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 the quarterly period ended September 30, 1999
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 September 30, 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>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 3,344 $ 2,817
Accounts Receivable 7,208 5,486
Inventory 55,686 58,487
Other Current Assets 1,274 1,274
------------- -------------
Total Current Assets 67,512 68,064
Property, Plant & Equipment (Net) 6,254 7,031
Deferred Income Taxes 31,717 32,937
Deferred Financing Costs 9,525 11,232
Goodwill (Net) 135,910 140,027
Other Assets 1,214 1,016
------------- -------------
Total Assets $ 252,132 $ 260,307
============= =============
Current Liabilities:
Accounts Payable $ 466 $ 458
Accrued Liabilities 9,442 3,696
Deferred Income Taxes 8,903 8,903
Current Portion of Long-Term Debt 13,151 12,983
------------- -------------
Total Current Liabilities 31,962 26,040
Long-Term Debt 187,636 202,603
Other Long-Term Liabilities 7,700 7,700
------------- -------------
Total Liabilities 227,298 236,343
------------- -------------
Preferred Stock, net of discount of $1,300 and $1,400,
respectively (Mandatory Redemption Value of $44,600 at 9/30/99
and $40,500 at 12/31/98) 43,268 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 (243) (247)
Accumulated Deficit (27,216) (24,146)
-------------- -------------
Total Stockholders' Deficit (18,434) (15,368)
------------- -------------
Total Liabilities and Stockholders' Deficit $ 252,132 $ 260,307
============= =============
</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
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net Sales $ 29,801 $ 31,361
Cost of Sales 9,979 9,915
------------- -------------
Gross Profit 19,822 21,446
Selling, General & Administrative Expenses 7,987 7,285
Amortization of Goodwill 1,373 1,392
------------- -------------
Operating Income 10,462 12,769
Interest Expense & Financing Costs, Net 5,874 6,267
Other Expense (Income) 2 (7)
------------- -------------
Income Before Provision for Income Taxes 4,586 6,509
Provision for Income Taxes 2,495 3,580
------------- -------------
Net Income 2,091 2,929
Preferred Stock Dividends (1,369) (1,219)
------------- -------------
Net Income Applicable to Common Shares $ 722 $ 1,710
============= =============
Net Income Per Common Share:
Basic $ 1.37 $ 3.24
============= =============
Diluted $ 1.17 $ 2.75
============= =============
Weighted Average Common Shares Outstanding:
Basic 528.2 528.2
===== =====
Diluted 617.0 621.5
===== =====
</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 OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net Sales $ 68,578 $ 68,971
Cost of Sales 23,801 23,716
------------- -------------
Gross Profit 44,777 45,255
Selling, General & Administrative Expenses 20,806 20,704
Amortization of Goodwill 4,117 4,175
------------- -------------
Operating Income 19,854 20,376
Interest Expense & Financing Costs, Net 17,771 18,786
Other Income (3) (42)
------------- -------------
Income Before Provision for Income Taxes 2,086 1,632
Provision for Income Taxes 1,220 898
------------- -------------
Net Income 866 734
Preferred Stock Dividends (3,936) (3,495)
------------- -------------
Net Loss Applicable to Common Shares $ (3,070) $ (2,761)
============= =============
Net Loss Per Common Share:
Basic and Diluted $ (5.81) $ (5.23)
============= =============
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.
4
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 866 $ 734
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Provision for Income Taxes 1,220 898
Depreciation 1,350 1,350
Amortization of Intangible Assets 4,117 4,175
Amortization of Deferred Financing Costs 1,707 1,638
Stock Option Expense 87 709
Changes in Operating Assets and Liabilities:
Accounts Receivable (1,722) (1,331)
Inventory 2,801 324
Income Tax Receivable - 5,326
Other Current Assets - (897)
Accounts Payable 8 (209)
Other Assets (198) -
Accrued Expenses and Other 5,659 3,330
------------- -------------
Net Cash Provided by Operating Activities 15,895 16,047
------------- -------------
Cash Flows from Investing Activities:
Capital Expenditures (573) (335)
------------- -------------
Net Cash Used in Investing Activities (573) (335)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from Revolving Credit Facility 4,000 8,000
Payments on Revolving Credit Facility (4,000) (8,000)
Payments on Term Loans (14,799) (12,251)
Repayment of Loans to Stockholders for Stock Purchases 4 -
------------- -------------
Net Cash Used In Financing Activities (14,795) (12,251)
------------- -------------
Net Increase In Cash 527 3,461
Cash, Beginning of Period 2,817 4,087
------------- -------------
Cash, End of Period $ 3,344 $ 7,548
============= =============
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
5
<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.
