FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-31931
NORTH ATLANTIC TRADING COMPANY, INC.
------------------------------------
(Exact name of Registrant as Specified in its Charter)
DELAWARE 13-3961898
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
257 Park Avenue South, New York, New York 10010-7304
----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(212) 253-8185
--------------
(Registrant's Telephone Number, Including Area Code)
Unchanged
---------
(Former name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 528,241 shares of common stock,
$.01 par value, as of June 30, 2000.
64980.0003
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except par value)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 274 $ 2,885
Accounts Receivable 4,997 4,984
Inventory 15,920 53,499
Income Taxes Receivable 334 175
Other Current Assets 1,740 1,688
------------- -------------
Total Current Assets 23,265 63,231
Property, Plant and Equipment (Net) 5,192 5,878
Deferred Income Taxes 25,096 29,718
Deferred Financing Costs 7,819 8,956
Goodwill (Net) 103,144 134,537
Other Assets 1,265 1,283
Net Assets of Discontinued Operations 66,095 -
------------- -------------
Total Assets $ 231,876 $ 243,603
============= =============
Current Liabilities:
Revolving Credit Facility $ 2,000 $ -
Accounts Payable 695 314
Accrued Liabilities 3,098 3,176
Deferred Income Taxes 2,905 9,718
Current Portion of Long-Term Debt 14,860 13,002
------------- -------------
Total Current Liabilities 23,558 26,210
Long-Term Debt 174,503 182,862
Other Long-Term Liabilities 8,851 8,851
------------- -------------
Total Liabilities 206,912 217,923
------------- -------------
Preferred Stock, net of discount of $1,174 and $1,259,
respectively (Mandatory Redemption Value of $48,500) 47,592 44,693
------------- -------------
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 9,078
Loans to Stockholders for Stock Purchase (178) (184)
Accumulated Deficit (31,533) (27,912)
------------- -------------
Total Stockholders' Deficit (22,158) (19,013)
------------- -------------
Total Liabilities and Stockholders' Deficit $ 231,876 $ 243,603
============= =============
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
2
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Net Sales $ 6,013 $ 5,128
Cost of Sales 2,698 1,977
------------- -------------
Gross Profit 3,315 3,151
Selling, General and Administrative Expenses 3,136 2,350
Amortization of Goodwill 1,173 1,173
------------- -------------
Operating Income (Loss) (994) (372)
Interest Expense and Financing Costs, Net 5,654 5,954
Other Income 1 2
------------- -------------
Income (Loss) before Income Tax Benefit from Continuing Operations (6,647) (6,324)
Income Tax Benefit from Continuing Operations 3,766 2,829
------------- -------------
Income (Loss) from Continuing Operations (2,881) (3,495)
Income from Discontinued Operations,
Net of Income Taxes of $1,364 and $1,613 1,943 2,316
-------------- --------------
Net Income (Loss) (938) (1,179)
Preferred Stock Dividends (1,463) (1,301)
-------------- --------------
Net Income (Loss) Applicable to Common Shares $ (2,401) $ (2,480)
============== ==============
Basic Earnings per Common Share:
Income (Loss) from Continuing Operations $ (8.22) $ (9.08)
Income from Discontinued Operations 3.68 4.38
-------------- ---------------
Net Income (Loss) $ (4.54) $ (4.70)
============== ===============
Diluted Earnings per Common Share:
Income (Loss) from Continuing Operations $ (8.22) $ (9.08)
Income from Discontinued Operations 3.68 4.38
-------------- ---------------
Net Income (Loss) $ (4.54) $ (4.70)
============== ===============
Weighted average Common Shares Outstanding:
Basic 528.2 528.2
Diluted 528.2 528.2
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
3
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Net Sales $ 20,641 $ 15,372
Cost of Sales 6,790 5,094
------------- -------------
Gross Profit 13,851 10,278
Selling, General and Administrative Expenses 6,444 4,764
Amortization of Goodwill 2,346 2,346
------------- -------------
Operating Income 5,061 3,168
Interest Expense and Financing Costs, Net 11,390 11,992
Other Income 2 3
------------- -------------
Income (Loss) before Income Tax Benefit from Continuing Operations (6,327) (8,821)
Income Tax Benefit from Continuing Operations 2,934 3,845
