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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-9875
[STANDARD LOGO]
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. [ ]
AT JUNE 11, 1998 THERE WERE 12,809,800 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 11, 1998 WAS APPROXIMATELY: $101,612,000.
PORTIONS OF THE REGISTRANT'S (1) ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR
ENDED MARCH 31, 1998 AND (2) PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON AUGUST 11, 1998 ARE INCORPORATED BY REFERENCE INTO
PARTS I, II, III AND IV.
PART I
ITEM 1. BUSINESS.
The Registrant (referred to herein as "Standard" or the "Company") is
principally engaged in two international businesses - tobacco and wool.
Standard is one of the three global independent leaf tobacco merchants
serving the large multinational cigarette manufacturers. The Company has a
leading market presence in a number of the emerging and low-cost flue-cured and
burley tobacco growing regions, including China, India, Malawi and Tanzania.
Founded in 1910, the Company purchases, processes, stores, sells and ships
tobacco grown in over 30 countries, servicing cigarette manufacturers from 20
processing facilities strategically located throughout the world. The Company is
also engaged in purchasing, processing and selling various types of wool and is
a world leader in the trading of scoured wool.
There have been no significant changes in business segments since April
1, 1997. Contributions to gross revenue from businesses other than tobacco and
wool for the past three years have not been material
Variability of Annual and Quarterly Financial Results
The purchasing and processing of tobacco and wool are dependent on
agricultural cycles and are seasonal in nature. These cycles and this
seasonality, together with the timing of shipments and variations in the mix of
sales, cause quarterly fluctuations in financial results. Sales and revenue
recognition by the Company is based upon the passage of title, which typically
occurs on the date of shipment. The nature of the Company's businesses is such
that it is not possible to predict the timing of shipments or orders with a high
degree of precision, and advances or delays in either are not unusual.
Therefore, the comparability of the Company's financial results, particularly
quarter-to-quarter comparisons, which may be significantly affected by these
factors, should be considered when evaluating the Company's performance. In
addition, the Company's business may be adversely affected by poor weather or
other agricultural factors, many of which are beyond the control of the Company.
Total tobacco inventories normally peak in the Company's third fiscal
quarter as large volumes of tobacco grown in the northern hemisphere are
purchased and held in various conditions of processing prior to shipment to
customers. Receivables typically peak in the fourth quarter as those tobaccos
are shipped and invoiced. Revolving credit borrowings and trade payables
normally peak with inventories.
Wool is generally purchased over a greater portion of the year than
tobacco, and wool growing seasons occur at different times of the year in
different countries. Wool trading is generally lower during the first and second
fiscal quarters as a result of reduced demand during the summer for wool
products in the northern hemisphere, when processors and users close down for
holidays and vacations in Europe. Generally, wool revenues reach high levels in
the third fiscal quarter and peak in the fourth fiscal quarter.
International Business Risks
The Company's international operations are subject to a number of
political and economic risks, including unsettled social and political
conditions, nationalization, expropriation, import and export restrictions,
confiscatory taxation, exchange controls, renegotiation or nullification of
existing contracts, inflationary economies and currency risks, strikes and risks
related to the restrictions of repatriation of earnings or proceeds from
liquidated assets of foreign subsidiaries. In certain countries, the Company has
advanced funds or guaranteed local loans or lines of credit for the purchase of
tobacco from growers, and expects to continue such practices in the future. Risk
of repayment is normally limited to the tobacco season, and the maximum exposure
occurs within a shorter period.
The Company's tobacco business is generally conducted in U.S. dollars,
as is the business of the 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. The Company attempts to minimize such currency risks by matching the
timing of its working capital borrowing needs against the tobacco purchasing and
processing funds requirements in the currency of the country of tobacco origin.
Fluctuations in the value of foreign currencies can significantly affect the
Company's operating results and/or its shareholders' equity.
Wool purchases and sales are typically denominated in the currency of
the source country and destination country, respectively. The Company typically
pays for its wool purchases in the currency of the country of origin, and
generally hedges the currencies of its purchase and sale commitments with
forward transactions.