<TABLE>
<CAPTION>
9/30/99 12/31/98
------- --------
<S> <C> <C>
Raw Materials and Work In Process $ 1,801 $ 1,960
Leaf Tobacco 17,092 19,679
Finished Goods - Smokeless Tobacco 3,086 3,074
Finished Goods - Roll-Your-Own 6,637 6,470
Other 547 381
------------- -------------
29,163 31,564
LIFO Reserve 26,523 26,923
------------- -------------
$ 55,686 $ 58,487
============= =============
</TABLE>
Based on currently available information, the Company has projected that it will
experience a decrement in its LIFO inventory at year end. Accordingly, a
provision has been made in the September 30, 1999 financial statements to record
the estimated effect of such decrement on the third quarter earnings. The
estimated impact of the projected decrease in LIFO inventory quantities resulted
in a decrease in net income for the quarter of approximately $476 for the
Smokeless Tobacco segment and an increase in net income for the quarter of
approximately $15 for the Roll-Your-Own segment.
3. PROVISION FOR INCOME TAXES
The provision for income taxes for the nine months ended September 30, 1999 has
been computed based on the estimated annual effective income tax rate, which is
expected to be 58.5%. 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
National Tobacco Company, L.P. ("National Tobacco"), a subsidiary of the
Company, and deferred financing costs related to its debt. All of the Company's
6
<PAGE>
subsidiaries are wholly owned and guarantee the Company's debt on a full,
unconditional and joint and several basis. In Management's opinion, separate
financial statements of the subsidiaries are not meaningful to investors and are
not included in these financial statements. Following is unaudited parent-only
summarized financial information of the Company:
<TABLE>
<CAPTION>
9/30/99 12/31/98
------- --------
<S> <C> <C>
Current Assets $ - $ -
Noncurrent Assets 237,012 247,140
Current Liabilities 24,372 19,964
Noncurrent Liabilities 187,636 202,603
Redeemable Preferred Stock 43,268 39,332
For the Nine Months Ended September 30: 1999 1998
---- ----
Equity in Earnings of Subsidiaries $ 13,682 $ 9,425
Net Income (Loss) Before Payment of Preferred
Stock Dividends 815 (785)
</TABLE>
5. NET INCOME PER COMMON SHARE RECONCILIATION
The following is a reconciliation of the basic and diluted per share
computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 2,091 $ 2,929 $ 866 $ 734
Less: Preferred Stock Dividends (1,369) (1,219) (3,936) (3,495)
------- ------- --------- --------
Net Income (Loss) Available to Common Stockholders $ 722 $ 1,710 $ (3,070) $(2,761)
======= ======= ========= ========
Weighted Average Shares of Common Stock Outstanding:
Basic 528.2 528.2 528.2 528.2
Effect of Dilutive Securities:
Warrants 63.5 63.5 - -
Stock Options 25.3 29.8 - -
------- ------- --------- --------
Diluted 617.0 621.5 528.2 528.2
======= ======= ========= ========
Net Income (Loss) per Common Share
Basic $ 1.37 $ 3.24 $ (5.81) $ (5.23)
======= ======= ========= ========
Diluted $ 1.17 $ 2.75 $ (5.81) $ (5.23)
======= ======= ========= ========
</TABLE>
The calculations are based on the weighted average number of shares of common
stock outstanding during the period. Common equivalent shares from stock options
and warrants were excluded from the computations for the nine months ended
September 30, 1999 and September 30, 1998, 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
7
<PAGE>
Tobacco segment, which manufactures smokeless tobacco products that are
distributed primarily through wholesale and food distributors in the United
States, and the Roll-Your-Own segment, which imports and distributes cigarette
papers and distributes Make-Your-Own smoking tobaccos and related accessory
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 based on earnings
before interest, taxes, depreciation, amortization, certain noncash charges and
other income and expenses (Adjusted EBITDA).
