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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___
Commission File Number 1-9875
[LOGO]
Standard
STANDARD COMMERCIAL CORPORATION
Incorporated under the laws of I.R.S. Employer
North Carolina Identification No. 13-1337610
2201 Miller Road, Wilson, North Carolina 27893
Telephone Number (252) 291-5507
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $0.20 par value New York Stock Exchange
7 1/4% Convertible Subordinated Debentures Due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether 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 Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained to
the best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At June 14, 2002, there were 13,371,988 shares of the Registrant's
common stock outstanding. The aggregate market value of the common stock held by
nonaffiliates of the Registrant based on the New York Stock Exchange closing
price on June 14, 2002 was approximately $268,776,959.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended March 31, 2002 and definitive proxy statement for the Annual Meeting of
Shareholders currently scheduled to be held on August 13, 2002 are incorporated
by reference into Parts II, III and IV of this Form 10-K.
Some of the statements contained in this report discuss our plans and
strategies for our business and are "forward-looking statements" as that term is
defined in the Private Securities Litigation Reform Act. The words "anticipate,"
"believe," "estimate," "expect," plan," "intend" and similar expressions are
meant to identify these statements as forward-looking statements, but they are
not the exclusive means of identifying them. The forward-looking statements in
this report reflect the current views of our management; however, various risks,
uncertainties and contingencies could cause our actual results, performance or
achievements to differ materially from those expressed or implied by these
statements, including:
. Unforeseen changes in shipping schedules;
. The balance between supply and demand for our products;
. Continued consolidation among our tobacco product manufacturer
customers;
. Market, economic, political and weather conditions in the United
States and worldwide; and
. The other factors discussed in this report.
In evaluating these forward-looking statements, you should
specifically consider the risks described above and in other parts of this
report, including the sections captioned "Risks Relating to Our Operations,"
"Risks Relating to the Tobacco Industry," "Risks Relating to Our Wool
Operations" and "Risks Relating to Owning Our Stock" under "ITEM 1. BUSINESS".
These factors might cause our actual results to differ materially from any
forward-looking statement.
PART I
Item 1. Business.
General
Standard Commercial Corporation is principally engaged in two
international businesses - tobacco and wool. We are one of the three global
independent leaf tobacco merchants serving the large multinational cigarette
manufacturers. We have a major market presence in a number of the emerging and
low-cost flue-cured and burley tobacco growing regions, including China, India,
Malawi and Thailand. Founded in 1910, we purchase, process, store, sell and ship
tobacco grown in over 30 countries, servicing cigarette manufacturers from 25
processing facilities strategically located throughout the world. We also are
engaged in purchasing, processing and selling various types of wool and are a
world leader in the trading of scoured wool.
The only change in our business segments since April 1, 2001,relate to
the decision to discontinue operations in four of our wool units. This action
will result in exiting the Argentina, South Africa and New Zealand wool markets
as well as closing our specialty fibers business in Holland. The remaining wool
operations are concentrated on the core sourcing, processing and sales markets
of Australia and Europe and the carpet sector of the wool industry.
Contributions to gross revenue from businesses other than tobacco and wool for
the past three years have not been material. You can find financial information
on our business segments and geographic sources and locations of our business
and properties in the notes to our consolidated financial statements, which are
included in our 2002 Annual Report to Shareholders, which is an exhibit to this
report. We do not own any material patents, trademarks, licenses, franchises or
concessions, nor do we engage in any significant research activity.
The Leaf Tobacco Industry
Multinational cigarette manufacturers, with one principal exception,
rely primarily on global independent leaf tobacco merchants like us to process
and supply leaf tobacco used in the manufacturing process. Leaf tobacco
merchants select, purchase, process, store, pack and ship tobacco, and, in a
growing number of emerging markets, provide agronomy expertise and financing for
growing leaf tobacco. We are one of three global independent leaf tobacco
merchants currently operating in the world. We believe the following are
important trends in the leaf tobacco industry:
Growth of American-Blend Cigarettes. American-blend cigarettes have
gained market share in several major foreign markets, including Asia
(particularly Pacific Rim countries), Europe and the Middle East in recent
years. American-blend cigarettes contain approximately 50% flue-cured, 35%
burley and 15% oriental tobacco, contain less tar and nicotine, and taste milder
than locally produced cigarettes containing dark and semi-oriental tobacco
historically consumed in other parts of the world. Several multinational
cigarette manufacturers have made significant investments in the former Soviet
Union, which we believe might lead to increased demand for and sale of
American-blend tobacco. As American-blend
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cigarettes have gained market share, the demand for export quality
American-blend tobacco, sourced and processed by the three global independent
leaf tobacco merchants, including us, has grown.
Growth in Foreign Operations of Multinational Cigarette Manufacturers.
Several multinational cigarette manufacturers have expanded their operations
throughout the world, including in Africa, Asia, Central and Eastern Europe and
the former Soviet Union, in order to increase presence in these markets. As
cigarette manufacturers expand their global operations, we believe there will be
increased demand for local sources of leaf tobacco and local tobacco processing
facilities, primarily due to the semi-perishable nature of unprocessed leaf
tobacco and the existence of domestic tobacco content laws in some foreign
countries. We also believe that the international expansion of cigarette
manufacturers will cause these manufacturers to place greater reliance on the
services of leaf tobacco merchants like us with the ability to source and
process tobacco on a global basis and to help develop higher quality local
tobacco sources.
Growth in Foreign-Sourced Tobacco. In an effort to respond to cigarette
manufacturers' increasing demand for lower cost American-blend tobacco, the
major leaf tobacco merchants have made significant investments in Africa, Asia,
Europe and South America, the principal sources of flue-cured, burley and
oriental tobacco outside the United States. We expect this trend to continue in
the foreseeable future as the quality of foreign-grown tobacco continues to
improve.
Global Market Conditions. In the U.S. market, the late November 1998
settlement between the cigarette manufacturers and the states for health care
claims resulted in major price increases in the United States, which affected
demand negatively. The negative impact of these price increases has lessened in
the last two years and U.S. market dynamics have stabilized. Our supply/demand
models indicate that currently, global supplies of flue-cured and burley
tobaccos are basically in line with demand. We believe there currently remains
an oversupply of oriental tobacco.
Our Tobacco Operations
We have developed an international network through which we purchase,
process and sell tobacco. In addition to processing facilities in North Carolina
and Kentucky, we own or have an interest in processing facilities in Brazil and
Zimbabwe, both significant exporters of flue-cured tobacco; Malawi, a leading
exporter of burley tobacco; and Turkey, the leading exporter of oriental
tobacco. We also have processing facilities in Argentina, Italy, Russia, Spain
and Thailand. In addition, we have entered into contracts, joint ventures and
other arrangements for the purchase and processing of tobacco grown in
substantially all countries that produce export-quality flue-cured, burley and
oriental tobacco, including Brazil, Canada, China, India, Kenya, Kyrgyzstan and
Ukraine. We also own and operate cut rolled expanded stem, or CRES, processing
facilities in the United States and Russia.
Purchasing. The tobacco in which we deal is grown in over 30 countries.
We believe that our diversity in sources of supply, combined with a broad
customer base, helps shield us from seasonal fluctuations in quality, yield or
price of tobacco crops grown in any one region. We rely primarily on revolving
lines of bank credit and internal resources to finance our purchases. Quite
often the tobacco serves as collateral for the credit. The period of exposure,
with some exceptions, generally is limited to a tobacco season and the maximum
exposure is limited to a shorter period.
Leaf tobacco merchants like us generally purchase tobacco at auction or
directly from growers. Tobacco grown in the United States, Canada, India, Malawi
and Zimbabwe generally is purchased at auction. Beginning in 2000, the U.S.
market began shifting from auction purchases to direct contracting with growers,
and continues to do so at an accelerating rate. We estimate that 80% of the 2002
crop will be contracted. We expect most of those contracts will be between the
farmer and the cigarette manufacturer, with us acting as an agent for the
manufacturer. We generally employ our own buyers to purchase tobacco on auction
markets, directly from growers and pursuant to marketing agreements with
government monopolies. At present, the largest amounts of tobacco purchased by
us outside the United States come from Argentina, Brazil, China, Greece, India,
Italy, Malawi, Spain, Thailand, Turkey and Zimbabwe.
