish goals for reduction of
underage tobacco use and provide a mandatory surcharge on tobacco businesses if
such goals are not met. Standards would also be developed to minimize
involuntary exposure to second-hand smoke.
The total face value of the 25-year settlement program would be $368.5
billion, to be borne by the tobacco industry as a deductible, ordinary business
expense. The legislation, if enacted in its present form, would also settle
certain types of existing lawsuits, including attorney general or similar
government actions and class actions. Punitive damages claims arising from
conduct preceding enactment of the legislation would be prohibited, no class
actions or other devices to resolve cases other than on an individual basis
would be permitted without the defendant's consent. An annual aggregate cap
would be placed on damages companies would pay. Where such cap is exceeded,
settlements and amounts of individual judgements exceeding $1 million would be
payable over time, with no more than $1 million to be paid over in any one year
in which the aggregate cap would be exceeded. All of the above limitations,
except for the limitation of punitive damages, would also apply to suits
claiming the occurence of injury after the effective date of legislation.
Since the introduction of the settlement on June 21, 1997, there has been
extensive public debate over the advisability of the Congress adopting
legislation to implement the proposed settlement, including whether payments
made pursuant to the settlement should be deductible for tax purposes. It is
impossible to predict whether, and in what form, the proposed legislation will
be enacted. Assuming some form is enacted, it is unclear what effect, if any,
such legislation would have upon the Company or the smokeless tobacco industry.
26
<PAGE>
EFFECTS OF INCREASED EXCISE TAXES
Smokeless tobacco products and RYO cigarette papers have long been subject
to federal and/or state and local excise taxes, and such taxes have frequently
been increased or proposed to be increased, in some cases significantly, to fund
various legislative initiatives. Future enactment of increases in excise taxes
could result in decreased unit sales of smokeless tobacco products and RYO
cigarette papers, which could have a material adverse effect on the Company's
business. See 'Business--Excise Taxes'.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS AND PREFERRED STOCK
The terms and conditions of the Indenture, the Certificate of Designation
and the New Senior Secured Facilities impose restrictions that affect the
ability of the Company to incur debt, make distributions, make acquisitions,
create liens and make capital expenditures. See 'Recent Transactions,'
'Description of Notes,' 'Description of New Preferred Stock,' and 'Description
of Other Indebtedness.' The Company also is required to maintain specified
financial ratios and tests and limit its capital expenditures, affiliate
payments and dividends. The restrictive covenants contained in the Indenture,
the Certificate of Designation and the New Senior Secured Facilities, as well as
the highly leveraged position of the Company, could significantly limit the
ability of the Company to respond to changing business or economic conditions or
to substantial declines in operating results. The ability of the Company to
comply with the provisions in the Indenture, the Certificate of Designation and
the New Senior Secured Facilities can be affected by events beyond the Company's
control, and there can be no assurance that the Company will achieve operating
results that will comply with such provisions.
The breach of any of these covenants under the New Senior Secured
Facilities could result in a default thereunder. In the event of any such
default, the Lender could elect to declare all amounts borrowed or owed under
the New Senior Secured Facilities, together with accrued interest and other
fees, to be due and payable or to apply all the available cash of the Company to
repay such amounts or to collateralize letters of credit (in which event cash
would not be available to the Company for other purposes). If the Company were
unable to repay any such amounts when due, the Lender could proceed against all
the collateral securing such debt. If the indebtedness under the New Senior
Secured Facilities or the Notes were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay such other
indebtedness and the Notes in full. See 'Description of Notes' and 'Description
of Other Indebtedness.'
RANKING OF THE NEW NOTES AND THE GUARANTEES; ABILITY TO INCUR ADDITIONAL SECURED
DEBT
The New Notes are not subordinated to any indebtedness of the Company and
rank pari passu with all other unsecured, unsubordinated indebtedness of the
Company including the Old Notes. The Notes are unsecured and thus, in effect,
would rank junior to any secured indebtedness of the Company. The New Senior
Secured Facilities are secured by substantially all of the assets and property
of the Company and each of its Subsidiaries. The Company has approximately $86.0
million in aggregate principal amount of secured indebtedness outstanding under
the New Secured Facilities as of June 30, 1997. In addition, the Indenture
permits the Company and its subsidiaries to incur additional secured debt under
certain circumstances. Some or all of such additional indebtedness may rank pari
passu with the Notes, and the holders of such indebtedness may have a claim to
assets of the Company superior to that of the holders of the Notes because such
additional indebtedness is secured by liens on assets of the Company. Although
there are certain limitations on the ability of the Company to secure such debt,
the incurrence of such additional debt might adversely affect the Company's
ability to meet its obligations under the Notes. See 'Description of
Notes--Certain Covenants' and 'Description of Other Indebtedness.' In the event
of dissolution, liquidation or reorganization of, or similar proceeding relating
to, the Company, the secured lenders of the Company would be entitled to receive
payment to the extent of the value of their collateral or in full, whichever is
less, prior to any payment in respect of the Notes.
The Guarantors have unconditionally guaranteed the payment of principal and
interest on the Notes when due. The Guarantees will rank pari passu with all
existing and future senior indebtedness of the Guarantors. The Guarantees are
unsecured and thus, in effect, would rank junior to any secured indebtedness of
the Guarantors. The Guarantors have $86.0 million in aggregate principal amount
of secured indebtedness outstanding as of June 30, 1997. The Indenture permits
the Company and its subsidiaries (including the Guarantors) to incur additional
secured debt under certain circumstances. Some or all of such additional
indebtedness may rank pari passu with the Guarantees, and the holders of such
indebtedness may have a claim to assets of a Guarantor superior to that of the
holders of the Notes because
27
<PAGE>
such additional indebtedness is secured by liens on assets of such Guarantor.
Although there are certain limitations on the ability of the Guarantors to
secure such debt, the incurrence of such additional debt might adversely affect
the Guarantors' ability to meet their obligations under the Guarantees. See
'Description of Notes--Guarantees.' Consequently, in the event of dissolution,
liquidation or reorganization of, or similar proceeding relating to, any
Guarantor, such Guarantor's secured lenders would be entitled to receive payment
to the extent of the value of their collateral or in full, whichever is less,
prior to any payment in respect of such Guarantor's Guarantee.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The incurrence by the Company of a portion of the indebtedness evidenced by
the Notes to finance the Acquisition, as described under 'Recent Transactions,'
is subject to review under relevant federal and state fraudulent conveyance
statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf of
creditors of the Company. Under these statutes, if a court were to find that
obligations (such as the Notes) were incurred with the intent of hindering,
delaying or defrauding present or future creditors, that the Company received
less than a reasonably equivalent value or fair consideration for those
obligations or that the Company contemplated insolvency with a design to prefer
one or more creditors to the exclusion, in whole or in part, of other creditors
and, at the time of the occurrence of the obligations, the obligor either (i)
was insolvent or rendered insolvent by reason thereof, (ii) was engaged or was
about to engage in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (iii) intended to
or believed that it would incur debts beyond its ability to pay such debts as
they matured or became due, such court could void the Company's obligations
under the Notes, subordinate the Notes to other indebtedness of the Company or
take other action detrimental to the holders of the Notes.
The measure of insolvency for purposes of a fraudulent conveyance claim
will vary depending upon the law of the jurisdiction being applied. Generally,
however, a company will be considered insolvent at a particular time if the sum
of its debts at that time is greater than the then fair value of its assets or
if the fair salable value of its assets at that time is less than the amount
that would be required to pay its probable liability on its existing debts as
they become absolute and mature. The Company believes that, after giving effect
to the Transactions, the Company is (i) neither insolvent nor rendered insolvent
by the incurrence of indebtedness in connection with the Transactions, (ii) in
possession of sufficient capital to run its business effectively and (iii)
incurring debts within its ability to pay as the same mature or become due.
There can be no assurance, however, as to what standard a court would apply
in order to evaluate the parties' intent or to determine whether the Company was
insolvent at the time of, or rendered insolvent upon consummation of, the
Transactions, the sale of the Old Notes or the Exchange Offer or that,
regardless of the method of valuation, a court would not determine that the
Company was insolvent at the time of, or rendered insolvent upon consummation
of, the Transactions.
In addition, the Guarantees may be subject to review under relevant federal
and state fraudulent conveyance and similar statutes in a bankruptcy or
reorganization case or a lawsuit by or on behalf of creditors of any of the
Guarantors. In such a case, the analysis set forth above would generally apply,
except that the Guarantees could also be subject to the claim that, since the
Guarantees were incurred for the benefit of the Company (and only indirectly for
the benefit of the Guarantors), the obligations of the Guarantors thereunder
were incurred for less than reasonably equivalent value or fair consideration. A
court could avoid a Guarantor's obligation under the Guarantee, subordinate the
Guarantee to other indebtedness of a Guarantor or take other action detrimental
to the holders of the Notes.
To the extent any Guarantee was avoided as a fraudulent conveyance, limited
as described above, or held unenforceable for any other reason, holders of the
Notes would, to such extent, cease to have a claim in respect of such Guarantee
and, to such extent, would be creditors solely of the Company and any Guarantor
whose Guarantee was not avoided, limited or held unenforceable. In such event,
the claims of the holders of the Notes against the issuer of an avoided, limited
or unenforceable Guarantee would be subject to the prior payment of all
liabilities of such Guarantor. There can be no assurance that, after providing
for all prior claims, there would be sufficient assets to satisfy the claims of
the holders of Notes.
CONTROL BY PRINCIPAL STOCKHOLDER
The Company is privately held. Thomas F. Helms, Jr., the Company's
President, Chief Executive Officer and Chairman of the Board owns a majority of
the Company's outstanding shares of Common Stock (before giving effect to the
exercise of the Warrants). Pursuant to the Exchange and Stockholders' Agreement,
dated as of June 25, 1997, between the Company and certain of its stockholders
(the
28
<PAGE>
'Stockholders' Agreement'), Mr. Helms has, in effect, the ability to elect all
or, in certain events, a majority of the members of the Board of Directors of
the Company. See 'Risk Factors--Limitation of Change of Control' and 'The
Transactions.' Accordingly, Mr. Helms has the ability to control the Company's
policies and affairs. Such control may have the effect of discouraging certain
types of transactions involving an actual or potential change of control of the
Company.
HOLDING COMPANY STRUCTURE; CHANGE OF CONTROL
The Company is a holding company with no business operations of its own.
The Company's only material asset is the direct and indirect equity interests in
its National Tobacco and NAOC subsidiaries, through which the Company conducts
its business operations. Accordingly, the Company will be dependent upon the
earnings and cash flows of, and dividends and distributions from, its direct and
indirect equity interests in National Tobacco and NAOC to pay its expenses, meet
its obligations and pay interest and principal on the Notes and dividends on the
Senior Preferred Stock. There can be no assurance that these direct and indirect
equity interests in National Tobacco and NAOC will generate sufficient earnings
and cash flows to pay dividends to distribute funds to the Company to enable the
Company to pay its expenses and meet its obligations and pay interest and
principal on the Notes and dividends on the Senior Preferred Stock.
NO PRIOR HISTORY OF COMBINED OPERATIONS; INTEGRATION OF ACQUIRED COMPANIES
Prior to the Acquisition, the operations of National Tobacco and NAOC were
conducted as separate and distinct businesses, each with its own management
team, sales force and manufacturing or distribution facilities. The Company
intends to manage the operations of National Tobacco and NAOC as an integrated
entity. While the Company believes that it can successfully integrate the
operations of National Tobacco and NAOC, there can be no assurance that this
will be the case. There also can be no assurance that the Company will be able
to realize expected operating and economic efficiencies following the
Transactions.
RELIANCE ON SUPPLIERS
The Company does not grow or purchase from growers any of the raw tobacco
products used in manufacture of its loose leaf chewing tobacco, and has entered
into a purchasing and processing agreement (the 'Lancaster Agreement') with the
Lancaster Leaf Tobacco Company of Pennsylvania ('Lancaster'). Pursuant to the
Lancaster Agreement, the Company, under normal conditions, must purchase all of
its tobacco requirements exclusively from Lancaster. In turn, Lancaster is
required to provide the Company with the quantity and types of tobacco it
desires.
Although the Company has put in place, and the Lancaster Agreement
provides, certain safeguards, including the right, under certain circumstances,
to purchase tobacco from other suppliers, there can be no guarantee that the
Company will be able to meet product demands in a timely manner or that the
Company will be able to find an alternate tobacco supplier if Lancaster is
unable to or does not meet the Company's supply needs. In the event that the
Company is unable to meet product demands, customers of the Company may seek to
fulfill their supply needs by purchasing competing brands, which in turn would
reduce the Company's market share.
The Company's RYO cigarette paper operations consist solely of the
marketing and distribution of finished RYO cigarette papers, rag or cut tobacco
and other tobacco related products. The Company does not manufacture any of its
cigarette paper products and has entered into an agreement with Bollore for the
long-term supply of finished products. Pursuant to the Distribution Agreements
(as defined) with Bollore, the Company, under normal conditions, must purchase
the finished products only from Bollore. In turn, Bollore is required by the
Distribution Agreements to provide the Company with the quantities of the
products that it desires.
Although the Company has put in place certain safeguards including the
maintenance by the Company of a six- to 12-week supply of inventory, and by
Bollore of a two-month supply of immediately available inventory at a public
warehouse in Sparks, Nevada, and the ability under certain circumstances to sell
ZIG-ZAG RYO cigarette papers which are purchased from sources other than
Bollore, there can be no guarantee that the Company will be able to meet product
demands in a timely manner or that the Company will be able to find an alternate
supplier if Bollore is unable to or does not meet the Company's supply needs. In
the event that the Company is unable to meet product demands, customers of the
Company may seek to fulfill their supply needs by purchasing competing brands,
which in turn would reduce the Company's market share.
29
<PAGE>
The Distribution Agreements prohibit ownership by a competitor of NAOC (a
'Competitor') of equity in the Company, transfer of equity in the Company to a
Competitor, and certain investments by significant stockholders of the Company
in a Competitor. If such prohibited transactions occurred, they would breach the
Bollore Agreement and could result in its termination. See: 'Business--Raw
Materials; Product Supply and Inventory Management' and '--Distribution
Agreements.'
RISKS ASSOCIATED WITH FOREIGN SUPPLIER
Although NAOC does not have material foreign operations or assets located
outside the United States, NAOC does make substantial purchases of inventory
from Bollore, on terms of net 45 days in French francs. Thus NAOC bears certain
foreign exchanges risks in its inventory purchases. To hedge this risk, NAOC
began utilizing the short-term forward currency market in 1997. In addition,
Bollore provides a contractual hedge against substantial currency fluctuation
under its agreement with NAOC. Foreign currency transactions are subject to
fluctuations, the impact of inflation, government expropriation, exchange
controls, political instability, civil insurrection and other risks. Changes in
certain exchange rates could have an adverse effect on the Company's ability to
meet interest, dividend and principal obligations with respect to its U.S.
dollar-denominated debt and preferred stock, including payments on the Notes and
Senior Preferred Stock.
COMPETITION
The Company encounters significant competition for the Company's products
from other third-party providers of similar products. The Company believes that
the principal competitive factors affecting the business for both major product
categories--loose leaf chewing tobacco products and RYO cigarette
papers--include product quality and taste, brand name recognition, product
innovation, low-cost manufacturing and sales and marketing resources.
Additionally, competitive pricing is a significant factor affecting the business
for both loose leaf chewing tobacco and RYO cigarette paper products. Certain
competitors of the Company in the loose leaf chewing tobacco and the RYO
cigarette paper businesses are better capitalized and less leveraged than the
Company and may have greater financial and other resources than those available
to the Company. See 'Business--Business Strategy' and '--Competition.'
QUARTERLY FLUCTUATIONS IN EARNINGS
On a pro forma basis, approximately half of the Company's net sales and
approximately two thirds of the Company's operating profits are derived from
NAOC. NAOC's sales are promotionally oriented. A substantial portion of its
sales are derived from three four-week promotions which occur in March,
July/August and November. As a result, the Company's net sales and profits may
fluctuate from quarter to quarter. In addition, NAOC's failure to successfully
promote its products during one or more of these periods could have a material
adverse effect on the Company.
LIMITATION ON CHANGE OF CONTROL
Upon a Change of Control (as defined) the Company will be required to offer
to purchase all of the outstanding Notes and the Senior Preferred Stock at a
price equal to 101% of the principal amount of the Notes plus accrued and unpaid
interest, if any, to the date of purchase and 101% of the liquidation preference
of the Senior Preferred Stock plus accumulated and unpaid dividends to the date
of purchase, respectively. The Change of Control purchase feature of the Notes
and the Senior Preferred Stock may in certain circumstances discourage or make
more difficult a sale or takeover of the Company. In particular, a Change of
Control may cause an acceleration of indebtedness under the New Senior Secured
Facilities and certain other indebtedness, if any, of the Company and its
subsidiaries, in which case such indebtedness would be required to be repaid in
full before repurchase of the Notes and the Senior Preferred Stock. See
'Description of Notes--Repurchase at the Option of Holders--Change of Control,'
'Description of New Preferred Stock--Change of Control Offer' and 'Description
of Other Indebtedness.' The inability to repay such indebtedness, if
accelerated, and to purchase all of the tendered Notes would constitute an event
of default under the Indenture. Finally, there can be no assurance that the
Company will have funds available to repurchase the Notes upon the occurrence of
a Change of Control.
DEPENDENCE ON MANAGEMENT
Certain of the executive officers of the Company are vital to the direction
and management of the Company. The loss of the services of such persons could
have a material adverse effect on the business and operations of the Company,
and there can be no assurance that the Company would be able to find
replacements for such persons with equivalent business experience.
30
<PAGE>
ABSENCE OF PUBLIC MARKET
Prior to the Exchange Offer, there has not been any public market for the
Unregistered Securities. The Unregistered Securities have not been registered
under the Securities Act and will be subject to restrictions on transferability
to the extent that they are not exchanged for Exchange Securities by holders who
are entitled to participate in the Exchange Offer. Certain holders of
Unregistered Securities (other than any such holder that is an affiliate of the
company within the meaning of Rule 405 under the Securities Act) who are not
eligible to participate in the Exchange Offer are entitled to certain
registration rights, and the Company may be required to file a Shelf
Registration Statement with respect to such Unregistered Securities. The New
Notes and New Preferred Stock will each constitute a new issue of securities
with no established trading market. The Company does not intend to list the
Exchange Securities on any national securities exchange or to seek approval for
quotation through any automated quotation system. The initial purchasers of the
Unregistered Securities currently make a market in the Unregistered Securities,
but they are not obligated to do so and may discontinue such market making at
any time. In addition, such market making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act and may be limited during the
Exchange Offer and the pendency of a Shelf Registration Statement. Accordingly,
no assurance can be given that an active public or other market will develop for
the Exchange Securities or as to the liquidity of the trading market for the
Exchange Securities. Consequently, holders of Exchange Securities may experience
difficulty in reselling the Exchange Securities or may be unable to sell them at
all. If a market for the Exchange Securities develops, any such market may be
discontinued at any time.
If a public trading market develops for the Exchange Securities, future
trading prices of such securities will depend on many factors, including among
other things, prevailing interest rates, the Company's results of operations and
the market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Exchange Securities may trade at a discount from
their principal amount.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Unregistered Securities who do not exchange their Unregistered
Securities for Exchange Securities pursuant to the Exchange Offer will continue
to be subject to the restrictions on transfer of such securities as set forth in
the legend thereon and in the Offering Memorandum dated June 18, 1997, because
the Unregistered Securities were issued pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Unregistered Securities
may not be offered or sold unless registered under the Securities Act and
applicable state securities laws, or pursuant to an exemption therefrom, or in a
transaction not subject to the Securities Act and applicable state securities
laws. The Company does not intend to register the Unregistered Securities under
the Securities Act and, after consummation of the Exchange Offer, will not be
obligated to do so except under limited circumstances. See 'The Exchange
Offer--Purpose and Effect.' Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to third parties, the Company
believes that the Exchange Securities issued pursuant to the Exchange Offer in
exchange for Unregistered Securities may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) a broker-dealer who
purchases such Exchange Securities from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act, or (ii) a person
that is an 'affiliate' of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such securities are acquired in
the ordinary course of such holders' business, such holders have no arrangement
with any person to participate in the distribution of such securities and
neither such holders nor any such other person is engaging in or intends to
engage in a distribution of such securities. Any holder of Unregistered
Securities who tenders in the Exchange Offer for the purpose of participating in
a distribution of the Exchange Securities may be deemed to have received
restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Securities for its own account in exchange for Unregistered Securities,
where such Unregistered Securities were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Securities. See 'Plan of Distribution,' and 'The Exchange Offer--Procedures for
Tendering.' To the extent the Unregistered Securities are tendered and accepted
in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Unregistered Securities could be adversely affected. See 'The
Exchange Offer--Purpose and Effect of the Exchange Offer.'
31
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreements. In consideration for
issuing the Exchange Securities contemplated in this Prospectus, the Company
will exchange Old Notes and Old Preferred Stock for Exchange Securities (in a
like principal amount and like number of shares), the form and terms of which
are the same as the form and terms of such Unregistered Securities, except as
otherwise described herein. The Old Notes surrendered in exchange for New Notes
will be retired and canceled and cannot be reissued. Shares of New Preferred
Stock will be issued in exchange for shares of Old Preferred Stock on a
one-for-one basis. Accordingly, issuance of the Exchange Securities will not
result in any increase or decrease in the indebtedness of the Company or the
Guarantors. As such, no effect has been given to the Exchange Offer in the pro
forma statements or capitalization tables. The Company will not receive any
proceeds from the Exchange Offer. The gross proceeds to the Company from Old
Notes Offering and the concurrent offering of the Units on June 25, 1997, were
approximately $189 million (before deducting fees and expenses relating to the
Offering). The net proceeds of the Old Notes Offering and the concurrent
offering of the Units, together with proceeds of $85 million of floating rate
borrowings under the New Senior Secured Facilities, $712,000 in equity
investments by certain employees and a consultant of the Company, and
approximately $0.6 million of excess cash were used to finance the Acquisition,
refinance certain indebtedness of National Tobacco, repurchase all of the
outstanding subordinated indebtedness and preferred interests of and warrants to
purchase membership interests in LLC, to pay a fee to Bollore, and to pay fees
and expenses associated with the Transactions which were consummated on June 25,
1997.
32
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization as of June 30, 1997 of
the Company on a historical basis. This table should be read in conjunction with
the historical consolidated financial statements and the related notes thereto
and the other information included elsewhere in this Prospectus. See 'Unaudited
Pro Forma Condensed Consolidated Financial Statements' and 'Recent
Transactions.'
<TABLE>
<S> <C>
Cash and cash equivalents......................................... $ 3,547
---------
---------
Senior debt:
Revolving credit facility....................................... $ 750
Floating rate term facility..................................... 85,000
11% Senior Notes due 2004, Series A............................. 155,000
11% Senior Notes due 2004, Series B............................. --
---------
Total debt................................................... 240,750
Preferred stock................................................... 32,371
Exchange preferred stock.......................................... --
Stockholders' equity.............................................. (24,715)
---------
Total capitalization......................................... $ 248,406
---------
---------
</TABLE>
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the six-month period ended June 30, 1997 has been derived from
the unaudited condensed Statement of Operations of National Tobacco and the
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1996 has been derived from the audited Statement of
Operations of National Tobacco, adjusted to give effect to the Recent
Transactions (see 'Recent Transactions' on page 74) and the May 17, 1996
recapitalization of National Tobacco (see Note 1 to National Tobacco's annual
financial statements on page F-8) as described in the accompanying Notes to
Unaudited Pro Forma Condensed Consolidated Statement of Operations. The
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the
six-month period ended June 30, 1997 and for the year ended December 31, 1996
were prepared as if the Recent Transactions and the May 17, 1996
recapitalization of National Tobacco had occurred on January 1, 1996. The
Unaudited Pro Forma Condensed Consolidated Statements of Operations do not
purport to represent what the Company's results of operations would have been
had the Recent Transactions and the May 17, 1996 recapitalization of National
Tobacco occurred on such dates or to project the Company's results of operations
on any future dates or for any future periods. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations are qualified by reference to, and should
be read in conjunction with, the historical financial statements and related
notes of National Tobacco and its predecessors.
The Acquisition has been accounted for using the purchase method of
accounting, under which the purchase price of NAOC has been allocated to the
tangible and intangible assets and liabilities of NAOC based upon their
respective fair values. The Unaudited Pro Forma Condensed Consolidated
Statements of Operations have been prepared based upon certain assumptions made
by management regarding the Recent Transactions and a preliminary estimate of
the purchase price allocation. Actual accounting adjustments for the Recent
Transactions may differ from the pro forma adjustments based on the balances of
the assets and liabilities of National Tobacco and NAOC and the final purchase
price allocation.
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------
NAOC
NAOC MARCH
JANUARY 31,
1, 1997 1997
TO TO PRO THE
MARCH JUNE FORMA COMPANY
NATIONAL 31, 25, ADJUSTING PRO
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) TOBACCO 1997 1997 ENTRIES FORMA
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $25,938 $10,244 $7,262 -- $43,444
Cost of sales................................... 9,300 3,386 2,899 -- 15,585
------- ------- ------- ------- -------
Gross profit.................................. 16,638 6,858 4,363 -- 27,859
Selling, general and administrative expenses.... 11,591 1,159 1,932 -- 14,682
Amortization of intangible assets............... 467 1,330 1,314 $(2,644)(1)
2,382 (2) 2,848
------- ------- ------- ------- -------
Operating income.............................. 4,580 4,369 1,117 (262) 10,329
Interest expense, net........................... 5,195 1,151 1,215 (7,561)(3)
12,169 (4)
1,076 (5) 13,245
Financial advisory fee expense.................. -- 481 295 (776) --
Other income.................................... (44) -- (206) -- (250)
------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes......................... (571) 2,737 (187) (4,646) (2,666)
Provision for income taxes...................... 5,018 903 56 (5,978)(7)
(1,338)(8) (1,338)
------- ------- ------- ------- -------
Income (loss) from continuing operations...... (5,589) 1,834 (243) (2,670) (1,328)
Preferred stock dividends....................... 58 -- -- 2,410 (9) 2,468
------- ------- ------- ------- -------
Income (loss) from continuing operations
applicable to common stock (10)............. $(5,647) $ 1,834 $(243) $ 260 $(3,796)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Income (loss) from continuing operations per
common share.................................. $(10.69) $137.54 $(18.27) $(7.19)
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of common shares
outstanding (000) (11)........................ 528.2 13.3 13.3 528.2
------- ------- ------- -------
------- ------- ------- -------
Supplemental financial data:
Historical loss from continuing operations
before income taxes......................... $ (571)
Pro forma benefit for income taxes (12)....... (228)
-------
Pro forma loss from continuing operations..... $ (342)
Preferred stock dividends..................... 58
-------
Pro forma loss from continuing operations
applicable to common share.................. $ (400)
-------
-------
Pro forma loss from continuing operations per
common share................................ $ (0.76)
-------
-------
Weighted average common shares outstanding.... 528.2
OTHER DATA:
Ratio of earnings to combined fixed charges and
preferred stock dividend (deficiency of
$5,134) (19)....................................................................................... --
Ratio of earnings to fixed charges (deficiency
of $2,166)(20)..................................................................................... --
EBITDA (17)..................................... $ 5,947 $5,715 -- $14,077
Depreciation and amortization of intangible
assets........................................ 1,368 1,346 $1,091 3,748
Capital expenditures............................ 442 30 -- 442
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Statement of Income.
35
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Historical
-----------------------------------------------------------
Pro National Pro The
Forma Tobacco Forma Company
(Dollars in thousands, NTC National Adjusting Pro Adjusting Pro
except per share data) Predecessor Tobacco Entries Forma NAOC Entries Forma
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $19,810 $36,126 -- $55,936 $46,139 -- $102,075
Cost of sales......................... 7,847 15,407 -- 23,254 16,453 -- 39,707
------- ------- ------- ------- ------- ------- -------
Gross profit........................ 11,963 20,719 -- 32,682 29,686 -- 62,368
Selling, general and administrative
expenses............................ 7,904 13,551 -- 21,455 3,980 -- 25,435
Amortization of intangible assets..... 365 504 $ (365)(13) 5,078 $(5,078)(1)
366 (13) 870 4,763 (2) 5,633
------- ------- ------- ------- ------- ------- -------
Operating income.................... 3,694 6,664 (1) 10,357 20,628 (315) 31,300
Interest expense, net................. 2,453 6,398 (2,453) (3) 4,976 (16,789)(3)
4,450 (15) 24,020 (4)
965 (16) 11,813 2,151 (5) 26,171
Financial advisory fee expense........ 114 -- (114)(14) -- 1,178 (1,178)(6) --
Other expense (income)................ (5) (117) -- (122) -- -- (122)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes... 1,132 383 (2,849) (1,334) 14,474 (7,889) 5,251
Provision for income taxes............ -- -- -- -- 5,130 (5,130)
1,556 (8) 1,556
------- ------- ------- ------- ------- ------- -------
Net income (loss)................... 1,132 383 (2,849) (1,334) 9,344 4,315 3,695
Preferred stock dividends............. -- -- -- -- -- 4,325 (9) 4,325
------- ------- ------- ------- ------- ------- -------
Net income (loss) applicable to
common stock (10)................. $ 1,132 $ 383 $(2,849) $(1,334) $ 9,344 $(8,640) $ (630)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Net income (loss) per common share.... $698.25 $ (1.19)
------- -------
------- -------
Weighted average number of common
shares outstanding (000) (11)....... 13.4 528.2
------- -------
------- -------
Supplemental financial data:
Historical income (loss) before
income taxes...................... $ 1,132 $ 383 $(2,849) $(1,334)
Pro forma provision (benefit) for
income taxes(12).................. 453 153 (1,140) (534)
------- ------- ------- -------
Pro forma net income (loss)......... $ 679 $ 230 $(1,709) $ (800)
------- ------- ------- -------
------- ------- ------- -------
OTHER DATA:
Ratio of earnings to combined fixed charges and preferred stock dividends (19)........................................ 1.03
Ratio of earnings to fixed charges (20)............................................................................... 1.20
EBITDA(17)..................................................................... $15,521 $25,768 -- $41,289
Depreciation and amortization of intangible assets............................. 2,358 5,140 $ (853) 7,183
LIFO adjustment................................................................ 2,806 -- -- 2,806
Capital expenditures........................................................... 300 55 -- 442
Ratio of EBITDA to interest expense(18)............................................................................... 1.72x
Ratio of EBITDA minus capital expenditures to interest expense(18).................................................... 1.70x
</TABLE>
See notes to Unaudited Pro Forma Consolidated Condensed Statement of Operations.
36
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
Three Months Ended March 31, 1997 and Year Ended December 31, 1996
(Dollars in thousands)
The Unaudited Pro Forma Consolidated Statements of Income give effect to
the following unaudited pro forma adjustments:
(1) Reflects the elimination of historical amortization expense of NAOC.
(2) Reflects the amortization of goodwill resulting from the acquisition of
NAOC. The estimated goodwill of $119,080 will be amortized over a 25-year
period on the straight-line method.
(3) Represents the removal of historical and pro forma interest expense and
deferred financing costs of National Tobacco and NAOC.
(4) Reflects the interest expense computed to give effect to the Transactions,
as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1996 1997
------------- ----------------
<S> <C> <C>
Interest expense on the Notes at
11%................................... $17,050 $8,525
Interest expense on the Term
Facility at 8.5%...................... 6,970 3,644
------------- ----------------
Total............................ $24,020 $12,169
------------- ----------------
------------- ----------------
</TABLE>
(5) Represents the amortization of deferred financing costs related to the
Transactions.
(6) Reflects the elimination of certain historical financial advisory fee
expenses which are non-recurring due to the termination of the related
agreement upon the occurrence of the Transactions.
(7) Reflects the elimination of the historical provision for income taxes of
NAOC.
(8) Reflects the pro forma income tax provision for the Company at a combined
statutory federal and state income tax rate of 40%, giving effect to the
nondeductible goodwill amortization expense related to the acquisition of
NAOC.
(9) Reflects pay-in-kind preferred dividends on and accretion of the Senior
Preferred Stock.
(10) National Tobacco and NTC Predecessor were partnerships for federal and
state income tax purposes through the consummation of this Exchange
Offering and, accordingly, did not incur any federal or state income taxes
during these periods.
(11) Income (loss) from continuing operations per common share is based on
weighted average number of shares of common stock outstanding during the
period. Stock options and warrants have not been included in the
calculation due to their antidilutive effect.
(12) Pro forma income taxes have been calculated using an effective tax rate of
40% (34% federal and 6% state).
(13) Reflects adjustment to remove historical amortization expense of NTC
Predecessor and record the amortization of the goodwill of $31,952
resulting from the May 17, 1996 recapitalization which is being amortized
over a 40-year period.
(14) Represents the removal of NTC Predecessor's financial advisory fee expenses
which are non-recurring to National Tobacco due to the termination of the
related agreement upon recapitalization on May 17, 1996.
(15) Reflects the interest expense computed to give effect of the May 17, 1996
recapitalization.
(16) Reflects the amortization of deferred financing costs of $5,700 and
amortization of the discount on National Tobacco's subordinated notes
resulting from the May 17, 1996 recapitalization.
37
<PAGE>
(17) 'EBITDA' represents operating income plus depreciation and amortization of
intangible assets plus the recurring non-cash LIFO adjustment, where
applicable. Information regarding EBITDA is presented because management
believes that EBITDA is useful as an indicator of an issuer's historical
cash flow available to service its debt. EBITDA should not be considered as
an alternative to, or more meaningful than, net income (as determined in
accordance with GAAP) as a measure of the Company's operating results or
cash flows (as determined in accordance with GAAP) as a measure of the
Company's liquidity.
Following is a reconciliation of net income to EBITDA:
<TABLE>
<CAPTION>
Year Ended Six months
December 31, Ended
1996 June 30, 1997
------------ -------------
<S> <C> <C>
Net income.............................. $ 3,695 $(1,328)
Interest expense, net................. 26,171 13,245
Income taxes.......................... 1,556 (1,338)
Depreciation.......................... 1,550 900
Amortization of intangibles........... 5,633 2,848
Other income.......................... (122) (250)
LIFO adjustment....................... 2,806 --
------------ -------------
EBITDA.................................. $ 41,289 $14,077
------------ -------------
------------ -------------
</TABLE>
(18) For purposes of calculating this ratio, interest expense excludes
amortization of deferred financing costs and dividends on preferred stock
management believes that EBITDA is useful as an indicator of an issuer's
historical cash flow available to service its debt. EBITDA should not be
considered as an alternative to, or more meaningful than, net income (as
determined in accordance with GAAP) as a measure of the Company's operating
results or cash flows (as determined in accordance with GAAP) as a measure
of the Company's liquidity.
(19) For purposes of calculating the ratio of earnings to fixed charges and
preferred stock dividends, earnings represent income (loss) before income
taxes plus combined fixed charges and preferred stock dividends. Combined
fixed charges and preferred stock dividends consist of interest expense
(including amortization of deferred financing costs) plus one-third (the
portion deemed to be representative of interest) of rent expense, plus the
pre-tax earnings which would be required to cover preferred stock dividends
(preferred stock dividends divided by 100% minus the relationship of the
provision for income taxes to the income (loss) before income taxes). The
Company had pro forma earnings which were inadequate to cover combined
fixed charges and preferred stock dividends by approximately $5,134 for the
six months ended June 30, 1997.
(20) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes plus fixed charges.
Fixed charges consist of interest expense (including amortization of
deferred financing costs) plus one-third (the portion deemed to be
representative of interest) of rent expense. The Company had pro forma
earnings which were inadequate to cover fixed charges by approximately
$2,166 for the six months ended June 30, 1997.
38
<PAGE>
SELECTED FINANCIAL DATA
NATIONAL TOBACCO
(DOLLARS IN THOUSANDS)
The following table sets forth selected financial data of National Tobacco
for the periods from May 17, 1996 to December 31, 1996 and the six months ended
June 30, 1997. The selected financial data for the period May 17, 1996 to
December 31, 1996 has been derived from audited financial statements of National
Tobacco, and the financial data for the six months ended June 30, 1997 have been
derived from unaudited condensed financial statements. Such unaudited condensed
financial statements include all adjustments, consisting of normal recurring
accruals, which management considers necessary for a fair presentation of the
financial position and the results of operations and cash flows for these
periods. Results for interim periods are not necessarily indicative of results
for the full year. Effective May 17, 1996, Predecessor 1 was recapitalized as
National Tobacco. As such, the selected financial data for the period from
January 1, 1996 to May 17, 1996, the six months ended June 30, 1996 and the
years ended December 31, 1993, 1994 and 1995, and the period from April 15, 1992
to December 31, 1992 have been derived from the audited financial statements of
Predecessor 1. The selected financial data for the Predecessor 1 are not
comparable in certain respects to the selected financial data of National
Tobacco due to the effects of the May 17, 1996 recapitalization. Effective April
15, 1992, Predecessor 2 was recapitalized as Predecessor 1. As such, the
selected historical consolidated financial data for Predecessor 2 are not
comparable in certain respects to the selected financial data of Predecessor 1
and National Tobacco due to the effects of the April 15, 1992 recapitalization.
This selected financial data is qualified by and should be read in conjunction
with the audited financial statements and the unaudited condensed financial
statements, and the related notes thereto, and the other financial information
contained in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR 2 PREDECESSOR 1
------------- --------------------------------------------------------------
PERIOD PERIOD PERIOD PERIOD
FROM FROM FROM FROM
01/01/92 04/15/92 YEAR ENDED DECEMBER 31, 01/01/96 5/18/96
TO TO ---------------------------- TO TO
04/15/92 12/31/92 1993 1994 1995 05/17/96 6/30/96
------------- -------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................ $12,809 $ 38,615 $52,312 $51,376 $ 52,630 $ 19,810 $ 8,376
Cost of sales.................... 5,716 19,063 26,929 21,872 20,491 7,847 2,974
------------- -------- ------- ------- -------- -------- ---------
Gross profit..................... 7,093 19,552 25,383 29,504 32,139 11,963 5,402
Selling, general and
administrative expenses........ 5,200 11,215 18,639 18,395 19,663 7,904 2,804
Amortization of intangible
assets......................... 743 660 1,040 1,038 973 365 331
------------- -------- ------- ------- -------- -------- ---------
Operating income................. 1,150 7,677 5,704 10,071 11,503 3,694 2,267
Interest expense................. 1,198 5,210 6,896 6,834 7,239 2,453 1,035
Financial advisory fee expense... 0 213 300 300 300 114 --
Other expense (income)(1)........ (3) (47) (27) (2,875) 1,336 (5) (15)
------------- -------- ------- ------- -------- -------- ---------
Income (loss) before income
taxes, cumulative effect of
change in accounting principle
and extraordinary loss......... (45) 2,301 (1,465) 5,812 2,628 1,132 1,247
Provision for income taxes....... -- -- -- -- -- -- --
------------- -------- ------- ------- -------- -------- ---------
Income (loss) before cumulative
effect of change in accounting
principle and extraordinary
loss........................... (45) 2,301 (1,465) 5,812 2,628 1,132 1,247
Cumulative effect of change in
accounting principle........... -- -- -- -- 123 -- --
------------- -------- ------- ------- -------- -------- ---------
Income (loss) before
extroardinary loss............. (45) 2,301 (1,465) 5,812 2,505 1,132 6
Extraordinary loss, net of
deferred tax benefit of
$3,224......................... -- -- -- -- -- -- --
Net income (loss)................ $ (45) $ 2,301 $(1,465) $ 5,812 $ 2,505 $ 1,132 $ 1,247
Preferred stock dividends........ -- -- -- -- -- -- --
Net income (loss) attributable to
common shares..................
Unaudited pro forma net income
(loss) after income taxes(2)... $ (27) $ 1,381 $ (879) $ 3,487 $ 1,503 $ 679 $ 748
------------- -------- ------- ------- -------- -------- ---------
------------- -------- ------- ------- -------- -------- ---------
OTHER DATA:
Ratio of earnings to fixed
charges(5)..................... -- 1.43 -- 1.82 1.35 1.44 2.17
Ratio of earnings to combined
fixed charges and preferred
stock dividends(6)............. N/A N/A N/A N/A N/A N/A N/A
Cash flow from operating
activities..................... $ 1,063 $ 3,804 $ 6,144 $ 6,920 $ 8,714 $ 1,172 $ 1,206
Cash flow from investing
activities..................... (203) (65,782) 607 (355) (239) (144) (72,200)
Cash flow from financing
activities..................... (482) 63,319 (5,668) (7,079) (9,048) (977) 72,087
EBITDA(3)........................ 2,056 9,603 11,715 12,756 13,496 4,700 2,808
Depreciation and amortization of
intangible assets.............. 890 1,400 2,047 2,076 2,046 819 541
LIFO adjustment.................. 16 526 3,964 609 (53) 187 --
Capital expenditures............. 109 262 224 355 239 144 144
Ratio of EBITDA to interest
expense........................ 1.72x 1.97x 1.82x 2.48x 2.42x 2.11x 2.71x
Gross margin..................... 55.4% 50.6% 48.5% 57.4% 61.1% 60.4% 64.5%
EBITDA margin.................... 16.1% 24.9% 22.4% 24.8% 25.6% 23.7% 33.5%
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)........ $(6,820) $ 20,901 $15,323 $13,397 $ 9,936 $ (9,673) $26,441
Total assets..................... 57,481 95,556 85,615 82,136 80,517 81,887 100,439
Total debt, including current
maturities..................... 44,752 71,390 62,200 54,888 48,782 48,388 73,809
Preferred stock.................. -- -- -- -- -- -- --
Preferred interests.............. -- -- -- -- -- -- 2,500
Warrants......................... -- -- -- -- -- -- 8,195
Equity........................... 8,178 13,941 12,172 17,706 20,471 21,603 5,739
<CAPTION>
NATIONAL TOBACCO
-------------------
PERIOD SIX
FROM MONTHS
06/30/96 ENDED
TO JUNE 30,
12/31/96 1997
------- ---------
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales........................ $27,750 $ 25,938
Cost of sales.................... 12,433 9,300
------- ---------
Gross profit..................... 15,317 16,638
Selling, general and
administrative expenses........ 10,747 11,591
Amortization of intangible
assets......................... 173 468
------- ---------
Operating income................. 4,397 4,579
Interest expense................. 5,363 5,194
Financial advisory fee expense... -- --
Other expense (income)(1)........ (102) (44)
------- ---------
Income (loss) before income
taxes, cumulative effect of
change in accounting principle
and extraordinary loss......... (864) (571)
Provision for income taxes....... -- 5,017
------- ---------
Income (loss) before cumulative
effect of change in accounting
principle and extraordinary
loss........................... (864) (5,588)
Cumulative effect of change in
accounting principle........... -- --
------- ---------
Income (loss) before
extroardinary loss............. (5,588)
Extraordinary loss, net of
deferred tax benefit of
$3,224......................... -- (8,262)
Net income (loss)................ $ (864) $ (13,850)
Preferred stock dividends........ -- $ 58
Net income (loss) attributable to
common shares.................. $ (13,908)
---------
---------
Unaudited pro forma net income
(loss) after income taxes(2)... $ (518) $ N/A
------- ---------
------- ---------
OTHER DATA:
Ratio of earnings to fixed
charges(5)..................... -- --
Ratio of earnings to combined
fixed charges and preferred
stock dividends(6)............. N/A --
Cash flow from operating
activities..................... $ 5,466 $ (25,862)
Cash flow from investing
activities..................... (101) (157,260)
Cash flow from financing
activities..................... (4,249) 184,460
EBITDA(3)........................ 5,394 5,947
Depreciation and amortization of
intangible assets.............. 997 1,386
LIFO adjustment.................. 2,619 --
Capital expenditures............. 101 442
Ratio of EBITDA to interest
expense........................ 1.01x 1.15x
Gross margin..................... 55.2% 64.1%
EBITDA margin.................... 19.4% 22.9%
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)........ $25,250 $ 49,199
Total assets..................... 96,553 274,527
Total debt, including current
maturities..................... 70,696 240,750
Preferred stock.................. -- 32,371
Preferred interests.............. 2,737 --
Warrants......................... 8,195 --
Equity........................... 4,875 (24,715)
</TABLE>
39
<PAGE>
- ------------------
(1) Fiscal 1994 other expense (income) includes a one-time charge of $352 for
abandoned debt issuance costs and one-time benefits to adjust the reserves
for asbestos removal by $812 and post-retirement benefits by $2,267. Fiscal
1995 other expense (income) includes a one-time charge of $1,561 for
abandoned debt issuance costs.
(2) National Tobacco and its predecessors were partnerships through the
consummation of the Transactions and, accordingly, did not incur any federal
or state income taxes. Unaudited pro forma net income has been adjusted for
assumed federal and state income taxes based on the statutory (federal and
state) tax rate of 40%.
(3) EBITDA represents operating income plus depreciation and amortization of
intangible assets plus the recurring non-cash LIFO adjustment. Information
regarding EBITDA is presented because management believes that EBITDA is
useful as an indicator of an issuer's historical cash flow available to
service its debt. EBITDA should not be considered as an alternative to, or
more meaningful than, net income (as determined in accordance with GAAP) as
a measure of the Company's operating results or cash flows (as determined in
accordance with GAAP) as a measure of the Company's liquidity.
Following is a reconciliation of net income to EBITDA:
<TABLE>
<CAPTION>
PERIOD PERIOD PERIOD PERIOD
FROM FROM FROM FROM
01/01/92 04/15/92 YEAR ENDED DECEMBER 31, 01/01/96 5/18/96
TO TO --------------------------- TO TO
04/15/92 12/31/92 1993 1994 1995 05/17/96 6/30/96
------------- -------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income......................... $ (45) $ 2,301 $(1,465) $ 5,812 $ 2,505 $ 1,132 $ 1,247
Interest expense, net............ 1,198 5,210 6,896 6,834 7,239 2,453 1,035
Income taxes..................... -- -- -- -- -- -- --
Depreciation..................... 147 740 1,007 1,038 1,073 454 210
Amortization of intangibles...... 743 660 1,040 1,038 973 365 331
Other income..................... (3) (47) (27) (2,875) 1,336 (5) (15)
Financial advisory fee expense... -- 213 300 300 300 114 --
LIPO adjustment.................. 16 526 3,964 609 (53) 187 --
Cumulative effect of accounting
change......................... -- -- -- -- 123 -- --
Extraordinary loss, net.......... -- -- -- -- -- -- --
------------- -------- ------- ------- ------- -------- ---------
EBITDA............................. $ 2,056 $ 9,603 $11,715 $12,756 $13,496 $ 4,700 $ 2,808
------------- -------- ------- ------- ------- -------- ---------
------------- -------- ------- ------- ------- -------- ---------
<CAPTION>
PERIOD
FROM SIX
06/30/96 MONTHS
TO ENDED
12/31/96 6/30/97
------- ---------
<S> <C> <C>
Net income......................... $ (864) $(13,850)
Interest expense, net............ 5,363 5,194
Income taxes..................... -- 5,017
Depreciation..................... 824 900
Amortization of intangibles...... 173 468
Other income..................... (102) (44)
Financial advisory fee expense... -- --
LIPO adjustment.................. -- --
Cumulative effect of accounting
change......................... -- --
Extraordinary loss, net.......... -- 8,262
------- ---------
EBITDA............................. $ 5,394 $ 5,947
------- ---------
------- ---------
</TABLE>
(4) For purposes of calculating this ratio, interest expense excludes
amortization of deferred financing costs. Management believes this ratio is
useful as an indicator of the issuer's historical cash flow available to
service its debt. EBITDA should not be considered as an alternative to, or
more meaningful than, net income (as determined in accordance with GAAP) as
a measure of the Company's operating results or cash flows (as determined in
accordance with GAAP) as a measure of the Company's liquidity.
(5) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) before income taxes and cumulative effect of change
in accounting principles plus fixed charges. Fixed charges consist of
interest expense plus one-third of rent expense (the portion deemed to be
representative of the interest portion). For the period from January 1, 1992
to April 15, 1992, the year ended December 31, 1993, the period from May 18,
1996 to December 31, 1996 and the six months ended June 30, 1997, National
Tobacco had earnings which were inadequate to cover fixed charges by
approximately $45 and $1,465, $864 and $571, respectively.
(6) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings represent income (loss) before
income taxes plus combined fixed charges and preferred stock dividends.
Combined fixed charges and preferred stock dividends consist of interest
expense (including amortization of deferred financing costs) plus one-third
(the portion deemed to be representative of interest) of rent expense, plus
the pre-tax earnings which would be required to cover preferred stock
dividends (preferred stock dividends divided by 100% minus the relationship
of the provision for income taxes to the income (loss) before income taxes).
The Company had pro forma earnings which were inadequate to cover combined
fixed charges and preferred stock dividends by approximately $629 for the
six months ended June 30, 1997.
40
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
NORTH ATLANTIC OPERATING COMPANY, INC.
(DOLLARS IN THOUSANDS)
The following table sets forth selected consolidated financial data of
North Atlantic Operating Company, Inc. (together with its predecessors, 'NAOC')
for the years ended December 31, 1996, 1995 and 1994, the period from March 31,
1993 to December 31, 1993 and the three month periods ended March 31, 1996 and
1997. The selected consolidated financial data for the years ended December 31,
1996, 1995 and 1994 and the period from March 31, 1993 to December 31, 1993 have
been derived from audited consolidated financial statements of NAOC and the
selected consolidated financial data of the three month periods ended March 31,
1996 and 1997 have been derived from unaudited consolidated condensed financial
statements. Such unaudited consolidated condensed financial statements include
all adjustments, consisting of normal recurring accruals, which management
considers necessary for a fair presentation of the consolidated financial
position and the results of consolidated operations for these periods. Results
for interim periods are not necessarily indicative of results for the full year.
This selected consolidated financial data is qualified by, and should be read in
conjunction with, the audited consolidated financial statements, and the
unaudited consolidated condensed financial statements, and the related notes
thereto, and the other financial information contained in this Prospectus.
<TABLE>
<CAPTION>
NORTH ATLANTIC OPERATING COMPANY, INC.
--------------------------------------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
PERIOD FROM DECEMBER 31, MARCH 31,
03/31/93 TO ------------------------- ----------------------------------------
12/31/93 1994 1995 1996 1996 1997
----------- ------- ------- ------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $23,708 $40,218 $42,546 $46,139 $12,439 $10,244
Cost of sales......................... 12,955 14,432 15,503 16,453 4,572 3,386
----------- ------- ------- ------- ------- -------
Gross profit.......................... 10,753 25,786 27,043 29,686 7,867 6,858
Selling, general and administrative
expenses............................ 1,858 3,400 4,004 3,980 927 1,159
Amortization of intangible assets..... 3,097 4,379 4,710 5,078 1,230 1,330
----------- ------- ------- ------- ------- -------
Operating income...................... 5,798 18,007 18,329 20,628 5,710 4,369
Interest expense, net................. 3,541 4,471 4,967 4,976 1,321 1,151
Financial advisory fee expense........ 225 305 654 1,178 219 481
Other expense (1)..................... -- -- 285 -- -- --
----------- ------- ------- ------- ------- -------
Income before income taxes and
extraordinary loss.................. 2,032 13,231 12,423 14,474 4,170 2,737
Income taxes.......................... 820 5,435 4,301 5,130 1,460 903
----------- ------- ------- ------- ------- -------
Income before extraordinary loss...... $ 1,212 $ 7,796 $ 8,122 $ 9,344 $ 2,710 $ 1,834
Extraordinary loss from early
extinguishment of debt, net......... -- -- 762 -- -- --
----------- ------- ------- ------- ------- -------
Net income............................ 1,212 7,796 7,360 9,344 2,710 1,834
----------- ------- ------- ------- ------- -------
----------- ------- ------- ------- ------- -------
EARNINGS PER COMMON SHARE:
Income before extraordinary loss...... 60.33 384.04 513.24 698.25 174.50 137.54
Extraordinary loss.................... -- -- (48.15) -- -- --
Net income............................ 60.33 384.04 465.09 698.25 174.50 137.54
Weighted average number of common
shares
outstanding (000) (2)............... 20.1 20.3 15.8 13.4 15.5 13.3
OTHER DATA:
Ratio of earnings to fixed charges
(5)................................. 1.57 3.94 3.49 3.89 4.14 3.37
Cash flow from operating activities... $10,667 $11,552 $10,923 $18,268 $ 5,173 $ 2,685
Cash flow from investing activities... (48,402) (7,488) (7,296) (8,053) (2,410) (3,040)
Cash flow from financing activities... 43,663 (7,128) (2,798) (5,142) (1,025) (800)
EBITDA (3)............................ 8,930 22,431 23,097 25,768 6,961 5,715
Depreciation and amortization of
intangible assets................... 3,132 4,424 4,768 5,140 1,251 1,346
Capital expenditures.................. 94 94 88 55 10 30
Ratio of EBITDA to interest expense
(4)................................. 2.95x 6.00x 5.78x 6.50x 6.39x 6.16x
Gross margin.......................... 45.4% 64.1% 63.6% 64.3% 63.2% 66.9%
EBITDA margin......................... 37.7% 55.8% 54.3% 55.8% 56.0% 55.8%
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)............. $ (506) $ 640 $ 1,558 $ 1,852 $ 2,371 $ 2,397
Total assets.......................... 49,185 49,840 58,459 64,685 61,800 64,078
Total debt, including current
maturities.......................... 36,500 29,372 36,900 31,983 36,100 31,182
Stockholder's equity.................. 8,787 16,578 16,438 25,527 18,892 27,361
</TABLE>
- ------------------
(1) 1995 other expense includes a $285,000 one-time charge related to a lawsuit
settlement.
(2) Earnings per common share is based on the weighted average number of common
shares outstanding during the period.
(3) EBITDA represents operating income plus depreciation and amortization of
intangible assets plus the recurring non-cash LIFO adjustment, where
applicable. Information regarding EBITDA is presented because EBITDA should
not be considered as an alternative to, or more meaningful than, net income
(as determined in accordance with GAAP) as a measure of the Company's
operating results or cash flows (as determined in accordance with GAAP) as a
measure of the Company's liquidity.
(Footnotes continued on next page)
41
<PAGE>
(Footnotes continued from previous page)
Following is a reconciliation of net income to EBITDA:
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, THREE MONTHS THREE MONTHS
03/31/93 TO ----------------------------- ENDED ENDED
12/31/93 1994 1995 1996 3/31/96 3/31/97
----------- ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME.............................. $ 1,212 $ 7,796 $ 7,360 $ 9,344 $ 2,710 $ 1,834
Interest expense, net................. 3,541 4,471 4,967 4,976 1,321 1,151
Income taxes.......................... 820 5,435 4,301 5,130 1,460 903
Depreciation.......................... 35 45 58 62 21 16
Amortization of intangibles........... 3,097 4,379 4,710 5,078 1,230 1,330
Other income.......................... -- -- 285 -- -- --
Financial advisory fee expense........ 225 305 654 1,178 219 481
Extraordinary loss, net............... -- -- 762 -- -- --
----------- ------- ------- ------- ------------ ------------
EBITDA................................ $ 8,930 $22,431 $23,097 $25,768 $ 6,961 $ 5,715
----------- ------- ------- ------- ------------ ------------
----------- ------- ------- ------- ------------ ------------
</TABLE>
(4) For purposes of calculating this ratio, interest expense excludes
amortization of deferred financing costs. Management believes this ratio is
useful as an indicator at the issuer's historical cash flow available to
service its debt. EBITDA should not be considered as an alternative to, or
more meaningful than, net income (as determined in accordance with GAAP) as
a measure of the Company's operating results or cash flows (as determined in
accordance with GAAP) as a measure of the Company's liquidity.
(5) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) before income taxes and extraordinary loss plus
fixed charges. Fixed charges consist of interest expense plus one-third (the
portion deemed to be representative of the interest portion) of rent
expense.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On June 25, 1997, the Company acquired NATC in the Acquisition, at which
time NATC and its subsidiaries were merged into NAOC. The Acquisition was
accounted for under the purchase method of accounting. By virtue of the
Acquisition the Company is a leading marketer of high-quality loose leaf chewing
tobacco, RYO cigarette papers and other tobacco-related products. National
Tobacco is the third largest manufacturer and marketer of loose leaf chewing
tobacco in the United States, selling its products under the brand names
BEECH-NUT REGULAR, BEECH-NUT WINTERGREEN, BEECH-NUT SPEARMINT, TROPHY and HAVANA
BLOSSOM. NAOC is the largest importer and distributor in the United States of
RYO cigarette papers, which are sold under the ZIG-ZAG brand name pursuant to an
exclusive distribution agreement. The Company believes that its future operating
results may not be directly comparable to historical operating results of either
National Tobacco or NAOC due to the Company's increased size, related cost
savings and marketing synergies. Certain factors which have affected the
operating results of the Company are discussed below. The unaudited financial
statements of the Company include the results of operations of NAOC from June
25, 1997 through June 30, 1997. The unaudited financial statements of NAOC have
not been updated following the Acquisition because the Acquisition occurred
prior to the end of the quarter ending June 30, 1997. Accordingly, because such
interim financials are not being furnished herewith for the period between March
31, 1997 and the date of Acquisition, no Management's Discussion and Analysis of
Financial Conditions and Results of Operations for NAOC is included with respect
to such interim period.
