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 March 31, 2004 |
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10 shares of common stock, $.01 par value, as of May 14, 2003.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
North Atlantic Trading Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except share data)
(unaudited)
| March 31, 2004 |
December 31, 2003 |
|||||||
| Current assets: |
||||||||
| Cash |
$ | 4,440 | $ | 304 | ||||
| Restricted cash (to pay off Senior notes including accrued interest) |
160,162 | — | ||||||
| Accounts receivable, net |
5,454 | 10,384 | ||||||
| Inventories |
46,839 | 42,257 | ||||||
| Income taxes receivable |
— | 910 | ||||||
| Other current assets |
3,452 | 3,594 | ||||||
| Total current assets |
220,347 | 57,449 | ||||||
| Property, plant and equipment, net |
8,280 | 8,310 | ||||||
| Deferred income taxes |
26,992 | 22,549 | ||||||
| Deferred financing costs |
10,786 | 5,163 | ||||||
| Goodwill |
128,697 | 128,659 | ||||||
| Other intangible assets |
10,644 | 10,851 | ||||||
| Other assets |
10,727 | 10,663 | ||||||
| Total assets |
$ | 416,473 | $ | 243,644 | ||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 2,964 | $ | 5,275 | ||||
| Accrued expenses |
13,331 | 6,796 | ||||||
| Deferred income taxes |
5,549 | 4,654 | ||||||
| Revolving credit facility |
20,400 | 6,300 | ||||||
| Senior notes |
155,000 | — | ||||||
| Payable to parent |
2,406 | — | ||||||
| Total current liabilities |
199,650 | 23,025 | ||||||
| Senior notes and long-term debt |
200,000 | 185,686 | ||||||
| Deferred income taxes |
1,055 | 1,141 | ||||||
| Postretirement benefits |
9,750 | 9,333 | ||||||
| Pension benefits and other long-term liabilities |
5,399 | 5,946 | ||||||
| Total liabilities |
415,854 | 225,131 | ||||||
| Preferred Stock, (mandatory redemption value of $0 and $65,080, respectively) |
— | 65,080 | ||||||
| Stockholders’ Deficit: |
||||||||
| Common stock, voting, $.01 par value authorized shares, 750,000; issued and outstanding shares, 10 and 528,241 |
— | 5 | ||||||
| Additional paid-in capital |
64,095 | 9,663 | ||||||
| Loans to stockholders for stock purchase |
(163 | ) | (168 | ) | ||||
| Accumulated other comprehensive income (loss) |
(1,229 | ) | (1,229 | ) | ||||
| Accumulated deficit |
(62,084 | ) | (54,838 | ) | ||||
| Total stockholders’ equity (deficit) |
619 | (46,567 | ) | |||||
| Total liabilities and stockholders’ deficit |
$ | 416,473 | $ | 243,644 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
North Atlantic Trading Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands except per share amounts)
(unaudited)
| Three months March 31, 2004 |
Three months March 31, 2003 |
|||||||
| Net sales |
$ | 22,105 | $ | 14,249 | ||||
| Cost of sales |
12,252 | 7,700 | ||||||
| Gross profit |
9,853 | 6,549 | ||||||
| Selling, general and administrative expenses |
11,439 | 7,101 | ||||||
| Operating income (loss) |
(1,586 | ) | (552 | ) | ||||
| Interest expense and financing costs, net |
7,410 | 4,642 | ||||||
| Other expense |
88 | 337 | ||||||
| Income (loss) before income tax expense (benefit) |
(9,084 | ) | (5,531 | ) | ||||
| Income tax expense (benefit) |
(3,452 | ) | (2,101 | ) | ||||
| Net income (loss) |
(5,632 | ) | (3,430 | ) | ||||
| Preferred stock dividends |
(1,613 | ) | (1,734 | ) | ||||
| Net loss applicable to common shares |
$ | (7,245 | ) | $ | (5,164 | ) | ||
| Basic and Diluted earnings per common share: |
||||||||
| Net income (loss) |
$ | (24.08 | ) | $ | (6.49 | ) | ||
| Preferred stock dividends |
(6.90 | ) | (3.29 | ) | ||||
| Net loss applicable to common shares |
$ | (30.98 | ) | $ | (9.78 | ) | ||
| Weighted average common shares outstanding: |
||||||||
| Basic |
233.9 | 528.2 | ||||||
| Diluted |
233.9 | 528.2 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
North Atlantic Trading Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Three months March 31, 2004 |
Three months March 31, 2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | (5,632 | ) | $ | (3,430 | ) | ||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
| Depreciation |
212 | 125 | ||||||
| Amortization of other intangible assets |
110 | — | ||||||
| Amortization of deferred financing costs |
687 | 346 | ||||||
| Deferred income taxes |
(3,634 | ) | (2,101 | ) | ||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable, net |
4,930 | 3,587 | ||||||
| Inventories |
(4,582 | ) | (3,828 | ) | ||||
| Other current assets |
1,052 | (2,421 | ) | |||||
| Other assets |
33 | (48 | ) | |||||
| Accounts payable |
(2,311 | ) | 617 | |||||
| Accrued liabilities and other |
6,403 | 5,564 | ||||||
| Net cash provided by (used in) operating activities |
(2,732 | ) | (1,589 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Capital expenditures |
(182 | ) | (107 | ) | ||||