Although Argentina, Brazil, China, Greece, Italy, Spain, Turkey and
Thailand are major tobacco producers, there are no tobacco auctions in these
markets. In these markets, we buy tobacco directly from farmers, agricultural
cooperatives or government agencies in advance of firm orders or indications of
interest, although these purchases are usually made with some knowledge of our
customers' requirements. In some of these markets we advance or finance the
purchase of fertilizer and other supplies to assist farmers in growing the crop
and are repaid with deliveries of tobacco. During fiscal 2002, the maximum
aggregate amount of such advances by us at any one time was $56.3 million.
Processing. The tobacco we purchase generally is perishable and must be
processed within a relatively short period of time to prevent deterioration in
quality. Consequently, we have located our processing facilities near the areas
where we purchase tobacco. Prior to and during processing, we take a number of
steps to ensure consistent quality of the
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tobacco. These steps include regrading and removing undesirable leaves, dirt and
other foreign matter. Most of the tobacco is then blended to meet customer
specifications and threshed; however, some of it is processed in whole-leaf form
and sold to some of our customers. Threshing involves mechanically separating
the stem from the tissue portions of the leaf, which are called strips, and
sieving out small scrap. Considerable expertise is required to produce strips of
large particle size and to minimize scrap.
Strips and stems are redried and packed separately. Redrying involves
further reducing the natural moisture left in the tobacco after it has been
cured by the growers. The objective is to pack tobacco at safe moisture levels
so that it can be held by the customer in storage for long periods of time. We
continually perform quality control checks during processing to ensure that the
product meets customer specifications as to yield, particle size, moisture
content and chemistry. Customers are frequently present at the factory to
monitor results while their tobacco is being processed.
Redried tobacco is packed in hogsheads, cartons, cases or bales for
storage and shipment. Packed tobacco generally is transported in the country of
origin by truck or rail, and exports are moved by ship.
We process our tobacco in three wholly-owned plants in the United
States and 13 other facilities around the world owned or leased by our
subsidiaries and affiliates. In addition, we have access to four other
processing plants in which we have no ownership interest. In all cases, tobacco
processing is under the direct supervision of our personnel. We maintain modern
laboratory facilities to assist in selecting tobacco for purchase and to test
tobacco during and after processing.
We believe that our plants are efficient and are adequate for our
purposes. We also believe that tobacco throughput at our existing facilities
could be increased if necessary without major capital expenditures.
Selling. Our customers include all of the world's leading manufacturers
of cigarettes and other consumer tobacco products. These customers are located
in approximately 85 countries throughout the world. We employ our own salesmen,
who travel extensively to visit our customers and to attend tobacco markets
worldwide with our customers, and we also use agents for sales to customers in
some countries. Sales are made on open account to customers who qualify based on
experience or are made against letters of credit opened by the customer prior to
shipment. The majority of sales are made in U.S. dollars. We receive payment for
most tobacco we sell after the tobacco has been processed and shipped.
The consumer tobacco business in most markets is dominated by a small
number of large multinational cigarette manufacturers and by government
controlled entities, all of whom are our customers. In fiscal 2002, our five
largest customers accounted for approximately 49% of total sales (59% of tobacco
sales). In fiscal years 2002, 2001 and 2000, one customer accounted for 14%,
17%, and 19% of total sales, respectively. We believe that formal purchase
contracts are not customary in the global leaf tobacco industry and that
agreements to purchase tobacco generally result from the supplier's course of
dealings with its customers. We have done business with most of our customers
for many years. We believe that we have good relationships with our large
customers; however, the loss of any one or more of these customers could have a
material adverse effect on our operations.
As of March 31, 2002, we had tobacco inventory of $185.7 million,
compared to $183.0 million at March 31, 2001. The level of tobacco fluctuates
from period to period and is significant only to the extent it reflects
short-term changes in demand for leaf tobacco in the Leaf Tobacco Industry.
Competition in the Leaf Tobacco Industry
The leaf tobacco industry is highly competitive. Competition among
independent leaf tobacco dealers is based primarily on the price charged for
products and services; the ability to meet customer demands and specifications
in sourcing, purchasing, blending, processing and financing tobacco; and the
ability to develop and maintain long-standing customer relationships by
demonstrating a knowledge of customer preferences and requirements. Although
most of our principal tobacco customers also purchase tobacco from our major
leaf tobacco competitors, Universal and Dimon, our relationships with our
largest tobacco customers span many years and we believe that we have the
personnel, expertise, facilities and technology to remain successful in the
industry. In addition, we believe that the consolidation of the leaf tobacco
industry has provided opportunities for us to enhance our relationship with and
increase sales to some cigarette manufacturers.
Worldwide Tobacco Presence
United States. We own and operate a total of three processing
facilities located in North Carolina and Kentucky and purchase tobacco at all
major markets in the United States, including flue-cured tobacco markets in
North Carolina,
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South Carolina, Virginia, Georgia and Florida; burley tobacco markets in
Kentucky, Tennessee, Virginia and North Carolina; and light air-cured tobacco
markets in Maryland and Pennsylvania. In the United States, flue-cured and
burley tobacco generally are sold at public auction to the highest bidder.
Commencing in late 2000, the U.S. market began undergoing a shift away from the
auction system and moving to direct contracting. In most cases, the cigarette
manufactures contract their requirements of leaf tobacco directly with the
grower. We often act as an agent to secure these contracts and receive a
commission for these services. We continue to receive and process the contracted
tobacco and receive fees and processing revenues from the manufacturers. We
estimate that as much as 80% of the total 2002 flue-cured crop will be
contracted in this manner. The remainder of the crop will continue to be sold at
auction. The price of such tobacco is supported under an industry-funded federal
program that also restricts tobacco production through a quota system. Tobacco
grown in the United States is more expensive than most foreign grown tobacco,
resulting in a declining trend in exports, which we believe should be offset by
increased demand for foreign tobacco.
South America. We currently sell, as we have for many years, leaf
tobacco produced in Brazil by Souza Cruz, a subsidiary of British American
Tobacco, plc. (BAT)., that has approximately 80.0% of the domestic cigarette
market in Brazil. During fiscal 1998, trusts established by us acquired
Meridional de Tobaccos Ltda., the fourth largest leaf tobacco processor in
Brazil. The ownership of this operation complements our continuing 28-year
relationship in Brazil with Souza Cruz, and provides us with direct ownership of
a processing facility in the second largest leaf tobacco growing region in the
world (excluding China). In fiscal 2002, we purchased the processing assets of
Nobleza Picardo, the Argentinean subsidiary of BAT. We signed a long-term
processing contract for Nobleza's domestic processed leaf requirements.
Turkey and Greece. We are one of the largest merchants of flue-cured,
burley and oriental tobacco in Turkey. In both Turkey and Greece, the oriental
tobacco markets are more fragmented than the major flue-cured and burley tobacco
markets in other parts of the world. During fiscal year 2001, we effectively
exchanged our 51% ownership of our subsidiary in Greece for the 49% minority
ownership position of our Turkish subsidiary. We now own 100% of the Turkish
subsidiary and continue to market the 2001 Greek crop on a sales commission
basis for the previous minority investor. We also maintain our own buying
operation for Greek tobaccos and have entered into a processing agreement with
SEKE, a Greek entity that is owned by a group of farmer collectives.
Malawi, Zimbabwe and Tanzania. In Malawi, the largest exporter of
low-cost burley tobacco in the world, we have a leading market position and
service the large multinational cigarette manufacturers from our facilities in
Lilongwe. We also are a leader in the purchase and processing of flue-cured and
dark-fired tobacco, which are also processed in our facilities. In Zimbabwe, we
purchase flue-cured tobacco and to a lesser extent burley tobacco, which we
process in our minority-owned facility. In fiscal 2001, we made a decision to
exit the Tanzanian market and sold our 20% interest in a privately-owned and
- -operated processing facility in Morogoro, Tanzania.