The table below presents financial information about reported segments (in
thousands):
<TABLE>
<CAPTION>
SMOKELESS
TOBACCO ROLL-YOUR-OWN TOTAL
------- ------------- -----
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
- --------------------------------------------------------------
Net Sales $ 12,474 $ 17,327 $ 29,801
Adjusted EBITDA 3,886 8,925 12,811
THREE MONTHS ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------
Net Sales $ 14,876 $ 16,485 $ 31,361
Adjusted EBITDA 5,561 9,394 14,955
NINE MONTHS ENDED SEPTEMBER 30, 1999
- --------------------------------------------------------------
Net Sales $ 35,880 $ 32,698 $ 68,578
Adjusted EBITDA 11,535 14,565 26,100
NINE MONTHS ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------
Net Sales $ 39,987 $ 28,984 $ 68,971
Adjusted EBITDA 13,480 13,505 26,985
</TABLE>
A reconciliation of Adjusted EBITDA to Consolidated Operating Income is as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------------------- -----------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Adjusted EBITDA $ 12,811 $ 14,955 $ 26,100 $ 26,985
LIFO Adjustment (400) - (400) -
Depreciation Expense (450) (450) (1,350) (1,350)
Amortization Expense (1,373) (1,392) (4,118) (4,175)
Stock Option Expense (29) (219) (87) (709)
Postretirement Expense (97) (125) (291) (375)
--------- --------- --------- ---------
Operating Income $ 10,462 $ 12,769 $ 19,854 $ 20,376
========= ========= ========= =========
</TABLE>
8
<PAGE>
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.
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. Discovery is
currently ongoing and a trial date has been set for January 14, 2000. National
Tobacco intends to defend the action vigorously.
Kentucky and Illinois Complaints. On July 15, 1998, North Atlantic Operating
Company, Inc. ("NAOC"), a subsidiary of the Company, 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 as well as other brand names. The Kentucky Complaint alleges, inter
alia, that Republic Tobacco's use of exclusivity agreements, rebates, incentive
programs, buy-backs and other activities related to the sale of 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 of 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.
9
<PAGE>
On June 30, 1998, Republic Tobacco 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 tortuous
interference with customer relationships, false advertising, violations of
Uniform Deceptive Trade Practices and Consumer Fraud Acts, defamation and unfair
competition. In addition, although not included in its original complaint but in
its amended complaint, Republic Tobacco 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 believes that Republic Tobacco's claims against
the Company are without merit. The Company intends to vigorously defend the
Illinois Complaint.
On April 9, 1999, the Court in the Illinois case ruled on the motion to dismiss,
dismissing certain of Republic's claims against the Company, including
Republic's monopolization claim. The Court also dismissed the Company's
counterclaims with leave to replead those claims. The Company has done so. On
September 17, 1999, Republic filed a Second Amended Complaint, which was
substantially identical to the original complaint, except that it alleged a
series of purportedly monopolistic practices on a regional market basis against
the Company. The Company has filed a motion to dismiss the allegations for
failure to state a claim on which relief could be granted. Briefing on the
motion is complete.
Discovery is continuing in the case.
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.
In the Allen case, the plaintiffs have specified the defendant companies for
each of the 65 cases. The Company was named in only six of the cases, five of
which alleged consumption prior to the existence of the Company of products
bearing the trademarks currently owned by the Company. The remaining case
alleges lung cancer as the injury. The Company has been dismissed from the first
five cases, and intends to vigorously defend the remaining action.
