FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-31931
NORTH ATLANTIC TRADING COMPANY, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE13-3961898
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
257 Park Avenue South, New York, New York 10010-7304
(Address of Principal Executive Offices) (Zip Code)
(212) 253-8185
(Registrant's Telephone Number, Including Area Code)
Unchanged
(Former name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No .
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 March 31, 1999.
<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>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
(Unaudited)
Current Assets:
Cash $ 2,839 $ 2,817
Accounts Receivable 7,914 5,486
Inventory 57,645 58,487
Other Current Assets 1,436 1,274
------------ ------------
Total Current Assets 69,834 68,064
Property, Plant & Equipment (Net) 6,706 7,031
Deferred Income Taxes 32,990 32,937
Deferred Financing Costs 10,663 11,232
Goodwill (Net) 138,654 140,027
Other Assets 1,182 1,016
------------ ------------
Total Assets 260,029 260,307
============ ============
Current Liabilities:
Accounts Payable $ 418 $ 458
Accrued Liabilities 8,148 3,696
Deferred Income Taxes 8,903 8,903
Current Portion of Long-Term Debt 13,193 12,983
------------ ------------
Total Current Liabilities 30,662 26,040
Long-Term Debt 197,747 202,603
Other Long-Term Debt 7,700 7,700
------------ ------------
Total Liabilities 236,109 236,343
------------ ------------
Preferred Stock, net of discount of $1,387 and $1,400,
respectively (Mandatory Redemption Value of $40,500) 40,598 39,332
------------ ------------
Stockholders' Deficit:
Common Stock, voting, $.01 par value; authorized shares,
750,000; issued and outstanding shares, 528,241 5 5
Common Stock, nonvoting, $.01 par value; authorized shares,
750,000; issued and outstanding shares, -0- - -
Additional Paid-In Capital 9,020 9,020
Loans to Stockholders for Stock Purchase (240) (247)
Accumulated Deficit (25,463) 24,146)
------------ ------------
Total Stockholders' Deficit (16,678) (15,368)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 260,029 $ 260,307
X ============ ============
</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
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Net Sales $ 20,748 $ 19,702
Cost of Sales 7,055 6,874
---------- ----------
Gross Profit 13,693 12,828
Selling, General & Administrative Expenses 6,421 7,021
Amortization of Goodwill 1,373 1,392
---------- ----------
Operating Income 5,899 4,415
Interest Expense & Financing Costs, Net 6,004 6,386
Other Income (1) (16)
---------- ----------
Loss Before Income Tax Benefit (104) (1,955)
Income Tax Benefit (53) (1,075)
---------- ----------
Net Loss (51) (880)
Preferred Stock Dividend (1,266) (1,122)
---------- ----------
Net Loss Applicable to Common Shares $ (1,317) $ (2,002)
========== ==========
Net Loss Per Common Share:
Basic and Diluted $ (2.49) $ (3.79)
========== ==========
Weighted Average Common Shares Outstanding
Basic and Diluted 528.2 528.2
========== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss $ (51) $ (880)
Adjustment to Reconcile Net Income (Loss)
to Net Cash Used in Operating Activities:
Depreciation 450 450
Amortization of Intangible Assets 1,373 1,392
Amortization of Deferred Financing Costs 569 540
Stock Option Expense 29 271
Changes in Operating Assets and Liabilities:
Accounts Receivable (2,428) (3,748)
Inventory 842 (1,969)
Other Current Assets (162) (447)
Accounts Payable (40) 388
Deferred Income Taxes (53) (1,075)
Other Assets (166) -
Accrued Expenses and Other 4,423 3,516
--------- ---------
Net Cash Provided by (Used in) Operating Activities 4,786 (1,562)
--------- ---------
Cash Flows from Investing Activities:
Capital Expenditures (125) (80)
--------- ---------
Net Cash Used in Investing Activities (125) (80)
--------- ---------
Cash Flows from Financing Activities:
Payments on Term Loans (4,646) (2,344)
Repayment of Loans to Stockholders for Stock Purchases 7 -
--------- ---------
Net Cash Used in Financing Activities (4,639) (2,344)
--------- ---------
Net Increase (Decrease) In Cash 22 (3,986)
Cash, Beginning of Period 2,817 4,087
--------- ---------
Cash, End of Period $ 2,839 $ 101
========= =========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
<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. INVENTORIES
The Company uses the last-in, first-out (LIFO) method for valuing its
inventories.