China, Thailand and India. We have provided agronomy services and
funded a variety of projects in China since 1981 and believe that we are the
largest independent exporter of Chinese leaf tobacco. We currently operate three
government-owned tobacco processing facilities in China. In fiscal 1999, we
expanded our presence in China and expect to increase our production in the area
through strategic alliances with the Chinese government. We are also one of the
leading exporters of flue-cured, burley and oriental leaf tobacco from Thailand,
which we purchase directly from farmers or in some cases from middlemen or
curers. Flue-cured tobacco is grown mainly in northern Thailand, burley tobacco
is grown in central Thailand and oriental leaf tobacco is grown in northeast
Thailand. We currently process tobacco in Thailand in two facilities in which we
own a minority interest. In India, an emerging source of low-cost filler
tobacco, we purchase primarily flue-cured tobacco. We have entered into a joint
venture with a local partner in Guntur, India for a new processing facility,
which began operations in fiscal 2001.
Other Foreign Operations. We also have foreign subsidiaries, joint
ventures and affiliates that purchase, process and sell tobacco grown in other
countries throughout the world, including Italy, Kenya, Spain and Zaire.
The Wool Industry
We are a world leader in the trading of scoured wool and a major trader
and processor of wool tops. As a result of a series of acquisitions commencing
in 1985, we own and operate an integrated group of wool companies which
purchase, process and sell wool to spinners and knitters of yarn, manufacturers
of worsted and woolen products, felting companies and other wool processors. We
do not raise sheep or produce textile products. For fiscal 2002, we derived
approximately 17% of our revenue from our wool division.
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The wool industry is highly fragmented, with a large number of small
dealers handling wool, often from limited origins. There are two broad
categories of wool fibers: fine wool from merino sheep and coarse wool from
crossbred sheep. Merino wool is used to make products for the apparel trade such
as fine sweaters and worsted fabrics for high quality suits. Crossbred wool is
used to make carpets, coarser worsted fabrics such as upholstery and draperies,
and woolens used in knitwear and hand-knitting yarns. Most merino wool for
export is produced in Australia, followed by South America and South Africa. The
main sources of crossbred wool for export are New Zealand, the United Kingdom
and South America.
The wool industry experienced a severe downturn beginning in 1989 that
was triggered by the withdrawal of China from international wool markets,
economic turmoil in Eastern Europe and the states of the former Soviet Union and
recessionary conditions in Western Europe. These events led to a decrease in
demand for wool on the world market. At the same time a worldwide oversupply of
wool had developed, largely due to artificially high prices caused by the
Australian support program.
Prior to 1991, Australian woolgrowers operated under a government price
support program. Under this program, the Australian government accumulated a
stockpile of 827,000 metric tons (raw weight) of wool. In 1991, the Australian
government abandoned its price support program, effectively creating a free
market for wool. Under free market conditions, prices fell substantially and
immediately, creating difficult trading conditions for the wool industry, and
leading to the development of market conditions necessary for a correction in
what had become a major imbalance between supply and demand. Wool International,
an organization created by the Australian government, was responsible for the
reduction of the stockpile. Sales from the stockpile were frozen in October 1998
and the operation was privatized. In mid-1999, the newly created company,
WoolStock, resumed sales from the stockpile, which was completely liquidated by
the summer of 2001.
Global Wool Market Conditions
The global condition of the wool industry reversed from a promising
outlook at the end of fiscal 2001 to a depressed state in fiscal 2002. The
combination of the effects of the hoof and mouth disease outbreak in Europe late
last year that resulted in reducing herd sizes and the continued drought
conditions in Western Australia that have had a like effect on herd sizes have
reduced the size of the wool clip. The shortage of supply prompted raw wool
prices to rise to record levels in fiscal 2002. These higher prices are not
being accepted by the spinning and weaving industries. As wool is a
substitutable product and the price of alternate fibers is low, demand has been
slack. This has resulted in poor trading conditions in the wool industry. Until
the demand issues are resolved, the industry will remain depressed.
Our Wool Operations
From the outset, our strategy has been to build a large international
wool network, primarily through the acquisition of well-established traders and
processors. As a result of our acquisitions and the continuing consolidation of
the wool industry, we have become one of the world's largest traders and
processors of wool. We own and operate processing facilities in four countries,
including scouring mills in South Africa, France and the United Kingdom and
combing mills in Chile and France. We also have joint ownership of an aqueous
scouring facility in Western Australia, the only one of its type in the region,
and a scouring facility in New Zealand. We also use the services of commission
processors in Argentina, Australia, Belgium, Germany and Italy. During fiscal
2002, as a result of weak market conditions in the industry, we decided to scale
back our operations to the core markets of Australia, France, Germany, Chile and
the UK. Accordingly, we have identified the South Africa, New Zealand and
Argentina units, as well as the specialty fibers operation in Holland as
discontinued operations and will exit those markets.
Purchasing. We deal in wool from all of the major producing areas, the
most significant of which are Argentina, Australia, Chile, New Zealand, South
Africa and the United Kingdom. We have buying offices in all of these areas. Our
employees buy wool at auctions and through negotiations with woolgrowers.
Although most wool is shorn before it is purchased, some wool is purchased "on
the back" before shearing. As in our tobacco business, most of our purchases are
made against specific customer orders. Australia is by far the largest producer
of wool in the world and its wool prices generally influence world prices. We
typically pay for our wool purchases in the currency of the country of origin,
and hedge the currencies of our purchase and sale commitments with forward
transactions. We do not engage in currency transactions for the purpose of
speculation.
Processing. Wool is purchased in its raw or naturally greasy state, and
must be scoured (washed) before it can be further processed. We sell some greasy
wool to topmakers, but most of the wool is blended and scoured and/or further
processed into tops, to meet customer specifications. The scouring is done at
our plants in South Africa, France and the United Kingdom, and at our jointly
owned facilities in Australia and New Zealand, or by commission scourers in
Argentina, Australia and Belgium. Similarly, tops are produced in our plants in
Chile and France, and by commission combers in
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Argentina, Australia, Italy and Germany. Our French plant also refines wool
grease removed during the scouring process into a variety of types of lanolin, a
marketable byproduct.
A top is a continuous strand of straightened and combed longer wool
fibers that have been separated from the short fibers. Topmaking involves seven
processes: blending, scouring, carding, gilling, combing, finishing and packing
to quality standards specified by the customer. Carding machines align the
fibers to produce a "sliver" of parallel fibers while removing foreign matter.
Slivers are combed and combined to produce a stronger "rope" or a top suitable
for spinning. Tops are wound into bobbins weighing approximately 22 pounds,
which are packed and shipped to customers in the apparel industry for further
manufacturing. We maintain laboratory facilities for analyzing and testing wool
and lanolin.
Selling. We currently derive approximately 64% of our wool revenues
from sales to customers in Europe, with sales to the Far East, North America and
other areas making up the balance. In fiscal 2002, processed wool (i.e., scoured
and tops) accounted for approximately 69% of our wool revenues, followed by
greasy wool (20%), and specialty fibers and lanolin and other (11%). Greasy wool
is sold primarily to customers in Western Europe, the Far East and the United
States. Scoured wool is shipped to carpet, woolen, felting, quilt and mattress
manufacturers located in Europe, the Far East and the United States. Tops are
sold primarily to Western European yarn spinners for processing and sale to
manufacturers of worsted fabrics. Lanolin is sold primarily to manufacturers of
cosmetics and pharmaceutical products. Our largest wool customer accounted for
less than 2% of total sales and 5% of total wool sales for fiscal 2002. Sales
are typically made in local currencies of our customers.
We rely primarily on short-term bank credit and internal resources to
finance our wool purchases. The period of exposure generally is limited to only
a few months. At March 31, 2002 and 2001, we had outstanding orders for wool of
approximately $82.3 million and $99.0 million, respectively.
Competition in the Wool Industry
The wool industry is more fragmented than the leaf tobacco industry.
