FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number 333-31931
NORTH ATLANTIC TRADING COMPANY, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3961898
- --------------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
257 Park Avenue South
New York, New York 10010-7304
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(212) 253-8185
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Unchanged
----------------------------------------------------
(Former name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 528,241 shares of common stock,
$.01 par value, as of June 30, 1998.
NYFS10...:\80\64980\0003\2475\FRM7098T.57C
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except par value)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 1,043 $ 4,087
Accounts Receivable 4,412 4,633
Inventory 59,867 56,110
Income Taxes Receivable 0 5,326
Other Current Assets 2,617 1,718
----------- ----------
Total Current Assets 67,939 71,874
Property, Plant & Equipment (Net) 7,574 8,251
Deferred Income Taxes 36,773 34,091
Goodwill (Net) 142,734 145,517
Other Assets 12,420 13,506
----------- ----------
Total Assets $ 267,440 $ 273,239
=========== ==========
Current Liabilities:
Notes payable $ 8,000 $ -
Accounts Payable 442 659
Accrued Liabilities 4,668 5,873
Deferred Income Taxes 6,721 6,721
Current Portion of Long-Term Debt 10,819 9,375
----------- ----------
Total Current Liabilities 30,650 22,628
Long-Term Debt 209,094 220,625
Other Long-Term Liabilities 6,986 7,486
----------- ----------
Total Liabilities 246,730 250,739
----------- ----------
Preferred Stock, net of discount of $1,515 and $1,600,
respectively (Mandatory Redemption Value of $38,181) 36,857 34,581
----------- ----------
Stockholders' Deficit:
Common Stock, voting, $.01 par value; authorized
shares, 750,000; issued and outstanding shares,
528,241 at June 30, 1998 5 5
Common Stock, nonvoting, $.01 par value; authorized
shares, 750,000; issued and outstanding shares,
-0- at June 30, 1998
Warrants 2,410 2,410
Additional Paid-In Capital 6,310 5,906
Stockholders' Deficit (24,872) (20,402)
---------- ----------
Total Stockholders' Deficit (16,147) (12,081)
---------- ----------
Total Liabilities and Stockholders' Deficit $ 267,440 $ 273,239
=========== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
2
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net Sales $ 17,908 $ 13,380
Cost of Sales 6,927 4,816
--------- ---------
Gross Profit 10,981 8,564
Selling, General & Administrative Expenses 6,397 6,226
Amortization of Goodwill 1,392 266
--------- --------
Operating Income 3,192 2,072
Interest Expense & Financing Costs, Net 6,133 2,714
Other Income (19) (71)
-------- --------
Loss Before Income Tax Provision (Benefit)
And Extraordinary Loss (2,922) (571)
Income Tax Provision (Benefit) (1,607) 5,017
-------- --------
Loss Before Extraordinary Loss (1,315) (5,588)
Extraordinary Loss, Net of Income Tax Benefit of $3,224 - (8,262)
-------- --------
Net Loss (1,315) (13,850)
Preferred Stock Dividends 1,153 58
--------- ----------
Net Loss Applicable to Common Shares $ (2,468) $ (13,908)
========= ==========
Net Loss Before Extraordinary Loss Per Common Share $ (4.67) $ (10.69)
Extraordinary Loss, Net Per Common Share - (15.64)
-------- ----------
Net Loss Per Common Share, Basic and Diluted $ (4.67) $ (26.33)
========= ==========
Weighted Average Common Shares Outstanding 528.2 528.2
Supplemental Unaudited Information(1):
Historical Loss Before Income Tax and Extraordinary Loss $ (571)
Pro Forma Income Tax Benefit (228)
----------
Pro Forma Net Loss Before Extraordinary Loss (343)
Extraordinary Loss, Net of Income Tax Benefit of $3,224 (8,262)
----------
Pro Forma Net Loss (8,605)
Preferred Stock Dividends 58
- -----------------
1 Supplemental unaudited information represents the Company's pro forma
results of operations assuming income taxes at the combined state and
federal rate of 40% and preferred stock dividends for the period from
April 1, 1997 through June 30, 1997.
3
<PAGE>
Pro Forma Net Loss Applicable To Common Shares $ (8,663)
===========
Net Loss Before Extraordinary Loss Per Common Share $ (.76)
Extraordinary Loss, Net of Income Tax Benefit of $3,224, Per Common Share (15.64)
----------
Pro Forma Net Loss Per Common Share $ (16.40)
===========
Pro Forma Weighted Average Common Shares Outstanding 528.2
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
ended ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net Sales $ 37,610 $ 25,938
Cost of Sales 13,801 9,300
--------- ---------
Gross Profit 23,809 16,638
Selling, General & Administrative Expenses 13,418 11,591
Amortization of Goodwill 2,783 468
--------- ---------
Operating Income 7,608 4,579
Interest Expense & Financing Costs, Net 12,518 5,194
Other (Income) (34) (44)
--------- ---------
Loss Before Income Tax Provision (Benefit)
and Extraordinary Loss (4,876) (571)
Income Tax Provision (Benefit) (2,682) 5,017
--------- ---------
Loss Before Extraordinary Loss (2,194) (5,588)
Extraordinary Loss, Net of Income Tax Benefit
of $3,224 - (8,262)
--------- ---------
Net Loss (2,194) (13,850)
Preferred Stock Dividends 2,276 58
--------- ---------
Net Loss Applicable to Common Shares $ (4,470) $ (13,908)
========= =========
Net Loss Before Extraordinary Loss Per Common Share $ (8.46) $ (10.69)
Extraordinary Loss, Net Per Common Share (15.64)
--------- ---------
Net Loss Per Common Share, Basic and Diluted $ (8.46) $ (26.33)
========= =========
Weighted Average Common Shares Outstanding 528.2 528.2
Supplemental Unaudited Information(2):
Historical Loss Before Income Tax and Extraordinary Loss
$ (571)
Pro Forma Income Tax Benefit (228)
Pro Forma Net Loss Before Extraordinary Loss (343)
Extraordinary Loss, Net of Income Tax Benefit of $3,224 (8,262)
---------
Pro Forma Net Loss (8,605)
Preferred Stock Dividends 58
Pro Forma Net Loss Applicable To Common Shares $ (8,663)
=========
- --------------------------
2 Supplemental unaudited inforamtion represents the Company's pro forma
results of operations assuming income taxes at the combined state and
federal rate of 40% and preferred stock dividends for the period from
January 1, 1997 through June 30, 1997.
5
<PAGE>
Net Loss Before Extraordinary Loss Per Common Share $ (.76)
Extraordinary Loss, Net of Income Tax Benefit of $3,224, Per
Common Share (15.64)
Pro Forma Net Loss Per Common Share $ (16.40)
=========
Pro Forma Weighted Average Common Shares Outstanding 528.2
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
6
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
ended ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (2,194) $ (13,850)
Adjustments to Reconcile Net Loss
To Net Cash Used In Operating Activities:
Income tax benefit (2,682) -
Depreciation 900 900
Amortization of Intangible Assets 2,783 468
Amortization of Deferred Financing Fees 1,086 1,000
Extraordinary Loss, Net of Income Tax Benefit
of $3,224 - 8,262
Recognition of Deferred Income Taxes - 5,017
Compensation Expense 490 -
Changes in Operating Assets and Liabilities:
Accounts Receivable 221 (662)
Inventory (3,757) 2,066
Income Tax Receivable 5,326 -
Other Current Assets (899) 646
Accounts Payable (217) 295
Borrowings Under Inventory Financing Agreement - 6,565
Payments on Borrowings Under Inventory
Financing Agreement - (23,526)
Accrued Expenses and Other (1,791) (13,043)
------- ---------
Net Cash Used In Operating Activities (734) (25,862)
------- ---------
Cash Flows From Investing Activities:
Acquisition of Business, Net of Cash Acquired of $2,602 (156,818)
Capital Expenditures (223) (442)
---------- ---------
Net Cash Used In Investing Activities (223) (157,260)
---------- ---------
Cash Flows from Financing Activities:
Proceeds from Revolving Loans 8,000 1,550
Payments on Revolving Loans - (800)
Payments on Term Loans (10,087) (40,750)
Proceeds from Senior Notes - 155,000
Proceeds from Term Loans - 85,000
Proceeds from Subordinated Notes Payable - 576
Payments on Subordinated Notes Payable - (21,082)
Payments on Capital Lease - (9)
Proceeds from Issuance of Preferred Stock and Warrants - 34,000
Redemption of Warrants - (27,000)
Increase in Preferred Interest - 198
Redemption of Preferred Interest - (2,935)
Capital Contributions - 712
--------- ----------
Net Cash Provided by (used in) Financing Activities (2,087) 184,460
-------- ----------
Net Increase (Decrease) In Cash (3,044) 1,338
Cash, Beginning of Period 4,087 2,209
-------- ----------
Cash, End of Period $ 1,043 $ 3,547
======== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
7
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share amounts)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are presented
in accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by generally accepted accounting
principles. The condensed consolidated financial statements have been prepared
in accordance with North Atlantic Trading Company, Inc.'s (the "Company's")
customary accounting practices and have not been audited. In the opinion of
Management, all adjustments necessary to fairly present the results of
operations for the reported interim periods have been made and were of a normal
recurring nature. The year-end balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
2. ACQUISITION
On June 25, 1997, the Company acquired NATC Holdings, USA Inc. ("NATC")
for a purchase price of $162.6 million. The excess of the net assets of $117.3
million was recorded as goodwill and is being amortized over 25 years. The
Acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of NATC have been included in the
accompanying financial statements since the date of acquisition.
Following are the unaudited pro forma results of operations as if the June
25, 1997 transaction had occurred on January 1, 1997:
Three Months Six Months
ended ended
June 30, 1997 June 30, 1997
------------- -------------
Net Sales $ 20,642 $ 43,444
========== =========
Net Loss $ (2,279) $ (2,517)
Preferred Stock Dividends 1,404 2,468
---------- ---------
Net Loss Applicable to Common Shares $ (3,683) $ (4,985)
========== =========
Basic and diluted loss per common share:
Net Loss per common share $ (6.97) $ (9.44)
---------- ---------
Weighted average common shares outstanding:
Basic and diluted 528.2 528.2
8
<PAGE>
This unaudited pro forma financial information is not necessarily
indicative of the operating results that would have occurred had the transaction
been consummated as of January 1, 1997, nor is it necessarily indicative of
future operating results.
3. INVENTORIES
The Company uses the last-in, first-out (LIFO) method for valuing
its inventories.
6/30/98 12/31/97
------- --------
Raw Materials and Work In Process $ 2,117 $ 1,492
Leaf Tobacco 37,392 36,675
Finished Goods - Tobacco 5,114 5,444
Finished Goods - Cigarette Papers 14,838 12,241
Other 406 258
--------- --------
$ 59,867 $ 56,110
========= ========
4. PROVISION FOR INCOME TAXES
Prior to June 25, 1997, the Company was a limited liability company and
prior to May 17, 1996, the predecessor was a partnership, neither of which were
subject to state or federal income taxes. Effective June 25, 1997, the Company
became a taxable corporation and recorded a one-time non-cash provision for
income taxes of approximately $5.0 million in order to record its previously
unrecorded deferred income tax assets of $3.1 million and liabilities of $8.1
million.
The provision for income taxes for the six months ended June 30, 1998 has
been computed based on the estimated annual effective income tax rate which is
expected to be 55%. The primary difference between the effective income tax rate
and the statutory income tax rate is certain goodwill amortization which is not
deductible for income tax purposes.
5. NOTES PAYABLE AND LONG-TERM DEBT
North Atlantic Trading Company, Inc. is a holding company with no
operations and no assets other than its investment in subsidiaries, deferred
income tax assets related to the differences between the book and tax basis of
its investment in the Partnership and deferred financing costs related to its
debt. All of the Company's subsidiaries are wholly-owned and guarantee
9
<PAGE>
the Company's debt on a full, unconditional and joint and several basis. In
Management's opinion, separate financial statements of the subsidiaries are not
meaningful to investors and are not included in these financial statements.
Following is unaudited parent-only summarized financial information of the
Company:
As of June 30, 1998:
Current Assets $ --
Noncurrent Assets 253,966
Current Liabilities 23,817
Noncurrent Liabilities 209,094
Redeemable Preferred Stock 36,857
For the Six Months Ended June 30, 1998:
Equity in Earnings of Subsidiaries $ 3,617
Net Loss Before Payment of Preferred
Stock Dividends (2,166)
6. NET LOSS PER COMMON SHARE RECONCILIATION
For the Three Months Ended June 30, 1998
----------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Loss $ (1,315)
Less:Preferred Stock Dividends (1,153)
----------
Basic and Diluted:
Loss available to common
stockholders $ (2,468) 528,241 $ (4.67)
========== ======= =========
For the Six Months Ended June 30, 1998
--------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Loss $ (2,194)
Less:Preferred Stock Dividends (2,276)
----------
Basic and Diluted:
Loss available to common
stockholders $ (4,470) 528,241 $ (8.46)
========== ======= =========
The calculations are based on the weighted average number of shares of
common stock outstanding during the period. Common equivalent shares from stock
options of 29,824 and warrants of
10
<PAGE>
63,430 are excluded from these computations as their effect is antidilutive.
7. CONTINGENCY
On March 30, 1998, an action was filed in California State Court, in the
City and County of San Francisco, against defendants United States Tobacco
Company, Inc., Conwood Company, L.P., Pinkerton Tobacco Company, Inc., National
Tobacco Company, L.P., Swisher International Group, Inc., Brown & Williamson
Tobacco Corporation, Merrill Reese, Inc., Lucky Stores, Inc., Quick Stop
Markets, Inc., Raley's, Inc., Save Mart Supermarkets, Inc., Sav-On Drug Stores,
Inc., The Southland Corporation, Circle K Stores, Inc., Longs Drug Stores
Corporation, Walgreen Co., Safeway, Inc. and DOES 1-500. The plaintiffs amended
their complaint on June 10, 1998 and subsequently served the complaint on
National Tobacco Company, L.P. The complaint purports to be brought on behalf of
The City and County of San Francisco, the People of the State of California and
the Environmental Law Foundation.