------------- -------------
Income (Loss) from Continuing Operations (3,393) (4,976)
Income from Discontinued Operations,
Net of Income Taxes of $1,849 and $2,570 2,670 3,751
-------------- -------------
Net Income (Loss) (723) (1,225)
Preferred Stock Dividends (2,899) (2,567)
-------------- -------------
Net Income (Loss) Applicable to Common Shares $ (3,622) $ (3,792)
============== =============
Basic Earnings per Common Share:
Income (Loss) from Continuing Operations $ (11.91) $ (14.28)
Income from Discontinued Operations 5.05 7.10
------------- -------------
Net Income (Loss) $ (6.86) $ (7.18)
============= =============
Diluted Earnings per Common Share:
Income (Loss) from Continuing Operations $ (11.91) $ (14.28)
Income from Discontinued Operations 5.05 7.10
-------------- -------------
Net Income (Loss) $ (6.86) $ (7.18)
============== =============
Weighted average Common Shares Outstanding:
Basic 528.2 528.2
Diluted 528.2 528.2
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
4
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ (723) $ (1,225)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Used in Operating Activities:
Depreciation 900 900
Amortization of Intangible Assets 2,346 2,745
Amortization of Deferred Financing Costs 1,138 1,138
Compensation Expense 50 58
Changes in Operating Assets and Liabilities:
Accounts Receivable (13) (1,086)
Inventory (2,721) 214
Other Current Assets (52) 151
Income Tax Receivable (159) -
Accounts Payable 381 68
Deferred Income Taxes (1,086) (1,275)
Other Assets 18 (176)
Net Assets of Discontinued Operations 2,147 -
Accrued Expenses and Other (128) 436
------------- -------------
Net Cash Provided by Operating Activities 2,098 1,948
------------- -------------
Cash Flows from Investing Activities:
Capital Expenditures (214) (316)
------------- -------------
Net Cash Used in Investing Activities (214) (316)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from Revolving Credit Facility 2,000 4,000
Payments on Term Loans (6,501) (7,812)
Repayment of Loans to Stockholders for Stock Purchases 6 3
------------- -------------
Net Cash Used In Financing Activities (4,495) (3,809)
------------- -------------
Net Decrease in Cash (2,611) (2,117)
Cash, Beginning of Period 2,885 2,817
------------- -------------
Cash, End of Period $ 274 $ 640
============= =============
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
5
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share amounts)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by generally accepted accounting
principles. The condensed consolidated financial statements have been prepared
in accordance with North Atlantic Trading Company, Inc.'s (the "Company's")
customary accounting practices and have not been audited. In the opinion of
Management, all adjustments necessary to fairly present the results of
operations for the reported interim periods have been made and were of a normal
recurring nature. The year-end balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
2. INVENTORIES
The Company uses the last-in, first-out (LIFO) method for valuing its
inventories. As of June 30, 2000, the inventories of the discontinued Smokeless
Tobacco segment have been reclassified into Net Assets of Discontinued
Operations.
6/30/00 12/31/99
------- --------
Raw Materials and Work In Process $ 908 $ 1,704
Leaf Tobacco - 17,028
Finished Goods - Loose Leaf - 2,631
Finished Goods - Cigarette Papers 6,583 3,854
Finished Goods - Make Your Own 571 1,074
Other 212 460
------------- -------------
8,274 26,751
LIFO reserve 7,646 26,748
------------- -------------
$ 15,920 $ 53,499
============= =============
3. PROVISION FOR INCOME TAXES
The provision for income taxes for the six months ended June 30, 2000 and June
30, 1999 was computed based on the estimated annual effective income tax rates
of 60% and 51%, respectively. The primary differences between the effective
income tax rate and the statutory income tax rate are certain goodwill
amortization, which is not deductible for income tax purposes, and the treatment
of operations from the discontinued segment. The income tax benefit for the
three months ended June 30, 2000 includes an adjustment of $0.4 million for the
first quarter 2000 as a result of the change in the estimated annual effective
income tax rate from 86% to 60%.
