FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 3, 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>
September 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 4,487 $ 2,885
Accounts Receivable 5,281 4,984
Inventory 14,955 53,499
Income Taxes Receivable 334 175
Other Current Assets 2,330 1,688
------------- -------------
Total Current Assets 27,387 63,231
Property, Plant and Equipment (Net) 4,837 5,878
Deferred Income Taxes 22,876 29,718
Deferred Financing Costs 7,250 8,956
Goodwill (Net) 101,971 134,537
Other Assets 1,540 1,283
Net Assets of Discontinued Operations 64,257 -
------------- -------------
Total Assets $ 230,118 $ 243,603
============= =============
Current Liabilities:
Revolving Credit Facility $ - $ -
Accounts Payable 619 314
Accrued Liabilities 8,189 3,176
Deferred Income Taxes 2,905 9,718
Current Portion of Long-Term Debt 14,266 13,002
------------- -------------
Total Current Liabilities 25,979 26,210
Long-Term Debt 168,847 182,862
Other Long-Term Liabilities 8,851 8,851
------------- -------------
Total Liabilities 203,677 217,923
------------- -------------
Preferred Stock, net of discount of $1,131 and $1,259,
respectively (Mandatory Redemption Value of $49,980) 49,131 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 (181) (184)
Accumulated Deficit (31,592) (27,912)
------------- -------------
Total Stockholders' Deficit (22,690) (19,013)
------------- -------------
Total Liabilities and Stockholders' Deficit $ 230,118 $ 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
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Net Sales $ 17,231 $ 17,326
Cost of Sales 4,644 5,169
------------- -------------
Gross Profit 12,587 12,157
Selling, General and Administrative Expenses 4,013 3,371
Amortization of Goodwill 1,173 1,173
------------- -------------
Operating Income 7,401 7,613
Interest Expense and Financing Costs, Net 5,601 5,927
Other Income 1 (5)
------------- --------------
Income before Income Tax Expense from Continuing Operations 1,801 1,681
Income Tax Expense from Continuing Operations 1,419 1,292
------------- -------------
Income from Continuing Operations 382 389
Income from Discontinued Operations,
Net of Income Taxes of $801 and $1,203 1,098 1,702
------------- -------------
Net Income 1,480 2,091
Preferred Stock Dividends (1,538) (1,369)
------------- -------------
Net Income (Loss) Applicable to Common Shares $ (58) $ 722
============= =============
Basic Earnings per Common Share:
Loss from Continuing Operations $ (2.19) $ (1.85)
Income from Discontinued Operations 2.08 3.22
------------- -------------
Net Income (Loss) $ (0.11) $ 1.37
============= =============
Diluted Earnings per Common Share:
Loss from Continuing Operations $ (2.19) $ (1.59)
Income from Discontinued Operations 2.08 2.76
------------- -------------
Net Income (Loss) $ (0.11) $ 1.17
============= =============
Weighted average Common Shares Outstanding:
Basic 528.2 528.2
Diluted 528.2 617.0
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
3
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Net Sales $ 37,872 $ 32,698
Cost of Sales 11,434 10,263
------------- -------------
Gross Profit 26,438 22,435
Selling, General and Administrative Expenses 10,457 8,134
Amortization of Goodwill 3,518 3,518
------------- -------------
Operating Income 12,463 10,783
Interest Expense and Financing Costs, Net 16,991 17,919
Other Income 3 (2)
------------- -------------
Loss before Income Tax Benefit from Continuing Operations (4,525) (7,138)
Income Tax Benefit from Continuing Operations (1,473) (2,511)
------------- -------------
Loss from Continuing Operations (3,052) (4,627)
Income from Discontinued Operations,
Net of Income Taxes of $2,609 and $3,732 3,809 5,493
------------- -------------
Net Income 757 866