| Restricted cash |
(160,162 | ) | — | |||||
| Goodwill |
(38 | ) | — | |||||
| Net cash provided by (used in) investing activities |
(160,382 | ) | (107 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Capital contribution from parent |
53,751 | — | ||||||
| Proceeds from revolving credit facility |
14,100 | 2,000 | ||||||
| Proceeds from issuance of new senior notes |
200,000 | — | ||||||
| Payment of financing costs |
(5,628 | ) | — | |||||
| Payments on notes payable |
(30,686 | ) | — | |||||
| Redemption of preferred stock |
(65,080 | ) | — | |||||
| Preferred stock cash dividends |
(1,613 | ) | — | |||||
| Payable to parent |
2,406 | — | ||||||
| Other |
— | (3 | ) | |||||
| Net cash provided by (used in) financing activities |
167,250 | 1,997 | ||||||
| Net increase (decrease) in cash |
4,136 | 301 | ||||||
| Cash, beginning of period |
304 | 805 | ||||||
| Cash, end of period |
$ | 4,440 | $ | 1,106 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
North Atlantic Trading Company, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Organization
These condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in North Atlantic Trading Company, Inc.’s (the “Company’s”) Annual Report on Form 10-K for the year ended December 31, 2003.
The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and, accordingly, do not include all the disclosures normally required by generally accepted accounting principles. The condensed consolidated financial statements have been prepared in accordance with 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 recorded and were of a normal and 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.
On February 9, 2004, North Atlantic Trading Company, Inc., a Delaware corporation (the “Company”), consummated a holding company reorganization whereby North Atlantic Holding Company, Inc., a Delaware corporation (the “Parent”) became the parent company of the Company. The holding company reorganization was effected pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated February 9, 2004, among the Company, the Parent and NATC Merger Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of the Parent (“Merger Sub”).
Pursuant to the Merger Agreement, (i) Merger Sub was merged with and into the Company (the “Merger”), with the Company as the surviving corporation; (ii) the Company became a wholly owned subsidiary of the Parent; (iii) each of the five hundred thirty-nine thousand two hundred thirty-five (539,235) issued and outstanding shares of voting common stock of the Company, par value $0.01 per share, was converted into the right to receive one share of common stock of the Parent, par value $0.01 per share (“NAHC Common Stock”); (iv) each issued and outstanding share of common stock of Merger Sub was converted into one issued and outstanding share of common stock of the Company, par value $0.01 per share (the “Company Common Stock”); and (v) all of the issued and outstanding shares of NAHC Common Stock held by the Company were cancelled.
Immediately after the Merger, (i) five hundred thirty-nine thousand two hundred thirty-five (539,235) shares of NAHC Common Stock were issued and outstanding; and (ii) ten (10) shares of Company Common Stock were issued and outstanding.
Subsequently, the Parent issued forty-nine thousand five hundred twenty-three (49,523) shares of NAHC Common Stock upon the exercise of certain warrants pursuant to a Warrant Agreement (the “Warrant Agreement”), dated June 25, 1997, between the Parent (as assignee to the Company’s rights and obligations under the Warrant Agreement) and The Bank of New York, as warrant agent (as successor to the United States Trust Company of New York). As of April 20, 2004, (i) five hundred eighty-eight thousand seven hundred
5
fifty-eight (588,758) shares of NAHC Common Stock were issued and outstanding; and (ii) ten (10) shares of Company Common Stock were issued and outstanding.
2. Recapitalization and Reorganization:
On February 9, 2004, the Company consummated the general corporate reorganization and on February 17. 2004, the refinancing of its existing debt and preferred stock. The general corporate reorganization consisted of the creation of the Parent. The refinancing consisted principally of (1) the offering and sale of $200.0 million principal amount of senior notes by the Company, (2) the entering into of an amended and restated loan agreement that provides a $50.0 million senior secured revolving credit facility to the Company and (3) the concurrent offering and sale of $97.0 million aggregate principal amount at maturity of senior discount notes of the Parent. Both the senior notes and the senior discount notes were offered pursuant to Rule l44A and Regulation S under the Securities Act of 1933, as amended.