Purchase Accounting Effects. The Acquisition has currently affected, and
will prospectively affect, the Company's results of operations in certain
significant respects. The aggregate acquisition purchase price of $162.6 million
was allocated to the net assets acquired based on the fair market value of such
net assets. The preliminary allocation of the purchase price resulted in an
increase in the historical book value of certain NATC assets such as intangible
assets, including goodwill, which will result in incremental annual amortization
expense of $0.5 million on a pro forma basis.
Strategic Acquisitions and Recapitalizations. National Tobacco was
originally formed in 1988 by the Company's Chairman, President and Chief
Executive Officer, Mr. Thomas F. Helms, Jr., and an investor group led by Lehman
Brothers to acquire the smokeless tobacco division of Lorillard. Together with
the management team he assembled in connection with this initial buyout, Mr.
Helms participated in two subsequent management buyouts. In April 1992, National
Tobacco's management and Pexco Holdings, Inc. ('Pexco') acquired Lehman
Brothers' interest in National Tobacco. In May 1996, National Tobacco's
management and other investors, including the MainStay Funds and Exeter,
purchased Pexco's interest in National Tobacco. Unless otherwise indicated,
National Tobacco's financial information for fiscal 1996 includes pro forma
adjustments to reflect the May 17, 1996 recapitalization as if it had occurred
on January 1, 1996. See 'Unaudited Pro Forma Condensed Consolidated Financial
Statements.'
NATC was originally formed by the investor group Drake, Goodwin and Graham
to acquire in March 1993 from UST certain assets including exclusive rights to
market and distribute ZIG-ZAG RYO cigarette papers in the United States, Canada
and other international markets. NAOC contracts all manufacturing of its RYO
cigarette paper and related products pursuant to a long-term, formula-priced
agreement with Bollore.
OVERVIEW--NATIONAL TOBACCO
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements of
National Tobacco and notes thereto included elsewhere in this Prospectus which
provide additional information on National Tobacco's financial activities and
condition.
43
<PAGE>
National Tobacco is the third largest manufacturer and marketer of loose
leaf chewing tobacco in the United States. For the year ended December 31, 1996,
National Tobacco's pro forma net sales, net income and EBITDA(1) were $55.9
million, $1.5 million and $15.5 million, respectively. For the year ended
December 31, 1995, National Tobacco recorded net sales, net income of $52.6
million and EBITDA of $13.5 million.
The loose leaf chewing tobacco industry has been characterized, in part, by
consistent price increases at the wholesale level. Annual manufacturers' prices
in the loose leaf chewing tobacco market have increased at a compound annual
rate of approximately 5.6% during the period from 1989 to 1996. In June 1996,
manufacturers' prices increased by 6.2%. See 'Business--Industry and Markets.'
With respect to National Tobacco's net sales, these price increases have more
than offset the unit net volume decreases experienced by National Tobacco. The
Company believes these trends are consistent with the entire loose leaf chewing
tobacco market. National Tobacco's net sales reflect gross revenues less
allowances for product discounts, returns and on-time payment discounts.
National Tobacco from time to time conducts promotional activities involving
discounts and coupons. Since 1990, industry-wide promotional activities and
discounting have increased. During this period of increasing manufacturers'
prices and decreasing net pound volume, National Tobacco has increased its
overall share of the chewing tobacco market from 17.1% in 1991 to 21.1% in 1996.
National Tobacco's principal components of cost of sales include raw
tobacco leaf, flavorings and packaging materials. For the period from 1992 to
1996, the cost of raw tobacco leaf has remained relatively stable. National
Tobacco has been able to maintain or lower its raw material costs, primarily by
improving raw tobacco leaf utilization and reformulating its food grade
flavorings. National Tobacco's gross margins have improved from 48.5% for the
year ended December 31, 1993 to 58.4% for the year ended December 31, 1996.
The Company accounts for its inventory using the last-in, first-out
('LIFO') method. As a result, non-cash LIFO charges have decreased (increased)
National Tobacco's gross profit by $0.6 million, $(0.1) million and $2.8 million
in the years ended December 31, 1994, 1995 and 1996, respectively.
- ------------------
(1) EBITDA represents operating income plus depreciation and amortization of
intangible assets plus the recurring non-cash LIFO adjustment.
44
<PAGE>
The following table sets forth, for the periods indicated, certain income
statement items as a percentage of net sales.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- -----------------
1994 1995 1996 1996 1997
----- ----- ----- -------- -----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -------- -----
----- ----- ----- -------- -----
Gross profit..................................................... 57.4% 61.1% 58.4% 61.6% 64.1%
Selling, general and administrative expenses..................... 35.8 37.4 38.4 38.0 44.7
Amortization of intangible assets................................ 2.0 1.8 1.6 2.5 1.8
----- ----- ----- -------- -----
Operating income................................................. 19.6 21.9 18.5 21.1 17.6
Interest expense, net............................................ 13.3 13.8 15.8 12.4 20.0
Financial advisory fee expense................................... 0.6 0.6 0.2 0.4 --
Other expense (income)........................................... (5.6) 2.5 (0.2) 0.1 (0.2)
----- ----- ----- -------- -----
Income before income taxes, cumulative effect of change in
accounting principle, income taxes and extraordinary loss..... 11.3 5.0 2.7 8.4 (2.2)
Provision for income taxes....................................... -- -- -- -- 19.3
----- ----- ----- -------- -----
Income (loss) before cumulative effect of change in accounting
principle and extraordinary loss.............................. 11.3 5.0 2.7 8.4 (21.5)
Cumulative effect of change in accounting principle.............. -- 0.2 -- -- --
----- ----- ----- -------- -----
Income (loss) before extraordinary loss.......................... 11.3 4.8 2.7 8.4 (21.5)
Extraordinary loss............................................... -- -- -- -- 31.9
----- ----- ----- -------- -----
Net income....................................................... 11.3 4.8 2.7 8.4 (53.4)
Preferred stock dividends........................................ -- -- -- -- 0.2
----- ----- ----- -------- -----
Net income (loss) attributable to common shares.................. 11.3% 4.8% 2.7% 8.4% (53.6)%
----- ----- ----- -------- -----
----- ----- ----- -------- -----
OTHER DATA:
EBITDA........................................................... 24.8% 25.6% 27.7% 26.7% 23.1%
LIFO adjustments................................................. 1.2 (0.1) 5.0 -- --
</TABLE>
Gross profit was affected by non-cash LIFO charges. Excluding LIFO
adjustments, the adjusted gross margins for the years ended December 31, 1994,
1995 and 1996 would have been 58.6%, 61.0% and 63.4%, respectively.
RESULTS OF OPERATIONS--NATIONAL TOBACCO
Comparison of Three and Six Months Ended June 30, 1997 to Three and Six Months
Ended June 30, 1996.
Net Sales. Net sales for the three and six months periods ended June 30,
1997 were $13.4 million and $25.9 million, respectively, compared to $15.5
million and $28.2 million for the three and six months periods ended June 30,
1996. These decreases were attributable to volume decreases of 17.8% and 12.9%,
respectively, which were partially offset by a price increase implemented in
June 1996. The Company believes that the decreases are primarily attributable to
unfavorable weather conditions in the first quarter and competitive promotional
activity during the second quarter.
Gross Profit. Gross profit and gross margin percentage for the three and
six months periods ended June 30, 1997 were $8.6 million or 64.0% of net sales
and $16.6 million or 64.1% of net sales, respectively, compared to $9.6 million
or 62.0% of net sales and $17.4 million or 61.6% of net sales for the three and
six months periods ended June 30, 1996. The increases in gross margin
percentages were primarily attributable to the 1996 price increase combined with
stable variable costs.
45
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three and six months periods ended June 30, 1997
were $6.2 million and $11.6 million, respectively, compared to $5.7 million and
$10.8 million for the three and six months periods ended June 30, 1996. These
increases were due to the addition of a chief operating officer and a chief
financial officer, an increase in legal fees, costs associated with the
relocation of the Company's executive offices and increased expenses associated
with the Company's membership in the Smokeless Tobacco Council.
Amortization of Intangible Assets. Amortization of intangible assets for
the three and six months periods ended June 30, 1997 was $0.3 million and $0.5
million, respectively, compared to $0.4 million and $0.7 million for the three
and six months periods ended June 30, 1996. These decreases were due to the
change in intangible assets resulting from the May 17, 1996 recapitalization.
Interest Expense and Financing Costs. Interest expense and financing costs
for the three and six months periods ended June 30, 1997 were $2.7 million and
$5.2 million, respectively, compared to $1.9 million and $3.5 million for the
three and six months periods ended June 30, 1996. These increases were the
result of additional indebtedness incurred in the May 17, 1996 recapitalization.
Extraordinary Loss. Upon the repayment of the Company's debt as described
in the Recent Transactions on page 74, the Company incurred an extraordinary
loss of $8.3 million (net of income tax benefit of $3.2 million) related to the
write-off of deferred financing fees of $4.4 million and debt discount of $7.1
million.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995.
Net Sales. Net sales for the year ended December 31, 1996 were $55.9
million compared to $52.6 million for the year ended December 31, 1995, an
increase of 6.3%. This increase in net sales was primarily attributable to the
continued growth of TROPHY, in addition to the implementation of a 6.2%
manufacturers' price increase in June 1996, which partially offset the
year-to-year decline in net unit volume of 2.6%, due in part to increased
promotional activity.
Gross Profit. Gross profit for the year ended December 31, 1996 was $32.7
million or 58.4% of net sales compared to $32.1 million or 61.1% of net sales
for the year ended December 31, 1995. The increased net sales were partially
offset by the non-cash LIFO charge of $2.8 million in 1996. Excluding such LIFO
adjustments, the adjusted gross margin would have been 63.4% in 1996 compared to
61.0% in 1995. This increase in gross margin was primarily attributable to the
aforementioned increase in net sales combined with stable variable costs on a
per pound basis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1996 were $21.5 million,
or 38.4% of net sales, an increase from $19.7 million, or 37.4% of net sales,
for the same period in 1995. This increase of $1.8 million was primarily due to
increased promotional activity for TROPHY and BEECH-NUT REGULAR.
Amortization of Intangible Assets. Amortization of intangible assets for
the year ended December 31, 1996 was $0.9 million, a decrease from $1.0 million
for the same period in 1995. This decrease reflects the ongoing amortization of
goodwill.
Net Interest Expense. Net interest expense for the year ended December 31,
1996 increased $1.7 million, or 24.0%, from $7.2 million for the year ended
December 31, 1995, to $8.9 million. This increase was a result of the additional
indebtedness incurred in the May 17, 1996 recapitalization.
Financial Advisory Fee Expense. Financial advisory fee expense for the
year ended December 31, 1996 was $0 compared to $300,000 for the year ended
December 31, 1995. Prior to the recapitalization undertaken by National Tobacco
on May 17, 1996, National Tobacco was required to pay financial advisory fees to
its former general partner, an affiliate of Pexco.
Other Income (Expense). Other income in 1996 was $122,000 and other
expense in 1995 was $1.3 million. Other expense in 1995 included $1.5 million of
abandoned debt issuance costs associated with a proposed refinancing.
46
<PAGE>
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Net Sales. Net sales for the year ended December 31, 1995 were $52.6
million compared to $51.4 million for the year ended December 31, 1994, an
increase of 2.3%. This increase in net sales principally resulted from a
manufacturers' price increase of 4.8% undertaken by the Company in May 1995 as
well as an increase in unit volume of 0.2% from 1994 to 1995.
Gross Profit. Gross profit for the year ended December 31, 1995 was $32.1
million or 61.1% of net sales compared to $29.5 million or 57.4% of net sales
for the year ended December 31, 1994. This increase was primarily due to the
manufacturers' price increase of 4.8% undertaken by National Tobacco in May
1995, an increase in unit volume as well as raw material expense reductions and
a reduction in the non-cash LIFO charge for 1995. Excluding such LIFO
adjustments, the adjusted gross margin would have been 61.0% in 1995 compared to
58.6% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1995 were $19.7 million,
or 37.4% of net sales, an increase of $1.3 million from $18.4 million, or 35.8%
of net sales, for the same period in 1994. This increase was primarily due to
increased promotional activities for TROPHY and BEECH-NUT REGULAR.
Amortization of Intangible Asset. Amortization of intangible assets for
each of the years ended December 31, 1995 and December 31, 1994 was $1.0
million.
Net Interest Expense. Net interest expense for the year ended December 31,
1995 increased $0.4 million or 5.9% to $7.2 million from $6.8 million for the
year ended December 31, 1994. This increase was primarily due to an increase in
the interest rate charged for the senior debt financing during 1995.
Financial Advisory Fee Expense. Financial advisory fee expense was
$300,000 in each of the years ended December 31, 1995 and 1994.
Other Income (Expense), Net. Other expense in 1995 was $1.3 million and
other income in 1994 was $2.9 million. The expense in 1995 consisted primarily
of abandoned debt issuance costs associated with a proposed refinancing. The
other income in 1994 resulted from amendments in National Tobacco's retirement
benefit plans which reduced the post-retirement benefit obligation as a change
in accounting estimate.
LIQUIDITY AND CAPITAL RESOURCES--NATIONAL TOBACCO
Historically, National Tobacco has relied primarily upon cash generated
from operations, on bank borrowings and on the Lancaster Agreement to finance
its working capital requirements. Cash flow from operations was $8.1 million in
1996 and $8.7 million in 1995.
The Lancaster Agreement has been a source of liquidity because National
Tobacco has been able to combine its tobacco procurement with the financing of
its raw tobacco leaf purchases through Lancaster, thereby increasing the
availability of cash for other purposes. In connection with the Transactions,
the Company paid all outstanding balances under the Lancaster Agreement and has
discontinued utilizing the Lancaster Agreement as a source of liquidity. In the
future the Company expects to utilize its Revolver as a source of liquidity and
to finance working capital requirements.
Inventory levels were $40.0 million, $42.0 million and $38.9 million at
June 30, 1997, December 31, 1996 and December 31, 1995, respectively. National
Tobacco believes that its inventory levels are adequate and will remain stable
in the foreseeable future.
National Tobacco has relied primarily on cash provided from operations to
finance its capital expenditure requirements. Capital expenditures for the years
ended December 31, 1994, 1995 and 1996 were $355,000, $239,000 and $300,000,
respectively. The Company believes that its capital expenditure requirements,
given its current operation, will remain within the $300,000 to $500,000 range
for the next several years.
47
<PAGE>
Historically National Tobacco has not been affected by inflation and the
Company believes that any effects 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, National Tobacco has been able to maintain a
stable variable cost structure in significant part due to its procurement and
reformulation activities.
National Tobacco's tax planning efforts have allowed it to create liquidity
benefits through its inventory tax accounting methods. These benefits have
enabled National Tobacco to reduce tax distributions to its partners, making
greater funds available to reduce its debt more rapidly.
OVERVIEW--NAOC
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements of NAOC and notes thereto included elsewhere in this Prospectus which
provide additional information on NAOC's financial activities and condition.
NAOC is the largest importer and distributor of RYO cigarette paper in the
United States. For the year ended December 31, 1996, NAOC recorded net sales of
$46.1 million, net income of 9.3 million and EBITDA of $25.8 million. For the
year ended December 31, 1995, NAOC recorded net sales of $42.5 million and
EBITDA of $23.1 million.
The RYO cigarette paper industry has been characterized, in part, by
consistent price increases. Annual manufacturers' prices in the RYO cigarette
paper market have increased at a compound annual rate of approximately 7.7% for
the period from 1991 to 1996. In April 1997, NAOC increased its wholesale prices
by 5.5%. See 'Business--Industry and Markets.' These price increases have
occurred in addition to NAOC's unit volume increases. NAOC's net sales reflect
gross revenues less allowances for product discounts, returns, outside selling
commissions and payment discounts. NAOC from time to time conducts promotional
activities involving promotional discounts, placement discounts and a yearly
performance incentive rebate.
NAOC's principal component of cost of sales is the finished product
purchased from Bollore from Bollore's manufacturing facility in Perpignon,
France. NAOC entered into an exclusive licensing agreement with Bollore in 1992,
whereby Bollore became the exclusive supplier of finished product to NAOC for 20
years, renewable in 20 year increments and at specified prices (increases are
indexed to the annual CPI-urban for Northeast U.S.) through December 31, 2004.
Terms are Delivered, Duties Unpaid (DDU). NAOC pays excise taxes at a rate of
$.0075 per 50 leaves at Port of Entry and a duty of 3.4% of manufacturer's
value. Under terms of GATT, the rate of duty decreases by 1/2 of 1% each year
and will be phased out over the next seven years.
Under the terms of its agreement with Bollore, NAOC purchases inventory in
approximately equal monthly quantities. This allows Bollore to manage production
and has permitted NAOC to obtain constant, long-term pricing, subject only to an
annual CPI adjustment. In July 1996 NAOC restructured its key promotional
program, moving from two annual promotions to three. This change helped to
smooth month-to-month fluctuations in sales and more closely aligned sales with
NAOC's purchasing patterns and allowed NAOC to reduce inventory levels. NAOC
accounts for its inventory using the average cost method. At March 31, 1997,
NAOC's inventory was $4.3 million, an 18.9% decrease from $5.3 million at
December 1996. The Company believes that inventory levels are currently adequate
and will remain stable for the foreseeable future. Accordingly, the Company
believes that inventory levels for NAOC will range between $3.0 and $6.0
million, assuming historical growth in sales.
NAOC purchases 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 the Company secures French francs in order to provide
payment for its monthly purchases of inventory. The Company utilizes the average
cost accounting method to account for its inventory. Based on the Company's
average annual projected cost of French francs as compared with its actual cost
of French francs, from January 1, 1997 to July 31, 1997 these forward
48
<PAGE>
purchases have reduced the Company's cost of goods sold by approximately
$600,000. In addition, Bollore provides a contractual hedge against substantial
currency fluctuation in its agreement with NAOC.
The following table sets forth, for the periods indicated, certain income
statement items as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Gross profit........................................................ 64.1% 63.6% 64.3% 63.2% 66.9%
Selling, general and administrative expenses........................ 8.5 9.4 8.6 7.5 11.3
Amortization of intangible assets................................... 10.9 11.1 11.0 9.9 13.0
----- ----- ----- ----- -----
Operating income.................................................... 44.8 43.1 44.7 45.9 42.6
Interest expense, net............................................... 11.1 11.7 10.8 10.6 11.2
Financial advisory fee expense...................................... 0.8 1.5 2.6 1.8 4.7
Other expense....................................................... -- 0.7 -- -- --
----- ----- ----- ----- -----
Income before income taxes and extraordinary loss................... 32.9 29.2 31.4 33.5 26.7
Income taxes........................................................ 13.5 10.1 11.1 11.7 8.8
----- ----- ----- ----- -----
Income before extraordinary loss.................................... 19.4 19.1 20.3 21.8 17.9
Extraordinary loss from early extinguishment of debt................ -- 1.8 -- -- --
----- ----- ----- ----- -----
Net income.......................................................... 19.4% 17.3% 20.3% 21.8% 17.9%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
OTHER DATA:
EBITDA.............................................................. 55.8% 54.3% 55.8% 56.0% 55.8%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
RESULTS OF OPERATIONS--NAOC
Comparison of Three Months ended March 31, 1997 to Three Months ended March 31,
1996.
Net Sales. Net sales for the three months ended March 31, 1997 was $10.2
million compared to $12.4 million for the three months ended March 31, 1996, a
decrease of 17.7%. This decrease in net sales was expected and primarily due to
a change in the timing of the Company's promotional periods and the size of the
promotions between 1996 and 1997. In March 1996, NAOC announced the change in
its major promotional activity from a 20% discount ('Buy four, get one free')
promotion to an off-invoice discount of 16.7% (equivalent to 'Buy five, get one
free'). In addition to reducing the discount offered in each promotional period,
NAOC also increased the number of promotional periods from two to three
annually. NAOC's customers knew that the March 1996 promotion was the last at
the 20% discount level and increased their purchases in anticipation of the
proposed change in promotional activities. As a result, NAOC ended the March
1997 promotional period 25% behind in unit volume from the comparable figure in
1996 but approximately 25% ahead of its 1997 budgeted unit goal.
Gross Profit. Gross profit for the three months ended March 31, 1997 was
$6.9 million or 66.9% of net sales compared to $7.9 million or 63.2% of net
sales for the three months ended March 31, 1996. The increase in gross margin
was primarily due to the 1996 manufacturers' price increase of 6.6% which was
partially offset by the Bollore CPI-based price increase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 1997 were $1.2
million, or 11.3% of net sales, an increase from $0.9 million, or 7.5% of net
sales, for the same period in 1996. This increase was due mainly to increased
promotional expenses.
Amortization of Intangible Assets. Amortization expense for the three
months ended March 31, 1997 was $1.3 million, an increase of $0.1 million over
$1.2 million for the same period in 1996. In
49
<PAGE>
connection with the purchase of NAOC in 1993, NAOC paid a royalty to UST of 30%
of Gross Profits (as defined in the UST Asset Purchase Agreement (as defined)).
NAOC capitalized this royalty in the month of accrual, and amortized the
intangible asset created by such royalty payment over the remainder of a 25-year
period. The increase in amortization expense was due to the increase in the
capitalized intangible asset resulting from the 1996 payment and the 1997
accrued payable to UST.
Net Interest Expense. Net interest expense for the three months ended
March 31, 1997 was $1.2 million and for the three months ended March 31, 1996
was $1.3 million. The decrease of $0.1 million was the result of a reduction in
NAOC's senior bank debt.
Financial Advisory Fee Expense. Financial advisory fee expense represents
management fees and expenses paid to Drake, Goodwin and Graham ('DGG'), as well
as salaries of current owners. Financial advisory fee expense for the three
months ended March 31, 1997 was $481,000, or 4.7% of net sales, an increase from
$219,000, or 1.8% of net sales, for the three months ended March 31, 1996. This
was a result of increased salaries and office expenses in New York and Canada.
Income Tax Expense. Income tax expense for the three months ended March
31, 1997 was $0.9 million, or 8.8% of net sales, a decrease from $1.5 million,
or 11.7% of sales, for the three months ended March 31, 1996. The effective
income tax rate for the three months ended March 31, 1997 was 33%, compared to
35% for the same period in 1996.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995.
Net Sales. Net sales for the year ended December 31, 1996 were $46.1
million compared to $42.5 million for the year ended December 31, 1995, an
increase of $3.6 million or 8.5%. This increase in net sales was attributable to
a manufacturer's price increase of 6.6% undertaken by NATC on May 20, 1996 and
the unit volume increase of 3.8% from 1995 to 1996.
Gross Profit. Gross profit for the year ended December 31, 1996 was $29.7
million, or 64.3% of net sales compared to $27.0 million or 63.6% of net sales
for the year ended December 31, 1995. This increase was a result of the price
increase of 6.6% undertaken by NAOC on May 20, 1996, the 3.8% unit volume
increase and an increase in the $US/FFranc exchange rate, the latter of which
lowered the cost of goods sold.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1996 were $4.0 million,
or 8.6% of net sales, compared to $4.0 million, or 9.4% of net sales, for the
same period in 1995. The decline as a percent of net sales was due to the
increase in net sales with no corresponding increase in selling, general and
administrative expenses.
Amortization of Intangible Assets. Amortization for the year ended
December 31, 1996 was $5.1 million, an increase over $4.7 million for the same
period in 1995. In connection with the purchase of NAOC in 1993, NAOC paid a
royalty to UST of 30% of Gross Profits (as defined in the UST Asset Purchase
Agreement (as defined)). NAOC capitalized this royalty in the month of accrual,
and amortized the intangible asset created by such royalty payment over the
remainder of a 25-year period. The increase in amortization expense was due to
the increase in the capitalized intangible asset resulting from the 1995 payment
and 1996 accrued payable to UST.
Net Interest Expense. Net interest expense for the years ended December
31, 1996 and December 31, 1995 was $5.0 million. Net interest expense remained
constant despite fluctuations in monthly interest during this period. After May
5, 1995, as a result of debt incurred in connection with the repurchase of a
minority shareholder's stock, interest expense increased. After May 15, 1996,
interest expense decreased following repayment of certain indebtedness.
Financial Advisory Fee Expense. Financial advisory fee expense paid to DGG
for management fees and expenses, as well as salaries of current owners, for the
year ended December 31, 1996 was $1.2 million or 2.6% of net sales, an increase
from $0.7 million or 1.5% of net sales in the same period of 1995.
50
<PAGE>
Other Expense. Other expense was $285,000 in the year ended December 31,
1995 as a result of a one-time charge related to a lawsuit settlement with a
financial advisor in connection with the 1993 purchase of ZIG-ZAG from UST.
Income Tax Expense. Income tax expense for the year ended December 31,
1996 was $5.1 million, an increase from $4.3 million for the year ended December
31, 1995. This increase in income tax expense was a result of an increase in
income before taxes of $2.1 million. The effective income tax rate for the year
ended December 31, 1996 was comparable to 1995 at 35.4% versus 34.6%,
respectively.
Extraordinary Loss. An extraordinary loss of $762,000 (net of income tax
benefit of $411,000) was recognized in 1995, which was due to the write-off of
deferred financing costs related to the early extinguishment of debt.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994.
Net Sales. Net sales for the year ended December 31, 1995 were $42.6
million compared to $40.2 million for the year ended December 31, 1994, an
increase of 6.0%. This increase in net sales was primarily attributable to two
price increases totalling 14.4% effective January 1, 1995 and June 12, 1995,
partially offset by a unit volume decrease of 3.8% from 1994 to 1995.
Gross Profit. Gross profit for the year ended December 31, 1995 was $27.0
million, or 63.6% of net sales compared to $25.8 million or 64.1% of net sales
for the year ended December 31, 1994. This increase was a result of the
aggregate price increases of 14.4% undertaken by NATC on January 1 and June 12,
1995, partially offset by a decrease in the $US/FFranc exchange rate, raising
per unit cost of goods sold.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1995 were $4.0 million,
or 9.4% of net sales, an increase from $3.4 million, or 8.5% of net sales, for
the same period in 1994. The increase was due to an expansion of NAOC's sales
and administrative staff in 1995.
Amortization of Intangible Assets. Amortization for the year ended
December 31, 1995 was $4.7 million, an increase over $4.4 million for the same
period in 1994. In connection with the purchase of NAOC in 1993, NAOC paid a
royalty to UST of 30% of Gross Profits (as defined in the UST Asset Purchase
Agreement (as defined)). NAOC capitalized this royalty in the month of accrual,
and amortized the intangible asset created by such royalty payment over the
remainder of a 25-year period. The increase in amortization expense was due to
the increase in the capitalized intangible asset resulting from the 1994 payment
and 1995 accrued payable to UST.
Net Interest Expense. Net interest expense for the year ended December
31, 1995 was $5.0 million, up from $4.5 million, for the same period in 1994.
This increase was due to increased debt. On April 5, 1995 NAOC purchased certain
minority shareholder interests, and financed these purchases with debt.
Financial Advisory Fee Expense. Financial advisory fee expense paid to DGG
for the year ended December 31, 1995 was $654,000 or 1.5% of net sales, an
increase from $305,000 or 0.8% of net sales in the same period of 1994.
Other Expense. Other expense was $285,000 in the year ended December 31,
1995 as a result of a one-time charge related to a lawsuit settlement with a
financial advisor in connection with the 1993 purchase of ZIG-ZAG from UST.
Income Tax Expense. Income tax expense for the year ended December 31,
1995 was $4.3 million, a decrease from $5.4 million for the year ended December
31, 1994. This decrease in income tax expense was a result of a decrease in net
income before taxes of $0.8 million and a decrease of the effective federal tax
rate. The effective income tax rate for the year ended December 31, 1995 was
34.6%, compared to 41.1% for the same period in 1994.
51
<PAGE>
Extraordinary Loss. An extraordinary loss of $762,000 (net of income tax
benefit of $411,000) was recognized in 1995, which was due to the write-off of
deferred financing costs related to the early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES--NAOC
Historically, NAOC has relied primarily upon cash generated from operations
and on bank borrowings to finance its working capital requirements. Cash flow
from operations was $2.7 million for the three months ended March 31, 1997,
$18.3 million for the year ended December 31, 1996 and $10.9 million for the
year ended December 31, 1995.
NAOC has relied primarily on cash provided from operations to finance
capital expenditures. NAOC accrued start-up costs in 1993, 1994 and 1995 related
to the purchase of furniture, computers and trade show displays of less than
$100,000 per year, and the Company anticipates no further expenditures other
than the continued upgrading of computer and software systems as needed.
Accordingly, the Company believes that NAOC's capital expenditures in the
foreseeable future will not significantly exceed NAOC's historical experience.
For the years ended December 31, 1994, 1995, and 1996, capital expenditures were
$94,000, $88,000 and $55,000.
Inventory levels increased from $3.3 million at December 31, 1994 to $6.6
million at December 31, 1995 as a result of purchases pursuant to a volume
rebate made available by Bollore. Inventories were reduced to $5.3 million at
December 31, 1996 and further reduced to $4.3 million at March 31, 1997. The
Company believes that inventories are currently adequate and will remain stable
for the foreseeable future.
Historically NAOC has not been affected by inflation and the Company
believes that any effects of inflation at current levels will be minimal.
Historically, NAOC 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, NAOC has been able to maintain a stable variable cost
structure in significant part through the terms of the Distribution Agreements.
As part of the purchase price of the ZIG-ZAG brand, NAOC agreed to pay UST
a royalty of 30% of Gross Profits (as defined in the UST Asset Purchase
Agreement (as defined)) for 10 years beginning March 1993. Payments for the
three months ended March 31, 1997 and for the years ended December 31, 1996,
1995 and 1994 were $3.0 million, $8.0 million, $7.2 million and $7.4 million,
respectively. This obligation was extinguished by a $32 million payment to UST
upon consummation of the Acquisition.
52
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading marketer of high-quality loose leaf chewing
tobacco, RYO cigarette papers and other tobacco-related products. National
Tobacco is the third largest manufacturer and marketer of loose leaf chewing
tobacco in the United States, selling its products under the brand names
BEECH-NUT REGULAR, BEECH-NUT WINTERGREEN, BEECH-NUT SPEARMINT, TROPHY and HAVANA
BLOSSOM. NAOC is the largest importer and distributor in the United States of
RYO cigarette papers, which are sold under the ZIG-ZAG brand name pursuant to an
exclusive distribution agreement. National Tobacco produces all of its loose
leaf chewing tobacco products in its highly efficient, well maintained
manufacturing facilities in Louisville, Kentucky. National Tobacco had pro forma
net sales, net income and EBITDA of $55.9 million, 1.5 million and $15.5
million, respectively, in fiscal 1996. NAOC imports and distributes RYO
cigarette paper and related products which are manufactured pursuant to a
long-term, formula-priced agreement with Bollore. NAOC reported net sales, net
income and EBITDA of $46.1 million, 9.3 million and $25.8 million, respectively,
in fiscal 1996.
EVOLUTION OF THE COMPANY
National Tobacco was originally formed in 1988 by the Company's Chairman,
President and Chief Executive Officer, Mr. Thomas F. Helms, Jr., and an investor
group led by Lehman Brothers to acquire the smokeless tobacco division of
Lorillard, which had introduced the popular BEECH-NUT brand in 1897. Together
with the management team he assembled in connection with this initial buyout,
Mr. Helms participated in two subsequent leveraged buyouts. In April 1992,
National Tobacco's management and Pexco acquired Lehman Brothers' interest in
National Tobacco. In May 1996, National Tobacco's management and other investors
including the MainStay Funds as well as Exeter Equity Partners, L.P. and Exeter
Venture Lenders, L.P. (collectively 'Exeter') purchased Pexco's interest in
National Tobacco. In connection with these transactions, Mr. Helms and his
management team increased their equity ownership from approximately 13% in 1988
to 25% in 1992 to 48% in 1996. After giving effect to the Transactions, which
includes the Company's purchase of all of the interests owned by MainStay Funds
and Exeter, the Company's management team will beneficially own approximately
72.9% of the Company's Common Stock (assuming the exercise in full of the
Warrants). As of March 31, 1997, National Tobacco had repaid over $60 million of
cumulative indebtedness primarily with cash flow generated from operations since
the initial buyout in 1988.
NATC was originally formed by the investor group DGG to acquire in March
1993 from UST, Inc. certain assets, including the exclusive rights to market and
distribute ZIG-ZAG RYO cigarette papers in the United States, Canada and other
international markets. Shortly after this acquisition, Mr. Jack Africk retired
as Vice Chairman of UST and became director, consultant and subsequently Chief
Executive Officer of NATC. Mr. Africk serves as a consultant of the Company. UST
had obtained North American distribution rights in 1938 from Bollore, a major
French manufacturer of high-quality and fine papers. The ZIG-ZAG brand was
introduced in France in 1869.
The Company was formed in 1997 to effect the acquisition of NATC and its
ZIG-ZAG RYO cigarette paper business. The Company believes the combination of
the ZIG-ZAG RYO cigarette paper business with National Tobacco's BEECH-NUT loose
leaf chewing tobacco business will produce substantial benefits and synergies,
as summarized below:
o Greater product line diversification with leading brand names;
o Improved product mix due to higher-margin RYO cigarette papers;
o Sales growth opportunities through:
--Complementary distribution channels,
--Strengthened regional market penetration for the ZIG-ZAG brand,
--Continued aggressive promotional strategies; and
o Management team with extensive industry experience.
53
<PAGE>
The Company's principal executive offices are located in New York, New York
at 257 Park Avenue South, 7th Floor, New York, New York 10010, and its telephone
number is (212) 253-8185.
BUSINESS STRENGTHS
Leading Brand Names
BEECH-NUT and ZIG-ZAG are among the most widely recognized brand names in
the loose leaf chewing tobacco and RYO cigarette paper industries, respectively.
The Company believes that the strength of these brand names has created a loyal
consumer base and significant barriers to competition. The Company believes
BEECH-NUT has been one of the leading loose leaf chewing tobacco brands in the
United States since its inception in 1897. Similarly, the Company believes
ZIG-ZAG has been the number-one selling domestic RYO cigarette paper brand since
UST's introduction of the brand in the United States in 1938.
High-Quality Products
Management seeks to ensure the quality of the Company's products through
its focus on quality control, research and development and its use of its highly
efficient, well maintained loose leaf chewing tobacco manufacturing facilities.
The Company imports all of its ZIG-ZAG RYO cigarette papers under its strict
quality requirements from Bollore, a major French manufacturer of high-quality
and fine papers.
Experienced Sales Organization
National Tobacco has made a substantial long-term investment in its
105-person sales organization. The Company believes it can successfully
merchandise ZIG-ZAG RYO cigarette papers through thousands of key retail
outlets, especially in the Southeast which has historically been an
underdeveloped market for NAOC, by selling the ZIG-ZAG product line through
National Tobacco's sales force and complementary distribution channels.
Consistent Cash Flows
The Company and its predecessors have had a long history of consistent cash
flows from operations. Although there can be no assurance, the Company believes
that this trend will continue, enabling the Company to promptly and
significantly reduce its debt.
Minimal Capital Expenditure Requirements
The Company's subsidiaries require minimal capital expenditures. National
Tobacco maintains a highly efficient loose leaf chewing tobacco manufacturing
facility. NAOC contracts for the manufacturing of all of its RYO cigarette paper
and related products. The Company's combined capital expenditures averaged
$377,000 annually for the fiscal years 1994 through 1996.
Successful History of Management Buyouts
The Company's management team has a long and successful history in
profitably operating a business with a leveraged balance sheet. Led by Mr.
Thomas F. Helms, Jr., Chairman, President and Chief Executive Officer of the
Company, substantially all of the Company's current management team have been
with National Tobacco or its predecessors since the initial buyout with Lehman
Brothers of Lorillard's interest in 1988. This same management team participated
in two subsequent management buyouts in April 1992 and in May 1996. Since the
initial Lorillard buyout, National Tobacco has cumulatively repaid approximately
$60 million of National Tobacco's indebtedness. As part of these buyouts,
management has reinvested its equity to increase its ownership from
approximately 13% in 1988 to 25% in 1992 to 48% in 1996. After giving effect to
the Transactions, management will beneficially own approximately 72.9% of the
Company's Common Stock (assuming the exercise in full of the Warrants).
54
<PAGE>
Experienced and Committed Management Team
The Company's management team is highly experienced in the tobacco
industry. The Company has experienced little management turnover and continues
to be strengthened through the recruitment of additional talented professionals.
The Company's seven senior executives have an average of approximately 25 years
of experience in the tobacco industry. Mr. Helms, Chief Executive Officer of the
Company, has 14 years of tobacco industry experience. In addition, Mr. Africk,
one of the Company's consultants, has 49 years of tobacco industry experience.
The Company's management team is highly motivated to build value over the long
term because of its beneficial equity ownership of approximately 72.9% after
giving effect to the Transactions (assuming the exercise in full of the
Warrants).
Highly Efficient Infrastructure
The Company's infrastructure is highly efficient. National Tobacco has
consistently sought to improve its manufacturing processes as well as its
product formulation and raw material procurement. National Tobacco's gross
margins have improved from 48.5% in fiscal 1993 to 58.4% in fiscal 1996. The
Company believes it is the low-cost manufacturer of loose leaf chewing tobacco.
NAOC had a fiscal 1996 gross margin of 64.3%, complementing National Tobacco's
high gross margins.
Attractive Market Dynamics
The Company believes that the smokeless tobacco market, including loose
leaf chewing tobacco, and the RYO cigarette paper industry are each
characterized by non-cyclical demand, brand loyalty, significant barriers to
entry, minimal capital expenditure requirements, high profit margins, consistent
price increases at the wholesale level as well as the ability to generate strong
and consistent free cash flows.
Strong Customer Relationships
Historically, both National Tobacco and NAOC have enjoyed strong
relationships with their respective customers by virtue of their leading brands,
significant market shares and experienced sales and marketing organizations. By
combining these two businesses' leading brands, management teams and sales
organizations, the Company expects to strengthen its customer relationships and
become a more important source of product supply to major distributors and
retailers. The combination of the National Tobacco and NAOC sales forces will
enable the Company to develop a valuable retail-oriented focus for the ZIG-ZAG
brand.
BUSINESS STRATEGY
The Company's near-term strategy is to cultivate sales, marketing and
distribution synergies through the combination of its loose leaf chewing tobacco
and RYO cigarette paper businesses. Over the long term, the Company's primary
strategy for building equity value is to reduce debt. The Company also intends
to continue to identify and pursue opportunities for profitable growth through
new product introductions and strategic acquisitions.
Continue to Capitalize on Strong Brands.
The Company intends to maintain the stability of its core BEECH-NUT, TROPHY
and ZIG-ZAG brands through adherence to its strict quality control procedures,
maintenance of key distributor relationships and the continuation of aggressive
marketing strategies.
Leverage Complementary Distribution Channels.
As a result of the Acquisition, the Company is strategically positioned to
cross-sell its products. This strategy is designed to enhance sales penetration
in certain distribution channels, primarily at the retail level, for each of its
product lines and more intensively focus sales efforts at the retail level on
the Company's higher-margin ZIG-ZAG RYO cigarette paper business.
55
<PAGE>
The Company believes it can leverage the excellent store-level
relationships of its loose leaf tobacco sales force to distribute more ZIG-ZAG
RYO cigarette papers into the important food, mass merchandising and discount
tobacco store channels, particularly in the Southeast, where BEECH-NUT sales
activity has been strong and where ZIG-ZAG has been historically underdeveloped.
Similarly, management plans to expand the distribution of its BEECH-NUT and
TROPHY loose leaf chewing tobacco brands in large chain convenience store
operations where ZIG-ZAG sales activity has historically been strong.
Broaden Penetration of Geographical Markets.
The Company believes it can increase sales of its higher-margin ZIG-ZAG RYO
cigarette paper products in BEECH-NUT's core markets in the southeastern states,
particularly in this region's convenience store and food store channels, where
ZIG-ZAG's sales have historically been underdeveloped.
Develop and Introduce New Products and Brand Extensions.
The Company intends to expand its overall market shares in its loose leaf
chewing tobacco and RYO cigarette paper businesses through the continued
development and introduction of new products, including line extensions of its
powerful brand names. Since 1988, the Company's National Tobacco subsidiary
successfully introduced two new loose leaf chewing tobacco products, BEECH-NUT
SPEARMINT and TROPHY, without losing appreciable market share for its existing
products. The Company plans at least one new RYO cigarette paper product
introduction within the next twelve months. In addition, the Company is
evaluating consumer demand for several new smokeless tobacco products and line
extensions that are currently being developed and tested. The Company believes
that new tobacco-related products can be manufactured at favorable costs by
utilizing existing capacity at National Tobacco's loose leaf chewing tobacco
manufacturing facility.
Expand into Complementary Niche Markets.
Consistent with its acquisition of the ZIG-ZAG RYO cigarette paper
business, the Company will continue to review opportunities for expansion into
complementary niche market segments with other tobacco-related product lines
through acquisitions and internal development. The addition of these niche
products will enable the Company to take advantage of its strengthened sales
organization, sophisticated research and development capabilities, manufacturing
and storage capacity and well developed distribution channels.
The Company intends to seek out potential strategic acquisitions in its
core smokeless tobacco market, where it could take advantage of synergies in
production, distribution, marketing and merchandising. Although the Company is
currently evaluating the competitive environment, it has not entered into any
letters of intent or other agreements with respect to potential acquisitions.
Continue to Increase Operating Efficiencies.
The Company believes that it can continue to reduce manufacturing and
operating expenses by (i) continuing development of more cost-effective blends
of loose leaf chewing tobacco and flavorings, (ii) reducing packaging costs,
(iii) improving raw material utilization and (iv) exploiting sales, promotional
and operational synergies from the combination of certain operations conducted
by its BEECH-NUT and ZIG-ZAG businesses.
Increase Dollar Sales Volume through Strategic Pricing.
Consistent with overall tobacco industry practice, the Company's strategy
is to enhance growth in net sales primarily through price increases. The Company
historically has been able to increase net sales through annual price increases.
Manufacturers' wholesale prices for loose leaf chewing tobacco and RYO cigarette
papers cumulatively increased 18% and 22%, respectively, over the past three
years. The Company's prices for these products generally have increased at
comparable rates. The Company expects this trend to continue.
Pursue Growth through Aggressive Promotional Strategies.
Management intends to develop promotional synergies between its two product
lines to increase its strong market shares. The Company's loose leaf chewing
tobacco business has historically implemented a retail point-of-sale 'pull'
strategy by offering promotions to consumers throughout the year. The
56
<PAGE>
Company's ZIG-ZAG RYO cigarette papers historically have been promoted to
wholesalers through a 'push' strategy, initially during two annual promotional
periods at a 20% ('Buy four, get one free') discount, and since July 1996, three
times per year at an off-invoice discount of 16.7% (equivalent to 'Buy five, get
one free'). This change was implemented both to reduce sales spikes and to
generate even stronger margins.
The Company's combined, strengthened sales organization plans to
cross-promote the higher-margin ZIG-ZAG line to retailers in order to expand
into new geographic markets and channels of distribution. For example, the
Company expects to offer certain of its retail customers ZIG-ZAG purchase
incentives and point-of-sale promotional displays in connection with the
retailers' purchases of loose leaf chewing tobacco.
INDUSTRY AND MARKETS
The Company believes that the smokeless tobacco market, including loose
leaf chewing tobacco, and the RYO cigarette paper industry are each
characterized by non-cyclical demand, brand loyalty, significant barriers to
entry, minimal capital expenditure requirements, high profit margins, consistent
price increases at the wholesale level as well as the ability to generate strong
and consistent free cash flows. The Company believes the smokeless tobacco and
loose leaf chewing tobacco markets were approximately $1.7 billion and $334
million, respectively, based on 1995 manufacturers' sales, and have grown at
compound annual rates of approximately 8% and 3%, respectively, since 1989
driven primarily by price increases. The Company believes that the RYO cigarette
paper industry was approximately $100 million, based on 1995 manufacturers'
sales, and has grown at a compound annual rate of approximately 5% since 1991.
Smokeless tobacco products, including chewing tobacco, have a long, established
tradition of use in the United States dating back to colonial times. Loose leaf
chewing tobacco has generally been most popular with outdoor enthusiasts and
blue-collar workers from the Southeast, Southwest, rural Northeast and North
Central regions. An estimated 7 million Americans are regular users of smokeless
tobacco products, according to the Smokeless Tobacco Council. While RYO
cigarette papers are sold in all 50 states, the Company believes sales are more
concentrated in certain western states.
Smokeless Tobacco
The smokeless tobacco industry is comprised of the five product categories
listed below. The Company currently competes in the loose leaf chewing tobacco
segment.
Moist snuff is cured, aged, flavored and finely ground tobacco packaged in
round fiber or plastic cans.
Loose leaf chewing tobacco is typically made from air-cured leaf tobacco,
using both domestic and imported tobaccos, aged, flavored and packed in foil
pouches.
Plug chewing tobacco is made from air-cured leaf tobacco, heavily flavored
and pressed into small bricks or blocks.
Twist chewing tobacco is made of dark, air-cured leaf tobacco, which is
twisted into strands that are dried and packaged like a dry, pliable rope.
Dry snuff is a powdered tobacco product which is sometimes flavored and is
packaged in a variety of containers.
According to information provided by the Smokeless Tobacco Council,
manufacturers' sales for smokeless tobacco were $991 million in 1989 and $1.74
billion in 1995, representing a compound annual growth rate of 9.8%. This
increase is primarily related to the increase in the moist snuff market, in
which manufacturers' sales have grown from $608 million in 1989 to $1.315
billion in 1995, representing a compound annual growth rate of 13.7%.
Manufacturers' sales of loose leaf chewing tobacco were $280 million in 1989 and
$334 million in 1995, representing a compound annual growth rate of 3.0% during
the same period.
57
<PAGE>
In each of these markets, growth in manufacturers' sales was fueled
primarily by price increases. Manufacturers' prices on moist snuff have
increased from $1.15 per can in 1989 to $1.96 in 1996, a compounded annual
increase of 7.9%. Manufacturers' selling prices for loose leaf chewing tobacco
have risen from $0.94 a pouch in 1989 to $1.38 in 1996, a compound annual
increase of 5.6%. The Company believes that this price differential will
continue to grow and that moist snuff consumers could switch to loose leaf
chewing tobacco as a result of the price disparity.
Loose Leaf Chewing Tobacco
Loose leaf chewing tobacco products are typically sold through the
following retail distribution channels (in order of importance): food stores,
mass merchandisers, convenience stores, discount tobacco stores, chain and
independent drug stores. Discount tobacco retailers are an increasingly
important distribution channel for all tobacco products, including loose leaf
chewing tobacco. Certain retailers purchase direct from manufacturers, although
most purchase through wholesale distributors.
The typical loose leaf chewing tobacco consumer is male, white, blue
collar, aged 25-49, has a high school education or less and lives in a rural 'C'
or 'D' county.
RYO Cigarette Paper
RYO cigarette papers are typically sold through the following retail
distribution channels (in order of importance): convenience stores, chain and
independent drug stores, mass merchandisers, food stores and discount tobacco
stores. Retailers purchase RYO cigarette papers primarily from wholesale
distributors.
PRODUCTS
The Company manufactures and markets loose leaf chewing tobacco and imports
and distributes RYO cigarette papers. The table below depicts the breakdown of
the Company's net sales, on a pro forma basis, by product line for the last
three fiscal years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Loose leaf chewing tobacco (National Tobacco)..................................... $ 51.4 $ 52.6 $ 55.9
RYO cigarette papers (NAOC)....................................................... 40.2 42.6 46.1
------ ------ ------
Total.......................................................................... $ 91.6 $ 95.2 $102.0
------ ------ ------
------ ------ ------
Percent of total net sales:
Loose leaf chewing tobacco........................................................ 56.1% 55.3% 54.8%
RYO cigarette papers.............................................................. 43.9 44.7 45.2
------ ------ ------
Total.......................................................................... 100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
</TABLE>
Loose Leaf Chewing Tobacco
Loose leaf chewing tobacco products can be broadly characterized as either
full-flavored or mild, each accounting for approximately one half of industry
volume. Loose leaf chewing tobacco is made from aged, air-cured tobacco which is
processed and flavored and then packaged in foil pouches. The BEECH-NUT brands
are available in three flavors: Regular, Wintergreen and Spearmint. BEECH-NUT
REGULAR is a full-flavored product and ranks second in sales in the
full-flavored loose leaf chewing tobacco category, and third overall. BEECH-NUT
WINTERGREEN and BEECH-NUT SPEARMINT were introduced by National Tobacco in 1979
and 1989, respectively. Retail prices of loose leaf chewing tobacco range from
$1.50 to $2.00 per 3 ounce pouch. These pouches are typically sold individually
or in cartons of 12 pouches. BEECH-NUT REGULAR and TROPHY represent 60% and 25%
of the Company's loose leaf chewing tobacco sales.
The Company introduced its TROPHY brand into the mild product segment of
the loose leaf chewing tobacco market in 1992. TROPHY was positioned as a direct
competitor to Conwood Corporation's Levi Garrett brand. Since its introduction,
National Tobacco has aggressively marketed TROPHY with promotional programs
without impairing the sales or profitability of its BEECH-NUT brands.
58
<PAGE>
In addition to the BEECH-NUT brands and TROPHY, National Tobacco also
produces a regional brand, HAVANA BLOSSOM, sold primarily in West Virginia,
Pennsylvania and Ohio.
RYO Cigarette Papers
RYO cigarette papers are sold in a variety of different widths and styles,
primarily standard width ZIG-ZAG White, ZIG-ZAG 1 1/4 width French Orange and
ZIG-ZAG Kutcorners, which is designed for easier hand-rolling. Retail prices of
RYO cigarette papers generally range from $0.99 to $1.99 per 32-leaf booklet.
Additionally, in 1989, a waterproof paper brand was developed for sale in
Canada. Other products sold under the ZIG-ZAG name, which constitute less than
2% of ZIG-ZAG sales, are 1 1/2 RYO cigarette papers, Gold Standard tobacco for
roll-your-own-cigarettes and ZIG-ZAG cigarette rollers, cigarette tubes and tube
injectors.
SALES AND MARKETING
Following the Acquisition and as part of the integration of the National
Tobacco and NAOC businesses, the two existing sales organizations were merged,
creating an 111-person sales organization nationwide. By combining these two
businesses' leading brands, management teams and sales organizations, the
Company expects to strengthen its customer relationships and become a more
important source of supply to major distributors. The combination of the
National Tobacco and NAOC sales forces will enable the Company to develop a
valuable retail-oriented focus for the ZIG-ZAG brand. In addition, the BEECH-NUT
sales force is strategically and geographically stronger in markets where the
Company believes ZIG-ZAG has the greatest growth potential. The Company believes
that the sales force integration will be facilitated by its uncomplicated and
complementary product lines and the network of store-level relationships
developed by the National Tobacco sales force, which was designed to concentrate
heavily on retail merchandising. The Company believes that its loose leaf
chewing tobacco sales force has been more effective than those of its
competitors because it focuses primarily on sales of the Company's five loose
leaf chewing tobacco brands. The sales forces of the Company's competitors, for
the most part, are responsible for the sale of a wide range of tobacco brands
and tobacco-related products, in addition to their loose leaf chewing tobacco
brands, which also constitutes a smaller share of their sales activity.
The Company currently sells its products to approximately 1,500 distributor
accounts who, in turn, sell to over 150,000 retail outlets. Only one
distributor, McLane Company, Inc. ('McLane'), a wholly owned subsidiary of
Wal-Mart Stores, Inc. and the largest distributor of food and non-food products
to convenience stores in the United States, comprises more than 10% of the
Company's fiscal 1996 net sales (on a pro forma basis). The top ten distributor
accounts collectively generate approximately 37% of fiscal 1996 sales (on a pro
forma basis).
Historically, NAOC's six-person sales force focused on wholesalers in the
large chain convenience store, drug store and mass merchandising channels
without calling on retail outlets, while National Tobacco's larger sales force
of 105 called on both wholesalers and retail merchants in these channels as well
as the food store and discount tobacco store channels. The Company believes that
its merged sales force will be able to move each of the Company's product lines
into geographical markets and retail channels where they previously had been
underrepresented. The Company believes that the merged sales force will be able
to increase the sales of the ZIG-ZAG product line, skewing the Company's product
mix toward higher-margin RYO cigarette paper. The Company believes that the
resources and longstanding relationships of the combined sales force will
facilitate new areas of market penetration for ZIG-ZAG, including the
Southeastern convenience store and food store channels, where the Company's
loose leaf chewing tobacco market strengths are a strong complement to
ZIG-ZAG's.
Loose leaf chewing tobacco has historically implemented a retail
point-of-sale 'pull' strategy by offering promotions to consumers throughout the
year. The Company's ZIG-ZAG RYO cigarette papers historically have been promoted
to wholesalers through a 'push' strategy, initially during two annual
promotional periods at a 20% discount ('Buy four, get one free'), and since July
1996, during three annual promotional periods an off-invoice 16.7% discount
(equivalent to 'Buy five, get one free'). This change was implemented to reduce
sales spikes and generate even stronger margins.
59
<PAGE>
Loose Leaf Chewing Tobacco
The Company's loose leaf chewing tobacco has historically been distributed
through approximately 1,500 wholesale tobacco and food distributors.
At the retail level, the Company's loose leaf chewing tobacco products are
promoted through in-store programs, such as 'buy one, get one free,' 'cents
off,' 'price off' coupons and the use of innovative, high visibility
point-of-purchase floor and shelf displays, banners and posters. Promotions
occur only in-store and the Company is therefore not reliant upon (and does not
conduct) any consumer advertising.
The Company's largest customer for loose leaf chewing tobacco (McLane)
accounted for approximately 13.7% of its loose leaf chewing tobacco revenues in
fiscal 1996 (on a pro forma basis). No other customer represents more than 10%
of loose leaf chewing tobacco revenues. The Company believes that the loss of
any one distributor or customer account would not have a material impact on the
financial condition or operations of the Company.
RYO Cigarette Paper
The Company's RYO cigarette paper has historically been distributed through
approximately 950 wholesale distributors.
The Company's largest customer for RYO cigarette papers (McLane) accounted
for approximately 12% of its RYO cigarette paper revenues in fiscal 1996. No
other customer accounts for more than 10% of RYO cigarette paper sales.
The majority of ZIG-ZAG promotional activity is at the distributor level
and consists of distributor 'push' promotions, trade shows and trade
advertising.
Sales by NAOC of its ZIG-ZAG White and ZIG-ZAG French Orange RYO cigarette
papers are the most important in terms of volume, accounting for in excess of
90% of NAOC's sales.
TRADEMARKS AND TRADE SECRETS
The Company has numerous registered trademarks relating to its loose leaf
chewing tobacco products, including the trademarks for its BEECH-NUT and TROPHY
products. These trademarks, which are significant to National Tobacco's
business, expire periodically and are renewable for additional 20-year terms
upon expiration. Flavor formulas relating to the Company's loose leaf chewing
tobacco products, which are key assets of its business, are maintained under
strict secrecy. The ZIG-ZAG trade name and trademark are owned by Bollore and
have been licensed to NAOC; however, NAOC does own the ZIG-ZAG trademark with
respect to certain tobacco products. Bollore retains significant powers over the
trademark. In the event that Bollore is prevented from registering its ZIG-ZAG
trademarks for RYO cigarette papers with the United States patent and trademark
office due to NAOC's ZIG-ZAG trademarks, NAOC has agreed to assign its ZIG-ZAG
trademarks to Bollore. Bollore would then irrevocably license these trademarks
back to NAOC.
RAW MATERIALS; PRODUCT SUPPLY AND INVENTORY MANAGEMENT
Loose Leaf Chewing Tobacco
The Company's loose leaf chewing tobacco is produced from air-cured leaf
tobacco. The Company utilizes tobaccos grown domestically in Pennsylvania and
Wisconsin and imported from many countries, including Argentina, Brazil,
Columbia, France, Germany, Indonesia, Italy and Mexico. Management does not
believe that it is dependent on any single country source for tobacco.
Historically, the prices of raw tobacco leaf have been stable. Pursuant to the
Lancaster Agreement, the Company (i) purchases and processes tobacco on an
exclusive basis and (ii) stores tobacco inventory purchased on behalf of the
Company. Lancaster purchases and processes raw leaf tobacco under instructions
from the Company, and generally maintains a 15- to 24-month commitment
allocation at its facilities. The Company generally maintains a one- to
two-month operating supply of tobacco in its Louisville facility. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources--NAOC.'
60
<PAGE>
Other than raw tobacco, the ingredients used in the Company's finished
loose leaf chewing tobacco products include food grade flavorings approved by
the FDA and other federal agencies, such as licorice, sugar and molasses.
National Tobacco is not dependent upon any one supplier for those raw materials
or for the supply of its products' packaging.
RYO Cigarette Paper
Under normal conditions, pursuant to the Distribution Agreements, the
Company must purchase its entire requirement for RYO cigarette papers from
Bollore. To maintain a steady supply of product: (i) the Company may seek
third-party suppliers and continue use of the ZIG-ZAG trademark if Bollore is
unable or unwilling to perform under the Distribution Agreement; and (ii)
Bollore is required to maintain in a public warehouse a two-month supply of
emergency inventory at Bollore's expense.