Preferred Stock Dividends (4,438) (3,936)
------------- --------------
Net Loss Applicable to Common Shares $ (3,681) $ (3,070)
============= ==============
Basic Earnings per Common Share:
Loss from Continuing Operations $ (14.18) $ (16.21)
Income from Discontinued Operations 7.21 10.40
------------- -------------
Net Loss $ (6.97) $ (5.81)
============= =============
Diluted Earnings per Common Share:
Loss from Continuing Operations $ (14.81) $ (16.21)
Income from Discontinued Operations 7.21 10.40
------------- -------------
Net Loss $ (6.97) $ (5.81)
============= =============
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>
Nine Months Nine Months
Ended Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 757 $ 866
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation 1,350 1,350
Amortization of Intangible Assets 3,518 4,117
Amortization of Deferred Financing Costs 1,706 1,707
Compensation Expense 75 87
Changes in Operating Assets and Liabilities:
Accounts Receivable (297) (1,722)
Inventory (1,756) 2,801
Other Current Assets (642) -
Income Tax Receivable (159) -
Accounts Payable 305 8
Deferred Income Taxes 1,135 1,220
Other Assets (257) (198)
Net Assets of Discontinued Operations 3,985 -
Accrued Expenses and Other 4,939 5,659
------------- -------------
Net Cash Provided by Operating Activities 14,659 15,895
------------- -------------
Cash Flows from Investing Activities:
Capital Expenditures (309) (573)
------------- -------------
Net Cash Used in Investing Activities (309) (573)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from Revolving Credit Facility 2,000 4,000
Payments on Revolving Credit Facility (2,000) (4,000)
Payments on Term Loans (12,751) (14,799)
Repayment of Loans to Stockholders for Stock Purchases 3 4
------------- -------------
Net Cash Used In Financing Activities (12,748) (14,795)
------------- -------------
Net Increase in Cash 1,602 527
Cash, Beginning of Period 2,885 2,817
------------- -------------
Cash, End of Period $ 4,487 $ 3,344
============= =============
</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 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 September 30, 2000, the inventories of the discontinued
Smokeless Tobacco segment have been reclassified into Net Assets of Discontinued
Operations.
<TABLE>
<CAPTION>
9/30/00 12/31/99
------- --------
<S> <C> <C>
Raw Materials and Work In Process $ 802 $ 1,704
Leaf Tobacco - 17,028
Finished Goods - Loose Leaf - 2,631
Finished Goods - Cigarette Papers 5,310 3,854
Finished Goods - Make Your Own 856 1,074
Other 341 460
------------- -------------
7,309 26,751
LIFO reserve 7,646 26,748
------------- -------------
$ 14,955 $ 53,499
============= =============
</TABLE>
3. PROVISION FOR INCOME TAXES
The provision for income taxes for the nine months ended September 30, 2000 and
September 30, 1999 was computed based on the estimated annual effective income
tax rates of 60% and 58%, respectively. The primary difference between the
effective income tax rate and the statutory income tax rate is certain goodwill
amortization, which is not deductible for income tax purposes.
4. NOTES PAYABLE AND LONG-TERM DEBT
North Atlantic Trading Company, Inc. is a holding company with no operations and
no assets other than its investment in subsidiaries, deferred income tax assets
related to the differences between the book and tax basis of its investment in
National Tobacco Company, L.P. and deferred financing costs related to its debt.
All of the Company's subsidiaries are wholly owned and guarantee the Company's
debt on a full, unconditional and joint and several basis. In Management's
opinion, separate financial statements of the subsidiaries are not meaningful to
investors and are not included in these financial statements.