3/31/99 12/31/98
--------- ---------
Raw Materials and Work In Progress $ 1,705 $ 1,960
Leaf Tobacco 18,090 19,679
Finished Goods - Tobacco 3,852 3,074
Finished Goods - Roll-Your-Own 6,688 6,470
Other 387 381
--------- ---------
30,722 31,564
LIFO reserve 26,923 26,923
--------- ---------
$ 57,645 $ 58,487
========= =========
3. PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended March 31, 1999 has
been computed based on the estimated annual effective income tax rate, which is
expected to be 51%. 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.
4. 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 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.
5
<PAGE>
Following is unaudited parent-only summarized financial information of the
Company:
<TABLE>
<CAPTION>
3/31/99 12/31/98
--------- ---------
<S> <C> <C>
Current Assets $ -- $ --
Noncurrent Assets 246,403 247,140
Current Liabilities 24,421 19,964
Noncurrent Liabilities 197,747 202,603
Redeemable Preferred Stock 40,598 39,332
For the Three Months Ended March 31: 1999 1998
--------- ---------
Equity in Earnings of Subsidiaries $ 4,025 $ 2,018
Net Loss Before Payments of Preferred Stock Dividends (23) (870)
</TABLE>
5. NET LOSS PER COMMON SHARE RECONCILIATION
The following is a reconciliation of the basic and diluted per share
computations:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Net Loss $ (51) $ (880)
Less: Preferred Stock Dividends (1,266) (1,122)
---------- ----------
Net Loss Available to Common Stockholders $ (1,317) $ (2,002)
========== ==========
Weighted Average Shares of Common Stock Outstanding
Basic and Diluted $ 528.2 $ 528.2
========== ==========
Basic and Diluted Net Loss per Common Share $ (2.49) $ (3.79)
========== ==========
</TABLE>
The calculations are based on the weighted average number of shares of common
stock outstanding during the period. Common stock equivalent shares from the
conversion of 63,500 warrants and options exchangeable into 23,500 and 29,800
common shares were excluded from the computation for the three months ended
March 31, 1999 and March 31, 1998, respectively, as their effect is
antidilutive.
6. SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company is organized primarily on the
basis of product lines which comprise its two reportable segments. The Smokeless
Tobacco segment manufactures smokeless tobacco products which are distributed
primarily through wholesale and food distributors in the United States. The
Roll-Your-Own segment imports and distributes cigarette papers and related
products through wholesale distributors in the United States.
Segment data includes a charge allocating all corporate costs to each operating
segment. The Company evaluates the performance of its segments and allocates
resources to them based on earnings before interest, taxes, depreciation,
amortization, certain noncash charges and other income and expenses (Adjusted
EBITDA).
6
<PAGE>
The table below presents financial information about reported segments for March
31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
SMOKELESS ROLL-YOUR-
TOBACCO OWN TOTAL
------- --- -----
<S> <C> <C> <C>
MARCH 31, 1999
Net Sales $ 10,504 $ 10,244 $ 20,748
Adjusted EBITDA 3,071 4,777 7,848
MARCH 31, 1998
Net Sales $ 10,796 $ 8,905 $ 19,702
Adjusted EBITDA 2,908 3,745 6,653
</TABLE>
A reconciliation of Adjusted EBITDA to total consolidated operating income for
March 31,1999 and 1998 (in thousands):
MARCH 31, DECEMBER 31,
1999 1998
---------- -----------
Adjusted EBITDA $ 7,848 $ 6,653
Depreciation Expense (450) (450)
Amortization Expense (1,373) (1,392)
Stock Option Expense (29) (271)
Postretirement Expense (97) (125)
---------- -----------
Operating income $ 5,899 $ 4,415
========== ==========
7. CONTINGENCIES
Proposition 65. 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, 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., Save-On Drug Stores Inc., The
Southland Corporation, Circle K Stores, Inc., Longs Drug Stores Corporation,
Walgreen Co., Safeway, Inc. and DOES 1-500. The plaintiff amended their claim on
June 10, 1998 and subsequently served the complaint on National Tobacco. The
complaint purports to be brought by the City and County of San Francisco on
behalf of the people of the State of California and by the Environmental Law
Foundation on behalf of the general public.