Plaintiffs claim that the defendants violated the California Safe Drinking
Water and Toxic Enforcement Act of 1986, Health and Safety Code ss.ss.25249.6
("Proposition 65") by "knowingly and intentionally" exposing California
consumers to carcinogens and reproductive toxins in smokeless tobacco products
while failing to provide a "clear and reasonable" warning that smokeless tobacco
products contain substances that are "known to the state to cause cancer" and
"known to the state to cause reproductive toxicity." Plaintiffs further claim
that the defendants violated California's Unfair Competition Act, Business &
Professions Code ss.ss.17200, et seq., by marketing smokeless tobacco products
to children, and by fraudulently concealing from the public the adverse
consequences and addiction associated with smokeless tobacco products.
The complaint seeks a preliminary and permanent injunction preventing
defendants from selling smokeless tobacco products without a "clear and
reasonable" warning, as well as an injunction ordering defendants to undertake a
court-approved public information campaign to instruct children that the use of
smokeless tobacco products results in exposures to substances known to the State
of California to cause cancer and reproductive harm. The plaintiffs also seek an
award of statutory penalties and damages for each violation of Proposition 65
and the Unfair Competition Act, disgorgement of profits from the sale of
smokeless tobacco products, and attorneys' fees and costs. National Tobacco
Company, L.P. intends to defend the action vigorously.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
On June 25, 1997, the Company acquired all of the issued and outstanding
capital stock of NATC Holdings USA, Inc. ("NATC") (the "Acquisition"), at which
time NATC and its subsidiaries were merged into North Atlantic Operating
Company, Inc. ("NAOC"), a wholly-owned subsidiary of the Registrant. The
Acquisition was accounted for under the purchase method of accounting and the
operating results of NATC have been included from the date of acquisition. The
aggregate acquisition purchase price of $162.6 million was allocated to the
acquired net assets based on the fair market value of such net assets.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED JUNE
30, 1997.
Net Sales. Net sales for the three months ended June 30, 1998 were $17.9
million, an increase of 33.8%, or $4.5 million, from the prior year's period.
Net sales of NAOC for the quarter ended June 30, 1998 were 20.1% of the
Company's consolidated sales.
National Tobacco Company L.P.'s ("National Tobacco") net sales of
smokeless tobacco products for the three months ended June 30, 1998 increased
6.7% due to the price increases in July 1997 and January 1998 and a volume
increase in net pounds of 7.2%. However, the increase in net sales was partially
offset by the Company's changes in its smokeless tobacco promotional strategy,
from a free goods to a cents off marketing strategy, to achieve a more
profitable product mix. For the three months ended June 30, 1998 free goods
activity in net pounds declined 13.1% compared to the prior year's period and
cents off activity in net pounds increased 51.5%. Net sales of the new value
brand, Durango, represented 5.8% of National Tobacco's net sales for the
quarter. On June 29, 1998 the Company instituted a 3.3% price increase for all
National Tobacco products except Durango.
NAOC's net sales of roll-your-own ("RYO") cigarette paper when compared to
the prior period's pro forma results declined 51.1% due to Management's decision
to reposition its promotional activity and to reduce inventory at the
distributor level.
Gross Profit. Gross profit for the three months ended June 30, 1998
increased $2.4 million, or 28.2%, from the prior year's period. Gross profit
attributable to NAOC for the quarter ended
12
<PAGE>
June 30, 1998 was 20.1% of the Company's consolidated gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 1998 increased 2.8%
to $6.4 million from last year's $6.2 million. This increase was due primarily
to expenses associated with the addition of new members of senior management, an
increase in legal and professional fees and the reorganization and expansion of
the Company's sales organization.
Amortization of Goodwill. Amortization of goodwill for the three months
ended June 30, 1998 was $1.4 million compared to $0.3 million for the prior
year's period. This increase was due to the increase in intangible assets as a
result of the Acquisition.
Interest Expense and Financing Costs. Interest expense and financing costs
increased to $6.1 million for the three months ended June 30, 1998 from $2.7
million for the prior year's period. This increase was the result of additional
indebtedness incurred in connection with the Acquisition and related
recapitalization.
Income Taxes. The income tax provision reflects the application of the
estimated annual effective tax rate of 55% based on projected earnings for 1998.
The Company's estimated effective tax rate was 40% prior to accounting for the
amortization of non-deductible goodwill. The Company has a net operating loss
carry-forward of approximately $9.5 million, as of December 31, 1997, and does
not expect to pay material federal income taxes during 1998.
Extraordinary Loss. The Company recorded an extraordinary loss of $8.3
million (net of income tax benefit of $3.2 million) for the three months ended
June 30, 1997 related to the write-off of deferred financing costs and the debt
discount due to the recapitalization of the Company on June 25, 1997.
Net Loss. Due to the factors described above, the net loss for the three
months ended June 30, 1998 was $1.3 million compared to $13.9 million for the
prior year's period.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30,
1997
Net Sales. Net Sales for the six months ended June 30, 1998 were $37.6
million, an increase of 45.0%, or $11.7 million, from the prior year's period.
Net sales of NAOC for the six months
13
<PAGE>
ended June 30, 1998 were 33.2% of the Company's consolidated sales.
National Tobacco's net sales of smokeless tobacco products for the six
months ended June 30, 1998 decreased 2.8% (reflecting a volume decline in net
pounds of 4.1%) due to the Company's changes in its smokeless tobacco
promotional strategy, from a free goods to a cents off marketing strategy, to
achieve a more profitable product mix. For the six months ended June 30, 1998
National Tobacco's free goods activity in net pounds declined 17.0% compared to
the prior year's period and its cent's off activity in net pounds increased
30.0%. In addition, the decline in net sales was partially offset price
increases. Net sales of Durango for the six months ended June 30, 1998
represented 7.5% of National Tobacco's net sales.
NAOC's net sales of RYO cigarette paper when compared to the prior
period's pro forma results declined 29.0% due to Management's decision to
reposition its promotional activity and to reduce inventory at the distributor
level.
Gross Profit. Gross profit for the six months ended June 30, 1998
increased $7.2 million, or 43.1%, from the prior year's period. Gross profit
attributable to NAOC for the six months ended June 30, 1998 was 34.5% of the
Company's consolidated gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 1998 increased 15.8%
to $13.4 million from last year's $11.6 million. This increase was due to
expenses associated with the addition of new members of senior management, an
increase in legal and professional fees and the reorganization and expansion of
the Company's sales organization.
Amortization of Goodwill. Amortization of goodwill for the six months
ended June 30, 1998 was $2.8 million compared to $0.5 million for the prior
year's period. This increase was due to an increase in goodwill as a result of
the Acquisition.
Interest Expense and Financing Costs. Interest expense and financing costs
increased to $12.5 million for the six months ended June 30, 1998 from $5.2
million for the prior year's period. This increase was the result of additional
indebtedness incurred in connection with the Acquisition and related
recapitalization.
Income Taxes. The income tax provision reflects the application of the
estimated annual effective tax rate of 55% based on projected earnings for 1998.
The Company's estimated
14
<PAGE>
effective tax rate was 40% prior to accounting for the amortization of
non-deductible goodwill. The Company has a net operating loss carry-forward of
approximately $9.5 million, as of December 31, 1997, and does not expect to pay
material federal income taxes during 1998.
Extraordinary Loss. The Company recorded an extraordinary loss of $8.3
million (net of income tax benefit of $3.2 million) for the six months ended
June 30, 1997 related to the write-off of deferred financing costs and the debt
discount due to the recapitalization of the Company on June 25, 1997.
Net Loss. Due to the factors described above, the net loss for the six
months ended June 30, 1998 was $2.2 million compared to $13.9 million for the
prior year's period.
LIQUIDITY AND CAPITAL REQUIREMENTS
At June 30, 1998, working capital was $37.3 million compared to $49.2
million at December 31, 1997. This decrease was a result of the receipt of a
federal tax carryback refund of $5.3 million which was used to prepay $5.3
million of the Term Loan. On June 30, 1998, a revolver borrowing of $8.0 million
was made to fund short-term operating requirements. It is anticipated that this
borrowing will be repaid in full by the end of the third quarter of 1998. The
Company will continue to fund its seasonal working capital requirements through
its operating cash flows, and, if needed, bank borrowings. The Company currently
has an undrawn availability of $16 million under its committed $25 million
revolving credit facility. As indicated above, Management decided to reposition
NAOC's RYO cigarette papers promotional activity and to reduce inventory levels
at NAOC's distributors. Although the Company was in compliance with the
financial covenants under its senior secured credit facility following such
repositioning, in June 1998 it obtained an amendment to such covenants to take
into account the anticipated financial effects of such repositioning.
The tobacco for loose leaf chewing tobacco requires aging of approximately
two years before being processed into finished products. The Company believes
that its National Tobacco subsidiary maintains sufficient tobacco inventories to
ensure proper aging as well as an adequate supply based on its historical and
anticipated sales activity. The Company also believes that its NAOC subsidiary
maintains adequate inventories and that the supply of such inventory will remain
stable for the foreseeable future.
15
<PAGE>
The Company believes that any effect of inflation at current levels will
be minimal. Historically, the Company has been able to increase prices at a rate
greater than that of inflation and believes that it will be able to do so in the
foreseeable future. In addition, the Company has been able to maintain a stable
variable cost structure for its smokeless tobacco products in significant part
due to its procurement and reformulation activities.
Given its current operation, the Company believes that its capital
expenditure requirements for 1998 will remain within the $500,000 range. During
fiscal 1997, the Company assessed the steps necessary to address matters related
to "Year 2000" issues. The preliminary review included all of the Company's
hardware and software requirements. The Company has developed and implemented a
strategy for attaining Year 2000 compliance that includes modifying existing
software, purchasing new software and acquiring new hardware. As a result,
Management believes that this will fully and adequately address any "Year 2000"
issues. The Company does not believe that the cost of its "Year 2000" compliance
program will be material to its financial condition or results of operations.
The Company believes that its operating cash flows, together with its
revolving credit facility, should be adequate to satisfy its reasonable
foreseeable capital requirements. The financing of any significant future
products, business or property acquisitions may require additional debt or
equity financing.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). The Statement establishs accounting and
reporting standards for derivative instruments and hedging activities. The
Company will adopt SFAS No. 133 in the Company's quarterly reporting for the
year ending December 31, 2000 as required. The Company is in the process of
assessing the impact of this standard on its financial statements.
ITEM 3. Not Applicable.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.
On March 30, 1998, an action was filed in California State Court, in the
City and County of San Francisco, against defendants United States Tobacco
Company, Inc., Conwood Company, L.P., Pinkerton Tobacco Company, Inc., National
Tobacco Company, L.P., Swisher International Group, Inc., Brown & Williamson
Tobacco Corporation, Merrill Reese, Inc., Lucky Stores, Inc., Quick Stop
Markets, Inc., Raley's, Inc., Save Mart Supermarkets, Inc., Sav-On Drug Stores,
Inc., The Southland Corporation, Circle K Stores, Inc., Longs Drug Stores
Corporation, Walgreen Co., Safeway, Inc. and DOES 1-500. The plaintiffs amended
their complaint on June 10, 1998 and subsequently served the complaint on
National Tobacco Company, L.P. The complaint purports to be brought on behalf of
The City and County of San Francisco, the People of the State of California and
the Environmental Law Foundation.
Plaintiffs claim that the defendants violated the California Safe Drinking
Water and Toxic Enforcement Act of 1986, Health and Safety Code ss.ss.25249.6
("Proposition 65") by "knowingly and intentionally" exposing California
consumers to carcinogens and reproductive toxins in smokeless tobacco products
while failing to provide a "clear and reasonable "warning that smokeless tobacco
products contain substances that are "known to the state to cause cancer" and
"known to the state to cause reproductive toxicity." Plaintiffs further claim
that the defendants violated California's Unfair Competition Act, Business &
Professions Code ss.ss.17200, et seq., by marketing smokeless tobacco products
to children, and by fraudulently concealing from the public the adverse
consequences and addiction associated with smokeless tobacco products.
The complaint seeks a preliminary and permanent injunction preventing
defendants from selling smokeless tobacco products without a "clear and
reasonable" warning, as well as an injunction ordering defendants to undertake a
court-approved public information campaign to instruct children that the use of
smokeless tobacco products results in exposures to substances known to the State
of California to cause cancer and reproductive harm. The plaintiffs also seek an
award of statutory penalties and damages for each violation of Proposition 65
and the Unfair Competition Act, disgorgement of profits from the sale of
smokeless tobacco products, and attorneys' fees and costs. National Tobacco
Company, L.P. intends to defend the action vigorously.
17
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
- ------ -----------
10.1 Amendment to Credit Agreement, dated as of June 5, 1998,
among North Atlantic Trading Company, Inc., the various
lending institutions referenced therein, and National
Westminster Bank plc, as Administrative Agent.
10.2 Amended and Restated Employment Agreement, dated as of April
30, 1998, between North Atlantic Trading Company, Inc. and
David I. Brunson.
10.3 Amended and Restated Employment Agreement, dated as of April
30, 1998, between North Atlantic Trading Company, Inc. and
Jeffrey S. Hay.
10.4 Amendment No. 1, dated as of April 30, 1998, to the Amended
and Restated Nonqualified Stock Option Agreement, dated as
of December 31, 1997, between North Atlantic Trading
Company, Inc. and Jeffrey S. Hay.