6
<PAGE>
Following is unaudited parent-only summarized financial information of the
Company:
<TABLE>
<CAPTION>
9/30/00 12/31/99
------------- -------------
<S> <C> <C>
Current Assets $ - $ -
Noncurrent Assets 221,217 229,453
Current Liabilities 26,060 20,861
Noncurrent Liabilities 168,847 182,862
Redeemable Preferred Stock 49,131 44,693
For the Three Months Ended September 30: 2000 1999
------------- -------------
Equity in Earnings of Subsidiaries $ 4,915 3,939
Net Income (Loss) before Payment of Preferred
Stock Dividends 1,499 (1,139)
For the Nine Months Ended September 30: 2000 1999
------------- -------------
Equity in Earnings of Subsidiaries $ 11,539 7,821
Net Income (Loss) before Payment of Preferred
Stock Dividends 821 (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 SEPTEMBER 30, 2000
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net Income from Continuing Operations $ 382
Preferred Stock Dividends (1,538)
----------
Basic and Diluted:
Net Loss from Continuing Operations
Available to Common Stockholders $ (1,156) 528,241 $ (2.19)
========== =========== =========
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Income from Continuing Operations $ 389
Preferred Stock Dividends (1,538)
-----------
Net Loss from Continuing Operations
Available to Common Stockholders $ (980)
===========
Basic 528,241 $ (1.85)
=========== =========
Effect of Dilutive Securities:
Warrants 63,490
Stock Options 25,300
-----------
Diluted 617,031 $ (1.59)
=========== =========
NINE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Loss from Continuing Operations $ (3,052)
Preferred Stock Dividends (4,438)
-----------
Basic and Diluted:
Net Loss from Continuing Operations
Available to Common Stockholders $ (7,490) 528,241 $ (14.18)
=========== =========== =========
7
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Loss from Continuing Operations $ (4,627)
Preferred Stock Dividends (3,936)
----------
Basic and Diluted:
Net Loss from Continuing Operations
Available to Common Stockholders $ (8,563) 528,241 $ (16.21)
========== =========== =========
</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 21.2 and 25.3 were excluded from the
computation for the three month and nine month periods ended September 30, 2000,
and the nine month period ended September 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 America 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 FTC 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 began on September 5 and ended on September 11, 2000. Closing
arguments were heard on September 27, 2000. To date, the Court has yet to issue
its ruling. Although the Company believes that it has good defenses to the
action, no assurances can be given as to its outcome. If the FTC staff were to
prevail, the Asset Purchase Agreement would likely be terminated. In such an
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 $1,500,000 would be
expensed, of which $706,000 was deferred on the Balance Sheet at September 30,
2000.
If the Company prevails with respect to the FTC's preliminary injunction motion
and related appeals, if any, the Company expects the transaction to be
8
<PAGE>
consummated promptly thereafter. The FTC may nevertheless continue an
administrative action against Swedish Match after such consummation.
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 nine-month periods ended September 30.
Summarized results of the operations of the discontinued segment for both
periods are 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 September 30, 2000, of the discontinued segment, which are to be
sold, consist of inventories of $36.9 million, intangible assets of $28.4
million and related net deferred tax liabilities of $1.1 million. These net
assets of discontinued operations of $64.2 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
---------------------- ------------------------
<S> <C> <C>
Net Sales $ 10,605 $ 12,902 $ 30,930 $ 35,880
Income before Income Taxes 1,899 2,904 6,418 9,225
Net Income from
Discontinued Operations 1,098 1,702 3,809 5,493
</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 purported 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 claimed 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
9
<PAGE>
"known to the state to cause reproductive toxicity." Plaintiffs further claimed
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 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 expects that the case
would 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, NAOC and National Tobacco 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
10
<PAGE>
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.
On October 20, 2000 Republic filed a motion to dismiss, stay, or
transfer the Kentucky proceeding to the Illinois Court. The Company's response
is due November 7, 2000. The Company intends to vigorously oppose the
application.
Discovery is continuing in the case.
West Virginia Complaints. On October 6, 1998 National Tobacco
Company, L.P. ("National") 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
National 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. National was named in only six of the cases,
five of which alleged consumption prior to the existence of National of products
bearing the trademarks currently owned by National. The remaining case alleges
lung cancer as the injury. National has been dismissed from the first five
cases, and intends to vigorously defend the remaining action.
On November 13, 1998, National 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 National 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.
