SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3961898
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
257 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10010-7304
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 253-8185
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy materials or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 29, 2000, the only class of voting or non-voting common equity
issued and outstanding is the Registrant's Voting Common Stock, par value $.01
per share, 100% of which is owned by 47 holders of record, 41 of whom are
affiliates or employees of the Registrant. There is no trading market for the
Voting Common Stock.
As of February 29, 2000, 528,241 shares of the Registrant's Voting Common Stock,
par value $.01 per share, and no shares of the Registrant's Non-Voting Common
Stock, par value $.01 per share, were outstanding.
NY2:\894705\01\J6CX01!.DOC\64980.0003
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North Atlantic Trading Company, Inc.
1999 Form 10-K Annual Report
TABLE OF CONTENTS
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PAGE
PART I
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Item 1. Business..............................................................................................1
Item 2. Properties...........................................................................................11
Item 3. Legal Proceedings....................................................................................11
Item 4. Submission of Matters to a Vote of Security Holders..................................................15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.................................16
Item 6. Selected Financial Data..............................................................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........................................22
Item 8. Financial Statements and Supplementary Data..........................................................23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................23
PART III
Item 10. Directors and Executive Officers of the Registrant...................................................24
Item 11. Executive Compensation...............................................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................33
Item 13. Certain Relationships and Related Transactions.......................................................35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................36
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PART I
Item 1. Business
OVERVIEW
North Atlantic Trading Company, Inc. (the "Company") is a
holding company, which is organized under the laws of the State of Delaware.
During 1999 and currently, the Company is comprised of two significant wholly
owned subsidiaries: National Tobacco Company, L.P. ("National Tobacco") and
North Atlantic Operating Company, Inc. ("NAOC"). National Tobacco is the third
largest manufacturer and marketer of loose leaf chewing tobacco in the United
States, selling its products under the brand names BEECH-NUT REGULAR, BEECH-NUT
WINTERGREEN, TROPHY, HAVANA BLOSSOM and DURANGO. NAOC is the largest importer
and distributor in the United States of roll-your-own ("RYO") cigarette papers
and other tobacco-related products, which are sold under the ZIG-ZAG brand name
pursuant to an exclusive long-term distribution agreement with Bollore, S.A.
("Bollore") and contract manufactures and distributes RYO and Make-Your-Own
("MYO") tobaccos and tobacco-related products under the ZIG-ZAG brand name.
RECENT EVENTS
On February 10, 2000, National Tobacco entered into a
definitive Asset Purchase Agreement with Swedish Match North America Inc.
("Swedish Match"). Under the terms of this agreement, National Tobacco agreed to
sell its chewing tobacco brands and related formulation, technology and
inventory. The purchase price for these assets is $165 million. In addition,
National Tobacco will continue to manufacture these brands for Swedish Match for
a limited period of time following the sale under a transitional contract
manufacturing arrangement. Pursuant to the agreement, National Tobacco has
retained all of its existing liabilities, including but not limited to, product
liabilities with respect to the time it owned the brands. All of National
Tobacco's obligations under the agreement have been guaranteed by the Company.
The transaction is subject to regulatory approval and other customary conditions
and is expected to close shortly after such regulatory approval is obtained. As
a result, the Company's new initiative is to focus on the RYO and MYO products
sold under the ZIG-ZAG brand name. Such focus will impact how the Company's
subsidiaries will be organized from sales, marketing and operational
perspectives, and the Company is in the process of evaluating various
alternatives.
EVOLUTION OF THE COMPANY
The Company was formed in 1997 to facilitate a corporate
reorganization and related financing in connection with the simultaneous
acquisition of NATC Holdings USA, Inc. ("NATC") and its ZIG-ZAG RYO cigarette
paper business (the "Acquisition"). Prior to the Acquisition, National Tobacco
and its corporate general partner, National Tobacco Finance Corporation
("NTFC"), were wholly owned subsidiaries of NTC Holding, LLC, a Delaware limited
liability company ("LLC"). All of the outstanding interests in LLC, together
with certain subordinated debt obligations, were acquired by the Company in
connection with the Acquisition. LLC transferred all of its assets to the
Company, including the limited and general partnership interests in National
Tobacco, and was subsequently dissolved.
In 1988, Thomas F. Helms, Jr., Chairman and Chief Executive
Officer, and an investor group led by Lehman Brothers, formed National Tobacco
to acquire the smokeless tobacco division of Lorillard, which had introduced the
popular BEECH-NUT brand in 1897. Together with the management team he assembled
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in connection with this initial buyout, Mr. Helms participated in two subsequent
leveraged buyouts prior to 1997, all of which boosted the percentage of
management ownership.
Upon consummation of the Acquisition, NATC and its
operating subsidiary were merged into NAOC. NATC was originally formed by an
investor group to acquire certain assets from UST, Inc. ("UST") in March 1993,
including the exclusive rights to market and distribute ZIG-ZAG RYO cigarette
papers in the United States, Canada and certain other international markets. In
1938, UST obtained the North American distribution rights for the ZIG-ZAG
brands, which had been originally introduced in France in 1869, from Bollore, a
major French industrial concern.
The Company's principal executive offices are located in
New York, New York at 257 Park Avenue South, 7th Floor, New York, New York
10010, and its telephone number is (212) 253-8185.
BUSINESS STRATEGY
The Company's current business strategy, whether through
internal growth or through acquisitions, is to (i) continue to cultivate the
sales, marketing and distribution synergies of its subsidiaries; (ii) capitalize
on the brand-name identity of its products; and (iii) increase operating
efficiencies within the subsidiaries of the Company.
INDUSTRY AND MARKETS
The Company believes that the smokeless tobacco market,
which includes loose leaf chewing tobacco, and the RYO cigarette paper market
are each characterized by non-cyclical demand, brand loyalty, significant
barriers to entry, minimal capital expenditure requirements, high profit
margins, strong wholesale prices and the ability to generate strong and
consistent free cash flows. Smokeless tobacco products, including chewing
tobacco, have a long, established tradition of use in the United States dating
back to colonial times. Loose leaf chewing tobacco has generally been most
popular in the Southeast, Southwest, rural Northeast and North Central regions
of the United States. An estimated 7 million Americans are regular users of
smokeless tobacco products, according to the Smokeless Tobacco Council. The RYO
cigarette market is a minor component of the overall United States cigarette
industry which, if viewed as a part of that industry, would have an estimated
share of 1%. In 1999, the United States cigarette industry sold in excess of 400
billion cigarettes, which were consumed by approximately 25% of the adult
population.
Smokeless Tobacco
The smokeless tobacco industry is comprised of the five
product categories listed below. The Company believes that many consumers of
smokeless tobacco regularly use products in more than one of the following
categories. In addition to the Company, other major manufacturers and marketers
of smokeless tobacco include UST, Pinkerton Tobacco Co., Conwood Corporation and
Swisher International Group Inc. The Company currently offers only loose leaf
chewing tobacco products; whereas, most other competitors offer more than a
single smokeless category.
Moist snuff is cured, aged, flavored and finely ground tobacco
packaged in round fiber or plastic cans.
Loose leaf chewing tobacco is typically made from air-cured leaf
tobacco, using both domestic and imported tobaccos, aged, flavored
and packed in foil pouches.
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Plug chewing tobacco is made from air-cured leaf tobacco, heavily
flavored and pressed into small bricks or blocks.
Twist chewing tobacco is made of dark, air-cured leaf tobacco, which
is twisted into strands that are dried and packaged like a dry,
pliable rope.
Dry snuff is a powdered tobacco product, which is sometimes flavored
and is packaged in a variety of containers.
According to information provided by the Smokeless Tobacco
Council, manufacturers' sales for the smokeless tobacco industry were $991
million in 1989 and $1.92 billion in 1998, representing a compound annual growth
rate of 6.8%. This increase is primarily related to the increase in
manufacturers' sales of moist snuff which have grown from $608 million in 1989
to $1.51 billion in 1998, representing a compound annual growth rate of 9.5% and
whose volume has grown from 39.9 million pounds in 1989 to 54.7 million pounds
in 1998 for a compounded annual growth rate of 3.2%. Manufacturers' sales of
loose leaf chewing tobacco were $280 million in 1989 and $327 million in 1998,
representing a compound annual growth rate of 1.6% during the same period;
however, its volume during this same period declined from 59.7 million pounds to
45.9 million pounds, a compound rate of decline of 2.6%.
Loose Leaf Chewing Tobacco
Loose leaf chewing tobacco products are typically sold
through the following retail distribution channels (in order of importance):
food stores, mass merchandisers, convenience stores, discount tobacco stores,
chain and independent drug stores. Discount tobacco retailers are becoming an
increasingly important distribution channel for all tobacco products, including
loose leaf chewing tobacco, for their volume has grown to be approximately 20%
of all tobacco sales. Certain retailers purchase loose leaf chewing tobacco
direct from manufacturers, although most purchase through wholesale
distributors.
RYO Cigarette Paper
RYO cigarette papers are typically sold through the
following retail distribution channels (in order of importance): convenience
stores, chain and independent drug stores, mass merchandisers, food stores and
discount tobacco stores. Certain retailers purchase RYO cigarette papers direct
from manufacturers, although most purchase through wholesale distributors.
PRODUCTS
Currently, the Company manufactures and markets loose leaf
chewing tobacco and imports and distributes RYO cigarette papers and
tobacco-related products and contract manufactures and markets RYO and MYO
tobaccos and tobacco-related products.
Loose Leaf Chewing Tobacco
Loose leaf chewing tobacco products can be broadly
characterized as either full-flavored or mild, each accounting for approximately
one half of industry volume. Loose leaf chewing tobacco is made from aged,
air-cured tobacco, which is processed and flavored and then packaged in foil
pouches. The BEECH-NUT brands are available in two flavors: Regular and
Wintergreen. BEECH-NUT REGULAR is a full-flavored product and ranks second in
sales in the full-flavored loose leaf chewing tobacco category, and third
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overall. BEECH-NUT WINTERGREEN was introduced by Lorillard in 1979 and has the
largest market share of any flavored loose leaf brand. National Tobacco
introduced its TROPHY brand into the mild product category in 1992. In addition
to the BEECH-NUT brands and TROPHY, National Tobacco currently produces a
regional brand, HAVANA BLOSSOM, sold primarily in West Virginia, Pennsylvania
and Ohio and a value brand, DURANGO, which was introduced in March 1998.
RYO Cigarette Papers and RYO and MYO Tobaccos and Related Products
RYO cigarette papers are sold in a variety of different
widths and styles, primarily standard width ZIG-ZAG White, ZIG-ZAG 1 1/4 width
French Orange and ZIG-ZAG Kutcorners, which is designed for easier hand-rolling.
Other products sold under the ZIG-ZAG name are 1 1/2 RYO cigarette papers, Gold
Standard and Classic American tobacco for roll-your-own-cigarettes, ZIG-ZAG
cigarette rollers, cigarette tubes and tube injectors and a ZIG-ZAG waterproof
paper that is sold in Canada.
SALES AND MARKETING
Currently, National Tobacco has a 107 person nationwide
sales organization. Since January 1, 1998, National Tobacco and NAOC have
operated under a Sales Representation Agreement, pursuant to which National
Tobacco markets NAOC's products.
Historically, NAOC's sales force focused on wholesalers in
the large chain convenience store, drug store and mass merchandising channels
without calling on retail outlets, while National Tobacco's larger sales force
called on both wholesalers and retail merchants in these channels as well as the
food store and discount tobacco store channels. The Company believes that the
resources and longstanding relationships of its sales force has enabled the
Company to move each of its product lines into geographical markets and retail
channels where they previously had been underrepresented.
National Tobacco's loose leaf chewing tobacco has
historically been distributed through approximately 1,500 wholesale tobacco and
food distributors. In 1999, BEECH-NUT REGULAR and TROPHY represented 48% and 31%
of National Tobacco's loose leaf chewing tobacco sales. At the retail level,
National Tobacco's loose leaf chewing tobacco products are promoted through
in-store volume and price-discount programs and the use of innovative, high
visibility point-of-purchase floor and shelf displays, banners and posters.
National Tobacco has not been reliant upon nor does it conduct any print or
media consumer advertising.
NAOC's RYO cigarette papers have historically been
distributed through approximately 950 wholesale distributors. Sales by NAOC of
its ZIG-ZAG White and ZIG-ZAG French Orange RYO cigarette papers are the most
important products in terms of volume, accounting for in excess of 69% of NAOC's
sales. The majority of ZIG-ZAG promotional activity is at the distributor level
and consists of distributor promotions, trade shows and trade advertising.
The Company's largest customer is The McLane Company
("McLane"), which accounted for approximately 14.4% and 8.4% of its loose leaf
chewing tobacco and RYO cigarette paper revenues in 1999, respectively. The
Company believes that the loss of any other customer or distributor account
would not have a material impact on the financial condition or operations of the
Company.
TRADEMARKS AND TRADE SECRETS
National Tobacco has numerous registered trademarks
relating to its loose leaf chewing tobacco products, including the trademarks
for its BEECH-NUT and TROPHY products. These trademarks, which are significant
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to National Tobacco's business, expire periodically and are renewable for
additional 20-year terms upon expiration. Flavor formulae relating to National
Tobacco's and NAOC's tobacco products, which are key assets of their businesses,
are maintained under strict secrecy. The ZIG-ZAG trade name and trademark are
owned by Bollore and have been licensed to NAOC; however, NAOC does own the
ZIG-ZAG trademark with respect to certain tobacco products.
RAW MATERIALS, PRODUCT SUPPLY AND INVENTORY MANAGEMENT
Loose Leaf Chewing Tobacco
National Tobacco's loose leaf chewing tobacco is produced
from air-cured leaf tobacco. National Tobacco utilizes tobaccos grown
domestically in Pennsylvania and Wisconsin and imported from many countries,
including, but not limited to, Argentina, Brazil, Columbia, France, Germany,
Indonesia, Italy, Mexico, and the Philippines. Management does not believe that
it is dependent on any single country source for tobacco. Pursuant to an
agreement with Lancaster Leaf Tobacco Company of Pennsylvania ("Lancaster"),
Lancaster (i) under instructions from National Tobacco, purchases and processes
tobacco on an exclusive basis, (ii) stores tobacco inventory purchased on behalf
of National Tobacco and (iii) generally maintains a 15- to 24-month supply of
National Tobacco's various tobacco types at its facilities. National Tobacco
generally maintains a one- to two-month operating supply of tobacco in its
Louisville facility.
Other than raw tobacco, the ingredients used in National
Tobacco's finished loose leaf chewing tobacco products include food grade
flavorings approved by the FDA and other federal agencies. National Tobacco is
not dependent upon any one supplier for those raw materials or for the supply of
its products' packaging.
RYO Cigarette Paper
Under normal conditions, pursuant to the Distribution
Agreements (as defined below), NAOC must purchase its RYO cigarette papers from
Bollore. See "Distribution Agreements." To maintain a steady supply of product:
(i) NAOC may seek third-party suppliers and continue the use of the ZIG-ZAG
trademark if Bollore is unable or unwilling to perform under the Distribution
Agreements; and (ii) Bollore is required to maintain in a public warehouse in
the United States a two-month supply of emergency inventory at Bollore's
expense.
The Distribution Agreements establish the purchase price
through 2004, subject to certain annual adjustments to reflect increases or
decreases in the U.S. and Canadian consumer price indices. Export duties,
insurance and shipping costs are the responsibility of Bollore and import duties
and excise taxes are the responsibility of NAOC. Bollore's terms of sale are 45
days after the bill of lading date and its invoices are payable in French
francs. The Distribution Agreements reduce catastrophic foreign exchange risk by
providing that Bollore will bear certain exchange rate risks at levels fixed
through 2004. The exchange rate risk allocations set forth in the Distribution
Agreements will be renegotiated in 2004 along with the prices to be paid by NAOC
to Bollore for the RYO cigarette papers.
NAOC seeks to maintain an adequate supply of product in
addition to the immediately available, two-month emergency inventory on hand at
the expense of Bollore. NAOC also builds inventory outside promotional periods
in order to have adequate inventory to meet increased demand during promotional
periods. NAOC's inventory is maintained at the Company's manufacturing facility
in Louisville, Kentucky and in bonded public warehouses located in Reno, Nevada
and Pittsburgh, Pennsylvania. See "Distribution Agreements."
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MANUFACTURING
National Tobacco manufactures its loose leaf chewing
tobacco products and NAOC contracts for the manufacture of its RYO cigarette
papers, cigarette tubes, tube injectors and RYO and MYO tobaccos. The Company
believes that National Tobacco's production, quality control, research and
development, facilities and equipment are vital to maintaining the high-quality
brand image and operating efficiency of its loose leaf tobacco products.
Production and Quality Control
National Tobacco's production process utilizes proprietary
techniques and is subject to strict quality control. During each production day,
National Tobacco's quality control group periodically tests the quality of the
tobacco, casings (flavorings in syrup form), application of casings and
packaging. National Tobacco utilizes sophisticated quality control and pilot
plant production equipment to test and closely monitor the quality of its
products. The quality of National Tobacco's products is largely the result of
using high grade, air-cured tobacco leaf, food grade flavorings and ongoing
analysis of tobacco cut, flavorings and moisture content.
Research and Development
National Tobacco has a research and development department
that reformulates existing products in an effort to maintain a high level of
product consistency and to facilitate the use of less costly raw materials
without sacrificing product quality. The Company believes that for all of its
tobacco products it has been and will be able to continue to develop cost
effective blends of tobacco and flavorings that will maintain or reduce overall
costs without compromising the high product quality.
The Company, primarily through National Tobacco, spent
approximately $592,000, $553,000 and $532,000 on its research and development
and quality control efforts for the years 1997, 1998 and 1999, respectively.
Facilities and Equipment
The Louisville, Kentucky plant, which is owned by National
Tobacco, was formerly used by Lorillard for the manufacture of cigarettes,
cigars and chewing tobacco. This approximately 600,000 square foot facility
occupies a 26 acre urban site near downtown Louisville. The majority of the
facility's structures sits on half of the total acres. The facilities are in
good condition and have received regular maintenance and capital improvement.
About two-thirds of the plant is currently utilized, thus, there is substantial
excess manufacturing and storage capacity. The existing structures would provide
ample space to accommodate an expansion of the Company's products.
COMPETITION
National Tobacco is the third largest manufacturer and
marketer of loose leaf chewing tobacco and NAOC is the largest importer and
distributor in North America of RYO cigarette papers. The other three principal
competitors for loose leaf chewing tobacco sales, which, together with National
Tobacco, generate approximately 95% of such sales, are Pinkerton Tobacco Co.,
Conwood Corporation and Swisher International Group Inc. Due to increased
competition with moist snuff, an alternative smokeless product that is used
interchangeably by many loose leaf consumers, and in addition to the three
previously named companies, the major competitor is UST, Inc., the largest moist
snuff as well as the largest smokeless tobacco company in the United States.
NAOC's two major competitors for RYO cigarette paper sales, which, together with
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NAOC, generate approximately 95% of such sales, are Republic Tobacco Company and
Imperial Tobacco Group plc. Certain competitors of the Company are better
capitalized than the Company and have greater financial and other resources than
those available to the Company. The Company believes that its strong market
positions in its principal product lines are due to the high brand recognition
and perceived quality of each of its products, its manufacturing and operating
efficiencies, and its significant sales, marketing and distribution strengths.
EMPLOYEES
As of February 29, 2000, the Company employed a total of
256 full-time employees. All of the Company's operations are non-union, with the
exception of 96 manufacturing employees, who are covered by three collective
bargaining agreements. One of these agreements, covering 91 employees, will
expire in December 2001. The other two agreements will expire during 2002.
REGULATION
The tobacco industry, particularly with respect to
cigarettes, has been under public scrutiny for over thirty years. Industry
critics include special interest groups, the Surgeon General and many
legislators at the state and federal levels. Although the smokeless tobacco
companies have recently come under some scrutiny, much of the focus has been
directed at the cigarette industry due to its large size relative to the
smokeless tobacco industry.
Producers of tobacco products are subject to regulation in
the United States at federal, state and local levels. Together with changing
public attitudes towards tobacco consumption, the constant expansion of
regulations since the early 1970s has been a major cause of the overall decline
in consumption of tobacco products. Moreover, the future trend is toward
increasing regulation of the tobacco industry.
Federal law has recently required states, in order to
receive full funding for federal substance abuse block grants, to establish the
minimum age of 18 years for the sale of tobacco products together with an
appropriate enforcement program. In recent years, a variety of bills relating to
tobacco issues has been introduced in the United States Congress, including
bills that would (i) prohibit the advertising and promotion of all tobacco
products and/or restrict or eliminate the deductibility of such advertising
expenses; (ii) increase labeling requirements on tobacco products to include,
among other things, additional warnings and lists of additives and toxins; (iii)
modify federal preemption of state laws to allow state courts to hold tobacco
manufacturers liable under common law or state statutes; (iv) shift regulatory
control of tobacco products and advertisements from the Federal Trade Commission
to the Food and Drug Administration ("FDA"); (v) increase tobacco excise taxes;
and (vi) require tobacco companies to pay for health care costs incurred by the
federal government in connection with tobacco related diseases. Hearings have
been held on certain of these proposals; however, to date, none of such
proposals have been enacted by Congress. Future enactment of such proposals or
similar bills, depending upon their content, could have a material adverse
effect on the sales, operations or financial condition of the Company.
In August 1995, the FDA published proposed rules for
regulation of tobacco and tobacco products. Following a year of comment and
revision, in August 1996 the FDA promulgated final rules which were scheduled to
take effect in August 1997, except for a portion of the rules prohibiting the
sale of tobacco to persons under 18, which had already become effective. The
FDA's regulations sought to restrict access to tobacco and tobacco products,
regulate tobacco labeling, and limit promotion and advertising of tobacco.
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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
statute does not provide this authority. The FDA petitioned the Supreme Court of
the United States for a writ of certiorari. On April 26, 1999, the Supreme Court
granted the writ. The hearing before the Supreme Court was held on December 1,
1999. On March 21, 2000, the Supreme Court affirmed the Fourth Circuit's
decision, ruling that the FDA has no authority over tobacco products.
In 1996, Massachusetts enacted a statute which requires all
tobacco companies to disclose information regarding the ingredients and nicotine
content of their products, which information will, subject to certain
conditions, be made publicly available. The ingredients of National Tobacco's
products are considered by the Company to be proprietary and such disclosure
could result in the manufacture and sale of imitations, which could have a
material adverse effect on its tobacco business. On December 10, 1997, U.S.
District Judge O'Toole (D. Mass.) entered a preliminary injunction on behalf of
5 smokeless tobacco companies (including National Tobacco) against the Attorney
General of Massachusetts and the Commissioner of Public Health. The order bars
the officials from taking any steps to enforce the ingredient-reporting
requirements of the Massachusetts statute pending a trial on the merits. On
November 6, 1998, the United States Court of Appeals for the First Circuit
affirmed the injunction. The tobacco companies did not seek an injunction
against the nicotine reporting requirements of the Massachusetts statute.
The district court set a schedule for the receipt and
disposition of cross motions for summary judgement. The parties filed their
motions on February 13, 1998. The cross motions were argued in June 1998. The
district court has not acted with regard to such motions.
Regulations issued by the Massachusetts Attorney General
affecting point of sale and certain advertising issues with respect to tobacco
products which were to become effective August 1, 1999, were delayed until
December 31, 1999 to allow for further review. The Attorney General made minor
modifications to the regulations. In January 2000, the Federal District Court in
Massachusetts upheld the advertising and point-of-sale regulations, rejecting
the industry's First Amendment challenge. However, the regulations have been
stayed pending appeal, which is scheduled to be heard on April 7, 2000. The
Massachusetts regulations, among other things, would restrict access to tobacco
products. Historically, smokeless tobacco products have 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.
While there is no current regulation materially and
adversely affecting the sale of RYO cigarette papers, there can be no assurance
that federal, state or local regulations will not be enacted which will seek to
regulate RYO cigarette papers. In the event such regulations are enacted,
depending upon their parameters, they could have an adverse effect on the
business of NAOC and the financial condition of the Company.
STATE ATTORNEY GENERAL SETTLEMENT AGREEMENTS
In November 1998 most of the states, represented by their
attorneys general acting through the National Association of Attorneys General,
signed two contracts: the Master Settlement Agreement ("MSA") and the Smokeless
Tobacco Master Settlement Agreement ("STMSA"). To the best of the Company's
knowledge, the only industry signatories to the MSA have been 23 cigarette
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manufacturers and/or distributors and the only signatory to the STMSA has been
UST Inc. In the Company's opinion, the fundamental basis for each agreement is
the states' consents to withdraw all claims for monetary, equitable and
injunction relief against certain tobacco products manufacturers and others and,
in return, the industry signatories have agreed to certain marketing
restrictions and regulations as well as certain payment obligations. The Company
does not currently intend to participate in either settlement. There can be no
assurance as to whether entering into one or both settlement agreements or
choosing not to do so would have a material adverse effect on the Company's
financial position, results of operations or cash flows.
In furtherance of the MSA, many states have enacted
statutes requiring companies not participating in the MSA to deposit, on an
annual basis, into qualified banks escrow account funds based on the number of
cigarettes or cigarette equivalents, i.e., the pounds of RYO tobacco sold. The
purpose of these statutes is expressly stated to be to eliminate the cost
disadvantage the settling manufacturers have as a result of settling. The
Company is entitled to direct the investment of the escrowed funds and withdraw
any appreciation, but cannot withdraw the principal for twenty-five years from
the year of each annual deposit, except to withdraw funds deposited pursuant to
an individual state's escrow statute to pay a judgment to that state plaintiff
in the event of a judgment against the Company.
EXCISE TAXES
Tobacco products and RYO cigarette papers have long been
subject to federal, state and local excise taxes, and such taxes have frequently
been increased or proposed to be increased, in some cases significantly, to fund
various legislative initiatives. Since 1986, smokeless tobacco (including dry
and moist snuff and chewing tobacco) has been subject to federal excise tax.
Smokeless tobacco is taxed by weight (in pounds or fractional parts thereof)
manufactured or imported. From July 1, 1986 through December 31, 1990, the
excise tax on chewing tobacco was $0.08 per pound. Effective January 1, 1991 the
federal excise tax on chewing tobacco was increased to $0.10 per pound, and
again increased to $0.12 per pound effective January 1, 1993. Effective January
1, 2000, the tax was increased to $0.17 per pound.
Effective January 1, 2000, the excise tax on RYO cigarette
paper is $.0106 per fifty papers, the tax on cigarette tubes is $.0213 per fifty
tubes, and the tax on RYO tobacco is $.9567 per pound. Future enactment of
increases in excise taxes could have a material adverse effect on the Company's
business. The Company is unable to predict the likelihood of the passage or the
enactment of future increases in excise taxes. Tobacco products and RYO
cigarette papers are also subject to certain state and local taxes. Budget
deficit concerns at the state level continue to exert pressure to increase
tobacco excise taxes. From time to time, the imposition of state and local taxes
has had limited impact on the National Tobacco's sales regionally. Any enactment
of new state excise taxes or increase in existing excise taxes is likely to have
an increasingly adverse effect on regional sales.
ENVIRONMENTAL REGULATIONS
The Company believes that it is currently in substantial
compliance with all material environmental regulations and pollution control
laws.
DISTRIBUTION AGREEMENTS
As part of the acquisition of the ZIG-ZAG RYO cigarette
paper business, NAOC entered into three long-term distribution and licensing
agreements with Bollore with respect to sales of RYO cigarette papers in the
United States, Canada and Hong Kong, Singapore, Dubai, Qatar, Oman and Jordan
(respectively, the "U.S. Distribution Agreement," the "Canada Distribution
Agreement" and the "Other Countries Distribution Agreement," and, collectively,
9
<PAGE>
the "Distribution Agreements"). Under the Distribution Agreements, Bollore has
granted NAOC the exclusive right to purchase RYO cigarette papers bearing the
ZIG-ZAG brand name from Bollore for resale in the countries noted above. NAOC
has the sole right to determine the price and other terms upon which NAOC may
resell any products purchased from Bollore, including the right to determine the
distributors of such products within the countries noted above.
The Distribution Agreements establish the purchase price
through 2004, subject to certain annual adjustments to reflect increases or
decreases in the U.S. and Canadian Consumer Price Indices. Export duties,
insurance and shipping costs are the responsibility of Bollore and import duties
and excise taxes are the responsibility of NAOC. Bollore's terms of sale are 45
days after the bill of lading date and its invoices are payable in French
francs. The Distribution Agreements reduce catastrophic foreign exchange risk by
providing that Bollore will bear certain exchange rate risks at levels fixed
through 2004. The exchange rate risk allocations set forth in the Distribution
Agreements will be renegotiated in 2004 along with the prices to be paid by NAOC
to Bollore for the RYO cigarette papers.
According to NAOC's Distribution Agreements with Bollore,
NAOC, under normal conditions, must purchase the finished product only from
Bollore. Conversely, Bollore is required by such agreements to provide NAOC the
quantities and quality of the products that it desires. The Distribution
Agreements provide NAOC with safeguards in order for NAOC to maintain a steady
supply of product. Such safeguards include (i) granting NAOC the right to seek
third party suppliers with continued use of the ZIG-ZAG trademark if Bollore is
unable or unwilling to perform its obligations under the Distribution Agreements
and (ii) maintaining a two month supply of emergency inventory in the United
States at Bollore's expense.
Under the Distribution Agreements, NAOC has agreed for the
term of the Distribution Agreements and for a period of five years after
termination of such Distribution Agreements not to engage, directly or
indirectly, in the manufacturing, selling, distributing, marketing or otherwise
promoting in the countries identified above RYO cigarette paper or RYO cigarette
paper booklets of a competitor without Bollore's consent, except for certain de
minimis acquisitions of debt or equity securities of such competitor and certain
activities with respect to an alternative supplier used by NAOC as permitted
under the Distribution Agreements.
Each of the Distribution Agreements became effective on
November 30, 1992. Each of the U.S. Distribution Agreement and the Canada
Distribution Agreement was for an initial term of twenty years commencing from
the effective date of such agreement and will be renewed automatically for
successive twenty year terms unless sooner terminated in accordance with the
provisions of such agreement. The Other Countries Distribution Agreement was for
an initial term of ten years commencing from the effective date of such
agreement and will be renewed automatically for successive ten year terms unless
sooner terminated in accordance with the provisions of such agreement. Each of
the Distribution Agreements permits Bollore to terminate such agreement (i) if
certain minimum purchases (which were exceeded in 1999 by a factor of 4.6 times
in the U.S.; such minimum purchases are not applicable with respect to the Other
Countries Distribution Agreement until the last three years of the initial term
of such agreement) of RYO cigarette paper booklets have not been made by the
Company for resale in the jurisdiction covered by such agreement within a
calendar year, (ii) if the Company assigns such agreement without the consent of
Bollore (other than certain permissible assignments to wholly owned subsidiaries
of the Company), (iii) upon a change of control of the NAOC or any parent of
NAOC without the consent of Bollore, (iv) upon certain acquisitions of equity
securities of NAOC or any parent of NAOC by a competitor of NAOC or certain
investments by significant stockholders of the Company in a competitor of NAOC
and (v) certain material breaches, including NAOC's agreement not to promote,
10
<PAGE>
directly or indirectly, RYO cigarette paper or RYO cigarette paper booklets of a
competitor. Additionally, each of the Canada Distribution Agreement and the
Other Countries Distribution Agreement is terminable by either NAOC or Bollore
upon the termination of the U.S. Distribution Agreement.
Item 2. Properties
As of December 31, 1999, the Company operated
manufacturing, distribution, office and warehouse space in the United States
with a total floor area of approximately 610,351 square feet. Of this footage,
approximately 10,351 square feet are leased and approximately 600,000 are owned.
To provide a cost-efficient supply of products to its
customers, the Company maintains centralized management of nationwide
manufacturing and distribution facilities. National Tobacco has one
manufacturing and distribution facility located in Louisville, Kentucky and five
other public warehouse distribution facilities in other locations throughout the
United States.
The following table describes the principal properties of
the Company (other than sales service centers, sales
office space or warehouse space) as of December 31, 1999.
Square Owned or
Location Principal Use Feet Leased
-------- ------------- ---- ------
New York, NY Corporate 10,351 Leased
headquarters
Louisville, KY Loose leaf 600,000 Owned(1)
chewing tobacco
manufacturing,
R&D, warehousing
and distribution
Item 3. 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.
- ----------------------------
(1) Encumbered by a mortgage securing all obligations and liabilities under the
Senior Secured Facilities.
11
<PAGE>
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 sought 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 sought 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. Plaintiffs
and defendants are in the process of negotiating a settlement, and the case has
been dismissed pending the completion of those negotiations. Management does not
expect that the terms of any settlement will have a materially adverse effect on
the Company. If negotiations should fail, the Company would expect the case to
be refiled.