The Distribution Agreements set the purchase price for the period 1997
through 2004 based on 1994 prices, subject to certain annual adjustments to
reflect increases or decreases in the U.S. and Canadian Consumer Price Index.
Export duties, insurance and shipping costs are the responsibility of Bollore
and import duties and excise taxes are the responsibility of NAOC.
The Company must pay Bollore in French francs within 45 days after the date
of the bill of lading. The Distribution Agreements reduce catastrophic foreign
exchange risk by providing that Bollore will bear certain exchange rate risks.
The exchange rate risk allocations set forth in the Distribution Agreements will
be maintained until 2004 along with the prices to be paid by NAOC to Bollore for
finished products.
The Company generally seeks to maintain a minimum six-week supply of
product in addition to the immediately available, two-month emergency inventory
on hand at the expense of Bollore. The Company also builds inventory outside
promotional periods in order to have adequate inventory to meet increased demand
during promotion. The Company's inventory is maintained in a bonded public
warehouse located in Reno, Nevada. See '--Distribution Agreements.'
MANUFACTURING
The Company manufactures its loose leaf chewing tobacco products and
contracts for the manufacture of its RYO cigarette papers. The Company believes
that its production, quality control, research and development, facilities and
equipment are vital to maintaining the high-quality brand image and operating
efficiency of its loose leaf tobacco products.
Production and Quality Control
The Company's production process utilizes proprietary techniques and is
subject to strict quality control. After delivery to the Louisville plant, the
tobacco continues to age in thousand-pound bundles for approximately 20 days.
When it is ready to be processed, the leaf is rehydrated to a 29% moisture
content (from approximately 14%) using a proprietary steam jet process.
Mechanized equipment then cuts, cleans and blends the tobacco. A fluid casing
made from a proprietary blend of flavorings including licorice, sugar and
molasses is applied to the strips of leaf. Machines then pack the tobacco into
labeled foil pouches, which are packed in cartons and then into cases. The
machinery is subject to regular maintenance (which is conducted during
off-shifts and three annual shut-down periods of one week each) and requires
minimal labor to operate and service.
During each production day, the Company's quality control department
periodically tests the quality of the tobacco, casings (flavorings in syrup
form), application of casings and packaging. The Company utilizes sophisticated
quality control and pilot plant production equipment to test and closely monitor
the quality of its products, as well as those of its competitors. The quality of
the Company's products is largely the result of using high grade, air-cured
tobacco leaf, food grade flavorings and ongoing analysis of leaf shape, cut,
flavorings and moisture content.
Research and Development
The Company has developed and built an efficient research and development
laboratory which is responsible for new product development. This department
also reformulates existing products in an effort to maintain a high level of
product consistency and facilitates the use of less costly raw materials without
sacrificing product texture or flavor. Specifically, the use of tobacco from
South America, Africa,
61
<PAGE>
Indonesia, Europe and other locations can substantially reduce the overall
product cost when such materials are blended with the more expensive
Pennsylvania and Wisconsin tobaccos. This investment has yielded, and the
Company believes it will continue to yield, cost effective blends of tobacco and
flavorings which reduce overall costs without compromising the high product
quality. For example, a new casings formula has recently been developed which is
composed of natural flavoring ingredients and has provided significant cost
savings since its introduction. Other cost reduction programs involving
flavorings and tobaccos are currently in development.
The Company has an active new product development program, and is
evaluating consumer demand for several new products that it has fully developed
and tested. These products can be introduced to respond to changing consumer
demands and competitive conditions.
National Tobacco spent approximately $284,000, $318,000 and $345,000 in
research and development for fiscal years 1994, 1995 and 1996, respectively.
NAOC did not spend any amount for research and development during this period.
Facilities and Equipment
The Louisville, Kentucky plant, which is owned by National Tobacco, was
formerly used by Lorillard for the manufacture of cigarettes, cigars and chewing
tobacco. This approximately 600,000 square foot facility sits on a 26 acre urban
site near downtown Louisville. The majority of the facility's structures sit on
half of the total acres. The facilities are in good condition and have received
regular maintenance and capital improvement. About two-thirds of the plant is
currently utilized, resulting in substantial manufacturing and storage capacity.
The existing structures would provide ample space to accommodate any expansion
of the Company's loose leaf chewing tobacco product line. The Company believes
that the Company's loose leaf chewing tobacco manufacturing equipment is as
sophisticated as is available in the industry. Annual capital expenditures have
been less than $400,000 for the past eight years and have been primarily spent
on new equipment and facilities in the administrative and research and
development areas. Management does not anticipate any significant new
expenditures for equipment or renovation above this level.
COMPETITION
National Tobacco is a leading manufacturer and marketer of loose leaf
chewing tobacco, and NAOC is the largest importer and distributor in North
America of RYO cigarette papers, with respective market shares of 21.1% and 49%.
The other three principal competitors in the loose leaf chewing tobacco market,
which, together with the Company, control 99% of the market, are Pinkerton
Tobacco Co., Conwood Corporation and Swisher International Group Inc. NAOC's two
major competitors in the RYO cigarette paper market, which, together with NAOC,
control 95% of the market, are Republic Tobacco Co. S.A. and House of Rizla.
Certain competitors of the Company are better capitalized than the Company and
have greater financial and other resources than those available to the Company.
The Company believes that its strong market positions in each of its principal
product lines is due to the high brand recognition and perceived quality of each
of its products, its manufacturing and operating efficiencies, and its
significant sales, marketing and distribution strengths.
EMPLOYEES
As of March 31, 1997, the Company employed a total of 285 full-time
persons, including manufacturing, sales and administrative personnel comprised
of 265 National Tobacco employees, and 20 NAOC employees. The Company's
integrated sales organization consists of 111 persons. All of the Company's
operations are non-union, with the exception of National Tobacco's hourly
employees, who are covered by collective bargaining agreements which will expire
in 1998. National Tobacco and NAOC each believes its relationships with its
employees are satisfactory.
PROPERTIES AND FACILITIES
As of March 31, 1997, the Company operated manufacturing, distribution,
office and warehouse space in the United States with a total floor area of
approximately 614,338 square feet. Of this footage, approximately 14,338 square
feet are leased and approximately 600,000 are owned.
62
<PAGE>
To provide a cost-efficient supply of products to its customers, the
Company maintains centralized management of nationwide manufacturing and
distribution facilities. National Tobacco has one manufacturing and distribution
facility located in Louisville, Kentucky and five other public warehouse
distribution facilities in other locations throughout the United States. The
Company's management will evaluate the potential closure of additional space
acquired pursuant to the Acquisition.
The following table describes the principal properties of the Company
(other than sales service centers, sales office space or temporary warehouse
space) as of June 30, 1997.
<TABLE>
<CAPTION>
OWNED OR
LOCATION PRINCIPAL USE SQUARE FEET LEASED
- -------------------- ------------------------------- ----------- ----------
<S> <C> <C> <C>
New York, NY Corporate headquarters 10,351 Leased
Louisville, KY Loose leaf chewing tobacco 600,000 Owned (1)
manufacturing and R&D
Raleigh, NC RYO cigarette paper sales and 3,987 Leased
marketing
</TABLE>
- ------------------
(1) Encumbered by a mortgage securing all obligations and liabilities under the
New Senior Secured Facilities.
PRODUCT LIABILITY AND LITIGATION
The Company is a party to only one lawsuit, which is a purported class
action seeking 'the establishment of a medical monitoring fund to monitor the
health of plaintiffs and class members for those diseases and health risks
associated with the use of smokeless tobacco products.' The lawsuit was filed on
June 30, 1997 against National Tobacco and other manufacturers of tobacco
products. The Company intends to defend vigorously against such claim. There can
be no assurance that in the future National Tobacco will not be named as a
defendant in one or more additional lawsuits or, if so named, that such lawsuits
would not have a material adverse effect on the Company's business. See 'Legal
Proceedings.' In addition, National Tobacco, as a member of Smokeless Tobacco
Council, Inc., a trade organization ('STC'), which is a defendant in certain of
these cases, is responsible for approximately 9.4% of STC's operating expenses,
including litigation costs.
The tobacco industry, primarily the cigarette segment, has experienced and
is experiencing significant product liability litigation. Numerous class action
and individual lawsuits have been brought against tobacco companies (primarily
the cigarette companies) for health-related injuries allegedly caused by use of
or exposure to tobacco products. Many of these lawsuits seek punitive damages in
addition to compensatory damages. In addition to individual and class action
product liability lawsuits, approximately 40 states and at least ten cities and
counties have sued tobacco companies, primarily cigarette companies, to recover
substantial medical costs allegedly incurred by such states, cities and counties
in treating tobacco-related illnesses and diseases. The total amount of damages
which may be at risk in these various lawsuits is presently unknown but could be
material.
Several events have occurred within the past few years which make it likely
that tobacco liability lawsuits will be pursued vigorously against tobacco
companies, primarily cigarette companies, in the near future, including the
following: in August 1996, a Florida jury awarded, in a verdict which is
currently under appeal, $750,000 in compensatory damages in favor of an
individual plaintiff who claimed he was injured as a result of smoking
cigarettes; documents obtained in discovery from several cigarette companies
which plaintiffs allege show that such companies concealed information regarding
the health risks and addictive effects of nicotine and tobacco; testimony has
been given and statements made by present or former cigarette company executives
regarding possibly harmful and addictive effects of nicotine and tobacco; at
least 25 statewide class actions have been brought by a well organized and well
financed group of plaintiffs' class action lawyers; approximately 40 states and
at least ten cities and counties have brought lawsuits seeking to recover costs
incurred in treating tobacco-related illnesses and diseases; and Liggett & Myers
recently broke ranks with other major cigarette companies and agreed to reach a
separate settlement of its tobacco liability litigation, pursuant to which it
agreed to produce documents and cooperate with plaintiffs.
63
<PAGE>
Most tobacco liability lawsuits have been brought against manufacturers and
sellers of cigarettes for injuries allegedly caused by smoking or by exposure to
smoke. However, several lawsuits have been brought against manufacturers and
sellers of smokeless tobacco, principally moist snuff, for injuries to health
allegedly caused by use of smokeless tobacco. Historically, such claims have
asserted that use of smokeless tobacco is addictive and causes oral cancer.
These cases include recent purported class actions brought in Louisiana and
Illinois; several of the 40 health care reimbursement actions brought by the
state attorneys general; and four individual actions brought in Louisiana and
Texas.
REGULATION
The tobacco industry, particularly with respect to cigarettes, has been
under public scrutiny for over thirty years. Industry critics include special
interest groups, the Surgeon General and many legislators at the state and
federal levels. Although the smokeless tobacco companies have come under such
scrutiny, much of the focus has been directed at the cigarette industry due to
its large size relative to the smokeless tobacco industry.
Smokeless tobacco manufacturers, like other producers of tobacco products,
are subject to regulation in the United States at federal, state and local
levels. Together with changing public attitudes towards smoking, a constant
expansion of smoking regulations since the early 1970s has been a major cause of
the overall decline in consumption of tobacco products. Moreover, the trend is
toward increasing regulation of the tobacco industry.
Federal law has recently required states, in order to receive full funding
for federal substance abuse block grants, to establish the minimum age of 18
years for the sale of tobacco products together with an appropriate enforcement
program. In recent years, a variety of bills relating to tobacco issues have
been introduced in the United States Congress, including bills that would (i)
prohibit the advertising and promotion of all tobacco products and/or restrict
or eliminate the deductibility of such advertising expenses; (ii) increase
labelling requirements on tobacco products to include, among other things,
additional warnings and lists of additives and toxins; (iii) modify federal
preemption of state laws to allow state courts to hold tobacco manufacturers
liable under common law or state statutes; (iv) shift regulatory control of
tobacco products and advertisements from the FTC to the FDA; (v) increase
tobacco excise taxes; and (vi) require tobacco companies to pay for health care
costs incurred by the federal government in connection with tobacco related
diseases. Hearings have been held on certain of these proposals; however, to
date, none of such proposals have been enacted by Congress. Future enactment of
such proposals or similar bills depending upon their content could have a
material effect on the sales or operations of the Company.
In August 1995, the FDA published proposed rules for regulation of tobacco
and tobacco products, including smokeless tobacco. Following a year of comment
and revision, in August 1996 the FDA promulgated final rules which were
scheduled to take effect in August 1997, except for a portion of the rules
prohibiting the sale of tobacco to persons under 18, which have already become
effective. The FDA's regulations restrict access to tobacco and tobacco
products, regulate tobacco labeling, and limit promotion and advertising of
tobacco.
On April 25, 1997, a federal court in Greensboro, North Carolina ruled that
the FDA has statutory authority to regulate tobacco products. The court upheld
the FDA's rules restricting access to tobacco products and regulating tobacco
labeling. However, the court ruled that the FDA does not have authority to
regulate promotion and advertising of tobacco products. The judge certified the
case for interlocutory appeal to the United States Fourth Circuit Court of
Appeals and the appeal is still pending.
The FDA regulations prohibit self-service displays of tobacco, including
smokeless tobacco, and require that a retailer sell cigarettes and smokeless
tobacco only in a direct, face to face exchange between the retailer and the
consumer. Historically, smokeless tobacco has been sold primarily by allowing
customers direct access to the product. Accordingly, there can be no assurance
that prohibiting such direct access would not have an adverse effect on sales.
In 1996, Massachusetts enacted a statute which requires tobacco companies,
incuding smokeless tobacco companies, to disclose information regarding the
ingredients and nicotine content of their products.
64
<PAGE>
On February 7, 1997, a federal court in Massachusetts ruled that this statute is
not preempted by federal law. The case has been certified for immediate appeal
to the United States First Circuit Court of Appeals. If tobacco companies are
required to disclose ingredient information, this may risk disclosure of trade
secrets, which may have a material adverse effect on their businesses.
While there is no current regulation materially and adversely affecting the
sale of RYO cigarette papers, there can be no assurance that federal, state or
local regulations will not be enacted which seek to regulate RYO cigarette
papers. In the event such regulations are enacted, depending upon their
parameters, they could have an adverse effect on the business of the Company.
Similarly, there can also be no assurance that the FDA will not attempt to
regulate the sale of RYO cigarette papers.
EXCISE TAXES
Smokeless tobacco products have long been subject to federal, state and
local excise taxes, and such taxes have frequently been increased or proposed to
be increased, in some cases significantly, to fund various legislative
initiatives. RYO cigarette papers are similarly taxed.
Since 1986, smokeless tobacco (including dry and moist snuff and chewing
tobacco) has been subject to federal excise tax. Smokeless tobacco is taxed by
weight (in pounds or fractional parts thereof) manufactured or imported. From
July 1, 1986 through December 31, 1990, the excise tax on snuff was $0.24 per
pound. Effective January 1, 1991, the federal excise tax rate on snuff increased
to $0.30 per pound, and again increased to $0.36 per pound, effective January 1,
1993. From July 1, 1986 through December 31, 1990, the excise tax on chewing
tobacco was $0.08 per pound. Effective January 1, 1991 the federal excise tax on
chewing tobacco was increased to $0.10 per pound, and again increased to $0.12
per pound effective January 1, 1993. The increase in the federal excise tax rate
on smokeless tobacco in 1991 and again in 1993 did not have a material adverse
effect on National Tobacco's product sales. The excise tax on RYO cigarette
paper is $.0075 per fifty papers. This level of taxation has not had a material
adverse effect on NAOC's sales.
Future enactment of increases in excise taxes could have a material adverse
effect on the business of the Company. The Company is unable to predict the
likelihood of the passage or the enactment of future increases in tobacco taxes.
Tobacco products are also subject to certain state and local taxes. Budget
deficit concerns at the state level continue to exert pressure to increase
tobacco excise taxes.
From time to time, the imposition of state and local taxes has had limited
impact on the Company's sales regionally. Any enactment of new state excise
taxes or increase in existing excise taxes are likely to have an increasingly
adverse effect on regional sales as smokeless tobacco consumption generally
declines.
ENVIRONMENTAL REGULATIONS
The Company believes that it is currently in substantial compliance with
all material environmental regulations and pollution control laws.
DISTRIBUTION AGREEMENTS
As part of the acquisition of the ZIG-ZAG RYO cigarette paper business,
NAOC entered into three long-term distribution and licensing agreements with
Bollore with respect to sales of RYO cigarette papers in the United States,
Canada and Hong Kong, Singapore, Dubai, Qatar, Oman and Jordan (respectively,
the 'U.S. Distribution Agreement,' the 'Canada Distribution Agreement' and the
'Other Countries Distribution Agreement,' and, collectively, the 'Distribution
Agreements'). Under the Distribution Agreements, Bollore has granted NAOC the
exclusive right to purchase RYO cigarette papers bearing the ZIG-ZAG brand name
from Bollore for resale in the countries noted above. The prices payable by NAOC
for the ZIG-ZAG RYO cigarette papers distributed by it are formula based,
subject to consumer price index adjustments, until 2004. NAOC has the sole right
to determine the price and other terms upon which NAOC may resell any products
purchased from Bollore, including the right to determine the distributors of
such products within the countries noted above.
65
<PAGE>
NAOC is required to pay Bollore within 45 days from the date of the bill of
lading. All payments must be made in French francs, exposing NAOC to short-term
foreign exchange rate risk, which can be effectively hedged. The Distribution
Agreements partially reduce such foreign exchange risks by providing that
Bollore bears certain exchange rate risks. The exchange rate risk allocations
set forth in the Distribution Agreements will be renegotiated in 2004 along with
the prices to be paid by NAOC to Bollore for the RYO cigarette papers.
According to NAOC's Distribution Agreements with Bollore, NAOC, under
normal conditions, must purchase the finished product only from Bollore.
Conversely, Bollore is required by such agreements to provide NAOC the
quantities and quality of the products that it desires. The Distribution
Agreements provide NAOC with safeguards in order for NAOC to maintain a steady
supply of product. Such safeguards include (i) granting NAOC the right to seek
third party suppliers with continued use of the ZIG-ZAG trademark if Bollore is
unable or unwilling to perform its obligations under the Distribution Agreements
and (ii) providing NAOC with a two month supply of emergency inventory in the
United States at Bollore's expense.
Under the Distribution Agreements, NAOC has agreed for the term of the
Distribution Agreements and for a period of five years after termination of such
Distribution Agreements not to engage, directly or indirectly, in the
manufacturing, selling, distributing, marketing or otherwise promoting in the
countries identified above RYO cigarette paper or RYO cigarette paper booklets
of a competitor without Bollore's consent, except for certain de minimis
acquisitions of debt or equity securities of such competitor and certain
activities with respect to an alternative supplier used by NAOC as permitted
under the Distribution Agreements.
Each of the Distribution Agreements became effective on March 31, 1993.
Each of the U.S. Distribution Agreement and the Canada Distribution Agreement
was for an initial term of twenty years commencing from the effective date of
such agreement and will be renewed automatically for successive twenty year
terms unless sooner terminated in accordance with the provisions of such
agreement. The Other Countries Distribution Agreement was for an initial term of
ten years commencing from the effective date of such agreement and will be
renewed automatically for successive ten year terms unless sooner terminated in
accordance with the provisions of such agreement. Each of the Distribution
Agreements permits Bollore to terminate such agreement (i) if certain minimum
purchases (which were exceeded in 1996 by a factor of five and seven in the U.S.
and Canada, respectively; such minimum purchases are not applicable with respect
to the Other Countries Distribution Agreement until the last three years of the
initial term of such agreement) of RYO cigarette paper booklets have not been
made by the Company for resale in the jurisdiction covered by such agreement
within a calendar year, (ii) if the Company assigns such agreement without the
consent of Bollore (other than certain permissible assignments to wholly owned
subsidiaries of the Company), (iii) upon a change of control of the Company or
any parent of the Company without the consent of Bollore, (iv) upon certain
acquisitions of equity securities of the Company or any parent of the Company by
a competitor of NAOC or certain investments by significant stockholders of the
Company in a competitor of NAOC (see 'Risk Factors--Reliance on Suppliers') and
(v) certain material breaches, including NAOC's agreement not to promote,
directly or indirectly, RYO cigarette paper or RYO cigarette paper booklets of a
competitor. Additionally, each of the Canada Distribution Agreement and the
Other Countries Distribution Agreement is terminable by either NAOC or Bollore
upon the termination of the U.S. Distribution Agreement.
66
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, position with the Company and age
of each member of the Board of Directors and each executive officer of the
Company. See '--Election of Directors.'
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas F. Helms, Jr............. 57 President, Chief Executive Officer and Chairman of the Board
Jay Martin...................... 63 Executive Vice President and Chief Operating Officer
Maurice R. Langston............. 68 Executive Vice President--Sales and Director
David I. Brunson................ 46 Executive Vice President--Finance and Administration, Chief Financial
Officer and Director
Jeffrey S. Hay.................. 36 Executive Vice President and General Counsel
Alan R. Minsterketter........... 45 Senior Vice President--Purchasing, Distribution and Operations and
Director
Clifford D. Ray................. 64 Vice President--Marketing
Christopher N. Kounnas.......... 60 Vice President--Research and Development
Arnold Sheiffer................. 65 Director
Mark F. Secrest................. 33 Director
</TABLE>
Thomas F. Helms, Jr. Thomas F. Helms, Jr. has been President, Chief
Executive Officer and Chairman of the Board of the Company since June 1997.
Since 1988, he has been President and Chief Executive Officer of National
Tobacco. Mr. Helms also served as President and Chief Executive Officer of
Culbro Corporation's smokeless tobacco division from 1983 until shortly prior to
its sale to American Maize-Products Company in March 1986. From 1979 to 1982,
Mr. Helms was General Manager of the Etherea Cosmetics and Designer Fragrances
Division of Revlon, Inc. Prior to that time, Mr. Helms was employed in marketing
and sales positions in various divisions of Revlon Consumer Products
Corporation.
Jay Martin. Jay Martin has been Executive Vice President and Chief
Operating Officer of the Company since June 1997. Since January 1997 he has held
the same offices with National Tobacco and also served as a Director. From 1991
until December 1996 he was a consultant of National Tobacco. A former owner of a
tobacco and candy wholesale distributor (and customer of National Tobacco), Mr.
Martin has 40 years experience in the tobacco industry. Mr. Martin also served
for five years as a consultant to R.J. Reynolds Tobacco Co. ('RJR') in the area
of wholesale distribution.
Maurice R. Langston. Maurice R. Langston has been Executive Vice
President--Sales and a Director of the Company since June 1997. Since April 1988
he has held the same office with National Tobacco. Mr. Langston, who has worked
in the smokeless tobacco industry for 46 years, was also a Vice President of
Sales of Culbro Corporation's smokeless tobacco division prior to its sale to
American Maize-Products Company in March 1986.
David I. Brunson. David I. Brunson has been Executive Vice
President--Finance and Administration, Chief Financial Officer and a Director of
the Company since June 1997. He has held the same offices with National Tobacco
since April 1997. Prior to that, from November 1992 until April 1997, he was
employed as Managing Director at Societe Generale and established and was
President of Societe Generale Investment Corporation. From July 1979 until
November 1992, he was employed at The First National Bank of Chicago, lastly as
a Managing Director in the Investment Banking Division.
Jeffrey S. Hay. Jeffrey S. Hay has been Executive Vice President and
General Counsel of the Company since July 1997. Since 1993, Mr. Hay was a
founding partner in Fennebresque, Clark, Swindell & Hay, and a partner of Moore
& Van Allen from 1990 until 1993.
Alan R. Minsterketter. Alan R. Minsterketter has been Senior Vice
President--Purchasing, Distribution and Operations of the Company since April
1997 and is a Director. He has held the same title with National Tobacco since
April 1997. From 1988 until April 1997, he was Vice President--Finance and Chief
Financial Officer of National Tobacco. Prior to that, Mr. Minsterketter held
various accounting-related positions with Lorillard.
Clifford D. Ray. Clifford D. Ray has been Vice President--Marketing of the
Company since June 1997. Since 1989 he has held the same office with National
Tobacco. Prior to that time, Mr. Ray was the marketing manager for the BEECH-NUT
brands at Lorillard for eight years. Before joining Lorillard, he worked for
more than
67
<PAGE>
twenty years at major advertising agencies, managing accounts in the tobacco,
toiletries and household products areas.
Christopher N. Kounnas. Christopher N. Kounnas has been Vice
President--Research and Development of the Company since June 1997. Since 1988
he has been Manager, Director, and lastly, Vice President--Research and
Development of National Tobacco. For three years prior to that time Mr. Kounnas
was Group Development Director Research and Development with Brown and
Williamson Tobacco Corporation ('Brown & Williamson'). Before joining Brown and
Williamson, he was employed by Philip Morris Companies Inc. for 18 years, during
which time he held the position of Senior Scientist and Research and Development
Group Leader for ten years.
Arnold Sheiffer. Arnold Sheiffer is a Director of the Company. Since 1996
he has been a Director of National Tobacco. Mr. Scheiffer has been a Director of
Spanish Broadcasting System, Inc. since 1994 and a Managing Director of Shenkman
Capital Management, Inc. since 1995. From 1990 to 1994, he was President and
Chief Operating Officer of Katz Media Corp., and prior to that, Managing Partner
of A. Sheiffer and Company, Certified Public Accountants.
Mark F. Secrest. Mark F. Secrest is a Director of the Company. Since 1996
he has been a Director of National Tobacco. Mr. Secrest has been a Vice
President--, and subsequently, Director--Investment Banking at UBS Securities
LLC since February 1995. From 1989 until 1995 Mr. Secrest was employed in the
Investment Banking Division of Kidder, Peabody & Co., Inc.
ELECTION OF DIRECTORS
Pursuant to the terms of an Exchange and Stockholders' Agreement, dated as
of June 25, 1997, among the Company and certain of the stockholders of the
Company (the 'Stockholders' Agreement'), Mr. Helms has the ability to elect all
of the directors of the Company unless dividends are not paid in cash to the
holders of the Company's Senior Preferred Stock when such dividends are required
to be paid in cash, in which event such holders have the right to elect two
directors. Mr. Helms and Mr. Brunson have served as directors of the Company
since June 17, 1997 following the formation of the Company. The other four
members of the Board of Directors have served as directors since June 25, 1997,
the date the Acquisition was consummated. Each director is to serve until the
next annual meeting of shareholders (or written consent in lieu thereof) and
until his successor is elected and duly qualified.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued for the year ended December 31, 1996 for the Chief Executive Officer
and each of the four other most highly compensated executive officers of the
Company. Messrs. Helms, Langston, Ray, Minsterketter and Kounnas' compensation
was paid by National Tobacco.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
----------------------- COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)
- ----------------------------------------------------------------- ------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Thomas F. Helms, Jr.,
President and Chief Executive Officer.......................... 1996 $ 297,462 $ 134,820 $ 50,274(1)
Maurice R. Langston,
Executive Vice President--Sales................................ 1996 167,974 38,802 5,504(2)
Clifford D. Ray,
Vice President--Marketing...................................... 1996 153,077 35,961 15,766(3)
Alan R. Minsterketter,
Senior Vice President--Purchasing,
Distribution and Operations.................................... 1996 130,558 30,634 9,343(4)
Christopher N. Kounnas,
Vice President--Research
and Development................................................ 1996 126,769 5,500 --
</TABLE>
- ------------------
(1) Includes insurance premiums of $41,738 paid by the Company with respect to
term life insurance and contributions by the Company of $8,536 to defined
contribution plans.
68
<PAGE>
(2) Includes contributions by the Company of $5,504 to defined contribution
plans.
(3) Includes insurance premiums of $7,635 paid by the Company with respect to
term life insurance and contributions by the Company of $8,131 to defined
contribution plans.
(4) Includes insurance premiums of $2,386 paid by the Company with respect to
term life insurance and contributions by the Company of $6,957 to defined
contribution plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas F. Helms, Jr. is the sole director of the Board of Directors of the
general partner of National Tobacco and as such performed the equivalent
function of a compensation committee. Mr. Helms's relationship with National
Tobacco and the Company is set forth under 'Management--Executive Officers and
Directors.' On April 26, 1988 and December 15, 1988, Mr. Helms borrowed $75,000
and $45,000, respectively, in connection with the purchase of a portion of his
partnership interest in National Tobacco, and executed a note payable to the
Company. The note bears interest in kind at a rate of 3% over the prime rate. As
of June 30, 1997 principal outstanding under this note was approximately
$240,000. See 'Recent Transactions.'
COMPENSATION OF DIRECTORS
Directors who do not receive compensation as officers, employees or
consultants of the Company or any of its affiliates will be paid an annual
retainer fee of $25,000, plus reasonable out-of-pocket expenses.
EMPLOYMENT AND CONSULTING AGREEMENTS
THOMAS F. HELMS, JR.
Thomas F. Helms, Jr., President and Chief Executive Officer of the Company,
has an employment agreement with the Company (the 'Helms Employment Agreement')
pursuant to which Mr. Helms will receive an annual base salary of $350,000 to be
reviewed annually, plus a bonus in accordance with the Company's Bonus Program
(as defined). The Helms Employment Agreement provides for a three-year term,
renewable annually, and is terminable at will except with respect to severance.
In addition, Mr. Helms will receive various other benefits, including life
insurance and health, hospitalization, disability and pension benefits and other
perquisites. The Helms Employment Agreement includes a non-compete provision
extending twelve months following the termination of Mr. Helms's employment for
any period during which severance is paid to Mr. Helms. Mr. Helms is entitled to
twelve months' severance and a continuation of benefits following a termination
of his employment by the Company without cause, except that the bonus received
shall be only for the year in which the termination occurred and shall be
prorated.
DAVID I. BRUNSON
David I. Brunson, Executive Vice President and Chief Financial Officer of
the Company, has an employment agreement with the Company (the 'Brunson
Employment Agreement') pursuant to which Mr. Brunson will receive an annual base
salary of $300,000 to be reviewed annually, plus a bonus in accordance with the
Company's Bonus Program, such bonus to be not less than $50,000 in 1997. The
Brunson Employment Agreement provides for a two-year term, renewable annually,
and is terminable at will except with respect to severance. In addition, Mr.
Brunson will receive various other benefits, including life insurance in an
amount equal to $2 million and medical, disability, pension benefits, club
memberships, stock options and reimbursements of certain expenses. The Brunson
Employment Agreement includes a non-compete provision extending twelve months
following the termination of Mr. Brunson's employment for any period during
which severance is paid to Mr. Brunson. Mr. Brunson is entitled to twelve
months' severance and a continuation of benefits following a termination of his
employment by the Company without cause, except that the bonus received shall be
only for the year in which the termination occurred, and shall be prorated. In
connection with his employment, Mr. Brunson also has reached an agreement with
the Company pursuant to which he is entitled to receive options to purchase
30,928 shares of Common Stock of the Company. One third of these options were
vested as of the closing of the Acquisition and one third of these options will
vest on each of the first two anniversaries of the date of his employment, April
23, 1997. In connection with the exercise of such options and
69
<PAGE>
subject to certain limitations, including a requirement that Mr. Brunson shall
not leave, resign or be terminated for cause, the Company has agreed to pay Mr.
Brunson an amount equal to the sum of (i) the difference between ordinary income
and long-term capital gain tax liability for reportable income resulting from
any exercise of the options, plus (ii) a 'gross-up' to compensate for the
additional ordinary income tax liability resulting from the payment of such
amount. The amount payable by the Company is to be determined by applying the
aggregate of the highest federal, state and local marginal tax rates then
applicable to Mr. Brunson's taxable income for the fiscal year in which the
options are exercised.
In connection with his employment, Mr. Brunson has also reached an
agreement with Mr. Helms regarding payment of additional compensation. This
agreement provides for payment to Mr. Brunson upon the occurence of certain
events, provided he is either an employee at the time payment is due or has been
terminated other than for cause no more than eighteen months prior to the time
such payment is due. In the event of a sale (a 'Sale') of substantially all of
the outstanding equity or all or substantially all of the assets of NTC Holding,
LLC ('LLC') prior to a Termination Event (as defined below), Mr. Helms has
agreed to pay Mr. Brunson an amount equal to 1.78% of the value of the common
equity of the Company (subject to dilution) less $445,000. A Termination Event
is the earlier of a refinancing of the Company's indebtedness (other than in
connection with the acquisition of NATC) or May 1, 2001. No payment will be
required in the event of: (a) a prior occurrence of an Adverse Condition (as
defined in the operating agreement of LLC); (b) a Sale in which Mr. Helms
receives proceeds of less than $25 million; or (c) a merger or consolidation of
LLC in which management receives a significant equity stake in the surviving
company and Mr. Brunson receives employment terms comparable to his present
terms. In addition, if LLC is recapitalized twice, the first recapitalization
occuring after the NATC transaction and prior to May 17, 2001, and the second
recapitalization resulting in payments to the equity holders of the Company of
equal to or greater than $25 million, then Mr. Helms will increase Mr. Brunson's
equity ownership in the Company by 1%.
JAY MARTIN
Jay Martin, Executive Vice President and Chief Operating Officer of the
Company, has an employment agreement with the Company (the 'Martin Employment
Agreement'), pursuant to which Mr. Martin will receive an annual base salary of
$200,000 plus a bonus in accordance with the Company's Bonus Program, such bonus
to be not less than $40,000 per annum. The Martin Employment Agreement provides
for a one year term, renewable annually, and is terminable at will except with
respect to severance. In addition, Mr. Martin will receive various other
benefits, including insurance, retirement and hospitalization benefits. The
Martin Employment Agreement also includes confidentiality and non-compete
provisions extending twelve months from and after the termination of Mr.
Martin's employment. Mr. Martin is entitled to severance in an amount equal to
his then current salary for the greater of the remaining term of the Martin
Employment Agreement or sixty days. Any bonus to be paid during the year of his
termination shall be computed on the basis of the Company's net income from the
beginning of the relevant fiscal year to the date of termination.
JACK AFRICK
Jack Africk is a consultant of the Company. Beginning in 1996 and until the
consummation of the Acquisition, he was Chief Executive Officer of NATC. Prior
to that time, from 1993 to 1996 Mr. Africk was a consultant and Director of
NATC. Mr. Africk is the former Vice Chairman of UST. From 1979 until 1993, Mr.
Africk held various positions with UST, including Vice Chairman and Executive
Vice President, as well as positions with subsidiary organizations including
President of an international division, and President and Chief Executive
Officer of United States Tobacco Company. Mr. Africk entered into a consulting
agreement with the Company (the 'Africk Consulting Agreement'), pursuant to
which Mr. Africk will receive an annual consulting fee of $300,000 plus a
minimum bonus of $75,000 per annum in accordance with the Company's existing
Bonus Program if certain financial targets are met. The Africk Consulting
Agreement provides for a one-year term and, thereafter, for successive one-year
periods, unless terminated by either party by notice at least 90 days prior to
the end of any such one-year term. The Africk Consulting Agreement includes a
non-compete provision for a period of five years following the termination of
Mr. Africk's retention. In addition, Mr. Africk will be reimbursed for certain
expenses, including a monthly car allowance of $1,000 and a monthly office
allowance of $900.
70
<PAGE>
RETIREMENT PLAN
The table below illustrates the approximate amounts of annual normal
retirement benefits payable under the Company's Retirement Plan (as defined
herein).
<TABLE>
<CAPTION>
ANNUAL BENEFITS AT RETIREMENT WITH
YEARS OF CREDITED SERVICE(A)
AVERAGE --------------------------------------------------------------
COMPENSATION 10 15 20 25 30 35
- ------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$125,000 $15,000 $22,500 $30,000 $37,500 $45,000 $52,500
150,000 18,000 27,000 36,000 45,000 54,000 63,000
175,000 21,000 31,500 42,000 52,500 63,000 73,500
200,000 24,000 36,000 48,000 60,000 72,000 84,000
225,000 27,000 40,500 54,000 67,500 81,000 94,500
250,000 30,000 45,000 60,000 75,000 90,000 105,000
300,000 36,000 54,000 72,000 90,000 108,000 126,000
400,000 48,000 72,000 96,000 120,000 144,000 168,000
450,000 54,000 81,000 108,000 135,000 162,000 189,000
500,000 60,000 90,000 120,000 150,000 180,000 210,000
</TABLE>
- ------------------
(a) Actual amounts paid under the Retirement Plan may be less than the amounts
set forth on the table due to IRC limitations.
The Company has a noncontributory, defined benefit retirement plan (the
'Retirement Plan'), which covers all full-time employees, including officers,
upon completing one year of service.
A participant in the Retirement Plan becomes fully vested prior to normal
retirement at age 65 upon the completion of five years of service. Benefits are
also provided under the Retirement Plan in the event of early retirement at or
after age 55 and the completion of at least ten years of service (or special
early retirement after completion of 30 years of service) and in the event of
retirement for disability after completion of five years of service. The amount
of the contribution, payment or accrual with respect to a specified person is
not and cannot readily be separately or individually calculated by the actuaries
for the Retirement Plan. Benefits under the Retirement Plan are based upon
application of a formula to the specified average compensation and years of
credited service at normal retirement age. Compensation covered by the
Retirement Plan consists of the average annual salary during any five
consecutive calendar years in the last ten years of an employee's service which
affords the highest salary, or, if employed for less than five years, the
average annual salary for the years employed. The benefits are not subject to
any deduction for social security payments. Estimated credited years of service
under the Retirement Plan for the individuals named in the Summary Compensation
Table are as follows: Thomas F. Helms, Jr., 9 years; Maurice R. Langston, 9
years; Alan R. Minsterketter, 19 years; Clifford D. Ray, 15 years; and Chris D.
Kounnas, 9 years.
BONUS PROGRAM
The National Tobacco Company Management Bonus Program ('Bonus Program')
provides executive officers and other participants designated by National
Tobacco's Management Committee with an opportunity to receive bonus pay, based
on annual EBITDA performance.
1997 SHARE INCENTIVE PLAN
The Board of Directors of the Company has adopted, and the Company's
stockholders have approved, the North Atlantic Trading Company, Inc. 1997 Share
Incentive Plan (the 'Incentive Plan').
The Incentive Plan is intended to provide incentives which will attract and
retain highly competent persons as key employees of the Company and its
subsidiaries, by providing them opportunities to acquire shares of stock or to
receive monetary payments based on the value of such shares pursuant to the
Benefits (as defined) described herein.
71
<PAGE>
Awards
The Company has granted options to purchase 30,928 shares and 15,966 of
Common Stock to David I. Brunson and Jeffrey S. Hay, respectively. One third of
the options granted to Mr. Brunson vested as of the closing of the Acquisition
and one third of these options will vest on each of the first two anniversaries
of the date of his employment, April 23, 1997. One third of the options granted
to Mr. Hay vested as of July 28, 1997, and one fifth of the remaining options
will vest on each of the first five anniversaries of the date of his employment,
July 28, 1997.
Shares Available
The Incentive Plan makes available for Benefits an aggregate amount of
61,856 shares of Common Stock (of which options to purchase 46,894 shares have
been granted as described above), subject to certain adjustments. Any shares of
Common Stock subject to a stock option or stock appreciation right which for any
reason is cancelled or terminated without having been exercised, and subject to
limited exceptions, any shares subject to stock awards, performance awards or
stock units which are forfeited, any shares subject to performance awards
settled in cash or any shares delivered to the Company as part of full payment
for the exercise of a stock option or stock appreciation right shall again be
available for Benefits under the Incentive Plan.
Administration
The Incentive Plan provides for administration by a committee (the
'Administration Committee') appointed by the Board of Directors from among its
members. Currently, the sole member of the Administration Committee is Thomas F.
Helms, Jr. The Administration Committee is authorized, subject to the provisions
of the Incentive Plan, to establish such rules and regulations as it deems
necessary for the proper administration of the Incentive Plan and to make such
determinations and interpretations and to take such action in connection with
the Incentive Plan and any Benefits granted as it deems necessary or advisable.
Thus, among the Administration Committee's powers are the authority to select
officers and other key employees of the Company and its subsidiaries to receive
Benefits, and determine the form, amount and other terms and conditions of
Benefits. The Administration Committee also has the power to modify or waive
restrictions on Benefits, to amend Benefits and to grant extensions and
accelerations of Benefits.
Eligibility for Participation
Key employees of the Company or any of its subsidiaries are eligible to
participate in the Incentive Plan. The selection of participants from eligible
key employees is within the discretion of the Administration Committee. All
employees are currently eligible to participate in the Incentive Plan.
Types of Benefits
The Incentive Plan provides for the grant of any or all of the following
types of benefits: (1) stock options, including incentive stock options and
non-qualified stock options; (2) stock appreciation rights; (3) stock awards,
including restricted stock; (4) performance awards; and (5) stock units
(collectively, the 'Benefits'). Benefits may be granted singly, in combination,
or in tandem as determined by the Administration Committee. Stock awards,
performance awards and stock units may, as determined by the Administration
Committee in its discretion, constitute Performance-Based Awards, as described
below.
Stock Options
Under the Incentive Plan, the Administration Committee may grant awards in
the form of options to purchase shares of Common Stock. Options may be either
incentive stock options, qualifying for special tax treatment, or non-qualified
stock options. The exercise price may be paid in cash or, in the discretion of
the Administration Committee, by the delivery of shares of Common Stock of the
Company then owned by the participant, by the withholding of shares of Common
Stock for which a stock option is exercisable, or by a combination of these
methods. In the discretion of the Administration Committee, payment may also be
made by delivering a properly executed exercise notice to the Company together
with a copy of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds to pay the exercise price. The
Administration Committee may prescribe any other method of paying the exercise
price that it determines to be
72
<PAGE>
consistent with applicable law and the purpose of the Incentive Plan. In
determining which methods a participant may utilize to pay the exercise price,
the Administration Committee may consider such factors as it determines are
appropriate.
Stock Appreciation Rights (SARs)
The Incentive Plan authorizes the Administration Committee to grant an SAR
either in tandem with a stock option or independent of a stock option. An SAR is
a right to receive a payment, in cash or Common Stock, equal to the excess of
(x) the fair market value, or other specified valuation (which shall not be
greater than the fair market value), of a specified number of shares of Common
Stock on the date the right is exercised over (y) the fair market value, or
other specified valuation (which shall not be less than fair market value), of
such shares of Common Stock on the date the right is granted, all as determined
by the Administration Committee. Each SAR shall be subject to such terms and
conditions as the Administration Committee shall impose from time to time.
Stock Awards
The Incentive Plan authorizes the Administration Committee to grant awards
in the form of restricted or unrestricted shares of Common Stock ('Stock
Awards'), which includes mandatory stock bonus incentive compensation and which
may constitute Performance-Based Awards. Such awards will be subject to such
terms, conditions, restrictions, and/or limitations, if any, as the
Administration Committee deems appropriate including, but not by way of
limitation, restrictions on transferability, continued employment and
performance goals established by the Administration Committee over a designated
period of time.
Performance Awards
The Incentive Plan allows for the grant of performance awards which may
take the form of shares of Common Stock or stock units, or any combination
thereof and which may constitute Performance-Based Awards. Such awards will be
contingent upon the attainment over a period to be determined by the
Administration Committee of certain performance goals. The length of the
performance period, the performance goals to be achieved and the measure of
whether and to what degree such goals have been achieved will be determined by
the Administration Committee. Payment of earned performance awards will be made
in accordance with terms and conditions prescribed or authorized by the
Administration Committee. The participant may elect to defer, or the
Administration Committee may require the deferral of, the receipt of performance
awards upon such terms as the Administration Committee deems appropriate.
Stock Units
The Administration Committee may, in its discretion, grant Stock Units to
participants, which may constitute Performance-Based Awards. A 'Stock Unit'
means a notational account representing one share of Common Stock. The
Administration Committee determines the criteria for the vesting of Stock Units
and whether a participant granted a Stock Unit shall be entitled to Dividend
Equivalent Rights (as defined in the Incentive Plan). Upon vesting of a Stock
Unit, unless the Administration Committee has determined to defer payment with
respect to such unit or a participant has elected to defer payment, shares of
Common Stock representing the Stock Units will be distributed to the participant
unless the Administration Committee, with the consent of the participant,
provides for the payment of the Stock Units in cash, or partly in cash and
partly in shares of Common Stock, equal to the value of the shares of Common
Stock which would otherwise be distributed to the participant.
Other Terms of Benefits
The Incentive Plan provides that Benefits shall not be transferable other
than by will or the laws of descent and distribution. The Administration
Committee shall determine the treatment to be afforded to a participant in the
event of termination of employment for any reason including death, disability or
retirement. Notwithstanding the foregoing, other than with respect to incentive
stock options, the Administration Committee may permit the transferability of an
award by a participant to members of the participant's immediate family or
trusts for the benefit of such person or family partnerships.
Upon the grant of any Benefit under the Incentive Plan, the Administration
Committee may, by way of an agreement with the participant, establish such other
terms, conditions, restrictions and/or limitations covering the
73
<PAGE>
grant of the Benefit as are not inconsistent with the Incentive Plan. No Benefit
shall be granted under the Incentive Plan after the date which is ten (10) years
after the Closing. The Board of Directors reserves the right to amend, suspend
or terminate the Incentive Plan at any time, subject to the rights of
participants with respect to any outstanding Benefits.
The Incentive Plan contains provisions for equitable adjustment of Benefits
in the event of a merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, reverse stock split, split up, spinoff, combination of
shares, exchange of shares, dividend in kind or other like change in capital
structure or distribution (other than normal cash dividends) to stockholders of
the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jay Martin is the sole stockholder of J. Martin Associates, Inc., a firm
which provided consulting services to National Tobacco in 1996. In fiscal 1996
this corporation received a total of $65,433 in fees and expenses for consulting
services rendered to National Tobacco.
UBS Securities LLC ('UBS') has served as a financial advisor to the Company
in connection with the Acquisition and related transactions. In connection
therewith, UBS is entitled to a fee of $1.56 million and the reimbursement of
certain out-of-pocket expenses. Mr. Secrest, a Director--Investment Banking of
UBS, is a Director of the Company.
On April 26, 1988 and December 15, 1988, Thomas F. Helms, Jr., President
and Chief Executive Officer of the Company, borrowed $75,000 and $45,000,
respectively in connection with the purchase of a portion of his partnership
interests in National Tobacco and executed a note payable to the Company. The
note bears interest in kind at a rate of 3% over the prime rate. As of June 30,
1997, principal outstanding under this note was approximately $240,000.
On April 14, 1992, Clifford D. Ray, Vice President--Marketing of the
Company, borrowed $40,000 in connection with the purchase of a portion of his
partnership interests in National Tobacco and executed a note payable to the
Company. The note bears interest at a rate of 2% over the prime rate. As of June
30, 1997, principal and accrued interest outstanding under this note was
approximately $61,000.
74
<PAGE>
RECENT TRANSACTIONS
The Company was formed in connection with the Acquisition, a corporate
reorganization and the related financings, consisting principally of the Old
Notes Offering, the establishment of the New Senior Secured Facilities which
includes the Term Facility and the Revolver, and the concurrent offering of the
Units and certain related transactions as more fully described below (the
'Transactions'), all which occurred concurrently with the closing of the Old
Notes Offering on June 25, 1997 (the 'Closing'). The Old Notes Offering provided
funds, before expenses, of $155 million.
Prior to the Acquisition, NTC Holding, LLC, a Delaware limited liability
company ('LLC'), was the sole limited partner of National Tobacco and the sole
stockholder of National Tobacco Finance Corporation (the 'GP'), which is the
sole general partner of National Tobacco. LLC entered into a Stock Purchase
Agreement with NATC Holding Company, Ltd. (the 'Seller'), dated April 17, 1997
(the 'Stock Purchase Agreement'), pursuant to which LLC agreed to acquire in the
Acquisition all of the outstanding capital stock of NATC Holdings USA, Inc.
('NATC'). As part of the Transactions, the membership interests in LLC were
acquired by the Company and LLC transferred all of its assets to the Company,
including the limited partnership interest in National Tobacco, all of the
capital stock of the GP and the right under the Stock Purchase Agreement to
purchase all of the capital stock of NATC. The transfer of the assets resulted
in the dissolution of LLC pursuant to the terms of its operating agreement. A
certificate of cancellation was filed on August 19, 1997. North Atlantic
Operating Company, Inc., a newly formed Delaware subsidiary of the Company
('NAOC'), acquired all of the outstanding capital stock of NATC in the
Acquisition. Immediately following the Acquisition, NATC and a wholly owned
subsidiary of NATC were merged into NAOC. Prior to the Acquisition, DGG received
a financial advisory fee representing management fees and expenses incurred by
the former owners in connection with the operation of the predecessor company
which was merged into NAOC. These fees and expenses will be eliminated following
the Acquisition.
LLC had outstanding $20.0 million aggregate principal amount of 13.5%/16.5%
Subordinated Notes due May 17, 2003, preferred interests in LLC and certain
warrants to purchase membership interests in LLC pursuant to a Subordinated
Note, Warrant and Preferred Equity Purchase Agreement dated May 17, 1996 among
LLC and the purchasers named therein. Such notes, preferred interests and
warrants were acquired by the Company for aggregate consideration of $47.1
million. In addition, the Company acquired certain warrants to purchase
membership interests in LLC from Societe Generale Investment Corporation
('SGIC') for aggregate consideration of $4.0 million.
Pursuant to the Stockholders' Agreement, the holders of all membership
interests in LLC, other than those holders whose interests were acquired as
described above, exchanged such membership interests for shares of Common Stock
of the Company. In addition, certain employees and a consultant of the Company
purchased 17,800 shares of Common Stock for an aggregate purchase price of
$712,000,
Aggregate consideration of approximately $162.6 million was paid by the
Company under the Stock Purchase Agreement (the 'Purchase Price'). The Purchase
Price was reduced by the amount of certain obligations of NATC (the 'NATC
Liabilities') that were paid by the Company on behalf of NATC, including (i) a
prepayment amount of $25.6 million to UST pursuant to an Amendment to the Asset
Purchase Agreement, dated as of November 25, 1992, among NATC, UST and the other
parties named therein, which satisfied and terminated the obligations of NATC to
make future royalty payments to UST thereunder, (ii) the payment in connection
with refinancing existing NATC debt under a term loan and a note purchase
agreement and (iii) the payment of $5 million to Bollore in consideration of its
consent to the change in control of NATC as a result of the Acquisition.
The Stock Purchase Agreement contains certain representations and
warranties and limited rights of indemnification from the Seller, including an
indemnity for 60% of an adjustment proposed by the Internal Revenue Service
('IRS') of approximately $1,672,000 for 1993, 1994 and 1995, and 100% of any
losses which arise from such adjustments following the Closing. The Seller
intends to file an administrative appeal of the IRS's proposed adjustments.
75
<PAGE>
The Company effected the following refinancing transactions in connection
with the Acquisition: (i) the Old Notes Offering; (ii) the termination pursuant
to the terms of the Credit Agreement of the Credit and Guaranty Agreement (the
'Old Credit Agreement'), dated May 17, 1996, among National Tobacco as Borrower,
LLC and GP as Guarantors, the lenders named therein and Societe Generale, as
Agent thereunder, and which was replaced by the New Senior Secured Facilities,
in an aggregate principal amount of not greater than $110 million (see
'Description of Other Indebtedness'); (iii) the elimination of an inventory
financing facility for National Tobacco's inventory requirements, in accordance
with the terms of a Second Amended and Restated Purchasing and Processing
Agreement (the 'Amendment') between National Tobacco and Lancaster dated as of
May 17, 1996, pursuant to which Lancaster will continue to purchase and process
tobacco for National Tobacco and to warehouse National Tobacco's tobacco
inventory; and (iv) the offering of Units consisting of Old Preferred Stock and
Warrants, the proceeds of which were used toward the repurchase of certain
subordinated notes, preferred interests and warrants to acquire membership
interests of LLC.
The following chart summarizes the resulting organizational structure and
equity ownership immediately after the consummation of the Transactions.
[CHART]
North Atlantic Trading Company, Inc.
(the 'Company')
/|\
/ | \
/ | \
/ | \
/ | \
100% of / | \ 100% of
Capital Stock / | \ Capital Stock
/ | \
National Tobacco | North Atlantic
Finance | Operating Company, Inc.
Corporation \ | ('NAOC')
\ | (operating company)
\ | 99% Limited
1% General \ | Partnership
Partnership \ | Interest
Interest \ |
National Tobacco
Company, L.P.
('National Tobacco')
(operating company)
76
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of Common Stock by (i) each person or entity who beneficially owns
five percent or more of the Common Stock, (ii) each director and named executive
officer of the Company and (iii) all Directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENT OWNED(A)
-------------------------------------
BEFORE EXERCISE AFTER EXERCISE
BENEFICIAL OWNER NUMBER OF SHARES OF WARRANTS OF WARRANTS
- ---------------------------------------------- ------------------- ---------------- -----------------
<S> <C> <C> <C>
Thomas F. Helms, Jr.(b)(c) ................. 427,146 80.9% 72.2%
Helms Management Corp.
Maurice R. Langston(b) ..................... 47,138 8.9 8.0
Langston Enterprises, Inc.
Alan R. Minsterketter(b) ................... 27,613 5.2 4.7
Alan M, Inc.
Clifford D. Ray(b) ......................... 17,728 3.4 3.0
C.D. Ray, Inc.
Mark F. Secrest(e) ......................... 12,251 2.3 2.1
Jay Martin(b) .............................. 12,137 2.3 2.1
J. Martin Associates, Inc.
David I. Brunson(d) ........................ 10,309 1.9 1.7
Arnold Sheiffer ............................ 8,725 1.7 1.5
Chris Kounnas(b) ........................... 8,377 1.6 1.4
CNK Enterprises, Inc.
Herbert Morris(b) .......................... 37,990 7.2 6.4%
Flowing Velvet Products, Inc.
3 Points of View
Warwick, New York 10990
DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP (10 PERSONS)(C)(F) .............. 463,753 85.3% 76.4%
</TABLE>
- ------------------
(a) The percentages assume, in the column entitled 'Before Exercise of
Warrants,' that none of the outstanding warrants to purchase an aggregate of
63,490 shares at an exercise price of $.01 per share is exercised and, in
the column entitled 'After Exercise of Warrants,' that all of such warrants
will be exercised.
(b) Reflects shares held by the corporation listed below the name of such
natural person. Such natural person owns all of the issued and outstanding
shares of capital stock of the corporation listed below the name of such
natural person.
(c) Mr. Helms, through Helms Management Corp., owns 276,300 shares of voting
Common Stock representing approximately 52.3% of the outstanding shares
assuming that none of the outstanding warrants are exercised, or 46.7% of
the outstanding shares assuming that all such warrants are exercised.
Because of his ability to vote an additional 150,846 shares of Common Stock
held by members of the Company's management in respect of the election of
the Company's directors pursuant to the Stockholders' Agreement, he may be
deemed to be the beneficial owner of such additional shares.
(d) Includes 10,309 shares subject to currently exercisable stock options.
(e) Reflects 10,000 shares held by Secrest Holdings, a general partnership of
which Mr. Secrest is a general partner, and 2,251 shares held by Fish Group,
LLC, a limited liability company of which Mr. Secrest is a member. Mr.
Secrest has the power to vote all of such shares.
(f) Executive officers, as a group, beneficially own 442,777 shares, including
37,853 shares which are legally owned by other, non-executive members of
management. Accordingly, members of management beneficially own a total of
442,777 shares, representing approximately 81.4% of the outstanding shares
assuming that none of the outstanding warrants are exercised, or 72.9% of
the outstanding shares assuming that all such warrants are exercised.
77
<PAGE>
STOCKHOLDER AGREEMENT
The Company and certain stockholders of the Company are parties to the
Stockholders' Agreement, setting forth among other things, the manner in which
directors of the Company are to be selected, See 'Management--Election of
Directors.' The Stockholders' Agreement also sets forth certain restrictions on
the transfer of shares of Common Stock by existing stockholders and on the
acquisition by existing stockholders of investments in competitors of Bollore.
In addition, the Stockholders' Agreement provides the existing stockholders with
certain 'tag-along' rights to participate ratably in sales of Common Stock to
third parties and requires existing stockholders to participate ratably in
certain sales of Common Stock to third parties. Subject to the terms of all
applicable debt agreements of the Company and its subsidiaries, including the
New Senior Secured Facilities, the Notes and the Indenture, the Stockholders'
Agreement provides that the Company may maintain insurance on the lives of the
members of its management officers and, in the event of the death of any such
person, for the mandatory repurchase by the Company of all of such person's
Common Stock at the fair market value thereof (which will be determined by an
independent investment banking firm if the parties cannot otherwise agree upon
such value) to the extent of available insurance proceeds, and the optional
repurchase of additional shares of such person's Common Stock at such fair
market value to the extent of available cash. Subject to the terms of all
applicable debt agreements of the Company and its subsidiaries, including the
New Senior Secured Facilities, the Notes and the Indenture as well as the
Certificate of Designation, the Company also has the right to repurchase the
shares of Common Stock held by members of management if their employment
terminates, in the event of certain bankruptcy proceedings relating to such
persons or upon an involuntary transfer of their shares by court order or
otherwise in each case at the fair market value of such shares.
78
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on June 25, 1997, to the
Initial Purchasers pursuant to the Note Purchase Agreement. The Units, which
were, in part, comprised of the Old Preferred Stock, were sold by the Company on
June 25, 1997, to NatWest, as the initial purchaser of the Units, pursuant to
the Units Purchase Agreement (the Units Purchase Agreement and the Notes
Purchase Agreement being referred to collectively as the 'Purchase Agreements').