10.5 Option Grant Letter, dated April 30, 1998, from Helms
Management Corp. to David I. Brunson.
10.6 Option Grant Letter, dated April 30, 1998, from Helms
Management Corp. to Jeffrey S. Hay.
10.7 Promissory Note, dated April 14, 1998, issued by Helms
Management Corp. in favor of North Atlantic Trading Company,
Inc.
27.1 Financial Data Schedule
b. Reports on Form 8-K
There were no reports on Form 8-K in the First Quarter of 1998.
18
<PAGE>
SIGNATURES
The Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH ATLANTIC TRADING COMPANY, INC.
Date: July 27, 1998 /s/ Thomas F. Helms, Jr.
------------------------------------------
Thomas F. Helms, Jr.
President & Chief Executive Officer
Date: July 27, 1998 /s/ David I. Brunson
------------------------------------------
David I. Brunson
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1 Amendment to Credit Agreement, dated as of June 5, 1998,
among North Atlantic Trading Company, Inc., the various
lending institutions referenced therein, and National
Westminster Bank plc, as Administrative Agent.
10.2 Amended and Restated Employment Agreement, dated as of April
30, 1998, between North Atlantic Trading Company, Inc. and
David I. Brunson.
10.3 Amended and Restated Employment Agreement, dated as of April
30, 1998, between North Atlantic Trading Company, Inc. and
Jeffrey S. Hay.
10.4 Amendment No. 1, dated as of April 30, 1998, to the Amended
and Restated Nonqualified Stock Option Agreement, dated as
of December 31, 1997, between North Atlantic Trading
Company, Inc. and Jeffrey S. Hay.
10.5 Option Grant Letter, dated April 30, 1998, from Helms
Management Corp. to David I. Brunson.
10.6 Option Grant Letter, dated April 30, 1998, from Helms
Management Corp. to Jeffrey S. Hay.
10.7 Promissory Note, dated April 14, 1998, issued by Helms
Management Corp. in favor of North Atlantic Trading Company,
Inc.
27.1 Financial Data Schedule
AMENDMENT
AMENDMENT (the "Amendment"), dated as of June 5, 1998, among NORTH
ATLANTIC TRADING COMPANY, INC. (the "Borrower") , the institutions party to the
Credit Agreement referred to below (the "Lenders") and NATIONAL WESTMINSTER BANK
PLC, as Administrative Agent (the "Administrative Agent") All capitalized terms
used herein and not otherwise defined shall have the respective meanings
provided such terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders and the Administrative Agent are
parties to a Credit Agreement dated as of June 25, 1997 (as currently in effect,
the "Credit Agreement");
WHEREAS, the parties hereto wish to amend the
Credit Agreement as herein provided;
NOW, THEREFORE, it is agreed:
1. Section 8.11 of the Credit Agreement is amended in its entirety
to read:
"8.11 Interest Coverage Ratio. The Borrower will not permit the
ratio of (i) Consolidated EBITDA to (ii) Consolidated Interest Expense for any
Test Period ending at the end of any fiscal quarter of the Borrower set forth
below, to be less than the ratio set forth opposite such fiscal quarter:
Fiscal Quarter Ratio
June 30, 1998 1.50:1.0
September 30, 1998 1.50:1.0
December 31, 1998 1.50:1.0
March 31, 1999 1.50:1.0
June 30, 1999 1.50:1.0
September 30, 1999 1.50:1.0
December 31, 1999 1.60:1.0
March 31, 2000 1.60:1.0
June 30, 2000 1.60:1.0
1
NYFS10...:\80\64980\0003\1948\AMD7168S.330
<PAGE>
September 30, 2000 1.60:1.0
December 31, 2000 1.80:1.0
March 31, 2001 1.80:1.0
June 30, 2001 1.80:1.0
September 30, 2001 1.80:1.0
December 31, 2001 2.10:1.0
March 31, 2002 2.10:1.0
2. Section 8.12 of the Credit Agreement is amended in its entirety
to read:
"8.12 Leverage Ratio. The Borrower will not permit the Leverage
Ratio to exceed, as of the end of any fiscal quarter of the Borrower set forth
below, the ratio set forth opposite such fiscal quarter:
Fiscal Quarter Ratio
June 30, 1998 6.25:1.0
September 30, 1998 6.25:1.0
December 31, 1998 6.00:1.0
March 31, 1999 6.00:1.0
June 30, 1999 6.00:1.0
September 30, 1999 6.00:1.0
December 31, 1999 5.50:1.0
March 31, 2000 5.50:1.0
June 30, 2000 5.50:1.0
September 30, 2000 5.50:1.0
December 31, 2000 4.75:1.0
March 31, 2001 4.75:1.0
June 30, 2001 4.75:1.0
September 30, 2001 4.75:1.0
December 31, 2001 4.00:1.0
March 31, 2002 4.00:1.0
3. Section 8.13 of the Credit Agreement is amended in its entirety
to read:
"8.13 Minimum Consolidated EBITDA. The Borrower will not permit
Modified Consolidated EBITDA, for any Test Period ending at the end of any
fiscal quarter of the
2
<PAGE>
Borrower set forth below, to be less than the amount set forth opposite such
fiscal quarter:
Fiscal Quarter Ratio
June 30, 1998 $36,000,000
September 30, 1998 $36,000,000
December 31, 1998 $36,000,000
March 31, 1999 $36,000,000
June 30, 1999 $36,000,000
September 30, 1999 $36,000,000
December 31, 1999 $38,000,000
March 31, 2000 $38,000,000
June 30, 2000 $38,000,000
September 30, 2000 $38,000,000
December 31, 2000 $40,000,000
March 31, 2001 $40,000,000
June 30, 2001 $40,000,000
September 30, 2001 $40,000,000
December 31, 2001 $42,000,000
March 31, 2002 $42,000,000
4. In order to induce the Lenders to enter into this Amendment, the
Borrower (x) represents and warrants that no Default or Event of Default exists
on the Amendment Date referred to below after giving effect to this Amendment,
and (y) makes each of the representations, warranties and agreements contained
in the Credit Agreement on the Amendment Date after giving effet to this
Amendment (it being understood that any representation or warranty which by its
terms is made as of a specified date shall be required to be true and correct in
all material respects as of such date).
5. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
6. This Agreement may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument.
3
<PAGE>
A complete set of counterparts shall be lodged with the Borrower and the
Administrative Agent.
7. This Amendment and the rights and obligations of the parties
hereunder shall be construed in accordance with and governed by the law of the
State of New York.
8. This Amendment shall become effective on the date (the "Amendment
Date") on which each of the Borrower and the Required Lenders shall have signed
a copy hereof (whether the same or different copies) and shall have delivered
(including by way of telecopier) the same to the Administrative Agent at its
Notice Office.
9. At all times on and after the Amendment Date, all references in
the Credit Agreement and each of the Credit Documents to the Credit Agreement
shall be deemed to be references to such Credit Agreement after giving effect to
this Agreement.
* * *
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
NORTH ATLANTIC TRADING COMPANY, INC.
By /s/ David Brunson
------------------------------------
Name: David Brunson
Title: EVP & CFO
NATIONAL WESTMINSTER BANK PLC,
Individually and as Administrative
Agent
By /s/ Andrew S. Weinberg
------------------------------------
Name: Andrew S. Weinberg
Title: Senior Vice President
BANK ONE KENTUCKY, NA
By /s/ W.J. Brenner
------------------------------------
Name: W.J. Brenner
Title: Senior Vice President
GOLDMAN SACHS CREDIT PARTNERS, L.P
By /s/ Jonathan Kolatch
------------------------------------
Name: Jonathan Kolatch
Title: Managing Director
LEHMAN COMMERCIAL PAPER INC.
By /s/ Michele Swanson
------------------------------------
Name: Michele Swanson
Title: Authorized Signatory
5
<PAGE>
COMMERCIAL LOAN FUNDING TRUST I
By: Lehman Commercial Paper Inc.,
not in its individual capacity
but solely as administrative
agent
By /s/ Michele Swanson
------------------------------------
Name: Michele Swanson
Title: Authorized Signatory
SANWA BUSINESS CREDIT CORP.
By /s/ Peter L. Skavla
------------------------------------
Name: Peter L. Skavla
Title: Vice President
TEXAS COMMERCE BANK/ALLIANCE
CAPITAL MANAGEMENT on behalf of
Alliance Investments Limited
By /s/ Joel Serebransky
------------------------------------
Name: Joel Serebransky
Title: Vice President
6
<PAGE>
HARCH CAPITAL MANAGEMENT
By
------------------------------------
Name:
Title:
INDOSUEZ CAPITAL FUNDING II, LTD.
By
------------------------------------
Name:
Title:
TCW LEVERAGED INCOME TRUST, L.P.
by: TCW Advisers (Bermuda), Ltd.,
as General Partner
By /s/ Mark L. Gold
------------------------------------
Name: Mark L. Gold
Title: Managing Director
By: TCW INVESTMENT MANAGEMENT
COMPANY, as Investment Adviser
By /s/ Justin L. Driscoll
------------------------------------
Name: Justin L. Driscoll
Title: Senior Vice President
CRESCENT/MACH I PARTNERS, L.P.
By /s/ Mark L. Gold
------------------------------------
Name: Mark L. Gold
Title:
7
<PAGE>
PAMCO CAYMAN LTD.
By
------------------------------------
Name:
Title:
8
Amended and Restated Employment Agreement
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement")
dated as of April 30, 1998, between NORTH ATLANTIC TRADING COMPANY, INC. (the
"Company") and DAVID I. BRUNSON (the "Executive").
AGREEMENT
---------
1. Employment, Duties and Acceptance. (a) The Company shall employ
the Executive during the Term (as hereinafter defined) as the Executive Vice
President - Finance and Administration and Chief Financial Officer of the
Company.
(b) The Executive hereby accepts such employment and agrees to
render his services to the Company on a full-time basis. The Executive further
agrees to accept election and to serve during all or any part of the Term or any
Renewal Term as an officer, director or representative of any subsidiary or
affiliate of the Company, without any compensation therefor other than that
specified in this Agreement. The Executive shall report directly to the Chief
Executive Officer of the Company.
(c) The duties to be performed by the Executive hereunder shall be
performed primarily in New York, New York, subject to reasonable travel
requirements on behalf of the Company. The Executive acknowledges that he may be
required to spend a significant amount of time periodically in the Company's
Louisville facility. The Company shall not relocate the Executive outside of New
York, New York, without his prior written consent, which may be withheld in the
Executive's discretion. The Executive shall be entitled to four (4) weeks of
paid vacation time annually.
2. Term of Employment. As used herein, the "Term" means the period
commencing as of April 30, 1998, and ending on April 30, 2002; provided,
however, that, unless either party gives written notice on or prior to April 30,
2000 of termination of this Agreement on April 30, 2002, the Term shall
automatically be extended for an additional one-day period at the end of each
day following April 30, 2000 (such that, at the end of every day following April
30, 2002, the Term shall continue for a total of 24 months thereafter).
NYFS10...:\80\64980\0003\2475\AGR4168W.13J
<PAGE>
3. Compensation. The Executive shall be entitled to the following
compensation:
(a) During the Term, the Company agrees to pay to the Executive a
salary in cash (the "Salary") as compensation for the services to be performed
by him as provided herein. The Salary shall be paid at the rate of $330,000 per
annum. The Salary shall be paid in equal monthly installments or more frequently
in accordance with the Company's salaried payroll payment policy less such
deductions or amounts to be withheld as shall be required by applicable law and
regulations. The Salary shall be reviewed annually and may be increased at the
sole discretion of the Company's Board of Directors.
(b) Upon the execution of this agreement, the Executive shall
receive a bonus in the amount of $300,000. If the Executive has not voluntarily
resigned his employment with the Company prior to February 28, 1999, he shall
receive an additional bonus in the amount of $300,000 on February 28, 1999.
(c) The Executive shall also be eligible throughout the Term to
receive annual cash bonuses (each a "Bonus") as a member of executive management
in accordance with the Company's Management Bonus Program (as in effect from
time to time) based on the Company's audited financial statements for the
applicable year and payable after delivery of such financial statements. The
minimum annual bonus the Executive shall be eligible to receive shall be not
less than 50% of Executive's then current annual Salary.
(d) The Executive shall be entitled to all rights and benefits for
which he shall be eligible under any other incentive program, retirement,
retirement savings, profit-sharing, pension or welfare benefit plan, life,
disability, health, dental, hospitalization and other forms of insurance and all
other so-called "fringe" benefits or perquisites, including an automobile
allowance and reimbursement of the costs of one club membership in each case at
the highest level which the Company shall from time to time provide for any of
its senior executives of the same or similar stature. In addition, to the extent
obtainable at reasonable premiums, the Company shall provide the Executive with
a term life insurance policy in an amount equal to $2,000,000.00, with
Executive's estate being the beneficiary.
4. Termination. (a) If during the Term the Executive shall die, the
Executive's legal representative shall be entitled to receive in cash an amount
equal to the sum of (i) any accrued and unpaid Salary to the date of such death,
and (ii) any
2
<PAGE>
accrued and unpaid Bonus to the date of such death, including any Bonus for the
year in which the termination occurs, calculated by reviewing the Company's
performance for such entire year and prorating any such Bonus for the number of
days elapsed during such year prior to such termination. The amount referred to
in clause (i) above shall be paid in accordance the Company's existing payroll
practices and any Bonus payable pursuant to clause (ii) above shall be paid
within ten business days after the release of the Company's audited financial
statements for the year in respect of which such Bonus was awarded. In addition,
the Executive (or his legal representative) shall be entitled to receive any
insurance proceeds payable pursuant to any insurance provided pursuant to
Section 3(d) hereof.