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
12
<PAGE>
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 cases 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 filed a motion to dismiss the allegations for failure
to state a claim on which relief could be granted. On December 23, 1999, the
Court dismissed the new antitrust claims in Republic's Second Amended Complaint.
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,
13
<PAGE>
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 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 (cigarette, cigar and
smokeless products) actions in the State of West Virginia, including the Allen
and Akers cases, has been referred to a Mass Litigation Panel, and assigned to
one judge. On January 11, 2000, the judge assigned the cases issued an order
concerning discovery schedules and establishing a trial procedure for the
purpose of trying all issues of law and fact common to all defendants. On
February 29, 2000, West Virginia plaintiffs' counsel, pursuant to the court's
order, identified all individual plaintiffs and the defendants against whom they
had claims. The Company was not named in any additional claims. Currently then
as previously stated, the Company is named in one case in West Virginia, which
alleges that lung cancer was caused by consuming the Company's chewing tobacco
products.
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) BEECH-NUT 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. Motions to
dismiss various counts have been filed and fully briefed. The hearing on the
motion is currently scheduled for April 28, 2000.
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, results of operations or cash flows.
Regulatory and Other Events. Regulations 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. The Attorney General made minor modifications to the
regulations. In January 2000, the Federal District Court in Massachusetts upheld
the advertising and point-of-sale regulations, rejecting the industry's First
Amendment challenge. The regulations, however, have been stayed pending appeal,
14
<PAGE>
which is scheduled to be heard on April 7, 2000. The Massachusetts regulations,
among other things, restrict access to tobacco products. Historically, smokeless
tobacco products have 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 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
had already become effective. The FDA's regulations would 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 petitioned the Supreme Court of
the United States for a writ of certiorari. On April 26, 1999, the Supreme Court
granted the writ. The hearing before the Supreme Court was held on December 1,
1999. On March 21, 2000, the Supreme Court affirmed the Fourth Circuit's
decision, ruling that the FDA has no authority over tobacco products.
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. Bollore and the Company are currently negotiating settlements
with one group of defendants. A full trial, to obtain permanent injunctive
relief and damages, is currently scheduled for September 2000 for all other
defendants. Management believes that successful prosecution of this litigation,
either by settlement or otherwise, will have a favorable impact on its RYO
cigarette paper business.
For a description of other industry litigation in which the
Company is a party, see Part I, Item 1. "Business--Regulation."
Item 4. Submission of Matters to a Vote of Security Holders
None.
15
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
There is no trading market for the Company's Voting Common
Stock, par value $.01 per share (the "Common Stock"), and, as of February 29,
2000, such stock was held by 47 stockholders of record, 41 of whom are
affiliates or employees of the Company.
There have been no dividends declared on the Company's
Common Stock. The current policy of the Company's Board of Directors is to
retain any future earnings to provide funds for the operation and expansion of
the Company's business; however, the Board of Directors will review the dividend
policy periodically to determine whether the declaration of dividends is
appropriate. In addition, the payment of dividends by the Company is subject to
certain restrictions contained in (i) the Company's senior secured credit
facility and (ii) the indenture and certificate of designation, respectively,
with regard to the Company's outstanding senior notes and preferred stock.
Item 6. Selected Financial Data
CONSOLIDATED SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts)
On February 10, 2000, National Tobacco announced that it
had reached an agreement to sell certain smokeless tobacco assets to Swedish
Match. Accordingly, the financial results for the smokeless tobacco segment are
treated as discontinued operations for all periods presented herein.
Consequently, revenues, operating costs and expenses, and other non-operating
results for these businesses are excluded from the Company's results from
continuing operations. The financial results of these businesses are presented
in the Company's consolidated statements of operations in a single line item
entitled "income from discontinued operations." The net assets of the
discontinued segment, which consist primarily of inventories of $40.3 million
and intangible assets of $29.0 million, each of which are to be sold, are
included in the consolidated balance sheets and related footnotes. See further
discussions in notes 18 and 20 to the consolidated financial statements.
The following table sets forth the consolidated selected
statements of operations, balance sheet and other data for the Company and its
predecessor for the periods indicated. The selected data is derived from the
audited consolidated financial statements of the Company and its predecessor for
such years. As described in the consolidated financial statements, the Company
completed an acquisition of NATC and a recapitalization of the Company on June
25, 1997. Additionally, as described in the notes to the consolidated financial
statements, the Company's predecessor was recapitalized on May 17, 1996 in
connection with the formation of the Company. As such, the selected data of the
Company and its predecessor are not comparable in certain respects due to the
purchase accounting effect of this acquisition and these recapitalizations. This
selected data should be read in conjunction with, and is qualified by reference
to, the consolidated financial statements of the Company and its predecessor,
and the related notes thereto, and the Management Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this Form
10-K.
16
<PAGE>
<TABLE>
<CAPTION>
The Company | The Predecessor
---------------------------------------------------- | ----------------------------
Year Ended December 31, |
------------------------------------ Period from | Period from Year Ended
5/17/96 to | 1/1/96 to December 31,
1999 1998 1997(1) 12/31/96 | 5/16/96 1995
-------- -------- ---------- ----------- | ------------ -------------
<S> <C> <C> <C> <C> | <C> <C>
STATEMENT OF OPERATIONS DATA: |
Net Sales................................... $48,647 $ 42,278 $ 30,643 $ -- | $ -- $ --
|
Income (loss) from continuing operations |
(net of preferred stock dividends of |
$5,361 in 1999, $4,751 in 1998 and |
$2,268 in 1997) applicable to common |
shares.................................... (10,415) (11,567) 2,240 -- | -- --
|
Income from discontinued operations......... 6,649 7,823 2,906 383 | 1,132 2,505
|
Net Income/(Loss) applicable to common |
Shares(2)................................. (3,766) (3,744) (1,975) 383 | 1,132 2,505
|
Basic earnings per common share: |
Income/(Loss) from continuing |
operations................................ ($19.72) ($21.90) $4.24 -- | -- --
Income from discontinued operations....... 12.59 14.81 5.50 -- | -- --
Extraordinary loss........................ -- -- (13.48) -- | -- --
-------- -------- -------- |
|
Net Loss applicable to common shares...... ($7.13) ($7.09) ($3.74) -- | -- --
======== ======== ======== |
|
Diluted earnings per common share: |
Income/(Loss) from continuing |
operations.............................. ($19.72) ($21.90) $3.67 -- | -- --
Income from discontinued operations....... 12.59 14.81 4.76 -- | -- --
Extraordinary loss........................ -- -- (11.66) -- | -- --
-------- -------- -------- |
|
Net Loss applicable to common shares...... ($7.13) ($7.09) ($3.23) -- | -- --
======== ======== ======== |
|
BALANCE SHEET DATA (AT END OF PERIOD): |
Total assets................................ 243,602 260,307 273,083 96,553 | 81,887 80,517
Total debt, including current |
maturities.................................. 195,864 215,586 230,000 70,696 | 43,388 48,782
Mandatorily redeemable preferred |
stock....................................... 44,693 39,332 34,581 -- | -- --
OTHER DATA: |
Adjusted EBITDA(3).......................... 37,689 38,503 32,668 10,885 | 4,810 13,939
</TABLE>
(1) The selected data for the year ended December 31, 1997 includes the
results of operations of NAOC since its acquisition on June 25, 1997.
(2) Net income (loss) attributable to common shares for the year ended
December 31, 1997 includes an extraordinary loss of $7,121 (net of
income tax benefit of $4,365) related to the write-off of debt discounts
and deferred financing costs upon the occurrence of the recapitalization
of the Company on June 25, 1997. Income (loss) from continuing
operations and net income (loss) applicable to common shares for the
periods prior to June 25, 1997 does not include income tax expense
because the Company and the Predecessor were a limited liability company
and a partnership, respectively, prior to June 25, 1997, and did not
incur any federal or state income taxes for such periods.
(3) Adjusted EBITDA represents operating income plus depreciation,
amortization and certain non-cash charges and expenses. Adjusted EBITDA
is presented because management believes that Adjusted EBITDA is useful
as an indicator of the Company's historical cash flow available to
service its debt. Adjusted EBITDA should not be considered as an
alternative to, or more meaningful than, net income (as determined in
accordance with generally accepted accounting principles (GAAP)) as a
measure of the Company's operating results or cash flows (as determined
in accordance with GAAP) as a measure of the Company's liquidity.
17
<PAGE>
Following is a reconciliation of net income to adjusted EBITDA:
<TABLE>
<CAPTION>
The Company | The Predecessor
---------------------------------------------------- | ----------------------------
Year Ended December 31, |
------------------------------------ Period from | Period from Year Ended
5/17/96 to | 1/1/96 to December 31,
1999 1998 1997 12/31/96 | 5/16/96 1995
-------- -------- --------- ----------- | ------------ -------------
<S> <C> <C> <C> <C> | <C> <C>
Loss from continuing operations $ (5,054) $ (6,816) $ (2,613) -- | -- --
Income from discontinued operations 6,649 7,823 2,906 383 | 1,132 2,505
----------- ---------- ---------- ----------- | ----------- ------------
|
Net income ............................. 1,595 1,007 293 383 | 1,132 2,505
Interest expense, net................ 23,488 24,927 18,361 6,398 | 2,453 7,239
Income tax expense................... 3,813 3,213 852 -- | -- --
Depreciation......................... 1,923 1,687 1,619 1,034 | 454 1,073
Amortization......................... 5,490 5,490 3,213 504 | 365 973
Other (income) expense............... (16) (46) (34) (117) | (5) 1,336
|
Financial advisory fee expense...... -- -- -- -- | 114 300
Unfunded pension obligation.......... 594 -- -- -- | -- --
|
LIFO adjustment...................... 175 904 (129) 2,619 | 187 (53)
|
Stock option compensation expense.... 70 819 900 -- | -- --
|
Postretirement expense............... 557 502 472 64 | 110 443
|
Cumulative effective of accounting |
change............................ -- -- -- -- | -- 123
|
|
Extraordinary loss, net of income |
tax benefit....................... -- -- 7,121 -- | -- --
----------- ---------- ---------- ----------- | ----------- ------------
|
Adjusted EBITDA......................... $ 37,689 $ 38,503 $ 32,668 $ 10,885 | $ 4,810 $ 13,939
=========== ========== ========== =========== | =========== ============
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The discussion set forth below relates to the consolidated
results of continuing operations and financial condition of the Company for the
years ended December 31, 1999, 1998 and 1997. The following table sets forth
certain statement of operations data and the related percentage of net sales as
adjusted to give retroactive effect to the proposed disposition of selected
smokeless tobacco assets (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ------------------------- ---------------------------
<S> <C> <C> <C>
Net Sales............................... $ 48,647 100.0% $ 42,278 100.0% $ 30,643 100.0%
Cost of sales........................... 15,028 30.9 12,546 29.7 9,485 30.9
------------- ---------- ------------ --------- ------------- ----------
Gross Profit............................ 33,619 69.1 29,732 70.3 21,158 69.1
Selling, general and
administrative expenses.............. 10,965 22.5 8,748 20.7 1,763 5.8
Amortization of goodwill................ 4,691 9.7 4,691 11.1 2,410 7.9
------------- ---------- ------------ --------- ------------- ----------
Operating income........................ 17,963 36.9 16,293 38.5 16,985 55.4
Interest expense & financing costs, net. 23,710 48.7 25,164 59.5 13,605 44.4
Other income............................ 4 -- -- -- 2 --
------------- ---------- ------------ --------- ------------- ----------
Income/(Loss) from continuing operations
before income tax benefit............... (5,743) (11.8) (8,871) (21.0) 3,382 11.0
Income tax benefit from continuing
operations.............................. (689) (1.4) (2,055) (4.9) (1,126) (3.7)
------------- ---------- ------------ --------- ------------- ----------
Income/(Loss) from continuing
operations.............................. (5,054) (10.4) (6,816) (16.1) 4,508 14.7
Income from discontinued operations..... 6,649 13.7 7,823 18.5 2,906 9.5
------------- ---------- ------------ --------- ------------- ----------
Income before extraordinary loss........ 1,595 3.3 1,007 2.4 7,414 24.2
Extraordinary loss...................... -- -- -- -- 7,121 23.2
------------- ---------- ------------ --------- ------------- ----------
Net income.............................. $ 1,595 3.3% $ 1,007 2.4% $ 293 1.0%
============= ========== ============ ========= ============= ==========
</TABLE>
18
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Net Sales. For the year ended December 31, 1999, net sales
were $48.7 million, an increase of 15.1% or $6.4 million from the prior year.
This increase was due primarily to increased sales of the expanded Make-Your-Own
product line, which consists of smoking tobaccos and accessory products.
Gross Profits. For the year ended December 31, 1999, gross
profit increased 13.1% to $33.6 million from $29.7 million. Gross profit margin
decreased to 69.1% from 70.3%. The decrease in gross profit margin was due to a
change in product mix in connection with the full introduction of the MYO
product line.
Currency. Currency movements and price increases are the
primary adjustment factors for changes in costs of goods sold. Cigarette papers
are purchased from Bollore on terms of net 45 days in French francs. Thus, NAOC
bears certain foreign exchange risks for its inventory purchases. To hedge this
risk, NAOC utilizes short-term forward currency contracts, through which NAOC
secures French francs in order to provide payment for its monthly purchases of
inventory. In addition, Bollore provides a contractual hedge against substantial
currency fluctuation in its agreement with NAOC. For the year ended December 31,
1999, currency rates were favorable due to the strength of the U.S. dollar
against the French franc. The Company was able to hedge its currency risk by
utilizing short-term forward currency contracts. In the event that the French
franc strengthens against the U.S. dollar, the Company will reassess its
currency strategy.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the year ended December 31, 1999
increased 25.4% to $11.0 million from the prior year's $8.7 million. This
increase was due primarily to an increase in marketing and sales incentives
related, in part, to the MYO product launch.
Amortization of Goodwill. Amortization of goodwill for the
year ended December 31, 1999 remained unchanged at $4.7 million as compared to
the prior year.
Interest Expense and Financing Costs. Interest expense and
financing costs decreased to $23.7 million for the year ended December 31, 1999
from $25.2 million for the prior year. This decrease was the result of a lower
average term loan balance.
Income Tax Benefit. Income tax benefit decreased to $0.7
million for the year ended December 31, 1999 from $2.1 million for the prior
year.
Income from Discontinued Operations. Income from
discontinued operations decreased $1.2 million or 15.0% to $6.6 million for the
year ended December 31,1999 compared to the prior year. This was due primarily
to a $2.4 million or 7.8% decrease in gross profit, reflecting an 11.5% volume
decrease, which was partially offset by manufacturers' price increases during
1999. Selling, general and administrative expenses decreased $0.5 million and
income tax expense decreased $0.8 million from the previous year.
Net Income. Due to the factors described above, net income
increased $0.6 million to $1.6 million compared to the prior year.
19
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Net Sales. For the year ended December 31, 1998, net sales
were $42.3 million, an increase of 38.0% or $11.6 million, from the prior year.
On June 25, 1997, the RYO segment was acquired and its operating results have
been included thereafter.
Gross Profits. Gross profit for the year ended December 31,
1998 was $29.7 million, an increase of $8.6 million or 40.5% from the prior
year, and the gross profit margin increased to 70.3% from 69.1%.
Currency. Currency movements and price increases are the
primary adjustment factors for changes in costs of goods sold. Cigarette papers
are purchased from Bollore on terms of net 45 days in French francs. Thus, NAOC
bears certain foreign exchange risks in its inventory purchases. To hedge this
risk, NAOC utilizes short-term forward currency contracts, through which NAOC
secures French francs in order to provide payment for its monthly purchases of
inventory. In addition, Bollore provides a contractual hedge against substantial
currency fluctuation in its agreement with NAOC. For the year ended December 31,
1998, currency rates were favorable due to the strength of the U.S. dollar
against the French franc. The Company was able to favorably hedge its currency
risk by utilizing short-term forward currency contracts. In the event that the
French franc strengthens against the U.S. dollar, the Company will reassess its
currency strategy.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the year ended December 31, 1998
increased to $8.7 million from the prior year's $1.8 million, due to the June
acquisition of the RYO segment. Selling, general and administrative expenses
were allocated to both continuing and discontinued operations for the year ended
December 31, 1998, but not for the year ended December 31, 1997, thus, it is not
practical or relevant to compare such expenses by segment.
Amortization of Goodwill. Amortization of goodwill for the
year ended December 31, 1998 increased $2.3 million or 94.7% from the prior year
due to the RYO acquisition in June. Substantially all of the increase was a
result of having a full year's amortization in 1998 compared to only a partial
year in 1997.
Interest Expense and Financing Costs. Interest expense and
financing costs increased to $25.2 million for the year ended December 31, 1998
from $13.6 million for the prior year. This increase was due to having a full
year's interest expense in 1998 compared to only a partial year in 1997,
subsequent to the Acquisition and related recapitalization.
Income Tax Benefit. Income tax benefit increased to $2.1
million for the year ended December 31, 1998 from $1.1 million for the prior
year.
Income from Discontinued Operations. Income from
Discontinued Operations increased $4.9 million to $7.8 million for the year
ended December 31, 1998. Gross profit decreased $4.5 million primarily due to a
LIFO Inventory adjustment of $1.4 million and the implementation of a cents-off
pricing strategy. In addition, selling, general and administrative expenses
decreased $7.7 million due to the fact that such expenses were allocated to both
continuing and discontinued operations in 1998. Interest expense decreased $5.1
million due to the acquisition and related recapitalization in 1997 and income
tax expense increased $3.3 million.
20
<PAGE>
Extraordinary Loss. The Company recorded an extraordinary
loss of $7.l million (net of income tax benefit of $4.4 million) for the year
ended December 31, 1997, which was associated with the write-off of deferred
financing costs and the debt discount due to the recapitalization of the Company
on June 25, 1997.
Net Income. Due to the factors described above, net income
for the year ended December 31, 1998 was $1.0 million compared to $0.3 million
for the prior year.
LIQUIDITY AND CAPITAL REQUIREMENTS
Working capital was $37.0 million at December 31, 1999
compared to $42.0 million at December 31, 1998. This decrease was primarily the
result of a decrease in inventory of $5.0 million due to the Company's efforts
in managing inventory levels. The Company funds its seasonal working capital
requirements through its operating cash flows, and, if needed, bank borrowings.
As of December 31, 1999, the Company had 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 National Tobacco maintains sufficient tobacco inventories
to ensure proper aging as well as an adequate supply based on its historical
sales activity. The Company also believes that NAOC maintains adequate
inventories and that the supply of such inventory will remain stable for the
foreseeable future.
The Company believes that any effect of inflation at
current levels will be minimal. Historically, the Company has been able to
increase prices at a rate greater than that of inflation and believes that it
will be able to do so in the foreseeable future. In addition, the Company has
been able to maintain a stable variable cost structure for its smokeless tobacco
products due in part to its procurement and reformulation activities.
For 1999, the Company spent $770,000 in capital
expenditures. Given its current operation, the Company believes that its annual
capital expenditure requirements for 2000 will be approximately $750,000.
Currently, 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 financing.
Pursuant to the proposed asset sale, the Company will
receive gross proceeds of $165 million and estimated after tax proceeds of $120
million. The Company intends to immediately repay its Senior Secured Term
Facility and will review and evaluate various alternatives for the use of the
remaining funds, such as capital investments, acquisitions and further
reductions of indebtedness.
YEAR 2000 PROJECT
During fiscal 1997, the Company assessed the steps
necessary to address matters related to "Year 2000" issues. This assessment
included a review of all of 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,
21
<PAGE>
purchasing new software and acquiring new hardware. To date, the Company has not
experienced any problems with the Year 2000 issue.
RECENT 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
2001 reporting, as described below.
In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," which makes SFAS No. 133 effective for fiscal years
beginning after June 15, 2000. The Company plans to adopt SFAS No. 133 as of
January 1, 2001. This adoption is not expected to have a material impact on the
consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The Company cautions you that certain statements contained
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations section as well as elsewhere in this Form 10-K 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 affect 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, the proposed asset sale, 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 you 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 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity. The Company has exposure to
interest rate volatility primarily relating to interest rate changes applicable
to term and revolving loans under its senior secured credit facility. The
Company's credit facility bears interest at rates which vary with changes in (i)
the London Interbank Offered Rate (LIBOR) or (ii) a rate of interest announced
publicly by the Federal Reserve or National Westminster Bank plc. The Company
does not speculate on the future direction of interest rates. As of December 31,
1999, approximately $40.9 million of the Company's debt bore interest at
variable rates. The Company believes that the effect, if any, of reasonably
possible near-term changes in interest rates on the Company's consolidated
financial position, results of operations or cash flows would not be
significant.
22
<PAGE>
Foreign Currency Sensitivity. NAOC purchases inventory from
Bollore on terms of net 45 days in French francs. Accordingly, exposure exists
to potentially adverse movement in foreign currency rates. NAOC uses short-term
forward currency contracts to hedge the risk in foreign currency exchange rates.
In addition, Bollore provides a contractual hedge against substantial currency
fluctuation in its agreement with NAOC. NAOC does not use derivative financial
instruments for speculative trading purposes, nor does NAOC hedge its foreign
currency exposure in a manner that entirely offsets the effects of changes in
foreign exchange rates.
NAOC regularly reviews its hedging programs and may as part
of this review determine at any time to change its hedging policy. As of
December 31, 1999, NAOC did not have any outstanding commitment under forward
currency contracts.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and Notes
to Consolidated Financial Statements, and the report of PricewaterhouseCoopers
LLP, independent accountants, with respect thereto, referred to in the Index to
Consolidated Financial Statements and Financial Statement Schedules of the
Company contained in Item 14(a), appear on pages F-1 through F-30 of this Form
10-K and are incorporated herein by reference thereto. Information required by
schedules called for under Regulation S-X is either not applicable or is
included in the Consolidated Financial Statements or Notes thereto.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
23
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, position with the
Company and age of each member of the Board of Directors and each executive
officer of the Company as of the date of this filing. See "Election of
Directors."
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Thomas F. Helms, Jr..................... 59 Chief Executive Officer, President and Chairman of the Board
David I. Brunson........................ 49 Executive Vice President--Finance and Administration, Chief Financial
Officer, Treasurer, Secretary and Director
Jack Africk............................. 71 Director
Leonard D. Pickett...................... 44 Director
Arnold Sheiffer......................... 67 Director
</TABLE>
Thomas F. Helms, Jr. Thomas F. Helms, Jr. has been Chief
Executive Officer, Chairman of the Board and the sole member of the
Administration Committee of the Company since June 1997 and a member of the
Company's Executive Committee since December 1997. On January 1, 1999, Mr. Helms
assumed the additional responsibilities of President of the Company. He had
previously held the position of President of the Company and its subsidiaries
(other than International Flavors and Technology, Inc. ("IFT")) prior to January
1998. He currently serves as Chairman of the Board of each of the Company's
corporate subsidiaries. He has been Chief Executive Officer of National Tobacco
and NTFC since 1988 and has held the same office with NAOC and IFT since October
1997. Mr. Helms also served as President and Chief Executive Officer of Culbro
Corporation's smokeless tobacco division from 1983 until shortly prior to its
sale to American Maize-Products Company in March 1986. From 1979 to 1982, Mr.
Helms was General Manager of the Etherea Cosmetics and Designer Fragrances
Division of Revlon, Inc. Prior to that time, Mr. Helms was employed in marketing
and sales positions in various divisions of Revlon Consumer Products
Corporation.
David I. Brunson. David I. Brunson has been Executive Vice
President--Finance and Administration, Chief Financial Officer and a Director of
the Company since June 1997 and a member of the Company's Executive Committee
since December 1997. He has held the same offices with National Tobacco and NTFC
(since April 1997), NAOC (since October and June 1997, respectively) and IFT
(since October 1997). In December 1998, Mr. Brunson was also appointed to the
offices of Treasurer and Secretary of the Company and Secretary of IFT. In
addition, he currently holds the offices of Treasurer and Assistant Secretary
with each of the Company's subsidiaries (other than IFT). Mr. Brunson has also
served as a member of the Board of the Directors of each of the Company's
corporate subsidiaries since October 1997 (or, in the case of NAOC, since June
1997). Prior to joining the Company, from November 1992 until April 1997, he was
employed as a Managing Director at Societe Generale and established and was
President of Societe Generale Investment Corporation. From July 1979 until
November 1992, he was employed at The First National Bank of Chicago, lastly as
a Managing Director in the Investment Banking Division.
24
<PAGE>
Jack Africk. Jack Africk has been a Director since October
1997. In December 1998 he resigned from his positions as President and Chief
Operating Officer of the Company and each of its subsidiaries (other than IFT),
having held those positions since January 1998. From February to December 1998,
Mr. Africk was also a Director of each of the Company's corporate subsidiaries.
Beginning in 1996 and until the consummation of the Acquisition, he was Chief
Executive Officer of NATC. Prior to that time, from 1993 to 1996, Mr. Africk was
a consultant and Director of NATC. Mr. Africk is a former Vice Chairman of UST.
From 1979 until 1993, Mr. Africk held various positions with UST, including Vice
Chairman and Executive Vice President, as well as positions with subsidiary
organizations including President of an international division, and President
and Chief Executive Officer of United States Tobacco Company. Mr. Africk also
currently serves as Chairman of the Board of Evolution Partners and as a
Director of Tanger Factory Outlets and Crown Central Petroleum.
Leonard D. Pickett. Leonard Pickett has served as a
Director of the Company since January 31, 2000. Since January 1997 Mr. Pickett
has been the President and Chief Executive Officer of Crosman Corporation. For
more than five years prior to joining Crosman Corporation, Mr. Pickett was
President of Pexco Holdings, Inc. and Chairman of Worldwide Sports and
Recreation, Inc., holding companies with interests in various businesses. Mr.
Pickett is a C.P.A., having began his career with Deloitte and Touche.
Arnold Sheiffer. Arnold Sheiffer has served as a Director
of the Company since June 1997. He has also served as a member of the Audit and
Compensation Committees of the Board of Directors since November and December
1997, respectively. Mr. Sheiffer has been a Director of Spanish Broadcasting
System, Inc. since 1994 and a Managing Director of Shenkman Capital Management,
Inc. since 1995. From 1990 to 1994, he was President and Chief Operating Officer
of Katz Media Corp., and prior to that, Managing Partner of A. Sheiffer and
Company, Certified Public Accountants. He currently is Chairman and Chief
Executive Officer of SmartRoute Systems, Inc., a nationwide provider of real
time traffic.
ELECTION OF DIRECTORS
Pursuant to the terms of an Exchange and Stockholders'
Agreement, dated as of June 25, 1997, among the Company and certain of the
stockholders of the Company (the "Stockholders' Agreement"), Mr. Helms has the
ability to elect all of the directors of the Company unless dividends are not
paid in cash to the holders of the Company's Senior Preferred Stock when such
dividends are required to be paid in cash, in which event such holders have the
right to elect two directors. Messrs. Helms and Brunson have served as directors
of the Company since June 17, 1997 following the formation of the Company. Mr.
Scheiffer has served as a director since June 25, 1997, the date the Acquisition
was consummated. Mr. Africk has served as a director since October 1997. Mr. Kim
S. Fennebresque, a director since October 1997, served as a director until his
resignation in December 1999. Mr. Pickett was elected by the Board of Directors
of the Company to serve as a director in January 2000. Each director is to serve
until the next annual meeting of shareholders (or written consent in lieu
thereof) and until his successor is elected and duly qualified.
None of the present directors is a director of any company
with a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934 or subject to the requirements of Section 15(d) of that Act
or any company registered as an investment company under the Investment Company
Act of 1940, except as indicated above. No family relationships exist between
any director and executive officer of the Company.
25
<PAGE>
COMMITTEES OF THE BOARD
In 1999, the Board of Directors initially appointed four
committees: an Executive Committee, an Audit Committee, a Compensation
Committee, and an Administration Committee. With the decision to reduce the size
of the Company's Board of Directors to five directors, the Board decided to
disband the Executive Committee effective March 31, 1999. The members of the
Audit and Compensation Committees for 1999 were Messrs. Fennebresque, until his
resignation, and Sheiffer. The sole member of the Administration Committee,
which administers the Company's 1997 Share Incentive Plan, was Thomas F. Helms,
Jr.
Item 11. Executive Compensation
The following table summarizes the compensation paid by the
Company as well as certain other compensation paid or accrued, to the Chief
Executive Officer and Executive Vice-President of the Company (the "Executive
Officers") for the fiscal years ended December 31, 1997, 1998 and 1999 (each
person appearing in the table is referred to as a "Named Executive"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
------------------- All Other
NAME AND PRINCIPAL POSITION Year Salary ($) Bonus ($) Compensation ($)
- --------------------------- ---- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Thomas F. Helms, Jr. ................................. 1999 $525,000 $0 $48,320 (1)
Chief Executive Officer and President 1998 441,108 175,000 163,799 (2)
1997 343,172 79,372 37,901 (3)
David I. Brunson...................................... 1999 354,231 300,000 18,793 (4)
Executive Vice President--Finance and 1998 333,339 450,000 13,980 (5)
Administration and Chief Financial Officer 1997 200,099 -- 62,253 (6)
</TABLE>
- ---------------------
(1) Includes insurance premiums of $41,917 paid by the Company with respect
to term life and disability insurance, and contributions by the Company
of $6,403 to a defined contribution plan.
(2) Includes insurance premiums of $34,132 paid by the Company with respect
to term life insurance, contributions by the Company of $4,800 to a
defined contribution plan and payment of a $124,867 non-cash bonus in
satisfaction of an employee loan.
(3) Includes insurance premiums of $33,151 paid by the Company with respect
to term life insurance, contributions by the Company of $4,750 to a
defined contribution plan.
(4) Includes insurance premiums of $12,930 paid by the Company with respect
to term life and disability insurance and contributions by the Company
of $6,403 to a defined contribution plan.
(5) Includes insurance premiums of $9,180 paid by the Company with respect
to term life insurance and contributions by the Company of $4,800 to a
defined contribution plan.
(6) Includes insurance premiums of $9,180 paid by the Company with respect
to term life insurance and payment of $37,333 pursuant to an employment
contract.
26
<PAGE>
STOCK OPTIONS
The Company did not award any stock options to any of the
Named Executives during the last fiscal year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas F. Helms, Jr. is the sole member of the Company's
Administration Committee and was, until October 1997, the sole director of the
Board of Directors of NTFC. As such, he performed the equivalent function of a
compensation committee for these entities. Mr. Helms' relationship with NTFC,
National Tobacco, and the Company is set forth under "Board of Directors and
Executive Officers." On April 26, 1988 and December 15, 1988, Thomas F. Helms,
Jr., President and Chief Executive Officer of the Company, borrowed $75,000 and
$45,000, respectively, in connection with the purchase of a portion of his
partnership interests in National Tobacco and executed two separate notes,
payable to the Company. On April 14, 1998, Helms Management Corp. issued a
promissory note to the Company in the aggregate principal amount of $886,900,
representing the principal on the notes discussed above, plus an additional loan
by the Company in the amount of $766,686.30 to cover certain income tax
liabilities of Helms Management Corp. resulting from the conversion of LLC to a
"C" corporation in connection with the Acquisition. Upon execution of the
$886,900 note, the prior notes issued by Mr. Helms were cancelled. The current
note bears interest at the rate of 6.5% per annum and has a final maturity on
March 31, 2003. On January 4, 1999, Mr. Helms issued a promissory note to the
Company, in the principal amount of $150,000, for an additional loan by the
Company to cover certain tax liabilities of Helms Management Corp. resulting
from the above-mentioned conversion of LLC. This note bears interest at the rate
of 6.5% per annum and has a final maturity on December 31, 2003. As of January
24, 1999, the aggregate amount outstanding under the above notes was
approximately $1,036,900.
COMPENSATION OF DIRECTORS
Generally, directors who do not receive compensation as
officers, employees or consultants of the Company or any of its affiliates will
be paid an annual retainer fee of $25,000, plus reasonable out-of-pocket
expenses, for their services on the Board and its committees. In addition to
compensation he receives as a consultant, Jack Africk receives additional
compensation of $25,000 in his capacity as a member of the Company's Board of
Directors. During 1999 and in addition to his compensation as a director, Kim S.
Fennebresque also received compensation of $25,000 in his capacity as Chairman
of the Company's Audit and Compensation Committees and compensation of $12,500
for his services as an ad hoc member of the Executive Committee until March 31,
1999, the date this committee was disbanded.
EMPLOYMENT AND CONSULTING AGREEMENTS
THOMAS F. HELMS JR.