11
<PAGE>
These two actions were commenced by two separate plaintiffs,
"individually and/or as the representatives of the various descendants named
herein [who] are residents of the State of West Virginia and/or smoked
cigarettes or used other tobacco products, manufactured, promoted, advertised,
marked, sold and/or distributed by all defendants." The complaint contains no
specific allegations referring to any individual plaintiff. These two actions
were brought against major manufacturers of cigarettes, smokeless tobacco
products, and certain other organizations.
The complaint alleges that "plaintiffs and plaintiffs' descendents
suffer/had suffered from a form of cancer of vascular disease and other injuries
due wholly or in part to defendants' products and/or activities." The complaint
further alleges that the actions "arise from decades of intentionally wrongful
conduct by the defendants who have manufactured, promoted, and sold cigarettes
and both 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
National, although National remains a defendant in those actions.
Ohio Complaints. On September 14, 2000, National was served with a
Summons and Consolidated Complaint filed in Circuit Court of Ohio County, West
Virginia, entitled Linda Adams, et al. v. Philip Morris Inc., et al. (Civil
Action Nos. 00-C-373 to 00-C-911). While National was served with a single
Summons and Consolidated Complaint, the caption of the Consolidated Complaint
lists 539 separate plaintiffs, each with an individual case number. Only one of
these plaintiffs alleged use of a product currently manufactured by National.
The time period during which this plaintiff allegedly used the product has not
yet been specified. Thus, it is not yet known whether National is a proper
defendant in this case.
On September 19, 2000, National was served with a Summons and
Consolidated Complaint filed in Circuit Court of Ohio County, West Virginia,
entitled Ronald Accord, et al. v. Philip Morris Inc., et al. (Civil Action Nos.
00-C-923 to 00-C-1483). While National was served with a single Summons and
Consolidated Complaint, the caption of the Consolidated Complaint lists 561
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separate plaintiffs, each with an individual case number. A total of five of
these plaintiffs allege use of a product currently manufactured by National. One
of these plaintiffs does not specify the time period during which the product
was allegedly used, and one alleges use that covers, in part, a period when
National did not manufacture the product. Of the remaining three, one alleges
consumption of a competitor's chewing tobacco from 1966 to 2000 and National
Tobacco's Beech-Nut chewing tobacco from 1998 to 2000; another alleges a
twenty-four year smoking history ending in 1995 and consumption of Beech-Nut
chewing tobacco from 1990 to 1995; and the last alleges a thirty-five year
smoking history ending in 2000, and consumption of National Tobacco's Durango
Ice chewing tobacco from 1990 to 2000 (although Durango Ice did not come onto
the market until 1999).
Minnesota Complaint. On September 24, 1999, National 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 National's (and, prior to
the formation of National, 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 were filed on all
counts except for negligence and, on September 28, 2000, the Court granted all
of National's motions. The sole cause of action remaining is for negligence. The
Court, however, granted leave to the plaintiff to replead within sixty days
those alleged causes of action based on alleged fraud.
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 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 cigarette
company plaintiffs have requested that the United States Supreme Court review
the case, and a stay of the regulations pending the disposition of that request
has been granted. 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
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currently scheduled for the January, 2001 term 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.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net Sales. Net sales for the three months ended September 30, 2000 were $17.2
million compared to $17.3 million for the prior year's period. An increase in
Make-Your-Own ("MYO") products of $1.1 million was offset by a like decrease in
the Roll-Your-Own paper products. While the July 2000 promotion met Management's
expectations, its results were less than the July 1999 promotion, which received
an exceptional benefit due to the resolution of the infringing goods case
(Bollore, S.A. v. Import Warehouses, Inc.).