Plaintiffs claim that the defendants violated the California Safe Drinking Water
and Toxic Enforcement Act of 1986, Health and Safety Code 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 Unfair Competition Act, Business & Professions
Code 17200, et seq., by marketing smokeless tobacco to children, and by
fraudulently concealing from the public the alleged adverse consequences and
addiction allegedly associated with smokeless tobacco products.
7
<PAGE>
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 exposure 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 attorney's fees and costs. National Tobacco
intends to defend the action vigorously.
Kentucky and Illinois Complaints. On July 15, 1998, NAOC and National Tobacco
filed a complaint against Republic Tobacco, Inc. and its affiliates ("Republic
Tobacco") in Federal District Court for the Western District of Kentucky. The
complaint was subsequently amended on August 18, 1998 (collectively, the
complaint and the amended complaint are referred to herein as the "Kentucky
Complaint"). Republic Tobacco imports and sells RYO cigarette papers under the
JOB and TOP brand names. The Kentucky Complaint alleges, inter alia, that
Republic Tobacco's use of exclusivity agreements, rebates, incentive programs,
buy-backs and other activities related to the sale of RYO cigarette papers in
the southeastern United States violate federal and state antitrust and unfair
competition laws. The Kentucky Complaint also alleges that Republic Tobacco has
defaced and directed others to deface NAOC's point or purchase vendor displays
for RYO cigarette papers by covering up the Zig-Zag brand name and advertising
material with advertisements for Republic Tobacco's RYO cigarette brands. The
Kentucky Complaint alleges that these activities constitute unfair competition
under the federal and state law.
Republic Tobacco on June 30, 1998 filed a complaint against the Company and NAOC
in the United States District Court of the Northern District of Illinois.
Republic Tobacco did not serve this complaint or otherwise notify the Company of
its existence until after the filing and service of the Kentucky Complaint. The
Company believes that this complaint was filed in anticipation of the filing of
the Kentucky Complaint. This complaint was amended by Republic Tobacco on
September 16, 1998 (collectively, the complaint and the amended complaint are
referred to herein as the "Illinois Complaint"). In the Illinois Complaint,
Republic Tobacco seeks declaratory relief that (a) Republic Tobacco's action in
defacing the Company's point of purchase display vendors do not violate federal
or state laws and (b) that Republic Tobacco's trade practices do not violate
federal or state antitrust or unfair competition laws. In addition, the Illinois
Complaint alleges that certain actions taken by the Company to inform its
customers of its claims against Republic Tobacco constitute tortious
interference with customer relationships, false advertising, violations of
Uniform Deceptive Trade Practices and Consumer Fraud Acts, defamation and unfair
competition. In addition, although not included in its original complaint, in
its amended complaint, Republic Tobacco alleges that the Company has unlawfully
monopolized and attempted to monopolize the market for RYO cigarette papers.
The Company has alleged that Republic Tobacco's trade practices in the
southeastern United States have unlawfully restricted the Company's ability to
expand the distribution of Zig-Zag RYO cigarette papers in the southeast, where
sales have been, historically underdeveloped.
The Company intends to vigorously pursue its claims set forth in the Kentucky
Complaint. With respect to the claims set forth in the Illinois Complaint, the
Company has filed a Motion to Dismiss concerning a substantial portion of the
claims against the Company, and believe that
8
<PAGE>
Republic Tobacco's claims against the Company are without merit. The Company
intends to vigorously defend the Illinois Complaint.
West Virginia Complaints. On October 6, 1998 the Company was served with a
summons and complaint in an action in the Circuit Court of Kanawha County, West
Virginia, entitled Kelly Allen, et al. v. Phillip Morris Incorporated, et al.
(Civil Action Nos.98-C-2401). While the Company was served with a single service
and complaint, the caption lists 65 separate plaintiffs, each with an individual
case number.
On November 13, 1998, the Company was served with a summons and complaint in an
action in the Circuit Court of Kanawha County, West Virginia, entitled Billie J.
Akers, et al. v. Phillip Morris Incorporated et al. (Civil Action Nos. 98-C-2696
to 98-C-2713). While the Company was served with a single summons and complaint,
the caption of the complaint lists 18 separate plaintiffs, each with an
individual case number. This action was filed by the same plaintiff's attorney
who filed the Allen action and the complaint is identical in most material
respects.