4. NOTES PAYABLE AND LONG-TERM DEBT
North Atlantic Trading Company, Inc. is a holding company with no operations and
no assets other than its investment in subsidiaries, deferred income tax assets
related to the differences between the book and tax basis of its investment in
National Tobacco Company, L.P. and deferred financing costs related to its debt.
All of the Company's subsidiaries are wholly owned and guarantee the Company's
debt on a full, unconditional and joint and several basis. In Management's
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<PAGE>
opinion, separate financial statements of the subsidiaries are not meaningful to
investors and are not included in these financial statements.
Following is unaudited parent-only summarized financial information of the
Company:
<TABLE>
<CAPTION>
6/30/00 12/31/99
---------------- ---------------
<S> <C> <C>
Current Assets $ - $ -
Noncurrent Assets 222,453 229,453
Current Liabilities 24,384 20,861
Noncurrent Liabilities 174,503 182,862
Redeemable Preferred Stock 47,592 44,693
For the Three Months Ended June 30: 2000 1999
---------------- ---------------
Equity in Earnings of Subsidiaries $ 3,209 3,939
Net Income (Loss) before Payment of Preferred
Stock Dividends (2,244) (1,139)
For the Six Months Ended June 30: 2000 1999
---------------- ---------------
Equity in Earnings of Subsidiaries $ 5,285 7,821
Net Income (Loss) before Payment of Preferred
Stock Dividends (2,018) (1,305)
</TABLE>
5. RECONCILIATION OF LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net Income (Loss) from Continuing Operations $ (2,881)
Preferred Stock Dividends (1,463)
--------------
Basic and Diluted:
Net Income (Loss) from Continuing Operations Available
to Common Stockholders $ (4,344) 528,241 $ (8.22)
============== ============= ==========
THREE MONTHS ENDED JUNE 30, 1999
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Income (Loss) from Continuing Operations $ (3,495)
Preferred Stock Dividends (1,301)
--------------
Basic and Diluted:
Net Income (Loss) from Continuing Operations Available
to Common Stockholders $ (4,796) 528,241 $ (9.08)
============== ============= ==========
SIX MONTHS ENDED JUNE 30, 2000
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Income (Loss) from Continuing Operations $ (3,393)
Preferred Stock Dividends (2,899)
--------------
Basic and Diluted:
Net Income (Loss) from Continuing Operations Available
to Common Stockholders $ (6,292) 528,241 $ (11.91)
============== ============= ==========
7
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Income (Loss) from Continuing Operations $ (4,976)
Preferred Stock Dividends (2,567)
--------------
Basic and Diluted:
Net Income (Loss) from Continuing Operations Available
to Common Stockholders $ (7,543) 528,241 $ (14.28)
============== ============= ==========
</TABLE>
The calculations are based on the weighted average number of shares of common
stock outstanding during the period. Common stock equivalent shares from
warrants of 63.5 and stock options of 25.2 and 23.5 were excluded from the
computation for the three months and six months ended June 30, 2000, and June
30, 1999, as their effect is antidilutive.
6. PENDING DISPOSITION
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
an after-tax gain of approximately $60 million and after-tax proceeds of
approximately $120 million. In addition, the Company will continue to
manufacture these brands for Swedish Match for a limited time following the sale
under a transitional manufacturing arrangement. The transaction is subject to
regulatory approval and other customary conditions. The parties made required
filings with the Federal Trade Commission ("FTC") pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. On June 22, 2000, the FTC
voted to challenge the sale of assets by commencing an administrative action.