Thomas F. Helms, Jr., Chief Executive Officer of the
Company, has an employment agreement with the Company (the "Helms Employment
Agreement") pursuant to which Mr. Helms is currently receiving an annual base
salary of $525,000 which is reviewed annually, plus a bonus in accordance with
the Company's Executive Plan (as defined). The Helms Employment Agreement
provides for a three-year term, renewable annually, and is terminable at will
except with respect to severance. In addition, Mr. Helms will receive various
other benefits, including life insurance and health, hospitalization, disability
and pension benefits and other perquisites. The Helms Employment Agreement
includes a non-compete provision for a minimum of twelve months following the
termination of Mr. Helms's employment as well as for any period during which
27
<PAGE>
severance is paid to Mr. Helms. Mr. Helms is entitled to twelve months'
severance and a continuation of benefits following a termination of his
employment by the Company without cause, except that the bonus received shall be
only for the year in which the termination occurred and shall be prorated.
DAVID I. BRUNSON
David I. Brunson, Executive Vice President--Finance and
Administration, Chief Financial Officer, Treasurer and Secretary of the Company,
entered into an amended and restated employment agreement with the Company on
April 30, 1998 (as so amended and restated, the "Brunson Employment Agreement").
Pursuant to the Brunson Employment Agreement, Mr. Brunson is currently receiving
an annual base salary of $365,000, which is reviewed annually, plus a bonus in
accordance with the Company's Executive Plan. The Brunson Employment Agreement
provides for a term ending on the later of April 30, 2002 or the second
anniversary of the date notice of termination is first given, and is terminable
at will except with respect to severance. Mr. Brunson received signing and stay
bonuses, each in the amount of $300,000, upon the execution of the Brunson
Employment Agreement and on February 28, 1999, respectively. In addition, Mr.
Brunson will receive various other benefits, including life insurance and
medical, disability, pension benefits, club memberships, stock options and
reimbursements of certain expenses. The Brunson Employment Agreement includes a
non-compete provision for a minimum of twelve months following the termination
of Mr. Brunson's employment and for any subsequent period during which severance
is paid to Mr. Brunson.
In the event Mr. Brunson resigns for good reason or is
terminated without cause, he is entitled to receive his annual base salary, and
a pro rated bonus (based on the highest bonus paid to Mr. Brunson during the
preceding two years) for the remainder of the term of employment. Any options or
shares of restricted stock granted to Mr. Brunson vest in full as of the date of
such termination. In addition, Mr. Brunson would also have the option to require
the Company to repurchase at fair market value all or a portion of his shares of
the Company's common stock. In the event of his termination within twelve months
following the occurrence of a change of control of the Company, Mr. Brunson will
receive a lump sum cash payment equal to three times the sum of (a) his current
annual base salary and (b) the highest bonus paid to Mr. Brunson pursuant to the
Executive Plan during the preceding two years. If Mr. Brunson's employment is
terminated for any other reason, he will receive his accrued and unpaid salary
and bonus to the date of termination.
Pursuant to a non-qualified stock option agreement, Mr.
Brunson was granted options to purchase 30,928 shares of Common Stock of the
Company. One-third of these options were vested as of the closing of the
Acquisition and one-third of these options were vested on each of the first two
anniversaries of the date of his employment, April 23, 1997. In connection with
the exercise of such options and subject to certain limitations, including a
requirement that Mr. Brunson shall not leave, resign or be terminated for cause,
the Company has agreed to pay Mr. Brunson an amount equal to the sum of (i) the
difference between ordinary income and long-term capital gain tax liability for
reportable income resulting from any exercise of the options, plus (ii) a
"gross-up" to compensate for the additional ordinary income tax liability
resulting from the payment of such amount.
On December 6, 1999, Mr. Brunson also reached an agreement
with Mr. Helms that upon the closing of a divestiture, either in whole or in
part, of National Tobacco, Mr. Brunson would receive a cash bonus equal to
one-percent (1%) of the total transaction value.
28
<PAGE>
JACK AFRICK
Jack Africk, the former President and Chief Operating
Officer of the Company, terminated his employment agreement with the Company
(the "Africk Employment Agreement") effective December 31, 1998, but continues
to serve as a member of the Company's Board of Directors and, as described
below, as a consultant to the Company.
In connection with Mr. Africk's resignation, he and the
Company agreed to enter into a consulting agreement (the "1999 Consulting
Agreement").
Pursuant to the 1999 Consulting Agreement, Mr. Africk is to
provide consulting services to the Company on an as needed basis at the rate of
$75,000 per annum. The 1999 Consulting Agreement is subject to annual renewals
on 90 days notice.
During his tenure as President and Chief Operating Officer
and pursuant to a non-qualified stock option agreement, Mr. Africk was granted
options to purchase 14,962 shares of Common Stock of the Company, all of which
were vested in full as of December 31, 1998. In connection with Mr. Africk's
resignation, the Company agreed to extend the exercise period for these options
until their expiration date on July 28, 2012. The Company also agreed that, as
had been previously provided in the Africk Employment Agreement, the Company
would pay Mr. Africk an amount equal to the sum of (i) the difference between
ordinary income and long-term capital gain tax liability for reportable income
resulting from any exercise of the options, plus (ii) a "gross-up" to compensate
for the additional ordinary income tax liability resulting from the payment of
such amount.
RETIREMENT PLAN
The table below illustrates the approximate amounts of
annual normal retirement benefits payable under the Company's Retirement Plan
(as defined herein).
<TABLE>
<CAPTION>
Annual Benefits at Retirement with
Years of Credited Service(1)
Average
Compensation 10 15 20 25 30 35
------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$125,000 $ 15,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500
150,000 18,000 27,000 36,000 45,000 54,000 63,000
175,000 21,000 31,500 42,000 52,500 63,000 73,500
200,000 24,000 36,000 48,000 60,000 72,000 84,000
225,000 27,000 40,500 54,000 67,500 81,000 94,500
250,000 30,000 45,000 60,000 75,000 90,000 105,000
300,000 36,000 54,000 72,000 90,000 108,000 126,000
400,000 48,000 72,000 96,000 120,000 144,000 168,000
450,000 54,000 81,000 108,000 135,000 162,000 189,000
500,000 60,000 90,000 120,000 150,000 180,000 210,000
</TABLE>
- --------------------------
(1) Actual amounts paid under the Retirement Plan may be less than the
amounts set forth on the table due to IRC limitations.
29
<PAGE>
The Company has a noncontributory, defined benefit
retirement plan (the "Retirement Plan"), which covers all full-time employees,
including officers, upon completing one year of service.
A participant in the Retirement Plan becomes fully vested
prior to normal retirement at age 65 upon the completion of five years of
service. Benefits are also provided under the Retirement Plan in the event of
early retirement at or after age 55 and the completion of at least ten years of
service (or special early retirement after completion of 30 years of service)
and in the event of retirement for disability after completion of five years of
service. The amount of the contribution, payment, or accrual with respect to a
specified person is not and cannot readily be separately or individually
calculated by the actuaries for the Retirement Plan. Benefits under the
Retirement Plan are based upon application of a formula to the specified average
compensation and years of credited service at normal retirement age.
Compensation covered by the Retirement Plan consists of the average annual
salary during any five consecutive calendar years in the last ten years of an
employee's service, which affords the highest salary, or, if employed for less
than five years, the average annual salary for the years employed. The benefits
are not subject to any deduction for social security payments. Estimated
credited years of service under the Retirement Plan for the Named Executives are
as follows: Thomas F. Helms, Jr., 12 years; and David I. Brunson, 2 years.
BONUS PLANS
In March 1999, the Compensation Committee of the Company's
Board of Directors adopted the 1999 Executive Incentive Plan (the "Executive
Plan"), the 1999 Management Bonus Plan (the "Management Plan") and the 1999
Discretionary Bonus Plan (the "Discretionary Plan"). The Executive Plan provides
executive members of the Company with the opportunity to receive bonus pay based
on the Company's annual EBITDA performance, subject to approval of the Board of
Directors, acting on advice of the Compensation Committee, to make discretionary
bonus payments to one or more participants in the Executive Plan. The Management
Plan provides certain members of senior management with the opportunity to
receive bonus pay based on the Company's annual EBITDA performance as well as
individual performance of participants, subject to approval of Executive
Management, acting on advice of the Compensation Committee, to make
discretionary bonus payments. Under the Discretionary Bonus Plan, the Executive
Committee may provide discretionary bonus payments to employees who are not
participants in any other bonus plan established by the Company based on
individual levels of performance.
1997 SHARE INCENTIVE PLAN
The Board of Directors of the Company has adopted, and the
Company's stockholders have approved, the North Atlantic Trading Company, Inc.
1997 Share Incentive Plan (the "Incentive Plan").
The Incentive Plan is intended to provide incentives which
will attract and retain highly competent persons as key employees of the Company
and its subsidiaries by providing them opportunities to acquire shares of stock
or to receive monetary payments based on the value of such shares pursuant to
the Benefits (as defined).
Shares Available
The Incentive Plan makes available for Benefits an
aggregate amount of 61,856 shares of Common Stock (59,760 of which have been
granted), subject to certain adjustments. Any shares of Common Stock subject to
a stock option or stock appreciation right which for any reason is cancelled or
30
<PAGE>
terminated without having been exercised, and subject to limited exceptions, any
shares subject to stock awards, performance awards or stock units which are
forfeited, any shares subject to performance awards settled in cash or any
shares delivered to the Company as part of full payment for the exercise of a
stock option or stock appreciation right shall again be available for Benefits
under the Incentive Plan.
Administration
The Incentive Plan provides for administration by a
committee (the "Administration Committee") appointed by the Board of Directors
from among its members. Currently, the sole member of the Administration
Committee is Thomas F. Helms, Jr. The Administration Committee is authorized,
subject to the provisions of the Incentive Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Incentive
Plan and to make such determinations and interpretations and to take such action
in connection with the Incentive Plan and any Benefits granted as it deems
necessary or advisable. Thus, among the Administration Committee's powers are
the authority to select officers and other key employees of the Company and its
subsidiaries to receive Benefits, and determine the form, amount and other terms
and conditions of Benefits. The Administration Committee also has the power to
modify or waive restrictions on Benefits, to amend Benefits and to grant
extensions and accelerations of Benefits.
Eligibility for Participation
Key employees of the Company or any of its subsidiaries are
eligible to participate in the Incentive Plan. The selection of participants
from eligible key employees is within the discretion of the Administration
Committee. All employees are currently eligible to participate in the Incentive
Plan. The Incentive Plan provides for the grant of any or all of the following
types of benefits: (1) stock options, including incentive stock options and
non-qualified stock options; (2) stock appreciation rights; (3) stock awards,
including restricted stock; (4) performance awards; and (5) stock units
(collectively, the "Benefits"). Benefits may be granted singly, in combination,
or in tandem as determined by the Administration Committee. Stock awards,
performance awards and stock units may, as determined by the Administration
Committee in its discretion, constitute Performance-Based Awards, as described
below.
Stock Options
Under the Incentive Plan, the Administration Committee may
grant awards in the form of options to purchase shares of Common Stock. Options
may be either incentive stock options, qualifying for special tax treatment, or
non-qualified stock options. The exercise price may be paid in cash or, in the
discretion of the Administration Committee, by the delivery of shares of Common
Stock of the Company then owned by the participant, by the withholding of shares
of Common Stock for which a stock option is exercisable, or by a combination of
these methods. In the discretion of the Administration Committee, payment may
also be made by delivering a properly executed exercise notice to the Company
together with a copy of irrevocable instructions to a broker to deliver promptly
to the Company the amount of sale or loan proceeds to pay the exercise price.
The Administration Committee may prescribe any other method of paying the
exercise price that it determines to be consistent with applicable law and the
purpose of the Incentive Plan. In determining which methods a participant may
utilize to pay the exercise price, the Administration Committee may consider
such factors as it determines are appropriate.
Stock Appreciation Rights (SARs)
The Incentive Plan authorizes the Administration Committee
to grant a SAR either in tandem with a stock option or independent of a stock
option. An SAR is a right to receive a payment, in cash or Common Stock, equal
31
<PAGE>
to the excess of (x) the fair market value, or other specified valuation (which
shall not be greater than the fair market value), of a specified number of
shares of Common Stock on the date the right is exercised over (y) the fair
market value, or other specified valuation (which shall not be less than fair
market value), of such shares of Common Stock on the date the right is granted,
all as determined by the Administration Committee. Each SAR shall be subject to
such terms and conditions, as the Administration Committee shall impose from
time to time.
Stock Awards
The Incentive Plan authorizes the Administration Committee
to grant awards in the form of restricted or unrestricted shares of Common Stock
("Stock Awards"), which includes mandatory stock bonus incentive compensation
and which may constitute Performance-Based Awards. Such awards will be subject
to such terms, conditions, restrictions, and/or limitations, if any, as the
Administration Committee deems appropriate including, but not by way of
limitation, restrictions on transferability, continued employment and
performance goals established by the Administration Committee over a designated
period of time.
Performance Awards
The Incentive Plan allows for the grant of performance
awards which may take the form of shares of Common Stock or stock units, or any
combination thereof and which may constitute Performance-Based Awards. Such
awards will be contingent upon the attainment over a period to be determined by
the Administration Committee of certain performance goals. The length of the
performance period, the performance goals to be achieved and the measure of
whether and to what degree such goals have been achieved will be determined by
the Administration Committee. Payment of earned performance awards will be made
in accordance with terms and conditions prescribed or authorized by the
Administration Committee. The participant may elect to defer, or the
Administration Committee may require the deferral of, the receipt of performance
awards upon such terms, as the Administration Committee deems appropriate.
Stock Units
The Administration Committee may, in its discretion, grant
Stock Units to participants, which may constitute Performance-Based Awards. A
"Stock Unit" means a notational account representing one share of Common Stock.
The Administration Committee determines the criteria for the vesting of Stock
Units and whether a participant granted a Stock Unit should be entitled to
Dividend Equivalent rights (as defined in the Incentive Plan). Upon vesting of a
Stock Unit, unless the Administration Committee has determined to defer payment
with respect to such unit or a participant has elected to defer payment, shares
of Common Stock representing the Stock Units will be distributed to the
participant unless the Administration Committee, with the consent of the
participant, provides for the payment of the Stock Units in cash, or partly in
cash and partly in shares of Common Stock, equal to the value of the shares of
Common Stock which would otherwise be distributed to the participant.
Other Terms of Benefits
The Incentive Plan provides that Benefits shall not be
transferable other than by will or the laws of descent and distribution. The
Administration Committee shall determine the treatment to be afforded to a
participant in the event of termination of employment for any reason including
death, disability, or retirement. Notwithstanding the foregoing, other than with
respect to incentive stock options, the Administration Committee may permit the
transferability of an award by a participant to members of the participant's
32
<PAGE>
immediate family or trusts for the benefit of such person or family
partnerships. Upon the grant of any Benefit under the Incentive Plan, the
Administration Committee may, by way of an agreement with the participant,
establish such other terms, conditions, restrictions and/or limitations covering
the grant of the Benefit as are not inconsistent with the Incentive Plan. No
Benefit shall be granted under the Incentive Plan after June 25, 2007. The Board
of Directors reserves the right to amend, suspend or terminate the Incentive
Plan at any time, subject to the rights of participants with respect to any
outstanding Benefits.
The Incentive Plan contains provisions for equitable
adjustment of Benefits in the event of a merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, reverse stock split, split up,
spin-off, combination of shares, exchange of shares, dividend in kind or other
like change in capital structure or distribution (other than normal cash
dividends) to stockholders of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The table below sets forth certain information regarding
the beneficial ownership of Common Stock as of March 1, 2000 by (i) each person
or entity who beneficially owns five percent or more of the Common Stock, (ii)
each Director and Named Executive of the Company and (iii) all Directors and
executive officers of the Company as a group. Unless otherwise indicated, each
beneficial owner's address is c/o North Atlantic Trading Company, Inc., 257 Park
Avenue South, 7th Floor, New York, New York 10010-7304.
<TABLE>
<CAPTION>
Percent Owned(a)
------------------------------------------
Before Exercise After Exercise
Beneficial Owner Number of Shares of Warrants of Warrants
---------------- ---------------- ------------- -------------
<S> <C> <C> <C>
Thomas F. Helms, Jr. (b)(c)...................... 478,911 90.7% 80.9%
Helms Management Corp.
David I. Brunson(d).............................. 304,478 54.5 48.9
Herbert Morris(b)................................ 37,990 7.2 6.4
Flowing Velvet Productions, Inc.
3 Points of View
Warwick, New York 10990
Maurice R. Langston(b)........................... 37,038 7.0 6.3
Langston Enterprises, Inc.
Alan R. Minsterketter(b)......................... 27,613 5.2 4.7
Alan M. Inc.
Jack Africk(e)................................... 21,212 3.9 3.5
Arnold Sheiffer.................................. 11,225 2.1 1.9
Leonard D. Pickett............................... -- -- --
DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP (5 PERSONS) (C) (D) (E)........... 490,136 92.8% 82.8%
</TABLE>
- --------------------------
(a) The percentages assume, in the column entitled "Before Exercise of
Warrants," that none of the outstanding warrants to purchase an
aggregate of 63,490 shares at an exercise price of $.01 per share is
exercised and, in the column entitled "After Exercise of Warrants," that
all of such warrants will be exercised.
(b) Reflects shares held by the corporation listed below the name of such
natural person. Such natural person owns all of the issued and
outstanding shares of capital stock of the corporation listed below the
name of such natural person.
(c) Helms Management Corp. owns 271,300 shares of Common Stock, which
represents approximately 51.4% of the outstanding shares assuming that
none of the outstanding warrants are exercised, or 45.8% of the
outstanding shares that all such warrants are exercised. The 271,300
shares owned by Helms Management Corp. are subject to a voting trust
agreement pursuant to which Mr. Helms and David I. Brunson exercise
certain voting powers and which may result in each of them being deemed
33
<PAGE>
a beneficial owner of such shares. See "Voting Trust Agreement." Because
of Mr. Helms' ability to vote an additional 151,231 shares of Common
Stock held by members of the Company's management in respect of the
election of the Company's directors pursuant to the Stockholders'
Agreement, he may be deemed to be the beneficial owner of such
additional shares. See "Stockholders' Agreement." In connection with the
transfer of 18,390 shares of Common Stock held by certain stockholders,
the transferees of such shares granted Mr. Helms the right to vote such
shares with respect to any and all matters submitted to a vote of the
stockholders of the Company and, consequently, Mr. Helms may be deemed
to be the beneficial owner of such shares. In addition, Mr. Helms may be
deemed the beneficial owner of 37,990 shares that are subject to a
voting agreement between Helms Management Corp. and Flowing Velvet
Productions, Inc. See "Voting Agreement."
(d) Includes 2,250 shares of Common Stock, 30,928 shares subject to
currently exercisable stock options and 271,300 shares owned by Helms
Management Corp. that are subject to a voting trust agreement pursuant
to which Mr. Brunson exercises certain voting powers and which may
result in his being deemed a beneficial owner of such additional shares.
See "Voting Trust Agreement." In addition, Mr. Brunson has the right to
acquire 6,536 shares currently owned by Helms Management Corp.
(e) Includes 6,250 shares of Common Stock held by the Africk Family
Foundation, Inc., of which Mr. Africk is the trustee and which may
result in his being deemed a beneficial owner of such shares. In
addition, 14,962 shares are subject to currently exercisable stock
options.
STOCKHOLDERS' AGREEMENT
The Company and certain stockholders of the Company are
parties to the Stockholders' Agreement, setting forth among other things, the
manner in which directors of the Company are to be selected. See
"Management--Election of Directors." The Stockholders' Agreement also sets forth
certain restrictions on the transfer of shares of Common Stock by existing
stockholders and on the acquisition by existing stockholders of investments in
competitors of Bollore. In addition, the Stockholders' Agreement provides the
existing stockholders with certain "tag-along" rights to participate ratably in
sales of Common Stock to third parties and requires existing stockholders to
participate ratably in certain sales of Common Stock to third parties. Subject
to the terms of all applicable debt agreements of the Company and its
subsidiaries and to the rights of holders of the Company's preferred stock, the
Stockholders' Agreement provides that the Company may maintain insurance on the
lives of the members of its management officers and, in the event of the death
of any such person, for the mandatory repurchase by the Company of all of such
person's Common Stock at the fair market value thereof (which will be determined
by an independent investment banking firm if the parties cannot otherwise agree
upon such value) to the extent of available insurance proceeds, and the optional
repurchase of additional shares of such person's Common Stock at such fair
market value to the extent of available cash. Subject to the terms of all
applicable debt agreements of the Company and its subsidiaries, and to the
rights of holders of the Company's preferred stock, the Company also has the
right to repurchase the shares of Common Stock held by members of management if
their employment terminates, in the event of certain bankruptcy proceedings
relating to such persons or upon an involuntary transfer of their shares by
court order or otherwise in each case at the fair market value of such shares.
In addition, in connection with the transfer of 18,390
shares of Common Stock pursuant to the Stockholders' Agreement, the transferees
of such shares granted Mr. Helms the right to vote such shares with respect to
any and all matters submitted to a vote of the stockholders of the Company.
VOTING TRUST AGREEMENT
Thomas F. Helms, Jr. and David I. Brunson are voting
trustees under a Voting Trust Agreement with Helms Management Corp. Helms
Management Corp. owns 271,300 shares of Common Stock in the Company, 240,000 of
which are subject to the Voting Trust Agreement. Pursuant to the Voting Trust
34
<PAGE>
Agreement, the voting trustees have the power to vote the shares subject to the
Voting Trust Agreement in connection with the election of directors and any
other matters. The holder of the voting trust certificate may remove at any time
any of the voting trustees and replace any of them with a successor. As voting
trustees under the Voting Trust Agreement, Messrs. Helms and Brunson are
entitled to three votes and one vote, respectively. Unless terminated by the
certificate holder, the Voting Trust Agreement will terminate on December 17,
2012.
VOTING AGREEMENT
Helms Management Corp. and Flowing Velvet Products, Inc.
("Flowing Velvet") are parties to a voting agreement, setting forth among other
things the agreement by Flowing Velvet to vote in all matters submitted to a
vote of Stockholders in such manner as Flowing Velvet may be directed by Thomas
F. Helms, Jr., the President of Helms Management Corp.
Item 13. Certain Relationships and Related Transactions
On March 24, 1998, Mr. Brunson purchased 2,250 shares of
Common Stock from the Company at a price of $40 per share. As part of the
purchase price, Mr. Brunson issued a note to the Company in the aggregate
principal amount of $60,000. The note bears interest at 6.5% per annum and has a
final maturity on March 31, 2003.
See "Compensation Committee Interlocks and Insider
Participation."
35
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
The following consolidated financial statements of North
Atlantic Trading Company, Inc. and subsidiaries are filed as part of this Form
10-K and are incorporated by reference in Item 8:
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NORTH ATLANTIC TRADING COMPANY, INC. PAGE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants............................................................................. F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998.................................................. F-2
Consolidated Statements of Operations for the
years ended December 31, 1999, 1998, and 1997........................................................... F-3
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998, and 1997. F-4
Consolidated Statements of Changes in Stockholders' Deficit for the
years ended December 31, 1999, 1998, and 1997........................................................... F-5
Notes to Consolidated Financial Statements.................................................................... F-6
</TABLE>
2. Financial Statement Schedules:
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and, therefore,
have been omitted.
3. See the accompanying Index to Exhibits, which
precedes the Exhibits filed with this Form 10-K.
36
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1* -- Asset Purchase Agreement, dated February 10, 2000, between
National Tobacco Company, L.P. and Swedish Match North America
Inc.
3.1(a) -- Restated Certificate of Incorporation of North Atlantic
Trading Company, Inc., filed February 19, 1998 (incorporated
herein by reference to Exhibit 3.1(a)(i) the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997).
3.1(b) -- Certificate of Incorporation of North Atlantic Operating
Company, Inc., filed June 9 1997 (incorporated herein by
reference to Exhibit 3.1(b)(i) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.1(c) -- Certificate of Amendment of Certificate of Incorporation of
North Atlantic Operating Company, Inc., filed June 17, 1997
(incorporated herein by reference to Exhibit 3.1(b)(ii) to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
3.1(d) -- Restated Certificate of Incorporation of National Tobacco
Finance Corporation, filed April 24, 1996 (incorporated herein
by reference to Exhibit 3.1(c) to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
3.1(e) -- Amended and Restated Certificate of Limited Partnership of
National Tobacco Company, L.P., filed May 17, 1996
(incorporated herein by reference to Exhibit 3.1(d) to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
3.1(f) -- Certificate of Incorporation of International Flavors and
Technology, Inc., filed August 7, 1997 (incorporated herein by
reference to Exhibit 3.1(e)(i) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.1(g) -- Certificate of Amendment of Certificate of Incorporation of
International Flavors and Technology, Inc., filed February 19,
1998 (incorporated herein by reference to Exhibit 3.1(e)(ii)
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997).
3.2(a) -- Amended and Restated Bylaws of North Atlantic Trading Company,
Inc. (incorporated herein by reference to Exhibit 3.2(a) to
the Registrant's Report on Form 10-Q for the fiscal quarter
ended March 31, 1998).
3.2(b) -- Bylaws of North Atlantic Operating Company, Inc. (incorporated
herein by reference to Exhibit 3.2(b) to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
37
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.2(c) -- Bylaws of National Tobacco Finance Corporation (incorporated
herein by reference to Exhibit 3.2(c) to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
3.2(d) -- Third Amended and Restated Agreement of Limited Partnership of
National Tobacco Company, L.P., effective May 17, 1996
(incorporated herein by reference to Exhibit 3.2(d)(i) to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
3.2 (e) -- Amendment No. 1 to Third Amended and Restated Agreement of
Limited Partnership of National Tobacco Company, L.P.,
effective June 25, 1997 (incorporated herein by reference to
Exhibit 3.2(d)(ii) to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
3.2(f) -- Bylaws of International Flavors and Technology, Inc.
(incorporated herein by reference to Exhibit 3.2(e) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
3.2(g) * -- Amendment No. 2 to the Third Amended and Restated Agreement of
Limited Partnership of National Tobacco Company, L.P.,
effective February 10, 2000.
3.3 -- Certificate of Designation of 12% Senior Exchange
Payment-In-Kind Preferred Stock of North Atlantic Trading
Company, Inc., filed July 22, 1997 (incorporated herein by
reference to Exhibit 3.3(b) to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
4.1 -- Indenture, dated as of June 25, 1997, among North Atlantic
Trading Company, Inc., as issuer, National Tobacco Company,
L.P., North Atlantic Operating Company, Inc. and National
Tobacco Finance Corporation, as guarantors, and United States
Trust Company of New York, as trustee (incorporated herein by
reference to Exhibit 4.1 to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
4.2 -- First Supplemental Indenture, dated as of February 26, 1998,
among North Atlantic Trading Company, Inc., National Tobacco
Company, L.P., National Tobacco Finance Corporation,
International Flavors and Technology, Inc. and The United
States Trust Company of New York (incorporated herein by
reference to Exhibit 4.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997).
9.1 -- Exchange and Stockholders' Agreement, dated as of June 25,
1997, by and between North Atlantic Trading Company, Inc. and
those stockholders signatory thereto (incorporated herein by
reference to Exhibit 9 to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
38
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
9.2 -- Voting Trust Agreement, dated as of December 17, 1997, among
Thomas F. Helms, Jr., David I. Brunson and Jeffrey S. Hay, as
voting trustees, and Helms Management Corp. (incorporated
herein by reference to Exhibit 9.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
9.3 * -- Amendment No. 1 to Voting Trust Agreement, dated as of August
2, 1999, among Thomas F. Helms, Jr. and David I. Brunson, as
voting trustees, and Helms Management Corp.
10.1 -- Third Amended and Restated Purchasing and Processing
Agreement, dated as of June 25, 1997, between National Tobacco
Company, L.P. and Lancaster Leaf Tobacco Company of
Pennsylvania (incorporated herein by reference to Exhibit 10.1
to Amendment No. 1 to Registration Statement (Reg. No.
333-31931) on Form S-4 filed with the Commission on September
3, 1997).
10.2+ -- Amended and Restated Distribution and License Agreement, dated
as of November 30, 1992, between Bollore Technologies, S.A.
and North Atlantic Trading Company, Inc., a Delaware
corporation and predecessor to North Atlantic Operating
Company, Inc. [United States] (incorporated herein by
reference to Exhibit 10.2 to Amendment No. 2 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
10.3+ -- Amended and Restated Distribution and License Agreement, dated
as of November 30, 1992, between Bollore Technologies, S.A.
and North Atlantic Trading Company, Inc., a Delaware
corporation and predecessor to North Atlantic Operating
Company, Inc. [Asia] (incorporated herein by reference to
Exhibit 10.3 to Amendment No. 2 to Registration Statement
(Reg. No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.4+ -- Amended and Restated Distribution and License Agreement, dated
as of November 30, 1992, between Bollore Technologies, S.A.
and North Atlantic Trading Company, Inc., a Delaware
corporation and predecessor to North Atlantic Operating
Company, Inc. [Canada] (incorporated herein by reference to
Exhibit 10.4 to Amendment No. 2 to Registration Statement
(Reg. No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.5+ -- Restated Amendment, dated as of June 25, 1997, between Bollore
Technologies, S.A. and North Atlantic Operating Company, Inc.
(incorporated herein by reference to Exhibit 10.5 to Amendment
No. 2 to Registration Statement (Reg. No. 333-31931) on Form
S-4 filed with the Commission on September 3, 1997).
10.6 -- Warrant Agreement, dated as of June 25, 1997, between North
Atlantic Trading Company, Inc. and United States Trust Company
of New York, as warrant agent (incorporated herein by
reference to Exhibit 10.12 to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
39
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.7++ -- 1997 Share Incentive Plan of North Atlantic Trading Company,
Inc. (incorporated herein by reference to Exhibit 10.12 to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
10.8++ -- Employment Agreement, dated May 17, 1996, between North
Atlantic Trading Company, Inc. and Thomas F. Helms, Jr.
(incorporated herein by reference to Exhibit 10.17 to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
10.9 ++ -- Employment Agreement, dated April 14, 1997, between National
Tobacco Company, Inc. and David I. Brunson (incorporated
herein by reference to Exhibit 10.18(a) to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
10.10++ -- Letter Agreement, dated April 23, 1997, between Thomas F.
Helms, Jr. and David I. Brunson (incorporated herein by
reference to Exhibit 10.18(b) to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
10.11++ -- Nonqualified Stock Option Agreement, dated as of June 25,
1997, between North Atlantic Trading Company, Inc. and David
I. Brunson (incorporated herein by reference to Exhibit
10.18(c) to Amendment No. 1 to Registration Statement (Reg.
No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.12++ -- Amendment No. 1, dated and effective September 2, 1997, to the
Nonqualified Stock Option Agreement, dated as of June 25,
1997, between North Atlantic Trading Company, Inc. and David
I. Brunson (incorporated herein by reference to Exhibit
10.18(d) to Amendment No. 1 to Registration Statement (Reg.
No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.13++ -- Amendment No. 2, dated as of December 31, 1997, to the
Nonqualified Stock Option Agreement, dated as of June 25,
1997, between North Atlantic Trading Company, Inc. and David
I. Brunson (incorporated herein by reference to Exhibit
10.18(e) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
10.14++ -- Consulting Agreement, dated as of June 25, 1997, between North
Atlantic Trading Company, Inc. and Jack Africk (incorporated
herein by reference to Exhibit 10.20 to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
40
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.15 -- Credit Agreement, dated as of June 25, 1997, among North
Atlantic Trading Company, Inc., the various lending
institutions referenced therein, Gleacher NatWest, Inc., as
arranging agent, and National Westminster Bank plc, as
administrative agent (incorporated herein by reference to
Exhibit 10.21 to Amendment No. 1 to Registration Statement
(Reg. No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.16 -- Subsidiary Guaranty, dated as of June 25, 1997, made by North
Atlantic Operating Company, Inc., National Tobacco Finance
Corporation, and National Tobacco Company, L.P. in favor of
National Westminster Bank plc, as administrative agent for
certain lending institutions (incorporated herein by reference
to Exhibit 10.22 to Amendment No. 1 to Registration Statement
(Reg. No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.17 -- Security Agreement, dated as of June 25, 1997, among North
Atlantic Trading Company, Inc., North Atlantic Operating
Company, Inc., National Tobacco Finance Corporation, National
Tobacco Company, L.P., and National Westminster Bank plc, as
collateral agent for certain secured creditors (incorporated
herein by reference to Exhibit 10.23 to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
10.18 -- Pledge Agreement, dated as of June 25, 1997, made by North
Atlantic Trading Company, Inc., North Atlantic Operating
Company, Inc., National Tobacco Finance Corporation, and
National Tobacco Company, L.P., in favor of National
Westminster Bank plc, as collateral agent for certain secured
creditors (incorporated herein by reference to Exhibit 10.24
to Amendment No. 1 to Registration Statement (Reg. No.