(b) If during the Term the Executive shall become physically or
mentally disabled, whether totally or partially, so that he is unable
substantially to perform his services hereunder for a period of at least 90 days
out of any twelve consecutive months (which condition is referred to herein as
the Executive becoming "Disabled"), the Company may at any time prior to the
90th day after the last day of such twelfth consecutive month, by written notice
to the Executive, terminate the Executive's employment, in which event the
Executive (or his legal representative) shall be entitled to receive in cash an
amount calculated as the sum of (i) any accrued and unpaid Salary to the date of
such notice and (ii) any accrued and unpaid Bonus to the date of such notice,
including any Bonus for the year in which the termination occurs, calculated by
reviewing the Company's performance for such entire year and prorating any such
Bonus for the number of days elapsed during such year prior to such termination.
The amount referred to in clause (i) above shall be paid in accordance the
Company's existing payroll practices and any Bonus payable pursuant to clause
(ii) above shall be paid within ten business days after the release of the
Company's audited financial statements for the year in respect of which such
Bonus was awarded. In addition, the Executive (or his legal representative)
shall be entitled to receive any disability benefits payable pursuant to any
plan referred to in Section 3(d) hereof. Nothing herein contained shall be
deemed to limit or abrogate any insurance or other similar benefits available to
the Executive.
(c) The Executive's employment may be terminated by the Company
during the Term for Cause (as hereinafter defined). If during the Term the
Executive's employment shall be lawfully terminated by the Company for Cause or
the Executive shall voluntarily resign without Good Reason (as hereinafter
defined), the Company's obligation to pay Salary and Bonus for the benefit of
the Executive, and the Executive's obligation to render services hereunder for
the benefit of the Company, shall cease on the effective date of such
termination or resignation (the
3
<PAGE>
effective date of a termination or resignation pursuant to any provision of
Section 4 is hereinafter referred to as the "Termination Date"); provided,
however, that the Executive shall be entitled to receive in cash an amount equal
to (i) any accrued and unpaid Salary to the Termination Date and (ii) any
accrued and unpaid Bonus for any year preceding such Termination Date. The
amount referred to in clause (i) above shall be paid in accordance the Company's
existing payroll practices and any Bonus payable pursuant to clause (ii) above
shall be paid within ten business days after the release of the Company's
audited financial statements for the year in respect of which such Bonus was
awarded.
As used herein, the term "Cause" shall mean only (i) a felony
conviction of the Executive (as determined by a court of competent jurisdiction,
not subject to further appeal), (ii) the commission by the Executive of an act
of fraud or embezzlement against the Company or any of its affiliates (as
determined by a court of competent jurisdiction, not subject to further appeal),
(iii) gross misconduct which is demonstrably willful and deliberate on the
Executive's part and which is materially detrimental to the Company or any of
its affiliates, (iv) any material breach by the Executive of any agreement with
the Company or any affiliate thereof not cured within 10 days after receiving
written notice thereof or any material violation of any policies or procedures
of the Company if the Company has given Executive written notice of such
violation and Executive persists in such violation or (v) insubordination
consisting of the Executive's continued failure to take specific action which is
within his individual control and consistent with his status as a senior
executive of the Company and his duties and responsibilities hereunder after
written notice from the Chief Executive Officer of the Company of not less than
10 days.
As used herein, the term "Good Reason" means any of the following:
(i) the assignment to the Executive of any duties inconsistent
with his status as Executive Vice President - Finance and
Administration and Chief Financial Officer of the Company or a
material adverse alteration in the nature or status of his
responsibilities from those provided herein or the transfer of a
significant portion of such responsibilities to one or more other
persons;
(ii) the failure by the Company to pay or provide to the
Executive, within 30 days of a written demand therefor, any amount
of compensation or any material benefit which is due, owing and
payable
4
<PAGE>
pursuant to the terms hereof or of any written plan, program,
arrangement or policy; or
(iii) the breach in any material respect by the Company of any
of its other obligations or agreements set forth herein and the
failure by the Company to cure such breach within 20 days after
written notice thereof from the Executive.
(d) If during the Term the Executive's employment shall be
terminated by the Company without Cause (and other than pursuant to Section
4(b)) or by the Executive for Good Reason (each a "Section 4(d) Event"), the
following provisions shall apply:
(i) The Executive shall be entitled to receive severance pay
equal to the sum of the following amounts:
(A) an amount equal to all accrued but unpaid Salary owing by the
Company as of the Termination Date;
(B) any accrued and unpaid Bonus to the Termination Date, including
any Bonus for the year in which the Executive is terminated, calculated by
reviewing the Company's performance for such entire year and prorating any
such Bonus for the number of days elapsed during such year prior to such
termination;
(C) subject to Section 5 hereof, an amount equal to the Executive's
annual Salary hereunder (at the rate then in effect) for the period
commencing on the Termination Date and ending on the expiration of the
Term; and
(D) subject to Section 5 hereof, an amount equal to the product of
(A) the highest Bonus paid to the Executive in the two (2) years preceding
Termination Date pursuant to the Company's Management Bonus Program, and
(B) the total number of days remaining in the Term divided by 365.
(ii) The amounts payable by the Company pursuant to Section
4(d)(i) shall be paid as follows:
(A) The amount referred to in clause (A) of Section 4(d)(i) shall be
paid in accordance with the Company's existing payroll practices;
5
<PAGE>
(B) The amount of any Bonus payable pursuant to clause (B) of
Section 4(d)(ii) shall be paid 10 business days after the release of the
Company's annual audited financial statements for the year in respect of
which such Bonus was awarded;
(C) The amounts payable by the Company pursuant to clauses (C) and
(D) of Section 4(d)(i) shall, in the sole discretion of the Company, be
paid either:
(1) as a lump sum cash payment within ten business days after the
Termination Date; or
(2) an amount equal to (x) the sum of (i) one year's salary (at
the rate then in effect) and (ii) the amount of the highest
bonus paid to the Executive in the two (2) years preceding
termination of employment pursuant to the Company's Management
Bonus Program, as a lump sum cash payment within ten business
days after the Termination Date and (y) the balance of the
amounts payable by the Company pursuant to clauses (C) and (D)
of Section 4(d)(i) in equal installments in accordance with
the Company's existing payroll practices during the period
commencing on the Termination Date and ending one year prior
to the conclusion of the Term.
In the event that the Company elects to make payments to the Executive
pursuant to clause (2) above, the Executive shall be entitled to receive
benefits under any benefit plan or program of the Company until the first
anniversary of the Termination Date (other than bonus or other incentive
plans or programs) to which the Executive would be entitled pursuant to
the terms of such plan or program if he had remained employed by the
Company during such period (to the extent permitted by the terms of such
plan or program and applicable law), or pursuant to any applicable state
or federal law; provided, however, in the event that the Company is unable
to provide health benefits under its existing plan, the Company will pay
the cost of continuing coverage pursuant to COBRA and, provided further,
the Executive's right to receive benefits pursuant to this sentence shall
terminate if the Executive obtains other employment pursuant to which he
is entitled to receive such benefits.
6
<PAGE>
(iii) Executive may, in his sole discretion, elect to purchase
his assigned Company car at a price not to exceed its pay-off value in
accordance with the Company's financial records and books pursuant to its
fleet contract.
(iv) Any options to purchase shares common stock, par value
$.01, of the Company granted to the Executive and any shares of restricted
stock granted to the Executive that have not vested as of the Termination
Date shall vest as of such date.
(e) During the term of the Executive's employment with Company and
for a period equal to the greater of (x) twelve months after the Termination
Date or (y) the date the last payment is payable to the Executive under the
terms of this Agreement (the "Noncompetition Period"), Executive hereby agrees
not to Compete with the Company. For purposes of this section, the term Compete
means:
(i) soliciting or counseling, personally or by or on behalf of
any person, firm or corporation, the employment of any employee of
Company, or requesting, inducing or attempting to influence any
employee of the Company to terminate his employment with Company; or
(ii) directly or indirectly (A) requesting, inducing or
attempting to influence any supplier of goods or services to Company
to curtail or cancel any business it transacts with Company; or (B)
requesting, inducing or attempting to influence any customer of
Company to curtail or cancel any business they may transact with
Company; or (C) engaging in any business that the Company is engaged
in as of the date of such termination (whether as an officer,
director, partner, employee, consultant or equity owner).
Notwithstanding the foregoing, (i) after first anniversary of the Termination
Date, the term "Compete" shall mean engaging in any business on behalf of
Swedish Match North America Inc., Conwood Company, L.P. and Swisher
International Inc., or any of their affiliates (whether as an officer, director,
partner, employee, consultant or equity owner) and (ii) the term "Compete" shall
not include owning (as a "beneficial owner", as such term is defined in the
Securities Exchange Act of 1934, as amended, or otherwise) one percent (1%) or
less of any class of equity securities of a company that is engaged in a
business in which the company is engaged, provided that such class of equity
securities is listed on a national securities exchange or actively traded
7
<PAGE>
in the over-the-counter market and that the Executive does not serve as an
officer, director, partner, employee or consultant of such company.
(f) The Company acknowledges and agrees that the Executive shall
have no duty at any time to seek other employment or to mitigate his damages
hereunder. The amounts payable to the Executive under this Agreement shall be
paid regardless of whether the Executive obtains other employment.
(g) Upon any termination of the Executive's employment hereunder,
the Company shall pay to the Executive or reimburse the Executive for any
business expenses and any amount payable under any benefit plan or program or
other amounts that were accrued or incurred but unpaid or unreimbursed at the
Termination Date.
5. Change in Control (a) If within 12 months following the
occurrence of a Change in Control (as hereinafter defined), Executive's
employment is terminated pursuant to Section 4(d) of this Agreement, in lieu of
the payments provided in Sections 4(d)(i)(C) and 4(d)(i)(D) (and payment thereof
as provided in Section 4(d)(ii)(C)), Executive shall receive a lump sum cash
payment, upon such termination, equal to three (3) times the amount of the
Executive's annual Salary (at the rate then in effect); and (b) three (3) times
the highest bonus paid to Executive in the two (2) years preceding the
termination of employment pursuant to the Company's Management Bonus Program.
As used herein, a "Change In Control" shall be deemed to occur as of
the first date on which any person or group of persons acting in concert other
than one or more "Helms Affiliates" (as hereinafter defined) or other members of
senior management of the Company shall become the direct or indirect Beneficial
Owners (as hereinafter defined) of securities of the Corporation representing
more than fifty percent (50%) of the combined voting power of the issued and
outstanding common stock voting securities of the Corporation or shall have the
right to elect by virtue of the ownership of securities, by contract or
otherwise a majority of the Company's Board of Directors. For purposes of this
Agreement, (i) the term "Helms Affiliates" shall mean Thomas F. Helms, Jr., his
immediate family members (which includes his parents, spouse, former spouses,
issue, siblings or the issue of any of the foregoing) or affiliates or any trust
for the benefit thereof or which any of the foregoing persons are parties
thereto or beneficiaries thereunder and (ii) the term "Beneficial Owner" shall
be given the definition contained in Rule 13-d-3 under the Securities Exchange
Act of 1934, as amended from time to time.
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(b) Notwithstanding any other provision of this Agreement to the
contrary, the Company shall not be obligated to make any payment or provide any
benefit (including the acceleration of stock options) to the extent that such
payment or benefit results in a "parachute payment" (as defined in Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code")); provided,
however, that the Company shall make all payments and provide all benefits under
this Agreement to the fullest extent permitted without giving rise to a
parachute payment.
(c) Whether any payment or benefit under this Agreement results in a
parachute payment (as defined in Section 280G of the Code) (i) shall be
determined by the Company's certified public accountants (the "Accountants");
and (ii) the value of any non-cash benefits or any deferred payment or benefit
shall be determined by the Accountants in accordance with the principles of
Section 280G of the Code.
(d) In the event that a payment or benefit under this Agreement is
subsequently determined by the Accountants to be a parachute payment, the
Executive shall repay to the Company, within 30 days following the time that the
character of such payment or benefit is re-defined by the Accountants, the
amount of such payment or benefit that has been paid to the Executive or on the
Executive's behalf and that would not have been paid if such payment or benefit
had been initially treated as a parachute payment, plus interest on the amount
of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code.
Notwithstanding the foregoing provisions of this Section 7(e), in the event any
portion of the payment or benefit to be refunded to the Company has been paid to
any federal, state or local authority, repayment thereof shall not be required
until actual refund or credit of such portion has been made to the Executive,
and interest payable to the Company shall not exceed interest received or
credited to the Executive by such tax authority for the period it held such
portion. The Executive and the Company shall mutually agree upon the course of
action to be pursued (and the method of allocating the expenses thereof) if the
Executive's good faith claim for refund or check is denied.