10
<PAGE>
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 plaintiffs' 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 complaint further
alleges 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 Akers 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.
Discovery of all tobacco-related actions in the State of West Virginia has been
referred to a Mass Litigation Panel, and assigned to one judge.
On September 24, 1999, the Company was served with a complaint in a case
entitled Tuttle v. Lorillard Tobacco Company, et al. (Case No. C2-99-7105),
brought in Minnesota. The other manufacturing defendants are Lorillard and The
Pinkerton Tobacco Company. The Complaint alleges that plaintiff's decedent was
injured as a result of using the Company's (and, prior to the formation of the
Company, Lorillard's) BEECHNUT brand and Pinkerton's REDMAN brand of loose-leaf
chewing tobacco. Plaintiff asserts theories of liability in negligence, strict
liability, breach of warranty, fraud and variations on fraud and
misrepresentation. The case has been removed to federal court.
Although the Company believes that it has good defenses to the above actions in
West Virginia, California and Minnesota, no assurances can be given that it will
prevail. If any of the plaintiffs were to prevail, the results could have a
materially adverse effect on the Company's financial position.
11
<PAGE>
Other Events. Regulations that had been issued by the previous Massachusetts
Attorney General affecting point of sale and certain advertising issues with
respect to tobacco products, which were to become effective August 1, 1999, have
been delayed until December 31, 1999 to allow for further review.
In August 1995, the FDA published proposed rules for regulation of tobacco and
tobacco products, including smokeless tobacco. Following a year of comment and
revision, in August 1996 the FDA promulgated final rules, which were scheduled
to take effect on August 1997, except for a portion of the rules prohibiting the
sale of tobacco to persons under 18, which have become effective already. The
FDA's regulations restrict access to tobacco and tobacco products, regulate
tobacco labeling, and limit promotion and advertising of tobacco.
On April 25, 1997, a federal court in Greensboro, North Carolina ruled that the
FDA has statutory authority to regulate tobacco products. The court upheld the
FDA's rules restricting access to tobacco products and regulating tobacco
labeling. However, the court ruled that the FDA does not have authority to
regulate promotion and advertising of tobacco products. The judge certified the
case for interlocutory appeal to the United States Fourth Circuit Court of
Appeals, which subsequently ruled that the FDA statue does not provide this
authority. The FDA has petitioned the Supreme Court of the United States for a
writ of certiorari. On April 26, 1999, the Supreme Court granted the writ.
Briefing is expected to be completed by October. The hearing before the Supreme
Court has been set for December 1, 1999.
The FDA regulations prohibit self-service displays of tobacco, including
smokeless tobacco, and require that a retailer sell cigarettes and smokeless
tobacco only in a direct, face to face exchange between the retailer and the
consumer. Historically, smokeless tobacco has been sold primarily by allowing
customers direct access to the product. Accordingly, there can be no assurance
that prohibiting such direct access would not have an adverse effect on sales.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net Sales. Net sales for the three months ended September 30, 1999 were $29.8
million, a decrease of 5.0% or $1.6 million, from the prior year's period.
Net sales of the Smokeless Tobacco segment for the three months ended September
30, 1999, decreased 16.1% due to greater discounting in the industry and to a
volume decrease in net pounds of 10.1%, which resulted, in part, from
Management's decision to reduce free goods promotions, both of which were
partially offset by a price increase in May 1999.
Net sales of the Roll-Your-Own segment when compared to the prior period's
results increased 5.1% due primarily to a more successful Summer 1999 promotion
as compared to that of 1998 and to increased sales of the expanded Make-Your-Own
product line, which consists of smoking tobaccos and related accessory products.
Gross Profit. Gross profit for the three months ended September 30, 1999,
decreased $1.6 million, or 7.6%, from the prior year's period due to the
discounting and volume decrease of the Smokeless Tobacco segment described above
12
<PAGE>
and to the LIFO charge given the estimated year-end inventory position of the
Company. Gross profit of the Smokeless Tobacco segment decreased $2.2 million or
22.3% while gross profit of the Roll-Your-Own segment increased $0.6 million or
5.0%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 1999, were $8.0
million, an increase of 9.6% or $0.7 million from the prior year's period. This
increase was due primarily to increased promotional expenses related to the
development and expansion of the Make-Your-Own product line as well as costs
associated with combatting infringing and counterfeit Zig-Zag products.