Gross Profit. Gross profit for the three months ended September 30, 2000, was
$12.6 million, an increase of $0.4 million, or 3.3%, from the prior year's
period. The gross margin increased to 73.0% from 70.2% due primarily to the
impact of a price increase of approximately 5.0% on Roll-Your-Own paper products
effective March 27, 2000 and the benefits of the Company's foreign exchange
position with regard to the French franc.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000 were $4.0
million, an increase of $0.6 million or 17.6% from the prior year's period. This
was due to a $0.4 million increase in customer incentives and associated
shipping costs to increase distribution of the MYO products and a $0.2 million
increase in allocated SG&A as a result of the Company's allocation methodology
which has been in place since the purchase of the business in 1997.
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 $5.6 million for the three months ended September 30, 2000, from
$5.9 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 Taxes. Income taxes were $1.4 million for the three months ended
September 30, 2000 compared to $1.3 million for the prior year's period.
Income from Discontinued Operations. Income from Discontinued Operations
decreased $0.6 million or 35.5% to $1.1 million for the three months ended
September 30, 2000 compared to the prior year's period. This was due to a 17.3%
decline in net sales volume as a result of lower than expected sales to a
significant customer, packaging for certain free goods did not meet market
acceptance and has been subsequently changed and to an increase in resignations
in the field sales organization, adversely affecting sales coverage, due to the
pending asset sale.
Net Income. Due to the factors described above, the net income for the three
months ended September 30, 2000, was $1.5 million compared to $2.1 million for
the prior year's period.
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COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net Sales. Net sales for the nine months ended September 30, 2000 were $37.9
million, an increase of 15.9%, or $5.2 million, from the prior year's period.
This increase was due, in part, to the 5% price increase on March 27, 2000, to
the growth in the Make-Your-Own ("MYO") area and to increased shipments to
Canada.
Gross Profit. Gross profit for the nine months ended September 30, 2000, was
$26.4 million, an increase of $4.0 million, or 17.9%, from the prior year's
period due to the increase in net sales described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 2000 were $10.5
million, an increase of 29.6% from the prior year's period. This was due
primarily to an increase in marketing costs associated with customer incentives
and associated shipping costs to increase distribution of the MYO products and
to increased legal expenses associated with the Company's antitrust litigation.
Amortization of Goodwill. Amortization of goodwill was $3.5 million for both
periods.
Interest Expense and Financing Costs. Interest expense and financing costs
decreased to $17.0 million for the nine months ended September 30, 2000, from
$17.9 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 $1.5 million for the nine months
ended September 30, 2000 compared to $2.5 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 $1.7 million or 30.9% to $3.8 million compared to the prior year's
period. This was due primarily to a 16.5% decline in volume. This volume decline
was primarily due to three factors. The first was the impact of the previously
reported disagreement with a major customer, which the Company believes has now
been resolved. Second, in January, the Company made certain free goods packaging
changes as a cost savings measure; however, these changes did not meet with
market acceptance. In May, the Company reverted back to standard industry
packaging and expects its volume to gradually return to its historical level and
trend. Third, due to the length of time the proposed asset sale has been
pending, there has occurred an increase in resignations among the field sales
organization, which has adversely affected sales coverage.
Net Income. Due to the factors described above, the net income for the nine
months ended September 30, 2000, was $0.8 million compared to $0.9 million for
the prior year's period.
LIQUIDITY AND CAPITAL REQUIREMENTS
At September 30, 2000, working capital was $1.4 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
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were included, working capital would have been $31.5 million at September 30,
2000. This pro-forma difference was primarily the result of a $4.3 million
increase in accrued interest on Senior Notes which is paid semi-annually in June
and December and a $1.3 million increase in the Current portion of Long Term
Debt. 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 September 30, 2000 has an undrawn availability of $24 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. 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.
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.
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FORWARD-LOOKING STATEMENTS
The Company cautions the reader that certain statements in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
and elsewhere in this Form 10-Q are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties and other important factors, including the risks discussed below.