333-31931) on Form S-4 filed with the Commission on September
3, 1997).
10.19++ -- National Tobacco Company Management Bonus Program
(incorporated herein by reference to Exhibit 10.25 to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
10.20++ -- Amended and Restated Nonqualified Stock Option Agreement dated
as of January 12, 1998, between North Atlantic Trading
Company, Inc. And Jack Africk (incorporated herein by
reference to Exhibit 10.28 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
10.21++ -- Assignment and Assumption, dated as of January 1, 1998,
between National Tobacco Company, L.P. and North Atlantic
Trading Company, Inc. (incorporated herein by reference to
Exhibit 10.30 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997).
10.22+ -- Amendment, dated October 27, 1997, to Amended and Restated
Distribution and License Agreements, between Bollore and North
Atlantic Operating Company, Inc. (incorporated herein by
reference to Exhibit 10.31 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
41
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.23 -- Sales Representative Agreement, effective as of January 1,
1998, between National Tobacco Company, L.P. and North
Atlantic Operating Company, Inc. (incorporated herein by
reference to Exhibit 10.32 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
10.24 -- 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 (incorporated herein by reference
to Exhibit 10.1 to the Registrant's Report on 10-Q for the
fiscal quarter ended June 30, 1998).
10.25++ -- Amended and Restated Employment Agreement dated as of April
30, 1998, between North Atlantic Trading Company, Inc. and
David I. Brunson (incorporated herein by reference to Exhibit
10.2 to the Registrant's Report on 10-Q for the fiscal quarter
ended June 30, 1998).
10.26 -- Option Grant Letter, dated April 30, 1998, from Helms
Management Corp. to David I. Brunson (incorporated herein by
reference to Exhibit 10.5 to the Registrant's Report on 10-Q
for the fiscal quarter ended June 30, 1998).
10.27 -- Promissory Note, dated April 14, 1998, issued by Helms
Management Corp. in favor of North Atlantic Trading Company,
Inc. (incorporated herein by reference to Exhibit 10.7 to the
Registrant's Report on 10-Q for the fiscal quarter ended June
30, 1998).
10.28 -- Amendment, dated as of February 1, 1998, among North Atlantic
Trading Company, Inc., the various lending institutions
referenced therein and National Westminster Bank plc, as
administrative agent (incorporated herein by reference to
Exhibit 10.39 to the Registrant's Report on 10-Q for the
fiscal quarter ended March 31, 1998).
10.29 -- Consent, dated as of March 12, 1998, among North Atlantic
Trading Company, Inc., the various lending institutions
referenced therein and National Westminster Bank plc, as
administrative agent (incorporated herein by reference to
Exhibit 10.40 to the Registrant's Report on 10-Q for the
fiscal quarter ended March 31, 1998).
10.30 -- Subscription Agreement, dated as of March 24, 1998, between
North Atlantic Trading Company, Inc. and David I. Brunson
(incorporated herein by reference to Exhibit--10.42 to the
Registrant's Report on 10-Q for the fiscal quarter ended March
31, 1998).
10.31 -- Promissory Note, dated March 24, 1998, issued by David I.
Brunson in favor of North Atlantic Trading Company, Inc.
(incorporated herein by reference to Exhibit 10.44 to the
Registrant's Report on 10-Q for the fiscal quarter ended March
31, 1998).
10.32 -- Promissory Note, dated April 14, 1998, issued by Helms
Management Corp. in favor of North Atlantic Trading Company,
Inc. (incorporated herein by reference to Exhibit 10.7 to the
Registrant's Report on 10-Q for the fiscal quarter ended June
30, 1998).
42
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.33++* -- Letter Agreement dated December 6, 1999, between North
Atlantic Trading Company, Inc. and David I. Brunson.
10.34++* -- Letter Agreement, dated September 24, 1999, between North
Atlantic Trading Company, Inc. and Jack Africk.
10.35++* -- North Atlantic Trading Company, Inc. 1999 Executive Incentive
Plan.
10.36++* -- North Atlantic Trading Company, Inc. 1999 Management Bonus
Plan
21 -- Subsidiaries of North Atlantic Trading Company, Inc.
(incorporated herein by reference to Exhibit 21 to the
Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1998).
27 * -- Financial Data Schedules.
* Filed herewith.
+ Portions of this agreement have been omitted
pursuant to Rule 406 under the Securities Act of 1933, as
amended, and have been filed confidentially with the
Securities and Exchange Commission.
++ Management contracts or compensatory plan or
arrangement required to be filed as an exhibit pursuant to
Item 14(c) of the rules governing the preparation of this
Report.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000
NORTH ATLANTIC TRADING COMPANY, INC.
By: /s/ Thomas F. Helms, Jr.
----------------------------------
Thomas F. Helms, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Thomas F. Helms, Jr. Chairman of the Board March 29, 2000
- ------------------------------------ and Chief Executive Officer
Thomas F. Helms, Jr. (Principal Executive Officer)
/s/ David I. Brunson Director, Executive Vice President March 29, 2000
- ------------------------------------ Finance and Administration, Chief
David I. Brunson Financial Officer
(Principal Financial and Accounting
Officer)
/s/ Jack Africk Director March 29, 2000
- ------------------------------------
Jack Africk
/s/ Leonard D. Pickett Director March 29, 2000
- ------------------------------------
Leonard D. Pickett
/s/ Arnold Sheiffer Director March 29, 2000
- ------------------------------------
Arnold Sheiffer
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
North Atlantic Trading Company, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows, and changes in stockholders'
deficit present fairly, in all material respects, the financial position of
North Atlantic Trading Company, Inc. and Subsidiaries (the Company) at December
31, 1999 and 1998 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PriceWaterhouseCoopers LLP
February 11, 2000
F-1
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 2,885 $ 2,817
Accounts receivable 4,984 5,486
Inventories 53,499 58,487
Income taxes receivable 175 -
Other current assets 1,688 1,274
----------------- -----------------
Total current assets 63,231 68,064
Property, plant and equipment, net 5,878 7,031
Deferred income taxes 29,718 32,937
Deferred financing costs 8,956 11,232
Goodwill, net 134,537 140,027
Other assets 1,283 1,016
----------------- -----------------
Total assets $ 243,603 $ 260,307
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 314 $ 458
Accrued expenses 3,176 3,696
Deferred income taxes 9,718 8,903
Current portion of notes payable and long-term debt 13,002 12,983
----------------- -----------------
Total current liabilities 26,210 26,040
Notes payable and long-term debt 182,862 202,603
Other long-term liabilities 8,851 7,700
----------------- -----------------
Total liabilities 217,923 236,343
----------------- -----------------
Preferred stock, net of unamortized discount of $1,259 in 1999 and $1,400 in
1998; mandatory redemption value of $45,700 in 1999 and $40,500
in 1998 44,693 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 9,078 9,020
Loans to stockholders for stock purchases (184) (247)
Accumulated deficit (27,912) (24,146)
----------------- -----------------
Total stockholders' deficit (19,013) (15,368)
----------------- -----------------
Total liabilities and stockholders' deficit $ 243,603 $ 260,307
================= =================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ -------------------
<S> <C> <C> <C>
Net sales $ 48,647 $ 42,278 $ 30,643
Cost of sales 15,028 12,546 9,485
------------------ ------------------ -------------------
Gross profit 33,619 29,732 21,158
Selling, general and administrative expenses 10,965 8,748 1,763
Amortization of Goodwill 4,691 4,691 2,410
------------------ ------------------ -------------------
Operating income 17,963 16,293 16,985
Interest expense and financing costs 23,710 25,164 13,605
Other income 4 - 2
------------------ ------------------ -------------------
Income (loss) from continuing operations
before income tax benefit (5,743) (8,871) 3,382
Income tax benefit from continuing operations (689) (2,055) (1,126)
------------------ ------------------ -------------------
Income (loss) from continuing operations (5,054) (6,816) 4,508
Income from discontinued operations, net of income
tax expense of $4,502, $5,268 and $1,978 6,649 7,823 2,906
------------------ ------------------ -------------------
Income before extraordinary loss 1,595 1,007 7,414
Extraordinary loss, net of income tax benefit of $4,365 - - 7,121
------------------ ------------------ -------------------
Net income 1,595 1,007 293
Preferred stock dividends 5,361 4,751 2,268
------------------ ------------------ -------------------
Net loss applicable to common shares $ (3,766) $ (3,744) $ (1,975)
================== ================== ===================
Basic earnings per common share:
Income (loss) from continuing operations $ (19.72) $ (21.90) $ 4.24
Income from discontinued operations 12.59 14.81 5.50
Extraordinary loss - - (13.48)
------------------ ------------------ -------------------
Net loss $ (7.13) $ (7.09) $ (3.74)
================== ================== ===================
Diluted earnings per common share:
Income (loss) from continuing operations $ (19.72) $ (21.90) $ 3.67
Income from discontinued operations 12.59 14.81 4.76
Extraordinary loss - - (11.66)
------------------ ------------------ -------------------
Net loss $ (7.13) $ (7.09) $ (3.23)
================== ================== ===================
Weighted average common shares outstanding:
Basic 528,241 528,241 528,241
Diluted 528,241 528,241 610,911
</TABLE>
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,595 $ 1,007 $ 293
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss, net of income tax benefit of $4,365 - - 7,121
Depreciation 1,923 1,687 1,619
Amortization of goodwill 5,490 5,490 3,213
Amortization of deferred financing costs and debt discount 2,276 2,274 2,104
Change in accrued pension liabilities 594 190 167
Change in accrued postretirement liabilities 557 502 472
Compensation expense 70 819 900
Deferred income taxes 4,034 3,336 (922)
Changes in operating assets and liabilities:
Accounts receivable 502 (853) (264)
Inventories 4,988 (2,377) (1,135)
Other current assets (414) 47 3,565
Income tax receivable (175) 5,326 1,144
Other assets (267) (775) (50)
Accounts payable (144) (201) 896
Borrowings under inventory financing agreement - - 6,565
Payments on borrowings under inventory financing agreement - - (10,622)
Accrued expenses and other (533) (2,770) (2,543)
----------------- ----------------- ----------------
Net cash provided by operating activities 20,496 13,702 12,523
----------------- ----------------- ----------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired of $597 - - (156,818)
Capital expenditures, net (770) (467) (704)
----------------- ----------------- ----------------
Net cash used in investing activities (770) (467) (157,522)
----------------- ----------------- ----------------
Cash flows from financing activities:
Payments on senior term loans (19,721) (14,414) (50,750)
Proceeds from term loans - - 85,000
Proceeds from senior notes - - 155,000
Payments on revolving loans - - (1,550)
Proceeds from revolving loans - - 1,550
Proceeds from subordinated notes payable - - 576
Payments on subordinated notes payable - - (21,082)
Payments on inventory financing agreements - - (12,904)
Payments of deferred financing costs - - (13,917)
Payment 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 loans to stockholders for stock purchases 63 (91) (11)
----------------- ----------------- ----------------
Net cash provided by (used in) financing activities (19,658) (14,505) 146,878
----------------- ----------------- ----------------
Net increase (decrease) in cash 68 (1,270) 1,879
Cash, beginning of period 2,817 4,087 2,208
----------------- ----------------- ----------------
Cash, end of period $ 2,885 $ 2,817 $ 4,087
================= ================= ================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 21,563 $ 23,126 $ 16,730
================= ================= ================
Cash paid during the period for income taxes - $ 75 $ 193
================= ================= ================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
LOANS TO
Common Additional Stockholders Total
Stock, Paid-In Contributed for Stock Accumulated Stockholders'
VOTING CAPITAL EQUITY PURCHASES DEFICIT DEFICIT
------------ ------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance, January 1, 1997 - $ 8,195 $ 4,492 $ (145) $ 383 $ 12,925
Distribution to warrant holders - (8,195) - - (18,810) (27,005)
Issuance of common stock in exchang
for membership interest $ 5 4,492 (4,492) - - 5
Issuance of common stock - 712 - - - 712
Issuance of warrants - 2,410 - - - 2,410
Compensation expense - 702 - - - 702
Net loans to stockholders for
stock purchases - - - (11) - (11)
Preferred stock dividend - - - - (2,268) (2,268)
Net income - - - - 293 293
------------ ------------- --------------- ---------------- --------------- ----------------
Ending balance, December 31, 1997 5 8,316 - (156) (20,402) (12,237)
Compensation expense - 704 - - - 704
Net loans to stockholders for
stock purchases - - - (91) - (91)
Preferred stock dividend - - - - (4,751) (4,751)
Net income - - - - 1,007 1,007
------------ ------------- --------------- ---------------- --------------- ----------------
Ending balance, December 31, 1998 5 9,020 - (247) (24,146) (15,368)
Compensation expense - 58 - - - 58
Net loans to stockholders for
stock purchases - - - 63 - 63
Preferred stock dividend - - - - (5,361) (5,361)
Net income - - - - 1,595 1,595
------------ ------------- --------------- ---------------- --------------- ----------------
Ending balance, December 31, 1999 $ 5 $ 9,078 - $ (184) $ (27,912) $ (19,013)
============ ============= =============== ================ =============== ================
</TABLE>
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION:
North Atlantic Trading Company, Inc. and Subsidiaries (the Company)
manufactures and distributes tobacco and related products through its
smokeless tobacco and roll-your-own operating segments. The smokeless
tobacco segment, which the Company has agreed to sell and has presented
as a discontinued operation in these financial statements as described
in Note 20, manufactures and distributes smokeless tobacco products
under the Beech-Nut, Durango, Trophy and Havana Blossom brand names. The
roll-your-own segment imports and distributes cigarette rolling papers,
tobacco and related accessories under the Zig-Zag brand name.
National Tobacco Company, L.P. (a limited partnership) was formed and
acquired the smokeless tobacco division of Lorillard, Inc. in 1988. On
April 14, 1992, the general partner and majority owner and certain
limited partners sold their partnership interest to a new general
partner. Accordingly, the April 1992 transaction was accounted for as
the formation of a new entity, National Tobacco Company, L.P. (the
Predecessor).
Certain members of management of the Predecessor formed NTC Holding, LLC
(the Holding Company), a limited liability company with a finite life
expiring December 31, 2100, and caused the Holding Company to form
National Tobacco Finance Corporation (the Finance Corporation), a
wholly-owned subsidiary of the Holding Company. On May 17, 1996,
National Tobacco Company, L.P. (the Partnership) was recapitalized and
the Holding Company acquired a 99% limited partnership interest in the
Partnership and the Finance Corporation became the sole general partner
and owner of the remaining 1% interest of the Partnership. Accordingly,
this transaction was accounted for as the formation of a new entity
under the purchase method of accounting.
On May 19, 1997, certain members of management and holders of membership
interests in the Holding Company formed a corporation named North
Atlantic Trading Company, Inc. (the Corporation). On June 25, 1997, the
Corporation acquired the membership interests in the Holding Company and
the Holding Company transferred all of its assets, including its limited
partnership interest in the Partnership, all of the capital stock of the
Finance Corporation, and its rights to acquire NATC Holdings USA, Inc.
(NATC). The Corporation then formed North Atlantic Operating Company,
Inc. (NAOC), a Delaware corporation and wholly-owned subsidiary of the
Corporation. NAOC then exercised its rights to acquire all of the
outstanding capital stock of NATC. NATC and its wholly-owned subsidiary
were then merged into NAOC. This acquisition was accounted for using the
purchase method of accounting under which the purchase price of $162.6
million was allocated to the net tangible assets of $45.3 million, with
the excess of $117.3 million recorded as goodwill which is being
amortized over 25 years. The results of operations of NAOC have been
included in the Company's consolidated statement of operations since the
date of acquisition.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION, CONTINUED:
As described in Note 8, on June 25, 1997 the Corporation obtained new
financing in the form of $155.0 million in 11% Senior Notes due 2004,
$34.0 million in 12% Senior Payment-in-Kind (PIK) Preferred Stock, and
$85.8 million under a new credit agreement. The proceeds of such
financing were used to repay all of the outstanding debt of the Holding
Company and the Partnership, finance the acquisition of NATC described
above, repay outstanding debt and other assumed liabilities of NATC, and
pay the transaction costs associated with the financing and acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION: The consolidated financial statements include the
consolidated accounts of the Corporation, the Finance Corporation, the
Partnership and NAOC. All intercompany accounts have been eliminated.
REVENUE RECOGNITION: The Company recognizes revenues and the related
costs upon shipment of product to the customer.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost
is determined on the last-in, first-out (LIFO) method. Leaf tobacco is
presented in current assets in accordance with standard industry
practice, notwithstanding the fact that such tobaccos are carried longer
than one year for the purpose of curing.
FIXED ASSETS: Fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method
over the estimated useful lives of the related assets (4 to 7 years for
machinery, equipment and furniture, and 25 years for buildings).
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized
and depreciated over their estimated useful lives. Upon disposition of
fixed assets, the costs and related accumulated depreciation amounts are
relieved and any resulting gain or loss is reflected in operations
during the period of disposition.
GOODWILL: The excess of purchase price over fair value of net assets
acquired is amortized using the straight-line method over 40 years and
25 years for the Partnership and NAOC, respectively.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
GOODWILL, CONTINUED: The Company periodically reviews the
appropriateness of the remaining life of its intangible assets
considering whether any events have occurred or conditions have
developed which may indicate that the remaining life or the amortization
method requires adjustment. After reviewing the appropriateness of the
remaining life and the pattern of usage of the intangible assets, the
Company then assesses the overall recoverability of intangible assets by
determining if the unamortized balance can be recovered through
undiscounted future operating cash flows.
DEFERRED FINANCING COSTS: Deferred financing costs are amortized over
the terms of the related debt obligations using the interest method.
INCOME TAXES: Prior to June 25, 1997, the Holding Company and the
Predecessor were a limited liability company and a partnership,
respectively; therefore, no provision for income taxes was recorded
since earnings or losses were reported by the partners or members on
their individual income tax returns.
On June 25, 1997, the Company was reorganized as a corporation subject
to federal and state income taxes. Accordingly, on June 25, 1997 the
Company began recording the effects of income taxes under the liability
method in which deferred income tax assets and liabilities are
recognized based on the difference between the financial and tax basis
of assets and liabilities using the enacted tax rates in effect for the
years in which the differences are expected to reverse.
ADVERTISING AND PROMOTION: Advertising and promotion costs are expensed
as incurred.
FINANCIAL INSTRUMENTS: The Company enters into foreign currency forward
contracts to hedge its exposure to changes in foreign currency exchange
rates on inventory purchase commitments. Gains and losses on these
contracts are included in income as the related inventories are sold.
STOCK-BASED COMPENSATION: The Company accounts for compensation expense
related to the stock options described in Note 12 under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation."
In the fourth quarter of 1997 the Company changed its method for
measuring stock compensation costs from the intrinsic value based method
to the fair value based method which is the preferred method under SFAS
No. 123. Under the intrinsic method, compensation cost for stock options
is measured as the excess, if any, of the market value of the Company's
stock at the measurement date over the exercise price. The fair value
based method requires compensation cost for stock options to be
recognized based on the fair value of stock options granted. This change
did not have a material effect on the Company's results of operations
for 1997 or the results of operations for any interim quarter during
1997.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
COMPUTATION OF NET LOSS PER COMMON SHARE: Basic net loss per common
share has been computed by dividing the net loss applicable to common
shares by the weighted average number of common shares outstanding
during the period.
Diluted net loss per share has been computed by dividing the net loss
applicable to common shares by the weighted average number of common and
common equivalent shares (warrants and stock options), where dilutive,
outstanding during the period.
RISKS AND UNCERTAINTIES: Smokeless and roll-your-own tobacco companies,
like other manufacturers and sellers of tobacco products, are subject to
regulation at the federal, state and local levels. Such regulations
include labeling requirements, limitations on advertising, and
prohibition of sales to minors. The trend in recent years has been
toward increased regulation of the tobacco industry. There can be no
assurance as to the ultimate content, timing or effect of any regulation
of tobacco products by any federal, state or local legislative or
regulatory body, nor can there be any assurance that any such
legislation or regulation would not have a material adverse effect on
the Company's financial position, results of operations or cash flows.
The tobacco industry has experienced and is experiencing significant
product liability litigation. Most tobacco liability lawsuits have been
brought against manufacturers and sellers of cigarettes for injuries
allegedly caused by smoking or by exposure to smoke. However, several
lawsuits have been brought against manufacturers and sellers of
smokeless tobacco for injuries to health allegedly caused by use of
smokeless tobacco. Typically, such claims assert that use of smokeless
tobacco is addictive and causes oral cancer. As discussed in Note 16,
the Partnership was named as a defendant in such a lawsuit. There can be
no assurance that the Company will not sustain losses in connection with
such lawsuits and that such losses will not have a material adverse
effect on the Company's financial position, results of operations or
cash flows or that additional lawsuits will not be brought against the
Company.
Further, in November 1998 most of the states, represented by their
attorneys general acting through the National Association of Attorneys
General (NAAG), signed two contracts: the Master Settlement Agreement
(MSA) and the Smokeless Tobacco Master Settlement Agreement (STMSA). To
the best of the Company's knowledge, the only industry signatories to
the MSA have been 23 cigarette manufacturers and/or distributors and the
only signatory to the STMSA has been UST Inc. In the Company's opinion,
the fundamental basis for each agreement is the states' consents to
withdraw all claims resulting from their litigation asserting various
claims for monetary, equitable and injunction relief against certain
tobacco products manufacturers and others and, in return, the industry
signatories have agreed to certain marketing restrictions and
regulations as well as certain payment obligations. The Company does not
currently intend to participate in either settlement. There can be no
assurance as to whether entering into one or both settlement agreements
or choosing not to do so would have a material adverse effect on the
Company's financial position, results of operations or cash flows.
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
In furtherance of the MSA, many states have enacted or plan to enact
statutes requiring companies, such as the Company, not participating in
the MSA to deposit, on an annual basis, into bank escrow accounts funds
based on the number of cigarettes or cigarette equivalents, i.e., the
pounds of roll-your-own tobacco sold. The purpose of these statutes is
expressly stated to be to eliminate the cost disadvantage the settling
manufacturers have as a result of settling. The Company is required to
deposit such funds for each calendar year into a qualifying escrow
account by April 15 of the following year. As of December 31, 1999, the
Company has recorded approximately $159,000 as an other non-current
asset which will be deposited into a qualifying escrow account during
2000 as required. The Company is entitled to direct the investment of
the escrowed funds and is allowed to withdraw any appreciation, but
cannot withdraw the principal for twenty-five years from the year of
each annual deposit, except to withdraw funds deposited pursuant to an
individual state's escrow statute to pay a judgment to that state
plaintiff, in the event of a judgment against the Company.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
CONCENTRATION OF CREDIT RISK: At December 31, 1999 and 1998, the Company
had bank deposits in excess of federally insured limits of approximately
$3.3 million and $2.9 million, respectively.
The Company sells its products to distributors and retail establishments
throughout the United States. The Company's largest customer accounted
for 14.4% and 10.1% of its smokeless tobacco revenues and 8.4% and 8.2%
of its roll-your-own revenues in 1999 and 1998, respectively. The
Company performs periodic credit evaluations of its customers and
generally does not require collateral on trade receivables.
Historically, the Company has not experienced significant credit losses.
RECLASSIFICATIONS: Certain prior period amounts have been reclassified
to conform to current year presentation.
F-10
<PAGE>
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments," as amended by
SFAS No. 126. The estimated fair value amounts have been determined by
the Company using the methods and assumptions described below. However,
considerable judgment is required to interpret market data to develop
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated
fair value amounts.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents are by definition
short-term and the carrying amount is a reasonable estimate of fair
value.
ACCOUNTS RECEIVABLE: The fair value of accounts receivable approximates
their carrying value.
NOTES PAYABLE AND LONG-TERM DEBT: The fair value of the notes payable
and long-term debt approximates their carrying value.
4. INVENTORIES:
The reduction of LIFO inventory quantities decreased net income of the
Company by approximately $0.8 million and $0.2 million for the years
ended December 31, 1999 and 1998, respectively.
The components of inventories at December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Raw materials and work in process $ 1,704 $ 1,960
Leaf tobacco 17,028 19,679
Finished goods - tobacco 2,631 3,074
Finished goods - cigarette papers 3,854 6,315
Finished goods - make your own 1,074 155
Other 460 381
------------------ ------------------
26,751 31,564
LIFO reserve 26,748 26,923
------------------ ------------------
$ 53,499 $ 58,487
================== ==================
</TABLE>
The LIFO inventory value is in excess of its current estimated
replacement cost by the amount of the LIFO reserve.
F-11
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31 consists of (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Land $ 654 $ 654
Buildings and improvements 3,546 3,338
Machinery and equipment 6,087 5,470
Furniture and fixtures 1,854 1,909
------------------- -------------------
12,141 11,371
Accumulated depreciation (6,263) (4,340)
------------------- -------------------
$ 5,878 $ 7,031
=================== ===================
6. GOODWILL:
Goodwill at December 31 consists of (in thousands):
1999 1998
------------------ ------------------
Partnership goodwill, net of accumulated amortization of $2,902
and $2,106 at December 31, 1999 and 1998, respectively $ 29,047 $ 29,846
NAOC goodwill, net of accumulated amortization of $11,793
and $7,081 at December 31, 1999 and 1998, respectively 105,490 110,181
------------------ ------------------
$ 134,537 $ 140,027
=================== ===================
7. DEFERRED FINANCING COSTS:
Deferred financing costs at December 31 consist of (in thousands):
1999 1998
------------------- -------------------
Deferred financing costs, net of accumulated amortization of
$5,684 and $3,408 at December 31, 1999 and 1998,
respectively $ 8,956 $ 11,232
=================== ===================
</TABLE>
F-12
<PAGE>
8. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt at December 31 consists of (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Senior notes $ 155,000 $ 155,000
Term borrowings under credit agreement 40,864 60,586
------------------- -------------------
195,864 215,586
Less current portion 13,002 12,983
------------------- -------------------
$ 182,862 $ 202,603
=================== ===================
</TABLE>
On June 25, 1997, the Corporation issued $155.0 million of 11% Senior
Notes due 2004 (the Notes). The Notes are unsecured senior obligations
of the Corporation which mature on June 15, 2004. The Notes bear
interest at 11% per annum, payable semiannually on June 15 and December
15, to holders of record at the close of business on the June 1 or
December 1 immediately preceding the interest payment date.
The Notes have no mandatory redemption requirements; however, they are
redeemable at the option of the Corporation at a redemption price of
105.5%, 102.75%, or 100.0%, plus accrued interest, on or after June 15,
2001, 2002, and 2003 and thereafter, respectively. In addition, in the
event of a change in control of the Corporation, as defined, the holders
have the right to require the Corporation to repurchase the Notes at a
purchase price of 101.0% plus accrued interest.
On June 25, 1997, the Corporation entered into a credit agreement (the
Credit Agreement) with a syndicate of lenders which provided borrowings
of $85.0 million under a term facility and a revolver with available
credit of up to $25 million, including a letter of credit sublimit of
$10.0 million. The borrowings under the term facility are subject to
quarterly principal payments over the five-year period through the
maturity date of June 25, 2002, while the revolver may be repaid and
reborrowed as necessary, with any unpaid amounts due and payable upon
its termination date of June 25, 2002.
Borrowings under the term facility and revolver bear interest per annum
at variable rates based on prime, federal funds or LIBOR rates at the
Corporation's option. The interest rate on borrowings under the term
facility ranged from 9.00% to 9.13% at December 31, 1999. In addition,
the Corporation must pay a quarterly commitment fee of 0.5% per annum of
the unused portion of the revolver.
F-13
<PAGE>
8. NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED:
The Notes and the Credit Agreement include cross default provisions and
limit the incurrence of additional indebtedness, dividends, transactions
with affiliates, asset sales, acquisitions, mergers, prepayments of
indebtedness, liens and encumbrances, and other matters. The Credit
Agreement also includes covenants which require the Corporation to meet
certain financial tests, including minimum interest coverage, maximum
leverage ratio and fixed charges coverage.
Scheduled maturities (exclusive of future mandatory prepayments, if any)
of the Corporation's notes payable and long-term debt are as follows (in
thousands):
Through December 31, 2000 $ 13,002
Through December 31, 2001 16,717
Through December 31, 2002 11,145
Through December 31, 2003 -
Through December 31, 2004 155,000
---------------
$ 195,864
===============
9. INCOME TAXES:
The Company and the Predecessor were a limited liability company and a
partnership, respectively, for federal and state income tax purposes
through June 25, 1997 and, accordingly, did not incur any income taxes
prior to such date. Upon the occurrence of the transactions on June 25,
1997 as described in Note 1, the Company became a taxable corporation
and recorded a one-time income tax benefit of $3.6 million in the
statement of operations for the six-month period ended June 30, 1997.
This provision was necessary to record the Company's deferred tax assets
and liabilities of $5.7 million and $2.1 million, respectively, which
had not previously been recorded due to its nontaxable status.
The income tax provision (benefit) for the year ended December 31, 1999,
1998 and 1997 has been allocated as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ ------------------
<S> <C> <C> <C>
Continuing operations $ (689) $ (2,055) $ (1,126)
Discontinued operations 4,502 5,268 1,978
------------------- ------------------ ------------------
$ 3,813 $ 3,213 $ 852
=================== ================== ==================
</TABLE>
F-14
<PAGE>
9. INCOME TAXES, CONTINUED:
The income tax provision from continuing operations for the years ended
December 31, 1999, 1998 and 1997 consists of the following components
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- --------------
<S> <C> <C> <C>
Current:
Federal - - -
State and local - $ 200 $ 300
--------------- ---------------- --------------
- 200 300
--------------- ---------------- --------------
Deferred:
Federal $ 3,609 2,943 3,675
State and local 204 70 432
--------------- ---------------- --------------
3,813 3,013 4,107
--------------- ---------------- --------------
Initial set-up of deferred taxes:
Federal - - (3,181)
State and local - - (374)
--------------- ---------------- --------------
- - (3,555)
--------------- ---------------- --------------
$ 3,813 $ 3,213 $ 852
=============== ================ ==============
</TABLE>
Deferred tax assets and liabilities at December 31, 1999 and 1998
consist of (in thousands).
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
Assets Liabilities Assets Liabilities
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Inventory - $ 9,718 - $ 8,903
Property, plant and equipment $ 237 - $ 458 -
Goodwill 20,361 - 23,553 -
Accrued pension and postretirement costs 3,116 - 2,914 -
NOL carryforward 4,948 - 5,179 -
Other 1,056 - 833 -
---------------- ---------------- ---------------- ----------------
Deferred income taxes $ 29,718 $ 9,718 $ 32,937 $ 8,903
================ ================ ================ ================
</TABLE>
F-15
<PAGE>
9. INCOME TAXES, CONTINUED:
At December 31, 1999, the Company had NOL carryforwards for income tax
purposes of $13,020 which expire in the years beginning in 2012.
The Company has determined that at December 31, 1999 its ability to
realize future benefits of net deferred tax assets meets the "more
likely than not" criteria in SFAS No. 109, "Accounting for Income
Taxes"; therefore, no valuation allowance has been recorded.
Reconciliation of the federal statutory rate and the effective income
tax rate for the years ended December 31, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Federal statutory rate 35.0 % 35.0 % 35.0 %
State taxes - 3.0 2.3
Initial set-up of deferred taxes - - (43.0)
Goodwill amortization 29.2 39.5 10.2
Other 3.6 (1.4) 5.8
-------------------- -------------------------------------
Effective income tax rate 67.8 % 76.1 % 10.3 %
==================== ================== =================
</TABLE>
10. PENSION AND POSTRETIREMENT BENEFIT PLANS:
The Company has defined benefit pension plans covering substantially all
of its employees. Benefits for the hourly employees' plan are based on a
stated benefit per year of service, reduced by amounts earned in a
previous plan. Benefits for salaried employees are based on years of
service and the employees' final compensation.
The Company sponsors two defined benefit postretirement plans that cover
both salaried and hourly employees. One plan provides medical and dental
benefits, and the other provides life insurance benefits. The
postretirement health care plan is contributory, with retiree
contributions adjusted annually; the life insurance plan is
noncontributory.