Concurrently with the closing of the refinancing, the Company also called for redemption all of its outstanding 11% senior notes due 2004, in accordance with the terms of the indenture governing such notes, at the applicable redemption price of 100.0% of the principal amount thereof, plus interest accrued to the redemption date of April 2, 2004. At December 31, 2003, the Company has outstanding $155.0 million aggregate principal amount of its 11% senior notes due 2004.
The proceeds from this offering, along with borrowings under our new senior revolving credit facility (see Notes 5 and 6) and the proceeds from the concurrent offering of senior discount notes by Parent for gross proceeds of $60.0 million (the “Parent Notes”) were used to (1) repay $36.6 million in outstanding borrowings under our existing senior credit facility, including borrowings used to finance the cash purchase price for the Stoker acquisition, (2) redeem the Company’s $155.0 million of the existing 11% senior notes due 2004, (3) redeem the Company’s $64.7 million of 12% senior exchange payment-in-kind preferred stock on March 18, 2004, (4) pay a $5.0 million pro rata distribution to stockholders of Parent and make a distribution to certain holders of warrants of Parent, (5) make $2.1 million in incentive payment to certain key employees and outside directors, and (6) pay fees and expenses of $9.0 million incurred in connection with these offerings.
3. Summary of Significant Accounting Policies:
Revenue Recognition: The Company recognizes revenues and the related costs upon transfer of title and risk of loss to the customer.
Shipping Costs: The Company records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs incurred were $0.8 million and $0.6 million for the three months ended March 31, 2004 and 2003, respectively.
Master Settlement Agreement Escrow Account: Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a
6
manufacturer of make-your-own cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account to have funds available for certain potential tobacco-related liabilities, with sub-accounts on behalf of each settling state. The Company has chosen to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years, as well as cash-on-hand to fund its projected deposit based on its monthly sales for the current year, as an other non-current asset. Each year’s obligation is required to be deposited in the escrow account by April 15 of the following year. As of March 31, 2004 and December 31, 2003, the Company has recorded as an Other Non-Current Asset approximately $8.3 million, of which approximately $3.4 million is related to the projected deposit for 2003 sales.
4. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out (“LIFO”) method for approximately 92% of the inventories. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.
The impact of LIFO resulted in decreased net income of the Company by approximately $0.2 million and $0.1 million for the three months ended March 31, 2004 and 2003, respectively.
The components of inventories are as follows (in thousands):
| 3/31/04 |
12/31/03 | |||||
| Raw materials and work in process |
$ | 5,922 | $ | 5,996 | ||
| Leaf tobacco |
8,677 | 8,274 | ||||
| Finished goods—loose leaf tobacco |
6,008 | 6,018 | ||||
| Finished goods—MYO products |
10,645 | 6,323 | ||||
| Other |
1,516 | 1,350 | ||||
| 32,768 | 27,961 | |||||
| LIFO reserve |
14,071 | 14,296 | ||||
| $ | 46,839 | $ | 42,257 | |||
5. Senior Notes and Long-Term Debt
The Senior Notes and Long-Term Debt are as follows (in thousands):
| 3/31/04 |
12/31/03 | |||||
| Senior notes |
$ | 155,000 | $ | 155,000 | ||
| New senior notes |
200,000 | — | ||||
| Notes payable |
— | 30,686 | ||||
| Sub-total |
355,000 | 185,686 | ||||
| Less current portion |
155,000 | — | ||||
| $ | 200,000 | $ | 185,686 | |||
7
On February 17, 2004, the Company consummated the refinancing of its existing debt and preferred stock. The refinancing consisted principally of (1) the offering and sale of $200.0 million principal amount of the Senior Notes (the “New Senior Notes”) by the Company, (2) the entering into of an amended and restated loan, agreement that provides a $50.0 million senior secured revolving credit facility to the Company (3) the concurrent sale of $97.0 million aggregate principal amount at maturity of senior discount notes of North Atlantic Holding Company, Inc. (the “Parent”), (4) the establishment of an escrow fund to payoff the existing Senior Notes, including accrued interest, on April 2, 2004 (deferred financing costs of approximately $1.2 million relating to the existing Senior Notes will be amortized in April 2004) and (5) the payoff of $30.7 million in notes payable relating principally to the Stoker acquisition (deferred financing costs of approximately $0.5 million relating to this transaction were amortized during the three months ended March 31, 2004).
The New Senior Notes are senior unsecured obligations of the Company and will mature on March 1, 2012. The New Senior Notes bear interest at the rate of 9&nb