Amortization of Goodwill. Amortization of goodwill for the three months ended
September 30, 1999 remained unchanged at $1.4 million as compared to the prior
year's period.
Interest Expense and Financing Costs. Interest expense and financing costs
decreased to $5.9 million for the three months ended September 30, 1999, from
$6.3 million for the prior year's period. This decrease was primarily the result
of a lower average term loan balance.
Income Taxes. The income tax provision reflects the application of the estimated
annual effective tax rate of 58.5% 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 Income. Due to the factors described above, the net income for the three
months ended September 30, 1999, was $2.1 million compared to $2.9 million for
the prior year's period.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net Sales. Net Sales for the nine months ended September 30, 1999 were $68.6
million, a decrease of 0.6% or $0.4 million, from the prior year's period.
Net Sales of the Smokeless Tobacco segment for the nine months ended September
30, 1999 decreased 10.3% due to increased discounting practices in the industry
and to a volume decrease in net pounds of 10.9%, which resulted, in part, from
Management's decision to reduce free goods promotions, both of which were
partially offset by price increases in July 1998 and May 1999.
Net Sales of the Roll-Your-Own segment when compared to the prior period's
results increased 12.8% due primarily to a more successful summer 1999 promotion
as compared to that of 1998 and to increased sales of the Make-Your-Own product
line.
Gross Profit. Gross profit for the nine months ended September 30, 1999
decreased $0.5 million, or 1.1%, from the prior year's period as the discounting
and volume decrease of the Smokeless Tobacco segment described above more than
offset the increased Net Sales of the Roll-Your-Own segment. In addition, gross
profit was adversely impacted by the non-cash LIFO charge given the Company's
estimated year-end inventory position. Gross profit of the Smokeless Tobacco
segment decreased $3.1 million or 12.2% while gross profit of the Roll-Your-Own
segment increased $2.6 million or 13.3%.
13
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 1999 increased
0.5% to $20.8 million from the prior year period's $20.7 million.
Amortization of Goodwill. Amortization of goodwill for the nine months ended
September 30, 1999 was $4.1 million compared to $4.2 million for the prior
year's period.
Interest Expense and Financing Costs. Interest expense and financing costs
decreased to $17.8 million for the nine months ended September 30, 1999 from
$18.8 million for the prior year's period. This decrease was primarily the
result of a lower average term loan balance.
Income Taxes. The income tax provision reflects the application of the estimated
annual effective tax rate of 58.5% 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 Income. Due to the factors described above, the net income for the nine
months ended September 30, 1999 was $0.9 million compared to $0.7 million for
the prior year's period.
LIQUIDITY AND CAPITAL REQUIREMENTS
At September 30, 1999, working capital was $35.6 million compared to $42.0
million at December 31, 1998. This decrease was primarily the result of a
decrease in inventory levels of $2.8 million and an increase in accrued interest
expense of $4.2 million. 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 $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 of roll-your-own products based on its past and
estimated future sales activity and that its sources of supply of such
inventories will remain stable for the foreseeable future.
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, in general, 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 approximate $750,000, which includes costs associated
with its Year 2000 compliance efforts.
The Company believes that its operating cash flows, together with its revolving
credit facility, should be adequate to satisfy its reasonable foreseeable
14
<PAGE>
capital requirements. The financing of any significant future products, business
or property acquisitions may require additional debt or equity financing.
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. By June 30, 1999, the Company completed its last dual-testing
segment. The aggregate cost of the Company's Year 2000 compliance was
approximately $400,000.
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 become Year 2000
compliant, the Company will assess the impact of that failure on the Company's
businesses and intends to take appropriate remedial action to the extent
feasible. Currently, the Company feels that there is minimal 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 terms of electronic data exchange.