The Company's actual future results, performance or achievement of results may
differ materially from any such results, performance, achievement implied by
these statements. Among the factors that could effect the Company's actual
results and could cause results to differ from those anticipated in the
forward-looking statements contained herein is the Company's ability to
implement its business strategy successfully, which will be dependent on
business, financial, and other factors beyond the Company's control, including,
among others, competitive pressures, prevailing changes in consumer preferences,
consumer acceptance of new product introductions and other marketing
initiatives, access to sufficient quantities of raw material or inventory,
wholesale ordering patterns, product liability litigation and changes in tobacco
products regulation.
The Company cautions the reader not to put undue reliance on any forward-looking
statements. In addition, the Company does not have any intention or obligation
to update the forward-looking statements in this document. The Company claims
the protection of the safe harbor for forward-looking statements contained in
Section 21E of the Securities Exchange Act of 1934.
Item 3. Not Applicable
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Sale of Assets. On February 11, 2000, the Company entered into a
definitive Asset Purchase Agreement with Swedish Match North America 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 FTC 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 began on September 5 and ended on September 11, 2000. Closing
arguments were heard on September 27, 2000. To date, the Court has yet to issue
its ruling. Although the Company believes that it has good defenses to the
action, no assurances can be given as to its outcome. If the FTC staff were to
prevail, the Asset Purchase Agreement would likely be terminated. In such an
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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 $1,500,000 would be
expensed, of which $706,000 was deferred on the Balance Sheet at September 30,
2000.
If the Company prevails with respect to the FTC's preliminary injunction motion
and related appeals, if any, the Company expects the transaction to be
consummated promptly thereafter. The FTC may nevertheless continue an
administrative action against Swedish Match after such consummation.
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 purported 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 claimed 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 claimed
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 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 expects that the case
would 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
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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, NAOC and National Tobacco in the United States District Court of the
Northern District of Illinois. Republic Tobacco did not serve this complaint or
otherwise notify the Company of its existence until after the filing and service
of the Kentucky Complaint. The Company believes that this complaint was filed in
anticipation of the filing of the Kentucky Complaint. This complaint was amended
by Republic Tobacco on September 16, 1998 (collectively, the complaint and the
amended complaint are referred to herein as the "Illinois Complaint"). In the
Illinois Complaint, Republic Tobacco seeks declaratory relief that (a) Republic
Tobacco's action in defacing the Company's point of purchase display vendors do
not violate federal or state laws and (b) that Republic Tobacco's trade
practices do not violate federal or state antitrust or unfair competition laws.
In addition, the Illinois Complaint alleges that certain actions taken by the
Company to inform its customers of its claims against Republic Tobacco
constitute tortuous interference with customer relationships, false advertising,
violations of Uniform Deceptive Trade Practices and Consumer Fraud Acts,
defamation and unfair competition. In addition, although not included in its
original complaint but in its amended complaint, Republic Tobacco alleges that
the Company has unlawfully monopolized and attempted to monopolize the market
for RYO cigarette papers.
The Company has alleged that Republic Tobacco's trade practices in
the southeastern United States have unlawfully restricted the Company's ability
to expand the distribution of ZIG-ZAG RYO cigarette papers in the southeast,
where sales have been historically underdeveloped.
The Company intends to vigorously pursue its claims set forth in the
Kentucky Complaint. With respect to the claims set forth in the Illinois
Complaint, the Company has filed a Motion to Dismiss concerning a substantial
portion of the claims against the Company, and believes that Republic Tobacco's
claims against the Company are without merit. The Company intends to vigorously
defend the Illinois Complaint.
On April 9, 1999, the Court in the Illinois 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
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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.
On October 20, 2000 Republic filed a motion to dismiss, stay, or
transfer the Kentucky proceeding to the Illinois Court. The Company's response
is due November 7, 2000. The Company intends to vigorously oppose the
application.
Discovery is continuing in the case.
West Virginia Complaints. On October 6, 1998 National Tobacco
Company, L.P. ("National") 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
National 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. National was named in only six of the cases,
five of which alleged consumption prior to the existence of National of products
bearing the trademarks currently owned by National. The remaining case alleges
lung cancer as the injury. National has been dismissed from the first five
cases, and intends to vigorously defend the remaining action.