The Company regularly monitors its foreign exchange position and has
not experienced material gains or losses on foreign exchange fluctuations. The
Company enters into forward contracts solely for the purpose of limiting its
exposure to short-term changes in foreign exchange rates. The Company does not
engage in currency transactions for the purpose of speculation.
Government Regulation and Environmental Compliance
In recent years, governmental entities in the United States at all
levels have taken or have proposed actions that may have the effect of reducing
consumption of cigarettes. These activities have included: (i) the U.S.
Environmental Protection Agency's classification of tobacco environmental smoke
as a "Group A" (known human) carcinogen; (ii) restrictions on the use of tobacco
products in public places and places of employment including a proposal by the
U.S. Occupational Safety and Health Administration to ban smoking in the work
place; (iii) proposals by the U.S. Food and Drug Administration to sharply
restrict cigarette advertising and promotion and to regulate nicotine as a drug;
(iv) increases in tariffs on imported tobacco; (v) proposals to increase sales
and excise taxes on cigarettes; (vi) the recently announced policy of the U.S.
government to link certain federal grants to the enforcement of state laws
banning the sale of tobacco products to minors; (vii) lawsuits against cigarette
manufacturers by several U.S. states seeking reimbursement of Medicaid and other
expenditures by such states claimed to have been made to treat diseases
allegedly caused by cigarette smoking; and (viii) the recent enactment of
stricter regulations designed to prohibit sales of cigarettes to minors. It is
not possible to predict the outcome of such actions or litigation or the effect
adverse determinations against the manufacturers might have on leaf merchants,
like the Company, or the extent to which governmental activities and litigation
might adversely affect the Company's business directly.
Approximately a year ago, the Attorneys General of 40 states reached a
proposed settlement with certain U.S. cigarette manufacturers regarding claims
for reimbursement of health care costs associated with smoking-related
illnesses. The settlement would, among other things, give the FDA the authority
to regulate tobacco products, curtail the advertising of tobacco products and
mandate new and larger warning labels on cigarette packages. Subsequently
various, more stringent bills dealing with these matters have been introduced in
Congress. It is not possible to predict whether legislation will be passed or
what the effect of such legislation will be on pending and future actions
brought by private litigants or the impact the settlement will have on sales of
tobacco products and the Company's business.
In calendar 1993, Congress enacted the 75/25 Rule, intended to limit
the importation of tobacco into the United States by requiring that all
cigarettes manufactured in the United States, including those manufactured for
export, contain at least 75.0% domestically grown tobacco. Although the 75/25
Rule was repealed in 1995, principally because it was inconsistent with GATT,
and was replaced with import quotas designed to assist domestic tobacco growers,
it had the effect in calendar 1993 and 1994 of drastically decreasing demand for
imports of foreign tobacco for use in the domestic production of cigarettes. It
is not possible to predict the extent to which future governmental or third
party actions might adversely affect the Company's business.
A number of foreign countries have also 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 U.S. 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 a number of other
countries. It is not possible to predict the extent to which these actions might
adversely affect the Company's business.
Although the Company's wool scouring and top making operations involve
discharges of significant amounts of effluent waste, the Company believes that
it is currently in compliance with applicable foreign laws which have been
enacted or adopted regulating the discharge of such materials into the
environment or otherwise relating to the protection of the environment. Such
compliance has not had, and is not anticipated to have, any material effect upon
the competitive position of the Company.
The Leaf Tobacco Industry
Multinational cigarette manufacturers, with one principal exception,
rely primarily on global independent leaf tobacco merchants, such as the
Company, to process and supply leaf tobacco used in the manufacturing process.