The next day the Commission staff filed an action in the United States District
Court for the District of Columbia seeking a preliminary injunction pending the
FTC administrative hearing and decision. The Company agreed to delay the closing
of the transaction pending the resolution of the application for injunctive
relief. That hearing is scheduled to begin September 5 and end September 8,
2000. Although the Company believes that it has good defenses to the action, no
assurances can be given as to its outcome. If the Commission staff were to
prevail, the Asset Purchase Agreement would likely be terminated. In such
event, the Company intends to retain these assets and operate them as a
Smokeless Tobacco Segment and account for such a segment as a continuing
operation. The transaction related costs of approximately $800,000 would be
expensed.
If the Company were to prevail, the transaction would likely close, although,
theoretically, the Commission could continue its administrative action even
though the transaction had closed. Management believes that such a result would
be highly unlikely.
As a result of this pending disposition, the smokeless tobacco segment has been
presented as a discontinued operation and, accordingly, the income of this
segment has been presented separately in the consolidated statement of
operations for the three-month and six-month periods ended June 30. Summarized
results of the operations of the discontinued segment for both periods are
8
<PAGE>
presented separately in the consolidated statement 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, at June 30, 2000, of the discontinued segment, which are to be sold,
consist of inventories of $38.6 million, intangible assets of $28.6 million and
related net deferred tax liabilities of $1.1 million. These net assets of
discontinued operations of $66.1 million have been separately stated in the
consolidated balance sheets. At December 31, 1999, the net assets of the
discontinued segment, which consist primarily of inventories of $40.3 million
and intangible assets of $29.0 million, are included in the consolidated balance
sheets and related footnotes. Operating results of the discontinued segment are
as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
2000 1999 2000 1999
--------------------------- ---------------------------------
<S> <C> <C>
Net Sales $ 11,918 $ 12,902 $ 20,325 $ 23,406
Income before Income Taxes 3,307 3,929 4,519 6,321
Net Income from
Discontinued Operations 1,943 2,316 2,670 3,751
</TABLE>
7. CONTINGENCIES
FTC Action. See Note 6 "Pending Disposition."
California Complaint. 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.
9
<PAGE>
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 damage 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 Roll-Your-Own
("RYO") cigarette papers under the JOB and TOP as well as other brand names. The
Kentucky Complaint alleges, inter alia, that Republic Tobacco's use of
exclusivity agreements, rebates, incentive programs, buy-backs and other
activities related to the sale of RYO cigarette papers in the southeastern
United States violate federal and state antitrust and unfair competition laws.
The Kentucky Complaint also alleges that Republic Tobacco has defaced and
directed others to deface NAOC's point of purchase vendor displays for RYO
cigarette papers by covering up the ZIG-ZAG brand name and advertising material
with advertisements for Republic Tobacco's RYO cigarette brands. The Kentucky
Complaint alleges that these activities constitute unfair competition under the
federal and state law.
On June 30, 1998, Republic Tobacco filed a complaint
against the Company and NAOC in the United States District Court of the Northern
District of Illinois. Republic Tobacco did not serve this complaint or otherwise
notify the Company of its existence until after the filing and service of the
Kentucky Complaint. The Company believes that this complaint was filed in
anticipation of the filing of the Kentucky Complaint. This complaint was amended
by Republic Tobacco on September 16, 1998 (collectively, the complaint and the
amended complaint are referred to herein as the "Illinois Complaint"). In the
Illinois Complaint, Republic Tobacco seeks declaratory relief that (a) Republic
Tobacco's action in defacing the Company's point of purchase display vendors do
not violate federal or state laws and (b) that Republic Tobacco's trade
practices do not violate federal or state antitrust or unfair competition laws.
In addition, the Illinois Complaint alleges that certain actions taken by the
Company to inform its customers of its claims against Republic Tobacco
constitute tortuous interference with customer relationships, false advertising,
violations of Uniform Deceptive Trade Practices and Consumer Fraud Acts,
defamation and unfair competition. In addition, although not included in its
original complaint but in its amended complaint, Republic Tobacco alleges that
the Company has unlawfully monopolized and attempted to monopolize the market
for RYO cigarette papers.