On November 13, 1998, National 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 National was served with a single
summons and complaint, the caption of the complaint lists 18 separate
plaintiffs, each with an individual case number. This action was filed by the
same plaintiffs' attorney who filed the Allen action and the complaint is
identical in most material respects.
These two actions were commenced by two separate plaintiffs,
"individually and/or as the representatives of the various descendants named
herein [who] are residents of the State of West Virginia and/or smoked
cigarettes or used other tobacco products, manufactured, promoted, advertised,
marked, sold and/or distributed by all defendants." The complaint contains no
specific allegations referring to any individual plaintiff. These two actions
were brought against major manufacturers of cigarettes, smokeless tobacco
products, and certain other organizations.
The complaint alleges that "plaintiffs and plaintiffs' descendents
suffer/had suffered from a form of cancer of vascular disease and other injuries
due wholly or in part to defendants' products and/or activities." The complaint
further alleges that the actions "arise from decades of intentionally wrongful
conduct by the defendants who have manufactured, promoted, and sold cigarettes
and both 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
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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
National, although National remains a defendant in those actions.
Ohio Complaints. On September 14, 2000, National was served with a
Summons and Consolidated Complaint filed in Circuit Court of Ohio County, West
Virginia, entitled Linda Adams, et al. v. Philip Morris Inc., et al. (Civil
Action Nos. 00-C-373 to 00-C-911). While National was served with a single
Summons and Consolidated Complaint, the caption of the Consolidated Complaint
lists 539 separate plaintiffs, each with an individual case number. Only one of
these plaintiffs alleged use of a product currently manufactured by National.
The time period during which this plaintiff allegedly used the product has not
yet been specified. Thus, it is not yet known whether National is a proper
defendant in this case.
On September 19, 2000, National was served with a Summons and
Consolidated Complaint filed in Circuit Court of Ohio County, West Virginia,
entitled Ronald Accord, et al. v. Philip Morris Inc., et al. (Civil Action Nos.
00-C-923 to 00-C-1483). While National was served with a single Summons and
Consolidated Complaint, the caption of the Consolidated Complaint lists 561
separate plaintiffs, each with an individual case number. A total of five of
these plaintiffs allege use of a product currently manufactured by National. One
of these plaintiffs does not specify the time period during which the product
was allegedly used, and one alleges use that covers, in part, a period when
National did not manufacture the product. Of the remaining three, one alleges
consumption of a competitor's chewing tobacco from 1966 to 2000 and National
Tobacco's Beech-Nut chewing tobacco from 1998 to 2000; another alleges a
twenty-four year smoking history ending in 1995 and consumption of Beech-Nut
chewing tobacco from 1990 to 1995; and the last alleges a thirty-five year
smoking history ending in 2000, and consumption of National Tobacco's Durango
Ice chewing tobacco from 1990 to 2000 (although Durango Ice did not come onto
the market until 1999).
Minnesota Complaint. On September 24, 1999, National 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 National's (and, prior to
the formation of National, 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 were filed on all
counts except for negligence and, on September 28, 2000, the Court granted all
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of National's motions. The sole cause of action remaining is for negligence. The
Court, however, granted leave to the plaintiff to replead within sixty days
those alleged causes of action based on alleged fraud.
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 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 cigarette
company plaintiffs have requested that the United States Supreme Court review
the case, and a stay of the regulations pending the disposition of that request
has been granted. 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 the January, 2001 term 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 Third 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: November 6, 2000 /s/ Thomas F. Helms. Jr.
----------------------------------------
Thomas F. Helms, Jr.
President & Chief Executive Officer
Date: November 6, 2000 /s/ David I. Brunson
----------------------------------------
David I. Brunson
Chief Financial Officer
24
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EXHIBIT INDEX
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Exhibit
Number Description
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27.1 Financial Data Schedule