6. Put Option. (a) If the Executive's employment is terminated
pursuant to Section 4(d), Executive shall have the right and option (the "Put
Option"), commencing on the date on which the last payment is to be made by the
Company to the Executive pursuant to the terms of Section 4(d)(ii) (the "Last
Payment Date"), to require the Company to repurchase all or a portion of his
Shares at their "Fair Market Value", as defined in the Exchange and
Stockholders' Agreement dated June 25, 1997, by and among the Company, the
Executive and the other parties thereto, as amended (the "Stockholders'
Agreement"), as of the date of exercise of the Put
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Option. The Put Option (i) shall be exercisable by the Executive giving written
notice (the "Put Notice") of the exercise thereof to the Company, attention:
Secretary, at the principal executive office of the Company and (ii) may only be
exercised one time during the 12-month period commencing on the Last Payment
Date or during any subsequent period of 12 consecutive months commencing on an
anniversary of the Last Payment Date, and (iii) shall at all times and in all
respects be subject, subordinate and junior in right of payment to all
borrowings, secured or unsecured, now owing or which hereafter may become owing,
of the Company, and the Company shall not be obligated to repurchase any Shares
if the Company upon or after such payment would be in default under or violation
of any instrument, agreement or law to which the Company is a party or by which
the Company or any of its assets is materially bound or affected. If the Company
is unable to repurchase all or a portion of the Executive's Shares for which the
Put Option is exercised for any of the reasons enumerated in the immediately
preceding sentence, the repurchase of such Shares may be deferred until such
time as such repurchase may be made without default under or violation of such
instrument, agreement or law; provided, however, if the repurchase of all or a
portion of the Executive's Shares for which the Put Option is exercised is to be
deferred, the Company shall give the Executive notice thereof (a "Deferral
Notice") within ten business days after the determination of the Fair Market
Value thereof, and the Executive, by written notice to the Company given within
ten business days after the date of the Company's notice, may elect to withdraw
the Put Notice with respect to the Shares for which such repurchase is deferred
and, provided further, in the event of the withdrawal of the Put Notice by the
Executive as contemplated by the immediately preceding proviso, for purposes of
clause (ii) of this Section 6(a), such Put Notice will be deemed not to have
been given.
(b) Notwithstanding anything to the contrary contained in Section
6(a) but subject to the last sentence of this Section 6(b), if Executive's
employment is terminated pursuant to Section 4(d) or the Executive otherwise
voluntarily terminates his employment with the Company, the Company shall have
the right and option (the "Call Option"), exercisable by giving written notice
of the exercise thereof to the Executive at his address appearing on the books
and records of the Company (the "Call Notice"), to repurchase all of the
Executive's Shares at their Fair Market Value as of the date of the Call Notice
at any time during the five year period commencing on the Termination Date. Any
Call Notice shall be accompanied by a certificate signed by an executive officer
of the Company certifying on behalf of the Company that the repurchase of the
Executive's Shares by the Company would not constitute a default under or
violation of any instrument, agreement or law to which the Company
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is a party or by which the Company or any of its assets is materially bound or
affected (it being understood that such certification may be based on reasonable
assumptions with respect to the Fair Market Value of the Executive's Shares and
other matters pertaining to such repurchase, which assumptions, if any, shall be
set forth in such certificate). Notwithstanding the foregoing, in the event that
the Executive has not theretofore exercised the Put Option for all of his Shares
or the Company has not theretofore exercised the Call Option, the Company shall
exercise the Call Option on the earliest to occur of the following events:
(i) the fifth anniversary of the Termination Date;
(ii) the date on which proceeds derived from any refinancing of
the Company's indebtedness under the "Credit Agreement" or
the "Indenture" (in each case as defined in the
Stockholders' Agreement and including, for purposes of such
definitions, any agreements or instruments entered into or
issued pursuant to the Credit Agreement or the Indenture) or
from any refinancing of the Company's obligations under the
"Preferred Stock" (as defined in the Stockholders'
Agreement) are used by the Company to repurchase or pay
dividends on any outstanding equity securities of the
Company (other than the Preferred Stock or any securities
issued to refinance the Preferred Stock); and
(iii)the date on which the Company refinances its indebtedness
under the Credit Agreement or the Indenture or its
obligations under the Preferred Stock, except in the event
and to the extent that (A) the Credit Agreement, Indenture
or Preferred Stock remains outstanding after such
refinancing and prohibits the proceeds of such refinancing
from being used to repurchase or pay dividends on any equity
securities of the Company (other than the Preferred Stock or
any securities issued to refinance the Preferred Stock) or
(B) the third parties providing such refinancing, after good
faith negotiations, do not permit any portion of the
proceeds of such refinancing to be used to repurchase or pay
dividends on any equity securities of the Company (other
than the Preferred Stock or any securities issued to
refinance the Preferred Stock).
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In the event that, within 15 business days after the date that the Company gives
a Call Notice to the Executive pursuant to this Section 6(b), the Executive
elects to irrevocably waive his rights to require the Company to repurchase any
of the Executive's Shares pursuant to the Put Option (including the repurchase
of any Shares subject to a prior exercise of the Put Option that has not yet
been consummated), which waiver shall be in writing and shall make specific
reference to this last sentence of Section 6(b) (the "Put Option Waiver"), all
rights and obligations of the Company under this Section 6 shall terminate and
be of no further force or effect from and after the giving of the Put Option
Waiver (it being understood that the rights and obligations of the Company and
the Executive under the Stockholders' Agreement shall remain in full force and
effect).
(c) Any repurchase of the Executive's Shares pursuant to this
Section 6 shall take place at the principal executive office of the Company at a
date and time during normal business hours designated by the Company by notice
to the Executive, which date shall be no later than the fifteenth business day
after the determination of the repurchase price of the applicable Shares (except
in the case of a deferred purchase as contemplated by the last sentence of
Section 6(a), which shall take place no later than the fifteenth business day
after the prohibition against repurchase first lapses or is waived). The Company
shall repurchase the Executive's Shares to be so sold to it for cash, certified
bank check or immediately available funds in the amount of the repurchase price
against delivery of certificates representing such Shares to the Company, duly
endorsed in blank or accompanied by a stock power duly executed in blank. The
Executive shall execute and deliver such additional documents as the Company may
reasonably request to document such transaction.
(d) Notwithstanding anything to the contrary contained in this
Section 6, (i) the Company shall have the right to designate any third party or
parties to purchase all or a portion of the Executive's Shares to be sold
pursuant to the exercise of the Put Option or Call Option (in lieu of the
Company effecting such purchase), (ii) the Executive agrees to sell his Shares
to any third party or parties so designated in writing by the Company to the
Executive prior to the date of the closing of such sale as contemplated by
Section 6(c), (iii) upon the purchase by any such third party or parties of such
Shares on the terms and conditions otherwise applicable to the Company, the
Company's obligations with respect to such Put Option or Call Option with
respect to such Shares shall be deemed to have been satisfied and (iv) if the
Company designates a third party or parties to effect such purchase and provides
notice thereof to the Executive prior to the time by which the Company would
otherwise be obligated to provide a Deferral Notice to the Executive under
Section
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6(a), the Company shall not be obligated to furnish such a Deferral Notice with
respect to the Shares to be purchased by such third party or parties and the
Executive shall not have a right to withdraw the Put Notice with respect to such
Shares. In the event that any third party designated by the Company to purchase
all or a portion of the Executive's Shares in accordance with this Section 6(d)
fails to consummate such purchase as contemplated hereby, (i) if the repurchase
of all or a portion of such Shares by the Company would not constitute a default
under or violation of any instrument, agreement or law to which the Company is a
party or by which the Company or any of its assets is materially bound or
affected, the Company shall repurchase all of such Shares or the portion of such
shares which would not constitute such a default or violation on the terms
contemplated hereby or (ii) if the repurchase of all or a portion of such Shares
by the Company would constitute such a default or violation, the Company shall
promptly give the Executive a Deferral Notice with respect to such Shares and
the Executive may withdraw the Put Notice with respect to such Shares in
accordance with the last sentence of Section 6(a).
(e) Nothing contained herein shall be construed as an waiver or
amendment of any provision of the Stockholders' Agreement, express or implied.
7. Withholding Taxes. The Company may require, as a condition to any
payments required to be made by the Company pursuant to this Agreement or as a
condition to effectuating a repurchase of Shares pursuant to Section 6 hereof,
that the Company be reimbursed in cash for any taxes required by any government
to be withheld or otherwise deducted and paid by the Company in respect of such
payment or repurchase of Shares by the Company. In lieu thereof, the Company or
any affiliate thereof which employs the Executive shall have the right to
withhold the amount of such taxes from any sums due or to become due from it to
the Executive.
9. Expenses. In the event that the Executive institutes any legal
action to enforce his rights under, or to recover damages from breach of, this
Agreement, the Executive, if he is the prevailing party, shall be entitled to
recover from the Company any actual expenses for attorneys' fees and
disbursements reasonably incurred by him.
10. Assignment. This Agreement is binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
Notwithstanding the foregoing, neither party shall assign or transfer any rights
or obligations hereunder, except that the Company may assign or transfer this
Agreement
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to (a) a successor corporation in the event of a merger, consolidation, or
transfer or sale of all or substantially all of the assets, of the Company or
(b) an affiliate of the Company; provided that no such assignment referred to in
the foregoing clause (a) or (b) shall relieve the Company from liability for its
obligations hereunder. Any purported assignment, other than as provided above,
shall be null and void.
11. Indemnification. The Company shall indemnify the Executive in
accordance with its Certificate of Incorporation and Bylaws, copies of which
have been delivered to the Executive, against all costs, charges and expenses
incurred or sustained by him in connection with any action, suit or proceeding
to which he may be made a party by reason of his being an officer, director or
employee of the Company or of any subsidiary or affiliate of the Company. The
Company's obligations under this Section 11 shall survive any termination of
this Agreement or the Executive's employment hereunder.
12. Notices. All notices, requests, consents and other
communications, required or permitted to be given hereunder, shall be in writing
and shall be delivered personally or sent by prepaid telegram, telex, facsimile
transmission, overnight courier or mailed, first class, postage prepaid by
registered or certified mail, as follows:
If to the Company: North Atlantic Trading Company, Inc.
257 Park Avenue South
New York, New York 10016
If to the Executive: David I. Brunson
4 Hawthorne Road
Bronxville, New York 10708
or such other address as either party shall designate by notice in writing to
the other in accordance herewith. Any such notice shall be deemed given when so
delivered personally, by telex, facsimile transmission or telegram, or if sent
by overnight courier, one day after delivery to such courier by the sender or if
mailed, five days after deposit by the sender in the U.S. mails.
13. Entire Agreement; Non-Exclusive Rights. (a) Subject to Section
13(b), this Agreement shall constitute the entire agreement between the
Executive and the Company concerning the subject matter hereof, and performance
of
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its obligations hereunder by the Company shall constitute full settlement and
release of any claim or cause of action, of whatsoever nature, which the
Executive might otherwise assert or claim against the Corporation or any of its
directors, stockholders, officers or employees on account of any termination.
This Agreement supersedes the Employment Agreement, dated April 23, 1997,
between the Corporation and the Executive, and such agreement is hereby
terminated and of no further force or effect. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing, signed by the Executive and an authorized
officer of the Company.
(b) Nothing in this Agreement shall impair or limit (i) any right or
obligation of any party hereto under the Stockholders' Agreement or (ii) the
Executive's continuing or future participation, during the term of Executive's
employment, in any benefit bonus, incentive or other plan or program provided by
the Company and for which the Executive may qualify, nor shall anything herein
limit or otherwise prejudice such rights as the Executive may have under any
other agreements with the Company, including, but not limited to stock option or
restricted stock agreements. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company at or subsequent to the Termination Date shall be payable in accordance
with such plan or program.
14. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York applicable to
agreements made and to be performed entirely within such State.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first written above.
NORTH ATLANTIC TRADING COMPANY, INC.
By:/s/ Thomas F. Helms, Jr.
----------------------------------------------
Name: Thomas F. Helms, Jr.
Title: Chairman of the Board of Directors and
Chief Executive Officer
/s/ David I. Brunson
----------------------------------------------
David I. Brunson
16
Amended and Restated Employment Agreement
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement")
dated as of April 30, 1998, between NORTH ATLANTIC TRADING COMPANY, INC. (the
"Company") and JEFFREY S. HAY (the "Executive").
AGREEMENT
1. Employment, Duties and Acceptance. (a) The Company shall employ
the Executive during the Term (as hereinafter defined) as the Executive Vice
President and General Counsel of the Company.
(b) The Executive hereby accepts such employment and agrees to
render his services to the Company on a full-time basis. The Executive further
agrees to accept election and to serve during all or any part of the Term or any
Renewal Term as an officer, director or representative of any subsidiary or
affiliate of the Company, without any compensation therefor other than that
specified in this Agreement. The Executive shall report directly to the Chief
Executive Officer of the Company.
(c) The duties to be performed by the Executive hereunder shall be
performed primarily in New York, New York, subject to reasonable travel
requirements on behalf of the Company. The Executive acknowledges that he may be
required to spend a significant amount of time periodically in the Company's
Louisville facility. The Company agrees that the Executive may reside in
Charlotte, North Carolina and, except to the extent that the exigencies of the
Company's business otherwise require, Executive may work one business day per
week out of Charlotte, North Carolina. The Company shall not require the
Executive to relocate outside of Charlotte, North Carolina, without his prior
written consent, which may be withheld in the Executive's discretion. The
Executive shall be reimbursed for his reasonable travel expenses. The Executive
shall be entitled to four (4) weeks of paid vacation time annually.
2. Term of Employment. As used herein, the "Term" means the period
commencing as of April 30, 1998, and ending on April 30, 2002; provided,
however, that, unless either party gives written notice on or prior to April 30,
2000 of termination of this Agreement on April 30, 2002, the Term shall
automatically be
NYFS10...:\80\64980\0003\2475\AGR5138R.08C
<PAGE>
extended for an additional one-day period at the end of each day following April
30, 2000 (such that, at the end of every day following April 30, 2002, the Term
shall continue for a total of 24 months thereafter).
3. Compensation. The Executive shall be entitled to the following
compensation:
(a) During the Term, the Company agrees to pay to the Executive a
salary in cash (the "Salary") as compensation for the services to be performed
by him as provided herein. The Salary shall be paid at the rate of $250,000 per
annum through and including July 31, 1998 and at the rate of $275,000 per annum
thereafter. The Salary shall be paid in equal monthly installments or more
frequently in accordance with the Company's salaried payroll payment policy less
such deductions or amounts to be withheld as shall be required by applicable law
and regulations. The Salary shall be reviewed annually and may be increased at
the sole discretion of the Company's Board of Directors.