The Initial Purchasers and NatWest subsequently resold the Old Notes and the Old
Preferred Stock, as the case may be, to qualified institutional buyers pursuant
to Rule 144A under the Securities Act, or institutional 'accredited investors'
(as defined in Rule 501(a) (1), (2), (3) or (7) of Regulation D under the
Securities Act) or outside the United States in compliance with Regulation S
under the Securities Act. Pursuant to the Purchase Agreements, the Company
entered into the Registration Rights Agreements, pursuant to which the Company
has agreed, for the benefit of the holders of the Unregistered Securities, at
the Company's cost, to use its best efforts to (i) file a registration statement
with the Commission within 30 days after the date of the original issue (the
'Issue Date') of the Unregistered Securities (such date of filing, the 'Filing
Date') with respect to the Exchange Offer for the Exchange Securities, and (ii)
cause the registration statement to be declared effective under the Securities
Act within 90 days after the Filing Date. Upon the registration statement being
declared effective, the Company will offer the Exchange Securities in exchange
for the Unregistered Securities. The Company will keep the Exchange Offer open
for no less than 30 business days (or longer if required by applicable law)
after the date on which notice of the Exchange Offer is mailed to the holders of
the Unregistered Securities.
For each Old Note or share of Old Preferred Stock properly tendered and
accepted pursuant to the Exchange Offer, the holder of such Unregistered
Security will receive a New Note having a principal amount equal to that of the
Old Note tendered or one share of New Preferred Stock, as the case may be.
Interest on each New Note and dividends on each share of New Preferred Stock
will accrue or accumulate from the last respective interest or dividend payment
date on which interest or dividends were paid on the Unregistered Security
tendered in exchange therefor or, if no interest or dividends have been paid on
such Unregistered Security, from the Issue Date.
Each holder of the Unregistered Securities who wishes to exchange the
Unregistered Securities for Exchange Securities in the Exchange Offer will be
required to represent in the Letter of Transmittal that (i) it is not an
affiliate of the Company or Guarantors, (ii) the Exchange Securities to be
received by it were acquired in the ordinary course of its business and (iii) at
the time of commencement of the Exchange Offer, it has no arrangement with any
person to participate in the distribution (within the meaning of the Securities
Act) of the Exchange Securities.
In the event that (i) applicable law or interpretations of the staff of the
Commission do not permit the Company to effect the Exchange Offer, (ii) in
certain circumstances, NatWest or an Initial Purchaser so requests, (iii) any
holder of the Unregistered Securities (other than NatWest or an Initial
Purchaser) is not eligible to participate in the Exchange Offer, or (iv) for any
reason the Exchange Offer is not consummated within 120 days after the Filing
Date, the Company will at its cost, (a) as promptly as reasonably practicable,
file a shelf registration statement covering resales of the Unregistered
Securities (a 'Shelf Registration Statement'), (b) use its best efforts to cause
such Shelf Registration Statement to be declared effective under the Securities
Act by the 165th day after the Issue Date (or one year from the date the Shelf
Registration Statement was declared effective if such Shelf Registration
Statement was filed pursuant to clause (ii), above) and (c) use its best efforts
to keep effective such Shelf Registration Statement until the earlier of two
years after the Issue Date and such time as all of the applicable Registered
Securities have been sold thereunder or when all of the Unregistered Securities
become eligible for resale pursuant to Rule 144 under the Securities Act without
volume restriction). See '--Resale of the Exchange Securities'. The Company
will, in the event of the filing of a Shelf Registration Statement, provide to
each holder of the Registered Securities copies of the prospectus which is a
part of such Shelf Registration Statement. A holder that sells its Registered
Securities pursuant to a Shelf Registration Statement generally will be required
to be named as a selling securityholder in the related prospectus and to deliver
a prospectus to purchasers, will be
79
<PAGE>
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreements which are applicable to such holder (including
certain indemnification obligations).
If the Company fails to comply with the above provisions or if such Shelf
Registration Statement fails to become effective, then, as liquidated damages,
additional interest or dividends (the 'Additional Amount'), as applicable, shall
become payable with respect to the Exchange Securities as follows:
(i) if the registration statement for the Exchange Offer or the Shelf
Registration Statement is not filed within 30 days following the Issue Date, the
Additional Amount shall accrue on the Unregistered Securities over and above the
stated interest or dividend percentage at a rate of 0.50% per annum for the
first 60 days commencing on the 31st day after the Issue Date, such Additional
Amount increasing by an additional 0.50% per annum at the beginning of each
subsequent 30-day period;
(ii) if the registration statement for the Exchange Offer or the Shelf
Registration Statement is not declared effective within 90 days following the
Filing Date, an Additional Amount shall accrue on the Unregistered Securities
over and above the stated interest or dividend percentage at a rate of 0.50% per
annum for the first 30 days commencing on the 91st day after the Filing Date,
such Additional Amount increasing by an additional 0.50% per annum at the
beginning of each subsequent 30-day period; or
(iii) if (A) the Company has not exchanged all Unregistered Securities
validly tendered in accordance with the terms of the Exchange Offer on or prior
to 120 days after the Filing Date or (B) the registration statement for the
Exchange Offer ceases to be effective at any time prior to the time that the
Exchange Offer is consummated or (C) if applicable, the Shelf Registration
Statement has been declared effective and such Shelf Registration Statement
ceases to be effective at any time prior to the third anniversary of the Issue
Date (unless all the Registered Securities have been sold thereunder or as
otherwise provided herein), then the Additional Amount shall accrue on the
Unregistered Securities over and above the stated interest or dividend
percentage of 0.50% per annum for the first 30 days commencing on (x) the 121st
day after the Filing Date with respect to the Notes validly tendered and not
exchanged by the Company, in the case of (A) above, or (y) the day of the
registration statement for the Exchange Offer ceases to be effective or usable
for its intended purpose in the case of (B) above, or (z) the day the Shelf
Registration Statement ceases to be effective in the case of (C) above, the rate
of such Additional Amount increasing by an additional 0.50% per annum at the
beginning of each subsequent 30-day period;
provided, however, that the Additional Amount payable on the Unregistered
Securities may not exceed in the aggregate 2.0% per annum; and provided further,
that (1) upon the filing of the registration statement for the Exchange Offer or
the Shelf Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of such registration statement for the Exchange Offer or the Shelf
Registration Statement (in the case of (ii) above), or (3) upon the exchange of
Exchange Securities for all Unregistered Securities tendered (in the case of
clause (iii) (A) above), or upon the effectiveness of the registration statement
which had ceased to remain effective in the case of clause (iii) (B) above, or
upon the effectiveness of the Shelf Registration Statement which had ceased to
remain effective (in the case of clause (iii) (C) above), the Additional Amount
accruing on the Unregistered Securities as a result of such clause (or the
relevant subclause thereof), as the case may be, shall cease to accrue.
Any Additional Amount due pursuant to clauses (i), (ii) or (iii) above will
be payable in cash, on the same original interest or dividend payment dates, as
the case may be, as interest or dividends on the Unregistered Securities. The
aggregate Additional Amount will be determined by multiplying the applicable
rate of such Additional Amount by the principal amount or liquidation value, as
the case may be, of the Unregistered Securities multiplied by a fraction, the
numerator of which is the number of days such Additional Amount was applicable
during such period (determined on the basis of a 360-day year comprised of
twelve 30-day months), and the denominator of which is 360.
The summary herein of all material provisions of the Registration Rights
Agreements does not purport to be exhaustive and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreements, a
copies of which will be available upon request to the Company.
Following the consummation of the Exchange Offer, holders of the
Unregistered Securities who were eligible to participate in the Exchange Offer
but who did not tender their Unregistered Securities will not
80
<PAGE>
have any further exchange or registration rights and such Unregistered
Securities will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Unregistered Securities could
be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all
Unregistered Securities validly tendered and not withdrawn prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Company will issue $1,000
principal amount of New Notes in exchange for each $1,000 principal amount of
outstanding Old Notes accepted in the Exchange Offer. Tendered and accepted
shares of Old Preferred Stock will be exchanged for New Preferred Stock on a
one-for-one basis. Holders may tender some or all of their Unregistered
Securities pursuant to the Exchange Offer. However, Old Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the Exchange Securities are the same as the form and
terms of the Unregistered Securities except (i) the New Notes bear a Series B
designation and a different CUSIP Number from the Old Notes, (ii) the New
Preferred Stock Certificates bear a Senior Exchange Payment-In-Kind designation
and a different CUSIP Number from the Old Preferred Stock, (iii) the Exchange
Securities have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof. The New Notes will evidence the same
debt as the Old Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus $155,000,000 aggregate principal amount
of Old Notes are outstanding and 1,397,176.96 shares (which includes 37,176.96
shares that were paid in a dividend on September 15, 1997) of Old Preferred
Stock are outstanding. The Company has fixed the close of business September 1,
1997 as the record date for the Exchange Offer for purposes of determining the
person to whom this Prospectus and the Letter of Transmittal will be mailed
initially.
Holders of the Unregistered Securities do not have any appraisal or
dissenters' rights under the General Corporation Law of Delaware, the Indenture
or the Certificate of Designation in connection with the Exchange Offer. The
Company intends to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder.
The Company shall be deemed to have accepted validly tendered Unregistered
Securities when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders for the purpose of receiving the Exchange Securities from the Company.
If any tendered Unregistered Securities are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, the certificates for any such unaccepted Unregistered
Securities will be returned, without expense, to the tendering holder thereof as
promptly as practicable after the Expiration Date.
Holders who tender Unregistered Securities in the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
of the Letter of Transmittal, transfer taxes with respect to the exchange of
Unregistered Securities pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than the transfer taxes in certain circumstances, in
connection with the Exchange Offer. See '--Fees and Expenses.'
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term 'Expiration Date' shall mean 5:00 p.m., New York City time, on
November 3, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term 'Expiration Date' shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, (i) to delay accepting any Unregistered
Securities, to extend the Exchange Offer or to terminate the Exchange Offer if
any of the conditions set forth below
81
<PAGE>
under '--Conditions' shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders.
PROCEDURES FOR TENDERING
The tender of Unregistered Securities pursuant to any of the procedures set
forth in this Prospectus and in the Letter of Transmittal will constitute a
binding agreement between the Tendering Holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal. The tender of Unregistered Securities will constitute an
agreement to deliver good and marketable title to all tendered Unregistered
Securities prior to the Expiration Date free and clear of all liens, charges,
claims, encumbrances, interests and restrictions of any kind.
EXCEPT AS PROVIDED IN '--GUARANTEED DELIVERY PROCEDURES,' UNLESS THE
UNREGISTERED SECURITIES BEING TENDERED ARE DEPOSITED BY THE HOLDER WITH THE
EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE (ACCOMPANIED BY A PROPERLY COMPLETED
AND DULY EXECUTED LETTER OF TRANSMITTAL), THE COMPANY MAY, AT ITS OPTION, REJECT
SUCH TENDER. ISSUANCE OF EXCHANGE SECURITIES WILL BE MADE ONLY AGAINST DEPOSIT
OF TENDERED UNREGISTERED SECURITIES AND DELIVERY OF ALL OTHER REQUIRED
DOCUMENTS. NOTWITHSTANDING THE FOREGOING, DTC PARTICIPANTS TENDERING THROUGH
ATOP WILL BE DEEMED TO HAVE MADE VALID DELIVERY WHERE THE EXCHANGE AGENT
RECEIVES AN AGENT'S MESSAGE (DEFINED BELOW) PRIOR TO THE EXPIRATION DATE.
Accordingly, to properly tender Unregistered Securities, the following
procedures must be followed:
Unregistered Securities held through DTC. Each Beneficial Owner holding
Unregistered Securities through a DTC Participant must instruct such DTC
Participant to cause its Unregistered Securities to be tendered in accordance
with the procedures set forth in this Prospectus.
Pursuant to an authorization given by DTC to the DTC Participants, each DTC
Participant holding Unregistered Securities through DTC must (i) electronically
transmit its acceptance through ATOP, and DTC will then edit and verify the
acceptance, execute a book-entry delivery to the Exchange Agent's account at DTC
and send an Agent's Message to the Exchange Agent for its acceptance, or (ii)
comply with the guaranteed delivery procedures set forth below and in the Notice
of Guaranteed Delivery. See '--Guaranteed Delivery Procedures.'
The Exchange Agent will (promptly after the date of this Prospectus)
establish accounts at DTC for purposes of the Exchange Offer with respect to
Unregistered Securities held through DTC, and any financial institution that is
a DTC Participant may make book-entry delivery of interests in Unregistered
Securities into the Exchange Agent's account through ATOP. However, although
delivery of interests in the Unregistered Securities may be effected through
book-entry transfer into the Exchange Agent's account through ATOP, an Agent's
Message in connection with such book-entry transfer, and any other required
documents, must be, in any case, transmitted to and received by the Exchange
Agent at its address set forth under '--Exchange Agent,' or the guaranteed
delivery procedures set forth below must be complied with, in each case, prior
to the Expiration Date. Delivery of documents to DTC does not constitute
delivery to the Exchange Agent. The confirmation of a book-entry transfer into
the Exchange Agent's account at DTC as described above is referred to herein as
a 'Book-Entry Confirmation.'
The term 'Agent's Message' means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
each DTC Participant tendering through ATOP that such DTC Participants have
received a Letter of Transmittal and agree to be bound by the terms of the
Letter of Transmittal and that the Company may enforce such agreement against
such DTC Participants.
Cede & Co., as the Holder of the global certificates representing the Old
Notes and the Old Preferred Stock (each a 'Global Security,' or together, the
'Global Securities'), will tender a portion of each of the Global Securities
equal to the aggregate principal amount due at the stated maturity or number of
shares for which instructions to tender are given by DTC Participants.
Unregistered Securities held by Holders. Each Holder must (i) complete and
sign and mail or deliver the accompanying Letter of Transmittal, and any other
documents required by the Letter of Transmittal,
82
<PAGE>
together with certificate(s) representing all tendered Unregistered Securities,
to the Exchange Agent at its address set forth under '--Exchange Agent,' or (ii)
comply with the guaranteed delivery procedures set forth below and in the Notice
of Guaranteed Delivery. See '--Guaranteed Delivery Procedures.'
All signatures on a Letter of Transmittal must be guaranteed by any member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an 'eligible guarantor' institution
within the meaning of Rule 17Ad-15 under the Exchange Act (each an 'Eligible
Institution'); provided, however, that signatures on a Letter of Transmittal
need not be guaranteed if such Unregistered Securities are tendered for the
account of an Eligible Institution including (as such terms are defined in Rule
17Ad-15): (i) a bank; (ii) a broker, dealer, municipal securities dealer,
municipal securities broker, government securities dealer or government
securities broker; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
institution that is a participant in a Securities Transfer Association
recognized program.
If a Letter of Transmittal or any Unregistered Security is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, agent, officer of
a corporation or other person acting in a fiduciary or representative capacity,
such person must so indicate when signing, and proper evidence satisfactory to
the Company of the authority of such person so to act must be submitted.
Holders should indicate in the applicable box in the Letter of Transmittal
the name and address to which substitute certificates evidencing Unregistered
Securities for amounts not tendered are to be issued or sent, if different from
the name and address of the person signing the Letter of Transmittal. In the
case of issuance in a different name, the employer identification or social
security number of the person named must also be indicated. If no instructions
are given, such Unregistered Securities not tendered, as the case may be, will
be returned to the person signing the Letter of Transmittal.
By tendering, each Holder and each DTC Participant will make to the Company
the representations set forth in the third paragraph under the heading
'--Purpose and Effect of the Exchange Offer.'
---------------------------------------------------------------
No alternative, conditional, irregular or contingent tenders will be
accepted (unless waived). By executing a Letter of Transmittal or transmitting
an acceptance through ATOP, as the case may be, each Tendering Holder waives any
right to receive any notice of the acceptance for purchase of its Unregistered
Securities.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Unregistered Securities will be resolved by
the Company, whose determination will be final and binding. The Company reserves
the absolute right to reject any or all tenders that are not in proper form or
the acceptance of which may, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the absolute right to waive any condition to
the Exchange Offer and any irregularities or conditions of tender as to
particular Unregistered Securities. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding. Unless waived, any irregularities in
connection with tenders must be cured within such time as the Company shall
determine. The Company and the Exchange Agent shall not be under any duty to
give notification of defects in such tenders and shall not incur liabilities for
failure to give such notification. Tenders of Unregistered Securities will not
be deemed to have been made until such irregularities have been cured or waived.
Any Unregistered Securities received by the Exchange Agent that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned by the Exchange Agent to the tendering Holder, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
LETTERS OF TRANSMITTAL AND UNREGISTERED SECURITIES MUST BE SENT ONLY TO THE
EXCHANGE AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR UNREGISTERED SECURITIES TO
THE COMPANY OR DTC.
The method of delivery of Unregistered Securities and Letters of
Transmittal, any required signature guaranties and all other required documents,
including delivery through DTC and any acceptance through ATOP, is at the
election and risk of the persons tendering and delivering acceptances or Letters
of
83
<PAGE>
Transmittal and, except as otherwise provided in the applicable Letter of
Transmittal, delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, it is suggested that the Holder use
properly insured, registered mail with return receipt requested, and that the
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Unregistered Securities held through DTC. DTC Participants holding
Unregistered Securities through DTC who wish to cause their Unregistered
Securities to be tendered, but who cannot transmit their acceptances through
ATOP prior to the Expiration Date, may cause a tender to be effected if:
(a) guaranteed delivery is made by or through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by mail, hand delivery,
facsimile transmission or overnight courier) substantially in the form
provided by the Company herewith; and
(c) Book-Entry Confirmation and an Agent's Message in connection
therewith (as described above) are received by the Exchange Agent within
three NYSE trading days after the date of the execution of the Notice of
Guaranteed Delivery.
Unregistered Securities Held by Holders. Holders who wish to tender their
Unregistered Securities and (i) whose are not immediately available, (ii) who
cannot deliver their Unregistered Securities, the Letter of Transmittal or any
other required documents to the Exchange Agent or (iii) who cannot complete the
procedures for book-entry transfer, prior to the Expiration Date, may effect a
tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address
of the holder, the certificate number(s) of such Unregistered
Securities and the principal amount of Unregistered Securities
tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days
after the Expiration Date, the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Unregistered
Securities (or a confirmation of book-entry transfer of such
Unregistered Securities into the Exchange Agent's account at the
Book-Entry Transfer Facility), and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
tendered Unregistered Securities in proper form for transfer (or a
confirmation or book-entry transfer of such Unregistered Securities
into the Exchange Agent's account at the Book-Entry Transfer Facility),
and all other documents required by the Letter of transmittal are
received by the Exchange Agent upon three New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Unregistered Securities according to
the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Unregistered Securities may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
Unregistered Securities held through DTC. DTC Participants holding
Unregistered Securities who have transmitted their acceptances through ATOP may,
prior to 5:00 p.m., New York City time, on the Expiration Date, withdraw the
instruction given thereby by delivering to the Exchange Agent, at its address
set forth under '--Exchange Agent,' a written, telegraphic or facsimile notice
of withdrawal of such instruction. Such notice of withdrawal must contain the
name and number of the DTC Participant, the
84
<PAGE>
principal amount due at the stated maturity or number of shares of the
Unregistered Securities to which such withdrawal related and the signature of
the DTC Participant. Withdrawal of such an instruction will be effective upon
receipt of such written notice of withdrawal by the Exchange Agent.
Unregistered Securities held by Holders. Holders may withdraw a tender of
Unregistered Securities in the Exchange Offer, by a telegram, telex, letter or
facsimile transmission notice of withdrawal received by the Exchange Agent at
its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Unregistered Securities to be withdrawn (the
'Depositor'), (ii) identify the Unregistered Securities to be withdrawn
(including the certificate number(s) and principal amount due at the stated
maturity or number of shares of such Unregistered Securities, or, in the case of
Unregistered Securities transferred by book-entry transfer, the name and number
of the account at the Book-Entry Transfer Facility to be credited), (iii) be
signed by the holder in the same manner as the original signature on the Letter
of Transmittal by which such Unregistered Securities were tendered (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Unregistered Securities
register the transfer of such Unregistered Securities into the name of the
person withdrawing the tender and (iv) specify the name in which any such
Unregistered Securities are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Unregistered
Securities so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Securities will be issued with
respect thereto unless the Unregistered Securities so withdrawn are validly
retendered. Any Unregistered Securities which have been tendered but which are
not accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Unregistered Securities
may be retendered by following one of the procedures described above under
'--Procedures for Tendering' at any time prior to the Expiration Date.
All signatures on a notice of withdrawal must be guaranteed by an Eligible
Institution; provided, however, that signatures on the notice of withdrawal need
not be guaranteed if the Unregistered Securities being withdrawn are held for
the account of an Eligible Institution.
A withdrawal of an instruction or a withdrawal of a tender must be executed
by a DTC Participant or a Holder, as the case may be, in the same manner as the
person's name appears on its transmission through ATOP or Letter of Transmittal,
as the case may be, to which such withdrawal relates. If a notice of withdrawal
is signed by a trustee, partner, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person acting in a
fiduciary or representative capacity, such person must so indicate when signing
and must submit with the revocation appropriate evidence of authority to execute
the notice of withdrawal. A DTC Participant or a Holder may withdraw an
instruction or a tender, as the case may be, only if such withdrawal complies
with the provisions of this Prospectus.
A withdrawal of a tender of Unregistered Securities by a DTC Participant or
a Holder, as the case may be, may be rescinded only by a new transmission of an
acceptance through ATOP or execution and delivery of a new Letter of
Transmittal, as the case may be, in accordance with the procedures described
herein.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange securities for, any Unregistered
Securities, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Unregistered Securities, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the judgment of the Company upon written advice of counsel, could
reasonably be expected to materially impair the ability of the Company to
proceed with the Exchange Offer or any material adverse development has
occurred in any existing action or proceeding with respect to the Company
or any of the subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the judgment
of the company and based on written advice of counsel,
85
<PAGE>
could reasonably be expected to materially impair the ability of the
Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its discretion and based on written advice of
counsel, deem necessary for the consummation of the Exchange Offer as
contemplated hereby.
If any of the conditions are not satisfied, the Company may (i) refuse to
accept any Unregistered Securities and return all tendered Unregistered
Securities to the tendering holders, (ii) extend the Exchange Offer and retain
all Unregistered Securities tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of holders to withdraw such Unregistered
Securities (see '--Withdrawal of Tenders') or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Unregistered Securities which have not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
United States Trust Company of New York
Attention: Corporate Trust Department
770 Broadway
New York, New York 10003
Telephone: (800) 548-6565
Facsimile: (212) 780-0592
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Securities will be recorded at the same carrying value as the
Unregistered Securities, which is face value, as reflected in the Company's
accounting records on the date of exchange. Accordingly, no gain or loss for
accounting purposes will be recognized by the Company. The expenses of the
Exchange Offer will be expended over the time of the Exchange Securities.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Unregistered Securities that are not exchanged for Exchange Securities
pursuant to the Exchange Offer will remain restricted securities. Accordingly,
such Unregistered Securities may be resold only (i) to the Company (upon
redemption thereof or otherwise), (ii) so long as the Unregistered Securities
are eligible for resale pursuant to Rule 144A, to a person inside the United
States whom the seller reasonably believes is a qualified institutional buyer
within the meaning of Rule 144A under the Securities Act in a transaction
86
<PAGE>
meeting the requirements of Rule 144A, in accordance with Rule 144 under the
Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Company), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
RESALE OF THE EXCHANGE SECURITIES
With respect to resales of Exchange Securities, based on interpretations by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
Exchange Securities in the ordinary course of business, whether or not such
person is the holder (other than (i) a broker-dealer who purchases such Exchange
Securities from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or (ii) a person that is an
'affiliate' of the Company within the meaning of Rule 405 under the Securities
Act) who receives Exchange Securities in exchange for Unregistered Securities,
and who is not participating, does not intend to participate, and has no
arrangement or understanding with person to participate, in the distribution of
the Exchange Notes, will be allowed to resell the Exchange Securities to the
public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Securities a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if any
holder acquires Exchange Securities in the Exchange Offer for the purpose of
distributing or participating in a distribution of the Exchange Securities, such
holder cannot rely on the position of the staff of the Commission enunciated in
such no-action letters or any similar interpretive letters, and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each broker-dealer that receives Exchange
Securities for its own account in exchange for Unregistered Securities, where
such Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities.
As contemplated by these no-action letters and the Registration Rights
Agreements, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Securities are to
be acquired by the holder or the person receiving such Exchange Securities,
whether or not such person is the holder, in the ordinary course of business,
(ii) the holder or any such other person (other than a broker-dealer referred to
in the next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Securities, (iii) the holder or any such other
person has no arrangement or understanding with any person to participate in the
distribution of the Exchange Securities, (iv) neither the holder nor any such
other person is an 'affiliate' of the Company within the meaning of Rule 405
under the Securities Act, and (v) the holder or any such other person
acknowledges that if such holder or other person participates in the Exchange
Offer for the purpose of distributing the Exchange Securities it must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the Exchange Securities and cannot rely on
those no-action letters. As indicated above, each broker-dealer that receives
any Exchange Securities for its own account in exchange for Unregistered
Securities must acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Securities. For a description of the procedures for
such resales by broker-dealers, see 'Plan of Distribution.'
87
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Old Notes were issued under an Indenture, dated as of June 25, 1997
(the 'Indenture'), among the Company, the Guarantors and United States Trust
Company of New York, as Trustee (the 'Trustee'), a copy of which is available
upon request to the Company. The New Notes also will be issued under the
Indenture. The Old Notes and the New Notes will be treated as a single class of
securities under the Indenture. The following is a summary of all material
provisions of the Indenture and the Notes and does not purport to be exhaustive
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Indenture (including the definitions of certain terms therein
and those terms made a part thereof by the Trust Indenture Act of 1939, as
amended) and the Notes. As used herein, the term 'Notes' means the New Notes and
Old Notes treated as a single class.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee in New York, New York), except
that, at the option of the Company, payment of interest may be made by check
mailed to the address of the holders as such address appears in the Note
Register. Initially, the Trustee will act as Paying Agent and Registrar for the
Notes. The Notes may be presented for registration of transfer and exchange at
the offices of the Registrar, which initially will be the Trustee's corporate
trust office. The Company may change any Paying Agent and Registrar without
notice to holders of the Notes.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000, and will be
initially issued as a single, permanent global certificate. See 'Book-Entry;
Delivery and Form. No service charge will be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
TERMS OF NOTES
The Notes will be unsecured, senior obligations of the Company, limited to
$155 million aggregate principal amount, and will mature on June 15, 2004. Each
Note will bear interest at the rate of 11% per annum from the date of issuance,
or from the most recent date to which interest has been paid or provided for,
and will be payable semiannually on June 15 and December 15 of each year,
commencing on December 15, 1997, to holders of record at the close of business
on the June 1 or December 1 immediately preceding the Interest Payment Date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
The interest rate on the Old Notes is subject to increase in certain
circumstances relating to the filing of a registration statement or the failure
to consummate the Exchange Offer with respect to the New Notes.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemptions or sinking
fund payments prior to the maturity of the Notes.
REDEMPTION
Optional Redemption. Except as set forth below, the Notes will not be
redeemable at the option of the Company prior to June 15, 2001. On and after
such date, the Notes will be redeemable, at the Company's option, in whole or in
part, at any time upon not less than 30 nor more than 60 days' prior notice
88
<PAGE>
mailed by first-class mail to each holder's registered address, at the following
redemption prices (expressed in percentages of principal amount), if redeemed
during the period commencing on the dates 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):
<TABLE>
<CAPTION>
REDEMPTION
DATE PRICE
- ----------------------------------------------------------- ----------
<S> <C>
June 15, 2001.............................................. 105.500%
June 15, 2002.............................................. 102.750%
June 15, 2003 and thereafter............................... 100.000%
</TABLE>
Optional Redemption upon Equity Offering. In addition, at any time prior
to June 15, 2000, the Company may, at its option, redeem up to 35% of the Notes
with Net Cash Proceeds of one or more Equity Offerings by the Company so long as
there is a Public Market at the time of such redemption, at a redemption price
equal to 111.0% 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 the aggregate principal amount of the Notes
outstanding must equal at least $100.0 million. In order to effect 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.
Selection. In the case of any partial redemption, selection of the Notes
for redemption will be made by the Trustee on a pro rata basis, by lot or by
such other method as the Trustee in its sole discretion shall deem to be fair
and appropriate; provided, however, that if a partial redemption is made with
proceeds of an Equity Offering, selection of the Notes or portion thereof for
redemption shall be made by the Trustee only on a pro rata basis, unless such
method is otherwise prohibited. Notes may be redeemed in part in multiples of
$1,000 principal amount only. Notice of redemption will be sent, by first class
mail, postage prepaid, at least 45 days (unless a shorter period is acceptable
to the Trustee) prior to the date fixed for redemption to each holder whose
Notes are to be redeemed at the last address for such holder then shown on the
registry books. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after any redemption date, interest
will cease to accrue on the Notes or part thereof called for redemption as long
as the Company has deposited with the Paying Agent funds in satisfaction of the
redemption price pursuant to the Indenture.
RANKING
The Old Notes are, and the New Notes will be, senior unsecured obligations
of the Company. The Notes will rank pari passu in right of payment with all
existing and future senior indebtedness of the Company and will rank senior in
right of payment to any future subordinated indebtedness of the Company. The
Notes (and the Guarantees) will be effectively subordinated to any secured debt
of the Company and the Guarantors, to the extent of the assets serving as
security therefor. As of June 30, 1997, on a pro forma basis after giving effect
to the Offering and the Acquisition, the aggregate principal amount of the
Company's outstanding senior indebtedness to which the Notes would have been
effectively subordinated would have been approximately $86.0 million and the
aggregate principal amount of the Guarantors' outstanding senior indebtedness to
which the Guarantees would have been effectively subordinated would have been
approximately $86.0 million.
GUARANTEES
Each Guarantor irrevocably and unconditionally guarantees, jointly and
severally, to each holder and the Trustee, as primary obligor and not as a
surety, the full and prompt payment of principal of and interest on the Notes,
and of all other monetary obligations of the Company under the Indenture.
89
<PAGE>
The obligations of each Guarantor are limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Guarantee or pursuant to its contribution obligations under
the Indenture, result in the obligations of such Guarantor under its Guarantee
not constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Guarantor in a pro rata
amount based on the Adjusted Net Assets of each Guarantor.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor without limitation. Upon the sale or disposition of
a Guarantor (or all or substantially all of its assets) to a Person which is not
a Guarantor, which sale or disposition is otherwise in compliance with the
Indenture (including the covenant described under 'Repurchase at the Option of
Holders--Sales of Assets and Subsidiary Stock'), such Guarantor shall be deemed
released from all its obligations under the Indenture and its Subsidiary
Guarantee and such Subsidiary Guarantee shall terminate; provided, however, that
any such termination shall occur only to the extent that all obligations of such
Guarantor under the New Senior Secured Facilities and all of its guarantees of,
and under all of its pledges of assets or other security interests which secure,
any other Indebtedness of the Company and the other Guarantors shall also
terminate upon such release, sale or transfer.
Subsequent to the Issue Date, separate financial information for the
Guarantors will not be provided except to the extent required by Regulation S-X
under the Securities Act.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control. The Indenture provides that upon the occurrence of a
Change of Control each holder will have the right to require the Company to
repurchase all or any part of such holder's Notes at a purchase price in cash
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant Interest
Payment Date).
The Indenture provides that within 30 days following any Change of Control,
the Company shall mail a notice to each holder with a copy to the Trustee
stating: (i) that a Change of Control has occurred and that such holder has the
right to require the Company to purchase such holder's Notes at a purchase price
in cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on a record date to receive interest on the relevant Interest Payment
Date), (ii) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and (iii) the
procedures determined by the Company, consistent with the Indenture, that a
holder must follow in order to have its Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The definition of 'Change of Control' includes, among other transactions, a
disposition of all or substantially all of the property and assets of the
Company and its Subsidiaries including a transaction permitted under the 'Merger
and Consolidation' covenant. With respect to the disposition of property or
assets, the phrase 'all or substantially all' as used in the Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the choice of law under
the Indenture) and is subject to judicial interpretation. Accordingly, in
certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would
90
<PAGE>
involve a disposition of 'all or substantially all' of the property or assets of
a Person, and therefore it may be unclear as to whether a Change of Control has
occurred and whether the Company is required to make an offer to repurchase the
Notes as described above.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the New Senior Secured Facilities.
Future senior indebtedness of the Company and its Subsidiaries may also contain
prohibitions of certain events that would constitute a Change of Control or
require such senior indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such senior indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase of the Company. Finally, the Company's ability to pay cash to the
holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. Even if sufficient
funds were otherwise available, the terms of the New Senior Secured Facilities
may prohibit the Company's prepayment of Notes prior to their scheduled
maturity. Consequently, if the Company is not able to prepay the Indebtedness
under the New Senior Secured Facilities and any other senior indebtedness
containing similar restrictions or obtain requisite consents, as described
above, the Company will be unable to fulfill its repurchase obligations if
holders of Notes exercise their repurchase rights following a Change of Control,
thereby resulting in a default under the Indenture.
The existence of a Holder's right to require the Company to repurchase such
Holder's Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would constitute
a Change of Control.
Sales of Assets and Subsidiary Stock. The Indenture provides that the
Company shall not, and shall not permit any of its Restricted Subsidiaries to,
make any Asset Disposition unless (i) the Company or such Restricted Subsidiary
receives consideration at the time of such Asset Disposition at least equal to
the fair market value, as determined in good faith by the Company's Board of
Directors (including as to the value of all non-cash consideration), of the
shares and assets subject to such Asset Disposition, (ii) at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents and (iii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) first, (x) to the extent the
Company or any Restricted Subsidiary elects (or is required by the terms of any
senior secured indebtedness), to prepay, repay or purchase senior secured
Indebtedness or (y) to the investment in or acquisition of Additional Assets
within 180 days from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; (B) second, within 180 days from the receipt
of such Net Available Cash, to the extent of the balance of such Net Available
Cash after application in accordance with clause (A), to make an offer to
purchase Notes at 100% of their principal amount plus accrued and unpaid
interest, if any, thereon; (C) third, within 180 days after the later of the
application of Net Available Cash in accordance with clauses (A) and (B) and the
date that is one year from the receipt of such Net Available Cash, to the extent
of the balance of such Net Available Cash after application in accordance with
clauses (A) and (B), to prepay, repay or repurchase Indebtedness (other than
Preferred Stock) of a Wholly-Owned Subsidiary (in each case other than
Indebtedness owed to the Company); and (D) fourth, to the extent of the balance
of such Net Available Cash after application in accordance with clauses (A), (B)
and (C), to (x) the prepayment, repayment or purchase of Indebtedness of the
Company (other than Indebtedness owing to any Affiliate or Subsidiary of the
Company or the repurchase of Disqualified Capital Stock) or Indebtedness of any
Subsidiary (other than Indebtedness owed to the Company or any of its
Subsidiaries or Affiliates or the repurchase of Disqualified Stock) or (y) any
other purpose otherwise permitted under the Indenture, in each case within the
later of 45 days after the application of Net Available Cash in accordance with
clauses (A), (B) and (C) or the date that is one year from the receipt of such
Net Available Cash; provided, however, that, in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (B), (C) or (D)
above, the Company or such Restricted Subsidiary shall retire such Indebtedness
and shall cause the related loan commitment (if any) to be permanently reduced
in an amount equal to the principal
91
<PAGE>
amount so prepaid, repaid or purchased. Notwithstanding the foregoing
provisions, the Company and its Restricted Subsidiaries shall not be required to
apply any Net Available Cash in accordance herewith except to the extent that
the aggregate Net Available Cash from all Asset Dispositions which are not
applied in accordance with this covenant at any time exceed $5 million. The
Company shall not be required to make an offer to purchase Notes pursuant to
this covenant if the Net Available Cash available therefor (after application of
the proceeds as provided in clauses (A) and (B)) is less than $5 million for any
particular Asset Disposition (which lesser amounts shall be carried forward for
purposes of determining whether an offer is required with respect to the Net
Available Cash from any subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption by the transferee of senior indebtedness of the Company or
senior indebtedness of any Restricted Subsidiary of the Company and the release
of the Company or such Restricted Subsidiary from all liability on such senior
indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary of the Company from the
transferee that are promptly (and in any event within 60 days) converted by the
Company or such Restricted Subsidiary into cash.
In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (iii) (B) of the first paragraph of '--Sales of Assets and
Subsidiary Stock', the Company will be required to purchase Notes tendered
pursuant to an offer by the Company for the Notes at a purchase price of 100% of
their principal amount plus accrued and unpaid interest, if any, to the purchase
date in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
the Notes tendered pursuant to the offer is less than the Net Available Cash
allotted to the purchase of the Notes, the Company will apply the remaining Net
Available Cash in accordance with clauses (iii) (C) or (D) of the first
paragraph of '--Sales of Assets and Subsidiary Stock' as permitted under the
Indenture.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the Indenture. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that the
Company may Incur Indebtedness if on the date thereof the Consolidated
Coverage Ratio would be greater than 2.0:1.
(b) Notwithstanding the foregoing paragraph (a), the Company may Incur
the following Indebtedness:
(i) Indebtedness Incurred pursuant to the New Senior Secured
Facilities (including, without limitation, any renewal, extension,
refunding, restructuring, replacement or refinancing thereof referred to
in the definition thereof), provided, however, that the aggregate
principal amount of all Indebtedness Incurred pursuant to this clause
(i) does not exceed $110 million at any time outstanding less the
aggregate principal amount thereof repaid with the net proceeds of Asset
Dispositions (to the extent, in the case of such repayment of revolving
credit indebtedness, the commitment to advance loans has been
terminated);
(ii) Indebtedness represented by Capitalized Lease Obligations,
mortgage financings or purchase money obligations, in each case Incurred
for the purpose of financing all or any part of
92
<PAGE>
the purchase price or cost of construction or improvement of property
used in a Permitted Business or Incurred to refinance any such purchase
price or cost of construction or improvement, in each case Incurred no
later than 365 days after the date of such acquisition or the date of
completion of such construction or improvement; provided, however, that
the principal amount of any Indebtedness Incurred pursuant to this
clause (ii) shall not exceed $3 million at any time outstanding;
(iii) Indebtedness of the Company owing to and held by any
Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing
to and held by the Company or any Wholly-Owned Subsidiary; provided,
however, that any subsequent issuance or transfer of any Capital Stock
or any other event which results in any such Wholly-Owned Subsidiary
ceasing to be a Wholly-Owned Subsidiary or any subsequent transfer of
any such Indebtedness (except to the Company or any Wholly-Owned
Subsidiary) shall be deemed, in each case, to constitute the Incurrence
of such Indebtedness by the issuer thereof;
(iv) Indebtedness represented by (w) the Notes, (x) the Guarantees,
(y) Existing Indebtedness and (z) any Refinancing Indebtedness Incurred
in respect of any Indebtedness described in this clause (iv) or Incurred
pursuant to paragraph (a) above;
(v) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on the date on which such Restricted Subsidiary was acquired
by the Company (other than Indebtedness Incurred in anticipation of, or
to provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Subsidiary or was otherwise
acquired by the Company); provided, however, that at the time such
Restricted Subsidiary is acquired by the Company, the Company would have
been able to Incur $1.00 of additional Indebtedness pursuant to
paragraph (a) above after giving effect to the Incurrence of such
Indebtedness pursuant to this clause (v) and (B) Refinancing
Indebtedness Incurred by a Restricted Subsidiary in respect of
Indebtedness Incurred by such Restricted Subsidiary pursuant to this
clause (v);
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by the Company or any of
its Restricted Subsidiaries to their customers in the ordinary course of
their business, (B) in respect of performance bonds or similar
obligations of the Company or any of its Restricted Subsidiaries for or
in connection with pledges, deposits or payments made or given in the
ordinary course of business in connection with or to secure statutory,
regulatory or similar obligations, including obligations under health,
safety or environmental obligations and (C) arising from Guarantees to
suppliers, lessors, licensees, contractors, franchises or customers of
obligations (other than Indebtedness) incurred in the ordinary course of
business;
(vii) Indebtedness under Currency Agreements and Interest Rate
Agreements; provided, however, that in the case of Currency Agreements
and Interest Rate Agreements, such Currency Agreements and Interest Rate
Agreements are entered into for bona fide hedging purposes of the
Company or its Restricted Subsidiaries (as determined in good faith by
the Board of Directors of the Company) and correspond in terms of
notional amount, duration, currencies and interest rates as applicable,
to Indebtedness of the Company or its Restricted Subsidiaries Incurred
without violation of the Indenture or to business transactions of the
Company or its Restricted Subsidiaries on customary terms entered into
in the ordinary course of business;
(viii) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credits, surety bonds or performance bonds
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness
93
<PAGE>
or other obligations incurred by any Person acquiring all or any portion
of such business assets or Restricted Subsidiary of the Company for the
purpose of financing such acquisition) in a principal amount not to
exceed the gross proceeds actually received by the Company or any of its
Restricted Subsidiaries in connection with such disposition; provided,
however, that the principal amount of any Indebtedness incurred pursuant
to this clause (viii) when taken together with all Indebtedness incurred
pursuant to this clause (viii) and then outstanding, shall not exceed $1
million;
(ix) Indebtedness consisting of (A) Guarantees by the Company (so
long as the Company could have incurred such Indebtedness directly
without violation of the Indenture) and (B) Guarantees by a Restricted
Subsidiary of senior indebtedness incurred by the Company without
violation of the Indenture (so long as such Restricted Subsidiary could
have incurred such Indebtedness directly without violation of the
Indenture);
(x) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument issued by
the Company or its Subsidiaries drawn against insufficient funds in the
ordinary course of business in an amount not to exceed $500,000 at any
time, provided that such Indebtedness is extinguished within two
business days of its incurrence; and
(xi) Indebtedness (other than Indebtedness described in clauses
(i)-(x)) in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this
clause (xi) and then outstanding, will not exceed $5 million (it being
understood that any Indebtedness Incurred under this clause (xi) shall
cease to be deemed Incurred or outstanding for purposes of this clause
(xi) (but shall be deemed to be Incurred for purposes of paragraph (a))
from and after the first date on which the Company or its Restricted
Subsidiaries could have Incurred such Indebtedness under the foregoing
paragraph (a) without reliance upon this clause (xi).
(c) The Company will not permit any Unrestricted Subsidiary to Incur
any Indebtedness other than Non-Recourse Debt.
Limitation on Restricted Payments. (a) The Company shall not, and shall
not permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company or any of its Restricted Subsidiaries)
except (A) dividends or distributions payable in its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase such
Capital Stock, and (B) dividends or distributions payable to the Company or a
Wholly-Owned Subsidiary of the Company, (ii) purchase, redeem, retire or
otherwise acquire for value any Capital Stock of the Company or any Restricted
Subsidiary of the Company held by Persons other than the Company or another
Restricted Subsidiary of the Company (in either case, other than in exchange for
its Capital Stock (other than Disqualified Stock)), (iii) purchase, repurchase,
redeem, defease or otherwise acquire or retire for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Obligations or (iv) make any Investment (other than a Permitted
Investment) in any Person (any such dividend, distribution, purchase,
redemption, repurchase, defeasance, other acquisition, retirement or Investment
as described in preceding clauses (i) through (iv) being referred to as a
'Restricted Payment'); if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom); or
(2) the Company is not able to incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) under 'Limitation on Indebtedness';
or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date would
exceed the sum of (A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the first day of the fiscal
94
<PAGE>
quarter beginning on or after the Issue Date to the end of the most recent
fiscal quarter ending prior to the date of such Restricted Payment as to
which financial results are available (but in no event ending more than 135
days prior to the date of such Restricted Payment) (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit);
(B) the aggregate net proceeds received by the Company from the issue or
sale of its Capital Stock (other than Disqualified Stock) or other capital
contributions subsequent to the Issue Date (other than net proceeds
received from an issuance or sale of such Capital Stock to a Subsidiary of
the Company or an employee stock ownership plan or similar trust);
provided, however, that the value of any non-cash net proceeds shall be as
determined by the Board of Directors in good faith, except that in the
event the value of any non-cash net proceeds shall be $1 million or more,
the value shall be as determined in writing by an independent investment
banking firm of nationally recognized standing; (C) the amount by which
Indebtedness of the Company is reduced on the Company's balance sheet upon
the conversion or exchange (other than by a Restricted Subsidiary of the
Company) subsequent to the Issue Date of any Indebtedness of the Company
Incurred subsequent to the Issue Date which is convertible or exchangeable
for Capital Stock of the Company (less the amount of any cash, or other
property, distributed by the Company upon such conversion or exchange); (D)
the amount equal to the net reduction in Investments (other than Permitted
Investments) made after the Issue Date by the Company or any of its
Restricted Subsidiaries in any Person resulting from (i) repurchases or
redemptions of such Investments by such Person, proceeds realized upon the
sale of such Investment to an unaffiliated purchaser, repayments of loans
or advances or other transfers of assets by such Person to the Company or
any Restricted Subsidiary of the Company or (ii) the redesignation of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case
as provided in the definition of 'Investment') not to exceed, in the case
of any Unrestricted Subsidiary, the amount of Investments previously
included in the calculation of the amount of Restricted Payments; provided,
however, that no amount shall be included under this Clause (D) to the
extent it is already included in Consolidated Net Income; and (E) $5.0
million.
(b) The provisions of the foregoing paragraph shall not prohibit:
(i) any purchase or redemption of Capital Stock or Subordinated
Obligations of the Company made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or
sold to a Subsidiary or an employee stock ownership plan or similar
trust); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B)
the Net Cash Proceeds from such sale shall be excluded from clause (3)
(B) of the foregoing paragraph;
(ii) any purchase or redemption of Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Subordinated Obligations of the
Company in compliance with the 'Limitation on Indebtedness' covenant;
provided, however, that such purchase or redemption shall be excluded in
the calculation of the amount of Restricted Payments;
(iii) any purchase or redemption of Subordinated Obligations from
Net Available Cash to the extent permitted under 'Repurchase at the
Option of Holders--Sales of Assets and Subsidiary Stock' above;
(iv) dividends paid within 60 days after the date of declaration if
at such date of declaration such dividend would have complied with this
provision; provided, however, that such dividend shall be included in
the calculation of the amount of Restricted Payments; and
(v) payments to Bollore Technologies S.A., which payments shall not
exceed $500,000 in any six month period and shall not exceed $2.5
million in the aggregate.
provided, however, that no Default or Event of Default shall have occurred or be
continuing at the time of such payment or as a result thereof.
95
<PAGE>
For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that any
Restricted Payment made other than in cash shall be valued at the fair market
value (determined, subject to the additional requirements of the immediately
succeeding proviso, in good faith by the Board of Directors) of the assets so
utilized in making such Restricted Payment, provided, further, that (i) in the
case of any Restricted Payment made with Capital Stock or Indebtedness, such
Restricted Payment shall be deemed to be made in an amount equal to the greater
of the fair market value thereof and the liquidation preference (if any) or
principal amount of the capital stock or indebtedness, as the case may be, so
utilized, and (ii) in the case of any Restricted Payment made with non-cash
assets in an aggregate amount in excess of $1 million, a written opinion as to
the fairness of the valuation thereof (as determined by the Company) for
purposes of determining compliance with the 'Limitation on Restricted Payments'
covenant in the Indenture shall be issued by an independent investment banking
firm of national standing.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any Liens except for Permitted Liens.
Limitation on Distributions from Restricted Subsidiaries. The Company
shall not, and shall not permit any of its Restricted Subsidiaries to, create or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any such Restricted Subsidiary to:
(i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company;
(ii) make any loans or advances to the Company; or
(iii) transfer any of its property or assets to the Company;
except (in each case) for such encumbrances or restrictions existing under or by
reason of:
(a) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date, including the New Senior Secured
Facilities;
(b) any encumbrance or restriction with respect to such a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness issued by
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company and outstanding on such date (other
than indebtedness issued as anticipation of, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary of the Company or was
acquired by the Company);
(c) any encumbrance or restriction with respect to such a Restricted
Subsidiary pursuant to an agreement evidencing Indebtedness Incurred
without violation of the Indenture or effecting a refinancing of
Indebtedness issued pursuant to an agreement referred to in clauses (a) or
(b) or this clause (c) or contained in any amendment to an agreement
referred to in clauses (a) or (b) or this clause (c); provided, however,
that the encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any of such agreement, refinancing agreement or
amendment, taken as a whole, are no less favorable to holders of the Notes
in any material respect, as determined in good faith by the Board of
Directors of the Company, than encumbrances and restrictions with respect
to such Restricted Subsidiary contained in agreements in effect at, or
entered into on, the Issue Date;
(d) in the case of clause (iii), any encumbrance or restriction (A)
that restricts in a customary manner the subletting, assignment or transfer
of any property or asset that is a lease, license, conveyance or contract
or similar property or asset, (B) by virtue of any transfer of, agreement
to
96
<PAGE>
transfer, option or right with respect to, or Lien on, any property or
assets of the Company or any Restricted Subsidiary not otherwise prohibited
by the Indenture, (C) that is included in a licensing agreement to the
extent such restrictions limit the transfer of the property subject to such
licensing agreement or (D) arising or agreed to in the ordinary course of
business and that does not, individually or in the aggregate, detract from
the value of property or assets of the Company or any of its Subsidiaries
in any manner material to the Company or any such Restricted Subsidiary;
(e) in the case of clause (iii) above, restrictions contained in
security agreements, mortgages or similar documents securing Indebtedness
of a Restricted Subsidiary to the extent such restrictions restrict the
transfer of the property subject to such security agreements;
(f) in the case of clause (iii) above, any instrument governing or
evidencing Indebtedness of a Person acquired by the Company or any
Restricted Subsidiary of the Company at the time of such acquisition, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person so acquired;
provided, however, that such Indebtedness is not incurred in connection
with or in contemplation of such acquisition.
(g) any restriction with respect to such a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition
of all or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition; and
(h) encumbrances or restrictions arising or existing by reason of
applicable law.
Limitation on Affiliate Transactions. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter into
or conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with or for the benefit of any Affiliate of the Company, other than a
Wholly-Owned Subsidiary (an 'Affiliate Transaction') unless: (i) the terms of
such Affiliate Transaction are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could be obtained at
the time of such transaction in arm's length dealings with a Person who is not
such an Affiliate; (ii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $1 million, the terms of such transaction have
been approved by a majority of the members of the Board of Directors of the
Company and by a majority of the disinterested members of such Board, if any
(and such majority or majorities, as the case may be, determines that such
Affiliate Transaction satisfies the criteria in (i) above); and (iii) in the
event such Affiliate Transaction involves an aggregate amount in excess of $2
million, the Company has received a written opinion from an independent
investment banking firm of nationally recognized standing that such Affiliate
Transaction is fair to the Company or such Restricted Subsidiary, as the case
may be, from a financial point of view.
The foregoing paragraph shall not apply to (i) any Restricted Payment
permitted to be made pursuant to the covenant described under 'Limitation on
Restricted Payments,' (ii) any issuance of securities, or other payments, awards
or grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, or any stock options and stock ownership plans for the
benefit of employees, officers and directors, consultants and advisors approved
by the Board of Directors of the Company, (iii) loans or advances to employees
in the ordinary course of business of the Company or any of its Restricted
Subsidiaries in aggregate amount outstanding not to exceed $900,000 at any time,
(iv) any transaction between Wholly-Owned Subsidiaries, (v) indemnification
agreements with, and the payment of fees and indemnities to, directors, officers
and employees of the Company and its Restricted Subsidiaries, in each case in
the ordinary course of business, (vi) transactions pursuant to agreements in
existence on the Issue Date which are (x) described in the Offering Memorandum
or (y) otherwise, in the aggregate, immaterial to the Company and its Restricted
Subsidiaries taken as a whole, (vii) any employment, non-competition or
confidentiality agreements entered into by the Company or any of its Restricted
Subsidiaries with its employees in the ordinary course of business and (viii)
the issuance of Capital Stock of the Company (other than Disqualified Stock).
97
<PAGE>
Limitation on Issuances of Capital Stock of Restricted Subsidiaries. The
Company will not permit any of its Restricted Subsidiaries to issue any Capital
Stock to any Person (other than to the Company or a Wholly-Owned Subsidiary of
the Company) or permit any Person (other than the Company or a Wholly-Owned
Subsidiary of the Company) to own any Capital Stock of a Restricted Subsidiary
of the Company, if in either case as a result thereof such Restricted Subsidiary
would no longer be a Restricted Subsidiary of the Company; provided, however,
that this provision shall not prohibit (x) the Company or any of its Restricted
Subsidiaries from selling, leasing or otherwise disposing of 100% of the Capital
Stock of any Restricted Subsidiary in accordance with 'Repurchase at Option of
Holders-Sales of Assets and Subsidiary Stock' or (y) the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary in compliance with the
Indenture.
SEC Reports. The Company will file with the Trustee and provide to the
holders of the Notes, within 15 days after it files them with the Commission,
copies of the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission may by
rules and regulations prescribe) which the Company files with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. In the event that the
Company is not required to file such reports with the Commission pursuant to the
Exchange Act, the Company will nevertheless deliver such Exchange Act
information to the holders of the Notes within 15 days after it would have been
required to file it with the Commission.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all of its
assets to, any Person, unless: (i) the resulting, surviving or transferee Person
(the 'Successor Company') shall be a corporation, partnership, trust or limited
liability company organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) shall expressly assume, by supplemental indenture, executed
and delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture; (ii) immediately
after giving effect to such transaction (and treating any Indebtedness that
becomes an obligation of the Successor Company or any Subsidiary of the
Successor Company as a result of such transaction as having been incurred by the
Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Company would be able to incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (a) of 'Limitation on Indebtedness'; (iv) the
Consolidated Net Worth of the resulting, surviving, or transferee corporation is
not less than that of the Company immediately prior to the transaction and (v)
the Company shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in the
case of a lease of all or substantially all its assets, the Company will not be
released from the obligation to pay the principal of and interest on the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
(i) a default in any payment of interest on any Note when due, continued for 30
days, (ii) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company to comply with its
obligations under the 'Merger and Consolidation' covenant described under
'Certain Covenants' above, (iv) the failure by the Company to comply for 30 days
after notice with any of its obligations under the covenants described under
'Redemption at the Option of Holders' above or under covenants described under
'Certain Covenants'
98
<PAGE>
above (in each case, other than a failure to purchase Notes which shall
constitute an Event of Default under clause (ii) above), other than '--Merger
and Consolidation,' (v) the failure by the Company or any Guarantor to comply
for 60 days after notice with its other agreements contained in the Indenture,
(vi) Indebtedness of the Company or any Restricted Subsidiary is not paid within
any applicable grace period after final maturity or is accelerated by the
holders thereof because of a default and the total amount of such Indebtedness
unpaid or accelerated exceeds $5 million and such default shall not have been
cured or such acceleration rescinded after a 10-day period, (vii) certain events
of bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary (the 'bankruptcy provisions'), (viii) any judgment or decree for the
payment of money in excess of $5 million (to the extent not covered by
insurance) is rendered against the Company or a Significant Subsidiary and such
judgment or decree shall remain undischarged or unstayed for a period of 60 days
after such judgment becomes final and non-appealable (the 'judgment default
provision') or (ix) any Subsidiary Guarantee by a Significant Subsidiary ceases
to be in full force and effect (except as contemplated by the terms of the
Indenture) or any Guarantor that is a Significant Subsidiary denies or
disaffirms its obligations under the Indenture or its Subsidiary Guarantee and
such Default continues for 10 days. However, a default under clause (iv) or (v)
will not constitute an Event of Default until the Trustee or the holders of 25%
in principal amount of the outstanding Notes notify the Company of the default
and the Company does not cure such default within the time specified in clause
(iv) or (v) after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes by notice to the
Company may declare the principal of and accrued and unpaid interest, if any, on
all the Notes to be due and payable. Upon such a declaration, such principal and
accrued and unpaid interest shall be due and payable immediately. If an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of the Company occurs, the principal of and accrued and unpaid interest on all
the Notes will become and be immediately due and payable without any declaration
or other act on the part of the Trustee or any holders. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction that, in the reasonable opinion of the Trustee, is
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee shall be entitled to indemnification satisfactory to it
in its sole discretion against all losses and expenses caused by taking or not
taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 60 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any Note, the Trustee may
withhold notice if and so long as its board of directors, a committee of its
board of directors or a committee of its
99
<PAGE>
Trust officers in good faith determines that withholding notice is in the
interests of the Noteholders. In addition, the Company is required to deliver to
the Trustee, within 90 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any events which
would constitute certain Defaults.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the holders of a majority in principal amount of the Notes
then outstanding. However, without the consent of each holder of an outstanding
Note affected, no amendment may, among other things, (i) reduce the amount of
Notes whose holders must consent to an amendment, (ii) reduce the stated rate of
or extend the stated time for payment of interest on any Note, (iii) reduce the
principal of or extend the Stated Maturity of any Note, (iv) reduce the premium
payable upon the redemption or repurchase of any Note or change the time at
which any Note may be redeemed as described under 'Optional Redemption' above,
(v) make any Note payable in money other than that stated in the Note, (vi)
impair the right of any holder to receive payment of principal of and interest
on such holder's Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such holder's Notes or
(vii) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, the Company and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation, partnership, trust or
limited liability company of the obligations of the Company under the Indenture,
to provide for uncertificated Notes in addition to or in place of certificated
Notes (provided that the uncertificated Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add
further Guarantees with respect to the Notes, to secure the Notes, to add to the
covenants of the Company for the benefit of the holders or to surrender any
right or power conferred upon the Company, to make any change that does not
adversely affect the rights of any holder or to comply with any requirement of
the Commission in connection with the qualification of the Indenture under the
Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders or any defect
therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ('legal defeasance'), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under covenants
described under 'Certain Covenants' (other than 'Merger and Consolidation'), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries, the judgment default provision and the
Subsidiary Guarantee provision described under 'Events of Default' above and the
limitations contained in clauses (iii) and (iv) under 'Certain Covenants--Merger
and Consolidation' above ('covenant defeasance').