These two actions were commenced by two separate plaintiffs, "individually
and/or as the representatives of the various descendants named herein [who] are
residents of the State of West Virginia and/or smoked cigarettes or used other
tobacco products, manufactured, promoted, advertised, marked, sold and/or
distributed by all defendants." The complaint contains no specific allegations
referring to any individual plaintiff. These two actions were brought against
major manufacturers of cigarettes, smokeless tobacco products, and certain other
organizations.
The complaint alleges that "plaintiffs and plaintiffs' descendents suffer/had
suffered from a form of cancer or vascular disease and other injuries due wholly
or in part to defendants' products and/or activities." The complaints further
allege that the actions "arise from decades of intentionally wrongful conduct by
the defendants who have manufactured, promoted, and sold cigarettes and both
smokeless and loose tobacco to the plaintiffs and plaintiffs descendants and
millions of Americans while knowing, but denying and concealing that their
products cause diseases, including but not limited to esophageal, laryngeal,
pharyngeal, mouth and throat cancers and Buerger's Disease." The complaints do
not identify which plaintiffs, if any, allege injury as a result of the use of
smokeless tobacco.
The complaint asserts 24 unspecified counts and seeks referral to the West
Virginia Mass Litigation Panel, because the actions allegedly "involve multiple
plaintiffs pursuing related claims or actions involving one or more common
questions of act or law and the plaintiffs seek damages caused by some
"product." The complaints seek unspecified compensatory damages. The Company
intends to vigorously defend against each such complaint.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO MARCH 31, 1998
Net Sales. Net sales for the three months ended March 31, 1999 were $20.7
million, an increase of 5.3%, or $1.0 million, from the prior year's period.
9
<PAGE>
Net sales of the Smokeless Tobacco segment for the three months ended March 31,
1999, decreased $0.3 million or 2.7% due to a 1.2% volume decline and an
increase in allowances due to the successful implementation of a cents-off
pricing strategy, as compared with the prior periods' more costly free goods
strategy.
Net sales of the Roll-Your-Own segment increased $1.3 million or 15% due
primarily to the timing of shipments for the first promotion of the year.
Gross Profit. Gross profit for the three months ended March 31, 1999, was $13.7
million, an increase of $0.9 million, or 6.7%, from the prior year's period due
primarily to the increase in net sales described above and, secondarily, to the
Company's emphasis on containing operating costs. Gross profit of the Smokeless
Tobacco segment decreased $0.2 million or 2.9% while gross profits of the
Roll-Your-Own segment increased $1.1 million or 18%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 1999 were $6.4
million, a decrease of 8.6% compared to last year's $7.0 million. This was due
primarily to a reduction in expenses as a result of the previously announced
changes in the Company's management structure and, secondarily, to the reduction
in the free goods volume.
Amortization of Goodwill. Amortization of goodwill was $1.4 million for both
periods.
Interest Expense and Financing Costs. Interest expense and financing costs
decreased to $6.0 million for the three months ended March 31, 1999, from $6.4
million for the prior year's period. This decrease was the result of a lower
average term loan balance as well as a lower interest rate.
Income Taxes. The income tax benefit reflects the application of the estimateD
annual effective tax rate of 51% based on projected earnings for 1999. The
Company's estimated effective tax rate was 40% prior to accounting for the
amortization of non-deductible goodwill.
Net Loss. Due to the factors described above, the net loss for the three months
ended March 31, 1999 was $0.05 million compared to $0.9 million for the prior
year's period.
LIQUIDITY AND CAPITAL REQUIREMENTS
At March 31, 1999, working capital was $39.2 million compared to $42.0 million
at December 31, 1998. This decrease was principally the result of an increase of
$4.3 million in accrued interest on the Company's Senior Notes which is paid
semi-annually in June and December. The Company expects to 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
$24 million under its committed $25 million revolving credit facility.
The tobacco for loose leaf chewing tobacco requires aging of approximately two
years before being processed into finished products. The Company believes that
its National Tobacco 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 based on its past and estimated future sales
activity and that its supply of such inventory will remain stable for the
foreseeable future.
10
<PAGE>
The Company believes that any effect of inflation at current anticipated levels
will be minimal. Historically, the Company has been able to increase prices at a
rate greater than that of inflation and believes that this trend will continue.
In addition, the Company has been able to maintain a relatively 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 1999 will be in the $750,000 range. The Company believes that
its operating cash flows, together with its revolving credit facility, should be
adequate to satisfy its reasonably foreseeable capital requirements. The
financing of any significant future products, business or property acquisitions
may require additional debt or equity refinancing.