Major competitors include Chargeurs, ADF, BWK and a number of Japanese trading
firms, the largest of which is Itochu. Key factors for success in the wool
business are broad market coverage, a full range of wool types, technical
expertise in buying and processing and high quality customer service. We believe
that our processing and marketing capabilities and buying and trading expertise
enable us to compete effectively and that our broad geographical trading base
enables us to react quickly to price changes to supply wool of similar types and
blending quality from different countries or areas while keeping the highest
quality standards.
Employees
At March 31, 2002, we had a total of approximately 2,648 full-time
employees, including approximately 359 in the United States and approximately
940 full-time employees in affiliated companies. As of that date, approximately
2,149 of our full-time employees were in the tobacco business and approximately
499 were in the wool business. Our tobacco business typically employs an
additional 5,500 to 5,800 part-time employees during peak production periods.
Our principal subsidiary in the United States has a collective
bargaining agreement with a union covering the majority of our hourly employees,
many of whom are seasonal. The agreement expires on March 31, 2005. We believe
our relations with our employees covered by this agreement are good. Our
employees at the French wool plant also are represented by labor unions under an
agreement subject to renewal every December 31. We believe that our relations
with our employees in France are good.
Risks Relating to Our Operations
Our financial results will vary according to growing conditions, customer
requirements and other factors, which reduces your ability to gauge our
performance and increases the risk of an investment in our common stock.
Our financial results, particularly the quarterly financial results,
might be significantly affected by fluctuations in tobacco growing seasons and
crop sizes, and wool growing seasons and production, all of which are dependent
upon a number of factors, including governmental agricultural programs in some
countries, availability of shipping, and the weather and other natural events,
such as hurricanes, tropical storms or droughts.
Further, because of the timing and unpredictability of customer
requirements, orders and shipments, we keep tobacco and wool in inventory, which
increases our risk and results in variations in quarterly and annual financial
results.
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We may from time to time in the ordinary course of business keep a significant
amount of processed tobacco in inventory for our customers to accommodate their
inventory management and other needs. Sales recognition by us and our
subsidiaries is based on the passage of ownership, usually with shipment of
product. Since individual shipments may represent significant amounts of
revenue, our quarterly and annual financial results might vary significantly
depending on our customers' needs and shipping instructions.
Our adoption and application of certain standards in financial accounting could
cause our annual and quarterly financial results to vary and will reduce your
ability to gauge our performance, increasing the risk of an investment in our
common stock.
Effective April 1, 2001, we adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137 and SFAS No. 138. As a result of
adoption of SFAS No. 133, we recognize all derivative financial instruments,
such as foreign exchange contracts, in the consolidated financial statements at
fair value regardless of the purpose or intent for holding the instrument. We
use forward contracts to mitigate our exposure to changes in foreign currency
exchange rates on forecasted transactions. Generally, the effective portion of
unrealized gains and losses associated with forward contracts and the intrinsic
value of option contracts are deferred as a component of accumulated other
comprehensive income until the underlying hedge transactions are reported on our
consolidated statement of earnings. We have not used interest rate swaps to
mitigate our exposure to changes in interest rates. Changes in the fair values
of derivatives not qualifying as hedges are reported in income. As a result of
fluctuations in interest rates and volatility in market expectations, the fair
market value of hedging instruments can be expected to appreciate or depreciate
over time. We plan to continue the practice of economically hedging various
components of our debt. However, as a result of SFAS No. 133, such hedging
instruments might create volatility in future reported earnings.
In addition, we will adopt SFAS No. 142, "Goodwill and Other Intangible
Assets", effective April 1, 2002. As a result of adoption of SFAS No. 142, we no
longer amortize goodwill and intangible assets, which will result in increased
earnings. However, if we determine that there has been a material impairment to
goodwill or other intangible assets with indefinite lives, we will recognize the
amount of that impairment as a charge to earnings in the applicable reporting
period. This could cause variances in our reported earnings in different
quarters and years, which might impair your ability to compare results in those
periods.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. We have early adopted SFAS No. 144.
The shift to direct buying of green tobacco by many of our U.S. customers will
affect your ability to compare our quarter-to-quarter or year-to-year results
and could have an adverse effect on our results of operations.
Comparability of our sales revenues will be affected by the shift to
direct contract buying in the United States. Traditionally in the United States,
we have taken ownership of all green tobacco we purchase, then process and
resell that tobacco to our customers. Concurrent with the shift from an auction
system to a direct contract buying system in the United States, which began with
the 2000 U.S. burley crop, major U.S. customers have begun purchasing green
tobacco directly from the growers. Although we expect that the tobacco purchased
directly from growers by our customers will continue to be processed in our U.S.
facilities, we might no longer take ownership of that tobacco and might no
longer record revenues associated with its resale. With the shift to direct
contract buying, our sales and other operating revenues were negatively impacted
in fiscal 2001 and 2002. We expect to continue to earn and record service
revenues for the processing of all such tobaccos for our customers. We do not
expect that our gross profit will be materially affected by the shift to direct
contract buying by our customers, although sales revenues will be reduced and
our profit margin might improve. In addition, although we expect to purchase the
majority of our flue-cured and burley crop requirements through direct contract
buying, we will still need to maintain buying personnel in the residual auction
markets, which could affect our ability to manage our costs.
Our extension of credit to tobacco growers could have an adverse effect on our
financial condition.
We make advances to tobacco growers in many countries to finance their
growing of tobacco for sale to us. Crop advances to growers are generally
secured by the grower's agreement to deliver green tobacco. In the event of crop
failure, recovery of advances could be delayed until deliveries of future crops
or indefinitely. The temporary or permanent loss of these advances to growers
could have a material adverse effect on our financial condition or results of
operations.
8
Competition could adversely affect our operating results.
The leaf tobacco industry is highly competitive. Competition among leaf
tobacco merchants is based primarily on the prices charged for products and
services as well as the merchant's ability to meet customer specifications in
the buying, processing and financing of tobacco. In addition, there is
competition in all countries to buy the available tobacco. We are one of three
major global competitors in the leaf tobacco industry, and we are dependent upon
a relatively small number of large cigarette manufacturing customers. The number
of cigarette manufacturers has declined in recent years due to consolidation.
The loss of, or a substantial reduction in the services provided to, any large
or significant customer could have a material adverse effect on our financial
condition or results of operations.
Our reliance on a small number of significant customers could adversely affect
our results of operations.
Our customers are manufacturers of cigarette and tobacco products in
many countries around the world. Several of these customers individually account
for a significant portion of our sales in a normal year. Of our total tobacco
sales in fiscal 2002, 2001 and 2000, approximately 59%, 56% and 58%,
respectively, represented sales to our five largest tobacco customers. In fiscal
2002, 2001 and 2000, one customer accounted for 14%, 17% and 19%, respectively,
of our total sales. In addition, tobacco product manufacturers are currently
experiencing a period of consolidation, and further consolidation among our
customers could decrease our customer's demand for our leaf tobacco or
processing services. The loss of any one or more of our customers could have a
material adverse effect on our financial condition or results of operations.
We face increased risks of doing business due to the extent of our international
operations.
We do business in over 30 countries, many of which do not have stable
economies or governments. Our international operations are subject to
international business risks, including terrorism, unsettled political
conditions, expropriation, import and export restrictions, exchange controls,
inflationary economies and currency risks and risks related to the restrictions
on repatriation of earnings or proceeds from liquidated assets of foreign
subsidiaries. These risks are exacerbated in countries where we have advanced
substantial sums or guaranteed local loans or lines of credit in substantial
amounts for the purchase of tobacco from growers.
Fluctuations in foreign currency exchange rates could adversely affect our
results of operations.
Our tobacco business is generally conducted in U.S. dollars, as is the
business of the tobacco industry as a whole. However, local country operating
costs, including the purchasing and processing costs for tobaccos, are subject
to the effects of exchange fluctuations of the local currency against the U.S.
dollar. We attempt to minimize such currency risks by matching the timing of our
working capital borrowing needs against the tobacco purchasing and processing
funds requirements in the currency of the country where the tobacco is grown.