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes
100
<PAGE>
may not be accelerated because of an Event of Default with respect thereto. If
the Company exercises its covenant defeasance option, payment of the Notes may
not be accelerated because of an Event of Default specified in clause (iv),
(vi), (vii) (with respect only to Significant Subsidiaries), (viii) or (ix)
under 'Events of Default' above or because of the failure of the Company to
comply with clause (iii) or (iv) under 'Certain Covenants--Merger and
Consolidation' above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the 'defeasance trust') with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such deposit and defeasance and will be subject to United States federal
income tax on the same amount and in the same manner and at the same times as
would have been the case if such deposit and defeasance had not occurred (and,
in the case of legal defeasance only, such Opinion of Counsel must be based on a
ruling of the Internal Revenue Service or other change in applicable United
States federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim a security or otherwise. The Trustee is permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined) it
must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes issued under the Indenture have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the Trustee. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured) the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any of the holders of the Notes issued thereunder unless they
shall have offered to the Trustee security and indemnity satisfactory to it.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
'Additional Assets' means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Permitted Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or a Restricted Subsidiary of the Company;
or (iii) Permitted Investments of the type and in the amounts described in
clause (viii) of the definition thereof; provided, however, that, in the case of
clause (ii), such Restricted Subsidiary is primarily engaged in a Permitted
Business.
'Adjusted Net Assets' of a Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Guarantor exceeds
the total amount of liabilities, including, without limitation, the probable
liability of such Guarantor with respect to its contingent liabilities (after
giving effect to all other fixed and contingent liabilities incurred or assumed
on such date), but excluding liabilities
101
<PAGE>
under the Subsidiary Guarantee, of such Guarantor at such date and (y) the
present fair salable value of the assets of such Guarantor at such date exceeds
the amount that will be required to pay the probable liability of such Guarantor
on its debts (after giving effect to all other fixed and contingent liabilities
incurred or assumed on such date and after giving effect to any collection from
any Subsidiary by such Guarantor in respect of the obligations of such
Subsidiary under the Subsidiary Guarantee), excluding debt in respect of the
Subsidiary Guarantee, as they become absolute and matured.
'Affiliate' of any specified person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
'control' when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
'controlling' and 'controlled' have meanings correlative to the foregoing.
'Asset Disposition' means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of (or
any other equity interests in) a Restricted Subsidiary (other than directors'
qualifying shares) or of any other property or other assets (each referred to
for the purposes of this definition as a 'disposition') by the Company or any of
its Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of inventory in the
ordinary course of business, (iii) a disposition of obsolete or worn out
equipment or equipment that is no longer useful in the conduct of the business
of the Company and its Restricted Subsidiaries and that is disposed of in each
case in the ordinary course of business, (iv) dispositions of property for net
proceeds which, when taken collectively with the net proceeds of any other such
dispositions under this clause (iv) that were consummated since the beginning of
the calendar year in which such disposition is consummated, do not exceed $1
million, and (v) transactions permitted under 'Certain Covenants--Merger and
Consolidation' above. Notwithstanding anything to the contrary contained above,
a Restricted Payment made in compliance with the 'Limitation on Restricted
Payments' covenant shall not constitute an Asset Disposition except for purposes
of determinations of the Consolidated Coverage Ratio (as defined).
'Attributable Indebtedness' in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
'Average Life' means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to Preferred Stock multiplied by the
amount of such payment by (ii) the sum of all such payments.
'Capitalized Lease Obligations' means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
'Capital Stock' of any Person means any and all shares, partnership or
other equity interests, rights to purchase, warrants, options, participations or
other equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
'Cash Equivalents' means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof,
102
<PAGE>
(iii) certificates of deposit, time deposits and eurodollar time deposits with
maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight bank deposits,
in each case with any commercial bank having capital and surplus in excess of
$500 million, (iv) repurchase obligations for underlying securities of the types
described in clauses (ii) and (iii) entered into with any financial institution
meeting the qualifications specified in clause (iii) above, (v) commercial paper
rated A-1 or the equivalent thereof by Moody's or S&P and in each case maturing
within one year after the date of acquisition, (vi) investment funds investing
95% of their assets in securities of the types described in clauses (i)-(v)
above, (vii) readily marketable direct obligations issued by any state of the
United States of America or any political subdivision thereof having one of the
two highest rating categories obtainable form either Moody's or S&P and (viii)
Indebtedness or preferred stock issued by Persons with a rating of 'A' or higher
from S&P or 'A2' or higher from Moody's.
'Change of Control' means (i) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all or substantially
all of the assets of the Company and its Subsidiaries; or (ii) a majority of the
Board of Directors of the Company or of any direct or indirect holding company
thereof shall consist of Persons who are not Continuing Directors of the
Company, as the case may be; or (iii) the acquisition by any Person or group of
related Persons (other than the Management Group) for purposes of Section 13(d)
of the Exchange Act, of the power, directly or indirectly, to vote or direct the
voting of securities having more than 50% of the ordinary voting power for the
election of directors of the Company or of any direct or indirect holding
company thereof.
'Consolidated Cash Flow' for any period means the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, and (v) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
item to the extent it represents an accrual of or reserve for cash disbursements
for any subsequent period prior to the Stated Maturity of the Notes or
amortization of a prepaid cash expense that was paid in a prior period) and
less, to the extent added in calculating Consolidated Net Income, non-cash items
(excluding such non-cash items to the extent they represent an accrual for cash
receipts reasonably expected to be received prior to the Stated Maturity of the
Notes), in each case for such period. Notwithstanding the foregoing, the income
tax expense, depreciation expense and amortization expense of a Subsidiary of
the Company shall be included in Consolidated Cash Flow only to the extent (and
in the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income.
'Consolidated Coverage Ratio' as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (A) if the Company or any of its Restricted Subsidiaries has incurred any
Indebtedness since the beginning of such period and through the date of
determination of the Consolidated Coverage Ratio that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (1) such Indebtedness as if such Indebtedness had
been incurred on the first day of such period (provided that if such
Indebtedness is incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by the Board
of Directors of the Company) shall be deemed outstanding for purposes of this
calculation), and (2) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period,
(B) if since the beginning of such period any Indebtedness of the Company or any
of its Restricted Subsidiaries has been repaid, repurchased, defeased or
otherwise discharged (other than Indebtedness under a revolving credit or
similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and has not been replaced), Consolidated Interest Expense for
such period shall be
103
<PAGE>
calculated after giving pro forma effect thereto as if such Indebtedness had
been repaid, repurchased, defeased or otherwise discharged on the first day of
such period, (C) if since the beginning of such period the Company or any of its
Restricted Subsidiaries shall have made any Asset Disposition or if the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
is an Asset Disposition, Consolidated Cash Flow for such period shall be reduced
by an amount equal to the Consolidated Cash Flow (if positive) attributable to
the assets which are the subject of such Asset Disposition for such period or
increased by an amount equal to the Consolidated Cash Flow (if negative)
attributable thereto for such period, and Consolidated Interest Expense for such
period shall be (1) reduced by an amount equal to the Consolidated Interest
Expense attributable to any Indebtedness of the Company or any of its Restricted
Subsidiaries repaid, repurchased, defeased or otherwise discharged with respect
to the Company and its continuing Restricted Subsidiaries in connection with
such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary of the Company is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent the Company and its continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such sale) and (2) increased by
interest income attributable to the assets which are the subject of such Asset
Disposition for such period, (D) if since the beginning of such period the
Company or any of its Restricted Subsidiaries (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary of the Company (or any
Person which becomes a Restricted Subsidiary of the Company as a result thereof)
or an acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder which constitutes all or substantially all of
an operating unit of a business, Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (E) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary of the Company or was merged with or into the Company or
any Restricted Subsidiary of the Company since the beginning of such period)
shall have made any Asset Disposition, Investment or acquisition of assets that
would have required an adjustment pursuant to clause (C) or (D) above if made by
the Company or a Restricted Subsidiary of the Company during such period,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such period.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).
'Consolidated Interest Expense' means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries determined in accordance
with GAAP, plus, to the extent not included in such interest expense (i)
interest expense attributable to Capitalized Lease Obligations, (ii)
amortization of debt discount, (iii) capitalized interest, (iv) non-cash
interest expense, (v) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing, (vi)
interest actually paid by the Company or any such Restricted Subsidiary under
any Guarantee of Indebtedness or other obligation of any other Person, (vii) net
payments (whether positive or negative) pursuant to Interest Rate Agreements,
(viii) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than the Company) in connection with
Indebtedness Incurred by such plan or trust and (ix) cash and Disqualified Stock
dividends in respect of all Preferred Stock of Subsidiaries and Disqualified
Stock of the Company held by Persons other than the Company or a Wholly-Owned
Subsidiary and less (a) to the extent included in such interest expense, the
amortization of capitalized debt issuance costs and (b) interest income.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect to
any Restricted Subsidiary of the Company, that was not a Wholly-Owned
Subsidiary, shall be included only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income.
104
<PAGE>
'Consolidated Net Income' means, for any period, the consolidated net
income (loss) of the Company and its consolidated Subsidiaries determined in
accordance with GAAP prior to the payment of dividends on the Senior PIK
Preferred Stock; provided, however, that there shall not be included in such
Consolidated Net Income: (i) any net income (loss) of any person acquired by the
Company or any of its Restricted Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) any net
income of any Restricted Subsidiary of the Company if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company (other than restrictions in effect on the Issue Date
with respect to a Restricted Subsidiary of the Company and other than
restrictions that are created or exist in compliance with the 'Limitation on
Restrictions on Distributions from Restricted Subsidiaries' covenant), (iii) any
gain or loss realized upon the sale or other disposition of any assets of the
Company or its consolidated Restricted Subsidiaries (including pursuant to any
Sale/Leaseback Transaction) which are not sold or otherwise disposed of in the
ordinary course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person, (iv) any extraordinary gain or
loss, (v) the cumulative effect of a change in accounting principles, (vi) the
net income of any Person, other than a Restricted Subsidiary, except to the
extent of the lesser of (A) dividends or distributions paid to the Company or
any of its Restricted Subsidiaries by such Person and (B) the net income of such
Person (but in no event less than zero), and the net loss of such Person (other
than an Unrestricted Subsidiary) shall be included only to the extent of the
aggregate Investment of the Company or any of its Restricted Subsidiaries in
such Person and (vii) any non-cash expenses attributable to grants or exercises
of employee stock options. Notwithstanding the foregoing, for the purpose of the
covenant described under 'Certain Covenants--Limitation on Restricted Payments'
only, there shall be excluded from Consolidated Net Income any dividends,
repayments of loans or advances or other transfers of assets from Unrestricted
Subsidiaries to the Company or a Restricted Subsidiary to the extent such
dividends, repayments or transfers increase the amount of Restricted Payments
permitted under such covenant.
'Consolidated Net Worth' means the total of the amounts shown on the
balance sheet of the Company and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of the
most recent fiscal quarter of the Company ending prior to the taking of any
action for the purpose of which the determination is being made and for which
financial statements are available (but in no event ending more than 135 days
prior to the taking of such action), as (i) the par or stated value of all
outstanding Capital Stock of the Company plus (ii) paid in capital or capital
surplus relating to such Capital Stock plus (iii) any retained earnings or
earned surplus less (A) any accumulated deficit and (B) any amounts attributable
to Disqualified Stock.
'Continuing Director' of any Person means, as of the date of determination,
any Person who (i) was a member of the Board of Directors of such Person on the
date of the Indenture or (ii) was nominated for election or elected to the Board
of Directors of such Person with the affirmative vote of a majority of the
Continuing Directors of such Person who were members of such Board of Directors
at the time of such nomination or election.
'Currency Agreement' means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
'Default' means any event which is, or after notice or passage of time or
both would be, an Event of Default.
'Disqualified Stock' means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), (i) matures (excluding any maturity as
the result of an optional redemption by the issuer thereof) or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
final stated maturity of the Notes, or (ii) is convertible into or exchangeable
(unless at the sole option
105
<PAGE>
of the issuer thereof) for (a) debt securities or (b) any Capital Stock referred
to in (i) above, in each case at any time prior to the final stated maturity of
the Notes.
'Existing Indebtedness' means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issue Date, plus interest accrued thereon,
after application of the net proceeds of the sale of the Notes as described in
this Offering Memorandum.
'Equity Offering' means an offering for cash by the Company of its common
stock, or options, warrants or rights with respect to its common stock.
'GAAP' means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
'Guarantee' means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term 'Guarantee' shall not include endorsements for
collection or deposit in the ordinary course of business. The term 'Guarantee'
used as a verb has a corresponding meaning.
'Guarantor' means each Subsidiary of the Company in existence on the Issue
Date and each Subsidiary (other than Unrestricted Subsidiaries) created or
acquired by the Company after the Issue Date.
'Incur' means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
'Indebtedness' means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v)) entered into in the ordinary
course of business of such Person to the extent that such letters of credit are
not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third business day following receipt by such Person of a
demand for reimbursement following payment on the letter of credit), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except trade payables and accrued expenses incurred in the
ordinary course of business), which purchase price is due more than six months
after the date of placing such property in service or taking delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock other than the Senior
PIK Preferred Stock or, with respect to any Restricted Subsidiary of the
Company, any Preferred Stock of such Restricted Subsidiary to the extent such
obligation arises on or before the Stated
106
<PAGE>
Maturity of the Notes (but excluding, in each case, accrued dividends) and (ix)
to the extent not otherwise included in this definition, obligations under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding principal amount of all
unconditional obligations as described above, as such amount would be reflected
on a balance sheet prepared in accordance with GAAP, and the maximum liability
of such Person, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations described above at such date.
'Interest Rate Agreement' means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
'Investment' in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the 'Limitation on Restricted Payments' covenant, (i) 'Investment' shall include
the portion (proportionate to the Company's equity interest in a Restricted
Subsidiary to be designated as an Unrestricted Subsidiary) of the fair market
value of the net assets of such Restricted Subsidiary of the Company at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
'Investment' in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's 'Investment' in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so redesignated a Restricted
Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors and
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Trustee.
'Issue Date' means the date on which the Notes are originally issued.
'Lien' means any security interest, encumbrance, lien or charge of any kind
(including any conditional sale or other title retention agreement or lease in
the nature thereof).
'Management Group' means Thomas F. Helms, Jr. and other members of senior
management of the Company.
'Net Available Cash' from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, therefrom in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, foreign and local taxes required to be paid or accrued as a liability
under GAAP, as a consequence of such Asset Disposition, (ii) all payments made
on any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon such assets, or which
must by its terms, or in order to obtain a necessary consent to such Asset
Disposition or by applicable law, be repaid out of the proceeds from such Asset
Disposition, (iii) all distributions and other payments required to be made to
any Person owning a beneficial interest in assets subject to sale or minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition, (iv) the deduction of appropriate amounts to be provided by the
seller as a reserve, in accordance with GAAP, against any liabilities associated
with the assets disposed of in such Asset Disposition, provided, however, that
upon any reduction in such reserves (other than to the extent resulting from
payments of the respective reserved liabilities), Net Available Cash shall be
107
<PAGE>
increased by the amount of such reduction to reserves, and retained by the
Company or any Restricted Subsidiary of the Company after such Asset Disposition
and (v) any portion of the purchase price from an Asset Disposition placed in
escrow (whether as a reserve for adjustment of the purchase price, for
satisfaction of indemnities in respect of such Asset Disposition or otherwise in
connection with such Asset Disposition) provided, however, that upon the
termination of such escrow, Net Available Cash shall be increased by any portion
of funds therein released to the Company or any Restricted Subsidiary.
'Net Cash Proceeds,' with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
'New Senior Secured Facilities' means the Credit Agreement, dated as of
June 25, 1997, among the Company as the borrower, certain guarantors, National
Westminster Bank plc, and any other financial institutions from time to time
party thereto, together with the related documents thereto (including, without
limitation, any guarantee agreements, pledge agreements and security documents),
in each case as such agreements may be amended (including any amendment and
restatement thereof), supplemented or otherwise modified from time to time,
including any agreement extending the maturity of, refinancing, replacing or
otherwise restructuring (including by way of adding Subsidiaries of the Company
as additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
'Non-Recourse Debt' means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor, general partner or otherwise) and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
'Permitted Business' means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Indenture.
'Permitted Investment' means an Investment by the Company or any of its
Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of the Company;
provided, however, that the primary business of such Wholly-Owned Subsidiary is
a Permitted Business; (ii) another Person if as a result of such Investment such
other Person becomes a Wholly-Owned Subsidiary of the Company or is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Wholly-Owned Subsidiary of the Company; provided,
however, that in each case such Person's primary business is a Permitted
Business; (iii) Temporary Cash Investments; (iv) receivables owing to the
Company or any of its Restricted Subsidiaries, created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; (v) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans and advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary; (vii) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the Company or any
of its Restricted Subsidiaries or in satisfaction of judgments or claims; (viii)
a Person engaged in a Permitted Business or a loan or advance to a Restricted
Subsidiary the proceeds of which are used solely to make an investment in a
Person engaged in a Permitted Business or a Guarantee by the Company of
Indebtedness of any Person in which such Investment has been made provided,
however, that no Permitted Investments may be made pursuant to this clause
(viii) to the extent the amount thereof would, when taken together with all
other Permitted Investments made pursuant to this clause (viii), exceed $5
million in the aggregate (plus, to the extent not previously reinvested, any
return of capital realized on
108
<PAGE>
Permitted Investments made pursuant to this clause (viii), or any release or
other cancellation of any Guarantee constituting such Permitted Investment);
(ix) Persons to the extent such Investment is received by the Company or any
Restricted Subsidiary as consideration for Asset Dispositions effected in
compliance with the covenant described under 'Repurchase at the Option of
Holders-Sales of Assets and Subsidiary Stock'; (x) prepayments and other credits
to suppliers made in the ordinary course of business consistent with the past
practices of the Company and its Restricted Subsidiaries; and (xi) Investments
in connection with pledges, deposits, payments or performance bonds made or
given in the ordinary course of business in connection with or to secure
statutory, regulatory or similar obligations, including obligations under
health, safety or environmental obligations.
'Permitted Liens' means (a) Liens granted by the Company and the Guarantors
which secure Indebtedness to the extent the Indebtedness is incurred pursuant to
clause (i) of paragraph (b) under the 'Limitation on Incurrence of Indebtedness'
covenant; (b) Liens in favor of the Company; (c) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary thereof; provided that such Liens were in existence
prior to the contemplation of such acquisition and do not extend to any assets
of the Company or its Restricted Subsidiaries other than those acquired in
connection with such merger or consolidation; (d) Liens to secure the
performance of obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (e)
Liens existing on the Issuance Date; (f) Liens in respect of extensions,
renewals, refundings or refinancings of any Indebtedness secured by the Liens
referred to in clauses (a), (b), (c) and (e) above and (h) below; provided that
the Liens in connection with such renewal, extensions, renewals, refundings or
refinancing shall be limited to all or part of the specific property which was
subject to the original Lien; (g) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded; provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (h) any Lien
securing purchase money obligations incurred in connection with the purchase of
real or personal property provided that (A) at the time such Lien attached to
the real or personal property of the Company or Guarantor, the Company shall be
permitted to Incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of the 'Limitation on Incurrence of Indebtedness' covenant and
(B) such Liens do not extend to any property (other than the property so
purchased) owned by the Company or its Restricted Subsidiaries and is not
incurred more than 30 days after the incurrence of such Indebtedness secured by
such Lien; (i) Liens to secure Capitalized Lease Obligations (except in respect
of Sale and Leaseback Transactions) on real or personal property of the Company
to the extent consummated in compliance with the Indenture; provided that (A) at
the time such Lien attaches to the real or personal property of the Company or
Guarantor, the Company shall be permitted to Incur at least $1.00 of additional
indebtedness pursuant to the first paragraph of the 'Limitation on Incurrence of
Indebtedness' covenant and (B) such Liens do not extend to or cover any property
of the Company of any of its Subsidiaries other than the property subject to
such Capitalized Lease Obligation; and (j) Liens incurred in the ordinary course
of business of the Company or any Restricted Subsidiary thereof with respect to
obligations that do not exceed $2 million at any one time outstanding and that
(A) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (B) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of the
business by the Company or such Restricted Subsidiary.
'Person' means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision hereof or any other entity.
'Preferred Stock,' as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
109
<PAGE>
A 'Public Market' exists at any time with respect to the common stock of
the Company if (i) the common stock of the Company is then registered with the
Securities and Exchange Commission pursuant to Section 12(b) or 12(g) of the
Exchange Act and traded either on a national securities exchange or in the
National Association of Securities Dealers Automated Quotation System and (ii)
at least 15% of the total issued and outstanding common stock of the Company, as
applicable, has been distributed prior to such time by means of an effective
registration statement under the Securities Act.
'Qualified Capital Stock' of any Person shall mean any Capital Stock of
such Person which is not Disqualified Stock.
'Refinancing Indebtedness' means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, 'refinances,' and 'refinanced' shall have a
correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of
any Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;
provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the earlier of (A) the first anniversary of the Stated Maturity
of the Notes and (B) the Stated Maturity of the Indebtedness being refinanced,
(ii) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the lesser
of (A) the Average Life of the Notes and (B) the Average Life of the
Indebtedness being refinanced (iii) the Refinancing Indebtedness is subordinated
to the Notes on the same terms as the Indebtedness being refinanced if such
Indebtedness is subordinate to the Notes and, (iv) the Refinancing Indebtedness
is in an aggregate principal amount (or if issued with original issue discount,
an aggregate issue price) that is equal to (or 101% of, in the case of a
refinancing of the Notes in connection with a Change of Control) or less than
the sum of the aggregate principal amount (or if issued with original issue
discount, the aggregate acreted value) then outstanding of the Indebtedness
being refinanced (plus the amount of any premium required to be paid in
connection therewith and reasonable fees and expenses therewith) provided,
further, that Refinancing Indebtedness shall not include Indebtedness of a
Subsidiary which refinances Indebtedness of the Company.
'Restricted Subsidiary' means any Subsidiary of the Company other an
Unrestricted Subsidiary.
'Sale/Leaseback Transaction' means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
'Secured Indebtedness' means any Indebtedness of the Company or a Guarantor
secured by a Lien.
'Senior PIK Preferred Stock' means the 12% senior preferred stock of the
Company.
'Significant Subsidiary' means any Restricted Subsidiary that would be a
'Significant Subsidiary' of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
'Stated Maturity' means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
'Subordinated Obligation' means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
'Subsidiary' of any Person incorporated in the United States means any
corporation, association, partnership or other business entity organized in the
United States of which more than 50% of the total voting power of shares of
Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
Unless otherwise specified herein, each reference to a Subsidiary shall refer to
a Subsidiary of the Company.
'Subsidiary Guarantee' means the Guarantee of the Notes by a Guarantor.
110
<PAGE>
'Temporary Cash Investments' means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated 'A' (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein is made
of 'P-1' (or higher) according to Moody's Investors Service, Inc. or 'A-1' (or
higher) according to Standard and Poor's Ratings Group, (v) Investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least 'A' by Standard & Poor's Ratings Group or 'A' by Moody's
Investors Service, Inc. and (vi) Investments in mutual funds whose investment
guidelines restrict such funds' investments to those satisfying the provisions
of clauses (i) through (v) above.
'Unrestricted Subsidiary' means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any Restricted Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated; provided,
however, each Subsidiary to be so designated and each of its Subsidiaries has
not at the time of designation, and does not thereafter, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable with respect
to any Indebtedness pursuant to which the lender has recourse to any of the
assets of the Company or any of its Restricted Subsidiaries and either (A) the
Subsidiary to be so designated has total consolidated assets of $10,000 or less
or (B) if such Subsidiary has consolidated assets greater than $10,000, then
such designation would be permitted under 'Limitation on Restricted Payments.'
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (x) the Company could Incur $1.00 of additional Indebtedness
under clause (a) of 'Limitation on Indebtedness' and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced to the Trustee by promptly filing with the Trustee a copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
'Voting Stock' of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
'Wholly-Owned Subsidiary' means a Restricted Subsidiary of the Company, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly-Owned Subsidiary.
111
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
DESCRIPTION OF NEW SENIOR SECURED FACILITIES
The Company entered into a Credit Agreement (the 'Credit Agreement') with
National Westminster Bank plc as agent (the 'Agent'), providing for the Term
Facility and the Revolver (the Revolver together with the Term Facility, the
'New Senior Secured Facilities'). The Term Facility shall be subject to
scheduled quarterly principal payments commencing September 30, 1997 and
continuing over the five-year period following the closing date. The Revolver
includes a letter of credit sublimit of $10 million and terminates five years
from the closing date. The Company used the Term Facility to provide certain
funding necessary to consummate the Acquisition, to refinance certain existing
debt of National Tobacco and LLC, and to redeem equity in LLC. The Revolver will
be used for working capital and general corporate purposes. This information
relating to the Credit Agreement is qualified in its entirety by reference to
the complete text of the documents entered into in connection therewith. The
following is a description of the general terms of the Credit Agreement.
Indebtedness under the New Senior Secured Facilities has been guaranteed by
each of National Tobacco, National Tobacco Finance Corporation and NAOC, and
each of their current and future direct and indirect subsidiaries, if any.
Indebtedness under the Credit Agreement is secured by a first perfected lien on
substantially all the present and after acquired assets and property of the
Company and each of its direct and indirect subsidiaries. The collateral also
includes a first priority lien on all equity interests and intercompany notes
held by the Company, National Tobacco, National Tobacco Finance Corporation and
NAOC and each of their respective subsidiaries.
Each advance under the New Senior Secured Facilities will bear interest per
annum, at the Company's option, as follows: (i) the higher of (a) the prime rate
plus 2.0% or (b) the Federal Funds Rate plus 2.5% or (ii) the Administrative
Agent's LIBOR rate plus 3.0% ('LIBOR Borrowing'), subject to limitations on the
amount of LIBOR Borrowing. In addition, the Credit Agreement provides for
mandatory repayment, subject to certain exceptions, of loans under the New
Senior Secured Facilities upon a Change of Control (as defined in the Credit
Agreement) or with 100% of the net proceeds of asset sales, certain equity and
debt issuances, and 80% of the excess cash flow for each fiscal year.
The Revolver may be repaid and reborrowed. The Company is required to pay
the lenders under the Credit Agreement a commitment fee equal to 1/2 of 1% per
annum, payable on a quarterly basis, on the undrawn and unused portion of the
Revolver. The Company also is required to pay to the lenders participating in
the Revolver letter of credit fees equal to 3% per annum of the face amount of
letters of credit issued under the Revolver and to the lender issuing a letter
of credit a facing fee of 0.25% per annum on the average daily stated amount of
each outstanding letter of credit issued by such lender and its customary
administrative, amendment, payment and negotiation charges in connection with
such letters of credit.
The Credit Agreement requires the Company to meet certain financial tests,
including minimum interest coverage, maximum leverage ratio, fixed charge
coverage and minimum consolidated EBITDA. The 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.
The 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, ERISA, judgment defaults and impairment of
security.
112
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of all material provisions regarding the capital
stock of the Company does not purport to be exhaustive and is qualified in its
entirety by reference to the detailed provisions of the Company's Charter and
the Company's by-laws.
The Company's authorized capital stock consists of 1,500,000 shares of
common stock, par value $.01 per share ('Common Stock'), which are divided
equally into voting and non-voting Common Stock, and 18,000,000 shares of
preferred stock, par value $.01 per share ('Preferred Stock') divided into two
classes consisting of twelve million shares of 12% Senior Payment-In-Kind
Preferred Stock (the 'Old Preferred Stock') and six million shares of 12% Senior
Exchange Payment-In-Kind Preferred Stock (the 'New Preferred Stock' and,
together with the Old Preferred Stock, the 'Senior Preferred Stock'). The
Company had outstanding 528,241 shares of voting Common Stock, currently
exercisable options to purchase 10,309 shares of voting Common Stock, options to
purchase an aggregate of 20,619 shares of Common Stock which are not currently
exercisable, warrants to purchase in the aggregate 63,490 shares of Common Stock
(representing approximately 10.0% of the Common Stock of the Company on a fully
diluted basis), including warrants to purchase 44,440 shares of Common Stock
issued as part of the Units and warrants to purchase 19,050 shares of Common
Stock issued to persons affiliated with the initial purchases of the Units, and
1,397,176.96 shares (which includes 37,176.96 shares that were paid in a
dividend on September 15, 1997) of Senior Preferred Stock (see 'The Exchange
Offering,' 'Recent Transactions,' 'Plan of Distribution').
COMMON STOCK
Voting Rights. Holders of voting Common Stock are entitled to one vote per
share on all matters that are submitted to holders of Common Stock for a vote.
Holders of non-voting Common Stock will not be entitled to vote on any matters
submitted to stockholders, except as otherwise may be required by law. All
shares of non-voting Common Stock currently are convertible by the holders
thereof, upon 61 days' prior notice (or lesser notice in certain circumstances),
into voting Common Stock. All shares of voting Common Stock are also convertible
by the holders thereof upon ten days' prior notice (or automatically in certain
circumstances) into non-voting Common Stock.
Under Delaware law, the affirmative vote of the holders of a majority of
the outstanding shares of any class of Common Stock which is entitled to vote is
required to approve any amendment to the Restated and Certificate of
Incorporation of the Company which would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value of
the shares of such class, or modify or change the powers, preferences or special
rights of the shares of any class so as to affect such class adversely.
Other Provisions. Subject to the rights of any Preferred Stock, the
holders of Common Stock are entitled to receive such dividends, if any, as may
be declared from time to time by the Board of Directors in its discretion from
funds legally available therefor, and upon liquidation or dissolution are
entitled to receive all assets available for distribution to the stockholders.
REGISTRATION, TAG-ALONG AND DRAG-ALONG RIGHTS
The Company, the Existing Stockholders (as defined below) and NatWest
entered into the Common Stock Registration Rights and Stockholders' Agreement,
dated as of June 25, 1997 (the 'Common Stock Registration Rights Agreement')
with respect to the shares of Common Stock (and other securities, if any)
issuable upon exercise of the Warrants ('Registrable Securities'). The Common
Stock Registration Rights Agreement provides that NatWest and persons to whom
Registrable Securities are transferred (collectively, 'Holders') will have the
registration rights and other rights and obligations with respect to the
Registrable Securities described below.
Registration Rights. Holders of Registrable Securities will have the right
to include such Registrable Securities in any registration statement under the
Securities Act filed by the Company for the account of any of its holders of
Common Stock (other than a registration statement on Form S-8) (a 'Piggy-Back
113
<PAGE>
Registration'). In the case of a Piggy-Back Registration, the number of
Registrable Securities and other shares of Common Stock requested to be included
therein by the holders thereof is subject to reduction on a pro rata basis to
the extent that the Company or the selling securityholders are advised by the
managing underwriter therefor that the total number of shares proposed to be
included therein is such as to materially and adversely affect the success of
the offering.
The Common Stock Registration Rights Agreement will include customary
covenants on the part of the Company and will provide that the Company will
indemnify the Holders of Registrable Securities included in any registration
statement and any underwriter with respect thereto against certain liabilities.
Tag-Along Rights. In the event of any proposed transfer, sale or other
disposition (collectively, a 'Transfer') of Common Stock by any of the Existing
Stockholders in any transaction, or a series of related transactions involving
shares of Common Stock aggregating at least 15% of the shares of Common Stock
then owned by the Existing Stockholders to a person (such other person being
hereinafter referred to as the 'proposed purchaser'), other than pursuant to an
Exempt Transfer (as defined below), each of the Holders of Warrants or the
Warrant Shares (i.e., shares of Common Stock issuable upon the exercise of
Warrants) shall have the right to require the Existing Stockholders to cause the
proposed purchaser to purchase from each of them a number of Warrant Shares
(and/or Warrants exercisable for a number of Warrant Shares) owned by such
Holder equal to the total number of shares of Common Stock to be sold by the
Existing Stockholders to the proposed purchaser (collectively, the 'Transfer
Shares') multiplied by a fraction, the numerator of which is the number of
Warrant Shares (including the number of Warrant Shares issuable upon the
exercise of Warrants) owned by such Holder, and the denominator of which is the
total number of shares of Common Stock and Warrant Shares (including the number
of Warrant Shares issuable upon the exercise of Warrants) owned by the Existing
Stockholders and by all of the Holders of Warrant Shares and Warrants. Any
Warrants or Warrant Shares purchased from the Holders pursuant to such provision
shall be paid for at the same price per security and upon the same terms and
conditions of such proposed transfer by such Existing Stockholders; provided
that the price per Warrant to be paid by the proposed purchaser shall equal the
price proposed to be paid per share of Common Stock for which such Warrant is
exercisable less the exercise price of such Warrant. The Company shall notify,
or cause to be notified, each Holder in writing of each such proposed transfer
at least 15 days prior to the date thereof. Such notice shall set forth (i) the
name of the proposed purchaser and the number of shares of Common Stock proposed
to be transferred, (ii) the name and address of the proposed purchaser, (iii)
the proposed amount of consideration and terms and conditions of payment offered
by such proposed purchaser (if the proposed consideration is not cash, the
notice shall describe the terms of the proposed consideration) and (iv) that
either the proposed purchaser has been informed of the 'tag-along right' and has
agreed to purchase Warrants or Warrant Shares in accordance with the terms of
the Common Stock Registration Rights Agreement or that the selling Existing
Stockholder will make such purchase.
The tag-along right may be exercised by any Holder by delivery of a written
notice to the Company (the 'Tag-Along Notice'), within 5 days following their
receipt to the notice specified in the preceding paragraph. The Tag-Along Notice
shall state the amount of Warrants or Warrant Shares that such Holder or holder
proposes to include in such transfer to the proposed purchaser determined as
aforesaid. Failure to provide a Tag-Along Notice within 5-day notice period
shall be deemed to constitute an election by such holder not to exercise its
tag-along rights.
In the event that the proposed purchaser does not purchase Warrants or
Warrant Shares from the Holders on the same terms and conditions as purchased
from the Existing Stockholder, then the Existing Stockholder making such
Transfer shall purchase such Warrants or Warrant Shares if the transfer occurs.
Tag-along rights shall terminate upon the effectiveness of any registration
statement filed with the Commission with respect to shares of Common Stock in an
initial public offering or subsequent public offering if, after giving effect so
such offering, at least 50% of the Company's Common Stock on a fully-diluted
basis would be held by persons unaffiliated with the Company and without
restriction on transfer under the Securities Act.
114
<PAGE>
As used herein, the term 'Exempt Transfer' shall mean a transfer by a
Existing Stockholder to certain affiliates or family members of such Existing
Stockholder or to the Company or another Existing Stockholder.
As used herein 'Existing Stockholders' shall mean the holders of Common
Stock on the Issue Date or any of their permitted transferees.
Drag-Along Rights. In the event of any proposed Transfer of Common Stock
by any of the Existing Stockholders in any transaction, or a series of related
transactions involving shares of Common Stock aggregating at least 51% of the
shares of Common Stock then owned by the Existing Stockholders to a person (such
other person being hereinafter referred to as the 'proposed purchaser'), other
than pursuant to an Exempt Transfer (as defined above), the Existing
Stockholders shall have the right to require each Holder of Warrants and Warrant
Shares to Transfer to the proposed purchaser a number of Warrant Shares (and/or
Warrants exercisable for a number of Warrant Shares) owned by such Holder equal
to the total number of Warrant Shares (including the number of Warrant Shares
issuable upon the exercise of Warrants) owned by such Holder multiplied by a
fraction, the numerator of which is the number of shares of Common Stock to be
sold by the Existing Stockholders to the proposed purchaser and the denominator
of which is the total number of shares of Common Stock then owned by the
Existing Stockholders. Any Warrants or Warrant Shares purchased from the Holders
pursuant to such provision shall be paid for at the same price per security and
upon the same terms and conditions of such proposed transfer by such Existing
Stockholders; provided that the price per Warrant to be paid by the proposed
purchaser shall equal the price proposed to be paid per share of Common Stock
for which such Warrant is exercisable less the exercise price of such Warrant.
The Company shall notify, or cause to be notified, each Holder in writing of
each such proposed transfer at least 15 days prior to the date thereof. Such
notice shall set forth (i) the name of the proposed purchaser and the number of
shares of Common Stock proposed to be transferred, (ii) the name and address of
the proposed purchaser, (iii) the proposed amount of consideration and terms and
conditions of payment offered by such proposed purchaser (if the proposed
consideration is not cash, the notice shall describe the terms of the proposed
consideration) and (iv) that either the proposed purchaser has been informed of
the 'drag-along right' and has agreed to purchase Warrants or Warrant Shares in
accordance with the terms hereon.
In the event that the proposed purchaser does not purchase Warrants and
Registrable Securities from the Holders on the same terms and conditions as
purchased from the Existing Stockholder, then the Existing Stockholder making
such Transfer shall purchase such Warrants and Shares if the transfer occurs.
Drag-along rights shall terminate upon the effectiveness of any
registration statement filed with the Commission with respect to shares of
Common Stock in an initial public offering or subsequent public offering if,
after giving effect so such offering, at least 50% of the Company's Common Stock
on a fully-diluted basis would be held by persons unaffiliated with the Company
and without restriction on transfer under the Securities Act.
Registration Requirements
The Company is not obligated to commence an exchange offer pursuant to an
effective registration statement or (except as described above) cause the
Warrants or the Common Stock issuable upon their exercise to be registered under
the Securities Act.
PREFERRED STOCK
Upon the consummation of the Exchange Offer, the only outstanding preferred
stock will be shares of the New Preferred Stock and any untendered shares of Old
Preferred Stock. See 'Description of Senior PIK Preferred Stock'.
115
<PAGE>
SECTION 203 OF THE DELAWARE LAW
Section 203 of the Delaware General Corporation Law prohibits a
publicly-held Delaware corporation from engaging in a 'business combination'
with an 'interested stockholder' for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless:
(i) prior to the date of the business combination, the transaction is approved
by the board of directors of the corporation; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock; or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A 'business combination' includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder. An
'interested stockholder' is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
DIRECTORS' LIABILITY
The Company has included in its Charter and Bylaws provisions to: (i)
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty (provided that such provisions do not
eliminate liability for breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, violations under Section 174 of the Delaware General Corporation Law, or
for any transaction from which the director derived an improper personal
benefit); and (ii) indemnify its directors and officers to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, including
circumstances in which indemnification is otherwise discretionary. The Company
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers.
In addition, the Company has obtained liability insurance for each director
and officer for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers for the Company.
WARRANTS
Upon the consummation of the Offering, Warrants to purchase approximately
7.0% of the Common Stock will be issued to the purchasers of the Units. See
'Description of Warrants.' The Warrant Agreement governing the Warrants contains
antidilution provisions which entitle the Warrant holders to receive their pro
rata share of any stock splits or dividends payable on any Common Stock.
DESCRIPTION OF NEW PREFERRED STOCK
The following summary of all material provisions does not purport to be an
exhaustive description of the New Preferred Stock and is subject to the detailed
provisions of, and qualified in its entirety by reference to, the provisions of
the Certificate of Designation relating thereto (including the definitions
contained therein). Definitions relating to certain capitalized terms are set
forth under 'Description of Notes--Certain Definitions' and throughout this
description provided that the determination of Consolidated Net Income shall be
after the payment of dividends on the New Preferred Stock. Capitalized terms
that are used but not otherwise defined herein have the meanings assigned to
them in the Certificate of Designation for the New Preferred Stock (the
'Certificate of Designation'), and such definitions are incorporated herein by
reference.
GENERAL
The number of shares constituting the series of preferred stock which is
herein referred to as the New Preferred Stock is 6,000,000, each with a
liquidation preference of $25.00. Such number of shares of the New Preferred
Stock as may be necessary to be publicly offered in exchange for the Old
Preferred Stock as contemplated by the Preferred Stock Registration Rights
Agreement shall be initially issued with additional
116
<PAGE>
shares reserved for issuance as payment-in-kind dividends. See '--Dividends'
below. The New Preferred Stock, when issued, will be fully paid and
nonassessable, and the holders thereof will not have any subscription or
preemptive rights.
RANKING
The New Preferred Stock ranks, with respect to dividend distributions and
distributions upon the liquidation, winding-up or dissolution of the Company,
pari passu with the Old Preferred Stock and senior to all classes of common
stock of the Company, and to each other class of capital stock or series of
preferred stock established after the date of this Memorandum other than as
permitted in the following sentence (collectively, 'Junior Securities'). The
Company may not issue any class or series of capital stock ranking senior to or
on a parity with the Senior Preferred Stock with respect to dividend
distributions or distributions upon liquidation, winding-up or dissolution of
the Company without the approval of the holders of at least a majority of the
shares of Senior Preferred Stock then outstanding, voting or consenting, as the
case may be, together as one class; provided, however, that the Company can
issue additional shares of Senior Preferred Stock to satisfy dividend payments
on outstanding shares of Senior Preferred Stock; and provided further, however,
that the Company can issue shares of preferred stock ranking on a parity with
the Senior Preferred Stock if after giving effect thereto the Consolidated
Coverage Ratio is greater than 1.7 to 1.
DIVIDENDS
Holders of the Senior Preferred Stock will be entitled to receive, when, as
and if declared by the board of directors of the Company, out of funds legally
available therefor, dividends on the Senior Preferred Stock at a rate per annum
equal to 12% of the liquidation preference per share of Senior Preferred Stock,
payable quarterly; provided that so long as a Triggering Event (as defined
below) shall have occurred and be continuing, additional dividends will
accumulate on the Senior Preferred Stock at a rate per annum equal to no more
than 2% of the liquidation preference per share of the Senior Preferred Stock,
payable quarterly (any such increase is an 'Additional Dividend'). All dividends
will be cumulative whether or not earned or declared on a daily basis from the
Issue Date and will be payable quarterly in arrears on March 15, June 15,
September 15 and December 15 of each year, commencing on September 15, 1997, to
holders of record on the March 1, June 1, September 1 and December 1 immediately
preceding the relevant dividend payment date. Dividends may be paid, at the
Company's option, on any dividend payment date occurring on or prior to June 15,
2002 either in cash or by the issuance of additional shares of Senior Preferred
Stock (including fractional shares) having an aggregate liquidation preference
equal to the amount of such dividends. In the event, that on or prior to June
15, 2002 dividends are declared and paid through the issuance of additional
shares of Senior Preferred Stock, as provided in the previous sentence, such
dividends shall be deemed paid in full and will not accumulate. After June 15,
2002, dividends must be paid in cash. The Indenture restricts the Company's
ability to pay cash dividends on its Capital Stock and will prohibit such
payments in certain instances and other future agreements may provide similar
restrictions. See 'Description of Notes.'
Unpaid dividends accumulating after June 15, 2002 on the Senior Preferred
Stock for any past dividend period and dividends in connection with any optional
redemption may be declared and paid at any time, without reference to any
regular dividend payment date, to holders of record on such date, not more than
forty-five days prior to the payment thereof, as may be fixed by the board of
directors of the Company.
REDEMPTION
Optional Redemption. At any time and from time to time on or prior to June
15, 2000, the Company may, subject to certain requirements, redeem up to 35% of
the Senior Preferred Stock out of Net Cash Proceeds of one or more Equity
Offerings by the Company so long as there is a Public Market as at the time of
such redemption, at a redemption price equal to 112% of the liquidation
preference thereof, plus, without duplication, an amount in cash equal to all
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for the period from the immediately preceding dividend payment
date to the redemption date). After June 15, 2000 and prior to June 15, 2002,
the Senior Preferred Stock is not
117
<PAGE>
redeemable. On or after June 15, 2002, the Senior Preferred Stock will be
redeemable, at the Company's option, in whole at any time or in part from time
to time, at the following redemption prices (expressed as a percentage of
liquidation preference) if redeemed during the twelve-month period commencing on
June 15 of the applicable year set forth below plus, without duplication, an
amount in cash equal to all accumulated and unpaid dividends (including an
amount in cash equal to a prorated dividend for the period from the immediately
preceding dividend payment date to the redemption date):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------- ----------
<S> <C>
2002............................... 106.000%
2003............................... 104.000%
2004............................... 102.000%
2005 and thereafter................ 100.000%
</TABLE>
Mandatory Redemption. The Senior Preferred Stock will be subject to
mandatory redemption (subject to contractual and other restrictions with respect
thereto and to the legal availability of funds therefor) in whole on June 15,
2007 at a price equal to the liquidation preference thereof, plus, without
duplication, all accumulated and unpaid dividends to the date of redemption.
In the event of redemption of fewer than all of the outstanding shares of
Senior Preferred Stock, the Senior Preferred Stock will be redeemed on a pro
rata basis. The Senior Preferred Stock will be redeemable upon not less than 30
nor more than 60 days, prior written notice, mailed by first class mail to a
holder's last address as it shall appear on the register maintained by the
Transfer Agent of the Senior Preferred Stock. On and after any redemption date,
dividends will cease to accrue on the Senior Preferred Stock or Portions thereof
called for redemption unless the Company shall fail to redeem any such Senior
Preferred Stock.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of the Senior Preferred Stock will initially be entitled to
be paid, out of the assets of the Company available for distribution, $25.00 per
share, plus an amount in cash equal to accumulated and unpaid dividends thereon
to the date fixed for liquidation, dissolution or winding-up (including an
amount equal to a prorated dividend for the period from the immediately
preceding dividend payment date to the date fixed for liquidation, dissolution
or winding-up), before any distribution is made on any Junior Securities. If
upon any voluntary or involuntary liquidation, dissolution or winding-up of the
Company, the amounts payable with respect to the Senior Preferred Stock are not
paid in full, the holders of the Senior Preferred Stock will share equally and
ratably in any distribution of assets of the Company first in proportion to the
full liquidation preference to which each is entitled until such preferences are
paid in full, and then in proportion to their respective amounts of accumulated
but unpaid dividends.
VOTING RIGHTS
Holders of the Senior Preferred Stock have no voting rights with respect to
general corporate matters, except as provided by Delaware Law or as set forth in
the Certificate of Designation. The Certificate of Designation provides that if
(i) after June 15, 2002, any dividends on the New Preferred Stock required to be
paid in cash are in arrears and unpaid or (ii) the Company fails to redeem the
New Preferred Stock on or before June 15, 2007 or fails to discharge any
redemption obligation with respect to the New Preferred Stock or (iii) the
Company fails to make a Change of Control offer if such an offer is required by
the provisions set forth under '--Change of Control' below or fails to purchase
shares of New Preferred Stock from holders who elect to have such shares
purchased pursuant to the Change of Control Offer or (iv) a breach or violation
of any of the provisions described under the caption '--Certain Covenants'
occurs and the breach or violation continues for a period of 60 days or more
after the Company receives notice thereof specifying the default from the
holders of at least 25% of the shares of New Preferred Stock then outstanding or
(v) the Company fails to pay at the final stated maturity (giving effect to any
extensions thereof) the principal amount of any Indebtedness of the Company or
any Restricted Subsidiary of the
118
<PAGE>
Company, or the final stated maturity of any such Indebtedness is accelerated,
if the aggregate principal amount of such Indebtedness, together with the
aggregate principal amount of any other such Indebtedness in default for failure
to pay principal at the final stated maturity giving effect to any extensions
thereof) or which has been accelerated, aggregates $5,000,000 or more at any
time, in each case, after a 20-day period during which such default shall not
have been cured or such acceleration rescinded, then the number of directors
constituting the board of directors of the Company will be adjusted to permit
the holders of a majority of the then outstanding shares of Senior Preferred
Stock, voting separately and as a class, to elect two directors to the board of
directors of the Company. Such voting rights will continue until such time as,
in the case of a dividend default, all accumulated and unpaid dividends on the
New Preferred Stock are paid in full in cash and, in all other cases, any
failure, breach or default giving rise to such voting rights is remedied, cured
or waived by the holders of at least a majority of the shares of New Preferred
Stock then outstanding, at which time the term of any directors elected pursuant
to the provisions of this paragraph shall terminate. Each such event described
in clauses (i) through (v) above is referred to herein as a 'Triggering Event.'
In addition, the Certificate of Designation provides that the Company will
not authorize any additional shares of Senior Preferred Stock or any class or
series of capital stock ranking prior to the Senior Preferred Stock with respect
to dividend distributions or distributions upon liquidation, winding-up or
dissolution without the affirmative vote or consent of holders of at least a
majority of the shares of Senior Preferred Stock of the Company then outstanding
which are entitled to vote thereon, voting or consenting, as the case may be, as
one class or on parity with the Senior Preferred Stock, unless after giving
effect to the issuance of any such preferred stock the Consolidated Coverage
Ratio is greater than 1.7 to 1. The Certificate of Designation also provides
that the Company may not amend the Certificate of Designation so as to affect
adversely the specified rights, preferences, privileges or voting rights of the
holders of shares of Senior Preferred Stock, without the affirmative vote or
consent of the holders of at least a majority of the then outstanding shares of
Senior Preferred Stock which are entitled to vote thereon, voting or consenting,
as the case may be, as one class.
Under Delaware law, holders of New Preferred Stock are entitled to vote as
a class upon a proposed amendment to the certificate of incorporation of the
Company, whether or not entitled to vote thereon by the certificate of
incorporation, if the amendment would increase or decrease the par value of the
shares of such class, or alter or change the powers, preferences, or special
rights of the shares of such class so as to affect them adversely.
CHANGE OF CONTROL OFFER
Within 20 days of the occurrence of a Change of Control, the Company shall
make an offer to purchase (the 'Change of Control Offer') the outstanding New
Preferred Stock at a purchase price equal to 101% of the liquidation preference
thereof plus, without duplication, an amount in cash equal to all accumulated
and unpaid dividends thereon (including (x) any Additional Dividends and (y) an
amount in cash equal to a prorated dividend for the period from the immediately
preceding dividend payment date to the Change of Control Payment Date (such
applicable purchase price being hereinafter referred to as the 'Change of
Control Purchase Price')) in accordance with the procedures set forth in this
covenant.
Within 20 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control to be sent at least once to
the Dow Jones News Service or similar business news service in the United States
and (ii) send by first-class mail, postage prepaid, to each holder of New
Preferred Stock, at the address appearing on the stock books of the Company, a
notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all New Preferred Stock tendered will be accepted for
payment, and otherwise subject to the terms and conditions set forth
herein;
119
<PAGE>
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 20 Business Days from the date such
notice is mailed (the 'Change of Control Payment Date'));
(3) that any New Preferred Stock not tendered will continue to
accumulate dividends;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any New Preferred Stock accepted for payment
pursuant to the Change of Control Offer shall cease to accumulate dividends
after the Change of Control Payment Date;
(5) that holders accepting the offer to have their New Preferred Stock
purchased pursuant to a Change of Control Offer will be required to
surrender their certificates representing New Preferred Stock to the
Company at the address specified in the notice prior to the close of
business on the Business Day preceding the Change of Control Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Company receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the number of shares of New Preferred Stock delivered for purchase,
and a statement that such holder is withdrawing his election to have such
New Preferred Stock purchased;
(7) that holders whose New Preferred Stock is being purchased only in
part will be issued new certificates representing the number of shares of
New Preferred Stock equal to the unpurchased portion of the certificates
surrendered; and
(8) any other procedures that a holder must follow to accept a Change
of Control Offer or effect withdrawal of such acceptance.
On the Change of Control Payment Date, the Company shall accept for payment
the New Preferred Stock tendered pursuant to the Change of Control Offer and
promptly mail to each holder of New Preferred Stock so accepted payment in an
amount equal to the purchase price for such New Preferred Stock certificate
equal to any unpurchased shares represented by a certificate surrendered.
In the event that a Change of Control occurs and the holders of New
Preferred Stock exercise their right to require the Company to purchase New
Preferred Stock, if such purchase constitutes a 'tender offer' for purposes of
Rule 14e-1 under the Exchange Act at that time, the Company will comply with the
requirements of Rule 14e-1 as then in effect with respect to such repurchase
and, in the event of a conflict between the requirements of the Exchange Act and
of the Certificate of Designations, the provisions of the Exchange Act shall
govern.
Prior to the mailing of the notice referred to above, but in any event
within 20 days following the date on which a Change of Control occurs, the
Company covenants that, if the purchase of the New Preferred Stock would violate
or constitute a default or be prohibited under the Indenture, the New Secured
Credit Facilities or any other instrument governing Indebtedness outstanding at
the time, then the Company will, to the extent needed to permit such purchase of
New Preferred Stock, either (i) repay in full all Indebtedness under the
Indenture, the New Secured Credit Facilities or any such other instrument, as
the case may be, or (ii) obtain the requisite consents under the Indenture, the
New Secured Credit Facilities or any such other instrument, as the case may be,
to permit the redemption of the New Preferred Stock as provided above. The
Company will first comply with the covenant in the preceding sentence before it
will be required to redeem New Preferred Stock pursuant to the provisions
described above.
120
<PAGE>
CERTAIN COVENANTS
The Certificate of Designation contains certain covenants including, among
others, the following:
Limitation on Indebtedness.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that the Company may
Incur Indebtedness if on the date thereof the Consolidated Coverage Ratio would
be greater than 1.7:1.0.
(b) Notwithstanding the foregoing paragraph (a), the Company may Incur the
following Indebtedness:
(i) Indebtedness Incurred pursuant to the New Senior Secured
Facilities (including, without limitation, any renewal, extension,
refunding, restructuring, replacement or refinancing thereof referred to in
the definition thereof), provided, however, that the aggregate principal
amount of all Indebtedness Incurred pursuant to this clause (i) does not
exceed $150 million at any time outstanding less the aggregate principal
amount thereof repaid with the net proceeds of Asset Dispositions (to the
extent, in the case of a repayment of revolving credit indebtedness, the
commitment to advance loans has been terminated);
(ii) Indebtedness represented by Capitalized Lease Obligations,
mortgage financings or purchase money obligations, in each case Incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property used in a Permitted Business or
Incurred to refinance any such purchase price or cost of construction or
improvement, in each case Incurred no later than 365 days after the date of
such acquisition or the date of completion of such construction or
improvement; provided, however, that the principal amount of any
Indebtedness Incurred pursuant to this clause (ii) shall not exceed $5
million at any time outstanding;
(iii) Indebtedness of the Company owing to and held by any
Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to
and held by the Company or any Wholly-Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any other
event which results in any such Wholly-Owned Subsidiary ceasing to be a
Wholly-Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or any Wholly-Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(iv) Indebtedness represented by (v) the Notes, (w) the New Senior
Secured Facilities, (x) the Subsidiary Guarantees, (y) Existing
Indebtedness and (z) any Refinancing Indebtedness Incurred in respect of
any Indebtedness described in this clause (iv) or Incurred pursuant to
paragraph (a) above;
(v) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred in anticipation of, or to
provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Subsidiary or was otherwise
acquired by the Company); provided, however, that at the time such
Restricted Subsidiary is acquired by the Company, the Company would have
been able to incur $1.00 of additional Indebtedness pursuant to paragraph
(a) above after giving effect to the Incurrence of such Indebtedness
pursuant to this clause (v) and (B) Refinancing Indebtedness Incurred by a
Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (v);
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by the Company or any of
its Restricted Subsidiaries to their customers in the ordinary course of
their business, (B) in respect of performance bonds or similar obligations
of the Company or any of its Restricted Subsidiaries for or in connection
with pledges, deposits or payments made or given in the ordinary course of
business in connection with or to secure statutory, regulatory or similar
obligations, including obligations under health, safety or environmental
obligations and (C) arising
121
<PAGE>
from Guarantees to suppliers, lessors, licensees, contractors, franchises
or customers of obligations (other than Indebtedness) incurred in the
ordinary course of business;
(vii) Indebtedness under Currency Agreements and Interest Rate
Agreements; provided, however, that in the case of Currency Agreements and
Interest Rate Agreements, such Currency Agreements and Interest Rate
Agreements are entered into for bona fide hedging purposes of the Company
or its Restricted Subsidiaries (as determined in good faith by the Board of
Directors of the Company) and correspond in terms of notional amount,
duration, currencies and interest rates as applicable, to Indebtedness of
the Company or its Restricted Subsidiaries Incurred without violation of
the Indenture or to business transactions of the Company or its Restricted
Subsidiaries on customary terms entered into in the ordinary course of
business;
(viii) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credit, surety bonds or performance bonds
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness or other
obligations incurred by any Person acquiring all or any portion of such
business assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition) in a principal amount not to exceed the gross
proceeds actually received by the Company or any of its Restricted
Subsidiaries in connection with such disposition; provided, however, that
the principal amount of any Indebtedness incurred pursuant to this clause
(viii) when taken together with all Indebtedness incurred pursuant to this
clause (viii) and then outstanding, shall not exceed $1 million;
(ix) Indebtedness consisting of (A) Guarantees by the Company without
violation of the Indenture and (B) Guarantees by a Restricted Subsidiary of
senior indebtedness incurred by the Company without violation of the
Indenture (so long as such Restricted Subsidiary could have incurred such
Indebtedness directly without violation of the Indenture);
(x) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business in an amount not to
exceed $500,000 at any time, provided that such Indebtedness is
extinguished within two business days of its incurrence; and
(xi) Indebtedness (other than Indebtedness described in clauses (i) -
(x)) in a principal amount which, when taken together with the principal
amount of all other Indebtedness Incurred pursuant to this clause (xi) and
then outstanding, will not exceed $10 million (it being understood that any
Indebtedness Incurred under this clause (xi) shall cease to be deemed
Incurred or outstanding for purposes of this clause (xi) (but shall be
deemed to be Incurred for purposes of paragraph (a)) from and after the
first date on which the Company or its Restricted Subsidiaries could have
Incurred such Indebtedness under the foregoing paragraph (a) without
reliance upon this clause (xi).