YEAR 2000
During fiscal 1997, the Company assessed the steps necessary to address matters
related to "Year 2000" issues. This assessment included a review of all the
company's hardware and software requirements. The Company developed and
implemented a strategy for attaining Year 2000 compliance for its internal
systems, which included modifying existing software, purchasing new software and
acquiring new hardware. By March 1999, the Company had completed its internal
compliance adjustments. In April 1999, the Company commenced the last
dual-testing segment, which should be completed by May 31, 1999. The aggregate
cost of the Company's Year 2000 compliance is estimated to be approximately
$350,000.
The Company has identified significant service providers, vendors, suppliers and
customers that are critical to its business operation and is assessing potential
vulnerabilities arising from these third parties. Steps have been and are being
undertaken in an attempt to ascertain their stage of readiness through
interviews and other means. To the extent these third parties are not compliant,
the Company will request a description of their plans to become "Year 2000"
compliant. To the extent that these third parties fail to certify by June 30,
1999 that they are Year 2000 compliant, the Company will assess the impact of
that failure on the Company's business and take appropriate remediation action
to the extent feasible. The Company feels that there is limited exposure in this
area due to the limited dependence on electronic components in the manufacturing
process, the small numbers of major suppliers and the preponderance of customers
that are relatively unimpacted in the terms of electronic data exchange. The
Company expects to complete this assessment by July 31, 1999.
Due to the general uncertainty inherent in Year 2000 problems, resulting in part
from the uncertainty of the Year 2000 readiness of third party suppliers and
customers, the Company is unable to fully determine, at this time, whether the
consequence of Year 2000 failures will have a material impact on the Company's
results of operation, liquidity or financial condition. The Company believes
with the implementation of the new business systems and the completion of the
project as scheduled, the possibility of significant interruptions of normal
operations will be mitigated. If the present efforts to address the Company's
Year 2000 compliance arrangements are not successful or if the Company's
significant service providers, vendors and customers do not successfully address
their issues, the Company's results of operation, liquidity and financial
condition could be materially or adversely affected.
11
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998 the FASB issued SFAS No.133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. The Company will
adopt this statement in the Company's first quarter 2000 reporting as required.
Management is currently evaluating the impact of this statement on the Company's
future financial reporting.
FORWARD-LOOKING STATEMENTS
We caution you that certain statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section and elsewhere
in this Form 10-Q are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
not guarantees of future performance. They involve risks, uncertainties and
other important factors, including the risks discussed below. The Company's
actual future results, performance or achievement of results may differ
materially from any such results, performance or achievement implied by these
statements. Among the factors that could effect the Company's actual results and
could cause results to differ from those anticipated in the forward-looking
statements contained herein is the Company's ability to implement its business
strategy successfully, which will be dependent on business, financial, and other
factors beyond the Company's control, including, among others, competitive
pressures, prevailing changes in consumer preferences, consumer acceptance of
new product introductions and other marketing initiatives, access to sufficient
quantities of raw material or inventory, wholesale ordering patterns, product
liability litigation and changes in tobacco products regulation.
We caution you not to put undue reliance on any forward-looking statements. In
addition, we do not have any intention or obligation to update the
forward-looking statements in this document. The Company claims the protection
of the safe harbor for forward-looking statements contained in Section 21E of
the Securities Exchange Act of 1934.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
12
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments with respect to these proceedings since
the filing of the Company's Annual Report or Form 10-K for the fiscal year ended
December 31, 1998.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
b. Reports on Form 8-K
There were no reports on Form 8-K in the First Quarter of 1998.
13
<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: May 14, 1999 /s/ Thomas F. Helms, Jr.
--------------------------------------------
Thomas F. Helms, Jr.
President & Chief Executive Officer
Date: May 14, 1999 /s/ David I. Brunson
--------------------------------------------
David I. Brunson
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,839
<SECURITIES> 0
<RECEIVABLES> 7,914
<ALLOWANCES> 0
<INVENTORY> 57,645
<CURRENT-ASSETS> 69,834
<PP&E> 11,496
<DEPRECIATION> 4,790
<TOTAL-ASSETS> 260,029
<CURRENT-LIABILITIES> 30,662
<BONDS> 0
40,598
0
<COMMON> 5
<OTHER-SE> (16,678)
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</TABLE>