The Company has alleged that Republic Tobacco's trade
practices in the southeastern United States have unlawfully restricted the
10
<PAGE>
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,
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.
11
<PAGE>
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. No individual plaintiff in the Akers cases alleged use of a product
manufactured by the Company, although the Company remains a defendant in those
actions. Accordingly, of the approximately 120 separate claims currently pending
before the Mass Litigation Panel in West Virginia, only one individual plaintiff
(who alleges lung cancer as a result of the use of various types of tobacco
products) claims to have used smokeless tobacco manufactured by the Company
during the relevant time period.
Minnesota Complaint. 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 was held on April 28, 2000, and a decision is pending.
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 were issued in
1999 by the Massachusetts Attorney General affecting point of sale and certain
advertising issues with respect to tobacco products. In January 2000, the
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Federal District Court in Massachusetts upheld the advertising and point-of-sale
regulations, rejecting the industry's First Amendment challenge. On July 12,
2000, the First Circuit Court of Appeals affirmed the District Court's decision.
The Company has been informed that some of the plaintiff tobacco companies
intend to request that the United States Supreme Court review the case, and
request a stay of the regulations pending the disposition of that request. 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 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 have negotiated 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.
In addition to the above described legal proceedings, the Company is subject to
other litigation in the ordinary course of its business. None of these
proceedings are considered material.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Net Sales. Net sales for the three months ended June 30, 2000 were $6.0 million,
an increase of 17.3%, or $0.9 million, from the prior year's period. This
increase was due to more successful promotional activity in 2000 as compared to
that of 1999, to the growth in the Make-Your-Own ("MYO") area and to increased
shipments to Canada. The Company announced a price increase of approximately
5.0% on its Roll-Your-Own paper products effective March 27, 2000. Management
believes that this will have a positive impact on net sales in the future.
Gross Profit. Gross profit for the three months ended June 30, 2000, was $3.3
million, an increase of $0.2 million, or 5.2%, from the prior year's period. The
gross margin declined to 55.1% from 61.4% due to the change in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2000 were $3.1
million, an increase of 33.4% from the prior year's period. This was due
primarily to an increase in customer incentives and associated shipping costs
related to the increase in volume.
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Amortization of Goodwill. Amortization of goodwill was $1.2 million for both
periods.
Interest Expense and Financing Costs. Interest expense and financing costs
decreased to $5.7 million for the three months ended June 30, 2000, from $6.0
million for the prior year's period. This decrease was the result of a lower
average term loan balance, more than off-setting an increase in interest rates.
Income Tax Benefit. Income tax benefits were $3.8 million for the three months
ended June 30, 2000 compared to $2.8 million for the prior year's period due to
an increase in the operating loss and an adjustment of $0.4 million for the
first quarter 2000 as a result of the change in the estimated annual effective
income tax rate from 86% to 60%.
Income from Discontinued Operations. Income from Discontinued Operations
decreased $0.4 million or 16.1% to $1.9 million for the three months ended June
30, 2000 compared to the prior year's period. This was due to an 11.2% decline
in volume and to increased promotional activity. In January, the Company changed
its free goods packaging as a cost savings measure; however, this change was
unsuccessful. In May, the Company reverted back to standard industry packaging
and expects its volume to return to its historical level and trend.
Net Loss. Due to the factors described above, the net loss for the three months
ended June 30, 2000, was $0.9 million compared to a net loss of $1.2 million for
the prior year's period.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Net Sales. Net sales for the six months ended June 30, 2000 were $20.6 million,
an increase of 34.3%, or $5.3 million, from the prior year's period. This
increase was due to more successful promotional activity in 2000 as compared to
that of 1999, to the growth in the Make-Your-Own ("MYO") area and to increased
shipments to Canada. The Company announced a price increase of approximately
5.0% on its Roll-Your-Own paper products effective March 27, 2000. Management
believes that this will have a positive impact on net sales in the future.