(c) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
Limitation on Restricted Payments. The Company shall not, and shall not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company or any of its Restricted Subsidiaries)
except (A) dividends or distributions payable in its Capital Stock (other than
Disqualified Capital Stock) or in options, warrants or other rights to purchase
such Capital Stock, (B) dividends or distributions payable to the Company or a
Wholly-Owned Subsidiary of the Company and (C) dividends (in cash or additional
shares of New Preferred Stock), (ii) purchase, redeem, retire or otherwise
acquire for value any Capital Stock of the Company (other than the New Preferred
Stock) or any Restricted Subsidiary of the Company held by Persons other than
the Company or another Restricted Subsidiary of the Company (in either case,
other than in exchange for its Capital Stock (other than Disqualified Stock)),
(iii) purchase, repurchase, redeem, defease or otherwise
122
<PAGE>
acquire or retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Obligations or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement or Investment as described in preceding clauses (i) through (iv)
being referred to as a 'Restricted Payment'); if at the time the Company or such
Restricted Subsidiary makes such Restricted Payment:
(1) The Company shall have paid a dividend, on the most recent
dividend payment date, by the issuance of additional New Preferred Stock;
or
(2) a Triggering Event shall have occurred and be continuing (or would
result therefrom); or
(3) the Company is not able to incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) under 'Limitation on Indebtedness';
or
(4) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date would
exceed the sum of (A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the first day of the fiscal
quarter beginning on or after the Issue Date to the end of the most recent
fiscal quarter ending prior to the date of such Restricted Payment as to
which financial results are available (but in no event ending more than 135
days prior to the date of such Restricted Payment) (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit);
(B) the aggregate net proceeds received by the Company from the issue or
sale of its Capital Stock (other than Disqualified Stock) or other capital
contributions subsequent to the Issue Date (other than net proceeds
received from an issuance or sale of such Capital Stock to a Subsidiary of
the Company or an employee stock ownership plan or similar trust);
provided, however, that the value of any non-cash net proceeds shall be as
determined by the Board of Directors in good faith, except that in the
event the value of any non-cash net proceeds shall be $1 million or more,
the value shall be as determined in writing by an independent investment
banking firm of nationally recognized standing; (C) the amount by which
Indebtedness of the Company is reduced on the Company's balance sheet upon
the conversion or exchange (other than by a Restricted Subsidiary of the
Company) subsequent to the Issue Date of any Indebtedness of the Company
Incurred subsequent to the Issue Date which is convertible or exchangeable
for Capital Stock of the Company (less the amount of any cash, or other
property, distributed by the Company upon such conversion or exchange); (D)
the amount equal to the net reduction in Investments (other than Permitted
Investments) made after the Issue Date by the Company or any of its
Restricted Subsidiaries in any Person resulting from (i) repurchases or
redemptions of such Investments by such Person, proceeds realized upon the
sale of such Investment to an unaffiliated purchaser, repayments of loans
or advances or other transfers of assets by such Person to the Company or
any Restricted Subsidiary of the Company or (ii) the redesignation of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case
as provided in the definition of 'Investment') not to exceed, in the case
of any Unrestricted Subsidiary, the amount of Investments previously
included in the calculation of the amount of Restricted Payments; provided,
however, that no amount shall be included under this Clause (D) to the
extent it is already included in Consolidated Net Income; and (E) $10.0
million.
The provisions of the foregoing paragraph shall not prohibit:
(i) any purchase or redemption of Capital Stock or Subordinated
Obligations of the Company made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Capital Stock of the Company (other
than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary or an employee stock ownership plan or similar trust); provided,
however, that (A) such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash
Proceeds from such sale shall be excluded from clause (3) (B) of the
foregoing paragraph;
(ii) any purchase or redemption of Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of the Company in compliance
with the 'Limitation on Indebtedness' covenant; provided, however, that
123
<PAGE>
such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments;
(iii) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted under 'Repurchase at the Option of
Holders--Sales of Assets and Subsidiary Stock' above;
(iv) dividends paid within 60 days after the date of declaration if at
such date of declaration such dividend would have complied with this
provision; provided, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments; and
(v) payments to Bollore Technologies, S.A. which payments shall not
exceed $500,000 in any six month period and shall not exceed $2.5 million
in the aggregate.
provided, however, that no Triggering Event shall have occurred or be continuing
at the time of such payment or as a result thereof.
For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that any
Restricted Payment made other than in cash shall be valued at the fair market
value (determined, subject to the additional requirements of the immediately
succeeding proviso, in good faith by the Board of Directors) of the assets so
utilized in making such Restricted Payment, provided, further, that (i) in the
case of any Restricted Payment made with Capital Stock or Indebtedness, such
Restricted Payment shall be deemed to be made in an amount equal to the greater
of the fair market value thereof and the liquidation preference (if any) or
principal amount of the capital stock or indebtedness, as the case may be, so
utilized, and (ii) in the case of any Restricted Payment in an aggregate amount
in excess of $1 million, a written opinion as to the fairness of the valuation
thereof (as determined by the Company) for purposes of determining compliance
with the 'Limitation on Restricted Payments' covenant in the Indenture shall be
issued by an independent investment banking firm of national standing.
Limitation on Distributions from Restricted Subsidiaries. The Company
shall not, and shall not permit any of its Restricted Subsidiaries to, create or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any such Restricted Subsidiary to:
(i) pay dividends or make any other distributions on its Capital Stock
or pay any Indebtedness or other obligation owed to the Company;
(ii) make any loans or advances to the Company; or
(iii) transfer any of its property or assets to the Company;
except (in each case) for such encumbrances or restrictions existing under or by
reason of:
(a) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date, including the New Senior Secured
Facilities;
(b) any encumbrance or restriction with respect to such a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness issued by
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company and outstanding on such date (other
than indebtedness issued as anticipation of, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary of the Company or was
acquired by the Company);
(c) any encumbrance or restriction with respect to such a Restricted
Subsidiary pursuant to an agreement evidencing Indebtedness Incurred
without violation of the Indenture or effecting a refinancing of
Indebtedness issued pursuant to an agreement referred to in clauses (a) or
(b) or this clause (c) or contained in any amendment to an agreement
referred to in clauses (a) or (b) or this clause (c); provided, however,
that the encumbrances and restrictions with respect to such Restricted
124
<PAGE>
Subsidiary contained in any of such agreement, refinancing agreement or
amendment, taken as a whole, are no less favorable to holders of the Notes
in any material respect, as determined in good faith by the Board of
Directors of the Company, than encumbrances and restrictions with respect
to such Restricted Subsidiary contained in agreements in effect at, or
entered into on, the Issue Date;
(d) in the case of clause (iii), any encumbrance or restriction (A)
that restricts in a customary manner the subletting, assignment or transfer
of any property or asset that is a lease, license, conveyance or contract
or similar property or asset, (B) by virtue of any transfer of, agreement
to transfer, option or right with respect to, or Lien on, any property or
assets of the Company or any Restricted Subsidiary not otherwise prohibited
by the Indenture, (C) that is included in a licensing agreement to the
extent such restrictions limit the transfer of the property subject to such
licensing agreement or (D) arising or agreed to in the ordinary course of
business and that does not, individually or in the aggregate, detract from
the value of property or assets of the Company or any of its Subsidiaries
in any manner material to the Company or any such Restricted Subsidiary;
(e) in the case of clause (iii) above, restrictions contained in
security agreements, mortgages or similar documents securing Indebtedness
of a Restricted Subsidiary to the extent such restrictions restrict the
transfer of the property subject to such security agreements;
(f) in the case of clause (iii) above, any instrument governing or
evidencing Indebtedness of a Person acquired by the Company or any
Restricted Subsidiary of the Company at the time of such acquisition, which
encumbrance or restriction is not applicable to any Person, or the
properties of assets of any Person, other than the Person so acquired;
provided, however,that such Indebtedness is not incurred in connection with
or in contemplation of, such acquisition.
(g) any restriction with respect to such a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition
of all or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition; and
(h) encumbrances or restrictions arising or existing by reason of
applicable law.
Limitation on Affiliate Transactions. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter into
or conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with or for the benefit of any Affiliate of the Company, other than a
Wholly-Owned Subsidiary (an 'Affiliate Transaction') unless: (i) the terms of
such Affiliate Transaction are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could be obtained at
the time of such transaction in arm's length dealings with a Person who is not
such an Affiliate; (ii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $1 million, the terms of such transaction have
been approved by a majority of the members of the Board of Directors of the
Company and by a majority of the disinterested members of such Board, if any
(and such majority or majorities, as the case may be, determines that such
Affiliate Transaction satisfies the criteria in (i) above); and (iii) in the
event such Affiliate Transaction involves an aggregate amount in excess of $2
million, the Company has received a written opinion from an independent
investment banking firm of nationally recognized standing that such Affiliate
Transaction is fair to the Company or such Restricted Subsidiary, as the case
may be, from a financial point of view.
The foregoing paragraph shall not apply to (i) any Restricted Payment
permitted to be made pursuant to the covenant described under 'Limitation on
Restricted Payments,' (ii) any issuance of securities, or other payments, awards
or grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, or any stock options and stock ownership plans for the
benefit of employees, officers and directors, consultants and advisors approved
by the Board of Directors of the Company, (iii) loans or advances to employees
in the ordinary course of business of the Company or any of its Restricted
Subsidiaries in aggregate amount outstanding not to exceed $1,500,000 at any
time, (iv) any transaction between Wholly-Owned Subsidiaries, (v)
indemnification agreements with, and the payment of fees and indemnities to,
directors, officers and employees of the Company and its Restricted
Subsidiaries, in each
125
<PAGE>
case in the ordinary course of business, (vi) transactions pursuant to
agreements in existence on the Issue Date which are (x) described in the
Offering Memorandum or (y) otherwise, in the aggregate, immaterial to the
Company and its Restricted Subsidiaries taken as a whole, (vii) any employment,
non-competition or confidentiality agreements entered into by the Company or any
of its Restricted Subsidiaries with its employees in the ordinary course of
business and (viii) the issuance of Capital Stock of the Company (other than
Disqualified Stock).
Limitation on Preferred Stock of Restricted Subsidiaries. Company will not
permit any Restricted Subsidiary of the Company to issue any Preferred Stock
(except Preferred Stock to the Company or a Restricted Subsidiary) or permit any
person (other than Company or a Restricted Subsidiary) to hold any such
Preferred Stock unless the Company or Restricted Subsidiary would be entitled to
incur or assume Indebtedness under the covenant described under 'Limitation on
Additional Indebtedness' in the aggregate principal amount equal to the
aggregate liquidation value of the Preferred Stock to be issued.
SEC Reports. The Company will provide to the holders of the New Preferred
Stock, within 15 days after it files them with the Commission, copies of the
annual reports and of the information, documents and other reports (or copies of
such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) which the Company files with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. In the event that the Company is not
required to file such reports with the Commission pursuant to the Exchange Act,
the Company will nevertheless deliver such Exchange Act information to the
holders of the New Preferred Stock within 15 days after it would have been
required to file it with the Commission.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all of its
assets to, any Person, unless: (i) the resulting, surviving or transferee Person
(the 'Successor Company') shall be a corporation, partnership, trust or limited
liability company organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) shall expressly assume, all the obligations of the Company
under the New Preferred Stock; (ii) immediately after giving effect to such
transaction (and treating any Indebtedness that becomes an obligation of the
Successor Company or any Subsidiary of the Successor Company as a result of such
transaction as having been incurred by the Successor Company or such Restricted
Subsidiary at the time of such transaction), no Default or Event of Default
shall have occurred and be continuing; (iii) immediately after giving effect to
such transaction, the Successor Company would be able to incur at least an
additional $1.00 of Indebtedness pursuant to paragraph (a) of 'Description of
Notes--Limitation on Indebtedness'; and (iv) the Consolidated Net Worth of the
resulting, surviving, or transferee corporation is not less than that of the
Company immediately prior to the transaction.
Notwithstanding the foregoing clauses (ii) and (iii), any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Unregistered Securities, where such Exchange Securities were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that for a period of 180 days after the Expiration Date,
it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
December 18, 1997, all dealers effecting transactions in the Exchange Securities
may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange
Securities by broker-dealers. Exchange Securities received by broker-dealers for
their own account pursuant to the Exchange Offer may
126
<PAGE>
be sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Securities, or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commission or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Securities. Any broker-dealer that resells
Exchange Securities that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Securities may be deemed to be an 'underwriter' within the meaning
of the Securities Act and any profit on any such resale of Exchange Securities
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensations under the Securities Act. The Letters of
Transmittal state that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
'underwriter' within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
pursuant to a Letter of Transmittal.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
U.S. HOLDERS
The following discussion summarizes certain material United States federal
income tax considerations generally applicable to the purchase, ownership and
disposition of New Notes and New Preferred Stock to a holder that is a citizen
or resident of the United States, a corporation, partnership or other entity
created or organized under the laws of the United States or any state thereof or
the District of Columbia or an estate or trust the income of which is subject to
United States federal income taxation regardless of source (a 'U.S. Holder').
This summary is based on the United States federal income tax laws, regulations,
rulings and decisions now in effect, all of which are subject to change,
possibly on a retroactive basis. This summary does not address the tax
consequences applicable to investors that may be subject to special tax rules,
such as banks, thrifts, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies, tax-exempt
investors or persons that hold New Notes or New Preferred Stock as a position in
a 'straddle,' as part of a 'synthetic security' or 'hedge,' as part of a
'conversion transaction' or other integrated investment. This summary also does
not address the tax consequences to persons that have a functional currency
other than the U.S. dollar or the tax consequences to shareholders, partners or
beneficiaries of a U.S. Holder of New Notes or New Preferred Stock. Further, it
does not include any description of any alternative minimum tax consequences,
estate tax consequences or the tax laws of any state or local government or of
any foreign government that may be applicable to the New Notes or New Preferred
Stock. The discussion assumes that the New Notes and New Preferred Stock will be
held as capital assets within the meaning of section 1221 of the Internal
Revenue Code of 1986, as amended (the 'Code'). Certain proposed tax legislation,
if enacted in substantially the same form as proposed, may affect some of the
federal income tax consequences discussed herein. See '--Proposed Legislation.'
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
127
<PAGE>
NEW NOTES
EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be a taxable exchange for federal income tax purposes. As a result,
there should be no federal income tax consequences to U.S. Holders exchanging
Old Notes for New Notes pursuant to the Exchange Offer. A U.S. Holder should
have the same adjusted basis and holding period in the New Note as it had in the
Old Note immediately before the Exchange Offer.
STATED INTEREST
Interest on a New Note will be taxable to a U.S. Holder as ordinary
interest income at the time it accrues or is received in accordance with such
holder's method of accounting for tax purposes. Further, the Company is
obligated to pay additional interest to the holders under certain circumstances
as described above under 'The Exchange Offer.' Such additional interest should
be taxable to U.S. Holders at the time it accrues or is received in accordance
with such holder's method of accounting.
MARKET DISCOUNT
If a New Note is acquired at a 'market discount', some or all of any gain
realized upon a sale or other disposition or payment at maturity, or some or all
of a partial principal payment, of such New Note may be treated as ordinary
income, as described below. For this purpose, 'market discount' is the excess
(if any) of the stated redemption price at maturity over the purchase price,
subject to a statutory de minimis exception. Unless a U.S. Holder has elected to
include the market discount in income as it accrues (as described below), any
gain realized on any subsequent disposition of such New Note (other than in
connection with certain nonrecognition transactions), on payment at maturity, or
on any partial principal payment with respect to such New Note, will be treated
as ordinary income to the extent of the market discount that accrued during the
period such New Note was held.
The amount of market discount treated as having accrued will be determined
either (i) on a ratable basis by multiplying the market discount times a
fraction, the numerator of which is the number of days the New Note was held by
the U.S. Holder and the denominator of which is the total number of days after
the date such U.S. Holder acquired the New Note up to and including the date of
its maturity or (ii) if the U.S. Holder so elects, on a constant interest rate
method.
A U.S. Holder of a New Note acquired at a market discount may elect to
include market discount in income currently, through the use of either the
ratable inclusion method or the elective constant interest method. Once made,
the election to include market discount in income currently applies to all Notes
and other obligations held by the U.S. Holder that are purchased at a market
discount during the taxable year for which the election is made and all
subsequent taxable years of the U.S. Holder, unless the Internal Revenue Service
(the 'Service') consents to a revocation of the election. If an election is made
to include market discount in income currently, the basis of the New Note in the
hands of the U.S. Holder will be increased by the market discount thereon as it
is included in income.
Unless a U.S. Holder who acquires a New Note at a market discount elects to
include market discount in income currently (as described above), such U.S.
Holder may be required to defer deductions for any interest paid or accrued on
indebtedness allocable to such New Notes in any amount not exceeding the
deferred income until such income is realized.
128
<PAGE>
BOND PREMIUM
If a U.S. Holder purchases a New Note and immediately after the purchase
the adjusted basis of the New Note to such holder exceeds the sum of all amounts
of principal payable on the instrument after the purchase date, the New Note
will have 'bond premium.' A U.S. Holder may elect to amortize such bond premium
over the remaining term of such Note (or, in certain circumstances, until an
earlier call date).
If bond premium is amortized, the amount of interest that must be included
in the U.S. Holder's income for each period ending on an interest payment date
or at the stated maturity, as the case may be, will be reduced by the portion of
premium allocable to such period based on the New Note's yield to maturity. If
such an election to amortize bond premium is not made, a U.S. Holder must
include the full amount of each interest payment in income in accordance with
its regular method of accounting and will receive a tax benefit from the premium
only in computing such holder's gain or loss upon the sale or other disposition
or payment of the principal of the New Note.
An election to amortize premium will apply to amortizable bond premium on
all Notes and other bonds, the interest on which is includible in the U.S.
Holder's gross income, held at the beginning of the U.S. Holder's first taxable
year to which the election applies or are thereafter acquired, and may be
revoked only with the consent of the Service.
SALE, EXCHANGE OR REDEMPTION OF THE EXCHANGE NOTES
Upon the disposition of a New Note by sale, exchange or redemption, a U.S.
Holder will generally recognize gain or loss equal to the difference between (i)
the amount realized on the disposition (other than amounts attributable to
accrued interest) and (ii) the U.S. Holder's tax basis in the New Note. A U.S.
Holder's tax basis in an New Note generally will equal its cost (net of accrued
interest) to the U.S. Holder, increased by amounts includible in income as
market discount (if the holder elects to include market discount in income on a
current basis) and reduced by any amortized bond premium and any payments (other
than interest) made on such New Note.
Such gain or loss (except to the extent that the market discount rules
otherwise provide) will generally constitute capital gain or loss and will be
long-term capital gain or loss if the U.S. Holder shall have held such New Note
for longer than one year at the time of a sale or exchange.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, a U.S. Holder of New Note may be subject, under certain
circumstances, to information reporting and/or backup withholding at a 31% rate
with respect to cash payments in respect of interest or the gross proceeds from
dispositions thereof. This withholding applies only if the holder (i) fails to
furnish its social security or other taxpayer identification number ('TIN')
within a reasonable time after a request therefor, (ii) furnishes an incorrect
TIN, (iii) fails to report interest properly, or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that it is not subject
to backup withholding. Any amount withheld from a payment to a U.S. Holder under
the backup withholding rules is allowable as a credit against (and may entitle
such holder to a refund of) such holder's U.S. federal income tax liability,
provided that the required information is furnished to the Service. Certain
persons are exempt from backup withholding, including corporations and financial
institutions. Holders of New Notes should consult their tax advisors as to their
qualification for exemption from withholding and the procedure for obtaining
such exemption.
129
<PAGE>
NEW PREFERRED STOCK
EXCHANGE OFFER
The exchange of Old Preferred Stock for New Preferred Stock pursuant to the
Exchange Offer should not be a taxable exchange for federal income tax purposes.
As a result, there should be no federal income tax consequences to U.S. Holders
exchanging Old Preferred Stock for New Preferred Stock pursuant to the Exchange
Offer. A U.S. Holder should have the same adjusted basis and holding period in
the New Preferred Stock as it had in the Old Preferred Stock immediately before
the Exchange Offer.
DISTRIBUTIONS ON NEW PREFERRED STOCK
Distributions on the New Preferred Stock, whether paid in cash, in
additional shares of New Preferred Stock or as constructive distributions (as
discussed below under 'Redemption Premium'), will be taxable as ordinary income
to the extent that the amount of cash or the fair market value of any New
Preferred Stock distributed does not exceed the Company's current or accumulated
earnings and profits (as determined for federal income tax purposes). To the
extent that the amount of distributions paid on the New Preferred Stock exceeds
such current or accumulated earnings and profits, such distributions will be
treated first as a return of capital, thus reducing the U.S. Holder's adjusted
tax basis in the New Preferred Stock. The amount of any such excess distribution
that is greater than the U.S. Holder's adjusted tax basis in the New Preferred
Stock will be taxed as capital gain, and will be long-term capital gain if the
U.S. Holder's holding period for the New Preferred Stock or Common Stock exceeds
one year. There can be no assurance that the Company will have sufficient
earnings and profits (as determined for federal income tax purposes) to cause
distributions on the New Preferred Stock to be treated as dividends for federal
income tax purposes. For purposes of the remainder of this discussion, the term
'dividend' refers to a distribution taxed as ordinary income as described above,
unless the context indicates otherwise.
A U.S. Holder's initial tax basis in any additional shares of New Preferred
Stock distributed by the Company will be equal to the fair market value of such
additional shares on their date of distribution. A U.S. Holder's holding period
for such additional shares will commence with their distribution and will not
include his holding period for the shares of New Preferred Stock with respect to
which the additional shares were distributed.
Dividends received by a corporate U.S. Holder will be eligible for the 70%
dividends-received deduction under section 243 of the Code, subject to the
limitations contained in sections 246 and 246A of the Code. Under section 246(c)
of the Code, the 70% dividends-received deduction will not be available with
respect to New Preferred Stock which is held for 45 days or less (90 days in the
case of a dividend attributable to a period or periods aggregating more than 366
days), including the day of disposition, but excluding the day of acquisition or
any day which is more than 45 days (or 90 days) after the date on which the New
Preferred Stock becomes ex-dividend. The length of time that a shareholder is
deemed to have held stock for these purposes is reduced for periods during which
the shareholder's risk of loss with respect to the stock is diminished by reason
of the existence of certain options, contracts to sell, short sales or other
similar transactions. Section 246(c) of the Code also denies the
dividends-received deduction to the extent that a corporate taxpayer is under an
obligation, with respect to substantially similar or related property, to make
payments corresponding to the dividend received. Under section 246(b) of the
Code, the aggregate dividends-received deductions allowed may not exceed 70% of
the taxable income (with certain adjustments) of the corporate shareholder.
Moreover, under section 246A of the Code, to the extent that a corporate
shareholder incurs indebtedness 'directly attributable' to an investment in the
New Preferred Stock, the dividends-received deduction is proportionately
reduced. Legislation has been proposed which, if enacted, would affect the
availability of the dividends-received deduction for dividends on the New
Preferred Stock. See '--Proposed Legislation.'
Section 1059 of the Code requires a corporate shareholder to reduce its tax
basis (but not below zero) in the New Preferred Stock by the 'non-taxed portion'
of any 'extraordinary dividend' if the U.S. Holder
130
<PAGE>
has not held its stock for more than two years as of the date the amount or
payment of such dividends is announced, declared or agreed to. If any part of
the non-taxed portion of an extraordinary dividend has not been applied to
reduce basis as a result of the limitation on reducing basis below zero, the
amount thereof will be treated as gain from the sale or exchange of stock when
such stock is disposed of or sold. Generally, the non-taxed portion of an
extraordinary dividend is the amount for which a deduction is allowed under
section 243 of the Code (relating to the dividends-received deduction). An
'extraordinary dividend' on the New Preferred Stock would include a dividend
that (i) equals or exceeds 5% of the U.S. Holder's adjusted tax basis in the New
Preferred Stock, treating all dividends having ex-dividend dates within an
85-day period as one dividend or (ii) exceeds 20% of the U.S. Holder's adjusted
tax basis in the New Preferred Stock, treating all dividends having ex-dividend
dates within a 365-day period as one dividend. In determining whether a dividend
paid is an extraordinary dividend, a U.S. Holder may elect to use the fair
market value of the stock rather than its basis for purposes of applying the 5%
(or 20%) threshold if the U.S. Holder is able to establish, to the satisfaction
of the Secretary of the Treasury, such fair market value as of the day before
the ex-dividend date. An extraordinary dividend also would include any amount
treated as a dividend in the case of a redemption of the New Preferred Stock
that is non-pro rata as to all shareholders, without regard to the period the
U.S. Holder held the stock. Legislation has been proposed that would require a
corporate U.S. Holder to immediately recognize gain under section 1059 of the
Code, instead of deferring such gain until the ultimate sale or exchange of such
stock, to the extent that, but for the foregoing rule, such U.S. Holder's tax
basis would have been reduced below zero. It is not certain whether the proposed
legislation will be enacted or, if enacted, will be enacted as originally
proposed.
Special rules apply with respect to 'qualified preferred dividends.' A
qualified preferred dividend is any fixed dividend payable with respect to
preferred stock which (i) provides for fixed preferred dividends payable no less
often than annually and (ii) is not in arrears as to dividends when acquired,
provided the actual rate of return on such stock, as determined under section
1059(e)(3) of the Code, does not exceed 15%. Where a qualified preferred
dividend exceeds the 5% (or 20%) threshold for extraordinary dividend status
described above, (i) the extraordinary dividend rules will not apply if the
holder holds the stock for more than five years, and (ii) if the holder disposes
of the stock before it has been held for five years, the aggregate reduction in
basis cannot exceed the excess of the qualified preferred dividends paid on such
stock during the period held by the holder over the qualified preferred
dividends which would have been paid during such period on the basis of the
stated rate of return, as determined under section 1059(e)(3) of the Code. The
length of time that a holder is deemed to have held stock for purposes of
section 1059 of the Code is determined under principles similar to those
contained in section 246(c) of the Code discussed above.
REDEMPTION PREMIUM
If the redemption price of redeemable preferred stock exceeds its issue
price by more than a de minimis amount, such excess may be treated as a
constructive distribution of additional stock on such preferred stock, over the
term of the preferred stock, using a constant yield method. For purposes of this
rule, if the redemption price at maturity exceeds the issue price by an amount
that equals or exceeds the product of (i) 1/4 of 1% of the redemption price and
(ii) the number of complete years to maturity, such preferred stock will be
deemed to have an excessive redemption price. Based on the Company's allocation
of the initial offering price of the Units between the Old Preferred Stock and
the Warrants, the issue price of the New Preferred Stock is $23.71 per share,
although such determination is not binding on the IRS. As a result, the New
Preferred Stock is deemed to have been issued with more than a de minimis amount
of redemption premium. Under section 305(c) of the Code, such premium must be
taken into account as a series of constructive distributions under principles
similar to the principles of the original issue discount provisions of the Code.
i.e., using a constant yield method over the term of the New Preferred Stock. In
addition, because the issue price of the New Preferred Stock distributed in lieu
of payments of cash dividends will be equal to its fair market value at the time
of distribution, it is possible, depending on its fair market value at that
time, that such New Preferred Stock will be issued with a redemption premium
large enough for the
131
<PAGE>
redemption premium to be considered a constructive distribution over the
remaining term of the New Preferred Stock under the above rules. In such event,
as noted above, U.S. Holders would be required to include such premium in income
as a distribution over some period in advance of receiving the cash attributable
to such income and such New Preferred Stock might trade separately, which might
adversely affect the liquidity of the New Preferred Stock.
Pursuant to recently issued regulations (the 'section 305(c) Regulations'),
constructive distributions on the New Preferred Stock may arise due to its
optional redemption provisions only if, based on all of the facts and
circumstances as of the date the New Preferred Stock was issued, an optional
redemption was more likely than not to occur. Even if redemption were more
likely than not to occur, however, constructive distribution treatment would not
result if the redemption premium were solely in the nature of a penalty for
premature redemption. For this purpose, a penalty for premature redemption is a
premium paid as a result of changes in economic or market condition over which
neither the issuer nor the U.S. Holder has control, such as changes in
prevailing dividend rates. The section 305(c) Regulations provide a safe harbor
pursuant to which constructive distribution treatment will not result from an
issuer call right if the issuer and the U.S. Holder are unrelated, there are no
arrangements that effectively require the issuer to redeem the stock and
exercise of the option to redeem would not reduce the yield of the stock.
Although the Company believes that the optional redemption would not be treated
as more likely than not to be exercised under these rules, that the redemption
premium is in the nature of a penalty for premature redemption or that the safe
harbor would apply, this determination cannot be made with certainty at this
time. Moreover, the right to require a redemption upon the occurrence of a
contingency (such as a Change of Control) could under certain circumstances
result in constructive distributions, although the Company does not believe that
such result should apply to the New Preferred Stock. No assurance can be given
as to the treatment of the optional redemption premium or Change of Control
premium with respect to the New Preferred Stock under the section 305(c)
Regulations.
The legislative history of section 305(c) of the Code authorizes the
Service to write regulations that, under appropriate circumstances, would treat
dividends accruing on preferred stock as part of the redemption price of such
stock (in which case a U.S. Holder may be treated as having received
constructive distributions on such preferred stock under the rules described
above). One such circumstance identified in the legislative history is if, at
the time of issuance, the issuer had no intention of paying dividends currently
on the preferred stock as they accrue. The preamble to the section 305(c)
Regulations state that, because of the complexity of the issue, such regulations
do not provide rules for those unpaid accumulated dividends, although the IRS
and Treasury will consider the issue. Accordingly, no assurance can be given
that regulations will not be issued that would require unpaid dividends on the
New Preferred Stock to be included in the redemption price in a manner that
would produce constructive distributions to a U.S. Holder.
REDEMPTION, SALE OR EXCHANGE OF THE NEW PREFERRED STOCK
A redemption of shares of the New Preferred Stock for cash or a sale of New
Preferred Stock that does not qualify for nonrecognition treatment pursuant to
the Code will be a taxable event to a U.S. Holder.
A redemption of shares of the New Preferred Stock for cash will be treated
as a dividend to the extent of the Company's current or accumulated earnings and
profits (as determined for federal income tax purposes), unless the redemption
(i) results in a 'complete termination' of the shareholder's stock interest in
the Company under section 302(b)(2) of the Code, (ii) is 'substantially
disproportionate' with respect to the shareholder under section 302(b)(2) of the
Code or (iii) is 'not essentially equivalent to a dividend' with respect to the
shareholder under section 302(b)(1) of the Code. In determining whether any of
these tests have been met, the shareholder must take into account not only stock
which such shareholder actually owns, but also stock which such shareholder
constructively owns within the meaning of section 318 of the Code (including
Common Stock of the Company which may be acquired pursuant to Warrants). A
distribution to a shareholder will be 'not essentially equivalent to a dividend'
if it results in a 'meaningful reduction' in the shareholder's stock interest in
the Company. If, as a result of a redemption for cash of the
132
<PAGE>
New Preferred Stock, a shareholder of the Company whose relative stock interest
in the Company is minimal and who exercises no control over corporate affairs
suffers a reduction in his proportionate interest in the Company (including any
ownership of Common Stock and any shares constructively owned), that shareholder
should be regarded as having suffered a meaningful reduction in his interest in
the Company.
If the redemption is not treated as a distribution taxable as a dividend,
the redemption of the New Preferred Stock for cash would result in taxable gain
or loss equal to the difference between the amount of cash received and the U.S.
Holder's adjusted tax basis in the New Preferred Stock redeemed. Such gain or
loss would be capital gain or loss and would be long-term capital gain or loss
if the holding period for the New Preferred Stock exceeded one year.
If a redemption of New Preferred Stock is treated as a distribution that is
taxable as a dividend, the amount of the distribution will be measured by the
amount of cash received by the U.S. Holder. The U.S. Holder's adjusted tax basis
in the redeemed New Preferred Stock will be transferred to any remaining stock
in the Company. Under section 1059 of the Code, the term 'extraordinary
dividend' includes any redemption of stock that is treated as a dividend and
that is non-pro rata as to all stockholders, including U.S. Holders of common
stock, irrespective of the holding period. Consequently, to the extent a
redemption of New Preferred Stock for cash constitutes a dividend, it will
constitute an 'extraordinary dividend' to a corporate U.S. Holder. See
'--Distributions on New Preferred Stock.'
PROPOSED LEGISLATION
Congress currently is considering certain proposed tax law changes. Among
these proposed tax law changes are several items that, if enacted into law
substantially as proposed, would affect the tax treatment of corporate U.S.
Holders of New Preferred Stock and Common Stock. In particular, these proposals
would provide that the 70% dividends-received deduction would not be available
with respect to stock which is held for 45 days or less (90 days in the case of
a dividend attributable to a period or periods aggregating more than 366 days)
during the 90-day period (180-day period in the case of dividends attributable
to a more than 366-day period) beginning 45 days (or 90 days) after the date on
which the stock becomes ex-dividend, effective for stock issued more than 30
days after the date of enactment of such legislation. Further, these proposals
would also require the immediate recognition of gain under section 1059 of the
Code (relating to extraordinary dividends) as discussed above, generally
effective for distributions after September 13, 1995. Further, the Clinton
Administration has proposed to reduce the benefits of the dividends-received
deduction. It cannot be predicted with certainty whether such proposed
legislation or proposals will be enacted or, if enacted, what the effective date
or dates would be. Corporate U.S. Holders of New Preferred Stock are urged to
consult their own tax advisors regarding the possible effects of this proposed
legislation.
BACKUP WITHHOLDING
A U.S. Holder of the New Preferred Stock may be subject to backup
withholding at a rate of 31% with respect to dividends on New Preferred Stock
and gross proceeds upon sale or retirement of the New Preferred Stock unless
such U.S. Holder: (i) is a corporation or other exempt recipient and, when
required, demonstrates that fact; or (ii) provides a correct taxpayer
identification number, certifies, when required, that such U.S. Holder is not
subject to backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. Backup withholding is not an
additional tax; any amounts so withheld are creditable against the U.S. Holder's
federal income tax, provided the required information is provided to the IRS.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a New Note that is not (i) a citizen or
resident of the United States, (ii) a corporation organized under the laws of
the United States or any political subdivision thereof or therein or (iii) an
estate or trust, the income
133
<PAGE>
of which is subject to U.S. federal income tax regardless of the source (a
'Non-U.S. Holder'). For taxable years beginning after December 31, 1996, a trust
that holds the New Notes will be a U.S. Holder if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust.
The discussion does not consider all aspects of U.S. federal income and
estate taxation that may be relevant to the purchase, ownership or disposition
of the New Notes by a particular Non-U.S. Holder in light of such Holder's
personal circumstances, including holding the New Notes through a partnership.
For example, persons who are partners in foreign partnerships and beneficiaries
of foreign trusts or estates who are subject to U.S. federal income tax because
of their own status, such as United States residents or foreign persons engaged
in a trade or business in the United States, may be subject to U.S. federal
income tax even though the entity is not subject to income tax on the
disposition of its New Note.
For purposes of the following discussion, interest and gain on the sale,
exchange or other disposition of the New Note will be considered 'U.S. trade or
business income' if such income or gain is (i) effectively connected with the
conduct of a U.S. trade or business or (ii) in the case of a treaty resident,
attributable to a U.S. permanent establishment (or to a fixed base) in the
United States.
Persons considering the purchase of New Notes should consult their own tax
advisors concerning the application of United States federal income tax laws, as
well as the laws of any state, local, or other taxing jurisdiction applicable to
their particular situations.
STATED INTEREST
Generally, any interest paid to a Non-U.S. Holder of a New Note that is not
U.S. trade or business income will not be subject to United States tax if the
interest qualifies as 'portfolio interest.' Generally, interest on the New Notes
will qualify as portfolio interest if (i) the Non-U.S. Holder does not actually
or constructively own 10% or more of the total voting power of all voting stock
of the Company and is not a 'controlled foreign corporation' with respect to
which the Company is a 'related person' within the meaning of the Code, (ii) the
beneficial owner, under penalty of perjury, certifies that the beneficial owner
is not a United States person and such certificate provides the beneficial
owner's name and address, and (iii) the Non-U.S. Holder is not a bank receiving
interest on an extension of credit made persuant to a loan agreement entered
into in the ordinary course of its trade or business.
The gross amount of payments to a Non-U.S. Holder of interest that do not
qualify for the portfolio interest exception and that are not U.S. trade or
business income will be subject to withholding of U.S. federal income tax at the
rate of 30%, unless a U.S. income tax treaty applies to reduce or eliminate
withholding. U.S. trade or business income will be taxed on a net basis at
regular U.S. rates rather than the 30% gross rate. To claim the benefit of a tax
treaty or to claim exemption from withholding because the income is U.S. trade
or business income, the Non-U.S. Holder must provide a properly executed Form
1001 or 4224 (or such successor forms as the IRS designates), as applicable,
prior to the payment of interest. These forms must be periodically updated.
Under proposed regulations, the Forms 1001 and 4224 will be replaced by Form
W-8. Also under proposed regulations, a Non-U.S. Holder who is claiming the
benefits of a treaty may be required to obtain a U.S. taxpayer identification
number and to provide certain documentary evidence issued by foreign
governmental authorities to prove residence in the foreign country. Certain
special procedures are provided in the proposed regulations for payments through
qualified intermediaries.
SALE, EXCHANGE OR REDEMPTION OF NEW NOTES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a New Note generally will not be subject to U.S. federal income
tax, unless (i) such gain is U.S. trade or business income, (ii) subject to
certain exceptions, the Non-U.S. Holder is an individual who holds the New Note
as a capital asset and is present in the United States for 183 days or more in
the taxable year of the disposition, or (iii) the Non-U.S.
134
<PAGE>
Holder is subject to tax pursuant to the provisions of U.S. tax law applicable
to certain U.S. expatriates (including certain former citizens or residents of
the United States).
FEDERAL ESTATE TAX
New Notes held (or treated as held) by an individual who is a Non-U.S.
Holder at the time of his or her death will not be subject to U.S. federal
estate tax provided that the individual does not actually or constructively own
10% or more of the total voting power of all voting stock of the Company and
income on the New Notes was not U.S. trade or business income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to withholding or that is exempt from U.S. withholding
tax pursuant to a tax treaty or the portfolio interest exception. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
Non-U.S. Holder resides.
The regulations provide that backup withholding and information reporting
will not apply to payments of principal on the New Notes by the Company to a
Non-U.S. Holder, if the Holder certifies as to its non-U.S. status under
penalties of perjury or otherwise establishes an exemption (provided that
neither the Company nor its paying agent has actual knowledge that the holder is
a United States person or that the conditions of any other exemption are not, in
fact, satisfied).
The payment of the proceeds from the disposition of New Notes to or through
the United States office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner certifies
as its non-U.S. status under penalties of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
Holder is a U.S. person or that the conditions of any other exemptions are not,
in fact, satisfied. The payment of the proceeds from the disposition of a New
Note to or through a non-U.S. office of a non-U.S. broker that is not a U.S.
related person will not be subject to information reporting or backup
withholding. For this purpose, a 'U.S. related person' is (i) a 'controlled
foreign corporation' for federal income tax purposes or (ii) a foreign person
50% or more of whose gross income from all sources for the three-year period
ending with the close of its taxable year preceding the payment (or for such
part of the period that the broker has been in existence) is derived from
activities that are effectively connected with the conduct of a United States
trade or business.
In the case of the payment of proceeds from the disposition of New Notes to
or through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a Non-
U.S. Holder and the broker has no knowledge to the contrary. Backup withholding
will not apply to payments made through foreign offices of a broker that is a
U.S. person or a U.S. related person (absent actual knowledge that the payee is
a U.S. person). Proposed regulations contain similar rules.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund of or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
THE FOREGOING IS FOR GENERAL INFORMATIONAL PURPOSES ONLY. INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISORS BEFORE INVESTING.
BOOK-ENTRY; DELIVERY AND FORM
The Unregistered Securities were each issued as single, permanent global
certificate in definitive, fully registered form (the 'Unregistered Global
Securities'). Except for Exchange Securities issued to Non-Global Purchasers (as
defined below), the Exchange Securities will each initially be issued in the
form of one or more global certificates (collectively, the 'Exchange Global
Certificates'). The Unregistered Global
135
<PAGE>
Securities were deposited on the date of the closing of the Old Notes Offering
and the concurrent offering of the Units, and the Exchange Global Certificates
will be deposited on the date of closing of the Exchange Offer with, or on
behalf of, the Depository and registered in the name of a nominee of DTC.
Securities (i) originally purchased by or transferred to foreign purchasers
or Accredited Investors who are not QIBs or (ii) held by QIBs who elect to take
physical delivery of their certificates instead of holding their interest
through Global Securities (and which are thus ineligible to trade through DTC)
(collectively referred to herein as the 'Non-Global Purchasers') will be issued
in registered certificated form ('Certificated Securities'). Upon the transfer
to a QIB of any Certificated Security initially issued to a Non-Global
Purchaser, such Certificated Security will, unless the transferee requests
otherwise or such Global Security has previously been exchanged in whole for
Certificated Securities, be exchanged for an interest in such Global Security.
'Global Securities' means the Unregistered Global Securities or the Exchange
Global Securities, as the case may be.
THE GLOBAL SECURITIES
The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Securities, DTC or its custodian will credit, on its
internal system, the principal amount of Notes or shares of Senior Preferred
Stock as the case may be, of the individual beneficial interest represented by
such Global Security to the respective accounts for persons who have accounts
with DTC and (ii) ownership of beneficial interests in the Global Securities
will be shown on, and the transfer of such ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
persons who have accounts with DTC ('Participants')) and the records of
Participants (with respect to interests of persons other than Participants).
Ownership of beneficial interests in the Global Securities will be limited to
Participants or persons who hold interests through Participants. QIBs may hold
their interests in the Global Securities directly through DTC, if they are
Participants in such system, or indirectly through organizations which are
Participants in such system.
So long as DTC or its nominee is the registered owner or holder of any of
the Global Securities, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the Note or Senior Preferred Stock
represented by the applicable Global Security for all purposes under the
Indenture or Certificate of Designation, as the case may be. No beneficial owner
of an interest in the Global Securities will be able to transfer that interest
except in accordance with DTC's procedures, in addition to those provided for
under the Indenture or Certificate of Designation, as the case may be.
Payments on the Global Securities will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or the Transfer Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Security or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment in
respect of a Global Security, will credit Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
applicable Global Security as shown on the records of DTC or its nominee. The
Company also expects that payments by Participants to owners of beneficial
interests in the Global Securities held through such Participants will be
governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
Participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Security for any reason,
including to sell such Note or Senior Preferred Stock (collectively and
individually, the 'Securities') to persons in states which require physical
delivery of Certificated Securities, or to pledge
136
<PAGE>
such securities, such holder must transfer its interest in the applicable Global
Security in accordance with the normal procedures of DTC.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Securities (including the presentation of the Securities
for exchange as described below) only at the direction of one or more
Participants to whose account the DTC interests in the Global Securities are
credited and only in respect of such portion of the Securities as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global
Securities representing Notes for Certificated Securities, which it will
distribute to its Participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a 'clearing corporation' within the meaning of the
Uniform Commercial Code and a 'clearing agency' registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Securities among Participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Initial Purchasers or any
other person will have any responsibility for the performance by DTC or its
Participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED SECURITIES
If DTC is at any time unwilling or unable to continue as depositary for the
Global Securities and a successor depositary is not appointed by the Company
within 90 days, Certificated Securities will be issued in exchange for the
Global Securities.
LEGAL PROCEEDINGS
National Tobacco 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
'[a]ll 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.
137
<PAGE>
The Company intends to defend this action vigorously.
LEGAL MATTERS
Certain legal matters in connection with the offering and sale of the Notes
and the Units will be passed upon for the Company by Weil, Gotshal & Manges LLP,
New York, New York.
INDEPENDENT PUBLIC ACCOUNTANTS
NORTH ATLANTIC TRADING COMPANY, INC.
The balance sheet of North Atlantic Trading Company, Inc. as of June 24,
1997 included in this Registration Statement have been included herein in
reliance on the report of Cooper & Lybrand L.L.P., independent accountants,
given the authority of that firm as experts in auditing and accounting. With
respect to the unaudited interim financial information of the Company as of and
for the six months ended June 30, 1996 and 1997 included in this Registration
Statement, the independent accountants have reported that they have applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report included in the Registration
Statement states that they did not audit and they do not express an opinion on
that interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited interim financial information because that report is not
a 'report' or a 'part' of the registration statement prepared or certified by
the accountants within the meaning of Sections 7 and 11 of the Act.
NATIONAL TOBACCO
The financial statements of National Tobacco as of December 31, 1995 and
1996 and for the periods indicated in the years ended December 31, 1994, 1995
and 1996, included in this Registration Statement, have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
which includes an explanatory paragraph concerning National Tobacco's adoption
of Statement of Financial Accounting Standards No. 106, 'Employers' Accounting
for Postretirement Benefits Other than Pensions,' given on the authority of that
firm as experts in auditing and accounting.
NAOC
The financial statements of NATC Holdings USA, Inc. as of December 31, 1995
and 1996 and for the periods indicated in the years ended December 31, 1994,
1995 and 1996, included in this Registration Statement, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in auditing and
accounting. With respect to the unaudited interim financial information of NATC
Holdings USA, Inc. as of March 31, 1997 and for the three months ended March 31,
1996 and 1997, included in this Registration Statement, the independent
accountants have reported that they have applied limited procedures in
accordance with professional standards for a review of such information.
However, their separate report included in the Registration Statement states
that they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their report on
such information should be restricted in light of the limited nature of the
review procedures applied. The accountants are not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for their report on the
unaudited interim financial information because that report is not a 'report' or
a 'part' of the registration statement prepared or certified by the accountants
within the meaning of Sections 7 and 11 of the Act.
138
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
AND NATC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
NORTH ATLANTIC TRADING COMPANY, INC.
AUDITED FINANCIAL STATEMENTS:
Report of Independent Accountants................................... F-2
Balance Sheet as of June 24, 1997................................... F-3
Notes to Balance Sheet.............................................. F-4
UNAUDITED INTERIM FINANCIAL STATEMENTS:*
Review Report of Independent Accountants............................ F-9
Unaudited Consolidated Condensed Balance Sheet as of June 30,
1997............................................................. F-10
Unaudited Consolidated Condensed Statements of Operations for the
periods from January 1, 1996 to May 17, 1996, May 18, 1996 to
June 30, 1996 and the six months ended June 30, 1997............. F-11
Unaudited Consolidated Condensed Statements of Changes in Equity for
the periods from January 1, 1996 to May 17, 1996, May 18, 1996 to
June 30, 1996 and the six months ended June 30, 1997............. F-12
Unaudited Consolidated Condensed Statements of Cash Flows for the
periods from January 1, 1996 to May 17, 1996, May 18, 1996 to
June 30, 1996 and the six months ended June 30, 1997............. F-13
Notes to Unaudited Consolidated Condensed Financial Statements...... F-14
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
AUDITED FINANCIAL STATEMENTS:
Report of Independent Accountants................................... F-19
Balance Sheets as of December 31, 1995 and 1996..................... F-20
Statements of Operations for the years ended December 31, 1994 and
1995 and the periods from January 1, 1996 to May 17, 1996 and
from May 17, 1996 (inception) to December 31, 1996............... F-21
Statements of Cash Flows for the years ended December 31, 1994 and
1995 and the periods from January 1, 1996 to May 17, 1996 and
from May 17, 1996 (inception) to December 31, 1996............... F-22
Statements of Changes in Equity for the years ended December 31,
1994 and 1995 and the periods from January 1, 1996 to May 17,
1996 and from May 17, 1996 (inception) to December 31, 1996...... F-24
Notes to Financial Statements....................................... F-25
NATC
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants................................... F-40
Consolidated Balance Sheets as of December 31, 1995 and 1996........ F-41
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995 and 1996........................... F-42
Consolidated Statements of Cash Flows for the years ended December
31, 1994, 1995 and 1996.......................................... F-43
Consolidated Statements of Changes in Stockholder's Equity for the
years ended December 31, 1994, 1995 and 1996..................... F-44
Notes to Consolidated Financial Statements.......................... F-45
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Review Report of Independent Accountants............................ F-52
Unaudited Consolidated Condensed Balance Sheet as of March 31,
1997............................................................. F-53
Unaudited Consolidated Condensed Statements of Operations for the
three months ended March 31, 1996 and 1997....................... F-54
Unaudited Consolidated Condensed Statements of Cash Flows for the
three months ended March 31, 1996 and 1997....................... F-55
Unaudited Consolidated Statement of Changes in Stockholder's Equity
for the three months ended March 31, 1996 and 1997............... F-56
Notes to Unaudited Consolidated Condensed Financial Statements...... F-57
</TABLE>
- ------------------
* North Atlantic Trading Company, Inc. is a holding company with no assets or
operations other than its investments in its subsidiaries of National Tobacco
Company, L.P., North Atlantic Operating Company and National Tobacco Finance
Corporation, except for certain income tax receivables, deferred tax assets
related to the differences between the book and tax basis of its investment in
the National Tobacco, L.P. and deferred financing costs related to its debt.
All of North Atlantic Trading Company, Inc.'s subsidiaries are wholly owned
and guarantee the debt of North Atlantic Trading Company, Inc. on a full,
unconditional, and joint and several basis; therefore, separate financial
statements of the guarantor subsidiaries have been omitted. In the opinion of
management, such separate financial statements of the guarantors would not be
meaningful to investors.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
North Atlantic Trading Company, Inc.
We have audited the accompanying balance sheet of North Atlantic Trading
Company, Inc. as of June 24, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of North Atlantic Trading Company,
Inc. as of June 24, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
September 12, 1997
F-2
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC.
BALANCE SHEET
JUNE 24, 1997 (NOTE 1)
<TABLE>
<CAPTION>
(In thousands
except share
amounts)
----------------
<S> <C>
ASSETS
Deferred financing costs........................................................................ $2,904
-------
Total assets.................................................................................. $2,904
-------
-------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses................................................................................ $2,904
-------
Total liabilities............................................................................. 2,904
-------
Mandatorily redeemable preferred stock, $.01 par value;
18 million shares authorized; -0- shares issued & outstanding................................. --
-------
Commitments and contingencies (Note 3).......................................................... --
-------
Stockholders' equity:
Common stock, voting, $.01 par value; 750,000 shares authorized;
-0- shares issued & outstanding............................................................ --
Common stock, non voting, $.01 par value; 750,000 shares authorized;
-0- shares issued & outstanding............................................................ --
-------
Total stockholders' equity................................................................. --
-------
Total liabilities and stockholders' equity................................................. $2,904
-------
-------
</TABLE>
The accompanying notes are an integral part of the balance sheet.
F-3
<PAGE>
NOTES TO BALANCE SHEET
1. BASIS OF PRESENTATION:
North Atlantic Trading Company, Inc. (the Company) was incorporated on May 19,
1997 by certain members of management and holders of membership interests in NTC
Holdings, LLC (the Holding Company) with the intention of utilizing the Company
as a holding company to facilitate the transactions described in Note 2.
Subsequent to the transactions described in Note 2, the Company became the
parent company of several wholly-owned subsidiaries and has no operations of its
own.
The balance sheet represents the financial position of the Company on June 24,
1997. The balance sheet has been retroactively adjusted to reflect the effect of
an amendment to the original articles of incorporation which was filed on June
25, 1997 to increase the number of authorized shares of preferred stock from 12
million to 18 million. As of June 24, 1997, no shares of common or preferred
stock were issued or outstanding. The Company's balance sheet as of June 24,
1997 includes approximately $2.9 million of accrued expenses and deferred
financing costs related to the planned debt issuance described in Note 2.
2. SUBSEQUENT EVENT (UNAUDITED):
A. CAPITALIZATION:
On June 25, 1997, the Company acquired the membership interests in the Holding
Company and the Holding Company transferred to the company all of its assets,
including its limited partnership interest in National Tobacco, L.P. (the
Partnership) and all of the capital stock of National Tobacco Finance
Corporation (the Finance Corporation) and its rights under the Stock Purchase
Agreement described below. The Company then formed North Atlantic Operating
Company, Inc. (NAOC), a Delaware Corporation and wholly-owned subsidiary of the
Company, to which the Company transferred its rights under the Stock Purchase
Agreement. NAOC then exercised its rights under the Stock Purchase Agreement,
acquiring all of the outstanding capital stock of NATC Holdings USA, Inc.
(NATC), a holding company. NATC and its wholly-owned subsidiary were then merged
into NAOC.
As described in d. and f. below, on June 25, 1997, the Company obtained new
financing in the form of $155.0 million in 11% Senior Notes due 2004, $34.0
million in 12% Senior PIK Preferred Stock, and $85.8 million under a new Senior
Secured Credit Facility. The proceeds of such financing were used to repay all
of the outstanding debt of the Holding Company and the Partnership, finance the
acquisition described below, repay outstanding debt and other assumed
liabilities of NATC, and pay the transaction costs associated with the financing
and acquisition.
B. ACQUISITION:
On April 17, 1997, the Holding Company entered into an agreement to purchase all
of the outstanding capital stock of NATC (the Stock Purchase Agreement),
subsequently transferring its rights thereunder to the Company which transferred
such rights to NAOC. On June 25, 1997, NAOC exercised its rights under the Stock
Purchase Agreement, acquiring all of the outstanding capital stock of NATC for a
preliminary purchase price of approximately $162.6 million, including the
following: $91.1 million for the purchase of NATC stock and stock options, $63.0
million for the payment of debt and certain other liabilities of NATC, and $8.5
million in transaction fees and expenses. This acquisition was accounted for
using the purchase method of accounting under which the preliminary purchase
price has been allocated to tangible assets with a fair value of $48.0 million
and assumed liabilities of $167.0 million, with the excess of 119.0 million
being recorded as goodwill which is being amortized over 25 years. The results
of operations of NATC have been included in the Company's condensed consolidated
statement of operations since the date of acquisition.
F-4
<PAGE>
NOTES TO BALANCE SHEET (CONTINUED)
2. SUBSEQUENT EVENT (UNAUDITED):--(CONTINUED)
C. REVISED PARENT-ONLY BALANCE SHEET:
Following is the unaudited parent-only balance sheet of the Company as of
June 25, 1997 giving effect to the transactions described in a. and b. above:
<TABLE>
<CAPTION>
(In thousands
except share
amounts)
----------------
<S> <C>
ASSETS
Current assets:
Income tax receivable......................................................................... $ 3,224
----------------
Total current assets....................................................................... 3,224
Deferred income taxes........................................................................... 3,087
Deferred financing costs........................................................................ 13,817
Investment in subsidiary........................................................................ 237,747
----------------
Total assets............................................................................... $257,875
----------------
----------------
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt........................................ $ 10,750
----------------
Total current liabilities.................................................................. 10,750
Long-term debt.................................................................................. 230,000
Deferred income taxes........................................................................... 8,106
----------------
Total liabilities.......................................................................... 248,856
----------------
Preferred Stock, mandatory redemption value of $34 million...................................... 32,313
----------------
Commitments and contingencies (Note 3).......................................................... --
----------------
Stockholders' equity:
Common stock, $.01 par value; 750,000 shares authorized; 528,241 shares issued &
outstanding................................................................................ 5
Common stock, $.01 par value; 750,000 shares authorized; -0- shares issued & outstanding...... --
Additional paid-in-capital.................................................................... 5,980
Retained earnings (deficit)................................................................... (31,689)
Warrants...................................................................................... 2,410
Total stockholders' equity................................................................. (23,294)
----------------
Total liabilities and stockholders' equity................................................. $257,875
----------------
----------------
</TABLE>
F-5
<PAGE>
NOTES TO BALANCE SHEET (CONTINUED)
2. SUBSEQUENT EVENT (UNAUDITED):--(CONTINUED)
D. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt at June 25, 1997 consists of (in thousands):
<TABLE>
<S> <C>
Senior notes.................................................. $155,000
Borrowings under credit agreement:
Term........................................................ 85,000
Revolver.................................................... 750
--------
240,750
Less current portion.......................................... (10,750)
--------
$230,000
--------
--------
</TABLE>
On June 25, 1997, the Company issued $155.0 million of 11% Senior Notes due 2004
(the Notes). The Notes are unsecured senior obligations of the Company which
mature on June 15, 2004. The Notes bear interest at 11% per annum, payable
semiannually on June 15 and December 15, commencing on December 15, 1997, to
holders of record at the close of business on the June 1 or December 1
immediately preceding the interest payment date.