(b) Upon the execution of this agreement, the Executive shall
receive a bonus in the amount of $75,000. If the Executive has not voluntarily
resigned his employment with the Company prior to February 28, 1999, he shall
receive an additional bonus in the amount of $75,000 on February 28, 1999.
(c) The Executive shall also be eligible throughout the Term to
receive annual cash bonuses (each a "Bonus") as a member of executive management
in accordance with the Company's Management Bonus Program (as in effect from
time to time) based on the Company's audited financial statements for the
applicable year and payable after delivery of such financial statements. The
minimum annual bonus the Executive shall be eligible to receive shall be not
less than 50% of Executive's then current annual Salary.
(d) The Executive shall be entitled to all rights and benefits for
which he shall be eligible under any other incentive program, retirement,
retirement savings, profit-sharing, pension or welfare benefit plan, life,
disability, health, dental, hospitalization and other forms of insurance and all
other so-called "fringe" benefits or perquisites, including reimbursement of the
costs of one club membership in each case at the highest level which the Company
shall from time to time provide for any of its senior executives of the same or
similar stature. In addition, to the extent obtainable at reasonable premiums,
the Company shall provide the Executive with a
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term life insurance policy in an amount equal to $1,000,000.00, with Executive's
estate being the beneficiary.
4. Termination. (a) If during the Term the Executive shall die, the
Executive's legal representative shall be entitled to receive in cash an amount
equal to the sum of (i) any accrued and unpaid Salary to the date of such death,
and (ii) any accrued and unpaid Bonus to the date of such death, including any
Bonus for the year in which the termination occurs, calculated by reviewing the
Company's performance for such entire year and prorating any such Bonus for the
number of days elapsed during such year prior to such termination. The amount
referred to in clause (i) above shall be paid in accordance the Company's
existing payroll practices and any Bonus payable pursuant to clause (ii) above
shall be paid within ten business days after the release of the Company's
audited financial statements for the year in respect of which such Bonus was
awarded. In addition, the Executive (or his legal representative) shall be
entitled to receive any insurance proceeds payable pursuant to any insurance
provided pursuant to Section 3(d) hereof.
(b) If during the Term the Executive shall become physically or
mentally disabled, whether totally or partially, so that he is unable
substantially to perform his services hereunder for a period of at least 90 days
out of any twelve consecutive months (which condition is referred to herein as
the Executive becoming "Disabled"), the Company may at any time prior to the
90th day after the last day of such twelfth consecutive month, by written notice
to the Executive, terminate the Executive's employment, in which event the
Executive (or his legal representative) shall be entitled to receive in cash an
amount calculated as the sum of (i) any accrued and unpaid Salary to the date of
such notice and (ii) any accrued and unpaid Bonus to the date of such notice,
including any Bonus for the year in which the termination occurs, calculated by
reviewing the Company's performance for such entire year and prorating any such
Bonus for the number of days elapsed during such year prior to such termination.
The amount referred to in clause (i) above shall be paid in accordance the
Company's existing payroll practices and any Bonus payable pursuant to clause
(ii) above shall be paid within ten business days after the release of the
Company's audited financial statements for the year in respect of which such
Bonus was awarded. In addition, the Executive (or his legal representative)
shall be entitled to receive any disability benefits payable pursuant to any
plan referred to in Section 3(d) hereof. Nothing herein contained shall be
deemed to limit or abrogate any insurance or other similar benefits available to
the Executive.
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(c) The Executive's employment may be terminated by the Company
during the Term for Cause (as hereinafter defined). If during the Term the
Executive's employment shall be lawfully terminated by the Company for Cause or
the Executive shall voluntarily resign without Good Reason (as hereinafter
defined), the Company's obligation to pay Salary and Bonus for the benefit of
the Executive, and the Executive's obligation to render services hereunder for
the benefit of the Company, shall cease on the effective date of such
termination or resignation (the effective date of a termination or resignation
pursuant to any provision of Section 4 is hereinafter referred to as the
"Termination Date"); provided, however, that the Executive shall be entitled to
receive in cash an amount equal to (i) any accrued and unpaid Salary to the
Termination Date and (ii) any accrued and unpaid Bonus for any year preceding
such Termination Date. The amount referred to in clause (i) above shall be paid
in accordance the Company's existing payroll practices and any Bonus payable
pursuant to clause (ii) above shall be paid within ten business days after the
release of the Company's audited financial statements for the year in respect of
which such Bonus was awarded.
As used herein, the term "Cause" shall mean only (i) a felony
conviction of the Executive (as determined by a court of competent jurisdiction,
not subject to further appeal), (ii) the commission by the Executive of an act
of fraud or embezzlement against the Company or any of its affiliates (as
determined by a court of competent jurisdiction, not subject to further appeal),
(iii) gross misconduct which is demonstrably willful and deliberate on the
Executive's part and which is materially detrimental to the Company or any of
its affiliates, (iv) any material breach by the Executive of any agreement with
the Company or any affiliate thereof not cured within 10 days after receiving
written notice thereof or any material violation of any policies or procedures
of the Company if the Company has given Executive written notice of such
violation and Executive persists in such violation or (v) insubordination
consisting of the Executive's continued failure to take specific action which is
within his individual control and consistent with his status as a senior
executive of the Company and his duties and responsibilities hereunder after
written notice from the Chief Executive Officer of the Company of not less than
10 days; provided, however, that the Executive shall not be terminated for Cause
if the action required to be taken would constitute a breach of the Executive's
responsibilities under the Rules of Professional Conduct of the North Carolina
State Bar Association.
As used herein, the term "Good Reason" means any of the following:
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<PAGE>
(i) the assignment to the Executive of any duties inconsistent
with his status as Executive Vice President and General Counsel of
the Company or a material adverse alteration in the nature or status
of his responsibilities from those provided herein or the transfer
of a significant portion of such responsibilities to one or more
other persons;
(ii) the failure by the Company to pay or provide to the
Executive, within 30 days of a written demand therefor, any amount
of compensation or any material benefit which is due, owing and
payable pursuant to the terms hereof or of any written plan,
program, arrangement or policy; or
(iii) the breach in any material respect by the Company of any
of its other obligations or agreements set forth herein and the
failure by the Company to cure such breach within 20 days after
written notice thereof from the Executive.
(d) If during the Term the Executive's employment shall be
terminated by the Company without Cause (and other than pursuant to Section
4(b)) or by the Executive for Good Reason (each a "Section 4(d) Event"), the
following provisions shall apply:
(i) The Executive shall be entitled to receive severance pay
equal to the sum of the following amounts:
(A) an amount equal to all accrued but unpaid Salary owing by the
Company as of the Termination Date;
(B) any accrued and unpaid Bonus to the Termination Date, including
any Bonus for the year in which the Executive is terminated, calculated by
reviewing the Company's performance for such entire year and prorating any
such Bonus for the number of days elapsed during such year prior to such
termination;
(C) subject to Section 5 hereof, an amount equal to the Executive's
annual Salary hereunder (at the rate then in effect) for the period
commencing on the Termination Date and ending on the expiration of the
Term; and
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(D) subject to Section 5 hereof, an amount equal to the product of
(A) the highest Bonus paid to the Executive in the two (2) years preceding
Termination Date pursuant to the Company's Management Bonus Program, and
(B) the total number of days remaining in the Term divided by 365.
(ii) The amounts payable by the Company pursuant to Section
4(d)(i) shall be paid as follows:
(A) The amount referred to in clause (A) of Section 4(d)(i) shall be
paid in accordance with the Company's existing payroll practices;
(B) The amount of any Bonus payable pursuant to clause (B) of
Section 4(d)(ii) shall be paid 10 business days after the release of the
Company's annual audited financial statements for the year in respect of
which such Bonus was awarded;
(C) The amounts payable by the Company pursuant to clauses (C) and
(D) of Section 4(d)(i) shall, in the sole discretion of the Company, be
paid either:
(1) as a lump sum cash payment within ten business days after the
Termination Date; or
(2) an amount equal to (x) the sum of (i) one year's salary (at
the rate then in effect) and (ii) the amount of the highest
bonus paid to the Executive in the two (2) years preceding
termination of employment pursuant to the Company's Management
Bonus Program, as a lump sum cash payment within ten business
days after the Termination Date and (y) the balance of the
amounts payable by the Company pursuant to clauses (C) and (D)
of Section 4(d)(i) in equal installments in accordance with
the Company's existing payroll practices during the period
commencing on the Termination Date and ending one year prior
to the conclusion of the Term.
In the event that the Company elects to make payments to the Executive
pursuant to clause (2) above, the Executive shall be entitled to receive
benefits under any benefit plan or program of the Company until the first
anniversary of the Termination Date (other than bonus or other incentive
plans or
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programs) to which the Executive would be entitled pursuant to the terms
of such plan or program if he had remained employed by the Company during
such period (to the extent permitted by the terms of such plan or program
and applicable law), or pursuant to any applicable state or federal law;
provided, however, in the event that the Company is unable to provide
health benefits under its existing plan, the Company will pay the cost of
continuing coverage pursuant to COBRA and, provided further, the
Executive's right to receive benefits pursuant to this sentence shall
terminate if the Executive obtains other employment pursuant to which he
is entitled to receive such benefits.
(iii) Executive may, in his sole discretion, elect to purchase
his assigned Company car at a price not to exceed its pay-off value in
accordance with the Company's financial records and books pursuant to its
fleet contract.
(iv) Any options to purchase shares common stock, par value
$.01, of the Company granted to the Executive and any shares of restricted
stock granted to the Executive that have not vested as of the Termination
Date shall vest as of such date.
(e) During the term of the Executive's employment with Company and
for a period equal to the greater of (x) twelve months after the Termination
Date or (y) the date the last payment is payable to the Executive under the
terms of this Agreement (the "Noncompetition Period"), Executive hereby agrees
not to Compete with the Company. For purposes of this section, the term Compete
means:
(i) soliciting or counseling, personally or by or on behalf of
any person, firm or corporation, the employment of any employee of
Company, or requesting, inducing or attempting to influence any
employee of the Company to terminate his employment with Company; or
(ii) directly or indirectly (A) requesting, inducing or
attempting to influence any supplier of goods or services to Company
to curtail or cancel any business it transacts with Company; or (B)
requesting, inducing or attempting to influence any customer of
Company to curtail or cancel any business they may transact with
Company; or (C) engaging in any business that the Company is engaged
in as of the date of such termination (whether as an officer,
director, partner, employee, consultant, attorney or equity owner).
7
<PAGE>
Notwithstanding the foregoing, (i) after first anniversary of the Termination
Date, the term "Compete" shall mean engaging in any business on behalf of
Swedish Match North America Inc., Conwood Company, L.P. and Swisher
International Inc., or any of their affiliates (whether as an officer, director,
partner, employee, consultant, attorney or equity owner) and (ii) the term
"Compete" shall not include owning (as a "beneficial owner", as such term is
defined in the Securities Exchange Act of 1934, as amended, or otherwise) one
percent (1%) or less of any class of equity securities of a company that is
engaged in a business in which the company is engaged, provided that such class
of equity securities is listed on a national securities exchange or actively
traded in the over-the-counter market and that the Executive does not serve as
an officer, director, partner, employee, consultant or attorney of such company.
(f) The Company acknowledges and agrees that the Executive shall
have no duty at any time to seek other employment or to mitigate his damages
hereunder. The amounts payable to the Executive under this Agreement shall be
paid regardless of whether the Executive obtains other employment.
(g) Upon any termination of the Executive's employment hereunder,
the Company shall pay to the Executive or reimburse the Executive for any
business expenses and any amount payable under any benefit plan or program or
other amounts that were accrued or incurred but unpaid or unreimbursed at the
Termination Date.
5. Change in Control (a) If within 12 months following the
occurrence of a Change in Control (as hereinafter defined), Executive's
employment is terminated pursuant to Section 4(d) of this Agreement, in lieu of
the payments provided in Sections 4(d)(i)(C) and 4(d)(i)(D) (and payment thereof
as provided in Section 4(d)(ii)(C)), Executive shall receive a lump sum cash
payment, upon such termination, equal to three (3) times the amount of the
Executive's annual Salary (at the rate then in effect); and (b) three (3) times
the highest bonus paid to Executive in the two (2) years preceding the
termination of employment pursuant to the Company's Management Bonus Program.
As used herein, a "Change In Control" shall be deemed to occur as of
the first date on which any person or group of persons acting in concert other
than one or more "Helms Affiliates" (as hereinafter defined) or other members of
senior management of the Company shall become the direct or indirect Beneficial
Owners (as hereinafter defined) of securities of the Corporation representing
more than fifty percent (50%) of the combined voting power of the issued and
outstanding common stock voting securities of the Corporation or shall have the
right to elect by virtue of
8
<PAGE>
the ownership of securities, by contract or otherwise a majority of the
Company's Board of Directors. For purposes of this Agreement, (i) the term
"Helms Affiliates" shall mean Thomas F. Helms, Jr., his immediate family members
(which includes his parents, spouse, former spouses, issue, siblings or the
issue of any of the foregoing) or affiliates or any trust for the benefit
thereof or which any of the foregoing persons are parties thereto or
beneficiaries thereunder and (ii) the term "Beneficial Owner" shall be given the
definition contained in Rule 13-d-3 under the Securities Exchange Act of 1934,
as amended from time to time.
(b) Notwithstanding any other provision of this Agreement to the
contrary, the Company shall not be obligated to make any payment or provide any
benefit (including the acceleration of stock options) to the extent that such
payment or benefit results in a "parachute payment" (as defined in Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code")); provided,
however, that the Company shall make all payments and provide all benefits under
this Agreement to the fullest extent permitted without giving rise to a
parachute payment.