Leaf tobacco merchants select, purchase, process, store, pack, ship and, in a
growing number of emerging markets, provide agronomy expertise and financing for
growing leaf tobacco. Presently, there are three global independent leaf tobacco
merchants, including the Company. Important trends in the leaf tobacco industry
include:
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 semioriental tobacco
historically consumed in certain parts of the world. According to the Tobacco
Merchants Association, the American-blend cigarette consumption (excluding
China) has increased from 1.7 trillion units in calendar 1990 to 1.9 trillion
units in calendar 1996, an increase of 10.8%. The TMA estimates that worldwide
American-blend tobacco consumption (excluding China) will increase an additional
5.5% to more than 2.0 trillion units by the year 2000. The TMA also estimates
that worldwide American-blend cigarette consumption (excluding China), as a
percentage of total consumption, has also experienced substantial growth,
increasing from 47.9% in 1990 to 52.5% in 1996, and is projected to reach 54.3%
by the year 2000. As American-blend cigarettes have continued to gain global
market share, the demand for export quality flue-cured, burley and oriental
tobacco sourced and processed by leaf tobacco merchants has grown accordingly.
Several multinational cigarette manufacturers have made significant investments
in the Former Soviet Union, which the Company believes may lead to increased
demand for and sale of American-blend tobacco. As American-blend 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 the Company, has grown accordingly.
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 their access to and penetration of
these markets. As cigarette manufacturers expand their global operations, the
Company believes there will be increased demand for local sources of leaf
tobacco and local tobacco processing facilities, primarily due to the
semiperishable nature of unprocessed leaf tobacco and the existence of domestic
tobacco content laws in certain countries. The Company also believes that the
international expansion of cigarette manufacturers will cause these
manufacturers to place greater reliance on the services of financially strong
leaf tobacco merchants 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. The Company expects this trend to
continue in the foreseeable future as the quality of foreign grown tobacco
continues to improve.
Consolidation of Tobacco Merchants. Leaf tobacco merchants continue to
consolidate through worldwide acquisitions and mergers. As recently as 1989,
there were eight major international merchants. Presently, there are three
global independent leaf tobacco merchants, including the Company, which
purchase, process, store, sell and ship leaf tobacco worldwide. The Company
believes that it has experienced growth in tobacco revenue as a result of this
industry consolidation as the multinational cigarette manufacturers diversify
their sourcing partners of quality leaf tobacco.
Tobacco Operations
The Company has developed an extensive international network through
which it purchases, processes and sells tobacco. In addition to processing
facilities in North Carolina and Kentucky, the Company owns or has an interest
in processing facilities in Brazil and Zimbabwe, both significant exporters of
flue-cured tobacco; Malawi, a leading exporter of burley tobacco; and Greece and
Turkey, the leading exporters of oriental tobacco. The Company also has
processing facilities in Italy, Spain and Thailand. In addition, the Company has
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 Argentina,
Brazil, Canada, China, India, Kenya, Kyrgyzstan, Tanzania and Ukraine.
Purchasing. The tobacco in which the Company deals is grown in over 30
countries. Management believes that its diversity in sources of supply, combined
with a broad customer base, helps shield the Company from seasonal fluctuations
in quality, yield or price of tobacco crops grown in any one region. The Company
relies primarily on revolving lines of bank credit and internal resources to
finance its 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.
Tobacco is generally purchased at auction or directly from growers.
Tobacco grown in the United States, Canada, India, Malawi and Zimbabwe is
purchased at auction. The Company generally employs its 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 the Company 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, the Company buys tobacco directly from farmers,
agricultural cooperatives or government agencies in advance of firm orders or
indications of interest although such purchases are usually made with some
knowledge of its customers' requirements. In certain of these markets the
Company advances or finances the purchase of fertilizer and other supplies to
assist farmers in growing the crop. These advances generally are repaid with
deliveries of tobacco by the farmers. During fiscal 1998, the maximum aggregate
amount of such advances by the Company was $53.2 million.
Processing. Tobacco purchased by the Company generally is perishable
and must be processed within a relatively short period of time to prevent
deterioration in quality. Consequently, the Company has located its processing
facilities near the areas where it purchases tobacco. Prior to and during
processing, the Company takes a number of steps to ensure consistent quality of
the 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 certain customers of the Company. 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.
Quality control checks are continually performed 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.