The Notes have no mandatory redemption requirements; however, they are
redeemable at the option of the Company at a redemption price of 105.0%,
102.75%, or 100.0%, plus accrued interest, on or after June 15, 2001, 2002, and
2003 and thereafter, respectively. In addition, in the event of a change in
control of the Company, as defined, the holders have the right to require the
Company to repurchase the Notes at a purchase price of 101.0% plus accrued
interest.
The Company has filed an Exchange Offer Registration Statement (the
Registration) with the Securities and Exchange Commission under which the
holders of the Notes will, upon the effective date of the Registration, have the
right to exchange the Notes for registered notes with substantially identical
terms. In the event that the Registration or, alternatively, a Shelf
Registration Statement is not effective within 120 days of the original issuance
of the Notes, the rate of interest on the Notes will increase by 0.5% per annum
for the first 30 days following the 91st day and an additional 0.5% per annum at
the beginning of each subsequent 30-day period.
On June 25, 1997, the Company entered into a Credit Agreement (the Credit
Agreement) with a lender which provided borrowings of $85.0 million under a term
facility and a revolver with available credit of up to $25 million, including a
letter of credit sublimit of $10.0 million. The borrowings under the term
facility are subject to quarterly principal payments commencing on September 30,
1997 and continuing over the five-year period through the maturity date of June
25, 2002, while the revolver may be repaid and reborrowed as necessary, with any
unpaid amounts due and payable upon its termination date of June 25, 2002.
Borrowings under the term facility and revolver bear interest, per annum, at the
Company's option, at the higher of the prime rate plus 2.0%, the federal funds
rate plus 2.5% or the lender's LIBOR rate plus 3.0%, subject to limitations on
the amount of borrowings at the LIBOR option. In addition, the Company must pay
a quarterly commitment fee of 0.5% to 1.0% per annum of the unused portion of
the revolver. The Company must also pay letter of credit fees equal to 3.0% per
annum on the face amount of letters of credit issued under the revolver and a
facing fee of 0.25% per annum on the average daily stated amount of each letter
of credit issued.
The Notes and the Credit Agreement include cross default provisions and
covenants which require the Company to meet certain financial tests, including
minimum interest coverage, maximum leverage ratio, fixed charges coverage and
minimum earnings before interest, taxes, depreciation and amortization, and
limit the incurrence of additional indebtedness, dividends, transactions with
affiliates, asset sales, acquisitions, mergers, prepayments of indebtedness,
liens and encumbrances, and other matters.
F-6
<PAGE>
NOTES TO BALANCE SHEET (CONTINUED)
2. SUBSEQUENT EVENT (UNAUDITED):--(CONTINUED)
E. INCOME TAXES
Upon the occurrence of the transactions described in a. above, the Company
recorded a one-time income tax provision of $5.0 million in the statement of
operations for the six-month period ended June 30, 1997. This change was
necessary to record the Company's deferred tax assets and liabilities of $3.2
million and $8.1 million, respectively, which are the result of differences
between the book and tax basis of the Company's investment in the Partnership's
assets and liabilities such as inventory and accrued pension and postretirement
benefit liabilities.
F. MANDATORILY REDEEMABLE PREFERRED STOCK:
As of June 25, 1997, the Company had authorized 18 million shares of 12% Senior
Payment-In-Kind Preferred Stock (the Preferred Stock), of which 1.36 million
shares were issued and outstanding. Each share of Preferred Stock has a par
value of $.01 and a liquidation preference of $25, for a total liquidation value
of $34.0 million for shares issued and outstanding on June 25, 1997. Prior to
June 15, 2002, holders of the Preferred Stock are entitled to receive dividends
at an annual rate of 12% of the liquidation preference, payable quarterly in
cash or by the issuance of additional shares of Preferred Stock having an
aggregate liquidation preference equal to the amount of the dividends, at the
Company's option. Following June 15, 2002, dividends must be paid in cash.
Prior to June 15, 2000, the Company may, subject to certain restrictions, redeem
up to 35% of the Preferred Stock out of the net cash proceeds from any one or
more public equity offerings of the Company, for 112% of the liquidation
preference plus all accumulated and unpaid dividends. The Preferred Stock is not
redeemable from June 16, 2001 to June 15, 2002. The Preferred Stock is then
redeemable, at the Company's option, on or after the following dates at the
indicated redemption prices (expressed as a percentage of the liquidation
preference) plus all accumulated and unpaid dividends: June 15, 2002 - 106%;
June 15, 2003 - 104%; June 15, 2004 - 102%; and June 15, 2005 - 100%. The
Preferred Stock is mandatorily redeemable on June 15, 2007 at a price equal to
the liquidation preference plus all accumulated and unpaid dividends. The
Preferred Stock is also redeemable, at the option of the holders, upon a change
in control of the Company, as defined, at a price equal to 101% of the
liquidation preference plus all accumulated and unpaid dividends.
The Company has filed an Exchange Offer Registration Statement (the
Registration) with the Securities and Exchange Commission under which the
holders of the Preferred Stock will, upon the effective date of the
Registration, have the right to exchange the Preferred Stock for registered
preferred stock with substantially identical terms.
G. WARRANTS
On June 25, 1997, the holders of the Preferred Stock were issued warrants, with
an original fair value of $1.69 million, to purchase 44,440 shares of common
stock of the Company for $0.01 per share, exercisable immediately. The original
fair value of these warrants has been recorded in equity, with a corresponding
amount recorded as a discount on the carrying value of the Preferred Stock. This
discount is being accreted under the interest method over the 10-year term of
the Preferred Stock as a part of the annual dividend requirement.
Persons affiliated with the initial purchases of the Preferred Stock were also
issued warrants, with an original fair value of $0.72 million, to purchase
19,050 shares of common stock of the Company for $0.01 per share, exercisable
immediately. The original fair value of these warrants has been recorded in
equity, with a corresponding amount capitalized and recorded as deferred
financing costs to be amortized over the terms of the financing described in c.
and e. above.
H. SHARE INCENTIVE PLAN:
On June 25, 1997 the Company began a share incentive plan covering certain key
employees which provides for the issuance of stock options to purchase common
stock and other stock related benefits. As of June 25, 1997, no benefits other
than the stock options described below had been granted under the plan.
F-7
<PAGE>
NOTES TO BALANCE SHEET (CONTINUED)
2. SUBSEQUENT EVENT (UNAUDITED):--(CONTINUED)
Stock options are issued at the fair value of the underlying stock on the date
of grant and become exercisable one-third on the date of grant and an additional
one-third on each annual anniversary of the date of grant thereafter until fully
exercisable. The stock options expire ten years after the date of grant. The
Company has granted stock options for 30,928 shares at a weighted average
exercise price of $18.19 per share, of which stock options for 10,309 shares
were exercisable at June 25, 1997.
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
'Accounting for Stock-Based Compensation,' the Company follows the provisions of
APB Opinion 25 and related Interpretations for its stock options. Therefore,
compensation cost has not been recognized for stock options issued, and if such
compensation cost had been determined based on the fair value of the awards on
the grant date consistent with the pro forma provisions of SFAS No. 123, there
would not have been a material impact on the Company's net loss or net loss per
common share.
3. SUBSEQUENT EVENT:
A. COMMITMENTS AND CONTINGENCIES:
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 one 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 purported class, in part, as
'[a]ll 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 purported 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.
B. GUARANTEES:
As of June 25, 1997, the Company is a holding company with no operations and no
assets other than its investment in its subsidiaries, income tax receivables,
deferred 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 debt
of the Company 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.
F-8
<PAGE>
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
NTC Holding, LLC
We have reviewed the accompanying consolidated condensed balance sheet of
North Atlantic Trading Company, Inc. and Subsidiaries (the Company), as of June
30, 1997, and the related condensed consolidated statements of operations,
changes in equity, and cash flows for the six-month period ended June 30, 1997
for the Company, which prior to June 25, 1997 was known as NTC Holding, L.L.C.
and Subsidiaries. Additionally, we have reviewed the condensed statements of
operations, changes in equity and cash flows of National Tobacco Company, L.P.
(the Predecessor), a limited partnership, for the six-month period ended June
30, 1996. These condensed consolidated financial statements are the
responsibility of the Company's and the Predecessor's management.
We conducted reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the condensed consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed financial statements in order for
them to be in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
August 27, 1997
F-9
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
(Unaudited)
<TABLE>
<CAPTION>
June 30,
1997
<S> <C>
- ----------------------------------------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash...................................................................................... $3,547
Accounts receivable....................................................................... 5,031
Inventories............................................................................... 52,909
Income taxes receivable................................................................... 4,725
Other current assets...................................................................... 2,854
-----------------
Total current assets................................................................... 69,066
-----------------
Property, plant and equipment, at cost...................................................... 10,613
Less accumulated depreciation and amortization.............................................. 1,934
-----------------
8,679
-----------------
Deferred income taxes....................................................................... 32,687
Deferred financing costs and other assets, net.............................................. 14,035
Goodwill, net............................................................................... 150,060
-----------------
Total assets........................................................................... $274,527
-----------------
-----------------
LIABILITIES AND EQUITY:
Current liabilities:
Accounts payable.......................................................................... $1,058
Accrued expenses.......................................................................... 8,059
Current portion of notes payable and long-term debt....................................... 10,750
-----------------
Total current liabilities.............................................................. 19,867
Notes payable and long-term debt............................................................ 230,000
Deferred income taxes....................................................................... 11,158
Other long-term liabilities................................................................. 5,846
-----------------
Total liabilities...................................................................... 266,871
-----------------
Preferred stock, mandatory redemption value of $34,000...................................... 32,371
-----------------
Stockholders' equity:
Common stock, voting, $.01 par value; authorized shares, 750,000;
issued and outstanding shares, 528,241................................................. 5
Common stock, nonvoting, $.01 par value; authorized shares, 750,000;
issued and outstanding shares, -0-..................................................... --
Warrants.................................................................................. 2,410
Additional paid-in-capital................................................................ 5,204
Accumulated deficit....................................................................... (32,334)
-----------------
Total stockholders' equity............................................................. (24,715)
-----------------
Total liabilities and stockholders' equity............................................. $274,527
-----------------
-----------------
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
condensed financial statements.
F-10
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
The The
Predecessor Company
------------ ------------------------------
Period from Period from Period from
January 1 to May 18 to January 1 to
May 17, 1996 June 30, 1996 June 30, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Net sales.................................................................. $ 19,810 $ 8,376 $ 25,938
Cost of sales.............................................................. 7,847 2,974 9,300
------------ ------------- -------------
Gross profit............................................................. 11,963 5,402 16,638
Selling, general and administrative expenses............................... 8,018 2,804 11,591
Amortization of intangible assets.......................................... 365 331 468
------------ ------------- -------------
Operating income......................................................... 3,580 2,267 4,579
Interest expense and financing costs....................................... (2,453) (1,035) (5,194)
Financial advisory fee expense............................................. -- -- --
Other income............................................................... 5 15 44
------------ ------------- -------------
Income (loss) before income taxes and extraordinary loss (1)............. 1,132 1,247 (571)
Income tax provision....................................................... -- -- 5,017
------------ ------------- -------------
Income (loss) before extraordinary loss.................................. 1,132 1,247 (5,588)
Extraordinary loss, net of income tax benefit of $3,224.................... -- -- (8,262)
------------ ------------- -------------
Net income (loss)........................................................ $ 1,132 $ 1,247 (13,850)
------------ -------------
------------ -------------
Preferred stock dividends.................................................. 58
-------------
Net loss applicable to common shares..................................... $ (13,908)
-------------
-------------
Net loss before extraordinary loss per common share........................ $ (10.69)
Extraordinary loss, net of income tax benefit of $3,224, per common
share.................................................................... (15.64)
-------------
Net loss per common share.................................................. $ (26.33)
-------------
-------------
Weighted average common shares outstanding................................. 528.2
Supplemental unaudited information:
Historical income (loss) before income taxes and extraordinary loss...... $ 1,132 $ 1,247 $ (571)
Pro forma income tax provision (benefit) (2)............................. 453 499 (228)
------------ ------------- -------------
Pro forma net income (loss) before extraordinary loss.................... 679 748 (343)
Extraordinary loss, net of income tax benefit of $3,224.................... -- -- (8,262)
------------ ------------- -------------
Pro forma net income (loss).............................................. 679 748 (8,605)
Preferred stock dividends.................................................. -- -- 58
------------ ------------- -------------
Pro forma net income (loss) applicable to common shares.................. $ 679 $ 748 $ (8,663)
------------ ------------- -------------
------------ ------------- -------------
Net loss before extraordinary loss, net of income tax benefit of $3,224,
per common share......................................................... $ (0.76)
Extraordinary loss, net of income tax benefit of $3,224, per common
share.................................................................... (15.64)
-------------
Pro forma net income (loss) per common share............................... $ 1.29 $ 1.42 $ (16.40)
------------ ------------- -------------
------------ ------------- -------------
Pro forma weighted average common shares outstanding....................... 528.2 528.2 528.2
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
- ------------------
(1) The Company and the Predecessor were a limited liability company and a
partnership, respectively, for federal and state income tax purposes through
June 25, 1997 and, accordingly, did not incur any federal or state income
taxes prior to such date.
(2) Pro forma income taxes have been calculated assuming the Company and the
Predecessor were subject to income taxes for the entire period for all
periods presented, using an effective rate of 40% (34% federal and 6%
state).
The accompanying notes are an integral part of the unaudited consolidated
condensed financial statements.
F-11
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
Amount
Retained Related to
Common Common Additional Earnings Minimum
Stock, Stock, Paid-in Contributed (Accumulated Pension Total
Voting Nonvoting Warrants Capital Equity Deficit) Liability Equity
------ --------- -------- ---------- ----------- ------------ ----------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THE PREDECESSOR:
Beginning balance, January 1,
1996........................ -- -- -- -- $10,956 $ 9,083 ($ 252) $ 19,787
Net income.................... -- -- -- -- -- 1,132 -- 1,132
------ --------- -------- ---------- ----------- ------------ ---------- --------
Ending balance, May 17,
1996........................ -- -- -- -- $10,956 $ 10,215 ($ 252) $ 20,919
------ --------- -------- ---------- ----------- ------------ ---------- --------
------ --------- -------- ---------- ----------- ------------ ---------- --------
THE COMPANY:
Beginning balance, May 17,
1996........................ -- -- -- -- -- -- -- --
Contributions of members...... -- -- -- -- $ 4,492 -- -- $ 4,492
Net income.................... -- -- -- -- -- $ 1,247 -- 1,247
------ --------- -------- ---------- ----------- ------------ ---------- --------
Ending balance, June 30,
1996........................ -- -- -- -- $ 4,492 $ 1,247 -- $ 5,739
------ --------- -------- ---------- ----------- ------------ ---------- --------
------ --------- -------- ---------- ----------- ------------ ---------- --------
Beginning balance, December
31, 1996.................... -- -- -- -- $ 4,492 $ 383 -- $ 4,875
Net income.................... -- -- -- -- -- (8,739) -- (8,739)
Distributions to warrant
holders..................... -- -- -- -- -- (18,809) -- (18,809)
Distribution to members....... -- -- -- -- (4,492) 27,165 -- 22,673
------ --------- -------- ---------- ----------- ------------ ---------- --------
Ending balance, June 25,
1997........................ -- -- -- -- -- -- -- --
------ --------- -------- ---------- ----------- ------------ ---------- --------
------ --------- -------- ---------- ----------- ------------ ---------- --------
Beginning balance, June 25,
1997........................ -- -- -- -- -- -- -- --
Issuance of common stock in
exchange for membership
interest.................... $ 5 -- -- $4,492 -- ($27,165) -- ($22,668)
Issuance of common stock...... -- -- -- 712 -- -- -- 712
Issuance of warrants.......... -- -- $2,410 -- -- -- -- 2,410
Net loss...................... -- -- -- -- -- (5,111) -- (5,111)
Preferred stock dividends..... -- -- -- -- -- (58) -- (58)
------ --------- -------- ---------- ----------- ------------ ---------- --------
Ending balance, June 30,
1997........................ $ 5 -- $2,410 $5,204 -- ($32,334) -- ($24,715)
------ --------- -------- ---------- ----------- ------------ ---------- --------
------ --------- -------- ---------- ----------- ------------ ---------- --------
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
condensed financial statements.
F-12
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
The
Predecessor The Company
------------- --------------------------------
Period from Period from Period from
January 1 to May 18 to January 1 to
May 17, 1996 June 30, 1996 June 30, 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,132 $ 1,247 $ (13,850)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation............................................ 454 210 900
Amortization of intangible assets....................... 365 104 468
Amortization of deferred financing costs................ 258 222 1,000
Recognition of deferred income taxes.................... -- -- 5,017
Extraordinary loss, net of income tax benefit of
$3,224................................................ -- -- 8,262
Changes in operating assets and liabilities:
Accounts receivable................................... (335) (1,781) (662)
Inventories--Lancaster Leaf Tobacco................... (512) (11) 2,715
Inventories--other.................................... (386) 1,068 (649)
Other current assets.................................. (647) 730 646
Accounts payable...................................... 1,262 (1,117) 295
Borrowings under inventory financing agreement ....... 2,797 42 6,565
Payments on borrowings under inventory financing
agreement........................................... (2,285) -- (23,526)
Accrued expenses and other............................ (931) 492 (13,043)
------------- -------------- --------------
Net cash provided by (used in) operating
activities........................................ 1,172 1,206 (25,862)
------------- -------------- --------------
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) (55) (442)
------------- -------------- --------------
Net cash used in investing activities............... (144) (72,200) (157,260)
------------- -------------- --------------
Cash flows from financing activities:
Proceeds from revolving loans............................. -- 450 1,550
Payments on revolving loans............................... -- (450) (800)
Proceeds from senior notes................................ -- -- 155,000
Proceeds from term loans, net of discount of $1,251 at
June 30, 1996........................................... -- 43,749 85,000
Payments on term loans.................................... -- (205) (40,750)
Proceeds from working capital loan........................ 20,056 -- --
Payments on working capital loan.......................... (19,022) -- --
Proceeds from subordinated notes payable, net of discount
of $6,614 at June 30, 1996.............................. 13,356 576
Payments on subordinated notes payable.................... -- -- (21,082)
Payment on capital lease.................................. -- -- (9)
Payments on other notes payable and long-term debt........ (2,011) -- --
Proceeds from issuance of preferred stock and warrants.... -- -- 34,000
Proceeds from preferred interest.......................... -- 2,500 --
Proceeds from warrants.................................... -- 8,196 --
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) 72,087 184,460
------------- -------------- --------------
Net increase (decrease) in cash............................. 51 1,093 1,338
Cash, beginning of period................................... 128 -- 2,209
------------- -------------- --------------
Cash, end of period......................................... $ 179 $ 1,093 $ 3,547
------------- -------------- --------------
------------- -------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 2,013 $ 1,993 $ 5,211
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
condensed financial statements.
F-13
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
accruals and reserves) considered necessary for a fair presentation have been
included. Operating results for the interim periods are not necessarily
indicative of the results that may be realized for the full year. These
unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements of the Holding Company and the
Predecessor for the years ended December 31, 1995 and 1996, as defined below.
On May 17, 1996, certain members of management and partners of National Tobacco
Company, L.P. (the Partnership, and, for periods prior to May 17, 1996, the
Predecessor), a limited partnership, formed NTC Holding, LLC (the Holding
Company), a limited liability company, and caused the Holding Company to form
National Tobacco Finance Corporation (the Finance Corporation), a wholly-owned
subsidiary of the Holding Company. The Holding Company then acquired a 99%
limited partnership interest in the Partnership and the Finance Corporation
became the sole general partner and owner of the remaining 1% interest of the
Partnership. Concurrent with the above transactions, on May 17, 1996 the
Partnership was recapitalized in a transaction accounted for as the formation of
a new entity under the purchase method of accounting. The above transactions
have been fully described in the consolidated financial statements of the
Holding Company as of December 31, 1996.
On May 19, 1997, certain members of management and holders of membership
interests in the Holding Company formed a corporation named North Atlantic
Trading Company, Inc. (the Company). On June 25, 1997 the Company acquired the
membership interests in the Holding Company and the Holding Company transferred
all of its assets, including its limited partnership interest in the Partnership
and all of the capital stock of the Finance Corporation, and its rights under
the Stock Purchase Agreement described in Note 2. The Company then formed North
Atlantic Operating Company, Inc. (NAOC), a Delaware Corporation and wholly-owned
subsidiary of the Company, to which the Company transferred its rights under the
Stock Purchase Agreement. NAOC then exercised its rights under the Stock
Purchase Agreement, acquiring all of the outstanding capital stock of NATC
Holdings USA, Inc. (NATC), a holding company. NATC and its wholly-owned
subsidiary were then merged into NAOC.
As described in Notes 5 and 7, on June 25, 1997, the Company obtained new
financing in the form of $155.0 million in 11% Senior Notes due 2004, $34.0
million in 12% Senior PIK Preferred Stock, and $85.8 million under a new Senior
Secured Credit Facility. The proceeds of such financing were used to repay all
of the outstanding debt of the Holding Company and the Partnership, finance the
acquisition described below, repay outstanding debt and other assumed
liabilities of NATC, and pay the transaction costs associated with the financing
and acquisition.
The Company is a holding company with no assets or operations other than its
investments in its subsidiaries, except for certain income tax receivables,
deferred 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 debt
of the Company on a full, unconditional, and joint and several basis; therefore,
separate financial statements of the guarantor subsidiaries have been omitted.
In the opinion of management, such separate financial statements of the
guarantors would not be meaningful to investors.
2. ACQUISITION:
On April 17, 1997, the Holding Company entered into an agreement to purchase all
of the outstanding capital stock of NATC (the Stock Purchase Agreement),
subsequently transferring its rights thereunder to the Company which transferred
such rights to NAOC. On June 25, 1997, NAOC exercised its rights under the Stock
Purchase Agreement, acquiring all of the outstanding capital stock of NATC for a
preliminary purchase price of approximately $162.6 million, including the
following: $91.1 million for the purchase of NATC stock and stock options ($0.6
million of which has been included in accrued expenses to be paid after
closing), $63.0 million for the payment of debt and certain other liabilities of
NATC, and $8.5 million in transaction fees and expenses ($2.5
F-14
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION:--(CONTINUED)
million at which has been included in accrued expenses to be paid at the
closing). This acquisition was accounted for using the purchase method of
accounting under which the preliminary purchase price has been allocated to
tangible assets with a fair value of $48.0 million and assumed liabilities of
$167.0 million, with the excess of $119.0 million being recorded as goodwill
which is being amortized over 25 years. The results of operations of NATC have
been included in the Company's condensed consolidated statement of operations
since the date of acquisition.
Following is a preliminary allocation of the purchase price to the fair value of
the net assets acquired (in thousands):
<TABLE>
<S> <C>
Cash....................................................................... $ 2,602
Accounts receivable........................................................ 836
Inventory.................................................................. 12,956
Other current assets....................................................... 74
Income tax receivable...................................................... 1,515
Deferred income taxes...................................................... 29,599
Fixed assets............................................................... 131
Other assets............................................................... 248
Accounts payable........................................................... (312)
Accrued expenses........................................................... (4,256)
Deferred income taxes...................................................... (3,052)
Debt assumed............................................................... (159,421)
-----------------
Amount allocated to goodwill.......................................... $ (119,080)
-----------------
-----------------
</TABLE>
The following unaudited pro forma results of operations assume the
acquisition occurred on January 1, 1996 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Net Sales.................................................................. $ 43,444 $102,075
Net income (loss) before extraordinary loss................................ (1,327) 3,695
Extraordinary loss, net of income tax benefit of $3,224.................... (8,262) (8,262)
---------- ------------
Net loss................................................................... (9,589) (4,567)
Preferred stock dividends.................................................. 2,468 4,325
---------- ------------
Net loss applicable to common shares....................................... $(12,057) $ (8,892)
---------- ------------
---------- ------------
Net income (loss) before extraordinary loss, net of income tax benefit of
$3,224, per common share................................................. $ (2.51) $ 7.00
Extraordinary loss, net of income tax benefit of $3,224, per common
share.................................................................... $ (15.64) $ (15.64)
Net loss per common share.................................................. $ (22.83) $ (16.83)
Weighted average common shares outstanding................................. 528.2 528.2
</TABLE>
This pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
as of January 1, 1996, nor is it necessarily indicative of future operating
results.
3. EXTRAORDINARY LOSS:
Upon the repayment of the Company's debt as described in Note 1, the
Company recorded an extraordinary loss of $8.3 million (net of tax benefit of
$3.2 million), for the write-off of deferred financing fees of $4.4 million and
debt discount of $7.1 million, respectively.
F-15
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
The components of inventories at June 30, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
Raw materials and work in process.............................. $ 1,467
Leaf tobacco................................................... 34,052
Finished goods - tobacco....................................... 4,417
Finished goods - cigarette papers.............................. 12,781
Other.......................................................... 192
-------
$52,909
-------
-------
</TABLE>
5. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt at June 30, 1997 consists of (in
thousands):
<TABLE>
<S> <C>
Senior notes.................................................. $155,000
Borrowings under credit agreement:
Term........................................................ 85,000
Revolver.................................................... 750
--------
240,750
Less current portion.......................................... (10,750)
--------
$230,000
--------
--------
</TABLE>
On June 25, 1997, the Company issued $155.0 million of 11% Senior Notes due
2004 (the Notes). The Notes are unsecured senior obligations of the Company
which mature on June 15, 2004. The Notes bear interest at 11% per annum, payable
semiannually on June 15 and December 15, commencing on December 15, 1997, to
holders of record at the close of business on the June 1 or December 1
immediately preceding the interest payment date.
The Notes have no mandatory redemption requirements; however, they are
redeemable at the option of the Company at a redemption price of 105.0%,
102.75%, or 100.0%, plus accrued interest, on or after June 15, 2001, 2002, and
2003 and thereafter, respectively. In addition, in the event of a change in
control of the Company, as defined, the holders have the right to require the
Company to repurchase the Notes at a purchase price of 101.0% plus accrued
interest.
The Company has filed an Exchange Offer Registration Statement (the
Registration) with the Securities and Exchange Commission under which the
holders of the Notes will, upon the effective date of the Registration, have the
right to exchange the Notes for registered notes with substantially identical
terms. In the event that the Registration or, alternatively, a Shelf
Registration Statement is not effective within 120 days of the original issuance
of the Notes, the rate of interest on the Notes will increase by 0.5% per annum
for the first 30 days following the 91st day and an additional 0.5% per annum at
the beginning of each subsequent 30-day period.
On June 25, 1997, the Company entered into a Credit Agreement (the Credit
Agreement) with a lender which provided borrowings of $85.0 million under a term
facility and a revolver with available credit of up to $25 million, including a
letter of credit sublimit of $10.0 million. The borrowings under the term
facility are subject to quarterly principal payments commencing on September 30,
1997 and continuing over the five-year period through the maturity date of June
25, 2002, while the revolver may be repaid and reborrowed as necessary, with any
unpaid amounts due and payable upon its termination date of June 25, 2002.
Borrowings under the term facility and revolver bear interest, per annum,
at the Company's option, at the higher of the prime rate plus 2.0%, the federal
funds rate plus 2.5% or the lender's LIBOR rate plus 3.0%, subject to
limitations on the amount of borrowings at the LIBOR option. In addition, the
Company must pay a quarterly commitment fee of 0.5% to 1.0% per annum of the
unused portion of the revolver. The Company must also pay letter of credit fees
equal to 3.0% per annum on the face amount of letters of credit issued under the
revolver and a facing fee of 0.25% per annum on the average daily stated amount
of each letter of credit issued.
F-16
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT:--(CONTINUED)
The Notes and the Credit Agreement include cross default provisions and
covenants which require the Company to meet certain financial tests, including
minimum interest coverage, maximum leverage ratio, fixed charges coverage and
minimum earnings before interest, taxes, depreciation and amortization, and
limit the incurrence of additional indebtedness, dividends, transactions with
affiliates, asset sales, acquisitions, mergers, prepayments of indebtedness,
liens and encumbrances, and other matters.
6. INCOME TAXES:
The Company and the Predecessor were a limited liability company and a
partnership, respectively, for federal and state income tax purposes through
June 25, 1997 and, accordingly, did not incur any income taxes prior to such
date. Upon the occurrence of the transactions described in Note l, the Company
became a taxable corporation and recorded a one-time income tax provision of
$5.0 million in the statement of operations for the six-month period ended June
30, 1997. This change was necessary to record the Company's deferred tax assets
and liabilities of $3.2 million and $8.1 million, respectively, which had not
previously been recorded due to its non-taxable status. The deferred taxes are
the result of differences between the book and tax basis of the Company's
investment in the Partnership's assets and liabilities such as inventory and
accrued pension and postretirement benefit liabilities.
7. MANDATORILY REDEEMABLE PREFERRED STOCK:
As of June 25, 1997, the Company had authorized 18 million shares of 12%
Senior Payment-In-Kind Preferred Stock (the Preferred Stock), of which 1.86
million were issued and outstanding. Each share of Preferred Stock has a par
value of $.01 and a liquidation preference of $25, for a total liquidation value
of $34.0 million for shares issued and outstanding on June 30, 1997. Prior to
June 15, 2002, holders of the Preferred Stock are entitled to receive dividends
at an annual rate of 12% of the liquidation preference, payable quarterly in
cash or by the issuance of additional shares of Preferred Stock having an
aggregate liquidation preference equal to the amount of the dividends, at the
Company's option. Following June 15, 2002, dividends must be paid in cash.
Dividends, including the discount accretion described in Note 7, for the period
from June 25, 1997 through June 30, 1997 were $58,000, which has been recorded
as an increase in the carrying value of the Preferred Stock.
Prior to June 15, 2000, the Company may, subject to certain restrictions,
redeem up to 35% of the Preferred Stock out of the net cash proceeds from any
one or more public equity offerings of the Company, for 112% of the liquidation
preference plus all accumulated and unpaid dividends. The Preferred Stock is not
redeemable from June 16, 2001 to June 15, 2002. The Preferred Stock is then
redeemable, at the Company's option, on or after the following dates at the
indicated redemption prices (expressed as a percentage of the liquidation
preference) plus all accumulated and unpaid dividends: June 15, 2002 - 106%;
June 15, 2003 - 104%; June 15, 2004 - 102%; and June 15, 2005 - 100%. The
Preferred Stock is mandatorily redeemable on June 15, 2007 at a price equal to
the liquidation preference plus all accumulated and unpaid dividends. The
Preferred Stock is also redeemable, at the option of the holders, upon a change
in control of the Company, as defined, at a price equal to 101% of the
liquidation preference plus all accumulated and unpaid dividends.
The Company has filed an Exchange Offer Registration Statement (the
Registration) with the Securities and Exchange Commission under which the
holders of the Preferred Stock will, upon the effective date of the
Registration, have the right to exchange the Preferred Stock for registered
preferred stock with substantially identical terms.
F-17
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
8. WARRANTS:
On June 25, 1997, the holders of the Preferred Stock were issued warrants,
with an original fair value of $1.69 million, to purchase 44,440 shares of
common stock of the Company for $0.01 per share, exercisable immediately. The
original fair value of these warrants has been recorded in equity, with a
corresponding amount recorded as a discount on the carrying value of the
Preferred Stock. This discount is being accreted under the interest method over
the 10-year term of the Preferred Stock as a part of the annual dividend
requirement. Accretion of the discount was $2,000 for the period from June 25,
1997 through June 30, 1997 and has been recorded as an increase in the carrying
value of the Preferred Stock.
Persons affiliated with the initial purchases of the Preferred Stock were
also issued warrants, with an original fair value of $0.72 million, to purchase
19,050 shares of common stock of the Company for $0.01 per share, exercisable
immediately. The original fair value of these warrants has been recorded in
equity, with a corresponding amount capitalized and recorded as deferred
financing costs to be amortized over the terms of the financing described in
Notes 5 and 7.
9. SHARE INCENTIVE PLAN:
On June 25, 1997 the Company began a share incentive plan covering certain
key employees which provides for the issuance of stock options to purchase
common stock and other stock related benefits. As of June 30, 1997, no benefits
other than the stock options described below had been granted under the plan.
Stock options are issued at the fair value of the underlying stock on the
date of grant and become exercisable one-third on the date of grant and an
additional one-third on each annual anniversary of the date of grant thereafter
until fully exercisable. The stock options expire ten years after the date of
grant. The Company has granted stock options for 30,928 shares at a weighted
average exercise price of $18.19 per share, of which stock options for 10,309
shares were exercisable at June 30, 1997.
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
'Accounting for Stock-Based Compensation,' the Company follows the provisions of
APB Opinion 25 and related Interpretations for its stock options. Therefore,
compensation cost has not been recognized for stock options issued, and if such
compensation cost had been determined based on the fair value of the awards on
the grant date consistent with the pro forma provisions of SFAS No. 123, there
would not have been a material impact on the Company's net loss or net loss per
common share.
10. 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 one 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 purported class, in part, as
'[a]ll 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 purported 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.
F-18
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
NTC Holding, LLC
We have audited the accompanying consolidated balance sheet of NTC Holding,
LLC and Subsidiaries (the Holding Company), a limited liability company, as of
December 31, 1996, and the related consolidated statements of operations,
changes in equity, and cash flows for the period from May 17, 1996 (inception)
to December 31, 1996. Additionally, we have audited the accompanying balance
sheet of National Tobacco Company, L.P. (the Predecessor), a limited
partnership, as of December 31, 1995, and the related statements of operations,
changes in equity and cash flows for the years ended December 31, 1994 and 1995,
and for the period from January 1, 1996 to May 17, 1996. These financial
statements are the responsibility of the Holding Company's and the Predecessor's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Holding
Company and its subsidiaries as of December 31, 1996, and the consolidated
results of their operations and their cash flows for the period from May 17,
1996 (inception) to December 31, 1996 and the financial position of the
Predecessor as of December 31, 1995, and the results of its operations and its
cash flows for the years ended December 31, 1994 and 1995 and for the period
from January 1, 1996 to May 17, 1996 in conformity with generally accepted
accounting principles.
As explained in Note 14, effective January 1, 1995, the Predecessor adopted
Statement of Financial Accounting Standards No. 106, 'Employers' Accounting for
Postretirement Benefits Other than Pensions.'
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
January 24, 1997
F-19
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
The Predecessor The Holding Company
----------------- -------------------
December 31, December 31,
1995 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash............................................ $ 127,569 $ 2,208,644
Accounts receivable............................. 3,224,816 3,532,820
Inventories..................................... 38,850,303 42,019,760
Other current assets............................ 966,899 3,412,138
----------------- -------------------
Total current assets.............................. 43,169,587 51,173,362
----------------- -------------------
Property, plant and equipment, at cost............ 11,733,195 10,039,972
Less accumulated depreciation..................... (3,857,566) (1,033,976)
----------------- -------------------
7,875,629 9,005,996
Goodwill, net..................................... 27,182,471 31,447,830
Deferred financing costs and other assets, net.... 2,288,809 4,926,192
----------------- -------------------
Total assets...................................... $80,516,496 $96,553,380
----------------- -------------------
----------------- -------------------
LIABILITIES AND EQUITY:
Current liabilities:
Accounts payable................................ $ 576,904 $ 448,895
Accrued expenses................................ 5,571,308 3,753,845
Current portion of notes payable
and long-term debt........................... 27,085,553 21,720,219
----------------- -------------------
Total current liabilities......................... 33,233,765 25,922,959
Notes payable and long-term debt.................. 21,696,236 48,976,228
Other long-term liabilities....................... 5,115,501 5,846,387
----------------- -------------------
Total liabilities................................. 60,045,502 80,745,574
----------------- -------------------
Preferred interests............................... -- 2,737,441
Warrants.......................................... -- 8,195,246
Equity:
Contributed equity.............................. 10,955,760 4,492,347
Warrants........................................ 684,200 --
Undistributed profits........................... 9,082,662 382,772
Amount related to minimum pension liability..... (251,628) --
----------------- -------------------
Total equity...................................... 20,470,994 4,875,119
----------------- -------------------
Total liabilities and equity...................... $80,516,496 $96,553,380
----------------- -------------------
----------------- -------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
The Holding
Company
The Predecessor -----------------
------------------------------------------------------- Period From
May 17
Year Ended December 31, Period From (Inception) to
------------------------------------ January 1 to December 31,
1994 1995 May 17, 1996 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales.......................... $51,375,538 $52,630,355 $19,810,335 $36,125,952
Cost of sales...................... 21,871,958 20,491,189 7,847,161 15,406,711
----------------- ----------------- ----------------- -----------------
Gross profit..................... 29,503,580 32,139,166 11,963,174 20,719,241
Selling, general and administrative
expenses......................... 18,395,142 19,663,054 7,904,081 13,551,412
Amortization of intangible
assets........................... 1,037,894 972,969 364,861 504,294
----------------- ----------------- ----------------- -----------------
Operating income................. 10,070,544 11,503,143 3,694,232 6,663,535
Interest expense and financing
costs............................ 6,833,731 7,238,906 2,452,982 6,398,223
Management fee expense............. 300,000 300,000 113,953 --
Other expense (income)............. (2,875,324) 1,335,759 (4,927) (117,460)
----------------- ----------------- ----------------- -----------------
Income before cumulative effect
of accounting change........... 5,812,137 2,628,478 1,132,224 382,772
Cumulative effect of accounting
change........................... -- 123,171 -- --
----------------- ----------------- ----------------- -----------------
Net income (1)................... $5,812,137 $2,505,307 $1,132,224 $382,772
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
Supplemental unaudited financial
data:
Historical income before income
taxes and cumulative effect of
accounting change.............. $5,812,137 $2,628,478 $1,132,224 $382,772
Pro forma income tax
expense (2).................... 2,324,855 1,051,391 452,890 153,109
----------------- ----------------- ----------------- -----------------
Pro forma income before
cumulative effect of accounting
change......................... 3,487,282 1,577,087 679,334 229,663
Historical cumulative effect of
accounting change, net of
income tax benefit of $49,268.. -- 73,903 -- --
----------------- ----------------- ----------------- -----------------
Pro forma net income............. $3,487,282 $1,503,184 $679,334 $229,663
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
</TABLE>
- ------------------
(1) The Holding Company and the Predecessor were a limited liability company and
a partnership, respectively, for federal and state income tax purposes
through the consummation of this offering and accordingly did not incur any
federal or state income taxes during these periods.
(2) Pro forma income taxes have been calculated using an effective tax rate of
40% (34% federal and 6% state).
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
The Holding
Company
The Predecessor ------------------
------------------------------------------------------------ Period From
May 17
Year Ended December 31, Period From (Inception) to
--------------------------------------- January 1 to December 31,
1994 1995 May 17, 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 5,812,137 $ 2,505,307 $ 1,132,224 $ 382,772
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 1,038,012 1,073,066 453,893 1,033,976
Amortization of intangible assets.... 1,037,894 972,969 364,861 504,294
Amortization of deferred financing
costs.............................. 893,719 909,097 257,670 1,139,299
Deferred interest.................... 883,548 682,493 -- 555,455
Preferred interest................... -- -- -- 237,441
Accrued transaction costs............ -- 880,676 -- --
Change in accrued pension
liabilities........................ (102,715) 13,973 -- 127,542
Change in accrued asbestos removal
costs.............................. (812,069) (169,183) -- --
Change in accrued postretirement
liabilities........................ (2,267,372) 442,502 110,121 63,987
Changes in operating assets and
liabilities:
Accounts receivable................ (365,666) 673,012 (335,160) 27,156
Inventories--Lancaster Leaf
Tobacco.......................... 1,515,607 2,136,918 (512,376) (109,130)
Inventories--other................. 772,917 (3,946,834) (386,426) 3,275,985
Other current assets............... (165,925) 52,359 (646,997) 115,783
Accounts payable................... (172,144) 41,949 1,260,325 (1,388,335)
Borrowings under inventory
financing agreement.............. 6,965,592 10,077,188 2,796,991 5,286,136
Payments on borrowings under
inventory financing agreement.... (8,481,199) (7,940,270) (2,284,614) (4,400,394)
Accrued expenses and other
liabilities.................... 367,541 308,421 (738,146) (179,796)
------------------ ------------------ ------------------ ------------------
Net cash provided by operating
activities..................... 6,919,877 8,713,643 1,472,366 6,672,171
------------------ ------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash
acquired of $597,010................. -- -- -- (72,145,337)
Capital expenditures................... (354,979) (239,253) (143,748) (155,765)
------------------ ------------------ ------------------ ------------------
Net cash used in investing
activities..................... (354,979) (239,253) (143,748) (72,301,102)
------------------ ------------------ ------------------ ------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
The Holding
Company
The Predecessor ------------------
------------------------------------------------------------ Period From
May 17
Year Ended December 31, Period From (Inception) to
--------------------------------------- January 1 to December 31,
1994 1995 May 17, 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt associated with the
acquisition, net of amount allocated
to warrants of $7,895,244............ -- -- -- 57,554,756
Payments on revolving loans............ -- -- -- (450,000)
Payments on term loans................. -- -- -- (4,250,000)
Payments on subordinated notes payable -- -- -- (204,772)
Payments on working capital loan....... (52,015,756) (53,544,973) (19,022,566)
Payments on other notes payable and
long-term debt..................... (6,901,954) (8,732,084) (2,010,761)
Proceeds from capital contribution..... -- -- -- 4,492,347
Proceeds from subordinated notes
payable.............................. -- 163,668 41,104 --
Proceeds from working capital loan..... 52,076,576 53,065,780 20,055,821 --
Proceeds from preferred interest....... -- -- -- 2,500,000
Proceeds from warrants................. -- -- -- 8,195,244
Increase in intangible assets.......... (238,307) -- (340,572) --
------------------ ------------------ ------------------ ------------------
Net cash provided by (used in)
financing activities........... (7,079,441) (9,047,609) (1,276,974) 67,837,575
------------------ ------------------ ------------------ ------------------
Net increase (decrease) in cash........ (514,543) (573,219) 51,644 2,208,644
Cash, beginning of period.............. 1,215,331 700,788 127,569 --
------------------ ------------------ ------------------ ------------------
Cash, end of period.................... $ 700,788 $ 127,569 $ 179,213 $ 2,208,644
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest........................... $ 5,391,649 $ 5,604,176 $ 2,013,102 $ 2,870,907
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
Amount Related
to Minimum
Contributed Undistributed Pension Total
Equity Warrants Profits Liability Equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THE PREDECESSOR:
Beginning balance,
December 31, 1993...... $10,955,760 $684,200 $765,218 $(233,152) $12,172,026
Net income............... -- -- 5,812,137 -- 5,812,137
Change in amount related
to minimum pension
liability.............. -- -- -- (277,890) (277,890)
----------------- -------------- ----------------- --------------- -----------------
Ending balance, December
31, 1994............... 10,955,760 684,200 6,577,355 (511,042) 17,706,273
Net income............... -- -- 2,505,307 -- 2,505,307
Change in amount related
to minimum pension
liability.............. -- -- -- 259,414 259,414
----------------- -------------- ----------------- --------------- -----------------
Ending balance, December
31, 1995............... 10,955,760 684,200 9,082,662 (251,628) 20,470,994
Net income............... -- -- 1,132,225 -- 1,132,225
----------------- -------------- ----------------- --------------- -----------------
Ending balance, May 17,
1996................... $10,955,760 $684,200 $10,214,887 $(251,628) $21,603,219
----------------- -------------- ----------------- --------------- -----------------
----------------- -------------- ----------------- --------------- -----------------
THE HOLDING COMPANY:
Beginning balance, May
17, 1996 (inception)... -- -- -- -- --
Equity contributions..... $4,492,347 -- -- -- $4,492,347
Net income............... -- -- $382,772 -- $382,772
----------------- -------------- ----------------- --------------- -----------------
Ending balance, December
31, 1996............... $4,492,347 -- $382,772 -- $4,875,119
----------------- -------------- ----------------- --------------- -----------------
----------------- -------------- ----------------- --------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS AND BASIS OF PRESENTATION:
National Tobacco Company, L.P. (a limited partnership), was formed and acquired
the smokeless tobacco division of Lorillard, Inc. in 1988. On April 14, 1992,
the general partner and majority owner and certain limited partners sold their
partnership interest to a new general partner. Accordingly, the April 1992
transaction was accounted for as the formation of a new entity, National Tobacco
Company, L.P. (the Predecessor).
Certain members of management of the Predecessor formed NTC Holding, LLC (the
Holding Company), a limited liability company with a finite life expiring
December 31, 2100, and caused the Holding Company to form National Tobacco
Finance Corporation (the Finance Corporation), a wholly-owned subsidiary of the
Holding Company. As described below, on May 17, 1996, National Tobacco Company,
L.P. (the Partnership) was recapitalized and the Holding Company acquired a 99%
limited partnership interest in the Partnership and the Finance Corporation
became the sole general partner and owner of the remaining 1% interest of the
Partnership. Accordingly, the May 17, 1996 transaction was accounted for as the
formation of a new entity. The Finance Corporation has no operations, assets or
liabilities, other than its 1% investment in the Partnership, which amounted to
approximately $311,000 as of December 31, 1996. References to the Company in the
notes to financial statements refer to both the Predecessor and the Partnership.
On May 17, 1996, the Partnership obtained new long-term debt financing, as more
fully described in Note 9, the proceeds of which were used to recapitalize the
Partnership. Under this recapitalization, substantially all of the existing
long-term debt was paid in full and the partnership interests of the general
partner and certain limited partners were acquired. Additionally, the interests
of the remaining limited partners were acquired, the proceeds of which were used
to purchase a portion of the membership interests in the Holding Company. The
Holding Company then contributed the proceeds from the sale of membership
interests to the Partnership in exchange for partnership interests in the
Partnership. Additionally, the proceeds from the subordinated debt and the sale
of warrants and preferred interests by the Holding Company, as more fully
described in Note 9, were also contributed to the Partnership in exchange for
limited partnership interests in the Partnership, which proceeds were used by
the Partnership to repay existing long-term debt and increase working capital.
The Holding Company then contributed capital in an amount equal to 1% of the
aggregate partnership interests in the Partnership to the Finance Corporation in
exchange for all of the capital stock of the Finance Corporation. The Finance
Corporation then immediately contributed such capital to the Partnership in
exchange for a 1% general partnership interest. As a result, the Partnership is
wholly-owned by the Holding Company. Accordingly, this transaction was accounted
for as the formation of a new entity under the purchase method of accounting.
F-25
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED):
The following is information related to the acquisition:
<TABLE>
<CAPTION>
Fair Value Reduction to
of Assets Historical Basis
Acquired and for the Former Carrying Value
Liabilities Assumed Partners Continuing of Assets and
and Incurred on in the Holding Liabilities at
Acquisition Date Company Acquisition Date
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets acquired:
Cash.............................................. $ 597,010 -- $ 597,010
Accounts receivable............................... 3,559,976 -- 3,559,976
Inventories....................................... 48,020,000 $ (2,919,359) 45,100,641
Other current assets.............................. 3,613,896 -- 3,613,896
Property, plant and equipment..................... 11,080,000 (1,195,793) 9,884,207
Goodwill.......................................... 31,952,125 -- 31,952,125
Loan costs........................................ 5,700,000 -- 5,700,000
Accounts payable.................................. (1,837,229) -- (1,837,229)
Accrued liabilities............................... (3,167,508) -- (3,167,508)
Other long-term liabilities....................... (5,654,954) -- (5,654,954)
Borrowings under inventory financing agreement.... (16,772,377) -- (16,772,377)
Subordinated note payable to former general
partner......................................... (204,772) -- (204,772)
Capital leases.................................... (28,668) -- (28,668)
------------------- ------------------- ------------------
Net assets acquired............................. 76,857,499 (4,115,152) 72,742,347
------------------- ------------------- ------------------
Proceeds from term loans, including amount allocated
to warrants of $1,250,828......................... 45,000,000 -- 45,000,000
Proceeds from revolving loans....................... 450,000 -- 450,000
Proceeds from subordinated notes, including amount
allocated to warrants of $6,644,416............... 20,000,000 -- 20,000,000
Proceeds from warrants.............................. 300,000 -- 300,000
Proceeds from preferred interest.................... 2,500,000 -- 2,500,000
------------------- ------------------- ------------------
Total proceeds.................................. 68,250,000 -- 68,250,000
------------------- ------------------- ------------------
Management's rollover and new interests............. 8,607,499 (4,115,152) 4,492,347
------------------- ------------------- ------------------
Total equity.................................... $ 8,607,499 $ (4,115,152) $ 4,492,347
------------------- ------------------- ------------------
------------------- ------------------- ------------------
</TABLE>
The following table presents unaudited pro forma results of operations data as
if the May 17, 1996 transactions described above had occurred on January 1,
1995.
<TABLE>
<CAPTION>
Period From
January 1, 1996
Year ended to
December 31, 1995 May 17, 1996
-------------------- ---------------
<S> <C> <C>
Net sales .................................................................. $ 52,630 $19,810
Income before cumulative effect of account change .......................... (1,472) (1,717)
---------- ---------------
Net income ................................................................. (1,595) (1,717)
---------- ---------------
---------- ---------------
</TABLE>
The pro forma data includes adjustments to remove historical amortization of
goodwill and historical interest expense and deferred financing costs and
adjustments to record the amortization of goodwill and the interest expense and
deferred financing costs associated with the transactions. The pro forma data is
not necessarily indicative of the results of operations as they would have been
had the transactions occurred on the assumed date.
F-26
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED):
The Company manufactures and distributes chewing tobacco products under the
brand names BEECH-NUT, BEECH-NUT WINTERGREEN, BEECH-NUT SPEARMINT, HAVANA
BLOSSOM and TROPHY. The Holding Company and the Finance Corporation have no
operations. The Company's customers consist primarily of distributors and retail
establishments within the United States. The Company sells to these customers on
open account and generally does not require collateral.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION: The consolidated financial statements of the Holding Company
include the consolidated accounts of the Holding Company, the Finance
Corporation and the Partnership. All intercompany accounts have been eliminated.
REVENUE RECOGNITION: The Company recognizes revenues and the related costs upon
shipment of product to the customer.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out (LIFO) method.
Leaf tobacco is included 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. Accordingly, the debt associated with this
inventory is included in current portion of notes payable and long-term debt.
FIXED ASSETS: Fixed assets are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets (4 to 7 years for machinery, equipment and
furniture and 25 years for buildings).
Expenditures for repairs and maintenance are charged to expense as incurred. The
costs of major renewals and betterments are capitalized and depreciated over
their estimated useful lives. Upon disposition of fixed assets, the costs and
related accumulated depreciation amounts are relieved and any resulting gain or
loss is reflected in operations during the period of disposition.
GOODWILL: The excess of purchase price over fair value of net assets acquired
is amortized over 40 years using the straight-line method.
The Company periodically reviews the appropriateness of the remaining life of
its intangible assets considering whether any events have occurred or conditions
have developed which may indicate that the remaining life or the amortization
method requires adjustment. After reviewing the appropriateness of the remaining
life and the pattern of usage of the intangible assets, the Company then
assesses the overall recoverability of intangible assets by determining if the
unamortized balance can be recovered through undiscounted future operating cash
flows. Absent any unfavorable findings, the Company continues to amortize its
intangible assets based on the existing estimated life.
DEFERRED FINANCING COSTS: Deferred financing costs are amortized over the terms
of the related debt obligations using the interest method.
INCOME TAXES: The Company is a partnership; therefore, no provision for income
taxes has been made since earnings or losses are reported by the partners on
their individual income tax returns.
ADVERTISING AND PROMOTION: Advertising and promotion costs are expensed as
incurred.
RISKS AND UNCERTAINTIES: Smokeless tobacco companies, like other manufacturers
and sellers of tobacco products, are subject to regulation at the federal, state
and local levels. Such regulations include labeling
F-27
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
requirements, limitations on advertising, and prohibition of sales to minors.
The trend in recent years has been toward increased regulation of the tobacco
industry. There can be no assurance as to the ultimate content, timing or effect
of any regulation of tobacco products by any federal, state or local legislative
or regulatory body, nor can there be any assurance that any such legislation or
regulation would not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
The tobacco industry has experienced and is experiencing significant product
liability litigation. Most tobacco liability lawsuits have been brought against
manufacturers and sellers of cigarettes for injuries allegedly caused by smoking
or by exposure to smoke. However, several lawsuits have been brought against
manufacturers and sellers of smokeless tobacco for injuries to health allegedly
caused by use of smokeless tobacco. Typically, such claims assert that use of
smokeless tobacco is addictive and causes oral cancer. There can be no assurance
that the Company will not sustain losses in connection with such lawsuits and
that such losses will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
disclosed of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Significant estimates made by the Company include accrued pension costs and
accrued postretirement benefits. Accrued pension costs and postretirement
benefits involve the use of actuarial assumptions, including the selection of
discount rates (see Notes 10 and 11). It is reasonably possible that the
Company's estimates for such items could change in the near term.
RECLASSIFICATIONS: Certain income statement amounts for the periods presented
have been reclassified to conform to current presentation with no effect on net
income of the periods.
3. CONCENTRATION OF CREDIT RISK:
At December 31, 1995 and 1996, the Company had bank deposits in excess of
federally insured limits of approximately $392,000 and $2,529,000, respectively.
The Company sells its products to distributors and retail establishments
throughout the United States. The Company performs periodic credit evaluations
of its customers and generally does not require collateral on trade receivables.
Historically, the Company has not experienced significant credit losses.
4. INVENTORIES:
The reduction of LIFO inventory quantities decreased earnings of the Company by
approximately $1,079,000, $146,000, $455,000 and $1,515,000 for the years ended
December 31, 1994 and 1995 and for the periods from January 1, 1996 to May 17,
1996 and from May 17, 1996 (inception) to December 31, 1996, respectively.
F-28
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES (CONTINUED):
The components of inventories at December 31 are as follows:
<TABLE>
<CAPTION>
The Predecessor The Holding Company
----------------- -------------------
1995 1996
---------------------------------------
<S> <C> <C>
Raw materials....................................................... $ 1,488,566 $ 1,510,315
Leaf tobacco........................................................ 33,967,031 36,825,352
Finished goods...................................................... 3,173,982 3,438,644
Supplies............................................................ 220,724 245,449
----------------- -------------------
$ 38,850,303 $ 42,019,760
----------------- -------------------
----------------- -------------------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31 consists of:
<TABLE>
<CAPTION>
The Predecessor The Holding Company
----------------- -------------------
1995 1996
---------------------------------------
<S> <C> <C>
Land................................................................ $ 733,478 $ 653,894
Buildings and improvements.......................................... 3,447,408 3,053,681
Machinery and equipment............................................. 7,105,933 5,149,085
Furniture and fixtures.............................................. 307,772 1,183,312
Capitalized leases.................................................. 138,604 --
----------------- -------------------
$ 11,733,195 $ 10,039,972
----------------- -------------------
----------------- -------------------
</TABLE>
6. GOODWILL:
Goodwill at December 31 consist of:
<TABLE>
<CAPTION>
The Predecessor The Holding Company
----------------- -------------------
1995 1996
---------------------------------------
<S> <C> <C>
Excess of purchase price over fair value of net assets acquired, net
of accumulated amortization of $2,782,652 and $504,294 at December
31, 1995 and 1996, respectively................................... $ 27,182,471 $ 31,447,830
----------------- -------------------
----------------- -------------------
</TABLE>
7. DEFERRED FINANCING COSTS AND OTHER ASSETS:
Deferred financing costs and other assets at December 31 consist of:
<TABLE>
<CAPTION>
The Predecessor The Holding Company
----------------- -------------------
1995 1996
---------------------------------------
<S> <C> <C>
Loan costs, net of accumulated amortization of $1,914,868 and
$773,808 at December 31, 1995 and 1996, respectively.............. $ 792,400 $ 4,926,192
Contingent interest costs, net of accumulated amortization of
$393,870 (see Note 9)............................................. 1,099,555 --
Organizational expenses, net of accumulated amortization of
$768,410.......................................................... 350,797 --
Intangible pension asset............................................ 46,057 --
----------------- -------------------
$ 2,288,809 $ 4,926,192
----------------- -------------------
----------------- -------------------
</TABLE>
F-29
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. ACCRUED EXPENSES:
Accrued expenses at December 31 consist of:
<TABLE>
<CAPTION>
The Predecessor The Holding Company
----------------- -------------------
1995 1996
---------------------------------------
<S> <C> <C>
Accrued vacation, wages and benefits................................ $ 1,327,046 $ 1,405,458
Accrued interest.................................................... 1,797,793 1,315,127
Current unfunded pension liability (see Note 13).................... 763,532 650,000
Other accrued expenses.............................................. 802,261 383,260
Transaction fees.................................................... 880,676 --
----------------- -------------------
$ 5,571,308 $ 3,753,845
----------------- -------------------
----------------- -------------------
</TABLE>
9. NOTES PAYABLE AND LONG-TERM DEBT:
THE PREDECESSOR:
Notes payable and long-term debt at December 31, 1995 consist of:
<TABLE>
<S> <C>
Term loan, net of unamortized discount of $86,825................................ $ 15,461,134
Working capital loan............................................................. 1,917,857
Borrowings under inventory financing agreement................................... 16,290,366
Senior subordinated notes payable to limited partner, interest payable quarterly
at 13% and 16%................................................................. 7,746,459
Subordinated notes payable to former general partner and former and current
limited partners, interest payable semiannually at 15%......................... 7,162,875
Subordinated notes payable to general partner, interest payable semiannually at
7%............................................................................. 163,668
Capital leases................................................................... 39,430
------------------
48,781,789
Less current portion............................................................. 27,085,553
------------------
$ 21,696,236
------------------
------------------
</TABLE>
The Predecessor had a credit agreement with a group of lenders providing for a
term loan in the original face amount of $42,000,000 and working capital loan
commitments totaling $6,574,468 at December 31, 1995. The loans bore interest at
4% above the prime rate during 1995, for an effective rate of 12.5%.