Further, the Company believes that it has taken all reasonable steps to minimize
third party activity.
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 will be unable to fully determine 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 its various
projects, the possibility of significant interruptions of normal operations has
been mitigated to a reasonable business standard. If the present efforts to
address the Company's Year 2000 compliance arrangements prove not to be
successful or if the Company's service providers, vendors, and customers have,
in fact, not successfully addressed their issues, the Company's results of
operation, liquidity, and financial condition could be materially and adversely
affected.
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. In July 1999 the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133", which delays the
adoption until first quarter 2001. Management is currently evaluating the impact
of these statements on the Company's future financial reporting.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
The Company cautions the reader that certain statements in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
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, 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.
The Company cautions the reader not to put undue reliance on any forward-looking
statements. In addition, the Company does not have any intention or obligation
to update the forward-looking statements in this document. The Company claims
the protection of the safe harbor for forward-looking statements contained in
Section 21E of the Securities Exchange Act of 1934.
Item 3. Not Applicable
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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
16
<PAGE>
fraudulently concealing from the public the alleged adverse consequences and
addiction allegedly 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 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. Discovery is
currently ongoing and a trial date has been set for January 14, 2000. 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 as well as other brand names. The Kentucky Complaint alleges, inter
alia, that Republic Tobacco's use of exclusivity agreements, rebates, incentive
programs, buy-backs and other activities related to the sale of 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 of 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.
On June 30, 1998, Republic Tobacco 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 tortuous
interference with customer relationships, false advertising, violations of
Uniform Deceptive Trade Practices and Consumer Fraud Acts, defamation and unfair
competition. In addition, although not included in its original complaint but in
its amended complaint, Republic Tobacco 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.
17
<PAGE>
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 believes that Republic Tobacco's claims against
the Company are without merit. The Company intends to vigorously defend the
Illinois Complaint.
On April 9, 1999, the Court in the Illinois case ruled on the motion to dismiss,
dismissing certain of Republic's claims against the Company, including
Republic's monopolization claim. The Court also dismissed the Company's
counterclaims with leave to replead those claims. The Company has done so. On
September 17, 1999, Republic filed a Second Amended Complaint, which was
substantially identical to the original complaint, except that it alleged a
series of purportedly monopolistic practices on a regional market basis against
the Company. The Company has filed a motion to dismiss the allegations for
failure to state a claim on which relief could be granted. Briefing on the
motion is complete.
Discovery is continuing in the case.
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.
In the Allen case, the plaintiffs have specified the defendant companies for
each of the 65 cases. The Company was named in only six of the cases, five of
which alleged consumption prior to the existence of the Company of products
bearing the trademarks currently owned by the Company. The remaining case
alleges lung cancer as the injury. The Company has been dismissed from the first
five cases, and intends to vigorously defend the remaining action.
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 plaintiffs' 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 of vascular disease and other injuries due wholly
or in part to defendants' products and/or activities." The complaint further
alleges that the actions "arise from decades of intentionally wrongful conduct
by the defendants who have manufactured, promoted, and sold cigarettes and both
18
<PAGE>
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 Akers 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.
Discovery of all tobacco-related actions in the State of West Virginia has been
referred to a Mass Litigation Panel, and assigned to one judge.
On September 24, 1999, the Company was served with a complaint in a case
entitled Tuttle v. Lorillard Tobacco Company, et al. (Case No. C2-99-7105),
brought in Minnesota. The other manufacturing defendants are Lorillard and The
Pinkerton Tobacco Company. The Complaint alleges that plaintiff's decedent was
injured as a result of using the Company's (and, prior to the formation of the
Company, Lorillard's) BEECHNUT brand and Pinkerton's RED MAN brand of loose-leaf
chewing tobacco. Plaintiff asserts theories of liability, breach of warranty,
fraud and variations on fraud and misrepresentation. The case has been removed
to federal court.