(c) Whether any payment or benefit under this Agreement results in a
parachute payment (as defined in Section 280G of the Code) (i) shall be
determined by the Company's certified public accountants (the "Accountants");
and (ii) the value of any non-cash benefits or any deferred payment or benefit
shall be determined by the Accountants in accordance with the principles of
Section 280G of the Code.
(d) In the event that a payment or benefit under this Agreement is
subsequently determined by the Accountants to be a parachute payment, the
Executive shall repay to the Company, within 30 days following the time that the
character of such payment or benefit is re-defined by the Accountants, the
amount of such payment or benefit that has been paid to the Executive or on the
Executive's behalf and that would not have been paid if such payment or benefit
had been initially treated as a parachute payment, plus interest on the amount
of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code.
Notwithstanding the foregoing provisions of this Section 7(e), in the event any
portion of the payment or benefit to be refunded to the Company has been paid to
any federal, state or local authority, repayment thereof shall not be required
until actual refund or credit of such portion has been made to the Executive,
and interest payable to the Company shall not exceed interest received or
credited to the Executive by such tax authority for the period it held such
portion. The Executive and the Company shall mutually agree upon the course of
action to be pursued (and the method of allocating the expenses thereof) if the
Executive's good faith claim for refund or check is denied.
9
<PAGE>
6. Put Option. (a) If the Executive's employment is terminated
pursuant to Section 4(d), Executive shall have the right and option (the "Put
Option"), commencing on the date on which the last payment is to be made by the
Company to the Executive pursuant to the terms of Section 4(d)(ii) (the "Last
Payment Date"), to require the Company to repurchase all or a portion of his
Shares at their "Fair Market Value", as defined in the Exchange and
Stockholders' Agreement dated June 25, 1997, by and among the Company, the
Executive and the other parties thereto, as amended (the "Stockholders'
Agreement"), as of the date of exercise of the Put Option. The Put Option (i)
shall be exercisable by the Executive giving written notice (the "Put Notice")
of the exercise thereof to the Company, attention: Secretary, at the principal
executive office of the Company and (ii) may only be exercised one time during
the 12-month period commencing on the Last Payment Date or during any subsequent
period of 12 consecutive months commencing on an anniversary of the Last Payment
Date, and (iii) shall at all times and in all respects be subject, subordinate
and junior in right of payment to all borrowings, secured or unsecured, now
owing or which hereafter may become owing, of the Company, and the Company shall
not be obligated to repurchase any Shares if the Company upon or after such
payment would be in default under or violation of any instrument, agreement or
law to which the Company is a party or by which the Company or any of its assets
is materially bound or affected. If the Company is unable to repurchase all or a
portion of the Executive's Shares for which the Put Option is exercised for any
of the reasons enumerated in the immediately preceding sentence, the repurchase
of such Shares may be deferred until such time as such repurchase may be made
without default under or violation of such instrument, agreement or law;
provided, however, if the repurchase of all or a portion of the Executive's
Shares for which the Put Option is exercised is to be deferred, the Company
shall give the Executive notice thereof (a "Deferral Notice") within ten
business days after the determination of the Fair Market Value thereof, and the
Executive, by written notice to the Company given within ten business days after
the date of the Company's notice, may elect to withdraw the Put Notice with
respect to the Shares for which such repurchase is deferred and, provided
further, in the event of the withdrawal of the Put Notice by the Executive as
contemplated by the immediately preceding proviso, for purposes of clause (ii)
of this Section 6(a), such Put Notice will be deemed not to have been given.
(b) Notwithstanding anything to the contrary contained in Section
6(a) but subject to the last sentence of this Section 6(b), if Executive's
employment is terminated pursuant to Section 4(d) or the Executive otherwise
voluntarily terminates his employment with the Company, the Company shall have
the right and option (the
10
<PAGE>
"Call Option"), exercisable by giving written notice of the exercise thereof to
the Executive at his address appearing on the books and records of the Company
(the "Call Notice"), to repurchase all of the Executive's Shares at their Fair
Market Value as of the date of the Call Notice at any time during the five year
period commencing on the Termination Date. Any Call Notice shall be accompanied
by a certificate signed by an executive officer of the Company certifying on
behalf of the Company that the repurchase of the Executive's Shares by the
Company would not constitute a default under or violation of any instrument,
agreement or law to which the Company is a party or by which the Company or any
of its assets is materially bound or affected (it being understood that such
certification may be based on reasonable assumptions with respect to the Fair
Market Value of the Executive's Shares and other matters pertaining to such
repurchase, which assumptions, if any, shall be set forth in such certificate).
Notwithstanding the foregoing, in the event that the Executive has not
theretofore exercised the Put Option for all of his Shares or the Company has
not theretofore exercised the Call Option, the Company shall exercise the Call
Option on the earliest to occur of the following events:
(i) the fifth anniversary of the Termination Date;
(ii) the date on which proceeds derived from any refinancing of
the Company's indebtedness under the "Credit Agreement" or
the "Indenture" (in each case as defined in the
Stockholders' Agreement and including, for purposes of such
definitions, any agreements or instruments entered into or
issued pursuant to the Credit Agreement or the Indenture) or
from any refinancing of the Company's obligations under the
"Preferred Stock" (as defined in the Stockholders'
Agreement) are used by the Company to repurchase or pay
dividends on any outstanding equity securities of the
Company (other than the Preferred Stock or any securities
issued to refinance the Preferred Stock); and
(iii)the date on which the Company refinances its indebtedness
under the Credit Agreement or the Indenture or its
obligations under the Preferred Stock, except in the event
and to the extent that (A) the Credit Agreement, Indenture
or Preferred Stock remains outstanding after such
refinancing and prohibits the proceeds of such refinancing
from being used to repurchase or
11
<PAGE>
pay dividends on any equity securities of the Company (other
than the Preferred Stock or any securities issued to refinance
the Preferred Stock) or (B) the third parties providing such
refinancing, after good faith negotiations, do not permit any
portion of the proceeds of such refinancing to be used to
repurchase or pay dividends on any equity securities of the
Company (other than the Preferred Stock or any securities
issued to refinance the Preferred Stock).
In the event that, within 15 business days after the date that the Company gives
a Call Notice to the Executive pursuant to this Section 6(b), the Executive
elects to irrevocably waive his rights to require the Company to repurchase any
of the Executive's Shares pursuant to the Put Option (including the repurchase
of any Shares subject to a prior exercise of the Put Option that has not yet
been consummated), which waiver shall be in writing and shall make specific
reference to this last sentence of Section 6(b) (the "Put Option Waiver"), all
rights and obligations of the Company under this Section 6 shall terminate and
be of no further force or effect from and after the giving of the Put Option
Waiver (it being understood that the rights and obligations of the Company and
the Executive under the Stockholders' Agreement shall remain in full force and
effect).
(c) Any repurchase of the Executive's Shares pursuant to this
Section 6 shall take place at the principal executive office of the Company at a
date and time during normal business hours designated by the Company by notice
to the Executive, which date shall be no later than the fifteenth business day
after the determination of the repurchase price of the applicable Shares (except
in the case of a deferred purchase as contemplated by the last sentence of
Section 6(a), which shall take place no later than the fifteenth business day
after the prohibition against repurchase first lapses or is waived). The Company
shall repurchase the Executive's Shares to be so sold to it for cash, certified
bank check or immediately available funds in the amount of the repurchase price
against delivery of certificates representing such Shares to the Company, duly
endorsed in blank or accompanied by a stock power duly executed in blank. The
Executive shall execute and deliver such additional documents as the Company may
reasonably request to document such transaction.
(d) Notwithstanding anything to the contrary contained in this
Section 6, (i) the Company shall have the right to designate any third party or
parties to purchase all or a portion of the Executive's Shares to be sold
pursuant to the exercise of the Put Option or Call Option (in lieu of the
Company effecting such purchase),
12
<PAGE>
(ii) the Executive agrees to sell his Shares to any third party or parties so
designated in writing by the Company to the Executive prior to the date of the
closing of such sale as contemplated by Section 6(c), (iii) upon the purchase by
any such third party or parties of such Shares on the terms and conditions
otherwise applicable to the Company, the Company's obligations with respect to
such Put Option or Call Option with respect to such Shares shall be deemed to
have been satisfied and (iv) if the Company designates a third party or parties
to effect such purchase and provides notice thereof to the Executive prior to
the time by which the Company would otherwise be obligated to provide a Deferral
Notice to the Executive under Section 6(a), the Company shall not be obligated
to furnish such a Deferral Notice with respect to the Shares to be purchased by
such third party or parties and the Executive shall not have a right to withdraw
the Put Notice with respect to such Shares. In the event that any third party
designated by the Company to purchase all or a portion of the Executive's Shares
in accordance with this Section 6(d) fails to consummate such purchase as
contemplated hereby, (i) if the repurchase of all or a portion of such Shares by
the Company would not constitute a default under or violation of any instrument,
agreement or law to which the Company is a party or by which the Company or any
of its assets is materially bound or affected, the Company shall repurchase all
of such Shares or the portion of such shares which would not constitute such a
default or violation on the terms contemplated hereby or (ii) if the repurchase
of all or a portion of such Shares by the Company would constitute such a
default or violation, the Company shall promptly give the Executive a Deferral
Notice with respect to such Shares and the Executive may withdraw the Put Notice
with respect to such Shares in accordance with the last sentence of Section
6(a).
(e) Nothing contained herein shall be construed as an waiver or
amendment of any provision of the Stockholders' Agreement, express or implied.
7. Withholding Taxes. The Company may require, as a condition to any
payments required to be made by the Company pursuant to this Agreement or as a
condition to effectuating a repurchase of Shares pursuant to Section 6 hereof,
that the Company be reimbursed in cash for any taxes required by any government
to be withheld or otherwise deducted and paid by the Company in respect of such
payment or repurchase of Shares by the Company. In lieu thereof, the Company or
any affiliate thereof which employs the Executive shall have the right to
withhold the amount of such taxes from any sums due or to become due from it to
the Executive.
13
<PAGE>
9. Expenses. In the event that the Executive institutes any legal
action to enforce his rights under, or to recover damages from breach of, this
Agreement, the Executive, if he is the prevailing party, shall be entitled to
recover from the Company any actual expenses for attorneys' fees and
disbursements reasonably incurred by him.
10. Assignment. This Agreement is binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
Notwithstanding the foregoing, neither party shall assign or transfer any rights
or obligations hereunder, except that the Company may assign or transfer this
Agreement to (a) a successor corporation in the event of a merger,
consolidation, or transfer or sale of all or substantially all of the assets, of
the Company or (b) an affiliate of the Company; provided that no such assignment
referred to in the foregoing clause (a) or (b) shall relieve the Company from
liability for its obligations hereunder. Any purported assignment, other than as
provided above, shall be null and void.
11. Indemnification. The Company shall indemnify the Executive in
accordance with its Certificate of Incorporation and Bylaws, copies of which
have been delivered to the Executive, against all costs, charges and expenses
incurred or sustained by him in connection with any action, suit or proceeding
to which he may be made a party by reason of his being an officer, director or
employee of the Company or of any subsidiary or affiliate of the Company. The
Company's obligations under this Section 11 shall survive any termination of
this Agreement or the Executive's employment hereunder.
12. Notices. All notices, requests, consents and other
communications, required or permitted to be given hereunder, shall be in writing
and shall be delivered personally or sent by prepaid telegram, telex, facsimile
transmission, overnight courier or mailed, first class, postage prepaid by
registered or certified mail, as follows:
If to the Company: North Atlantic Trading Company, Inc.
257 Park Avenue South
New York, New York 10016
If to the Executive: 225 Glenbrook Springs
New London, NC 28127
14
<PAGE>
or such other address as either party shall designate by notice in writing to
the other in accordance herewith. Any such notice shall be deemed given when so
delivered personally, by telex, facsimile transmission or telegram, or if sent
by overnight courier, one day after delivery to such courier by the sender or if
mailed, five days after deposit by the sender in the U.S. mails.
13. Entire Agreement; Non-Exclusive Rights. (a) Subject to Section
13(b), this Agreement shall constitute the entire agreement between the
Executive and the Company concerning the subject matter hereof, and performance
of its obligations hereunder by the Company shall constitute full settlement and
release of any claim or cause of action, of whatsoever nature, which the
Executive might otherwise assert or claim against the Corporation or any of its
directors, stockholders, officers or employees on account of any termination.
This Agreement supersedes the Employment Agreement, dated July 28, 1997, between
the Corporation and the Executive, and such agreement is hereby terminated and
of no further force or effect. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and an authorized officer of the Company.
(b) Nothing in this Agreement shall impair or limit (i) any right or
obligation of any party hereto under the Stockholders' Agreement or (ii) the
Executive's continuing or future participation, during the term of Executive's
employment, in any benefit bonus, incentive or other plan or program provided by
the Company and for which the Executive may qualify, nor shall anything herein
limit or otherwise prejudice such rights as the Executive may have under any
other agreements with the Company, including, but not limited to stock option or
restricted stock agreements. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company at or subsequent to the Termination Date shall be payable in accordance
with such plan or program.
14. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York applicable to
agreements made and to be performed entirely within such State.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first written above.
NORTH ATLANTIC TRADING COMPANY, INC.
By:/s/ Thomas F. Helms, Jr.
--------------------------------------------------
Name: Thomas F. Helms, Jr.