In conjunction with the credit agreement, certain lenders received detachable
warrants to purchase a 5% Class B partnership interest for $10. The original
fair value of this interest of $684,200 was reflected as a discount which was
amortized over the life of the term loan using the interest method.
The term loan was payable in varying quarterly principal installments ranging
from $1,750,000 to $2,250,000 plus interest with a final payment of all
remaining principal and accrued interest due on April 14, 1997. Amounts
outstanding under the working capital loan were limited to 85% of eligible
receivables and 65% of eligible inventories. A mandatory annual prepayment was
required if the Predecessor had cash in excess of a specified amount, or if it
sold property or equipment. Additionally, the Predecessor could make
nonscheduled prepayments. No mandatory prepayments were required to be made
during 1995. The loans were collateralized by all assets of the Predecessor and
were guaranteed by the partners.
The Predecessor had an inventory financing agreement with a supplier that
purchased, stored and processed raw leaf tobacco for the Predecessor. Amounts
borrowed and related interest under this agreement were repayable as the
supplier shipped the leaf tobacco that collateralized the loan to the
Predecessor.
F-30
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
Borrowings under the inventory financing agreement bore interest at the prime
rate plus 2% when prime was less than 10%, or prime plus 2.5% when prime was 10%
or greater (the effective rate was 10.5% at December 31, 1995). The loan was
guaranteed by the Predecessor's general and limited partners. The agreement
limited additional borrowings and substantial asset sales by the Predecessor.
The agreement also granted the supplier the exclusive right to process leaf
tobacco for the Predecessor until 2000. The Predecessor could terminate the
agreement without penalty if the supplier's price was uncompetitive; otherwise,
the Predecessor was required to pay a cancellation fee of $1,500,000.
The Predecessor had subordinated notes payable to certain Class A limited
partners in an original face amount of $7,500,000. The notes bore a stated
interest rate of 13% and were due October 15, 1998. The loan agreement permitted
deferral of the quarterly interest payments up to the March 31, 1993 payment
($246,459 was deferred during 1993). The deferred interest bore interest at 16%.
In addition to fixed interest, the note holders were entitled to receive a
contingent interest payment upon the occurrence of a 'triggering event,' as
defined (essentially the earlier of a sale or recapitalization of the
Predecessor, or April 14, 1997). The contingent interest amount was equal to 7%
of the 'common equity value' of the Predecessor, as defined, as of the
'triggering event' date. Contingent interest was paid in cash or notes and,
under certain circumstances, at the holder's option, as warrants to acquire an
aggregate 7% of Class B partnership interests. At December 31, 1995, the
Predecessor had recorded a liability for contingent interest, based on
calculations performed at that date, in the amount of $1,493,000 (see Note 10)
and a corresponding intangible asset in the same amount. The asset was amortized
over the life of the loan using the interest method (see Note 7).
The subordinated notes payable to the former general partner and former and
current limited partners (original face amount of $4,500,000) bore interest at
15% and were due April 14, 1999, or upon payment in full of all senior debt, if
earlier. Interest was payable semiannually on October 14 and April 14. On each
payment date through April 14, 1995, the Predecessor could, at its option, issue
notes for the accrued interest payable. Other than the principal amount, these
notes had identical terms to the original note. The Predecessor issued notes for
$682,492 for interest payments due in 1995. Subsequent to April 14, 1995, at
least two-thirds of the current interest was required to be paid in cash. No
interest deferral was permitted after April 14, 1997. At December 31, 1995,
approximately $907,000 of deferred interest notes were payable to limited
partners.
Certain notes and lending agreements contained covenants which required, among
other things, maintenance of specified ratios and partners' equity levels, and
limits on capital expenditures. The Predecessor was not in compliance with
certain of the covenants at December 31, 1995; however, the Predecessor
refinanced all of its long-term debt in the transactions described in Note 1.
Accordingly, the long-term portion of debt was not reclassified as current at
December 31, 1995.
F-31
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
THE HOLDING COMPANY AND THE PARTNERSHIP:
Notes payable and long-term debt at December 31, 1996 consists of:
<TABLE>
<S> <C>
Tranche A term loans.............................................................. $ 26,250,000
Tranche B term loan, net of unamortized discount of $1,120,293.................... 13,379,707
Borrowings under inventory financing agreement.................................... 16,911,873
Deferred interest notes under inventory financing agreement....................... 49,472
Subordinated notes payable, net of unamortized discount of $6,409,461............. 14,096,521
Capital leases.................................................................... 8,874
-----------------
70,696,447
Less current portion.............................................................. 21,720,219
-----------------
$ 48,976,228
-----------------
-----------------
</TABLE>
The Partnership has a credit agreement (the Credit Agreement) with a group of
lenders for Tranche A term loans in the original face amount of $30,000,000,
Tranche B term loan in the original face amount of $15,000,000 and revolving
loan commitments in the amount of $8,000,000 (there were no revolving loans
outstanding at December 31, 1996). The Holding Company and the Finance
Corporation are guarantors of this Credit Agreement.
The Tranche A term loans bear interest at the higher of the principal lender's
base rate or the Federal Funds rate plus 0.5%, plus 2% (10.25% at December 31,
1996), payable quarterly beginning on June 30, 1996. The Partnership has the
option to convert the interest rate to a rate based on LIBOR plus 3% (8.5% at
December 31, 1996). As of December 31, 1996, the Tranche A term loans had been
converted to the LIBOR option under a contract expiring January 21, 1997.
Principal repayments are required in varying quarterly installments ranging from
$875,000 to $2,875,000 beginning on September 30, 1996 and ending on May 17,
2001.
The Tranche B term loan bears interest at the higher of the principal lender's
base rate or the Federal Funds rate plus 0.5%, plus 2.5% (10.75% at December 31,
1996), payable quarterly beginning on June 30, 1996. The Partnership has the
option to convert the interest rate to a rate based on LIBOR plus 3.5% (9.0% at
December 31, 1996). As of December 31, 1996, the Tranche B term loan had been
converted to the LIBOR option under a contract expiring January 21, 1997. The
effective rate (assuming the December 31, 1996 variable rate of 10.75%) over the
term of this loan, after considering the effect of the discount discussed below,
is 14%. Principal repayments are required in varying quarterly installments
ranging from $250,000 to $2,500,000 beginning on September 30, 1996 and ending
on May 17, 2002.
The revolving loans will be made from time to time as requested by the
Partnership in a maximum aggregate outstanding principal amount at any one time
not to exceed the lesser of $8,000,000 and the borrowing base amount in effect
at that time. The borrowing base amount is defined as 80% of eligible accounts
receivable, 60% of eligible finished goods inventory and 40% of eligible tobacco
inventory. The revolving loans bear interest at the higher of the principal
lender's base rate or the Federal Funds rate plus 0.5%, plus 2% (10.25% at
December 31, 1996). Principal and interest under the revolving loan commitments
is due in full on the earlier of May 16, 2001 or the date on which the principal
amount of all Tranche A and Tranche B term loans is repaid in full.
Under the Credit Agreement, the lenders have also extended letter of credit
commitments under which the lenders will issue letters of credit from time to
time in a maximum aggregate outstanding principal amount at any one time not to
exceed $3,000,000, provided that the aggregate outstanding principal amount of
all revolving loans and all letters of credit shall not at any one time exceed
the lesser of $8,000,000 and the
F-32
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
borrowing base amount in effect at that time. A letter of credit in the amount
of $1,025,000 was outstanding at December 31, 1996. The Partnership pays
quarterly commitment fees of 0.5% of the unused portion of all revolving loans
and 3.0% on all letters of credit.
The Credit Agreement also requires mandatory prepayments if the Partnership has
excess cash flows or proceeds from the sale of fixed assets or additional debt
or equity interests as set forth in the Credit Agreement. In addition, the
Partnership may make voluntary unscheduled prepayments without penalty under the
provisions set forth in the Credit Agreement. As of December 31, 1996, the
Partnership had made $2,000,000 of voluntary prepayments on the Tranche A term
loans. The loans under the Credit Agreement are collateralized by all assets of
the Partnership.
The Partnership has an inventory financing agreement with a supplier that
purchases, stores and processes raw leaf tobacco for the Partnership. Amounts
borrowed under this agreement are repayable as the supplier ships the leaf
tobacco that collateralizes the loan to the Partnership.
Borrowings under the inventory financing agreement bear interest at the prime
rate plus 2% (10.25% at December 31, 1996), payable quarterly beginning on or
about June 30, 1996. Of the quarterly interest payments, interest of 1% is
payable in kind by issuing separate deferred interest notes to the supplier. The
deferred interest notes bear interest at prime plus 1% and all interest is
payable quarterly either in cash or in kind by issuing additional deferred
notes, at the Partnership's discretion. Deferred interest notes of $49,472 under
this agreement are included in notes payable and long-term debt as of December
31, 1996. All deferred interest notes, together with accrued interest thereon,
are due and payable in full on the earlier of May 17, 2003 or in the event of a
change in control or payment in full of the subordinated notes. The supplier has
a lien on all personal property of the Partnership. This lien is subordinated to
the interests of the lenders in the Credit Agreement described above, except as
it relates to leaf tobacco purchased under this agreement. The agreement limits
additional borrowings and substantial asset sales by the Partnership.
The agreement also grants the supplier the exclusive right to process leaf
tobacco for the Partnership until November 30, 2006. The Partnership can
terminate the agreement without penalty if the supplier's price is
uncompetitive; otherwise, the Partnership must pay a cancellation fee of
$5,000,000, increased each year, beginning January 1, 1997, by the percentage
increase in the Consumer Price Index (CPI). Beginning January 1, 2003, the
original termination fee of $5,000,000 will be reduced 25% each year, after
giving effect to the CPI increases described above.
The Holding Company has a subordinated credit agreement with certain lenders for
subordinated notes in the original face amount of $20,000,000. The subordinated
notes bear interest at 13.5% through May 31, 2001 and at 16.5% thereafter, until
maturity. The effective rate of these notes, after considering the effect of the
varying interest rates and the discount described below, is 26%. Interest of
8.2% is payable in cash quarterly beginning October 31, 1996. Interest in excess
of 8.2% is payable in kind by issuing separate deferred interest notes to the
subordinated note holders, quarterly, beginning October 31, 1996. The deferred
interest notes bear interest at the same rates as the subordinated notes;
however, all interest is payable quarterly in kind by the issuance of additional
deferred notes rather than in cash. Deferred interest notes of $505,983 are
included in the subordinated notes payable balance in the Holding Company's
balance sheet as of December 31, 1996. All subordinated notes and deferred
interest notes, together with accrued interest thereon, are due and payable in
full on May 17, 2003.
The subordinated credit agreement also requires mandatory prepayments if the
debt under the Credit Agreement has been paid and the Partnership has proceeds
from the sale of fixed assets or additional debt or equity interests as defined
in the agreement. The subordinated credit agreement requires mandatory
F-33
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
redemptions of the subordinated notes if demanded by the holders of a majority
in aggregate principal amount of the subordinated notes upon a change of
control, or after the debt under the Credit Agreement referred to above has been
paid in full and the warrant issued to the Tranche B lender has been redeemed,
to the extent of 80% of excess cash flow, in each case at a prepayment price
equal to 101% of the principal being prepaid plus accrued interest. Under terms
of the agreement, the Holding Company may not make optional prepayments before
May 17, 1998, after which the Holding Company may prepay the principal amount of
subordinated and deferred interest notes at a prepayment price equal to 105% of
the principal being prepaid plus accrued interest. The prepayment price declines
by 1% each year to 101% of the principal being prepaid after May 16, 2002.
Certain notes and credit agreements contain covenants which require, among other
things, maintenance of specified financial ratios and partners' equity levels,
and limits on capital expenditures. The Holding Company and the Partnership were
in compliance with the covenants at December 31, 1996.
Scheduled maturities (exclusive of future mandatory prepayments, if any) of
Holding Company's and the Partnership's notes payable and long-term debt are as
follows:
<TABLE>
<S> <C>
Through December 31, 1997......................................................... $ 21,720,219
Through December 31, 1998......................................................... 5,500,000
Through December 31, 1999......................................................... 6,500,000
Through December 31, 2000......................................................... 9,750,000
Through December 31, 2001......................................................... 9,250,000
Thereafter........................................................................ 25,000,000
-----------------
77,720,219
Less unamortized discount......................................................... 7,529,754
-----------------
$ 70,696,447
-----------------
-----------------
</TABLE>
10. OTHER LONG-TERM LIABILITIES:
Other long-term liabilities at December 31 consist of:
<TABLE>
<CAPTION>
The Predecessor The Holding Company
----------------- -------------------
1995 1996
---------------------------------------
<S> <C> <C>
Postretirement benefits (see Note 12)............................... $ 3,100,000 $ 4,653,872
Noncurrent unfunded pension liability (see Note 11)................. 491,259 1,161,794
Contingent interest................................................. 1,493,425 --
Other liabilities................................................... 30,817 30,721
----------------- -------------------
$ 5,115,501 $ 5,846,387
----------------- -------------------
----------------- -------------------
</TABLE>
At its inception on April 15, 1992, the Predecessor recorded a liability to
accrue the estimated costs of removing all asbestos from its manufacturing
facility. During 1994, management and an outside engineering consultant
determined the cost of removing the remaining asbestos to be approximately
$200,000. Thus, the remaining liability of approximately $1,012,000 was adjusted
to the new estimate of $200,000 at December 31, 1994. This reduction in the
liability of approximately $812,000 was treated as a change in
F-34
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. OTHER LONG-TERM LIABILITIES (CONTINUED):
accounting estimate and recorded in other income in the statement of operations
for the year ended December 31, 1994. The remaining liability at December 31,
1995 and 1996 was approximately $31,000.
Manangement is of the opinion that there are no other environmental liabilities
as of December 31, 1996.
11. PREFERRED INTERESTS:
On May 17, 1996 (inception), the Holding Company issued mandatory redeemable
preferred interests in the Holding Company to the subordinated lenders for
$2,500,000. These preferred interests have no voting rights in the management of
the Holding Company, but do have certain consent rights, along with other equity
interests, to certain fundamental transactions under certain circumstances. The
preferred interest compounds, on a quarterly basis, for the first five years at
an annual rate of 14.5%, and thereafter at 17.5%, such return to be paid in the
form of an increase in the preferred interest accounts. The preferred interest
is mandatorily redeemable by the Holding Company on May 17, 2003 at the amount
of the preferred interest account balances on that date. The Holding Company may
redeem the preferred interest at any time after May 17, 1998 at a premium equal
to 105% of the preferred interest account balances on that date. The premium
percentage decreases by 1% each year to 101% of the preferred interest account
balances after May 17, 2002 through the redemption date. In the event of a
change in control, the Holding Company must offer to redeem the preferred
interest at 101% of the preferred interest account balances on that date. The
preferred interest account balance of $2,737,441 at December 31, 1996 has been
classified as a non equity item in the accompanying balance sheet and the
accrual of preferred interest of $237,441 from May 17, 1996 (inception) to
December 31, 1996 as interest expense in the accompanying statement of
operations.
12. WARRANTS
Under terms of the subordinated credit agreement and related agreements, the
lenders received warrants with an original fair value of $6,944,416, including
$300,000 allocated to warrants purchased with cash, to purchase a 38.86% Class A
membership interest in the equity of the Holding Company for $0.39. These
warrants are exercisable at any time after issuance, have weighted average
anti-dilution protection and expire on May 17, 2006. The remaining balance of
this interest at December 31, 1996 of $6,709,461, less $300,000 allocated to
warrants purchased with cash, has been reflected in the Holding Company's
statement of financial position as a loan discount which is being amortized over
the life of the subordinated notes under the interest method. The lenders also
received redeemable warrants to purchase an additional 5% Class A membership
interest in the equity of the Holding Company for $0.05, which have limited
rights. These warrants are exercisable at any time after May 17, 2001, have
weighted average anti-dilution protection and expire on May 17, 2006. The
redeemable warrants may be redeemed by the Holding Company at any time before
May 17, 2001 pro rata with the redemption of the subordinated notes, at a
redemption price equal to the exercise price, and are not redeemable thereafter.
The lender of the Tranche B term loan received detachable warrants with an
original fair value of $1,250,828 to purchase a 7% Class B membership interest
in the equity of the Holding Company for $100. The unamortized balance of this
interest at December 31, 1996 of $1,120,293 has been reflected in the
Partnership's balance sheet as a loan discount which is being amortized over the
life of the Tranche B term loan under the interest method.
All of the warrants described above have put rights which can be exercised under
certain conditions, including a change in control, an asset sale, a
reorganization of the Holding Company as a 'C' corporation, the filing of a
registration statement under the Securities Act of 1933, the repayment or
refinancing of the debt of the Holding Company and the Partnership, the
occurrence of an event of default,
F-35
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. WARRANTS (CONTINUED):
or upon May 17, 2002. Under the put rights, the warrant holders may require the
Holding Company to purchase all or a portion of the warrant interests at their
market value as defined in the warrant agreement.
13. PENSION PLANS:
The Company has defined benefit pension plans covering substantially all of its
employees. Benefits for the hourly employees' plan are based on a stated benefit
per year of service, reduced by amounts earned in a previous plan. Benefits for
salaried employees are based on years of service and the employees' final
compensation.
The following table sets forth the plans' funded status and amounts recognized
in the Company's balance sheets and statements of operations.
<TABLE>
<CAPTION>
The Predecessor The Holding Company
----------------- -------------------
December 31, December 31,
1995 1996
---------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $4,713,024 and $5,472,269 in
1995 and 1996, respectively.................................... $ 4,889,442 $ 5,661,483
----------------- -------------------
----------------- -------------------
Projected benefit obligation........................................ $ 5,783,384 $ 6,754,067
Plan assets......................................................... 4,205,517 5,218,348
----------------- -------------------
Projected benefit obligation in excess of plan assets............... 1,577,867 1,535,719
Unrecognized net (gain) loss from past experience different than
assumed........................................................... (560,095) 276,075
Unrecognized prior service cost..................................... (60,646) --
Recognition of minimum liability.................................... 297,665 --
Amounts to be funded within one year (included in accrued
expenses)......................................................... (763,532) (650,000)
----------------- -------------------
Noncurrent unfunded pension liability (included in other long-term
liabilities)...................................................... $ 491,259 $ 1,161,794
----------------- -------------------
----------------- -------------------
</TABLE>
Net pension cost included the following components:
<TABLE>
<CAPTION>
The Holding Company
The Predecessor -------------------
--------------------------------------------------- Period From
May 17
Year Ended December 31, Period From (Inception) to
--------------------------------- January 1 to December 31,
1994 1995 May 17, 1996 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost................... $ 509,606 $ 514,884 $ 193,081 $ 508,759
Interest cost.................. 313,160 372,726 139,772 449,361
Return on plan assets.......... (207,139) (728,815) (273,305) (604,634)
Net amortization and
deferral..................... 40,300 544,976 204,366 284,984
--------------- --------------- --------------- -------------------
Net pension cost............. $ 655,927 $ 703,771 $ 263,914 $ 638,470
--------------- --------------- --------------- -------------------
--------------- --------------- --------------- -------------------
</TABLE>
F-36
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. PENSION PLANS (CONTINUED):
The average discount rate and expected long-term rate of return on plan assets
was 7.5% for the periods presented. The rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation for the salary plan was 6% for the periods presented. The Company's
funding policy is to contribute annually amounts equal to or in excess of the
minimum funding requirements of the Employee Retirement Income Security Act of
1974. The plans' assets are primarily invested in bond and equity mutual funds.
The Company also sponsors a voluntary retirement savings plan (401(k)). Eligible
employees may elect to contribute up to 10% of their annual earnings subject to
certain limitations. The Company matches 50% of each eligible participant's
contribution not in excess of 6% of the participant's compensation for the plan
year. Company matching is subject to a vesting schedule. Additional
discretionary matching contributions by the Company are determined annually by
the Board of Directors. Expense related to this plan was approximately $130,000
for the period from May 17, 1996 (inception) to December 31, 1996.
14. POSTRETIREMENT BENEFIT PLANS:
The Company sponsors two defined benefit postretirement plans that cover both
salaried and hourly employees. One plan provides medical and dental benefits,
and the other provides life insurance benefits. The postretirement health care
plan is contributory, with retiree contributions adjusted annually; the life
insurance plan is noncontributory.
At its inception on April 15, 1992, the Predecessor recorded a liability related
to postretirement benefits of approximately $5,065,000. The Predecessor's policy
was to reduce the liability for payments included in the calculations of the
liability at the acquisition date and to expense postretirement benefits not
included in the liability as they were paid. Payments to retired employees under
these plans amounted to approximately $91,000 for the year ended December 31,
1994.
During 1994, the Predecessor made certain amendments to its postretirement
benefit plans, including altering employee service requirements for plan
eligibility and capping the amount of future cost increases to be absorbed by
the Predecessor. These amendments reduced the postretirement liability by
approximately $2,267,000. This reduction in the postretirement liability was
accounted for as a change in accounting estimate and included in other income in
the accompanying statement of operations. The remaining liability at December
31, 1994 of approximately $2,657,000 was recorded in other long-term
liabilities.
Effective January 1, 1995, the Predecessor adopted Statement of Financial
Accounting Standards (SFAS) No. 106, 'Employers' Accounting for Postretirement
Benefits Other Than Pensions.' Under SFAS No. 106, the Predecessor accrues the
cost of these benefits over employees' active service periods.
The Predecessor elected to recognize this change in accounting on the immediate
recognition basis. The adoption of SFAS No. 106 resulted in a one-time expense
totaling approximately $123,000.
F-37
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. POSTRETIREMENT BENEFIT PLANS (CONTINUED):
The postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
The Holding
Company
---------------
The Predecessor Period From
------------------------------- May 17
Year Ended Period From (Inception) to
December 31, January 1 to December 31,
1995 May 17, 1996 1996
-------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned........................... $ 167,000 $ 68,563 $ 165,648
Interest cost on accumulated postretirement benefit
obligation.............................................. 219,000 100,852 194,606
Net amortization and deferral............................. -- 44,873 --
-------------- -------------- ---------------
Postretirement benefit expense............................ $ 386,000 $ 214,288 $ 360,254
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
The postretirement benefit liability as of December 31, 1995 and 1996 included
the following components:
<TABLE>
<CAPTION>
The Predecessor The Holding Company
----------------- -------------------
1995 1996
---------------------------------------
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit
obligation:
Retirees........................................................... $ 998,000 $ 1,443,963
Fully eligible active plan participants............................ 1,518,000 1,889,590
Other active plan participants..................................... 956,000 1,190,373
----------------- -------------------
3,472,000 4,523,926
Unrecognized net (gain) loss......................................... (372,000) 129,946
----------------- -------------------
Accrued postretirement benefit liability............................. $ 3,100,000 $ 4,653,872
----------------- -------------------
----------------- -------------------
</TABLE>
The assumed discount rate used to determine the accumulated postretirement
benefit obligation as of December 31, 1995 and 1996 was 7.0% and 7.5%,
respectively. As of December 31, 1995 and 1996, the assumed health care cost
trend rate for participants under age 65 was 10% and 9.5%, respectively; for
participants age 65 and over, the rate was 9% and 8.5%, respectively. The health
care cost trend rate was assumed to decline gradually to 5.5% for pre-age 65
costs and to 5% for post-age 65 costs over 27 years. A one-percentage-point
increase in the assumed health care cost trend rate would have increased the
accumulated postretirement benefit obligation as of December 31, 1995 and 1996
by $240,000 and $383,000, respectively, and the postretirement benefit expense
for the year ended December 31, 1995 and the periods from January 1, 1996 to May
17, 1996 and from May 17, 1996 (inception) to December 31, 1996 by $40,000,
$18,000, and $39,000, respectively.
15. DEFERRED COMPENSATION PLANS:
The Predecessor had deferred compensation agreements with certain employees.
Under these agreements, compensation was determined based on the growth of the
Predecessor's tax equity, subject to certain adjustments. Amounts earned under
these plans were to become vested over a five-year period. There were no amounts
earned or expense recorded related to these plans for the years ended December
31, 1994 or 1995 or the period from January 1, 1996 to May 17, 1996.
F-38
<PAGE>
NATIONAL TOBACCO (PREDECESSOR OF NORTH ATLANTIC TRADING COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. LEASES:
The Company leases vehicles and office space under cancelable operating leases
and a computer under a capital lease. Total rent expense under the operating
leases was $759,000, $674,000, $337,000 and $426,000 for the years ended
December 31, 1994 and 1995 and the periods from January 1, 1996 to May 17, 1996
and from May 17, 1996 (inception) to December 31, 1996, respectively.
17. RESEARCH AND DEVELOPMENT EXPENSE:
Research and development expense was approximately $284,000, $318,000, $128,000
and $216,000 for the years ended December 31, 1994 and 1995 and the periods from
January 1, 1996 to May 17, 1996, and from May 17, 1996 (inception) to December
31, 1996, respectively.
18. RELATED PARTIES:
The general partner charged the Predecessor a management fee of $25,000 per
month; total management fee expense was $300,000 for the years ended December
31, 1994 and 1995. At December 31, 1995, $412,500 related to this management fee
was included in accrued liabilities. Additionally, the Predecessor reimbursed
the general partner for expenses incurred on behalf of the Predecessor of
approximately $50,000 in 1994 and 1995.
19. ABANDONED DEBT ISSUE COSTS:
Abandoned debt issue costs of approximately $352,000 and $1,561,000 were
included in other expense for the years ended December 31, 1994 and 1995,
respectively.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, Disclosure About Fair Value of Financial Instruments, as
amended by Statement of Financial Accounting Standards No. 126. The estimated
fair value amounts have been determined by the Company using the methods and
assumptions described below. However, considerable judgment is required to
interpret market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practical to estimate that value:
CASH AND CASH EQUIVALENTS: Cash and cash equivalents are by definition
short-term and the carrying amount is a reasonable estimate of fair value.
LONG-TERM DEBT: All long-term debt is subject to variable rates. As such, the
fair value of long-term debt approximates its carrying value.
F-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
NATC Holdings USA, Inc.
We have audited the accompanying consolidated balance sheets of NATC
Holdings USA, Inc. as of December 31, 1995 and 1996, and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for the years ended December 31, 1994, 1995, and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NATC Holdings
USA, Inc. as of December 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1994, 1995, and
1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
April 29, 1997
F-40
<PAGE>
NATC HOLDINGS USA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
(Dollars in thousands, except par value amounts) 1995 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.......................................................... $ 3,693 $ 8,766
Accounts receivable................................................................ 1,270 1,004
Inventory.......................................................................... 6,563 5,287
Other current assets............................................................... 101 94
----------- -----------
Total current assets................................................................. 11,627 15,151
----------- -----------
Deferred income taxes................................................................ 1,233 1,191
Fixed assets, net.................................................................... 148 141
Intangible assets, net............................................................... 41,357 45,096
Deferred financing costs, net........................................................ 3,694 2,800
Other assets, net.................................................................... 400 306
----------- -----------
Total assets......................................................................... $ 58,459 $ 64,685
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Current maturities of long-term debt............................................... $ 4,918 $ 6,124
Accounts payable, trade............................................................ 552 588
Payable to United States Tobacco Company........................................... 2,400 3,010
Accrued interest................................................................... 770 682
Accrued expenses................................................................... 384 1,057
Income taxes payable............................................................... 1,015 1,838
----------- -----------
Total current liabilities............................................................ 10,039 13,299
----------- -----------
Long-term debt, less current maturities.............................................. 31,982 25,859
----------- -----------
Commitments and contingencies (Note 8)............................................... -- --
Stockholder's equity:
Class A voting common stock, $.01 par value; 50,000 shares authorized, 20,300
shares issued; 13,634 and 13,334 shares outstanding at December 31, 1995 and
1996, respectively.............................................................. -- --
Class B non voting common stock, $.01 par value; 50,000 shares authorized; none
issued and outstanding.......................................................... -- --
Additional paid-in capital......................................................... 7,725 7,725
Retained earnings.................................................................. 16,363 25,707
Treasury stock, 6,666 and 6,966 shares at cost at
December 31, 1995 and 1996, respectively........................................ (7,500) (7,905)
----------- -----------
Total stockholder's equity before note receivable, officer........................... 16,588 25,527
Note receivable, officer............................................................. 150 --
----------- -----------
Total stockholder's equity........................................................... 16,438 25,527
----------- -----------
Total liabilities and stockholder's equity........................................... $ 58,459 $ 64,685
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-41
<PAGE>
NATC HOLDINGS USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
(Dollars in thousands, except per share data) 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales..................................................... $40,218 $42,546 $46,139
Cost of goods sold............................................ 14,432 15,503 16,453
------------- ------------- -------------
Gross profit............................................. 25,786 27,043 29,686
Operating expenses:
Selling, general and administrative......................... 3,400 4,004 3,980
Amortization of intangible assets........................... 4,379 4,710 5,078
------------- ------------- -------------
Income from operations................................... 18,007 18,329 20,628
Other expenses:
Interest expense............................................ 4,471 4,967 4,976
Litigation settlement....................................... -- 285 --
Financial advisory fee and other expenses................... 305 654 1,178
------------- ------------- -------------
Income before provision for income taxes and
extraordinary loss..................................... 13,231 12,423 14,474
Provision for income taxes.................................... 5,435 4,301 5,130
------------- ------------- -------------
Income before extraordinary loss......................... 7,796 8,122 9,344
Extraordinary loss from early extinguishment of debt, net of
income tax benefit of $411.................................. -- 762 --
------------- ------------- -------------
Net income............................................... $7,796 $7,360 $9,344
------------- ------------- -------------
------------- ------------- -------------
Earnings per common share:
Income before extraordinary loss......................... $384.04 $513.24 $698.25
Extraordinary loss....................................... -- (48.15) --
Net income............................................... $384.04 $465.09 $698.25
Weighted average number of common shares outstanding
(000).................................................. 20.3 15.8 13.4
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-42
<PAGE>
NATC HOLDINGS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
(Dollars in thousands) 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $7,796 $7,360 $9,344
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 45 58 62
Amortization of intangible assets............................. 4,379 4,710 5,078
Amortization of deferred financing costs...................... 734 971 1,013
Deferred income taxes......................................... (1,065) (168) 42
Write-off of deferred financing costs......................... -- 964 --
Changes in operating assets and liabilities:
Accounts receivable........................................... (518) 28 266
Inventory..................................................... 146 (3,290) 1,276
Other current assets.......................................... 298 (6) (23)
Accounts payable, trade....................................... -- -- (172)
Accrued interest and expenses................................. (458) (274) 585
Income taxes payable.......................................... 450 565 823
Other......................................................... (255) 5 (26)
------------- ------------- -------------
Net cash provided by operating activities................... 11,552 10,923 18,268
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Royalty payments to United States Tobacco Company ............... (7,394) (7,208) (7,998)
Capital expenditures............................................. (94) (88) (55)
------------- ------------- -------------
Net cash used in investing activities....................... (7,488) (7,296) (8,053)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of long-term debt....................... -- 16,000 --
Repayment of long-term debt...................................... (7,128) (8,472) (4,917)
Acquisition of treasury stock.................................... -- (7,500) (225)
Payments for deferred financing costs............................ -- (2,826) --
------------- ------------- -------------
Net cash used in financing activities....................... (7,128) (2,798) (5,142)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents ........... (3,064) 829 5,073
Cash and cash equivalents at beginning of year..................... 5,928 2,864 3,693
------------- ------------- -------------
Cash and cash equivalents at end of year........................... $2,864 $3,693 $8,766
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash paid during the year:
Cash paid for interest........................................... $4,011 $4,105 $4,224
Cash paid for income taxes....................................... $5,755 $3,279 $4,265
</TABLE>
Non-cash financing activities:
During 1996, the Company acquired 300 shares of its common stock from an
officer of the Company for $405. The Company offset $180 of the purchase price
by reducing the officers note receivable and accrued interest on that note
receivable, which amounted to $150 and $30, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
F-43
<PAGE>
NATC HOLDINGS USA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Class A Class A
Voting Voting Additional Note
(Dollars in Common Common Paid-in Retained Treasury Receivable,
thousands) Shares Stock Capital Earnings Stock Officer Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993............... 20,300 -- $7,725 $1,207 -- $(150) $8,782
Net income........... -- 7,796 -- 7,796
------------ ------------ ------------ ------------- ------------- ------------ -------------
Balance, December 31,
1994............... 20,300 -- 7,725 9,003 -- (150) 16,578
Net income........... -- -- -- 7,360 -- -- 7,360
Repurchase of Company
Class A Voting
Common Stock....... (6,666) -- -- -- $(7,500) -- (7,500)
------------ ------------ ------------ ------------- ------------- ------------ -------------
Balance, December 31,
1995............... 13,634 -- 7,725 16,363 (7,500) (150) 16,438
Net income........... -- -- -- 9,344 -- -- 9,344
Repurchase of Company
Class A Voting
Common Stock....... (300) -- -- -- (405) 150 (255)
------------ ------------ ------------ ------------- ------------- ------------ -------------
Balance, December 31,
1996............... 13,334 -- $7,725 $25,707 $(7,905) -- $25,527
------------ ------------ ------------ ------------- ------------- ------------ -------------
------------ ------------ ------------ ------------- ------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE>
NATC HOLDINGS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
NATC Holdings USA, Inc. and its wholly-owned subsidiary North Atlantic Trading
Company, Inc. (collectively, the 'Company') are engaged primarily in the
distribution of cigarette paper in the United States and Canada. The Company is
a wholly-owned subsidiary of NATC Holding Company Ltd.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of NATC Holdings USA, Inc. and its wholly-owned subsidiary North
Atlantic Trading Company, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION: The Company recognizes revenues and the related costs upon
shipment of product to the customer.
CASH AND CASH EQUIVALENTS: For purposes of the financial statements, the
Company considers cash equivalents to be highly liquid investments with
maturities of three months or less.
The Company maintains a significant portion of its cash and cash equivalents at
one financial institution.
INVENTORIES: Inventories consisting primarily of finished goods are stated at
the lower of cost or market. Cost is determined on an average cost basis.
FIXED ASSETS: Fixed assets, consisting primarily of furniture, fixtures and
office equipment, are stated at cost less accumulated depreciation. Depreciation
is provided using an accelerated method over the estimated useful lives of the
related assets, generally three to seven years.
Expenditures for repairs and maintenance are charged to expense as incurred. The
costs of major renewals and betterments are capitalized and depreciated over
their estimated useful lives. Upon disposition of fixed assets, the cost and
related accumulated depreciation amounts are relieved and any resulting gain or
loss is reflected in operations.
Depreciation expense included in the accompanying statements of income was
$45,000, $58,000, and $62,000 for the years ended December 31, 1994, 1995, and
1996, respectively.
INTANGIBLE ASSETS: Intangible assets consist primarily of prepaid royalties, a
covenant not to compete, a customer list and contingent royalty payments. Such
amounts are amortized over the estimated useful lives of the related assets,
generally five to twenty-five years, using the straight-line method (Note 4).
The Company periodically reviews the appropriateness of the remaining life
of its intangible assets considering whether any events have occurred or
conditions have developed which may indicate that the remaining life or the
amortization method requires adjustment. After reviewing the appropriateness of
the remaining life and the pattern of usage of the intangible assets, the
Company then assesses the overall recoverability of intangible assets by
determining if the unamortized balance can be recovered through undiscounted
future operating cash flows. Absent any unfavorable findings, the Company
continues to amortize its intangible assets based on the existing estimated
life.
DEFERRED FINANCING COSTS: Deferred financing costs consist of amounts paid in
connection with the Company's debt refinancing in 1995 and interest rate cap
agreements, which are amortized over the terms of the related debt obligations
and interest rate cap agreements, (three to seven years) using the straight-line
method.
INCOME TAXES: Deferred income taxes are determined based on temporary
differences between the financial statement and tax basis of assets and
liabilities, using enacted tax rates expected to be in effect
F-45
<PAGE>
NATC HOLDINGS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
during the years in which the differences are expected to reverse. The Company's
temporary differences relate principally to intangibles, fixed assets and
inventory.
ADVERTISING AND PROMOTION: Advertising and promotion costs are expensed as
incurred. Advertising expense was approximately $495,000, $795,000, and $541,000
for the years ended December 31, 1994, 1995 and 1996.
EARNINGS PER SHARE: The number of shares used in computing earnings per common
share includes the weighted average number of shares of common stock outstanding
during the period. In February 1997, the Financial Accounting Standards Board
issued Statements of Financial Standards No. 128, 'Earnings per Share' ('SFAS
No. 128'). SFAS No. 128 is designed to improve the earnings per share
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements, and increasing
comparability of earnings per share on an international basis. This
pronouncement is effective for periods beginning after December 15, 1997, and
would not have had an impact on the Company's earnings per share as previously
reported.
RISKS AND UNCERTAINTIES: The sellers of tobacco products, are subject to
regulation at the federal, state and local levels. The trend in recent years has
been toward increased regulation of the tobacco industry. There can be no
assurance as to the ultimate content, timing or effect of any regulation of
tobacco products by any federal, state or local legislative or regulatory body,
nor can there be any assurance that any such legislation or regulation would not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
Most tobacco liability lawsuits have been brought against manufacturers and
sellers of cigarettes for injuries allegedly caused by smoking or by exposure to
smoke. No such cases have been brought against the Company, but there can be no
assurance that the Company will not be sued in the future or, if sued, that such
lawsuits will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
3. FIXED ASSETS:
Fixed assets at December 31, 1995 and 1996 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Furniture and fixtures....................................................... $129 $136
Computer and office equipment................................................ 146 194
----------- -----------
275 330
Less accumulated depreciation................................................ 127 189
----------- -----------
$148 $141
----------- -----------
----------- -----------
</TABLE>
F-46
<PAGE>
NATC HOLDINGS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INTANGIBLE ASSETS:
Intangible assets at December 31, 1995 and 1996 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Royalty payments...................................................... $36,308 $45,124
Covenant not-to-compete............................................... 15,000 15,000
Customer list......................................................... 2,235 2,235
-------------- --------------
53,543 62,359
Less accumulated amortization......................................... 12,186 17,263
-------------- --------------
$41,357 $45,096
-------------- --------------
-------------- --------------
</TABLE>
Amortization expense charged to operations in the accompanying statements of
operations was approximately $4,379,000, $4,710,000 and $5,078,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
5. DEFERRED FINANCING COSTS:
Deferred financing costs at December 31, 1995 and 1996 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Debt refinancing costs................................................... $4,757 $4,757
Interest rate cap agreements............................................. 258 99
------------ ------------
5,015 4,856
Less accumulated amortization............................................ 1,321 2,056
------------ ------------
$3,694 $2,800
------------ ------------
------------ ------------
</TABLE>
The amortization of deferred financing costs charged to operations, and included
in interest expense in the accompanying statements of operations, was
approximately $660,000, $833,000 and $894,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
6. ACQUISITION:
On March 31, 1993, the Company acquired certain assets and assumed certain
liabilities relating to the cigarette paper business (the 'Business') of United
States Tobacco Company ('UST'), including inventory and a license to use their
trade name in the United States and Canada. The total purchase price including
costs of the transaction was approximately $44,400,000. In addition, the Company
is obligated to pay UST additional consideration during the ten-year period
immediately following the acquisition date equal to 30% of the annual gross
profits attributable to the product sales of the Business. These contingent
royalty payments are being capitalized as additional purchase consideration and
amortized over the remaining life assigned to this intangible asset. For the
years ended December 31, 1994 and 1995, and 1996 approximately $7,394,000,
$8,134,000, and $8,816,000 respectively, of such royalties were capitalized. At
December 31, 1995 and 1996, the amount payable to UST for contingent royalties
was $2,400,000 and $3,010,000, respectively.
The funds used to acquire the Business were provided by proceeds from the
issuance of common stock and long-term debt financing. The acquisition has been
accounted for under the purchase method.
F-47
<PAGE>
NATC HOLDINGS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt at December 31, 1995 and 1996 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Term loan (NationsBank)............................................... $14,400 $9,483
Note Purchase Agreement............................................... 22,500 22,500
-------------- --------------
36,900 31,983
Less current maturities............................................... 4,918 6,124
-------------- --------------
$31,982 $25,859
-------------- --------------
-------------- --------------
</TABLE>
On April 28, 1995, the Company altered its existing debt obligations.
NationsBank, pursuant to a credit agreement, provided the Company with a term
loan in the principal amount of $16,000,000 and a $2,000,000 working capital
facility. The Company used the proceeds of the term loan to satisfy the
obligation outstanding with Banque Nationale de Paris ('BNP') and to redeem
common shares from minority stockholders of the Company. In addition, the
Company amended and restated the terms and conditions of its Note Purchase
Agreement. The Company has recorded an extraordinary loss of $762,000 (net of
income tax benefit of $411,000), consisting of fees paid to BNP and the
write-off of deferred financing costs, related to the early extinguishment of
debt with BNP.
The Term Loan is payable in quarterly installments of $800,000 commencing July
1995, with the balance due April 30, 2000, and is collateralized by
substantially all of the Company's assets. In addition, the Company is required,
under the terms of the agreement, to reduce its outstanding borrowings by an
amount equal to 40% of excess cash flows, as defined, for the fiscal year ending
December 31, 1995 and 60% of excess cash flows, as defined, for each fiscal year
thereafter, in two equal payments on April 30 and on October 31 of each such
fiscal year. Working capital advances are payable in full on or before April 15
and October 15 of each calendar year. During a period of at least thirty
consecutive days commencing on April 15 and October 15 of each calendar year, no
amounts can be outstanding under the working capital note. As of December 31,
1996, the Company had $2,000,000 of unused borrowings under the working capital
facility. Outstanding borrowings are subject to interest at the Libor Rate as
defined (London Interbank Offered Rate plus margin of 3.25%, 9.097% as of
December 31, 1996). The credit agreement contains various covenants which, among
other things, require the Company to maintain specific levels of net worth,
leverage, interest coverage, fixed charge coverage, and limits capital
expenditures, as defined.
Borrowings under the Note Purchase Agreement are payable in full on April 30,
2000 and bear interest at 14.0% per annum. The notes are subordinate to the Term
Loan, and are collateralized by a second lien on substantially all of the
Company assets. The note purchase agreement contains various covenants which,
among other things, requires the Company to maintain specific levels of interest
coverage, as defined. Aggregate maturities of long-term debt in each of the
years subsequent to December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997......................................................................... $ 6,124
1998......................................................................... 3,200
1999......................................................................... 159
2000......................................................................... 22,500
--------------
$31,983
--------------
--------------
</TABLE>
During 1993, the Company entered into a three-year interest rate cap agreement
whereby the Company will effectively pay the lesser of Libor plus 3%, or 8% on
the first $9,000,000 of borrowings under the Term Loan. This agreement
terminated during 1996.
F-48
<PAGE>
NATC HOLDINGS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED):
During 1995, the Company entered into a three-year interest rate cap agreement
whereby the Company will effectively pay the lesser of the rate stated above or
10.50% on borrowings under the Term Loan.
8. COMMITMENTS AND CONTINGENCIES:
During November 1992, the Company entered into an exclusive licensing agreement
with Bollore Technologies S.A. ('Bollore'), whereby Bollore will be the
exclusive supplier of finished product to the Company for 20 years, renewable in
20 year increments and at specified prices through December 2001.
Pursuant to the Credit Agreement with NationsBank dated April 28, 1995, the
Company is obligated to pay an annual working capital facility fee of $10,000
each year.
During 1995, the Company settled a lawsuit in the amount of $285,000 related to
the funding of the acquisition of the Business.
The Company's tax returns are currently under examination by the IRS for the
years ending December 31, 1993, 1994 and 1995. In the opinion of management,
adequate provision has been made for all income taxes and interest, and any
liability that may arise for prior periods, as a result of the examination, will
not have a material effect on the financial condition or results of operations
of the Company.
9. INCOME TAXES:
The components of the income tax provision (benefit) for the years ended
December 31, 1994, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal............................................ $ 5,460 $4,281 $4,872
State.............................................. 1,040 188 216
-------------- -------------- --------------
6,500 4,469 5,088
-------------- -------------- --------------
Deferred:
Federal............................................ (1,007) (159) 40
State.............................................. (58) (9) 2
-------------- -------------- --------------
(1,065) (168) 42
-------------- -------------- --------------
$ 5,435 $4,301 $5,130
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Reconciliation of expected income tax at the statutory federal rate with income
tax expense for the years ended December 31, 1994, 1995 and 1996 is as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Income tax at statutory rates applied to pretax income... $4,499 $4,214 $4,921
State taxes, net of federal tax benefit.................. 131 123 143
Other.................................................... 805 (36) 66
------------- ------------- -------------
Total............................................... $5,435 $4,301 $5,130
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-49
<PAGE>
NATC HOLDINGS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED):
The significant components of the Company's deferred income tax asset as of
December 31, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Inventory................................................................. $ 129 $ 168
Depreciation of fixed assets.............................................. (8) (5)
Amortization of intangible assets......................................... 1,112 1,028
------------ ------------
$1,233 $1,191
------------ ------------
------------ ------------
</TABLE>
10. RELATED PARTY TRANSACTIONS:
The Company and Drake, Goodwin and Graham ('DGG'), a company related through
common ownership, have a financial advisory agreement which was amended in 1995.
Pursuant to the amended financial advisory agreement the Company pays an annual
financial advisory fee of $500,000 to DGG.
During the years ended December 31, 1994, 1995 and 1996 the Company paid DGG
$291,000, $376,000 and $673,000, respectively, for the financial advisory fee
above and other expenses.
In connection with the refinancing during 1995, the Company paid an investment
banking fee to Drake, Goodwin Corporation, a related company, of $1,000,000,
which was capitalized and is included in deferred financing costs.
11. CONCENTRATION OF CREDIT RISK:
Historically, the Company has experienced bad debts of less than 1/10th of 1% of
net sales. For the years ended December 31, 1994, 1995 and 1996 the Company's
top customer accounted for approximately 12% of net sales. The Company performs
ongoing credit evaluations of these customers' financial conditions and
generally requires no collateral from its customers.
12. EMPLOYEE BENEFIT PLAN:
In July 1996 the Company adopted a 401(k) plan for all employees who have
completed three months of service and are 21 years of age.
The Company is required to make matching contributions equal to 25% of the first
6% of employee contributions. In addition, the Company can make discretionary
contributions. During the year ended December 31, 1996, the Company recorded
expenses under this plan of $6,102.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, Disclosure About Fair Value of Financial Instruments, as
amended by Statement of Financial Accounting Standards No. 126. The estimated
fair value amounts have been determined by the Company using the methods and
assumptions described below. However, considerable judgment is required to
interpret market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practical to estimate that value:
F-50
<PAGE>
NATC HOLDINGS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
CASH AND CASH EQUIVALENTS: Cash and cash equivalents are by definition
short-term and the carrying amount is a reasonable estimate of fair value.
LONG-TERM DEBT: The fair value of long term debt has been estimated by
discounting the future cash flows using the current rates offered for debt
issues with similar characteristics.
At December 31, 1996 the estimated fair value and carrying value of long-term
debt is $32,221,000 and $31,983,000, respectively.
14. SUBSEQUENT EVENT:
On June 25, 1997, 100% of the outstanding common stock of NATC Holdings, USA,
Inc. was sold to NTC Holding, L.L.C. for an aggregate purchase price of $162.6
million.
F-51
<PAGE>
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
NATC Holdings USA, Inc.
We have reviewed the accompanying consolidated condensed balance sheet of
NATC Holdings USA, Inc. as of March 31, 1997, and the related consolidated
condensed statements of operations, stockholder's equity and cash flows for the
three-month periods ended March 31, 1996 and 1997. These consolidated condensed
financial statements are the responsibility of the management of NATC Holdings
USA, Inc.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the consolidated condensed financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated condensed financial statements
in order for them to be in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
April 29, 1997
F-52
<PAGE>
NATC HOLDINGS USA, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31,
(Dollars in thousands, except par value amounts) 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents......................................................................... $ 7,611
Accounts receivable............................................................................... 2,036
Inventory......................................................................................... 4,310
Other current assets.............................................................................. 99
----------
Total current assets................................................................................ 14,056
----------
Deferred income taxes............................................................................... 1,191
Fixed assets, net................................................................................... 155
Intangible assets, net.............................................................................. 45,793
Deferred financing costs, net....................................................................... 2,583
Other assets, net................................................................................... 300
----------
Total assets........................................................................................ $64,078
----------
----------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Current maturities of long-term debt.............................................................. $ 6,124
Accounts payable, trade........................................................................... 396
Payable to United States Tobacco Company.......................................................... 2,027
Accrued interest.................................................................................. 1,451
Accrued expenses.................................................................................. 340
Income taxes payable.............................................................................. 1,321
----------
Total current liabilities........................................................................... 11,659
----------
Long-term debt, less current maturities............................................................. 25,058
----------
Commitments and contingencies (Note 3)..............................................................
----
Stockholder's equity:
Class A voting common stock, $.01 par value; 50,000 shares authorized, 20,300 shares issued;
13,334 shares outstanding at March 31, 1997....................................................
----
Class B non voting common stock, $.01 par value; 50,000 shares authorized; none issued and
outstanding....................................................................................
----
Additional paid-in capital........................................................................ 7,725
Retained earnings................................................................................. 27,541
Treasury stock, 6,666 shares at cost at March 31, 1997............................................ (7,905)
----------
Total stockholder's equity.......................................................................... 27,361
----------
Total liabilities and stockholder's equity.......................................................... $64,078
----------
----------
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
condensed financial statements.
F-53
<PAGE>
NATC HOLDINGS USA, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
(Dollars in thousands, except per share data) 1996 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Net sales....................................................................... $ 12,439 $ 10,244
Cost of goods sold.............................................................. 4,572 3,386
------------ ------------
Gross profit............................................................... 7,867 6,858
Operating expenses:
Selling, general and administrative........................................... 927 1,159
Amortization of intangible assets............................................. 1,230 1,330
------------ ------------
Income from operations..................................................... 5,710 4,369
Other expenses:
Interest expense.............................................................. 1,321 1,151
Financial advisory fee and other expenses..................................... 219 481
------------ ------------
Income before provision for income taxes................................... 4,170 2,737
Provision for income taxes...................................................... 1,460 903
------------ ------------
Net income................................................................. $ 2,710 $ 1,834
------------ ------------
------------ ------------
Earnings per common share....................................................... $ 174.50 $ 137.54
Weighted average number of common shares outstanding (000)...................... 15.5 13.3
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
condensed financial statements.
F-54
<PAGE>
NATC HOLDINGS USA, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
(Dollars in thousands) 1996 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $2,710 $1,834
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................................ 21 16
Amortization of intangible assets........................................... 1,230 1,330
Amortization of deferred financing costs.................................... 232 223
Changes in operating assets and liabilities:
Accounts receivable......................................................... (3,637) (1,032)
Inventory................................................................... 2,845 977
Other current assets........................................................ 31 (5)
Accounts payable, trade........................................................ (59) (193)
Accrued interest and expenses............................................... 792 52
Income taxes payable........................................................ 1,008 (517)
------------- -------------
Net cash provided by operating activities................................. 5,173 2,685
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Royalty payments to United States Tobacco Company.............................. (2,400) (3,010)
Capital expenditures........................................................... (10) (30)
------------- -------------
Net cash used in investing activities..................................... (2,410) (3,040)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt.................................................... (800) (800)
Acquisition of treasury stock.................................................. (225) --
------------- -------------
Net cash used in financing activities..................................... (1,025) (800)
------------- -------------
Increase (decrease) in cash and cash equivalents.......................... 1,738 (1,155)
Cash and cash equivalents at beginning of year................................... 3,693 8,766
------------- -------------
Cash and cash equivalents at end of year......................................... $5,431 $7,611
------------- -------------
------------- -------------
Supplemental disclosure of cash paid during the year:
Cash paid for interest......................................................... $338 $220
Cash paid for income taxes..................................................... $2,252 $1,498
Non-cash financing activities:
During 1996, the Company acquired 300 shares of its common stock from an officer of the Company for $405.
The Company offset $180 of the purchase price by reducing the officers note receivable and accrued interest on
that note receivable, which amounted to $150 and $30, respectively.
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
condensed financial statements.
F-55
<PAGE>
NATC HOLDINGS USA, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Class A Class A
Voting Voting Additional Note
(Dollars in Common Common Paid-in Retained Treasury Receivable,
thousands) Shares Stock Capital Earnings Stock Officer Total
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
1995............... 13,634 $ -- $7,725 $16,363 $(7,500) $(150) $16,438
Net income........... -- -- -- 2,710 -- -- 2,710
Repurchase of Company
Class A Voting
Common Stock....... (300) -- -- -- (405) 150 (255)
------------ ------------ ------------ ------------- ------------- ------------ -------------
Balance, March 31,
1996............... 13,334 $ -- $7,725 $19,073 $(7,905) $ -- $18,893
------------ ------------ ------------ ------------- ------------- ------------ -------------
------------ ------------ ------------ ------------- ------------- ------------ -------------
Balance, December 31,
1996............... 13,334 $ -- $7,725 $25,707 $(7,905) $ -- $25,527
Net income........... -- -- -- 1,834 -- -- 1,834
------------ ------------ ------------ ------------- ------------- ------------ -------------
Balance, March 31,
1997............... 13,334 $ -- $7,725 $27,541 $(7,905) $ -- $27,361
------------ ------------ ------------ ------------- ------------- ------------ -------------
------------ ------------ ------------ ------------- ------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
condensed financial statements.
F-56
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
accruals and reserves) considered necessary for a fair presentation have been
included. Operating results for the interim periods are not necessarily
indicative of the results that may be realized for the full year. These
unaudited consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements of the Company for the
years ended December 31, 1995 and 1996, respectively.
2. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt at March 31, 1997 consist of
the following (in thousands):
<TABLE>
<S> <C>
Term loan (NationsBank)........................................................................... $ 8,682
Note purchase agreement........................................................................... 22,500
------------
31,182
Less current maturities........................................................................... 6,124
------------
$25,058
------------
------------
</TABLE>
3. SUBSEQUENT EVENT:
On June 25, 1997, 100% of the outstanding Common Stock of NATC Holdings,
USA, Inc. was sold to NTC Holding, L.L.C. for an aggregage purchase price of
$162.6 million.
F-57
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE UNREGISTERED SECURITIES
IN ANY JURISDICTION WHERE, OR TO ANY PERSON WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information........................... 4
Forward-Looking Statements...................... 5
Certain Market Information...................... 5
Trademarks...................................... 5
Prospectus Summary.............................. 7
Summary of Historical and Unaudited
Pro Forma Financial Data...................... 22
Risk Factors.................................... 24
Use of Proceeds................................. 32
Capitalization.................................. 33
Unaudited Pro Forma Condensed Consolidated
Statement of Operations....................... 34
Selected Financial Data......................... 39
Selected Consolidated Financial Data............ 41
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 43
Business........................................ 53
Management...................................... 67
Certain Relationships and Related
Transactions.................................. 74
Recent Transactions............................. 75
Principal Stockholders.......................... 77
The Exchange Offer.............................. 79
Description of Notes............................ 88
Description of Other Indebtedness............... 112
Description of Capital Stock.................... 113
Description of New Preferred Stock.............. 116
Plan of Distribution............................ 126
Certain U.S. Federal Tax Considerations......... 127
Book-Entry; Delivery and Form................... 135
Legal Proceedings............................... 137
Legal Matters................................... 138
Independent Public Accountants.................. 138
Index to Financial Statements................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$155,000,000 SENIOR NOTES
1,397,176.96 SHARES OF
SENIOR PIK PREFERRED STOCK
NORTH ATLANTIC
TRADING COMPANY, INC.
OFFER TO EXCHANGE
11% SENIOR NOTES DUE 2004, SERIES B
FOR
11% SENIOR NOTES DUE 2004, SERIES A
12% SENIOR EXCHANGE
PAYMENT-IN-KIND PREFERRED STOCK
FOR
12% SENIOR
PAYMENT-IN-KIND PREFERRED STOCK
------------------------------
PROSPECTUS
------------------------------
SEPTEMBER 19, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