F-16
<PAGE>
10. PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:
The following tables provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets over the two-year
period ended December 31, 1999, and a statement of the funded status as
of December 31 (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------ ------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation:
Benefit obligation at January 1 $ 8,887 $ 7,478 $ 5,126 $ 5,283
Service cost 651 541 335 304
Interest cost 631 554 348 317
Actuarial loss (gain) 296 653 (645) (664)
Benefit paid (355) (339) (120) (114)
----------------- ----------------- ----------------- -----------------
Benefit obligation at December 31 $ 10,110 $ 8,887 $ 5,044 $ 5,126
================= ================= ================= =================
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 $ 8,138 $ 6,738 - -
Actual return on plan assets 865 1,364 - -
Employer contributions - 375 - -
Benefit paid (355) (339) - -
----------------- ----------------- ----------------- -----------------
Fair value of plan assets at December 31 $ 8,648 $ 8,138 - -
================= ================= ================= =================
Funded status:
Funded status at December 31 $ (1,462) $ (749) $ (5,044) $ (5,126)
Unrecognized prior service cost 9 10 - -
Unrecognized net (gain) loss (1,181) (1,301) (1,142) (502)
----------------- ----------------- ----------------- -----------------
Accrued benefit cost $ (2,634) $ (2,040) $ (6,186) $ (5,628)
================= ================= ================= =================
The following table provides the amounts recognized in the balance
sheets as of December 31 (in thousands):
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------ ------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
Accrued benefit cost at January 1 $ (2,040) $ (1,850) $ (5,628) $ (5,126)
Net periodic benefit cost (594) (564) (678) (616)
Contributions - 374 120 114
----------------- ----------------- ----------------- -----------------
Accrued benefit cost at December 31 $ (2,634) $ (2,040) $ (6,186) $ (5,628)
================= ================= ================= =================
</TABLE>
F-17
<PAGE>
10. PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:
The following table provides the components of net periodic pension and
postretirement benefit costs for the plans for the years ended December
31 (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------------- -----------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 651 $ 541 $ 544 $ 335 $ 304 $ 269
Interest cost 631 554 491 348 317 334
Expected return on plan assets (676) (508) (1,135) - - -
Amortization of gains and losses (12) (23) 733 (5) (5) -
------------ ------------- ------------ ------------ ------------ ------------
Net periodic benefit cost $ 594 $ 564 $ 633 $ 678 $ 616 $ 603
============ ============= ============ ============ ============ ============
The weighted average assumptions used in the measurement of the
Company's benefit obligation are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------------- -----------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------- ------------ ------------ ------------ ------------
Discount rate 7.0% 7.0% 7.5% 8.0% 7.0% 7.0%
Expected return on plan assets 8.5% 8.5% 7.5% - - -
Rate of compensation increase 4.0% 4.0% 4.0% - - -
</TABLE>
For measurement purposes, the assumed health care cost trend rate for
participants under age 65 as of December 31, 1999 and 1998 was 8.5% and
9%, respectively, and for participants age 65 and over the rate was 7.5%
and 8%, respectively. The health care cost trend rate was assumed to
decline gradually to 5% for pre-age 65 and for post-age 65 costs over 27
years.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement benefit plans. A 1% change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- ---------------
<S> <C> <C> <C>
Effect on total of service and interest cost
components of net periodic postretirement
cost $ 2,000 $ 2,000 $ 2,000
Effect on the health care component of
the accumulated postretirement benefit
obligation 27,000 23,000 23,000
</TABLE>
F-18
<PAGE>
10. PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:
The Company also sponsors a voluntary retirement savings plan (401(k)).
Eligible employees may elect to contribute up to 15% of their annual
earnings subject to certain limitations. Through December 31, 1998, the
Company matched 50% of each eligible participant's contribution up to 5%
of the participant's compensation for the plan year. Beginning January
1, 1999, the Company changed its matching contribution policy. The
Company match for the Hourly employee was increased to 66.7% of each
eligible participant's contribution up to 6% of compensation for the
plan year. The Company match for the Salaried employees was increased to
the greater of (1) 66.7% of each eligible participant's contribution up
to 6% of compensation, or (2) 100% of the first 3% plus 50% of the next
2% of each eligible participant's contribution. Company matching is
subject to a vesting schedule. Additional discretionary matching
contributions by the Company are determined annually by the Board of
Directors. Company matching contributions to this plan were
approximately $0.3 million, $0.2 million and $0.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
11. MANDATORILY REDEEMABLE PREFERRED STOCK:
On December 31, 1999 and 1998, the Company had authorized 12 million
shares of 12% Senior Payment-In-Kind Preferred Stock (the Preferred
Stock) of which 1.83 million shares and 1.62 million shares,
respectively, were issued and outstanding. Each share of Preferred Stock
has a par value of $0.01 and a liquidation preference of $25, for total
liquidation values of approximately $45.7 million and $40.5 million at
December 31, 1999 and 1998, respectively. Prior to June 2002, holders of
the Preferred Stock are entitled to receive dividends at an annual rate
of 12% of the liquidation preference, payable quarterly in cash or by
the issuance of additional shares of Preferred Stock having an aggregate
liquidation preference equal to the amount of the dividends, at the
Company's option. Following June 15, 2002, dividends must be paid in
cash. Preferred stock dividends, including the interest accretion
described below, for the years ended December 31, 1999, 1998 and 1997
were $5.4 million, $4.8 million, and $2.4 million, respectively, which
were recorded as an increase in the carrying value of the Preferred
Stock.
On June 25, 1997, the holders of the Preferred Stock were issued
warrants, with an original fair value of $1.7 million, to purchase
44,440 shares of common stock of the Company for $0.01 per share,
exercisable immediately. The original fair value of these warrants has
been recorded in equity, with a corresponding amount recorded as a
discount on the carrying value of the Preferred Stock. This discount is
being amortized under the interest method over the 10-year term of the
Preferred Stock as a part of the annual preferred stock dividend
requirement. Amortization of the discount for the years ended December
31, 1999, 1998 and 1997 was $0.2 million, $0.2 million and $0.1 million,
respectively.
F-19
<PAGE>
11. MANDATORILY REDEEMABLE PREFERRED STOCK, CONTINUED:
Prior to June 15, 2000, the Company may, subject to certain
restrictions, redeem up to 35% of the Preferred Stock out of the net
cash proceeds from any one or more public equity offerings of the
Company, for 112% of the liquidation preference plus all accumulated and
unpaid dividends. The Preferred Stock is not redeemable from June 16,
2001 to June 15, 2002. The Preferred Stock is then redeemable, at the
Company's option, on or after the following dates at the indicated
redemption prices (expressed as a percentage of the liquidation
preference) plus all accumulated and unpaid dividends: June 15, 2002 -
106%; June 15, 2003 - 104%; June 15, 2004 - 102%; and June 15, 2005 -
100%. The Preferred Stock is mandatorily redeemable on June 15, 2007 at
a price equal to the liquidation preference plus all accumulated and
unpaid dividends. The Preferred Stock is also redeemable, at the option
of the holders, upon a change in control of the Company, as defined, at
a price equal to 101% of the liquidation preference plus all accumulated
and unpaid dividends.
Persons affiliated with the initial purchases of the Preferred Stock
were also issued warrants, with an original fair value of $0.7 million,
to purchase 19,050 shares of common stock of the Company for $0.01 per
share, exercisable immediately. The original fair value of these
warrants has been recorded in equity, with a corresponding amount
capitalized and included in deferred financing costs.
12. SHARE INCENTIVE PLAN:
On June 25, 1997, the Company implemented a share incentive plan
covering certain key employees which provides for the grant of options
to purchase common stock of the Company and other stock related
benefits. As of December 31, 1999, no benefits other than the stock
options described below had been granted. The total number of shares
available for granting under the plan is 61,856. Stock option activity
is summarized below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
Average Average
Incentive Exercise Grant Date
Shares Price Fair Value
---------------- ----------------- -----------------
<S> <C> <C> <C>
Outstanding December 31, 1997 46,894 $ 18.19 $ 26.51
Granted 14,962 18.19 26.51
Exercised - - -
Forfeited (7,096) (18.19) (26.51)
---------------- ----------------- -----------------
Outstanding December 31, 1998 54,760 18.19 26.51
Granted 5,000 18.19 26.51
---------------- ----------------- -----------------
Exercised - - -
Forfeited - - -
Outstanding, December 31, 1999 59,760 $ 18.19 $ 26.51
================ ================= =================
</TABLE>
F-20
<PAGE>
12. SHARE INCENTIVE PLAN, CONTINUED:
Of the stock options outstanding on December 31, 1999, 54,760 were
exercisable, with an additional 5,000 becoming exercisable at a rate of
25% per year from 2000 to 2003. All stock options expire 15 years from
the grant date. The Company estimates that all of the stock options
granted will be exercised and that the expected life of all stock
options is five years from the date of grant. The weighted average fair
value of the options was determined as the difference between the fair
value of the common stock on the grant date and the present value of the
exercise price over the expected life of five years at a risk free
interest rate of 6%, with no assumed dividend yield.
A significant percentage of the stock options described above includes a
provision under which the Company will reimburse the employee for the
difference between their ordinary income tax liability and the liability
computed using the capital gains rate in effect upon exercise of the
options. The effect of this provision is accounted for as a variable
portion of the option plan.
The Company has recorded compensation expense related to the options
based on the provisions of SFAS No. 123 under which the fixed portion of
such expense is determined as the fair value of the options on the date
of grant and amortized over the vesting period. The variable portion of
the compensation expense is remeasured on each reporting date with the
expense amount adjusted for changes in the fair value of the company
stock on that date. Compensation expense of $70,000, $819,000 and
$900,000 ($43,000, $508,000 and $558,000 net of deferred income tax
benefit) has been recognized in the statements of operations for the
years ended December 31, 1999, 1998 and 1997, respectively.
F-21
<PAGE>
13. INCOME (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE RECONCILIATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denomimator) Amount
------------------- ---------------------- ------------------
<S> <C> <C> <C>
Loss from continuing operations $ (5,054)
Less: Preferred stock dividends (5,361)
-------------------
Basic and diluted:
Loss from continuing operations available
to common stockholders $ (10,415) $ 528,241 $ (19.72)
=================== ===================== =================
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMIMATOR) AMOUNT
------------------- ---------------------- ------------------
Loss from continuing operations $ (6,816)
Less: Preferred stock dividends (4,751)
-------------------
Basic and diluted:
Loss from continuing operations available
to common stockholders $ (11,567) 528,241 $ (21.90)
=================== ===================== =================
The calculations above are based on the weighted average number of
shares of common stock outstanding during the year. Common equivalent
shares from stock options of 25,236 and warrants of 63,490 are excluded
from the computations as their effect is antidilutive.
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denomimator) Amount
------------------- ------------------ ------------------
Income from continuing operations $ 4,508
Less: Preferred stock dividends (2,268)
-------------------
Basic:
Income from continuing operations
available to common stockholders 2,240 528,241 $ 4.24
==================
Effect of dilutive securities:
Warrants - 63,490
Stock options - 19,180
------------------- ------------------
Diluted:
Income available to common stockholders
and assumed conversions $ 2,240 610,911 $ 3.67
=================== ===================== =================
</TABLE>
F-22
<PAGE>
14. EXTRAORDINARY LOSS:
Upon the repayment of the Company's debt on June 25, 1997 as described
in Note 1, the Company recorded an extraordinary loss of $7.1 million
(net of tax benefit of $4.4 million) for the write-off of deferred
financing costs of $4.4 million and debt discount of $7.1 million.
15. FOURTH QUARTER ADJUSTMENT:
The fourth quarter of 1999 includes an adjustment to increase the income
tax provision by approximately $1,035,000 as a result of the year-end
income tax computation.
The fourth quarter of 1997 includes an adjustment of $8.7 million to
increase the income tax benefit which results from the final
determination by tax counsel in the fourth quarter of the income tax
treatment of certain payments made related to the recapitalization which
occurred in the second quarter of 1997.
16. 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.
F-23
<PAGE>
16. CONTINGENCIES, CONTINUED:
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. Plaintiffs
and defendants are in the process of negotiating a settlement and the
case has been dismissed pending the completion of those negotiations.
Management does not expect that the terms of any settlement will have a
materially adverse effect on the Company. If negotiations should fail,
the Company would expect the case to be refilled.
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.
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
F-24
<PAGE>
16. CONTINGENCIES, CONTINUED:
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 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 filed a motion
to dismiss the allegations for failure to state a claim on which relief
could be granted. On December 23, 1999, the Court dismissed the new
antitrust claims in Republic's Second Amended Complaint.
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.
F-25
<PAGE>
16. CONTINGENCIES, CONTINUED:
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 (cigarette, cigar, and smokeless
products) actions in the State of West Virginia, including the Allen and
Akers cases, has been referred to a Mass Litigation Panel, and assigned
to one judge. On January 11, 2000, the judge assigned the cases issued
an order concerning discovery schedules and establishing a trial
procedure for the purpose of trying all issues of law and fact common to
all defendants. On February 29, 2000, West Virginia plaintiffs' counsel,
pursuant to the court's order, identified all individual plaintiffs and
the defendants against whom they had claims. The Company was not named
in any additional claims. Currently then, as previously stated, the
Company is named in one case in West Virginia, which alleges that lung
cancer was caused by consuming the Company's chewing tobacco products.
F-26
<PAGE>
16. CONTINGENCIES, CONTINUED:
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. Notices to dismiss various counts
have been filed and fully briefed. The hearing on the Motion is
currently scheduled for April 28, 2000.
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, results of operations or cash flows.
OTHER EVENTS. Regulations 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, had been delayed until December 31, 1999 to allow for further
review. The Attorney General made minor modifications to the
regulations. In January 2000 the Federal District Court in Massachusetts
upheld the advertising and point-of-sale regulations, rejecting the
industry's First Amendment challenge. The regulations, however have been
stayed pending appeal, which is scheduled to be heard on April 7, 2000.
The Massachusetts regulations, among other things, restrict access to
tobacco products. 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 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 would
restrict access to tobacco and tobacco products, regulate tobacco
labeling, and limit promotion and advertising of tobacco.
F-27
<PAGE>
16. CONTINGENCIES, CONTINUED:
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 petitioned
the Supreme Court of the United States for a writ of certiorari. On
April 26, 1999, the Supreme Court granted the writ. The hearing before
the Supreme Court was held on December 1, 1999. On March 21, 2000 the
Supreme Court affirmed the Fourth Circuit's decisions, ruling that the
FDA has no authority over tobacco products.
17. PARENT-ONLY FINANCIAL INFORMATION:
The Corporation is a holding company with no operations and no assets
other than its investments in its subsidiaries, income tax receivables,
deferred income tax assets related to the differences between the book
and tax basis of its investment in the Partnership, and deferred
financing costs related to its debt.
All of the Corporation's subsidiaries are wholly-owned and guarantee the
debt of the Corporation 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 have not been included
in these financial statements.
Following is unaudited parent-only summarized financial information of
the Corporation (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
Noncurrent assets $ 229,453 $ 241,228
Current liabilities 20,861 19,965
Noncurrent liabilities 182,862 202,602
Redeemable preferred stock 44,693 39,332
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998
------------------ -------------------
Equity in earnings of subsidiaries $ 27,069 $ 13,707
Income before extraordinary loss and preferred stock dividends 1,564 4,549
</TABLE>
F-28
<PAGE>
18. SEGMENT INFORMATION:
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company has been
historically organized on the basis of product lines which are comprised
of two reportable segments. The Smokeless Tobacco segment, which the
Company has agreed to sell and has presented as a discontinued operation
in these financial statements as described in Note 20, manufactures
smokeless tobacco products which are distributed primarily through
wholesale and food distributors in the United States. The remaining
Roll-Your-Own segment imports and distributes cigarette papers and
related products through wholesale distributors in the United States.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies." Elimination and
Other includes the assets of the Company not assigned to segments and
the elimination of intercompany accounts between segments. Operating
results of the discontinued smokeless tobacco segment are presented in
Note 20.
The table below presents total asset information about reported segments
for 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
SMOKELESS ELIMINATIONS
Tobacco Roll-Your-Own and Other Total
----------------- -------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
1999 $ 81,483 $ 208,539 $ (46,419) $ 243,603
1998 87,908 193,713 (21,314) 260,307
1997 87,485 181,129 4,469 273,083
</TABLE>
19. NEW ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement requires that all derivatives be measured at
fair value and recognized in the balance sheet as either assets or
liabilities. SFAS No. 133 also requires that changes in a derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualified hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement and requires formal documentation,
designation, and assessment of the effectiveness of derivatives that
receive hedge accounting.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," which makes SFAS No. 133 effective for fiscal
years beginning after June 15, 2000. The Company plans to adopt SFAS No.
133 as of January 1, 2001. The adoption is not expected to have a
material impact on the consolidated financial statements.
F-29
<PAGE>
20. SUBSEQUENT EVENT:
On February 11, 2000, the Company entered into a definitive Asset
Purchase Agreement with Swedish Match North American Inc. Under the
terms of this agreement, the Company agreed to sell certain smokeless
tobacco assets, including its chewing tobacco brands and related
formulation, technology and inventory. The brands to be sold include
Beech-nut; Durango; Trophy; and Havana Blossom. The purchase price for
these assets is $165 million and will result in a gain of approximately
$55 million, net of tax. In addition, the Company will continue to
manufacture these brands for Swedish Match for a limited period of time
following the sale under a transitional contract manufacturing
arrangement. The transaction is subject to regulatory approval and other
customary conditions and is expected to close shortly after such
regulatory approval is given.
The smokeless tobacco segment has been presented as a discontinued
operation and, accordingly, the consolidated statements of operations
have been restated to reflect discontinued operations accounting.
Summarized results of operations of the discontinued segment are
presented separately in the consolidated statements of operations and
include an allocation, based on sales dollars, of common selling,
general and administrative costs of the Company. Interest expense of the
Company was not allocated to the results of operations of the
discontinued segment. The net assets of the discontinued segment, which
consist primarily of inventories of $40.3 million and intangible assets
of $29.0 million which are to be sold, are included in the consolidated
balance sheets and related footnotes. Operating results of the
discontinued segment are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ -------------------
<S> <C> <C> <C>
Net sales $ 45,814 $ 50,803 $ 53,787
Income before income taxes 11,151 13,092 4,884
Net income from
discontinued operations 6,649 7,823 2,906
</TABLE>
F-30
<PAGE>
EXHIBIT INDEX
TO
NORTH ATLANTIC TRADING COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1* -- Asset Purchase Agreement, dated February 10, 2000, between
National Tobacco Company, L.P. and Swedish Match North America
Inc.
3.1(a) -- Restated Certificate of Incorporation of North Atlantic
Trading Company, Inc., filed February 19, 1998 (incorporated
herein by reference to Exhibit 3.1(a)(i) the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997).
3.1(b) -- Certificate of Incorporation of North Atlantic Operating
Company, Inc., filed June 9 1997 (incorporated herein by
reference to Exhibit 3.1(b)(i) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.1(c) -- Certificate of Amendment of Certificate of Incorporation of
North Atlantic Operating Company, Inc., filed June 17, 1997
(incorporated herein by reference to Exhibit 3.1(b)(ii) to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
3.1(d) -- Restated Certificate of Incorporation of National Tobacco
Finance Corporation, filed April 24, 1996 (incorporated herein
by reference to Exhibit 3.1(c) to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
3.1(e) -- Amended and Restated Certificate of Limited Partnership of
National Tobacco Company, L.P., filed May 17, 1996
(incorporated herein by reference to Exhibit 3.1(d) to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
3.1(f) -- Certificate of Incorporation of International Flavors and
Technology, Inc., filed August 7, 1997 (incorporated herein by
reference to Exhibit 3.1(e)(i) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1(g) -- Certificate of Amendment of Certificate of Incorporation of
International Flavors and Technology, Inc., filed February 19,
1998 (incorporated herein by reference to Exhibit 3.1(e)(ii)
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997).
3.2(a) -- Amended and Restated Bylaws of North Atlantic Trading Company,
Inc. (incorporated herein by reference to Exhibit 3.2(a) to
the Registrant's Report on Form 10-Q for the fiscal quarter
ended March 31, 1998).
3.2(b) -- Bylaws of North Atlantic Operating Company, Inc. (incorporated
herein by reference to Exhibit 3.2(b) to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
3.2(c) -- Bylaws of National Tobacco Finance Corporation (incorporated
herein by reference to Exhibit 3.2(c) to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
3.2(d) -- Third Amended and Restated Agreement of Limited Partnership of
National Tobacco Company, L.P., effective May 17, 1996
(incorporated herein by reference to Exhibit 3.2(d)(i) to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
3.2 (e) -- Amendment No. 1 to Third Amended and Restated Agreement of
Limited Partnership of National Tobacco Company, L.P.,
effective June 25, 1997 (incorporated herein by reference to
Exhibit 3.2(d)(ii) to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
3.2(f) -- Bylaws of International Flavors and Technology, Inc.
(incorporated herein by reference to Exhibit 3.2(e) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
3.2(g) * -- Amendment No. 2 to the Third Amended and Restated Agreement of
Limited Partnership of National Tobacco Company, L.P.,
effective February 10, 2000.
3.3 -- Certificate of Designation of 12% Senior Exchange
Payment-In-Kind Preferred Stock of North Atlantic Trading
Company, Inc., filed July 22, 1997 (incorporated herein by
reference to Exhibit 3.3(b) to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
4.1 -- Indenture, dated as of June 25, 1997, among North Atlantic
Trading Company, Inc., as issuer, National Tobacco Company,
L.P., North Atlantic Operating Company, Inc. and National
Tobacco Finance Corporation, as guarantors, and United States
Trust Company of New York, as trustee (incorporated herein by
reference to Exhibit 4.1 to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
4.2 -- First Supplemental Indenture, dated as of February 26, 1998,
among North Atlantic Trading Company, Inc., National Tobacco
Company, L.P., National Tobacco Finance Corporation,
International Flavors and Technology, Inc. and The United
States Trust Company of New York (incorporated herein by
reference to Exhibit 4.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997).
9.1 -- Exchange and Stockholders' Agreement, dated as of June 25,
1997, by and between North Atlantic Trading Company, Inc. and
those stockholders signatory thereto (incorporated herein by
reference to Exhibit 9 to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
9.2 -- Voting Trust Agreement, dated as of December 17, 1997, among
Thomas F. Helms, Jr., David I. Brunson and Jeffrey S. Hay, as
voting trustees, and Helms Management Corp. (incorporated
herein by reference to Exhibit 9.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
9.3 * -- Amendment No. 1 to Voting Trust Agreement, dated as of August
2, 1999, among Thomas F. Helms, Jr. and David I. Brunson, as
voting trustees, and Helms Management Corp.
10.1 -- Third Amended and Restated Purchasing and Processing
Agreement, dated as of June 25, 1997, between National Tobacco
Company, L.P. and Lancaster Leaf Tobacco Company of
Pennsylvania (incorporated herein by reference to Exhibit 10.1
to Amendment No. 1 to Registration Statement (Reg. No.
333-31931) on Form S-4 filed with the Commission on September
3, 1997).
10.2+ -- Amended and Restated Distribution and License Agreement, dated
as of November 30, 1992, between Bollore Technologies, S.A.
and North Atlantic Trading Company, Inc., a Delaware
corporation and predecessor to North Atlantic Operating
Company, Inc. [United States] (incorporated herein by
reference to Exhibit 10.2 to Amendment No. 2 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
10.3+ -- Amended and Restated Distribution and License Agreement, dated
as of November 30, 1992, between Bollore Technologies, S.A.
and North Atlantic Trading Company, Inc., a Delaware
corporation and predecessor to North Atlantic Operating
Company, Inc. [Asia] (incorporated herein by reference to
Exhibit 10.3 to Amendment No. 2 to Registration Statement
(Reg. No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.4+ -- Amended and Restated Distribution and License Agreement, dated
as of November 30, 1992, between Bollore Technologies, S.A.
and North Atlantic Trading Company, Inc., a Delaware
corporation and predecessor to North Atlantic Operating
Company, Inc. [Canada] (incorporated herein by reference to
Exhibit 10.4 to Amendment No. 2 to Registration Statement
(Reg. No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.5+ -- Restated Amendment, dated as of June 25, 1997, between Bollore
Technologies, S.A. and North Atlantic Operating Company, Inc.
(incorporated herein by reference to Exhibit 10.5 to Amendment
No. 2 to Registration Statement (Reg. No. 333-31931) on Form
S-4 filed with the Commission on September 3, 1997).
10.6 -- Warrant Agreement, dated as of June 25, 1997, between North
Atlantic Trading Company, Inc. and United States Trust Company
of New York, as warrant agent (incorporated herein by
reference to Exhibit 10.12 to Amendment No. 1 to Registration
Statement (Reg. No. 333-31931) on Form S-4 filed with the
Commission on September 3, 1997).
10.7++ -- 1997 Share Incentive Plan of North Atlantic Trading Company,
Inc. (incorporated herein by reference to Exhibit 10.12 to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
10.8++ -- Employment Agreement, dated May 17, 1996, between North
Atlantic Trading Company, Inc. and Thomas F. Helms, Jr.
(incorporated herein by reference to Exhibit 10.17 to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
10.9 ++ -- Employment Agreement, dated April 14, 1997, between National
Tobacco Company, Inc. and David I. Brunson (incorporated
herein by reference to Exhibit 10.18(a) to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
10.10++ -- Letter Agreement, dated April 23, 1997, between Thomas F.
Helms, Jr. and David I. Brunson (incorporated herein by
reference to Exhibit 10.18(b) to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
10.11++ -- Nonqualified Stock Option Agreement, dated as of June 25,
1997, between North Atlantic Trading Company, Inc. and David
I. Brunson (incorporated herein by reference to Exhibit
10.18(c) to Amendment No. 1 to Registration Statement (Reg.
No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.12++ -- Amendment No. 1, dated and effective September 2, 1997, to the
Nonqualified Stock Option Agreement, dated as of June 25,
1997, between North Atlantic Trading Company, Inc. and David
I. Brunson (incorporated herein by reference to Exhibit
10.18(d) to Amendment No. 1 to Registration Statement (Reg.
No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.13++ -- Amendment No. 2, dated as of December 31, 1997, to the
Nonqualified Stock Option Agreement, dated as of June 25,
1997, between North Atlantic Trading Company, Inc. and David
I. Brunson (incorporated herein by reference to Exhibit
10.18(e) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
10.14++ -- Consulting Agreement, dated as of June 25, 1997, between North
Atlantic Trading Company, Inc. and Jack Africk (incorporated
herein by reference to Exhibit 10.20 to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
10.15 -- Credit Agreement, dated as of June 25, 1997, among North
Atlantic Trading Company, Inc., the various lending
institutions referenced therein, Gleacher NatWest, Inc., as
arranging agent, and National Westminster Bank plc, as
administrative agent (incorporated herein by reference to
Exhibit 10.21 to Amendment No. 1 to Registration Statement
(Reg. No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.16 -- Subsidiary Guaranty, dated as of June 25, 1997, made by North
Atlantic Operating Company, Inc., National Tobacco Finance
Corporation, and National Tobacco Company, L.P. in favor of
National Westminster Bank plc, as administrative agent for
certain lending institutions (incorporated herein by reference
to Exhibit 10.22 to Amendment No. 1 to Registration Statement
(Reg. No. 333-31931) on Form S-4 filed with the Commission on
September 3, 1997).
10.17 -- Security Agreement, dated as of June 25, 1997, among North
Atlantic Trading Company, Inc., North Atlantic Operating
Company, Inc., National Tobacco Finance Corporation, National
Tobacco Company, L.P., and National Westminster Bank plc, as
collateral agent for certain secured creditors (incorporated
herein by reference to Exhibit 10.23 to Amendment No. 1 to
Registration Statement (Reg. No. 333-31931) on Form S-4 filed
with the Commission on September 3, 1997).
10.18 -- Pledge Agreement, dated as of June 25, 1997, made by North
Atlantic Trading Company, Inc., North Atlantic Operating
Company, Inc., National Tobacco Finance Corporation, and
National Tobacco Company, L.P., in favor of National
Westminster Bank plc, as collateral agent for certain secured
creditors (incorporated herein by reference to Exhibit 10.24
to Amendment No. 1 to Registration Statement (Reg. No.
333-31931) on Form S-4 filed with the Commission on September
3, 1997).
5
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.19++ -- National Tobacco Company Management Bonus Program
(incorporated herein by reference to Exhibit 10.25 to
Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
on Form S-4 filed with the Commission on September 3, 1997).
10.20++ -- Amended and Restated Nonqualified Stock Option Agreement dated
as of January 12, 1998, between North Atlantic Trading
Company, Inc. And Jack Africk (incorporated herein by
reference to Exhibit 10.28 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
10.21++ -- Assignment and Assumption, dated as of January 1, 1998,
between National Tobacco Company, L.P. and North Atlantic
Trading Company, Inc. (incorporated herein by reference to
Exhibit 10.30 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997).
10.22+ -- Amendment, dated October 27, 1997, to Amended and Restated
Distribution and License Agreements, between Bollore and North
Atlantic Operating Company, Inc. (incorporated herein by
reference to Exhibit 10.31 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
10.23 -- Sales Representative Agreement, effective as of January 1,
1998, between National Tobacco Company, L.P. and North
Atlantic Operating Company, Inc. (incorporated herein by
reference to Exhibit 10.32 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
10.24 -- 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 (incorporated herein by reference
to Exhibit 10.1 to the Registrant's Report on 10-Q for the
fiscal quarter ended June 30, 1998).
10.25++ -- Amended and Restated Employment Agreement dated as of April
30, 1998, between North Atlantic Trading Company, Inc. and
David I. Brunson (incorporated herein by reference to Exhibit
10.2 to the Registrant's Report on 10-Q for the fiscal quarter
ended June 30, 1998).
10.26 -- Option Grant Letter, dated April 30, 1998, from Helms
Management Corp. to David I. Brunson (incorporated herein by
reference to Exhibit 10.5 to the Registrant's Report on 10-Q
for the fiscal quarter ended June 30, 1998).
10.27 -- Promissory Note, dated April 14, 1998, issued by Helms
Management Corp. in favor of North Atlantic Trading Company,
Inc. (incorporated herein by reference to Exhibit 10.7 to the
Registrant's Report on 10-Q for the fiscal quarter ended June
30, 1998).
6
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.28 -- Amendment, dated as of February 1, 1998, among North Atlantic
Trading Company, Inc., the various lending institutions
referenced therein and National Westminster Bank plc, as
administrative agent (incorporated herein by reference to
Exhibit 10.39 to the Registrant's Report on 10-Q for the
fiscal quarter ended March 31, 1998).
10.29 -- Consent, dated as of March 12, 1998, among North Atlantic
Trading Company, Inc., the various lending institutions
referenced therein and National Westminster Bank plc, as
administrative agent (incorporated herein by reference to
Exhibit 10.40 to the Registrant's Report on 10-Q for the
fiscal quarter ended March 31, 1998).
10.30 -- Subscription Agreement, dated as of March 24, 1998, between
North Atlantic Trading Company, Inc. and David I. Brunson
(incorporated herein by reference to Exhibit--10.42 to the
Registrant's Report on 10-Q for the fiscal quarter ended March
31, 1998).
10.31 -- Promissory Note, dated March 24, 1998, issued by David I.
Brunson in favor of North Atlantic Trading Company, Inc.
(incorporated herein by reference to Exhibit 10.44 to the
Registrant's Report on 10-Q for the fiscal quarter ended March
31, 1998).
10.32 -- Promissory Note, dated April 14, 1998, issued by Helms
Management Corp. in favor of North Atlantic Trading Company,
Inc. (incorporated herein by reference to Exhibit 10.7 to the
Registrant's Report on 10-Q for the fiscal quarter ended June
30, 1998).
10.33++* -- Letter Agreement dated December 6, 1999, between North
Atlantic Trading Company, Inc. and David I. Brunson.
10.34++* -- Letter Agreement, dated September 24, 1999, between North
Atlantic Trading Company, Inc. and Jack Africk.
10.35++* -- North Atlantic Trading Company, Inc. 1999 Executive Incentive
Plan.
10.36++* -- North Atlantic Trading Company, Inc. 1999 Management Bonus
Plan
21 -- Subsidiaries of North Atlantic Trading Company, Inc.
(incorporated herein by reference to Exhibit 21 to the
Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1998).
27 * -- Financial Data Schedules.
* Filed herewith.
+ Portions of this agreement have been omitted
pursuant to Rule 406 under the Securities Act of 1933, as
amended, and have been filed confidentially with the
Securities and Exchange Commission.
++ Management contracts or compensatory plan or
arrangement required to be filed as an exhibit pursuant to
Item 14(c) of the rules governing the preparation of this
Report.
7
EXHIBIT 2
ASSET PURCHASE AGREEMENT
BETWEEN
NATIONAL TOBACCO COMPANY, L.P.
AND
SWEDISH MATCH NORTH AMERICA INC.