Fluctuations in the value of foreign currencies can significantly affect our
tobacco operating results.
Our wool business involves many currencies. We typically buy wool in
the currency of the source country and sell in the currency of the destination
country. We generally hedge our purchase and sale commitments through netting of
expenses or with forward currency transactions. No hedging program is completely
effective in offsetting currency risks, however, and fluctuations in the value
of currencies can significantly affect our wool operating results.
In addition, the devaluation of foreign currencies, particularly Asian
and Eastern European currencies, has resulted and might in the future result in
reduced purchasing power from customers in these areas. We might incur a loss of
business as a result of the devaluation of these currencies now or in the
future.
Terrorist attacks on the United States or its allies, and the continuing fear of
future attacks, might have unpredictable adverse effects on global economic
conditions, the financial markets and our business and results of operations.
The September 11, 2001 terrorist attacks on the United States, and the
continuing fear of future attacks, have caused uncertainty and volatility in the
U.S. and international economies and financial markets. Terrorist attacks might
also be targeted against U.S. businesses operating abroad or U.S. allies. We
cannot predict what effect the international terrorist threat, including
retaliatory measures that have been taken, and those that might be taken in the
future, might have on global economic conditions, the financial markets, or on
our business and results of operations.
9
Risks Relating to the Tobacco Industry
Reductions in demand for consumer tobacco products could adversely affect our
results of operations.
The tobacco industry, both in the United States and abroad, continues
to face a number of issues that might reduce the consumption of cigarettes and
adversely affect our business, sales volume, results of operations, cash flows
and financial condition.
These issues, some of which are more fully discussed below, include:
. governmental actions seeking to make tobacco product
manufacturers liable for adverse health effects associated with
smoking and exposure to environmental tobacco smoke;
. smoking and health litigation against tobacco product
manufacturers;
. possible tax increases on consumer tobacco products;
. current and potential actions by state attorneys general to
enforce the terms of the Master Settlement Agreement, or MSA,
between state governments in the United States and tobacco
product manufacturers;
. governmental and private bans and restrictions on smoking;
. actual and proposed price controls and restrictions on imports
in countries outside the United States;
. restrictions on tobacco product manufacturing, marketing,
advertising and sales;
. the diminishing social acceptance of smoking;
. increased pressure from anti-smoking groups; and
. other tobacco product legislation that might be considered by
Congress, the states and other countries.
Tobacco product manufacturer litigation may reduce demand for our services.
Our primary customers, the leading cigarette manufacturers, face
hundreds of lawsuits brought throughout the United States and, to a lesser
extent, the rest of the world. The cumulative effect of the lawsuits on our
customers could reduce their demand for tobacco from us. These lawsuits have
been brought by (1) individuals and classes of individuals alleging personal
injury, (2) governments (including governmental and quasi-governmental entities
in the United States and abroad) seeking recovery of health care costs allegedly
caused by cigarette smoking, and (3) other groups seeking recovery of health
care expenditures allegedly caused by cigarette smoking, including third-party
health care payors, such as unions and health maintenance organizations. Damages
claimed in some of the smoking and health cases range into the billions of
dollars. In September 1999, the United States Department of Justice filed a
lawsuit against the leading cigarette manufacturers, seeking to recover billions
of dollars in alleged federal smoking-related health care costs. Additional
plaintiffs continue to file lawsuits. Several of these cases have resulted in
verdicts in the hundreds of millions and even billions of dollars.
In November 1998, several United States tobacco product manufacturers
entered into the MSA with 46 states, the District of Columbia, the Commonwealth
of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the
Northern Marianas to settle asserted and unasserted health care cost recovery
and other claims. These manufacturers had previously settled similar claims
brought by Mississippi, Florida, Texas and Minnesota and an environmental
tobacco smoke and health class action brought on behalf of airline flight
attendants. The MSA has received final judicial approval in all 52 settling
jurisdictions.
Key provisions of the MSA are as follows:
. payments of approximately $206 billion over 25 years from the
cigarette manufacturers to the states;
10
. marketing and advertising restrictions, including bans on
cartoon characters, point-of-sale advertising, billboards, bus
and taxi placards and sponsorships of most sporting events by
brand names;
. disbanding the Tobacco Institute, the Council for Tobacco
Research and the Council for Indoor Air Research;
. eliminating vending machine sales and requiring that all tobacco
products be behind a counter; and
. making payments of $1.7 billion for educational efforts about
the dangers of smoking and to discourage youth smoking.
Other state settlement agreements include provisions relating to
advertising and marketing restrictions, public disclosure of industry documents,
limitations on challenges to tobacco product control and underage use laws,
lobbying activities and other provisions.
It is not possible to predict the outcome of the litigation pending
against the U.S. cigarette manufacturers, or the extent to which these actions
might adversely affect our customers, their demand for our product and our
business generally. Unfavorable outcomes in pending cases could encourage the
commencement of additional litigation. Adverse legislative, regulatory,
political and other developments concerning cigarette smoking and the tobacco
product industry continue to receive widespread media attention. These
developments might negatively affect the perception of potential judges and
juries with respect to the tobacco product industry, possibly affecting the
outcome of litigation. Although we are not a party to this litigation, the MSA
or any state settlement agreement, determinations that are adverse to the
manufacturers could adversely affect their purchases as our customers.
Legislative and regulatory initiatives could reduce consumption of consumer
tobacco products and demand for our services.
In recent years, members of Congress have introduced legislation, some
of which has been the subject of hearings or floor debate, that would subject
cigarettes to various regulations under the Department of Health and Human
Services or regulation under the Consumer Products Safety Act, establish
antismoking educational campaigns or anti-smoking programs, or provide
additional funding for governmental anti-smoking activities, further restrict
the advertising of cigarettes, including requiring additional warnings on
packages and in advertising, provide that the Federal Cigarette Labeling and
Advertising Act and the Smoking Education Act could not be used as a defense
against liability under state statutory or common law, allow state and local
governments to restrict the sale and distribution of cigarettes, and further
restrict certain advertising of cigarettes and eliminate or reduce the tax
deductibility of tobacco product advertising. It is not possible to determine
the outcome of these regulatory initiatives, or to predict what, if any, other
foreign or domestic governmental legislation or regulations will be adopted
relating to the manufacturing, advertising, sale or use of cigarettes, or to the
tobacco industry generally. However, if any or all of the foregoing were to be
implemented, our business, volume, results of operations, cash flows and
financial condition could be materially adversely affected.
Reports with respect to the harmful physical effects of cigarette
smoking have been publicized for many years, and the sale, promotion and use of
cigarettes continue to be subject to increasing governmental regulation. Since
1964, the Surgeon General of the United States and the Secretary of Health and
Human Services have released a number of reports linking cigarette smoking with
a broad range of health hazards, including various types of cancer, coronary
heart disease and chronic lung disease, and recommending various governmental
measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994
reports focus upon the addictive nature of cigarettes, the effects of smoking
cessation, the decrease in smoking in the United States, the economic and
regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking
by adolescents, particularly the addictive nature of cigarette smoking in
adolescence.
A number of foreign nations also have taken steps to restrict or
prohibit cigarette advertising and promotion, to increase taxes on cigarettes
and to discourage cigarette smoking. In some cases, such restrictions are more
onerous than those in the United States. For example, advertising and promotion
of cigarettes has been banned or severely restricted for a number of years in
Australia, Canada, Finland, France, Italy, Singapore and other countries. It is
impossible to predict the extent to which these and any additional restrictions
might affect our business.
In addition, from time to time, the leaf tobacco industry has been the
subject of government investigations regarding trade practices. In September
1998, we and several of our employees received subpoenas relating to an
investigation by the Antitrust Division of the United States Department of
Justice into certain buying practices alleged to
11
have occurred in the industry. We have received notice that this investigation
has been concluded without any action taken against us. In addition, we are
currently defending a class action claim brought on behalf of U.S. tobacco
growers alleging that cigarette manufacturers and certain leaf tobacco merchants
violated U.S. antitrust laws by bid-rigging tobacco auctions and conspiring to
undermine the tobacco quota and price support program. The Company believes it
has meritorious defenses to the suit and intends to vigorously defend it.