Title: Chairman of the Board of Directors and
Chief Executive Officer
/s/ Jeffrey S. Hay
--------------------------------------------------
Jeffrey S. Hay
16
AMENDMENT NO. 1 TO THE
AMENDED AND RESTATED
NONQUALIFIED STOCK OPTION AGREEMENT
GRANTED TO: Jeffrey S. Hay
EFFECTIVE DATE OF July 28, 1997
ORIGINAL GRANT:
GRANTED PURSUANT TO: NORTH ATLANTIC TRADING COMPANY 1997
SHARE INCENTIVE PLAN
DATE OF AMENDMENT: April 30, 1998
Amendment No. 1 (the "Amendment"), dated and effective April 30,
1998, to the Amended and Restated Nonqualified Stock Option Agreement (the
"Agreement"), made and entered into as of December 31, 1997, between North
Atlantic Trading Company, Inc., a Delaware corporation (the "Company"), and
Jeffrey S. Hay. Capitalized terms used but not otherwise defined herein shall
have the meanings respectively assigned to them in the Agreement.
Effective as of the date hereof, this Amendment hereby amends the
Agreement as follows:
1. The "VESTING SCHEDULE" set forth for in the preamble of the Agreement
is amended in its entirety to read as follows:
VESTING SCHEDULE: One third commencing on July 28,
1997 and one third of the remaining
options on each of the first three
anniversaries thereafter
2. Paragraph 4 of the Agreement is amended in its entirety to read as
follows:
4. Subject to Paragraph 5 below, the Option shall become exercisable
according to the vesting schedule set forth below:
5,322 shares of Common Stock shall become exercisable and remain
exercisable on July 28, 1997
3,548 shares of Common Stock shall become exercisable and remain
exercisable on July 28, 1998
3,548 shares of Common Stock shall become exercisable and remain
exercisable on July 28, 1999
3,548 shares of Common Stock shall become exercisable and remain
exercisable on July 28, 2000
NYFS10...:\80\64980\0003\2475\FRM9037N.44B
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first written above.
NORTH ATLANTIC TRADING COMPANY, INC.
By /s/ Thomas F. Helms, Jr.
---------------------------------
Thomas F. Helms, Jr.
President
ACCEPTED:
/s/ Jeffrey S. Hay
- -------------------------------
Signature of Employee
- -------------------------------
Jeffrey S. Hay
Name of Employee - Please Print
Date: April 30, 1998
2
Helms Management Corp.
257 Park Avenue South, 7th Floor
New York, New York 10010
April 30, 1998
Mr. David I. Brunson
4 Hawthorne Road
Bronxville, NY 10708
Dear David:
This letter shall serve to confirm our mutual understanding and
agreement in connection with your employment, pursuant to the Amended and
Restated Employment Agreement, dated as of April 30, 1998, between North
Atlantic Trading Company, Inc. (the "Company") and you.
1. Grant. Upon the execution and delivery of this letter agreement,
Helms Management Corp. ("HMC") hereby grants you an option (the "Option") to
purchase 6,536 shares (the "Shares") of the Company's Common Stock, par value
$.01 per share (the "Common Stock") owned by HMC.
2. Exercise Price. The Option shall be exercisable at an exercise
price of $10.00 per share (the "Exercise Price").
3. Exercise Period. The Option shall be exercisable from and after
the date hereof through and including April 30, 2013, at which time the Option
shall terminate and be of no further force or effect.
4. Withholding. Upon exercise of the Option, the Company shall be
entitled to withhold all amounts required to be withheld for federal, state and
local income tax purposes.
5. Stock Dividends, Subdivisions and Combinations. If at any time
Company shall:
(a) declare and pay a dividend on its Common Stock entitling
the holders thereof to receive additional shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
NYFS10...:\80\64980\0003\2475\LTR5148W.22B
<PAGE>
Mr. David I. Brunson
April 30, 1998
Page 2
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then (i) the number of shares of Common Stock for which the Option is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which the Option is exercisable immediately
prior to the occurrence of such event would own or be entitled to receive after
the happening of such event, and (ii) the Exercise Price shall be adjusted to
equal (A) the Exercise Price multiplied by the number of shares of Common Stock
for which the Option is exercisable immediately prior to the adjustment divided
by (B) the number of shares for which the Option is exercisable immediately
after such adjustment.
6. Entire Agreement. This letter agreement shall constitute the
entire agreement between you and HMC concerning the subject matter hereof and
shall constitute full settlement. This agreement supersedes the agreement dated
April 14, 1997 between you and Thomas F. Helms, Jr., and such agreement is of no
further force or effect.
If the foregoing reflects our mutual understanding and agreement,
please indicate by signing a copy of this letter agreement where indicated
below, at which time this letter agreement will become effective as of the date
first stated above, and will constitute a legally binding agreement between us.
Very truly yours,
HELMS MANAGEMENT CORP.
By: /s/ Thomas F. Helms, Jr.
---------------------------------
Thomas F. Helms, Jr.
President
Agreed to as of the
date first stated above.
/s/ David I. Brunson
- -----------------------------
David I. Brunson
Helms Management Corp.
257 Park Avenue South, 7th Floor
New York, New York 10010
April 30, 1998
Mr. Jeffrey S. Hay
1827 Belvedere Avenue
Charlotte, North Carolina 28205
Dear Jeffrey:
This letter shall serve to confirm our mutual understanding and
agreement in connection with your employment, pursuant to the Amended and
Restated Employment Agreement, dated as of April 30, 1998, between North
Atlantic Trading Company, Inc. (the "Company") and you.
1. Grant. Upon the execution and delivery of this letter agreement,
Helms Management Corp. ("HMC") hereby grants you an option (the "Option") to
purchase 3,000 shares (the "Shares") of the Company's Common Stock, par value
$.01 per share (the "Common Stock") owned by HMC.
2. Exercise Price. The Option shall be exercisable at an exercise
price of $10.00 per share (the "Exercise Price").
3. Exercise Period. The Option shall be exercisable from and after
the date hereof through and including April 30, 2013, at which time the Option
shall terminate and be of no further force or effect.
4. Withholding. Upon exercise of the Option, the Company shall be
entitled to withhold all amounts required to be withheld for federal, state and
local income tax purposes.
5. Stock Dividends, Subdivisions and Combinations. If at any time
Company shall:
(a) declare and pay a dividend on its Common Stock entitling
the holders thereof to receive additional shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
NYFS10...:\80\64980\0003\2475\LTR5148V.45B
<PAGE>
Mr. Jeffrey S. Hay
April 30, 1998
Page 2
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then (i) the number of shares of Common Stock for which the Option is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which the Option is exercisable immediately
prior to the occurrence of such event would own or be entitled to receive after
the happening of such event, and (ii) the Exercise Price shall be adjusted to
equal (A) the Exercise Price multiplied by the number of shares of Common Stock
for which the Option is exercisable immediately prior to the adjustment divided
by (B) the number of shares for which the Option is exercisable immediately
after such adjustment.
6. Entire Agreement. This letter agreement shall constitute the
entire agreement between you and HMC concerning the subject matter hereof and
shall constitute full settlement.
If the foregoing reflects our mutual understanding and agreement,
please indicate by signing a copy of this letter agreement where indicated
below, at which time this letter agreement will become effective as of the date
first stated above, and will constitute a legally binding agreement between us.
Very truly yours,
HELMS MANAGEMENT CORP.
By: /s/ Thomas F. Helms, Jr.
--------------------------------
Thomas F. Helms, Jr.
President
Agreed to as of the
date first stated above.
/s/ Jeffrey S. Hay
- --------------------------------
Jeffrey S. Hay
PROMISSORY NOTE
U.S. $886,900.00 April 14, 1998
FOR VALUE RECEIVED, the undersigned, Helms Management Corp. (the
"Maker"), HEREBY PROMISES TO PAY to the order of North Atlantic Trading Company,
Inc. (together with any successor in interest or assignee thereof, the "Payee")
at its offices located at 257 Park Avenue South, New York, New York, 10010-7304,
or at such other place as Payee or any holder hereof may from time to time
designate to Maker in writing, in immediately available funds the principal sum
of eight hundred eighty-six thousand nine hundred dollars United States dollars
($886,900.00), plus accrued interest as provided herein, in lawful money of the
United States, in accordance with the terms hereafter set forth.
The principal amount of this note represents (i) the principal and
accrued interest owed pursuant to that certain Promissory Note dated April 26,
1988 between Helms Management Corp. and National Tobacco Company, L.P.
("National Tobacco"), which was assigned to the Payee as of the date hereof (the
"First Subscription Note"), (ii) the principal and accrued interest owed
pursuant to that certain Promissory Note dated December 15, 1988 between Helms
Management Corp. and National Tobacco, which was assigned to the Payee as of the
date hereof (the "Second Subscription Note") and (iii) a new loan in the amount
of $766,686.30 made to cover certain income tax liabilities of the Maker. Upon
execution of the Promissory Note, the First Subscription Note and the Second
Subscription Note shall be canceled.
Interest shall accrue on the unpaid principal balance hereof at the
fixed rate equal to six and one-half percent (6.5%) per annum from the date
hereof until paid in full and shall be payable in cash on each anniversary of
the date hereof. The outstanding principal amount of this Note, together with
all accrued and unpaid interest thereon shall, unless sooner accelerated, be due
and payable in full on March 31, 2003 or on the following business day if any
such date is not a business day. Interest hereunder shall be computed on the
basis of the actual number of days elapsed over the period of a 365-day year.
Maker hereby waives diligence, demand, presentment, protest and notice, and
assents to extensions of time of payments, releases, surrender or substitution
of security, or forbearance or other indulgence, without notice.
All payments shall be applied first to accrued and unpaid interest
hereunder and then to the principal balance hereof. If the Maker shall default
in the punctual payment of any sum payable hereunder whether or not notice of
such default is given, then: (i) all amounts outstanding under this Note shall
become immediately due and payable without any further notice by Payee; and (ii)
the unpaid principal balance outstanding at such date shall bear interest at the
rate equal to eight and one-half percent (8.5%) per annum; provided, however,
that in no case shall the rate of interest exceed the maximum amount permitted
by applicable law. The rights and remedies referred to above shall be
cumulative, nonexclusive and enforceable alternatively, successively and
concurrently. Maker acknowledges and agrees that its obligation to pay principal
<PAGE>
and interest hereunder shall not be subject to any counterclaims, offsets or
defenses against Payee or any holder of this Note that are presently existing or
which may arise in the future.
This Note may be prepaid at any time, in whole or in part, at
Maker's option, and shall become due and payable in full (i) upon any sale,
transfer, redemption, assignment, hypothecation, pledge or other disposition of
all or any part of the shares of common stock of the Payee held by the Maker
except for transfers to a living trust for the benefit of any or all of the
Maker's spouse or descendants or to a deceased Maker's executors, legal heirs,
devisees, administrators or testamentary trustees and beneficiaries, or
transfers pursuant to which the Payee agrees to waive its right to such
prepayment, or (ii) within sixty (60) days after termination of Maker's
employment with the Payee or any of its subsidiaries. Any prepayment shall be
made without premium or penalty, and any such prepayment shall be applied and
credited first to any accrued and unpaid interest hereunder to the date of such
prepayment and the balance, if any, to the reduction of the principal amount
hereof.
If, after the due date for the payment of any principal or interest
hereunder, this Note is referred to an attorney for collection, Maker shall be
liable for attorneys' fees and expenses and other expenses and costs of
collection.
Maker hereby irrevocably consents to the jurisdiction of the courts
of the State of New York and the courts of the United States of America located
in the State of New York in connection with any action or proceeding arising out
of or related to this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW
PRINCIPLES THEREOF, AND SHALL BE BINDING UPON THE SUCCESSORS AND ASSIGNS OF
MAKER AND SHALL INURE TO THE BENEFIT OF PAYEE, ITS SUCCESSORS, ENDORSEES AND
ASSIGNS.
This Note may not be changed, modified or terminated orally, but
only by an agreement in writing signed by the party to be charged. No extension
of the date on which payment is due shall be effective unless signed by Payee.
If any term or provision of this Note shall be invalid, illegal or
unenforceable, the validity of all other terms and provisions hereof shall in no
way be affected.
2
<PAGE>
IN THE EVENT OF ANY LITIGATION WITH RESPECT TO THIS NOTE, MAKER
WAIVES (TO THE EXTENT PERMITTED BY LAW) THE RIGHT TO A TRIAL BY JURY, ALL RIGHTS
OF SET-OFF AND RIGHTS TO INTERPOSE COUNTERCLAIMS AND CROSS-CLAIMS (UNLESS SUCH
SET-OFF, COUNTERCLAIM OR CROSS-CLAIM COULD NOT, BY REASON OF ANY APPLICABLE
FEDERAL OR STATE PROCEDURAL LAWS, BE INTERPOSED, PLEADED OR ALLEGED IN ANY OTHER
ACTION) AND THE DEFENSES OF FORUM NON CONVENIENS AND IMPROPER VENUE.
HELMS MANAGEMENT CORP.
By: /s/ Thomas F. Helms, Jr.
------------------------------
Name: Thomas F. Helms, Jr.
Title: President
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,043
<SECURITIES> 0
<RECEIVABLES> 4,412
<ALLOWANCES> 0
<INVENTORY> 59,867
<CURRENT-ASSETS> 67,939
<PP&E> 11,126
<DEPRECIATION> 3,552
<TOTAL-ASSETS> 267,440
<CURRENT-LIABILITIES> 30,650
<BONDS> 0
36,857
0
<COMMON> 5
<OTHER-SE> (16,152)
<TOTAL-LIABILITY-AND-EQUITY> 267,440
<SALES> 17,908
<TOTAL-REVENUES> 17,908
<CGS> 6,927
<TOTAL-COSTS> 6,927
<OTHER-EXPENSES> (19)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,133
<INCOME-PRETAX> (2,922)
<INCOME-TAX> (1,607)
<INCOME-CONTINUING> (1,315)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,468)
<EPS-PRIMARY> (4.67)
<EPS-DILUTED> (4.67)
</TABLE>