DATED FEBRUARY 10, 2000
NY2:\893791\01\J5NJ01!.DOC\64980.0003
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1. DEFINITIONS....................................................................................................1
SECTION 1.1. Specified Definitions.............................................................................1
SECTION 1.2. Certain Other Defined Terms.......................................................................3
SECTION 1.3. Other Definitional Provisions.....................................................................4
ARTICLE 2. SALE AND PURCHASE OF ASSETS; ASSUMPTION OF LIABILITIES.........................................................4
SECTION 2.1. Purchase and Sale.................................................................................4
SECTION 2.2. Acquired Assets and Excluded Assets...............................................................5
(a) Acquired Assets.................................................................5
(b) Excluded Assets.................................................................6
SECTION 2.3. Assumed Liabilities...............................................................................6
SECTION 2.4. Purchase Price....................................................................................7
SECTION 2.5. Purchase Price Adjustment.........................................................................7
SECTION 2.6. Determination of Final Inventory..................................................................8
ARTICLE 3. THE CLOSING....................................................................................................9
SECTION 3.1. Closing Date......................................................................................9
SECTION 3.2. Transactions To Be Effected at the Closing.......................................................10
(a) Deliveries by Seller...........................................................10
(b) Deliveries by Purchaser........................................................10
ARTICLE 4. REPRESENTATIONS AND WARRANTIES................................................................................10
SECTION 4.1. Representations and Warranties of Seller.........................................................10
(a) Organization, Standing and Power...............................................10
(b) Authority......................................................................10
(c) No Conflict....................................................................11
(d) Consents.......................................................................11
(e) Financial Statements...........................................................11
(f) Compliance with Applicable Laws................................................12
(g) Litigation; Decrees............................................................12
(h) Title to Acquired Assets.......................................................12
(i) Intellectual Property and Technology...........................................12
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TABLE OF CONTENTS
(CONTINUED)
(j) Absence of Certain Changes or Events...........................................14
(k) Inventory......................................................................15
(l) Product Warranties.............................................................15
(m) Brokers........................................................................15
(n) Securities Filings.............................................................15
SECTION 4.2. Representations and Warranties of Purchaser......................................................15
(a) Organization, Standing and Power...............................................15
(b) Authority......................................................................15
(c) No Conflict....................................................................16
(d) Consents.......................................................................16
(e) Financing......................................................................16
(f) Brokers........................................................................16
ARTICLE 5. COVENANTS ....................................................................................................16
SECTION 5.1. Covenants of Seller Relating to Conduct of Business..............................................16
SECTION 5.2. Access to Information............................................................................17
SECTION 5.3. Governmental Approvals, Etc......................................................................17
SECTION 5.4. Third Party Consents.............................................................................18
SECTION 5.5. Certain Information..............................................................................18
SECTION 5.6. Bulk Transfer Laws...............................................................................18
SECTION 5.7. Additional Agreements............................................................................19
SECTION 5.8. Certain Understandings...........................................................................19
SECTION 5.9. Noncompetition...................................................................................20
SECTION 5.10. Revised Disclosure..............................................................................21
SECTION 5.11. Sale of Equipment...............................................................................21
SECTION 5.12. Allocation......................................................................................21
SECTION 5.13..Confidential Information........................................................................21
ARTICLE 6. CONDITIONS PRECEDENT..........................................................................................22
SECTION 6.1. Conditions to Each Party's Obligation............................................................22
(a) HSR Waiting Period.............................................................22
(b) No Injunctions or Restraints...................................................22
ii
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TABLE OF CONTENTS
(CONTINUED)
(c) Manufacturing Services.........................................................22
(d) No Lawsuits or Actions.........................................................22
SECTION 6.2. Conditions to Obligation of Purchaser............................................................22
(a) Representations and Warranties.................................................22
(b) Performance of Obligations of Seller...........................................22
(c) Certificate of Incumbency and Resolutions......................................23
(d) Opinion of Seller's Counsel....................................................23
(e) Release of Lien................................................................23
(f) Seller's Required Consents.....................................................23
(g) No Material Adverse Effect.....................................................23
(h) NATC Guaranty..................................................................23
SECTION 6.3. Conditions to Obligation of Seller...............................................................23
(a) Representations and Warranties.................................................23
(b) Performance of Obligations of Purchaser........................................23
(c) Certificate of Incumbency and Resolutions......................................24
(d) Opinions of Purchaser's Counsel................................................24
(e) Swedish Match Guaranty.........................................................24
ARTICLE 7. TERMINATION, AMENDMENT AND WAIVER.............................................................................24
SECTION 7.1. Termination......................................................................................24
ARTICLE 8. INDEMNIFICATION...............................................................................................26
SECTION 8.1. Indemnification by Seller........................................................................26
SECTION 8.2. Indemnification by Purchaser.....................................................................26
SECTION 8.3. Limitations......................................................................................26
SECTION 8.4. Characterization of Indemnification Payments.....................................................27
SECTION 8.5. Losses Net of Insurance; Tax Loss and Benefits...................................................27
SECTION 8.6. Termination of Indemnification...................................................................27
SECTION 8.7. Procedures Relating to Third Party Claims........................................................27
SECTION 8.8. Procedures Relating to Non-Third Party Claims....................................................29
ARTICLE 9. GENERAL PROVISIONS............................................................................................29
SECTION 9.1. Notices..........................................................................................29
iii
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TABLE OF CONTENTS
(CONTINUED)
SECTION 9.2. Interpretation...................................................................................31
SECTION 9.3. Amendments and Waivers...........................................................................31
SECTION 9.4. Survival of Representations......................................................................31
SECTION 9.5. Severability.....................................................................................31
SECTION 9.6. Counterparts.....................................................................................32
SECTION 9.7. Entire Agreement; No Third Party Beneficiaries...................................................32
SECTION 9.8. Governing Law....................................................................................32
SECTION 9.9. Consent to Jurisdiction..........................................................................32
SECTION 9.10. Publicity.......................................................................................32
SECTION 9.11. Assignment......................................................................................33
</TABLE>
iv
<PAGE>
List of Exhibits
----------------
Exhibit A Form of Trademark Assignment Agreement
Exhibit B Manufacturing Services Agreement
Exhibit C Opinion of Weil, Gotshal & Manges LLP, counsel to Seller
Exhibit D Guaranty Agreement (NATC)
Exhibit E Opinion of Womble Carlyle Sandridge & Rice, PLLC, counsel
to Purchaser
Exhibit F Opinion of the General Counsel of Swedish Match
Exhibit G Guaranty Agreement (Swedish Match)
List of Schedules
-----------------
Schedule 2.2(a)(i) Intellectual Property
Schedule 2.2(a)(ii) Technology
Schedule 2.2(a)(iii) Inventory
Schedule 4.1(c) Seller Conflicts
Schedule 4.1(d) Seller Consents
Schedule 4.1(e) Other Assumed Liabilities
Schedule 4.1(f) Compliance with Applicable Laws
Schedule 4.1(h) Liens
Schedule 4.1(i) Intellectual Property and Technology
Schedule 4.1(j) Change in Business
Schedule 4.1(k) Location of Inventory
Schedule 4.1(l) Express Warranties
Schedule 9.2 Certain Persons
v
<PAGE>
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made
February 10, 2000, between NATIONAL TOBACCO COMPANY, L.P., a Delaware limited
partnership ("Seller"), and SWEDISH MATCH NORTH AMERICA INC., a Delaware
corporation ("Purchaser").
W I T N E S S E T H:
WHEREAS, Seller is engaged in the business (the "Business")
of manufacturing and selling loose leaf chewing tobacco products under, among
other brand names, the brands Beech-Nut, Trophy, Havana Blossom and Durango; and
WHEREAS, Seller desires to sell, transfer and assign to
Purchaser, and Purchaser desires to purchase from Seller, the Brands, the
Inventory and other assets constituting the Acquired Assets (in each case as
hereinafter defined), upon the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, in consideration of the mutual covenants,
representations and warranties herein contained, the parties hereto, intending
to be legally bound, hereby agree as follows:
ARTICLE 1.
DEFINITIONS
SECTION 1.1. SPECIFIED DEFINITIONS. As used in this
Agreement, the following capitalized terms have the meanings specified below:
"Affiliate" of a Person means a Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such Person.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in New York, New York are
authorized or obligated by law, regulation or executive order to be closed.
"Closing" means the closing of the purchase, assignment and
sale of the Acquired Assets and the assumption of the Assumed Liabilities
contemplated hereunder.
"Closing Date" means the time and date on which the Closing
takes place, as established by Section 3.1.
"GAAP" means United States generally accepted accounting
principles.
"Governmental Authority" means any agency, board, bureau,
court, commission, department, instrumentality or administration of any foreign
government, the United States government, any state government or any local or
other governmental body in a state, territory or possession of the United States
or the District of Columbia.
<PAGE>
"HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"HSR Date" means the later of (a) the date that the
Pre-Merger Notification and Report Form of Seller or (b) the date that the
Pre-Merger Notification and Report Form of Purchaser has been accepted for
filing pursuant to the HSR Act with respect to the transactions contemplated
hereby.
"Law" means, as to any Person, any foreign or United States
federal, state or local law, statute, code, ordinance, regulation, order, writ,
injunction, judgment or decree applicable to such Person and to the businesses
and assets thereof.
"Liabilities" means, as to any Person, all debts, adverse
claims, liabilities and obligations, direct, indirect, absolute or contingent,
known or unknown, of such Person, whether accrued, vested or otherwise, whether
in contract, tort, strict liability or otherwise and whether or not actually
reflected, or required by GAAP to be reflected, in such Person's balance sheets
or other books and records, including, without limitation, Product Liabilities.
"Liens" means mortgages, liens (including Tax liens),
security interests, easements, rights of way, pledges, restrictions or
encumbrances of any nature whatsoever.
"Losses" means any and all demands, claims, complaints,
actions or causes of action, suits, proceedings, investigations, arbitrations,
assessments, losses, damages, liabilities, obligations (including those arising
out of any action, such as any settlement or compromise thereof or judgment or
award therein) and any reasonable costs and expenses, including, without
limitation, attorney's and other advisors' fees and disbursements.
"Material Adverse Effect" means an effect that is
materially adverse to the value of the Acquired Assets or to the operations of
the Business to the extent relating to the value of the Acquired Assets, other
than effects relating to or resulting from seasonal changes, changes relating to
the economy in general or changes relating to the industry in which the Business
operates.
"NATC" means North Atlantic Trading Company, Inc., a
Delaware corporation.
"NATC Group" means Thomas F. Helms, Jr., NATC, Seller and
all other Persons, directly or indirectly, through one or more intermediaries,
controlled by Thomas F. Helms, Jr., NATC or Seller.
"Ordinary Course of Business" means, with respect to
Seller, actions taken in the ordinary course of business consistent with past
practices of Seller in relation to the Business.
2
<PAGE>
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, trust, unincorporated organization,
other form of business or legal entity or Governmental Authority.
"Prime Rate" means the base rate of interest publicly
announced from time to time by Citibank, N.A., whether or not such rate is
actually charged by such bank.
"Product Liabilities" means, as to any Person, all
Liabilities in respect of any product liability claim brought by any other
Person or class of Persons (or the personal representative of such Persons)
alleging personal injury to such Persons caused by the use of the Products, and
any other product liability claims, including but not limited to governmental
cost recovery claims, fraud and conspiracy claims related to the Products.
"Products" shall mean any and all loose leaf chewing
tobacco products sold under the Brands.
"Schedules" means the disclosure schedules delivered by
Seller to Purchaser in connection herewith.
"Swedish Match" means Swedish Match AB, a Swedish
corporation.
"Tax" means all federal, state, local, foreign or other
governmental taxes, assessments, duties, fees, levies or similar charges of any
kind, including all income, profit, franchise, excise (including any
specifically relating to tobacco), property, use, intangibles, sales, payroll,
employment, withholding and other taxes, and including all interest and
penalties imposed with respect to such amounts.
"Trademarks" means trademarks, trade names, trade dress,
brand names, logos and all other names and slogans, registrations thereof,
pending applications therefor and such unregistered rights as may exist through
use, and all goodwill associated with the foregoing.
SECTION 1.2. CERTAIN OTHER DEFINED TERMS. Each of the terms
set forth below is defined, for purposes of this Agreement, in the Section of
this Agreement listed opposite such term:
"Acquired Assets" 2.2(a)
"Agreement" Preamble
"Assumed Liabilities" 2.3
"Brands" 2.2(a)(i)
"Business" Recitals
"Confidentiality Agreement" 5.2
3
<PAGE>
"Excluded Assets" 2.2(b)
"Final Inventory" 2.5(b)
"Final Inventory Statement" 2.6(b)
"Financial Statements" 4.1(e)
"Intellectual Property" 2.2(a)(i)
"Inventory" 2.2(a)(iii)
"Manufacturing Services Agreement" 6.1(c)
"Packaging Trade Dress" 2.2(a)(i)
"Principal Brand Registrations" Schedule 2.2(a)(i)
"Purchase Price" 2.4
"Purchaser" Preamble
"SEC" 4.1(e)
"Scheduled Intellectual Property" 4.1(i)(i)
"Seller" Preamble
"Swedish Match Guaranty" 6.3(f)
"Technology" 2.2(a)(ii)
SECTION 1.3. OTHER DEFINITIONAL PROVISIONS.
(a) The words "hereof", "herein", and "hereunder" and words
of similar import, when used in this Agreement, shall refer to this Agreement as
a whole and not to any particular provision of this Agreement.
(b) The terms defined in the singular shall have a
comparable meaning when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States
dollars.
(d) The term "day", unless specified as a "Business Day",
means a calendar day.
ARTICLE 2.
SALE AND PURCHASE OF ASSETS; ASSUMPTION OF LIABILITIES
SECTION 2.1. PURCHASE AND SALE. Upon the terms and subject
to the conditions of this Agreement, at the Closing, Seller agrees to sell,
assign, transfer, convey and deliver to Purchaser all of Seller's right, title
4
<PAGE>
and interest in, to and under the Acquired Assets, and Purchaser agrees to
purchase, acquire and accept from Seller, all such right, title and interest in,
to and under the Acquired Assets.
SECTION 2.2. ACQUIRED ASSETS AND EXCLUDED ASSETS.
(A) ACQUIRED ASSETS. The term "Acquired Assets" means the
following, as they exist on the date hereof, with such changes, deletions or
additions thereto as may occur from the date hereof to the Closing Date
consistent with Section 5.1 and the other terms and conditions of this
Agreement:
(i) all right, title and interest in and to the brand
names listed on Schedule 2.2(a)(i) (collectively, the
"Brands"), including, without limitation, the
registered Trademarks listed on Schedule 2.2(a)(i),
the trade dress of the packaging for each of the
Brands as of the date hereof (collectively, the
"Packaging Trade Dress"), and all other Trademarks
and copyrights owned by Seller and used in connection
with the Business, but not including the names or
marks "National Tobacco Company, L.P. and "Select
Products, Inc." (collectively with the Brands and the
Packaging Trade Dress, the "Intellectual Property");
(ii) all trade secrets, know-how, formulae, processes,
procedures, research records and test information
owned by Seller and used to manufacture the Products
currently marketed as the Brands, including, without
limitation, the items listed on Schedule 2.2(a)(ii)
(collectively, the "Technology");
(iii) the tobacco leaf, work-in-process, packaging, casings
and finished goods of the Business listed on Schedule
2.2(a)(iii) (collectively, the "Inventory");
(iv) all customers' and suppliers' lists and related
purchase and sale data owned by Seller on the Closing
Date and used for the Business, except to the extent
relating to the Excluded Assets;
(v) all rights, claims and causes of action to the extent
relating to any of the Acquired Assets;
(vi) the UPC codes and related manufacturer's number with
respect to the Products to the extent assignable
without including the names or marks "National
Tobacco Company, L.P" or "Select Products, Inc." (or
any name or mark derived from or including the
foregoing);
(vii) the material safety data sheets with respect to the
Products;
5
<PAGE>
(viii) all documents, including, without limitation, files,
correspondence, books and records, in the possession
of or available to Seller that are reasonably
necessary to (a) substantiate the use and the
validity of the registered Trademarks listed on
Schedule 2.2(a)(i) and the prosecution and
maintenance of all registrations and applications for
such registered Trademarks, (b) substantiate the use
of the Packaging Trade Dress, (c) substantiate the
use of the DURANGO trademark and the prosecution and
maintenance of all applications for such trademark,
and (d) embody the Technology and to manufacture the
Products currently marketed as the Brands; and
(ix) all goodwill related to the Acquired Assets.
(B) EXCLUDED ASSETS. The term "Excluded Assets" means any
and all other property or assets of the Business or Seller other than the
Acquired Assets, including without limitation, any real property, any
manufacturing equipment relating to the production of loose leaf chewing
tobacco, any computer hardware, software or supplies, or the names and marks
"National Tobacco Company, L.P." and "Select Products, Inc." (in logotype design
or any other style or design) and any name or mark derived from or including any
of the foregoing; provided, however, that Purchaser may use the names and marks
"National Tobacco Company, L.P." and "Select Products, Inc." in connection with
the distribution and sale of (i) the Products manufactured for Purchaser
pursuant to the Manufacturing Services Agreement as and to the extent provided
therein and (ii) other items of Inventory purchased from Seller hereunder that
are associated with the Products previously sold under such names or marks for
twelve (12) months following the Closing.
SECTION 2.3. ASSUMED LIABILITIES.
(a) Upon the terms and subject to the conditions of this
Agreement, Purchaser hereby agrees to assume, effective as of the Closing, and
agrees to pay, perform and discharge when due the following Liabilities of
Seller (collectively, the "Assumed Liabilities"):
(i) any and all obligations of Seller to the Smokeless
Tobacco Council ("STC") (A) for dues and "proxy
taxes" to the extent attributable to periods after
the Closing Date in respect of the Business, (B) for
litigation expenses in respect of calendar year 2000
to the extent attributable to an increase in Seller's
market share based upon a reassessment thereof by the
STC after the Closing (it being understood and agreed
that Purchaser has not assumed any obligation of
Seller to STC for litigation expenses for calendar
year 2000 based upon the current assessment of its
market share for which Seller shall remain liable)
and (C) for litigation expenses for periods on and
after January 1, 2001; and
6
<PAGE>
(ii) any obligation for the return after the Closing Date
of Products sold by Seller on or before the Closing
Date as a result of defects or otherwise.
(b) Purchaser will assume at Closing only the Liabilities
and/or obligations of Seller described in Section 2.3(a). Purchaser has not
agreed to assume or be liable for any Liability of Seller not specifically
assumed pursuant to this Section 2.3(a), and Seller shall retain responsibility
for all of its Liabilities other than the Assumed Liabilities, including without
limitation with respect to the following: (i) environmental matters; (ii)
Product Liabilities; (iii) Taxes; (iv) Liabilities arising out of Seller's use
of the Intellectual Property or Technology prior to the Closing Date; and (v)
any employees or former employees of Seller, including any expenses arising out
of or relating to the employment by Seller of its employees or Seller's
termination of employment of such employees, including without limitation any
terminations effected by Seller as a result of the transactions contemplated by
this Agreement, and all liabilities and costs under (A) the Consolidated Omnibus
Budget Reconciliation Act, as amended ("COBRA") (including liabilities for
violations thereof) for all "qualifying events" (as defined in COBRA) occurring
with respect to employees and their dependents prior to and on the Closing Date,
including qualifying events that occur as a result of the sale of the Acquired
Assets contemplated by this Agreement; and (B) the Workers Adjustment Retraining
and Notification Act, as amended, and the rules and regulations thereunder.
SECTION 2.4. PURCHASE PRICE. The purchase price for the
Acquired Assets shall be $165,000,000, subject to adjustment as provided in
Section 2.5 (the "Purchase Price"), payable in the form and manner set forth in
Section 3.2(b), together with the assumption of the Assumed Liabilities.
SECTION 2.5. PURCHASE PRICE ADJUSTMENT.
(a) The Purchase Price shall be increased as of the Closing
Date by an amount equal to the sum of the dues and any proxy taxes paid by
Seller to the Smokeless Tobacco Council in respect of the calendar quarter
during which the Closing Date occurs multiplied by a fraction, the numerator of
which shall be the number of days remaining in such calendar quarter after the
Closing Date and the denominator of which shall be the number of days in such
calendar quarter.
(b) The Purchase Price shall be adjusted after final
determination of Final Inventory (as defined below) pursuant to Section 2.6
hereof, as follows:
(i) Purchaser shall pay to Seller, as an increase in the
Purchase Price, the amount by which Final Inventory
shall exceed $21,652,000; or
(ii) Seller shall pay to Purchaser, as a reduction of the
Purchase Price, the amount by which Final Inventory
shall be less than $21,652,000.
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(c) For purposes of this Agreement, "Final Inventory" shall
mean the value (before any LIFO reserves) of the Inventory on the books and
records of Seller as of the close of business on the Closing Date, determined on
a basis consistent with the preparation of the Financial Statements, subject to
adjustment to reflect the physical count contemplated by Section 2.6.
(d) Any payment required under Section 2.5(b) shall be made
within ten (10) days after the final determination of the amount of Final
Inventory as provided in Section 2.6 hereof (after giving effect to the
resolution of any dispute as provided therein), by payment of such amount by
wire transfer of immediately available funds to an account designated in writing
by the party to receive such payment together with interest on the amount of
such payment from the Closing Date through and including the date of payment at
the Prime Rate.
SECTION 2.6. DETERMINATION OF FINAL INVENTORY.
(a) On or before the first Business Day after the Closing
Date, Seller shall conduct or cause to be conducted a physical count and
inspection of the Inventory. Such physical count and inspection shall be
conducted in accordance with the same procedures used in preparation of the
Financial Statements to the extent such a physical count was conducted in
connection therewith. The physical count may, at Purchaser's option, be observed
by Purchaser and its certified public accountants, who will perform such
procedures as they deem necessary to confirm the accuracy of the count. The
results of such physical count and inspection shall be used to determine the
value of the Inventory, which shall be equal to the value (before any LIFO
reserves) of the Inventory on the books and records of Seller as of the close of
business on the Closing Date as adjusted to reflect increases or decreases in
the Inventory based on such physical count.
(b) Following conclusion of the physical count and
inspection, Seller shall prepare a "Final Inventory Statement." No later than
ten (10) Business Days after the Closing, Seller shall deliver the Final
Inventory Statement to Purchaser and its certified public accountants for review
and verification that the calculation was conducted using the same procedures as
in the preparation of the Financial Statements. In connection with the
preparation of the Final Inventory Statement, Purchaser shall be permitted to
review all work papers, books and records associated with such preparation.
(c) Promptly following receipt of the Inventory Statement,
Purchaser shall review the same and, within fifteen (15) Business Days after
such receipt, Purchaser shall deliver to Seller a certificate setting forth its
acceptance of, or objections to, the Inventory Statement, together with a
summary of the reasons therefor and adjustments which, in its view, are
necessary to eliminate such objections.
(d) If Purchaser accepts the Final Inventory Statement (or
does not so object within such fifteen (15) Business Day period), the
determination of the Final Inventory by Seller shall be deemed final and binding
as of such fifteenth (15th) Business Day.
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(e) In the event that Purchaser objects within such fifteen
(15) Business Day period to the Final Inventory Statement, Purchaser and Seller
shall use reasonable efforts during the following five (5) Business Day period
to resolve any such objections. If Purchaser and Seller resolve all such
differences and each signs a certificate to that effect, the Final Inventory
Statement, as so adjusted, shall be deemed final and binding for purposes of
this Agreement. If Purchaser and Seller resolve some of such differences, the
items as to which the parties have agreed shall be final and binding for
purposes of this Agreement and the remaining items shall be determined as
provided below. Notwithstanding any dispute between Purchaser and Seller
described in this Section 2.6(e), Purchaser or Seller, as applicable, shall pay,
in accordance with Section 2.5(d) above, the increase or decrease in the
Purchase Price based on the amount of the Final Inventory that is not being
disputed under this Section 2.6(e).
(f) To resolve any objections raised by Purchaser that are
not resolved as provided above, the parties shall submit the dispute to a
mutually agreed upon office of such "big five" independent certified public
accounting firm that does not serve as an auditor of, or consultant to,
Purchaser, Seller or any of their respective Affiliates (an "Independent
Accounting Firm") as may be jointly selected by Seller and Purchaser, who shall
act as an arbitrator. If Seller and Purchaser cannot agree on the choice of an
Independent Accounting Firm to serve as arbitrator within three (3) Business
Days after either party's written request to the other to select such a firm,
the parties shall choose an Independent Accounting firm by lot, and such firm
shall serve as an arbitrator. The arbitrator shall be instructed to use its
commercially reasonable efforts to determine the proper resolution of the matter
or matters in dispute within thirty (30) calendar days after the submission to
it of the Final Inventory Statement and a statement of Purchaser's objections
thereto, and, in any case, as soon as practicable after such submission. The
arbitration proceeding will not be public, and no party will disclose any of the
evidence in the proceeding to any Person other than the parties to the
proceeding and their respective counsel and accountants, except in a proceeding
to enforce the award. Each of the parties shall bear all costs and expenses
incurred by it (including legal and accounting fees) in connection with such
arbitration; provided, however, that the fees and expenses of the Independent
Accounting Firm acting as arbitrator shall be shared equally by Purchaser and
Seller; and, provided further, that in any action to enforce the arbitration
decision, the successful party shall recover its reasonable attorney's fees from
the unsuccessful party. This provision for arbitration shall be specifically
enforceable by the parties, and the decision of the Independent Accounting Firm
acting as arbitrator in accordance with the provisions hereof shall be final and
binding and there shall be no right of appeal therefrom.
ARTICLE 3.
THE CLOSING
SECTION 3.1. CLOSING DATE. The Closing shall take place at
the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York
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10153, at 10:00 a.m. on a date specified by Seller that is not later than two
(2) Business Days following the satisfaction or waiver of the conditions to the
Closing set forth in Article 6.
SECTION 3.2. TRANSACTIONS TO BE EFFECTED AT THE CLOSING. At
the Closing:
(A) DELIVERIES BY SELLER. Seller shall deliver to Purchaser
such appropriately executed deeds, bills of sale, assignments and other
instruments of transfer providing for the sale, assignment, transfer, conveyance
and delivery of the Acquired Assets in form and substance reasonably
satisfactory to Purchaser and its counsel, including, without limitation, the
Trademark Assignment Agreement substantially in the form of Exhibit A (it being
understood that any such deed, bill of sale, assignment or other instrument
shall not provide for any representations or warranties or any Liabilities that
are not otherwise expressly provided for in this Agreement); and
(B) DELIVERIES BY PURCHASER. Purchaser shall deliver to
Seller (i) by wire transfer to an account designated in writing by Seller prior
to the Closing of immediately available funds in an amount equal to the Purchase
Price (as adjusted pursuant to Section 2.5(a), but remaining subject to
adjustment as provided in Section 2.5(b)) and (ii) such appropriately executed
assumption agreements and other instruments of assumption providing for the
assumption of the Assumed Liabilities in form and substance reasonably
satisfactory to Seller and its counsel (it being understood that any such deed,
bill of sale, assignment or other instrument shall not provide for any
representations or warranties or any Liabilities that are not otherwise
expressly provided for in this Agreement).
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES
SECTION 4.1. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller hereby represents and warrants to Purchaser as follows:
(A) ORGANIZATION, STANDING AND POWER. Seller is a limited
partnership duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite partnership power and authority
to own the Acquired Assets owned by it and to carry on the Business as now being
conducted. Seller is duly qualified as a foreign limited partnership and is in
good standing in the State of Kentucky. All of the partnership interests of
Seller are owned, directly or indirectly, by NATC.
(B) AUTHORITY. Seller has the requisite partnership power
and authority to execute and deliver this Agreement and the agreements to be
entered into by it at the Closing pursuant hereto (the "Seller Ancillary
Documents") and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the Seller Ancillary Documents
and the consummation of the transactions contemplated hereby and thereby have
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been duly authorized by all necessary partnership action on the part of Seller,
and will not require the approval of securityholders of Seller. This Agreement
has been duly executed and delivered by Seller and constitutes, and each Seller
Ancillary Document will be duly executed and delivered by Seller at or prior to
the Closing and when so executed and delivered will constitute, a legal, valid
and binding obligation of Seller enforceable against it in accordance with its
terms.
(C) NO CONFLICT. Except as set forth on Schedule 4.1(c),
the execution and delivery by Seller of this Agreement and the Seller Ancillary
Documents, the consummation by Seller of the transactions contemplated hereby
and thereby, and the compliance by Seller with the terms hereof and thereof will
not, conflict with, or result in any violation of or default (with or without
notice or lapse of time, or both) under, any provision of (i) the Delaware
Revised Uniform Limited Partnership Act of the State of Delaware, (ii) the
certificate of limited partnership and the partnership agreement of Seller,
(iii) any contract, agreement, indenture, commitment or obligation to which
Seller is a party or by which Seller or its properties are bound, or (iv) any
Law applicable to Seller, other than, in the case of clauses (iii) and (iv)
above, any such conflicts, violations, or defaults that, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect
(and none of which, individually or in the aggregate, would materially impair
Seller's ability to perform its obligations hereunder).
(D) CONSENTS. Except as set forth on Schedule 4.1(d), no
consent, approval, license, permit, order or authorization of, or registration,
declaration or filing with, any Governmental Authority or any third party is
required to be obtained or made by or with respect to Seller or the Acquired
Assets in connection with the execution and delivery of this Agreement and the
Seller Ancillary Documents or the consummation of the transactions contemplated
hereby and thereby, except for (i) compliance with and filings under the HSR
Act, (ii) those that may be required solely by reason of Purchaser's (as opposed
to any other Person's) participation in the transactions contemplated hereby,
and (iii) those the failure of which to obtain or make, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect.
The items set forth on Schedule 4.1(d) are referred to collectively as the
"Seller Required Consents."
(E) FINANCIAL STATEMENTS. (i) Seller has previously
delivered to Purchaser in the form filed with the Securities and Exchange
Commission ("SEC") (including any amendments thereto), (i) the consolidated
audited financial statements of NATC included in NATC's Annual Reports on Form
10-K for the fiscal year ended December 31, 1998 and (ii) the consolidated
unaudited financial statements of NATC included in NATC's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (collectively, the "Financial
Statements"). The Financial Statements have been prepared from the books and
records of NATC and its subsidiaries (including Seller in respect of the
Business) and, except as described in the notes thereto, have been prepared in
accordance with GAAP applied on a consistent basis and present fairly the
financial position, results of operations and cash flows of NATC and its
subsidiaries (including Seller in respect of the Business) as at the dates and
for the periods indicated, subject, in the case of the interim financial
statements, to normal year-end adjustments.
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(ii) Except as set forth in the Financial Statements or on
Schedule 4.1(e), Seller has no knowledge of any Liability that would constitute
an Assumed Liability hereunder.
(iii) As of September 30, 1999, the value of the Inventory
on the books and records of the Seller was $21,652,000 before any LIFO reserves.
(iv) The financial information set forth in the disclosure
letter dated as of the date hereof, and delivered by Seller to Purchaser, has
been derived from the Financial Statements and the books and records of the
Seller, except as otherwise described therein.
(F) COMPLIANCE WITH APPLICABLE LAWS. Seller has complied
with all Laws which (i) relate to the Business and the Acquired Assets or (ii)
would give rise to a Lien, except where the failure to so comply would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Except as set forth in Schedule 4.1(f), since September 30,
1999, Seller has not (i) received any written notice alleging any non-compliance
with any such Laws which would reasonably be expected to have a Material Adverse
Effect or (ii) received any written notice of any administrative, civil or
criminal investigation or audit by any Governmental Authority relating to the
Business which is reasonably likely to be adversely determined and which if
adversely determined would reasonably be expected to have a Material Adverse
Effect.
(G) LITIGATION; DECREES. Except as set forth in the
Financial Statements and except for any lawsuit, action or proceeding brought
after the date of this Agreement by any Person seeking to delay or prevent, or
otherwise challenging, the transactions contemplated hereby, there is no
lawsuit, action or proceeding pending, or, to Seller's knowledge, threatened,
against Seller relating to the Business which is reasonably likely to be
adversely determined and which if adversely determined would reasonably be
expected to have a Material Adverse Effect. Seller is not in default under any
judgment, order, injunction or decree of any Governmental Authority or
arbitrator entered against Seller and relating to the Business or the Acquired
Assets, except for any such defaults which, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect.
(H) TITLE TO ACQUIRED ASSETS . Except as set forth in
Schedule 4.1(h), (i) Seller has good and valid title to the Acquired Assets free
and clear of all Liens, and (ii) at the Closing, Seller will transfer to
Purchaser good and valid title to the Acquired Assets free and clear of all
Liens.
(I) INTELLECTUAL PROPERTY AND TECHNOLOGY. Except as set
forth on Schedule 4.1(i):
(i) Schedule 2.2(a)(i) sets forth a complete list of all
U.S. registered Trademarks owned by Seller, including all registration numbers,
classifications and dates of registration therefor (the "Scheduled Intellectual
Property"). There are no licenses (A) to Seller from a third Person concerning
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the Intellectual Property and/or Technology used in connection with the Business
or (B) from Seller to a third Person concerning any of the Intellectual Property
and/or Technology.