In October 2001, the Directorate General - Competition of the
European Commission (the DG Comp),began conducting an administrative
investigation of certain selling and buying practices alleged to have occurred
within the leaf tobacco industry in some countries within the European Union,
including Spain, Italy and Greece. The Company, through its local subsidiaries,
is cooperating fully with the investigation and has discovered and voluntarily
disclosed information which tends to establish that a number of leaf dealers,
including the Company's subsidiaries, have jointly agreed with respect to green
tobacco prices and purchase quantities. The Company believes, however, that
there are significant mitigating circumstances relating to the structure of
these markets, their historical conduct and the prominence of seller's
cooperatives. The investigation is in its very early stages and although the
fines, if any, that the DG Comp may assess on the Company's subsidiaries could
be material, The Company is not able to make an accurate assessment of the
amount of any such fines at this time.
Due to the present litigation, regulatory and legislative environment,
a substantial risk exists that past growth trends in tobacco product sales might
not continue and that existing sales might decline. We cannot predict the extent
to which any of these issues might affect our business.
Risks Relating to Our Wool Operations
Downturns in the wool industry could negatively affect our operations.
The wool industry experienced a severe decade-long downturn beginning
in 1989 that was triggered by the withdrawal of China from international wool
markets, economic turmoil in Eastern Europe and the states of the former Soviet
Union and recessionary conditions in Western Europe. These events led to a
decrease in demand for wool on the world market. At the same time, a worldwide
oversupply of wool had developed, largely due to artificially high prices caused
by the Australian price support program, under which the Australian government
stockpiled wool. In 1991, the Australian government abandoned its price support
program, effectively creating a free market for wool and began selling its
stockpile of wool. Under free market conditions, prices fell substantially and
immediately, creating difficult trading conditions for the wool industry. The
stockpile was completely sold by the summer of 2001. Supply and demand
imbalances, downturns or other adverse market conditions could occur in the
future which might negatively affect the wool industry which, in turn, could
affect our operations.
Widespread disease among livestock could negatively impact our operations.
Wool production is dependant on the supply of sheep for wool shearing. Although
the outbreak of hoof and mouth disease in Europe in early 2001 primarily
impacted sheep for the meat market rather than for the wool market, a widespread
outbreak of any livestock disease could negatively affect wool production and,
in turn, our operations.
Our wool operations produce significant effluent waste, which could subject us
to significant liability which could negatively affect our operations and
financial condition.
Our wool scouring and top making operations involve discharges of
significant amounts of effluent waste, which could subject us to significant
liability under applicable foreign laws relating to the protection of the
environment in the event we failed to comply with those laws. Any noncompliance
could result in fines and clean-up expenses that could negatively impact our
financial condition. Any noncompliance also could have a material effect on our
competitive position in those countries.
12
Risks Relating to Owning Our Stock
Antitakeover provisions could discourage a takeover that you consider to be in
your best interest or prevent the removal of our current directors and
management.
We have adopted a number of provisions that could have antitakeover
effects or prevent the removal of our current directors and management. We have
adopted a shareholder protection rights plan, commonly referred to as a poison
pill. The rights plan is intended to deter an attempt to acquire our company in
a manner or on terms not approved by our Board of Directors. The rights plan
will not prevent an acquisition that is approved by our Board of Directors. Our
charter authorizes the Board of Directors to determine the terms of up to
1,000,000 shares of undesignated preferred stock and issue them without
stockholder approval. The issuance of preferred stock could make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, voting control of our company in order to remove our current
directors and management. These provisions could make more difficult the removal
of our current directors and management or a takeover of our company, even if
the events could be beneficial to our stockholders. These provisions could also
limit the price that investors might be willing to pay for our common stock.
Our stock price has been volatile, which makes investing in our common stock
risky.
Our stock price has been volatile and might continue to be, making an
investment in our common stock risky. Between December 2000 and May 2002, the
price of a share of our common stock varied from $4.56 to $21.15.
The securities markets have experienced significant price and volume
fluctuations unrelated to the performance of particular companies. In addition,
the market prices of the common stock of many publicly traded companies have in
the past and can in the future be expected to be volatile. In addition, the
trading prices of securities of tobacco-related public companies have fluctuated
widely. Announcements of tobacco-related lawsuits, tobacco-related medical
findings, regulatory developments in both the United States and other countries,
public concern as to the safety of tobacco products, and economic and other
external factors, as well as period-to-period fluctuations in our financial
results, might have a significant impact on the market price of our common
stock.
ITEM 2. PROPERTIES.
Tobacco Operations
We generally conduct our tobacco processing operations in facilities
near the area of production. In some places, long-standing arrangements exist
with local companies to process tobacco in their plants under the supervision of
our personnel. A current summary showing our or our affiliates' principal
tobacco operating properties is shown below:
AREA
LOCATION PRINCIPAL USE (SQUARE FEET)
-------- ------------- -------------
UNITED STATES
Wilson, NC Factory/storage 1,088,406
King, NC Factory 134,600
Springfield, KY Factory/storage 392,000
TURKEY
Izmir Factories/storage 500,000
MALAWI
Lilongwe Factory/storage 776,000
ZIMBABWE
Harare Factory/storage 565,800*
Harare Storage 233,500
THAILAND
Chiengmai Factory/storage 864,000
Banphai Factory/storage 448,000
13
ITALY
Caserta Factory/storage 788,385
SPAIN
Benavente Factory/storage 211,266
Benavente Storage 107,600*
BRAZIL
Santa Cruz do Sul Factory/storage 821,867
ARGENTINA
El Carril Factory/storage 404,723
INDIA
Guntur Factory/storage 820,421
RUSSIA
St. Petersburg Factory/storage 147,886
* Leased facility.
We believe our tobacco operating properties are generally
well-maintained, in good operating condition and are suitable and adequate for
the normal growth of our business.
Wool Operations
We generally conduct our scoured wool operations in the country of
origin, and process wool tops in France and Chile. A current summary showing our
or our affiliates' principal wool operating properties is shown below:
AREA
LOCATION PRINCIPAL USE (SQUARE FEET)
-------- ------------- -------------
AUSTRALIA
Fremantle Storage 200,000
East Rockingham Factory/storage 1,076,400
CHILE
Punta Arenas Factory/storage 57,000
FRANCE
Tourcoing Factory/storage 964,900
NETHERLANDS**
Dongen Storage 23,700
NEW ZEALAND**
Winchester Factory/storage 85,000
SOUTH AFRICA**
Port Elizabeth Factory/storage 70,000*
UNITED KINGDOM
Bradford Factory/storage 165,000
* Leased facility.
** Classified as available for sale as a discontinued operation
14
We believe our wool operating properties are generally well maintained,
in good operating condition and are suitable and adequate for the normal growth
of our business.
ITEM 3. LEGAL PROCEEDINGS.
On February 26, 2001, we were served with a Third Amended Complaint,
naming us and other leaf merchants as defendants in Deloach, et al. V. Philip
Morris Inc., et al., a suit originally filed against U.S. cigarette
manufacturers in the United States District Court for the District of Columbia
and now pending in the United States District Court for the Middle District of
North Carolina, Greensboro Division (Case No. 00-CV-1235) (the "Deloach Suit").
The Deloach suit is a class action claim brought on behalf of U.S. tobacco
growers and quota holders alleging that defendants violated antitrust laws by
bid-rigging at tobacco auctions and by conspiring to undermine the tobacco quota
and price support program administered by the federal government. Plaintiffs
seek injunctive relief, trebled damages in an unspecified amount, pre- and
post-judgement interest, attorney's fees and costs of litigation. On April 3,
2002, the Court granted the plaintiffs' motion for class action certification.
We intend to vigorously defend the Deloach Suit, including joining a petition to
the United States Court of Appeals for the Fourth Circuit for appeal of the
class certification. Because the suit is still in its initial stages, we cannot
estimate the amount or range of loss that could result from an unfavorable
outcome.