Although the Company believes that it has good defenses to the above actions in
West Virginia, California and Minnesota, no assurances can be given that it will
prevail. If any of the plaintiffs were to prevail, the results could have a
materially adverse effect on the Company's financial position.
Regulatory and Other Events. Regulations that had been issued by the previous
Massachusetts Attorney General affecting point of sale and certain advertising
issues with respect to tobacco products, which were to become effective August
1, 1999 have been delayed until December 31, 1999 to allow for further review.
In August 1995, the FDA published proposed rules for regulation of tobacco and
tobacco products, including smokeless tobacco. Following a year of comment and
revision, in August 1996 the FDA promulgated final rules, which were scheduled
to take effect on August 1997, except for a portion of the rules prohibiting the
sale of tobacco to persons under 18, which have become effective already. The
FDA's regulations restrict access to tobacco and tobacco products, regulate
tobacco labeling, and limit promotion and advertising of tobacco.
On April 25, 1997, a federal court in Greensboro, North Carolina ruled that the
FDA has statutory authority to regulate tobacco products. The court upheld the
FDA's rules restricting access to tobacco products and regulating tobacco
labeling. However, the court ruled that the FDA does not have authority to
regulate promotion and advertising of tobacco products. The judge certified the
case for interlocutory appeal to the United States Fourth Circuit Court of
Appeals, which subsequently ruled that the FDA statue does not provide this
authority. The FDA has petitioned the Supreme Court of the United States for a
writ of certiorari. On April 26, 1999, the Supreme Court granted the writ.
19
<PAGE>
Briefing is expected to be completed by October. The hearing before the Supreme
Court has been set for December 1, 1999.
The FDA regulations prohibit self-service displays of tobacco, including
smokeless tobacco, and require that a retailer sell cigarettes and smokeless
tobacco only in a direct, face to face exchange between the retailer and the
consumer. Historically, smokeless tobacco has been sold primarily by allowing
customers direct access to the product. Accordingly, there can be no assurance
that prohibiting such direct access would not have an adverse effect on sales.
In Bollore, S.A. v. Import Warehouses, Inc., Civ. No. 3-99-CV-1196-R (N.D.
Texas), Bollore, the Company's Licensor of ZIG-ZAG brand cigarette papers,
obtained a sealed order allowing it to conduct a seizure of infringing and
counterfeit ZIG-ZAG products in the United States. On June 7, 1999, seizures of
products occurred in Michigan and Texas. Subsequently, all named defendants have
been enjoined from buying and selling such infringing or counterfeit goods. A
full trial, to obtain permanent injunctive relief and damages, is currently
scheduled for December 1999 for one group of defendants and September 2000 for
all other defendants. Management believes that successful prosecution of this
litigation will have a favorable impact on its Roll-Your-Own cigarette paper
business in the future.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
b. Reports on Form 8-K
There were no reports on Form 8-K in the Third Quarter of 1999.
20
<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: November 9, 1999 /s/ Thomas F. Helms. Jr.
------------------------------------------
Thomas F. Helms, Jr.
President & Chief Executive Officer
Date: November 9, 1999 /s/ David I. Brunson
------------------------------------------
David I. Brunson
Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,344
<SECURITIES> 0
<RECEIVABLES> 7,208
<ALLOWANCES> 0
<INVENTORY> 55,686
<CURRENT-ASSETS> 67,512
<PP&E> 11,943
<DEPRECIATION> 5,689
<TOTAL-ASSETS> 252,132
<CURRENT-LIABILITIES> 31,962
<BONDS> 0
43,268
0
<COMMON> 5
<OTHER-SE> (18,439)
<TOTAL-LIABILITY-AND-EQUITY> 252,132
<SALES> 68,578
<TOTAL-REVENUES> 68,578
<CGS> 23,801
<TOTAL-COSTS> 23,801
<OTHER-EXPENSES> (3)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,771
<INCOME-PRETAX> 2,086
<INCOME-TAX> 1,220
<INCOME-CONTINUING> 866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,070)
<EPS-BASIC> (5.81)
<EPS-DILUTED> (5.81)
</TABLE>