(ii) The Intellectual Property and Technology constitute
all intellectual property and technology necessary for operation of the Business
and the manufacture and distribution of the Products as conducted by Seller on
the date hereof.
(iii) Except as set forth on Schedule 4.1(h), Seller owns,
beneficially and of record, the entire right, title and interest in and to the
Scheduled Intellectual Property, free and clear of any Lien. Except as set forth
on Schedule 4.1(h), no effective financing statement or other instrument similar
in effect covering all or any part of such Scheduled Intellectual Property or
listing the Seller as debtor is on file in any recording office (including,
without limitation, the United States Patent and Trademark Office and the United
States Copyright Office).
(iv) Each item of the Scheduled Intellectual Property
designated on Schedule 2.2(a)(i) as a "Principal Brand Registration" is
subsisting and has not been adjudged invalid, unregistrable or unenforceable, in
whole or in part, and is valid, registrable and enforceable. To the knowledge of
Seller, all appropriate actions have been taken to maintain the validity and
enforceability of the Principal Brand Registrations.
(v) Seller has not granted any release, covenant not to
sue, or non-assertion assurance to any Person with respect to the rights
embodied in the Principal Brand Registrations.
(vi) No claim has been made in writing to Seller and, to
the knowledge of Seller, no other claim has been made or threatened, and no
judicial or administrative proceeding of any kind is pending, against Seller
that any item of the Principal Brand Registrations is invalid or unenforceable
or that the use by Seller of any of the Principal Brand Registrations does or
may violate the rights of any Person. To the knowledge of Seller, there is no
infringement or unauthorized use of any item of the Principal Brand
Registrations by any Person.
(vii) None of the Principal Brand Registrations is the
subject of any outstanding order, ruling, decree, judgment or stipulation by or
with any Governmental Authority with respect to the Brands.
(viii) Seller has been using, and continues to use, the
DURANGO trademark in interstate commerce in the conduct of the Business since at
least as early as March 1998. Except as set forth in Schedule 4.1(h), Seller has
not licensed, transferred or encumbered Seller's right, title and interest in
and to the DURANGO trademark. Except as set forth in Schedule 4.1(h), no
effective financing statement or other instrument similar in effect covering the
DURANGO trademark listing the Seller as debtor is on file in any recording
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office (including, without limitation, the United States Patent and Trademark
Office and the United States Copyright Office). The DURANGO trademark as used in
connection with the Business has not been finally adjudged invalid,
unregisterable or unenforceable and, to the knowledge of Seller, is valid,
registerable and enforceable. Seller has not granted any release, covenant not
to sue, or non-assertion assurance to any Person with respect to its rights in
the DURANGO trademark. No claim has been made in writing to Seller and, to the
knowledge of Seller, no other claim has been made or threatened, and no judicial
proceeding of any kind is pending against Seller, that the DURANGO trademark is
invalid or unenforceable or that use by Seller of the DURANGO trademark does or
may violate the rights of any Person. To the knowledge of Seller, the DURANGO
trademark is not being infringed or used without authorization by any Person and
the use of the DURANGO trademark by Seller does not infringe any rights of any
Person. To the knowledge of Seller, no Person has established superior rights in
the DURANGO trademark for tobacco products. Seller's DURANGO trademark is not
the subject of any outstanding order, ruling, decree, judgment or stipulation by
or with any Governmental Authority.
(ix) Except as set forth in Schedule 4.1(h), Seller owns
the entire right, title and interest in and to the Technology and the Packaging
Trade Dress. Except as set forth in Schedule 4.1(h), Seller has not licensed,
transferred or encumbered Seller's right, title and interest in and to the
Technology and/or the Packaging Trade Dress. Except as set forth in Schedule
4.1(h), no effective financing statement or other instrument similar in effect
covering the Technology and/or Packaging Trade Dress listing the Seller as
debtor is on file in any recording office (including, without limitation, the
United States Patent and Trademark Office and the United States Copyright
Office). None of the Technology or Packaging Trade Dress has been adjudged
invalid or unenforceable and, to the knowledge of Seller, the Technology and
Packaging Trade Dress are valid and enforceable. Seller has not granted any
release, covenant not to sue, or non-assertion assurance to any Person with
respect to its rights embodied in the Technology and/or Packaging Trade Dress.
No claim has been made in writing to Seller and, to the knowledge of Seller, no
other claim has been made or threatened, and no judicial or administrative
proceeding of any kind is pending against Seller, that any item of the
Technology and/or the Packaging Trade Dress is invalid or unenforceable or that
the use by Seller of the Technology and/or Packaging Trade Dress does or may
violate the rights of any Person. To the knowledge of Seller, none of the
Technology or the Packaging Trade Dress is being infringed or used without
authorization by any Person and the use of the Technology and the Packaging
Trade Dress by Seller does not infringe any rights of any Person. None of the
Technology and the Packaging Trade Dress is the subject of any outstanding
order, ruling, decree, judgment or stipulation by or with any Governmental
Authority.
(x) Schedule 2.2(a)(x) sets forth a complete list of all
pending applications for Trademarks used in connection with the Business (the
"Trademark Applications"). Except as set forth in Schedule 4.1(h), Seller owns
the entire right, title and interest in and to the Trademark Applications.
Except as set forth in Schedule 4.1(h), Seller has not licensed, transferred or
encumbered Seller's right, title and interest in and to the Trademark
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Applications. Except as set forth in Schedule 4.1(h), no effective financing
statement or other instrument similar in effect covering the Trademark
Applications listing the Seller as debtor is on file in any recording office
(including, without limitation, the United States Patent and Trademark Office).
None of the Trademark Applications has been adjudged invalid or unregisterable
and, to the knowledge of Seller, the Trademark Applications are valid and
registerable. Seller has not granted any release, covenant not to sue, or
non-assertion assurance to any Person with respect to its rights embodied in the
Trademark Applications. No claim has been made in writing to Seller and, to the
knowledge of Seller, no other claim has been made or threatened, and no judicial
or administrative proceeding of any kind is pending against Seller, that any
item of the Trademark Applications is invalid or unregisterable or that the use
by Seller of the Trademark Applications does or may violate the rights of any
Person. To the knowledge of Seller, none of the Trademark Applications is being
infringed or used without authorization by any Person and the use of the
Trademark Applications by Seller does not infringe any rights of any Person.
None of the Trademark Applications is the subject of any outstanding order,
ruling, decree, judgment or stipulation by or with any Governmental Authority.
(xi) Seller does not own any patents, registered
copyrights, or Internet domain names that comprise or contain any of the
Trademarks.
(J) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set
forth in the Schedule 4.1(j) hereto, the Financial Statements or as contemplated
by this Agreement, since September 30, 1999, (i) Seller has conducted the
Business in all material respects only in the Ordinary Course of Business (ii)
Seller has not notified the trade of its intention to discontinue any Brand and
(iii) there has not been any Material Adverse Effect.
(K) INVENTORY. All items included in the Inventory (i) are
useable or saleable in the Ordinary Course of Business (ii) are located on the
premises described on Schedule 4.1(k), and (iii) have been acquired by Seller
only in bona fide transactions entered into in the Ordinary Course of Business.
(L) PRODUCT WARRANTIES. Except as set forth on Schedule
4.1(l), Seller has not made any express warranties in connection with the sale
of Products.
(M) BROKERS. Seller has not incurred and will not incur any
broker's, finder's, investment banking or similar fee in connection with the
transactions contemplated by this Agreement, and Seller has not made any
statement or representation that could form the basis for any claim for such
fee.
(N) SECURITIES FILINGS. NATC has timely filed with the SEC
all documents required by the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to be filed with respect to NATC and its business
(collectively, the "Securities Filings"). The Securities Filings (i) comply as
to form with the applicable requirements under the Exchange Act and (ii) at the
time filed did not contain any untrue statement of a material fact or omit to
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state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
SECTION 4.2. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser hereby represents and warrants to Seller as follows:
(A) ORGANIZATION, STANDING AND POWER. Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority to
carry on its business as now being conducted. Purchaser is duly qualified as a
foreign corporation and is in good standing in the State of New York. All of the
equity interests of Purchaser are owned, directly or indirectly, by Swedish
Match.
(B) AUTHORITY. Purchaser has the requisite corporate power
and authority to execute this Agreement and the agreements to be entered into by
it at the Closing pursuant hereto (the "Purchaser Ancillary Documents") and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the Purchaser Ancillary Documents and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of Purchaser, and will
not require the approval of the stockholders of Purchaser. This Agreement has
been duly executed and delivered by Purchaser and constitutes, and each
Purchaser Ancillary Document will be duly executed and delivered by Purchaser at
or prior to the Closing and when so executed and delivered will constitute, a
legal, valid and binding obligation of Purchaser enforceable against it in
accordance with its terms.
(C) NO CONFLICT. The execution and delivery by Purchaser of
this Agreement and the Purchaser Ancillary Documents, the consummation by
Purchaser of the transactions contemplated hereby and thereby and the compliance
by Purchaser with the terms hereof and thereof will not, conflict with, or
result in any violation of or default (with or without notice or lapse of time,
or both) under, any provision of (i) the Delaware General Corporation Law, (ii)
the certificate of incorporation or by-laws of Purchaser, (iii) any contract,
agreement, indenture, commitment or obligation to which Purchaser is a party or
by which Purchaser or its properties are bound, or (iv) any Law applicable to
Purchaser, other than, in the case of clauses (iii) and (iv) above, any such
conflicts, violations or defaults that, individually or in the aggregate, would
not materially impair the ability of Purchaser to perform its obligations under
this Agreement.
(D) CONSENTS. No consent, approval, license, permit, order
or authorization of, or registration, declaration or filing with, any
Governmental Authority or any third party is required to be obtained or made by
or with respect to Purchaser or the Acquired Assets in connection with the
execution and delivery of this Agreement and the Purchaser Ancillary Documents
or the consummation of the transactions contemplated hereby and thereby, except
for (i) compliance with and filings under the HSR Act and (ii) those the failure
of which to obtain or make, individually or in the aggregate, would not
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materially impair the ability of Purchaser to perform its obligations under this
Agreement.
(E) FINANCING. Purchaser has available cash or has existing
borrowing facilities or firm commitments which, together with its available
cash, are sufficient to enable it to consummate the transactions contemplated
hereby. True and complete copies of any borrowing facilities or commitments that
will be used to finance any portion of the Purchase Price have been provided to
Seller prior to the date of this Agreement.
(F) BROKERS. Except for Merrill Lynch International,
Purchaser has not incurred nor will incur any broker's, finder's, investment
banking or similar fee in connection with the transactions contemplated by this
Agreement and Purchaser has not made any statement or representation that could
form the basis for any claim for any such fee.
ARTICLE 5.
COVENANTS
SECTION 5.1. COVENANTS OF SELLER RELATING TO CONDUCT OF
BUSINESS. During the period from the date of this Agreement and continuing until
the Closing, except as expressly provided in this Agreement, including the
Schedules hereto, or to the extent that Purchaser shall otherwise consent (which
consent shall not be unreasonably withheld or delayed), Seller shall carry on
the Business and conduct all promotional activities in the Ordinary Course of
Business, and shall not engage in promotional shipments or activities outside
the Ordinary Course of Business. Without limiting the generality of the
foregoing, Seller shall: (a) protect and maintain the Intellectual Property and
the Technology in the Ordinary Course of Business and not sell or otherwise
dispose of the same; (b) sell or dispose of Inventory only in the Ordinary
Course of Business; (c) comply with the provisions of Section 5.11 prior to the
sale or other disposition of machinery or equipment of the Business outside the
Ordinary Course of Business; (d) comply, in all material respects, with all
applicable Laws in the conduct of the Business; and (e) use commercially
reasonable efforts to preserve the business of the Business.
SECTION 5.2. ACCESS TO INFORMATION. From the date hereof to
the Closing, to the extent not prohibited by applicable Law, Seller shall
furnish to Purchaser such information as Purchaser may reasonably request
relating to product costs, inventory and sales and trade commitments; provided,
however, Seller may withhold information or limit the level of detail or
specificity of the information provided to the extent that Seller, in its
reasonable discretion, determines the nature or extent of the information
requested to be proprietary to Seller or competitively sensitive.
Notwithstanding the foregoing proviso, Seller agrees to furnish to Purchaser (a)
within seven (7) calendar days after the date hereof production ready art work
for cartons and pouches for each of the Brands and (b) as soon as reasonably
practicable after the date hereof, information within Seller's possession
relating to the establishment of the chain of title with respect to the
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registered Trademarks listed on Schedule 2.2(a)(i). Purchaser acknowledges that
any information being provided to it or its representatives by Seller pursuant
to or in connection with this Agreement is subject to the terms of a
confidentiality agreement between Swedish Match North America Inc. and North
Atlantic Trading Company, Inc. dated December 7, 1999 (the "Confidentiality
Agreement").
SECTION 5.3. GOVERNMENTAL APPROVALS, ETC.
(a) Each of Purchaser and Seller shall as promptly as
practicable, but in no event later than six (6) Business Days following the
execution and delivery of this Agreement, file with the United States Federal
Trade Commission and the United States Department of Justice, the notification
and report form under the HSR Act required for the transactions contemplated
hereby and any supplemental information requested in connection therewith
pursuant to the HSR Act. Each of Purchaser and Seller shall as promptly as
practicable comply with any other Laws of any country which are applicable to
any of the transactions contemplated hereby and pursuant to which any consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Authority or any other Person in connection with such
transactions is necessary. Each of Purchaser and Seller shall furnish to the
other such necessary information and reasonable assistance as the other may
request in connection with its preparation of any filing, registration or
declaration which is necessary under the HSR Act or any other such Laws.
Purchaser and Seller shall keep each other apprised of the status of any
communications with, and any inquiries or requests for additional information
from, any Governmental Authority, and shall comply promptly with any such
inquiry or request.
(b) Subject to the terms and conditions of this Agreement,
each party shall use its best efforts to cause the Closing to occur as promptly
as practicable, including without limitation, (i) in the case of Purchaser,
vigorously defending against any lawsuits, actions or proceedings, judicial or
administrative, challenging this Agreement or the consummation of the
transactions contemplated hereby on antitrust grounds, including seeking to have
vacated or reversed any preliminary injunction, temporary restraining order,
stay or other legal restraint or prohibition entered or imposed by any court or
other Governmental Authority that is not yet final and nonappealable, (ii) in
the case of Seller, assisting Purchaser and cooperating fully with Purchaser in
defending any lawsuits, actions or proceedings of the nature described in clause
(i) above, including, but not limited to, providing information within Seller's
possession and making Seller's personnel available to Purchaser's counsel in a
timely manner as necessary, instructing Seller's counsel to vigorously defend
depositions of Seller's personnel and to work closely with Purchaser's counsel
to develop common litigation strategies and (iii) in the case of each party, (A)
vigorously defending against any other lawsuits, actions or proceedings naming
it as a defendant that would cause the condition set forth in Section 6.1(d) not
to be satisfied and (B) assisting and cooperating fully with the other party in
defending any lawsuits, actions or proceedings of the nature described in clause
(A) above.
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SECTION 5.4. THIRD PARTY CONSENTS. It shall be the
responsibility of Seller to obtain all Seller Required Consents prior to the
Closing Date. Seller will use its best efforts to obtain such Required Consents,
and Purchaser will cooperate with Seller as may reasonably be requested in its
efforts to obtain such Required Consents.
SECTION 5.5. CERTAIN INFORMATION. After the Closing, upon
reasonable written notice, Purchaser and Seller shall furnish or cause to be
furnished to each other and their respective accountants, counsel and other
representatives access, during normal business hours, such information
(including records pertinent to the Business) and assistance relating to the
Acquired Assets as is reasonably necessary for financial reporting and
accounting matters, the preparation and filing of any Tax returns, reports or
forms or the defense of, or response required under, or pursuant to, any
lawsuit, action or proceeding (including any proceeding involving Seller related
to the Acquired Assets). Purchaser and Seller shall, and shall cause their
Affiliates to, retain until five years after the Closing Date all such records
pertinent to the Acquired Assets which are owned by such Person immediately
after the Closing; after the end of such period, before disposing of any such
records, the applicable party shall give notice to such effect to the other, and
shall give the other, at the other's cost and expense, a reasonable opportunity
to remove and retain all or any part of such records as the other may select.
SECTION 5.6. BULK TRANSFER LAWS. The parties agree to waive
the requirements, if any, of any so-called "bulk transfer law" of any
jurisdiction in connection with the sale of the Acquired Assets to Purchaser.
Seller is current and, from the date hereof until the Closing, shall remain
current, on all payments due to raw material and other vendors supplying
materials necessary to conduct the Business in the Ordinary Course of Business,
in each case, in accordance with the terms of Seller's contracts or other
arrangements with such vendors, except for payments being contested in good
faith by Seller.
SECTION 5.7. ADDITIONAL AGREEMENTS.
(a) Without limiting any other obligation of Purchaser or
Seller under this Agreement, each of Purchaser and Seller will use all
reasonable efforts to facilitate and effect the implementation of the transfer
of the Acquired Assets to Purchaser and the assumption of the Assumed
Liabilities by Purchaser and, for such purpose but without limitation, each of
Purchaser and Seller promptly will at and after the Closing execute and deliver
or cause to be executed and delivered to the other party such assignments,
deeds, bills of sale, assumption agreements, consents and other instruments of
transfer or assumption as Purchaser or its counsel or Seller or its counsel may
reasonably request as necessary or desirable for such purpose (it being
understood that any such assignment, deed, bill of sale, assumption agreement,
consent or other instrument of transfer or assumption shall not provide for any
representations or warranties or any obligations or liabilities that are not
otherwise expressly provided for in this Agreement).
(b) Each party agrees that, upon the request of the other
party, it will negotiate in good faith with such other party to implement any
change to the structure of the transactions contemplated hereby that would
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reduce the tax liability of, or create tax benefits for, such other party; it
being understood and agreed that (i) neither party shall be required to
negotiate with respect to any revision that would have any significant adverse
effect upon such party and (ii) neither party shall be obligated to enter into
any amendment hereto proposed by the other party as contemplated by this Section
5.7(b) unless the failure to do so is wholly unreasonable.
(c) Any defect in record title, including gaps in the chain
of title or encumbrances, with respect to Scheduled Intellectual Property,
whether known or unknown at Closing, shall be corrected by Seller at Seller's
expense diligently following receipt of notice from Purchaser of such defect.
(d) Upon Purchaser's reasonable request and at Purchaser's
expense, Seller shall cooperate with Purchaser and take all action as may be
reasonably necessary in (i) the prosecution of applications to register, and the
maintenance of registrations of, the Intellectual Property or the Technology,
(ii) the enforcement of the Intellectual Property or the Technology against
third parties, and (iii) the defense of any action or proceeding concerning the
Intellectual Property or the Technology. Nothing in this Section 5.7(d) shall be
construed to limit or impair Purchaser's right to indemnification pursuant to
Article 8.
SECTION 5.8. CERTAIN UNDERSTANDINGS. Except as set forth in
this Agreement and in the Seller Ancillary Documents, Purchaser acknowledges
that none of Seller or any other Person has made any representation or warranty,
express or implied, as to the accuracy or completeness of any information
regarding the Business, the Acquired Assets or other matters not included in
this Agreement, the Schedules hereto, or the Seller Ancillary Documents, and
none of Seller or any other Person will be subject to any liability to Purchaser
or any other person resulting from the distribution to Purchaser, or Purchaser's
use of, any such information, including any information, documents or material
made available to Purchaser or in any other form in expectation of the
transactions contemplated hereby.
SECTION 5.9. NONCOMPETITION. As a condition to Purchaser's
obligation to purchase the Acquired Assets and in order to ensure to Purchaser
the full benefits of the Acquired Assets, Seller hereby covenants and agrees
that, for a period of three (3) years following the Closing Date (the
"Restricted Period") and within the entire United States, the NATC Group shall
not engage, directly or indirectly, in the business of manufacturing, and shall
not contract for the manufacturing of, any loose leaf chewing tobacco products;
provided, however, that the NATC Group shall not be deemed to be engaged in the
business of manufacturing, and shall not be deemed to have contracted for the
manufacturing of, any loose leaf chewing tobacco products as a result of (i) the
acquisition after the Closing Date of any Person engaged in such business or in
such contracting or (ii) the provision by International Flavors and
Technologies, Inc., a subsidiary of NATC engaged in the business of developing
tobacco blends and flavorings, or any successor, or any successor to such
business, of consulting or other services to Persons engaged in the business of
manufacturing, or contracting for the manufacturing of, loose leaf chewing
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tobacco products; provided, further, however, that (A) in the event the NATC
Group directly or indirectly acquires control of a Person that is engaged in the
business of manufacturing, or contracts for the manufacturing of, any loose leaf
chewing tobacco products, the NATC Group shall not, and shall cause any such
controlled Person not to, manufacture or contract to be manufactured during the
Restricted Period any brands that were not in existence at the time of such
acquisition, and (B) International Flavors and Technologies, Inc. and any
successors to its business shall not provide consulting or other services to any
person during the Restricted Period that involve efforts to replicate any of the
Brands. Seller acknowledges that any breach of the covenants of this Section
will result in irreparable damage and continuing injury to Purchaser. Therefore,
in the event of any breach or threatened breach of the covenants in this
Section, Seller acknowledges that Purchaser shall be entitled, without limiting
any other remedies, to an injunction restraining the NATC Group from committing
any such violation, and Seller hereby consents to the issuance of such
injunction. Seller acknowledges and agrees that (i) the covenants of this
Section are reasonably necessary for the protection of Purchaser and its
business; (ii) such covenants are reasonably limited with respect to the
activities prohibited, the duration thereof, the geographical area thereof, the
scope thereof and the effect thereof on Seller and the public; (iii) the purpose
and effect of such covenants is solely to protect Purchaser for a limited period
of time from unfair competition by Seller; and (iv) the purchase of the Acquired
Assets is expressly conditioned upon Seller agreeing to abide by and be bound by
all of the covenants and provisions of this Section. In the event that any
provision of this Section shall be determined by any court to be unenforceable,
this Section shall be interpreted to extend over the maximum time periods for
which it may be enforceable, and to the maximum extent in any and all other
respects as to which it may be enforceable, all as shall be determined by such
court.
SECTION 5.10. REVISED DISCLOSURE. In the event that, at any
time after the date hereof, Seller determines that any of Seller's
representations or warranties contained herein are not true and correct in all
material respects, Seller shall provide notice thereof to Purchaser (a "Revised
Disclosure") and, to the extent not previously furnished or made available to
Purchaser, copies of any additional documents that are referenced in the Revised
Disclosure. All representations and warranties set forth in Section 4.1 shall be
deemed amended, supplemented and qualified by the information set forth in the
Revised Disclosure to the same effect as if such Revised Disclosure had been
incorporated herein on the date of this Agreement.
SECTION 5.11. SALE OF EQUIPMENT . From and after the date
hereof until the Closing Date, Seller and Purchaser agree to negotiate in good
faith with respect to the sale by Seller, and the purchase by Purchaser, of such
items, as Purchaser may request, of machinery and equipment used in the Business
that Seller does not expect to use for other purposes after the Closing Date.
Nothing contained in this Agreement shall obligate Seller to sell or Purchaser
to purchase any such machinery or equipment.
SECTION 5.12. ALLOCATION. As soon as practicable after the
Closing, Seller and Purchaser shall in good faith seek to agree upon an
allocation of the Purchase Price among the Acquired Assets and the Assumed
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Liabilities. Subject to mutual agreement with respect to such allocation, prior
to filing any Tax return which includes information related to the transactions
contemplated in this Agreement, Seller and Purchaser, employing the agreed upon
allocation, shall prepare mutually acceptable IRS Forms 8594 which they shall
use to report the transactions contemplated in this Agreement to the Internal
Revenue Service and to all other taxing Governmental Authorities. Neither Seller
nor Purchaser shall take a position in any return, Tax proceeding, Tax audit or
otherwise inconsistent with any such agreed upon allocation; provided, however,
that nothing contained herein shall require Seller or Purchaser to contest any
proposed deficiency or adjustment by any taxing Governmental Authority which
challenges such allocation of the Purchase Price, or exhaust administrative
remedies before any taxing Governmental Authority in connection therewith, and
Seller and Purchaser shall not be required to litigate before any court
(including, without limitation, the United States Tax Court), any proposed
deficiency or adjustment by any taxing Governmental Authority which challenges
such allocation of the Purchase Price. Seller and Purchaser shall give prompt
notice to the other of any challenge by any taxing Governmental Authority of the
agreed upon allocation of the Purchase Price.
SECTION 5.13. CONFIDENTIAL INFORMATION. During the term of
this Agreement, Seller shall not disclose Evaluation Material (as defined in the
Confidentiality Agreement) to any Person (other than to Purchaser and its
advisers) except as may be required by Law.
ARTICLE 6.
CONDITIONS PRECEDENT
SECTION 6.1. CONDITIONS TO EACH PARTY'S OBLIGATION. The
obligation of Purchaser to purchase the Acquired Assets and the obligation of
Seller to sell, assign, transfer, convey and deliver the Acquired Assets to
Purchaser shall be subject to the satisfaction prior to the Closing of the
following conditions:
(A) HSR WAITING PERIOD. Any waiting period applicable to
the transactions contemplated hereby under the HSR Act shall have terminated or
expired, or the parties shall have resolved any antitrust issues raised by a
Governmental Authority in the manner contemplated by Section 5.3(b).
(B) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining
order, preliminary or permanent injunction or other legal restraint or
prohibition preventing the consummation of the transactions contemplated by this
Agreement shall be in effect.
(C) MANUFACTURING SERVICES. Purchaser and Seller shall have
executed and delivered a Manufacturing Services Agreement in substantially the
form attached hereto as Exhibit B (the "Manufacturing Services Agreement").
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(D) NO LAWSUITS OR ACTIONS. No lawsuit, action or other
proceeding shall have been instituted against either party hereto to (i)
restrain, enjoin or otherwise prevent the consummation of the transactions
contemplated hereby or seek equitable relief in the form of a divestiture of
assets or similar actions, or (ii) obtain substantial damages from either party
hereto as a result of the consummation of the transactions contemplated hereby;
provided, however, that no lawsuit action or other proceeding of the nature
described in clause (ii) above shall remain a condition to a party's obligation
hereunder if such party is not reasonably likely to suffer substantial Losses as
a result thereof (after taking into account, without limitation, the merits of
the claim and any rights of such party to receive indemnification or
contribution for any such Losses).
SECTION 6.2. CONDITIONS TO OBLIGATION OF PURCHASER. The
obligation of Purchaser to purchase the Acquired Assets is subject to the
satisfaction at and as of the Closing of each of the following conditions:
(A) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Seller set forth in this Agreement shall be true and correct as of
the date of this Agreement and shall be true and correct in all material
respects as of the Closing as though made at and as of the Closing, and
Purchaser shall have received a certificate signed by an authorized officer of
Seller to such effect.
(B) PERFORMANCE OF OBLIGATIONS OF SELLER. Seller shall have
performed or complied in all material respects with all obligations, conditions
and covenants required to be performed or complied with by it under this
Agreement at or prior to the Closing, and Purchaser shall have received a
certificate signed by an authorized officer of Seller to such effect.
(C) CERTIFICATE OF INCUMBENCY AND RESOLUTIONS. Purchaser
shall have received a certificate of the President and Secretary of each of
Seller and NATC (i) as to the incumbency and signatures of the officers of
Seller and NATC; and (ii) as to the adoption and continued effectiveness of
resolutions of Seller and NATC authorizing the transactions contemplated hereby.
(D) OPINION OF SELLER'S COUNSEL. Purchaser shall have
received an opinion dated the Closing Date of Weil, Gotshal & Manges LLP,
counsel to Seller, substantially in the form set forth in Exhibit C.
(E) RELEASE OF LIEN. Seller shall have obtained the release
of the liens under the Credit Agreement, Security Agreement and Assignment
listed on Schedule 4.1(h) and shall have provided Purchaser of evidence of such
release. Seller shall have filed for recordal with the United States Patent and
Trademark Office the Release and Reassignment, entered into by Societe Generale,
dated as of June 25, 1997, and the Release and Reassignment, entered into by
Lancaster Leaf Tobacco Company of Pennsylvania, Inc., dated as of June 23, 1997,
and shall have provided Purchaser of evidence of such filing.
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(F) SELLER'S REQUIRED CONSENTS. Seller shall have delivered
to Purchaser evidence that all of Seller Required Consents have been obtained.
(G) NO MATERIAL ADVERSE EFFECT. No Material Adverse Effect
shall have occurred; provided, however, that Purchaser shall be deemed to have
waived any claim that a Material Adverse Effect has occurred based upon (i) a
Revised Disclosure as contemplated by Section 5.10 if Purchaser has not
terminated the Agreement as a result thereof pursuant to Section 7.1(a)(iv) and
(ii) an Adverse Change as and to the extent provided in Section 7.1(b).
(H) NATC GUARANTY. NATC shall have executed and delivered
to Purchaser a Guaranty Agreement in the form attached hereto as Exhibit D.
SECTION 6.3. CONDITIONS TO OBLIGATION OF SELLER. The
obligation of Seller to sell, assign, transfer, convey, and deliver the Acquired
Assets is subject to the satisfaction at and as of the Closing of each of the
following conditions:
(A) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser set forth in this Agreement shall be true and correct
has of the date of this Agreement and shall be true and correct in all material
respects as of the Closing as though made at and as of the Closing, and Seller
shall have received a certificate signed by an authorized officer of Purchaser
to such effect.
(B) PERFORMANCE OF OBLIGATIONS OF PURCHASER. Purchaser
shall have performed or complied in all material respects with all obligations,
conditions and covenants required to be performed or complied with by it under
this Agreement at or prior to the Closing, and Seller shall have received a
certificate signed by an authorized officer of Purchaser to such effect.
(C) CERTIFICATE OF INCUMBENCY AND RESOLUTIONS. Seller shall
have received a certificate of the President and Secretary of each of Purchaser
and Swedish Match (i) as to the incumbency and signatures of the officers of
Purchaser and Swedish Match; and (ii) as to the adoption and continued
effectiveness of resolutions of Purchaser and Swedish Match authorizing the
transactions contemplated hereby.
(D) OPINIONS OF PURCHASER'S COUNSEL. Seller shall have
received (i) an opinion dated the Closing Date of Womble Carlyle Sandridge &
Rice, PLLC, counsel to Purchaser, substantially in the form set forth in Exhibit
E and (ii) an opinion dated the Closing Date of the General Counsel of Swedish
Match, with respect to the Swedish Match Guaranty, substantially in the form set
forth in Exhibit F.
(E) SWEDISH MATCH GUARANTY. Swedish Match shall have
executed and delivered to Seller a Guaranty Agreement in the form attached
hereto as Exhibit G (the "Swedish Match Guaranty").
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ARTICLE 7.
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. TERMINATION.
(a) Notwithstanding anything to the contrary in this
Agreement, this Agreement may be terminated and the transactions contemplated
hereby abandoned at any time prior to the Closing:
(i) by mutual written consent of Seller and Purchaser;
(ii) by Seller if any of the conditions set forth in
Sections 6.1 or 6.3 shall have become incapable of
fulfillment, and shall not have been waived by
Seller;
(iii) by Purchaser if any of the conditions set forth in
Sections 6.1 or 6.2 shall have become incapable of
fulfillment, and shall not have been waived by
Purchaser;
(iv) by Purchaser on or before that date that is five (5)
Business Days after the delivery of any Revised
Disclosure pursuant to Section 5.10, if the facts,
events, agreements (or other instruments) or
circumstances first disclosed in the Revised
Disclosure are reasonably likely to have a Material
Adverse Effect;
(v) by Purchaser or Seller pursuant to Section 7.1(b);
(vi) subject to Section 7.1(b), by Seller or Purchaser if
the Closing shall not have occurred on or prior to
the date that is 120 days after the HSR Date;
(vii) by Seller or Purchaser if the Closing shall not have
occurred on or prior to the date that is 180 days
after the date hereof; or
(viii) by Seller, upon 30 days prior written notice to
Purchaser furnished at any time on or after the
conclusion of the 60 days period referred to below,
if any lawsuit, action or other proceeding is
instituted against either party hereto that causes
the condition to Seller's obligations hereunder set
forth in Section 6.1(d) not to be satisfied and such
lawsuit, action or other proceeding is not dismissed,
settled or otherwise resolved within 60 days after
the same is instituted such that it no longer
constitutes a condition to Seller's obligations
hereunder pursuant to Section 6.1(d); provided,
however, that Seller shall have no right to terminate
this Agreement pursuant to this Section 7.1(a)(viii)
as a result of a lawsuit, action or proceeding that
is the subject of a Seller's notice to Purchaser
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pursuant to this Section 7.1(a)(viii), if such
lawsuit, action or other proceeding is dismissed,
settled or otherwise resolved within the 30-day
period following the furnishing of such notice such
that it no longer constitutes a condition to Seller's
obligations hereunder pursuant to Section 6.1(d).
provided, however, that the party seeking termination pursuant to clause (ii),
(iii), (v) or (vi) is not in breach in any material respect of any of its
representations, warranties, covenants or agreements contained in this Agreement
and that the acts or omissions of the party seeking termination are not causing
the failure by the other party to satisfy a condition set forth in clause (ii),
(iii), (v) or (vi).