In October 2001, the Directorate General - Competition of the
European Commission (the DG Comp),began conducting an administrative
investigation of certain selling and buying practices alleged to have occurred
within the leaf tobacco industry in some countries within the European Union,
including Spain, Italy and Greece. The Company, through its local subsidiaries,
is cooperating fully with the investigation and has discovered and voluntarily
disclosed information which tends to establish that a number of leaf dealers,
including the Company's subsidiaries, have jointly agreed with respect to green
tobacco prices and purchase quantities. The Company believes, however, that
there are significant mitigating circumstances relating to the structure of
these markets, their historical conduct and the prominence of seller's
cooperatives. The investigation is in its very early stages and although the
fines, if any, that the DG Comp may assess on the Company's subsidiaries could
be material, The Company is not able to make an accurate assessment of the
amount of any such fines at this time.
Except for the above, neither we nor any of our subsidiaries are
currently involved in any litigation that we believe would, individually or in
the aggregate, have a material adverse effect on our consolidated financial
position, consolidated results of operation or liquidity nor, to our knowledge,
is any such litigation currently threatened against us or our subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the
quarter ended March 31, 2002.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
Name Age Positions
- ---- --- ---------
Robert E. Harrison 48 President and Chief Executive Officer
Alfred F. Rehm 53 President - Tobacco Division
Paul H. Bicque 58 Managing Director - Wool Division
Henry C. Babb 57 Vice President - Public Affairs, General Counsel
and Secretary
Ery W. Kehaya, II 50 Vice President and Chief Information Officer
Michael K. McDaniel 52 Vice President-Human Resources
Robert A. Sheets 47 Vice President and Chief Financial Officer
Keith H. Merrick 47 Vice President and Treasurer
Hampton R. Poole, Jr. 50 Vice President and Controller
Timothy S. Price 43 Vice President - Business Planning
and Development
Krishnamurthy Rangarajan 59 Vice President and Assistant Secretary
15
Business experience during the past five years of our executive
officers and key employees is set forth below.
Robert E. Harrison was appointed President and Chief Executive Officer
in August 1996. He was employed in July 1995 as Senior Vice President and Chief
Financial Officer and retained the latter position until April 1998. Prior to
joining the Company, he was employed by RJ Reynolds Tobacco International in a
number of positions in the Far East.
Alfred F. Rehm was appointed Tobacco Division President in April 1998.
He had been Vice President - Sales of our Tobacco Division since February 1995.
He joined in 1978 and his 33-year career in the tobacco industry includes
experience in all phases of the leaf department.
Paul H. Bicque has served as Managing Director of our Wool Division
since December 1995. From 1992 to December 1995, he served as a Commercial
Director of our Wool Division
Henry C. Babb joined in December 1997 as Vice President - Public
Affairs and General Counsel. He was appointed Secretary in June 1998. Prior to
joining the Company, Mr. Babb practiced law for 28 years, including 27 years as
a partner with a law firm in Wilson, North Carolina.
Ery W. Kehaya, II was appointed Vice President and Regional Manager,
North America of our Tobacco Division in 1998. Prior to that, he had been named
Tobacco Division Vice President - Operations in 1995 and Sales Director in 1993,
and has been a Corporate Vice President since 1992.
Michael K. McDaniel joined as Director-Human Resources in November 1996
and was elected Vice President-Human Resources in June 1997. From 1995 to
November 1996 he was a partner in a human resources consulting firm, and from
1978 to 1995 he was Director of Human Resources and Organizational Development
for the City of Wilson, North Carolina.
Robert A. Sheets was appointed Vice President and Chief Financial
Officer in April 1998. He joined in October 1995 as Assistant Controller. His
previous experience included 10 years in the foods and international tobacco
divisions at RJR Nabisco. Mr. Sheets is a Certified Public Accountant.
Keith H. Merrick has served as our Treasurer since 1993 and was elected
a Vice President in 1996. Prior to joining, he was employed as a Vice President
of First Union National Bank of North Carolina.
Hampton R. Poole, Jr. was appointed Vice President in 1996 and has
served as our Controller since 1993. He joined in 1984 and is a Certified Public
Accountant.
Timothy S. Price was appointed Vice President - Business Planning and
Development in June 1998. He had been Financial Director of our Wool Division
since December 1995. Previously, he served as Vice President and Controller of
W. A. Adams Company from the time it was acquired by us in June 1992. Mr. Price
is a Certified Public Accountant.
Krishnamurthy Rangarajan was hired in 1978 after qualifying as a
Chartered Accountant. He was elected a Vice President in 1988 after being named
Assistant Vice President in 1986 and Chief Accountant in 1981.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The information called for by this item regarding the market for our
common stock, the holders of our common stock and our dividend policy is
contained in our 2002 Annual Report to Shareholders under the heading "Quarterly
Financial Data (Unaudited)" and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this item is contained in our 2002 Annual
Report to Shareholders under the heading "Selected Financial Data" and is
incorporated herein by reference.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information called for by this item is contained in our 2002 Annual
Report to Shareholders under the heading "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information called for by this item is contained in our 2002 Annual
Report to Shareholders under the heading "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in our 2002 Annual
Report to Shareholders under the headings "Independent Auditors' Report,"
"Company Report on Financial Statements," "Consolidated Balance Sheets,"
"Consolidated Statements of Income and Comprehensive Income (Loss),"
"Consolidated Statements of Cash Flows," "Consolidated Statements of
Shareholders' Equity" and "Notes to Consolidated Financial Statements Years
Ended March 31, 2002, 2001 and 2000" and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item regarding our directors is
included under the heading "Information About Nominees and Other Directors" in
our proxy statement related to the 2002 Annual Meeting of Shareholders currently
scheduled to be held on August 13, 2002, which we will file with the SEC within
120 days of the end of our fiscal year.
The information regarding our executive officers required by this item
is set forth in Part I of this report under the heading "Executive Officers and
Key Employees".
The information required by this item concerning compliance with
Section 16(a) of the Securities Exchange Act of 1934, as amended, incorporated
by reference to the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" in our proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is contained in our proxy
statement under the headings "Executive Compensation," Non-employee Directors'
Compensation", "Compensation Committee Report" and "Performance Graph" and is
incorporated herein by reference. Pursuant to Instruction 9 to Item 402 of
Regulation S-K, the information contained under the headings "Compensation
Committee Report" and "Performance Graph" shall not be deemed filed as part of
this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
17
The information required by this item relating to ownership of our
common stock by our directors, officers and others is contained in our proxy
statement under the heading "Principal Shareholders" and is incorporated herein
by reference.
The following table provides information as of March 31, 2002 on all of
our equity compensation plans that currently are in effect.
Equity Compensation Plan Information as of March 31, 2002
=================================================================================================================================
(a) (b) (c)
=================================================================================================================================
Plan category Number of securities to be Weighted-average exercise price Number of securities remaining
issued upon exercise of of outstanding options and available for future issuance
outstanding options and restricted stock under equity compensation plans
restricted stock (excluding securities reflected
in column (a))
=================================================================================================================================
Equity compensation plans
approved by our shareholders:
Performance Improvement
Compensation Plan -0-
Restricted Stock 336,071 Not applicable
Nonqualified Stock Option 81,540 $ 6.342
2001 Performance
Improvement Compensation
Plan 733,843
Restricted Stock 4,224 Not applicable
Nonqualified Stock Option 91,500 $ 17.50
=================================================================================================================================
Equity compensation plans not
approved by our shareholders:
Non-Qualified Stock Option
Agreement with Robert E.
Harrison 45,144 $ 8.875 -0-
=================================================================================================================================
Total 558,479 733,843
=================================================================================================================================
The Performance Improvement Compensation Plan was approved by our
shareholders in 1992 and as of August 14, 2001, no new awards may be made under
this plan. The 2001 Performance Improvement Compensation Plan was approved by
our shareholders in August 2001. The Restricted Stock Plan, the Nonqualified
Stock Option Plan are part of the Performance Improvement Compensation Plan.