Gross Profit. Gross profit for the six months ended June 30, 2000, was $13.9
million, an increase of $3.6 million, or 34.8%, from the prior year's period due
to the increase in net sales described above and its associated product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 2000 were $6.4
million, an increase of 35.3% from the prior year's period. This was due
primarily to an increase in customer incentives and associated shipping costs
related to the increase in volume.
Amortization of Goodwill. Amortization of goodwill was $2.3 million for both
periods.
Interest Expense and Financing Costs. Interest expense and financing costs
decreased to $11.4 million for the six months ended June 30, 2000, from $12.0
million for the prior year's period. This decrease was the result of a lower
average term loan balance, more than off-setting an increase in interest rates.
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Income Tax Benefit. Income tax benefits were $2.9 million for the six months
ended June 30, 2000 compared to $3.8 million for the prior year's period due to
increased profitability associated with the sales increase described above.
Income from Discontinued Operations. Income from Discontinued Operations
decreased $1.1 million or 28.8% to $2.7 million compared to the prior year's
period. This was due primarily to a 17.0% decline in volume. This volume decline
was primarily due to two factors. The first was a disagreement with a major
customer, which the Company believes has now been resolved. Second, in January,
the Company changed its free goods packaging as a cost savings measure; however,
this change was unsuccessful. In May, the Company reverted back to standard
industry packaging and expects its volume to return to its historical level and
trend.
Net Loss. Due to the factors described above, the net loss for the six months
ended June 30, 2000, was $0.7 million compared to a net loss of $1.2 million for
the prior year's period.
LIQUIDITY AND CAPITAL REQUIREMENTS
At June 30, 2000, working capital was ($0.3) million compared to $37.0 million
at December 31, 1999. Due to the pending disposition and its classification of
Net Assets of Discontinued Operations, items relating to the pending disposition
were excluded from the working capital total. If such items were included,
working capital would have been $31.4 million at June 30, 2000. This pro-forma
difference was primarily the result of a Revolving Credit Facility borrowing of
$2.0 million in June 2000 to fund short term operating requirements, a related
decrease in cash of $2.6 million and an increase of $1.8 million in the Current
Portion of Long Term Debt. Further, the $2.0 million borrowing under the
Revolving Credit Facility was repaid on July 26, 2000. The Company expects to
continue to fund its seasonal working capital requirements through its operating
cash flows, and, if needed, bank borrowings. The Company, as of June 30, 2000
has an undrawn availability of $22 million under its committed $25 million
revolving credit facility.
The Company believes that it maintains adequate inventories based on its past
and estimated future sales activity and that its ability to source its inventory
requirements will be met for the foreseeable future.
The Company believes that any effect of inflation at current anticipated levels
will be minimal. Historically, the Company has been able to increase prices at a
rate greater than that of inflation and believes that this trend will continue.
In addition, the Company believes that it will be able to maintain its
relatively stable variable cost structure.
Given its current operation, the Company believes that its capital expenditure
requirements for 2000 will be approximately $750,000. The Company believes that
its current operating cash flows, together with its revolving credit facility,
should be adequate to satisfy the capital requirements for its current
operations; however, the financing of any significant future products, business
or property acquisitions may require additional debt or equity refinancing.
If the proposed asset sale is completed, the Company will receive gross proceeds
of $165 million and estimated after-tax proceeds of approximately $120 million.
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The Company intends to immediately repay its Senior Secured Term Facility and
will then review and evaluate various alternatives for the use of the remaining
funds.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 Activity-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.
FORWARD-LOOKING STATEMENTS
The Company cautions the reader that certain statements in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
and elsewhere in this Form 10-Q are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties and other important factors, including the risks discussed below.