(b) In the event that, at any time after the date that is
45 days after the HSR Date, Seller determines that there has been or is
reasonably likely to be an adverse change in the Business (an "Adverse Change"),
Seller may notify Purchaser in writing of the occurrence of such Adverse Change
setting forth, in reasonable detail, the facts, events, agreements or
circumstances giving rise to the Adverse Change, and request Purchaser to
provide its good faith estimate of the date by which the condition set forth in
Section 6.1(a) is likely to be satisfied (the "Estimated HSR Date"). Purchaser
shall notify Seller of the Estimated HSR Date within five (5) Business Days
after Seller's request therefore. Within five (5) Business Days after Seller's
receipt of notice of the Estimated HSR Date, Seller may, by notice to Purchaser,
offer the Purchaser the option to either (i) terminate this Agreement, or (ii)
notify Seller of its intention to continue this Agreement, in which event
Purchaser shall be deemed to (A) have waived any claim that a Material Adverse
Effect has occurred on or prior to the Closing based upon the Adverse Change
disclosed by Seller to Purchaser and (B) committed to continue to use best
efforts to satisfy the condition set forth in Section 6.1(a) through the later
of the Estimated Date and the date that is 120 days after the HSR Date.
(c) If this Agreement is terminated and the transactions
contemplated hereby are abandoned as described in this Section 7.1, this
Agreement shall become null and void and of no further force and effect, except
for the provisions of (i) Section 5.2 relating to the obligation of Purchaser to
keep confidential certain information and data obtained by it from Seller, (ii)
this Section 7.1, and (iii) Article 9. Nothing in this Section 7.1 shall be
deemed to release either party from any liability for any breach by such party
of the terms and provisions of this Agreement or to impair the right of either
party to compel specific performance by the other party of its obligations under
this Agreement.
ARTICLE 8.
INDEMNIFICATION
SECTION 8.1. INDEMNIFICATION BY SELLER. Seller hereby
agrees to indemnify Purchaser and its Affiliates and their respective officers,
directors, employees, stockholders, agents and representatives against, and
agrees to hold them harmless from, any Losses, as incurred (payable quarterly
upon written request), to the extent arising from, relating to or otherwise in
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respect of (a) any breach of any representation or warranty of Seller contained
in this Agreement, (b) any breach of any covenant of Seller contained in this
Agreement or in any Seller Ancillary Document, or (c) any Liability of Seller
which is not an Assumed Liability; provided, however, that Seller shall not have
any Liability under this Section 8.1 to the extent the Liability arises as a
result of the operation or use of the Acquired Assets after the Closing or any
action taken or omitted to be taken by Purchaser or any of its Affiliates.
SECTION 8.2. INDEMNIFICATION BY PURCHASER. Purchaser hereby
agrees to indemnify Seller, and its Affiliates and their respective officers,
directors, employees, stockholders, agents and representatives against, and
agrees to hold them harmless from, any Losses, as incurred (payable quarterly
upon written notice) to the extent arising from, relating to or otherwise in
respect of (a) any breach of any representation or warranty of Purchaser
contained in this Agreement, (b) any breach of any covenant of Purchaser
contained in this Agreement or in any Purchaser Ancillary Document requiring
performance after the Closing, (c) any Assumed Liabilities, or (d) the operation
or use of the Acquired Assets after the Closing or any action taken or omitted
to be taken by Purchaser or any of its Affiliates.
SECTION 8.3. LIMITATIONS.
(a) Notwithstanding the provisions of Sections 8.1 and 8.2,
Seller shall not have any indemnification obligation under Section 8.1(a), and
Purchaser shall not have any indemnification obligation under Section 8.2(a),
unless and until the aggregate amount of all Losses relating thereto exceeds
$500,000, and then only to the extent of such excess (it being understood and
agreed that such limitations shall not apply to indemnification obligations
under Section 8.1(b) and 8.1(c) or Section 8.2(b), 8.2(c) and 8.2(d)). In
addition, neither Seller nor Purchaser shall have any liability to indemnify for
Losses under Section 8.1 or Section 8.2, respectively, to the extent such Losses
exceed the Purchase Price except for Losses arising from Third Party Claims
(relating to Product Liabilities or otherwise), with respect to which such
limitation shall not apply.
(b) Each party hereto acknowledges and agrees that its sole
and exclusive remedy with respect to any and all claims relating to the subject
matter of this Agreement shall be pursuant to the indemnification provisions set
forth in this Article 8, except in the case of actual common law fraud.
SECTION 8.4. CHARACTERIZATION OF INDEMNIFICATION PAYMENTS.
All amounts paid by Seller or Purchaser, as the case may be, under this Article
8 shall be treated as adjustments to the Purchase Price for all Tax purposes.
SECTION 8.5. LOSSES NET OF INSURANCE; TAX LOSS AND
BENEFITS. The amount of any Loss for which indemnification is provided under
this Article 8 (a) shall be net of any amounts recovered or recoverable by the
indemnified party under insurance policies with respect to such Loss, (b) shall
be net of any amounts recovered by the indemnified party from any third Person
(by contribution, indemnification or otherwise) with respect to such Loss, and
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(c) shall be (i) increased to take account of any net Tax cost incurred by the
indemnified party arising from the receipt of indemnity payments hereunder
(grossed-up for such increase) and (ii) reduced to take account of any net Tax
benefit realized by the indemnified party arising from the incurrence or payment
of any such Loss. In computing the amount of any such Tax cost or Tax benefit,
the indemnified party shall be deemed to recognize all other items of income,
gain, loss, deduction or credit before recognizing any item arising from the
receipt of any indemnity payment hereunder or the incurrence or payment of any
indemnified loss, liability, claim, damage or expense.
SECTION 8.6. TERMINATION OF INDEMNIFICATION. The
obligations to indemnify and hold harmless any party, (a) pursuant to Section
8.1(a) and Section 8.2(a), shall terminate when the applicable representation or
warranty terminates pursuant to Section 9.4; provided, however, that such
obligations to indemnify and hold harmless shall not terminate with respect to
any item as to which the Person to be indemnified shall have, before the
expiration of the applicable period, previously made a claim by delivering a
notice pursuant to Sections 8.7 or 8.8 (stating in reasonable detail the basis
of such claim) to the party to be providing the indemnification, and (b)
pursuant to the other clauses of Sections 8.1 and 8.2, shall not terminate.
SECTION 8.7. PROCEDURES RELATING TO THIRD PARTY CLAIMS.
(a) In order for a Person (the "indemnified party"), to be
entitled to any indemnification provided for under this Agreement in respect of,
arising out of or involving a claim made by any Person against the indemnified
party (a "Third Party Claim"), such indemnified party must notify the
indemnifying party in writing, and in reasonable detail, of the Third Party
Claim within ten (10) Business Days after receipt by such indemnified party of
written notice of the Third Party Claim; provided, however, that failure to give
such notification shall not affect the indemnification provided hereunder except
to the extent the indemnifying party shall have been actually prejudiced as a
result of such failure (except that the indemnifying party shall not be liable
for any expenses incurred during the period in which the indemnified party
failed to give such notice). Thereafter, the indemnified party shall deliver to
the indemnifying party, promptly after the indemnified party's receipt thereof,
copies of all notices and documents (including court papers) received by the
indemnified party relating to the Third Party Claim.
(b) If a Third Party Claim is made against an indemnified
party, the indemnifying party will be entitled to participate in the defense
thereof and, if it so chooses, to assume the defense thereof with counsel
selected by the indemnifying party; provided, however, that the indemnifying
party shall have the right to assume the defense only if (i) it obtains counsel
that is reasonably satisfactory to the indemnified party; (ii) the Third Party
Claim involves only money damages and does not seek an injunction or other
equitable relief; and (iii) the indemnifying party conducts the defense of the
claim diligently. Should the indemnifying party so assume the defense of a Third
Party Claim, the indemnifying party will not be liable to the indemnified party
for any legal expenses subsequently incurred by the indemnified party in
28
<PAGE>
connection with the defense thereof. If the indemnifying party assumes such
defense, the indemnified party shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the indemnifying party, it being understood that the
indemnifying party shall control such defense. The indemnifying party shall be
liable for the fees and expenses of counsel employed by the indemnified party
for any period during which the indemnifying party has not assumed the defense
thereof (other than during any period in which the indemnified party shall have
failed to give notice of the Third Party Claim as provided above). If the
indemnifying party chooses to defend or prosecute a Third Party Claim, all the
parties hereto shall cooperate in the defense or prosecution thereof. Such
cooperation shall include the retention and (upon the indemnifying party's
request) the provision to the indemnifying party of records and information
which are reasonably relevant to such Third Party Claim, and making employees
available on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder. If the indemnifying party
chooses to defend or prosecute any Third Party Claim, the indemnified party will
agree to any settlement, compromise or discharge of such Third Party Claim which
the indemnifying party may recommend and which by its terms obligates the
indemnifying party to pay the full amount of the liability in connection with
such Third Party Claim and provides for a full and unconditional release of the
indemnified party from any Liability with respect to such Third Party Claim.
Whether or not the indemnifying party shall have assumed the defense of a Third
Party Claim, the indemnified party shall not admit any liability with respect
to, or settle, compromise or discharge, such Third Party Claim without the
indemnifying party's prior written consent (which consent shall not be
unreasonably withheld).
(c) Notwithstanding anything to the contrary contained in
Section 8.7(b), in the event that both Seller and Purchaser are in any Third
Party Claim relating to Product Liabilities and such claim does not relate
exclusively to the period of time during which Products were sold by Seller or
the period of time during which Products were sold by Purchaser, the provisions
of Section 8.7(b) shall not apply to the defense of such Third Party Claim and,
unless the parties otherwise agree in writing, each of Seller and Purchaser
shall assume the defense of such claim on its own behalf and employ counsel, at
its own expense, separate from the counsel employed by the other, it being
understood that each party shall control its own defense. The parties shall
nevertheless cooperate in the defense or prosecution of the Third Party Claim.
Such cooperation shall include the retention and, upon either party's request,
the provision to such party of records and information which are reasonably
relevant to such Third Party Claim, and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder.
(d) Each party hereby agrees to use commercially reasonable
efforts to enforce any rights it may have to indemnification from third Persons
with respect to Product Liabilities that are the subject of any Third Party
Claim.
29
<PAGE>
SECTION 8.8. PROCEDURES RELATING TO NON-THIRD PARTY CLAIMS.
In order for an indemnified party to be entitled to any indemnification provided
for under this Agreement in respect of a claim that does not involve a Third
Party Claim being asserted against or sought to be collected from such
indemnified party, the indemnified party shall deliver notice of such claim with
reasonable promptness to the indemnifying party. The failure by any indemnified
party so to notify the indemnifying party shall not relieve the indemnifying
party from any liability which it may have to such indemnified party under this
Agreement, except to the extent that the indemnifying party shall have been
actually prejudiced by such failure. If the indemnifying party does not notify
the indemnified party within 30 calendar days following its receipt of such
notice that the indemnifying party disputes its liability to the indemnified
party under this Agreement, such claim specified by the indemnified party in
such notice shall be conclusively deemed a liability of the indemnifying party
under this Agreement and the indemnifying party shall pay the amount of such
liability to the indemnified party on demand or, in the case of any notice in
which the amount of the claim (or any portion thereof) is estimated, on such
later date when the amount of such claim (or such portion thereof) becomes
finally determined. If the indemnifying party has timely disputed its liability
with respect to such claim, as provided above, the indemnifying party and the
indemnified party shall proceed in good faith to negotiate a resolution of such
dispute and, if not resolved through negotiations, such dispute shall be
resolved by litigation in an appropriate court of competent jurisdiction.
ARTICLE 9.
GENERAL PROVISIONS
SECTION 9.1. NOTICES. All notices and other communications
hereunder shall be in writing (including telecopy or similar writing) and shall
be sent, delivered or mailed, addressed or telecopied:
(a) if to Purchaser, to
Swedish Match North America, Inc.
6600 West Broad Street
Richmond, Virginia 23230
Attention: Gerard J. Roerty, Jr., Esq.
Telecopy No.: (804) 287-3282
30
<PAGE>
with copies to:
Swedish Match AB
Rosenlundsgaten 36
SE-118 85 Stockholm
Sweden
Attention: Bo Aulin, Senior Vice President,
Secretary and General Counsel
Telecopy No.: 011-46-8-720-7656
Womble Carlyle Sandridge & Rice, PLLC
3300 One First Union Center
301 South College Street
Charlotte, North Carolina 28202
Attention: Lesley G. Powell, Esq.
Telecopy No.: (704) 338-7857
(b) if to Seller, to
National Tobacco Company, L.P.
257 Park Avenue South, 7th Floor
New York, New York 10010-7304
Attention: David I. Brunson,
Chief Financial Officer
Telecopy No.: ( 212 ) 253-8296
with copies to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153-0119
Attention: David E. Zeltner, Esq.
Telecopy No.: (212) 310-8007
Each such notice or other communication shall be given (i) by hand delivery,
(ii) by nationally recognized courier service, or (iii) by telecopy, receipt
confirmed. Each such notice or communication shall be effective (i) if delivered
by hand or by nationally recognized courier service, when delivered at the
address specified in this Section 9.1 (or in accordance with the latest
unrevoked direction from such party) and (ii) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section 9.1 (or
in accordance with the latest unrevoked direction from such party), and
confirmation is received.
SECTION 9.2. INTERPRETATION. When a reference is made in
this Agreement to a Section, Schedule or Exhibit, such reference shall be to a
Section of, or a Schedule or Exhibit to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "included", "includes" or
31
<PAGE>
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation". Whenever the word "material" is used in this
Agreement (except when used with respect to the Purchaser), it shall mean
material to the value of the Acquired Assets or to the operations of the
Business as they relate to the value of the Acquired Assets. Whenever the phrase
"reasonably likely to be adversely determined" is used in this Agreement, it
shall not require a determination that it is more likely than not. Whenever
reference is made to "knowledge of Seller", it shall mean the actual knowledge
of the Persons named on Schedule 9.2, except that, with respect to the
representations and warranties contained in Section 4.1(i), knowledge shall mean
the knowledge of such Persons and Seller's outside trademark counsel. Any matter
set forth in any Schedule shall be deemed set forth in all other Schedules to
the extent relevant.
SECTION 9.3. AMENDMENTS AND WAIVERS. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto. By an instrument in writing Purchaser, on the one hand, or
Seller, on the other hand, may waive compliance by the other party with any term
or provision of this Agreement that such other party was or is obligated to
comply with or perform.
SECTION 9.4. SURVIVAL OF REPRESENTATIONS. The
representations and warranties contained in this Agreement and in any document
delivered in connection herewith shall survive the Closing solely for purposes
of Article 8 and shall terminate at the close of business 18 months following
the Closing Date; provided, however, that (i) the representations and warranties
of Seller in Section 4.1(h) (entitled "Title to Acquired Assets") and in clause
(iii) of Section 4.1(i) (entitled "Intellectual Property and Technology") shall
not terminate until the close of the statute of limitations applicable to claims
made under such Section and (ii) the other representations and warranties of
Seller in Section 4.1(i) shall terminate at the close of business 24 months
following the Closing Date.
SECTION 9.5. SEVERABILITY. If any provision of this
Agreement (or any portion thereof) or the application of any such provision (or
any portion thereof) to any Person or circumstance shall be held invalid,
illegal or unenforceable in any respect by a court of competent jurisdiction,
such invalidity, illegality or unenforceability shall not affect any other
provision hereof (or the remaining portion thereof) or the application of such
provision to any other persons or circumstances.
SECTION 9.6. COUNTERPARTS. This Agreement may be executed
in two or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been
signed by each of the parties and delivered (including by telecopy) to the other
party.
SECTION 9.7. ENTIRE AGREEMENT; NO THIRD PARTY
BENEFICIARIES. This Agreement and the Confidentiality Agreement (a) constitute
the entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and (b) except as provided in Article 8, are not intended to confer upon any
32
<PAGE>
Person other than the parties hereto and their successors and permitted assigns
any rights or remedies hereunder.
SECTION 9.8. GOVERNING LAW. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of New York
applicable to contracts made and to be performed entirely in the State of New
York, regardless of the laws that might otherwise govern under applicable
principles of conflict of laws.
SECTION 9.9. CONSENT TO JURISDICTION. Each of Purchaser and
Seller irrevocably submits to the non-exclusive jurisdiction of (a) the Supreme
Court of the State of New York, New York County, and (b) the United States
District Court for the Southern District of New York located in the Borough of
Manhattan in the City of New York, for the purposes of any suit, action or other
proceeding arising out of this Agreement or any transaction contemplated hereby
and brought by a party hereto against the other party hereto (including, without
limitation, any claim over on the theory of indemnity, contribution or
otherwise). Each of the Purchaser and Seller further agrees that service of any
process, summons, notice or document by U.S. registered mail or overnight
delivery service to such party's respective address set forth in Section 9.1
shall be effective service of process for any action, suit or proceeding in New
York with respect to any matters to which it has submitted to jurisdiction as
set forth above. Each of Purchaser and Seller irrevocably and unconditionally
waives any objection to the laying of venue of any action, suit or proceeding
arising out of this Agreement or the transactions contemplated hereby and
brought by a party hereto against the other party hereto (including, without
limitation, any claim over on the theory of indemnity, contribution or
otherwise) in (a) the Supreme Court of the State of New York, New York County,
or (b) the United States District Court for the Southern District of New York,
and hereby further irrevocably and unconditionally waives and agrees not to
plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.
SECTION 9.10. PUBLICITY. From the date of this Agreement
through the Closing, neither Seller, on the one hand, nor Purchaser, on the
other hand, shall issue or cause the publication of any press release or other
public announcement with respect to the transactions contemplated by this
Agreement without the consent of the other party, except as such release or
announcement may be required by Law or the rules or regulations of a national
securities exchange in the United States, in which case the party required to
make the release or announcement shall allow the other party reasonable time to
comment on such release or announcement in advance of its issuance.
SECTION 9.11. ASSIGNMENT. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any party
hereto without the prior written consent of the other party, except that
Purchaser may assign to any direct or indirect wholly owned subsidiary or
Affiliate of Purchaser the right to acquire part or all of the Acquired Assets
hereunder; provided, however, that any such assignment shall not release
Purchaser from any obligation or liability hereunder (including any right or
obligation under Article 8). Subject to the preceding sentence, this Agreement
33
<PAGE>
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
[SIGNATURES BEGIN ON NEXT PAGE]
34
<PAGE>
IN WITNESS WHEREOF, Seller and Purchaser have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
NATIONAL TOBACCO COMPANY, L.P.
By: NATIONAL TOBACCO FINANCE CORPORATION,
solely in its capacity as general partner
By: /s/ Thomas F. Helms, Jr.
-------------------------------------
Name: Thomas F. Helms, Jr.
Title: President
SWEDISH MATCH NORTH AMERICA INC.
By: /s/ Lennart R. Freeman
-------------------------------------
Name: Lennart R. Freeman
Title: President
35
EXHIBIT 3.2 (g)
AMENDMENT NO. 2 TO THE THIRD AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF NATIONAL TOBACCO COMPANY, L.P.
AMENDMENT NO. 2 dated and effective as of February 10,
2000, to the Third Amendment and Restated Agreement of Limited Partnership (the
"Partnership Agreement") dated as of May 17, 1996, of National Tobacco Company,
L.P. a Delaware limited partnership, between National Tobacco Finance
Corporation, a Delaware corporation, as the sole general partner (the "General
Partner"), and North Atlantic Trading Company, Inc., a Delaware corporation, as
the sole limited partner (the "Limited Partner"). Capitalized terms used but not
otherwise defined herein shall have the meanings respectively assigned to them
in the Partnership Agreement.
The undersigned parties to the Partnership Agreement hereby
agree as follows:
1. Section 3.2 of the Partnership Agreement is hereby
amended in its entirety to read as follows:
"3.2. Limitations on General Partner's Authority.
Notwithstanding the grant of authority to the General Partner
pursuant to Section 3.1, none of the following actions shall be
approved by the General Partner or any officer of the Partnership,
without first having obtained the prior written consent of the
Limited Partner:
(a) Mergers or consolidations involving the partnership,
whether or not Partnership is the surviving entity;
(b) Sale of all or substantially all of the assets of the
partnership (whether effected by sale of assets,
equity exchange or otherwise);
(c) Subject to Section 17-802 of the Act dissolution of
the Partnership; or
(d) Admit a new partner under Section 6.1.
Except as specifically set forth in this Section 3.2, the Limited
Partner shall not participate in the management, control or direction
of the Partnership's operations, business or affairs, transact any
business for the Partnership, or have the power to act for or on
behalf of or to bind the Partnership, such power being vested solely
and exclusively in the General Partner."
NY2:\893787\01\J5NF01!.DOC\64980.0003
<PAGE>
2. Section 9.1 of the Partnership Agreement is hereby
amended in its entirety to read as follows:
"9.1 Dissolution. The Partnership shall be dissolved and
its affairs wound up upon the first to occur of the following events:
(a) The election of the General Partner to dissolve the
Partnership at any time with the consent of the
Limited Partner;
(b) The bankruptcy or the dissolution of the General
partner unless within ninety (90) days after such
event, all the remaining Partners consent in writing
to continue the business of the Partnership and to
the appointment effective as of the date of such
event of one or ore additional general partners of
the Partnership;
(c) The entry of a decree of judicial dissolution
pursuant to Section 17-802 of the Delaware Act; or
(d) The effectiveness of a Transfer of an Interest to the
Lenders pursuant to an exercise of remedies under the
Credit Agreement or the Pledge Agreement unless
within ninety (90) days after the effectiveness of
such Transfer not less than a majority in interest of
the Partners (including the Lenders as transferees of
such Interests) consent in writing to continue the
business of the Partnership."
Except as expressly amended hereby, all provisions of the
Partnership Agreement are hereby ratified, confirmed and approved and remain in
full force and effect.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment No. 2 as of the date first above written.
GENERAL PARTNER:
---------------
NATIONAL TOBACCO FINANCE CORPORATION
By: /s/ Thomas F. Helms, Jr.
-------------------------------------------
Name: Thomas F. Helms, Jr.
Title: Chief Executive Officer
LIMITED PARTNER:
----------------
NORTH ATLANTIC TRADING COMPANY, INC.
By: /s/ Thomas F. Helms, Jr.
-------------------------------------------
Name: Thomas F. Helms, Jr.
Title: Chief Executive Officer
3
EXHIBIT 9.3
AMENDMENT NO. 2
TO VOTING TRUST AGREEMENT
AMENDMENT NO. 2 ("Amendment") dated as of September 22,
1999, to the Voting Trust Agreement dated as of December 17, 1997 (the
"Agreement") by and among Thomas F. Helms, Jr. ("Helms") and David Brunson, as
voting trustees (the "Voting Trustees" or, individually, a "Voting Trustee"),
and Helms Management Corp., a Kentucky corporation and a stockholder (the
"Stockholder") of North Atlantic Trading Company, Inc. a Delaware corporation
(the "Company"). Except as otherwise specified herein, capitalized terms used
and not defined herein shall have the same meaning set forth in the Agreement.
STATEMENT OF PURPOSE
WHEREAS, the Stockholder has deposited into the voting
trust established by the Agreement (the "Voting Trust") 251,300 shares of common
stock, par value $.01 per share, of the Company ("Common Stock"), which shares
have been transferred on the books of the Company into the names of the Voting
Trustees, as Voting Trustees under the Agreement; and
WHEREAS, the Stockholder has been issued Voting Trust
Certificate No. 2 for the number of shares deposited into the Voting Trust and
transferred to the Voting Trustees; and
WHEREAS, the Stockholder wishes to transfer 5,000 shares of
Common Stock held in the Voting Trust to the Stockholder, and each of the Voting
Trustees is willing to effect such transfer; and
WHEREAS, the Stockholder and the Voting Trustees wish to
enter into this Amendment to effect the transfer contemplated by the immediately
preceding recital;
NOW THEREFORE, in consideration of the premises and the
mutual covenants and promises hereinafter contained, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Notwithstanding anything to the contrary contained in
Article 2 of the Agreement, concurrently with the execution of this Amendment,
(i) the Stockholder shall deliver Voting Certificate No. 2 to the Voting
Trustees for cancellation, (ii) the Voting Trustees shall record such
cancellation, (iii) the Voting Trustees shall issue and deliver to the
Stockholder Voting Trust Certificate No. 3 for 246,300 shares in the name of the
Stockholder, and (iv) the Voting Trustees shall transfer 5,000 shares of Common
Stock from the names of the Voting Trustees, as Voting Trustees under the
NY2:\893789\01\J5NH01!.DOC\64980.0003
<PAGE>
Agreement, to the name of the Stockholder, and shall cause a stock certificate
to be issued in the Stockholder's name for such shares.
2. Except for the 5,000 shares of Common Stock to be
transferred to the Stockholder as contemplated hereby and 25,000 shares of
Common Stock transferred to the Stockholder in accordance with Amendment No. 1
to the Agreement dated August 18, 1999, the Stockholder shall deliver to the
Voting Trustees any additional stock certificates representing Shares of the
Company acquired by the Stockholder at any time after its execution of the
Agreement, and shall duly assign said certificates to the Voting Trustees. The
Voting Trustees shall cause all such Shares to be transferred on the books of
the Company into the name of the Voting Trustees, as Voting Trustees hereunder,
and the Voting Trustee shall issue to the Stockholder a Voting Trust Certificate
for the number of Shares transferred by the Stockholder to the Voting Trustees.
3. Except as amended hereby, the Agreement shall remain in
full force and effect in accordance with its terms.
4. This amendment may be signed in one or more
counterparts.
IN WITNESS WHEREOF, the parties hereto have hereunto signed
this Amendment as of the date first above written.
TRUSTEES:
By: /s/ Thomas F. Helms, Jr.
---------------------------------
Name: Thomas F. Helms, Jr.
By: /s/ David Brunson
---------------------------------
Name: David I. Brunson
STOCKHOLDER:
HELMS MANAGEMENT CORP.,
a Kentucky corporation
By: /s/ Thomas F. Helms, Jr.
---------------------------------
Name: Thomas F. Helms, Jr.
Title: President
2
EXHIBIT 10.33
CONFIDENTIAL
November 30, 1999
To: Tom Helms
From: David Brunson
Re: Divestiture of National Tobacco Company
As we have discussed, if we were to proceed with a divestiture of National
Tobacco Company ("NTC"), either in whole or a significant portion of its assets
(e.g., brands, inventory, etc.), and in recognition of my roles in the strategic
and tactical aspects of a prospective successful endeavor, it is agreed that
upon the closure of the divestiture that I would be paid a cash bonus equal to
one percent (1%) of the total transaction value. Total transaction value is
defined as the aggregate of i) cash paid for NTC, ii) debt and/or other
liabilities assumed by the prospective purchaser and iii) securities offered in
lieu of cash.
Agreed as of this 6th day of December, 1999.
/s/ Thomas F. Helms, Jr.
- ---------------------------------------
Thomas F. Helms, Jr.
NY2:\894009\01\J5TL01!.DOC\64980.0003
EXHIBIT 10.34
[NORTH ATLANTIC TRADING COMPANY, INC. LETTERHEAD]
THOMAS F. HELMS, JR.
Chairman of the Board & Chief Executive Officer
VIA FEDERAL EXPRESS
September 24, 1999
Mr. Jack Africk
North Atlantic Trading Company, Inc.
1200 North Federal Highway, Suite 211
Boca Raton, Florida 33431
Re: Consultant Agreement
Dear Jack:
Pursuant to the notification terms of your existing Consultant Agreement, we are
pleased to inform you that North Atlantic Trading Company wishes to renew its
arrangement with you for fiscal year 2000, which will run from January 1, 200 to
December 31, 2000. The terms and conditions of that arrangement would be
maintained as currently stated in the current Consultant Agreement, dated as of
December 11, 1998.
As you recall, the additional compensation for reimbursement of secretarial
services, office rent and car expense were provided in a separate agreement and
was o expire on June 30, 1999 but, at your request, was extended until December
31, 1999. Given the circumstances associated with those one-time decisions, this
additional compensation will not be offered beyond December 31, 1999.
Once again, we would be very pleased to have you continue as a Consultant to the
Company for fiscal year 2000, we believe you provide real and significant value
to the Company. If the above is acceptable to you, please indicate your
agreement by signing below and return the executed document.
Very truly yours,
/s/ Thomas F. Helms, Jr.
Agreed & Accepted this 27th day of September, 1999
/s/ Jack Africk
- ------------------------------------------
Jack Africk
NY2:\893994\01\J5T601!.DOC\64980.0003
EXHIBIT 10.35
NORTH ATLANTIC TRADING COMPANY, INC.
1999 EXECUTIVE INCENTIVE PLAN
The 1999 Executive Incentive Plan (the "Executive Plan") is based on the
Company achieving its budgeted EBITDA, determined on a consolidated basis in
accordance with the Company's 1999 budget. The participants in the Executive
Plan are Thomas F. Helms, Jr. and David I. Brunson.
In the event the Company's EBITDA for 1999 equals or exceeds budgeted EBITDA,
the participants in the Executive Plan shall be entitled to receive bonuses as
follows:
Participants Bonus Amount
------------ ------------
Helms 100% of base salary
Brunson 50% of base salary
In the event the Company's EBITDA for 1999 is less than the budgeted EBITDA, the
Management Committee, acting with the advice of the Compensation Committee,
shall have the right to make discretionary bonus payments to one or more of the
participants in the Executive Plan.
If the Management Committee determines that it is highly probable that bonuses
will be earned pursuant to the Executive Plan, it shall have the right to
accelerate the payment of such bonuses if requested by a participant for tax
purposes, subject to receiving a written undertaking to repay such amounts if in
fact no bonus is earned. Nothing in this Executive Plan restricts the Management
Committee from approving other bonuses for any participant in the Executive
Plan.
NY2:\893953\02\J5S102!.DOC\64980.0003
EXHIBIT 10.36
NORTH ATLANTIC TRADING COMPANY, INC.
1999 MANAGEMENT BONUS PLAN
The 1999 Management Bonus Plan (the "Management Plan") is based on (1) the
Company achieving its budgeted EBITDA, determined on a consolidated basis in
accordance with the Company's 1999 budget, and (2) each participant's individual
performance level during 1999. The participants in the Management Plan are Steve
Dickman, Jim Hinely, Chris Kounnas, Jay Martin, Ray Orlandi, Cliff Ray and John
Todd.
In the event the Company's EBITDA for 1999 equals or exceeds budgeted EBITDA,
each participant in the Management Plan shall be eligible to be considered for a
bonus in an amount up to twenty-five percent (25%) of such participant's base
salary, with the amount of each bonus being based on such participant's level of
performance for 1999. Each participant's level of performance shall be evaluated
based on performance criteria established between such participant and his
supervisor.
In the event the Company's EBITDA for 1999 is less than budgeted EBITDA, the
Executive Committee, acting with the advice of the Compensation Committee, shall
have the right to make discretionary bonus payments to one or more of the
participants in the Management Plan.
Participants in the Management Plan shall not have the right to participate in
any other bonus plan established by the Company for the 1999 fiscal year.
NY2:\893961\02\J5S902!.DOC\64980.0003
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,885
<SECURITIES> 0
<RECEIVABLES> 4,984
<ALLOWANCES> 0
<INVENTORY> 53,499
<CURRENT-ASSETS> 63,231
<PP&E> 12,119
<DEPRECIATION> 6,241
<TOTAL-ASSETS> 243,603
<CURRENT-LIABILITIES> 26,210
<BONDS> 0
44,693
0
<COMMON> 5
<OTHER-SE> (19,018)
<TOTAL-LIABILITY-AND-EQUITY> 243,603
<SALES> 48,647
<TOTAL-REVENUES> 48,647
<CGS> 15,028
<TOTAL-COSTS> 15,028
<OTHER-EXPENSES> (4)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,710
<INCOME-PRETAX> (5,743)
<INCOME-TAX> (689)
<INCOME-CONTINUING> (5,054)
<DISCONTINUED> 6,649
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,766)
<EPS-BASIC> (7.13)
<EPS-DILUTED> (7.13)
</TABLE>