The Non-Qualified Stock Option Agreement between Robert E. Harrison and
us has not been approved by our shareholders. The following is a summary of the
terms of Mr. Harrison's agreement.
On December 15, 1998, we entered into a Non-Qualified Stock Option
Agreement with Robert E. Harrison, our President and Chief Executive Officer, in
which we granted him an option to purchase 45,144 shares of our common stock
with an exercise price of $8.875 per share. The option was subject to a
four-year vesting schedule.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained in our proxy
statement under the heading "Compensation Committee Interlocks and Insider
Participation" and is incorporated herein by reference.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements: See Item 8 of this Form 10-K.
2. Financial Statement Schedules:
(i) Report of Independent Auditors on Financial Statement
Schedule.
(ii) Schedule II - Valuation and Qualifying Accounts.
(iii) All other schedules are omitted because they are
either not applicable or the required information is
included in the data mentioned in Item 8 and
incorporated herein by reference.
(b) Reports on Form 8-K.
During the three months ended March 31, 2002, we filed the
following Current Reports on Form 8-K:
Form 8-K filed on January 18, 2002 to report that our Spanish
subsidiary had been notified of an administrative investigation being
conducted by the European Commission of buying practices within the
leaf tobacco industry in Spain.
Form 8-K filed on February 15, 2002 to report the authorization of
the redemption by our principal subsidiary of $25.0 million of its 8?%
Senior Notes due 2005.
(c) The following exhibits are filed as part of this Report:
Incorporated by Reference To
----------------------------
Exhibit Registrant's Exhibit Filed
------------ ------- -----
No. Description Form Filed Number Herewith
--- ----------- ---- ----- ------ --------
3.1 Restated Articles of Incorporation of Standard 10-Q 11/21/94 3(i)
Commercial Corporation, as amended on September 26, 1994.
3.2 Bylaws of Standard Commercial Corporation. 10-K 7/14/94 3(ii)
4.1 Shareholder Protection Rights Agreement. 8-K 4/05/94 4
4.2 Master Facilities Agreement dated May 5, 1995 among 10-K 6/29/95 4(ii)
Standard Commercial Corporation, certain of its
subsidiaries, Deutsche Bank A.G. and other banks.
4.3 Second Supplemental Agreement dated July 16, 1996 among 10-Q 11/05/96 4(iii)
Standard Commercial Corporation, certain of its
subsidiaries and Deutsche Bank A.G. and other banks.
4.4 Third Supplemental Agreement dated August 1, 1997 among 10-Q 11/13/97 4(i)
Standard Commercial Corporation, certain of its
subsidiaries and Deutsche Bank A.G. and other banks.
4.5 Fourth Supplemental Agreement dated May 18, 1999 among 10-Q 8/11/99 4(i)
Standard Commercial Corporation, certain of its
subsidiaries and Deutsche Bank A.G. and other banks.
4.6 Fifth Supplemental Agreement dated May 15, 2000 among 10-Q 8/08/00 4(i)
Standard Commercial Corporation, certain of its
subsidiaries and Deutsche Bank A.G. and other banks.
4.7 Sixth Supplemental Agreement dated June 7, 2001 among 10-Q 8/08/01 4(i)
Standard Commercial Corporation, certain of its
subsidiaries and Deutsche Bank A.G. and other banks.
10.1 Performance Improvement Compensation Plan. 10-K 6/ /93 10
19
Incorporated by Reference To
----------------------------
Exhibit Registrant's Exhibit Filed
------------ ------- -----
No. Description Form Filed Number Herewith
--- ----------- ---- ----- ------ --------
10.2 Agreement dated as of March 24, 1997 between Standard S-3 3/24/97 10.3
Commercial Corporation and Robert E. Harrison.
10.3 Agreement dated as of December 1997 between Standard 10-K 6/25/99 10.3
Commercial Corporation and Henry C. Babb.
10.4 Agreement dated as of August 1998 between Standard 10-K 6/25/99 10.4
Commercial Corporation and Paul H. Bique.
10.5 2001 Performance Improvement Compensation Plan Proxy Statement 7/16/01 Appendix B
10.6 Agreement dated as of March 1999 between Standard X
Commercial Corporation and Robert A. Sheets
11.1 Computation of Earnings per Common Share. X
13.1 Annual Report to Shareholders for the year ended
March 31, 2002 (which, except for information
expressly incorporated by reference into Items
5, 6, 7, 7A and 8, is not deemed to be filed as
part of this Report). X
21.1 Subsidiaries of the Registrant. 10-K 6/21/01 21
23.1 Consent of Deloitte & Touche LLP, Independent Auditors. X
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STANDARD COMMERCIAL CORPORATION
By: /s/ Robert E. Harrison
----------------------
June 12, 2002 Robert E. Harrison, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on June 12, 2002 by the following persons on behalf of the
Registrant in the capacities indicated.
/s/ Robert E. Harrison President, and Director
- ------------------------------------------
Robert E. Harrison (Principal Executive Officer)
/s/ Robert A. Sheets Vice President and Chief Financial Officer
- ------------------------------------------
Robert A. Sheets (Principal Financial and Accounting Officer)
/s/ J. Alec G. Murray Chairman of the Board of Directors
- ------------------------------------------
J. Alec G. Murray
/s/ William S. Barrack Director
- ------------------------------------------
William S. Barrack Jr.
/s/ Marvin W. Coghill Director
- ------------------------------------------
Marvin W. Coghill
/s/ Mark W. Kehaya Director
- ------------------------------------------
Mark W. Kehaya
/s/ B. Clyde Preslar Director
- ------------------------------------------
B. Clyde Preslar
/s/ William S. Sheridan Director
- ------------------------------------------
William S. Sheridan
/s/ Daniel M. Sullivan Director
- ------------------------------------------
Daniel M. Sullivan
/s/ William A. Ziegler Director
- ------------------------------------------
William A. Ziegler
21
Report of Independent Auditors on Financial Statement Schedule
To the Board of Directors and Shareholders of
Standard Commercial Corporation
We have audited the consolidated financial statements of Standard
Commercial Corporation as of March 31, 2002 and 2001, and for each of the three
years in the period ended March 31, 2002, and have issued our report thereon
dated June 6, 2002 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to the restatement discussed in Note 19); such
consolidated financial statements and report are included in your 2002 Annual
Report to Shareholders and are incorporated herein by reference. Our audits also
included the consolidated financial statement schedule of Standard Commercial
Corporation, listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Corporation's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
June 6, 2002
STANDARD COMMERCIAL CORPORATION
FINANCIAL STATEMENT SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Deductions Balance at
Beginning Costs and Other End of
Of Period Expenses Accounts See Note A Period
Year ended March 31, 2000
Deducted from asset accounts
Allowance for doubtful accounts ....... $ 5,003,268 $ 2,282,998 $ - $ 720,157 $ 6,566,109
Inventory ............................. 10,648,025 3,701,344 - 2,338,796 12,010,573
--------------------------------------------------------------------------
Total .............................. $ 15,651,293 $ 5,984,342 $ - $ 3,058,953 $ 18,576,682
==========================================================================
Year ended March 31, 2001
Deducted from asset accounts
Allowance for doubtful accounts ....... $ 6,566,109 $ 2,840,928 $ - $ 3,260,644 $ 6,146,393
Inventory ............................. 12,010,573 4,340,248 - 2,890,735 13,460,086
--------------------------------------------------------------------------
Total .............................. $ 18,576,682 $ 7,181,176 $ - $ 6,151,379 $ 19,606,479
==========================================================================
Year ended March 31, 2002
Deducted from asset accounts
Allowance for doubtful accounts ....... $ 6,146,393 $ 1,505,717 $ - $ 2,055,041 $ 5,597,069
Inventory ............................. 13,460,086 553,340 - 4,033,426 9,980,000
--------------------------------------------------------------------------
Total .............................. $ 19,606,479 $ 2,059,057 $ - $ 6,088,467 $ 15,577,069
==========================================================================