The Company's actual future results, performance or achievement of results may
differ materially from any such results, performance, achievement implied by
these statements. Among the factors that could effect the Company's actual
results and could cause results to differ from those anticipated in the
forward-looking statements contained herein is the Company's ability to
implement its business strategy successfully, which will be dependent on
business, financial, and other factors beyond the Company's control, including,
among others, competitive pressures, prevailing changes in consumer preferences,
consumer acceptance of new product introductions and other marketing
initiatives, access to sufficient quantities of raw material or inventory,
wholesale ordering patterns, product liability litigation and changes in tobacco
products regulation.
The Company cautions the reader not to put undue reliance on any forward-looking
statements. In addition, the Company does not have any intention or obligation
to update the forward-looking statements in this document. The Company claims
the protection of the safe harbor for forward-looking statements contained in
Section 21E of the Securities Exchange Act of 1934.
Item 3. Not Applicable
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Sale of Assets. 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 an after-tax gain of approximately $60 million and after-tax
proceeds of approximately $120 million. In addition, the Company will continue
to manufacture these brands for Swedish Match for a limited time following the
sale under a transitional manufacturing arrangement. The transaction is subject
to regulatory approval and other customary conditions. The parties made required
filings with the Federal Trade Commission ("FTC") pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. On June 22, 2000, the FTC
voted to challenge the sale of assets by commencing an administrative action.
The next day the Commission staff filed an action in the United States District
Court for the District of Columbia seeking a preliminary injunction pending the
FTC administrative hearing and decision. The Company agreed to delay the closing
of the transaction pending the resolution of the application for injunction
relief. That hearing is scheduled to begin September 5 and end September 8,
2000. Although the Company believes that it has good defenses to the action, no
assurances can be given as to its outcome. If the Commission staff were to
prevail, the Asset Purchase Agreement would likely be terminated. In such
event, the Company intends to retain these assets and operate them as a
Smokeless Tobacco Segment and account for such a segment as a continuing
operation. The transaction related costs of approximately $800,000 would be
expensed.
If the Company were to prevail, the transaction would likely close, although,
theoretically, the Commission could continue its administrative action even
though the transaction had closed. Management believes that such a result would
be highly unlikely.
California Complaint. 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
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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 damage 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
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.
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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,
advertised, marked, sold and/or distributed by all defendants." The complaint
contains no specific allegations referring to any individual plaintiff. These
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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. No individual plaintiff in the Akers cases alleged use of a product
manufactured by the Company, although the Company remains a defendant in those
actions. Accordingly, of the approximately 120 separate claims currently pending
before the Mass Litigation Panel in West Virginia, only one individual plaintiff
(who alleges lung cancer as a result of the use of various types of tobacco
products) claims to have used smokeless tobacco manufactured by the Company
during the relevant time period.
Minnesota Complaint. 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 was held on April 28, 2000, and a decision is pending.
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.
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Regulatory and Other Events. Regulations were issued in
1999 by the Massachusetts Attorney General affecting point of sale and certain
advertising issues with respect to tobacco products. In January 2000, the
Federal District Court in Massachusetts upheld the advertising and point-of-sale
regulations, rejecting the industry's First Amendment challenge. On July 12,
2000, the First Circuit Court of Appeals affirmed the District Court's decision.
The Company has been informed that some of the plaintiff tobacco companies
intend to request that the United States Supreme Court review the case, and
request a stay of the regulations pending the disposition of that request. The
regulations have been stayed pending appeal, which was heard on April 7, 2000,
and a decision is pending. 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 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 have negotiated 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.
In addition to the above described legal proceedings, the Company is subject to
other litigation in the ordinary course of its business. None of these
proceedings are considered material.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
b. Reports on Form 8-K
There were no reports on Form 8-K in the Second Quarter of 2000.
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SIGNATURES
The Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NORTH ATLANTIC TRADING COMPANY, INC.
Date: August 2, 2000 /s/ Thomas F. Helms. Jr.
------------------------------------------
Thomas F. Helms, Jr.
President & Chief Executive Officer
Date: August 2, 2000 /s/ David I. Brunson
------------------------------------------
David I. Brunson
Chief Financial Office
22
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EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