The Company processes its tobacco in four wholly-owned plants in the
United States and 12 other facilities around the world owned or leased by
subsidiaries and affiliates. In addition, the Company has access to four other
processing plants in which it has no ownership interest. In all cases, tobacco
processing is under the direct supervision of Company personnel. Modern
laboratory facilities are maintained by the Company to assist in selecting
tobacco for purchase and to test tobacco during and after processing.
The Company believes that its plants are efficient and are adequate for
its purposes. The Company also believes that tobacco throughput at its existing
facilities could be increased without major capital expenditures.
Selling. The Company's 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. The Company
employs its own salesmen, who travel extensively to visit customers and to
attend tobacco markets worldwide with these customers, and it also uses agents
for sales to customers in certain 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. Virtually all sales are made in U.S.
dollars. Payment for most tobacco sold by the Company is received 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. In fiscal 1998, the Company's five largest customers
accounted for approximately 49.7% of total sales (64.6% of tobacco sales). In
fiscal years 1998, 1997 and 1996, one customer accounted for 24.1%, 24.1% and
17.4% of total sales, respectively. The Company believes that formal purchase
contracts are not customary in the global leaf tobacco industry and agreements
to purchase tobacco generally result from the supplier's course of dealings with
its customers. The Company has done business with most of its customers for many
years. The Company believes that it has good relationships with its large
customers; however, the loss of any one or more of these customers could have a
material adverse effect on the Company.
As of March 31, 1998, the Company had tobacco inventory of $284.8
million compared to $181.3 million at March 31, 1997. 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.
Competition
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 the Company's principal tobacco customers also purchase tobacco from the
Company's major tobacco competitors, Universal and Dimon, the Company's
relationships with its largest tobacco customers span many years and the Company
believes that it has the personnel, expertise, facilities and technology to
remain successful in the industry. In addition, the Company believes that the
consolidation of the leaf tobacco industry has provided opportunities for it to
enhance its relationship with and increase sales to certain cigarette
manufacturers.
Worldwide Tobacco Presence
United States. The Company owns and operates a total of four processing
facilities located in North Carolina and Kentucky and purchases tobacco at all
major markets in the United States, including flue-cured tobacco markets in
North Carolina, 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 are generally sold at public auction to the highest bidder.
The price of such tobacco is supported under an industry-funded federal program
that also restricts tobacco production through a quota system. U.S. grown
tobacco is more expensive than most non-U.S. tobacco, resulting in a declining
trend in exports, which management believes should be offset by increased demand
for foreign tobacco.
Brazil. The Company currently, and has for many years, sells leaf
tobacco produced in Brazil as the agent for Souza Cruz, a subsidiary of B.A.T.
which has approximately 80.0% of the domestic cigarette market in Brazil. The
Company fills orders and earns a commission from Souza Cruz based upon the sales
price of the tobacco. During fiscal 1998, The MDTL Trust, a trust established by
the Company, acquired 100% of Meridional, the fourth largest leaf tobacco
processor in Brazil. This strategic acquisition complements the Company's
continuing 27-year partnership in Brazil with Souza Cruz, and provides the
Company with direct ownership of a processing facility in the second largest
leaf tobacco growing region in the world (excluding China).
Turkey and Greece. The Company is 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. The Company believes that
the fragmented nature of the oriental tobacco markets and its leading presence
in these markets provides it with an excellent opportunity to expand revenues
through acquisitions and continued strategic investments. The Company also
purchases and processes flue-cured and burley tobacco in Greece. The Company
processes tobacco in Turkey and Greece in two 51.0% owned facilities.
Malawi, Zimbabwe and Tanzania. In Malawi, the largest exporter of
low-cost burley tobacco in the world, the Company has a leading market position
and services the large multinational cigarette manufacturers from its 51.9%
owned facility in Lilongwe and its 50.0% owned facility in Limbe. The Company
also is a leader in the purchase and processing of flue-cured and dark-fired
tobacco, which are also processed in the Company's facilities. In Zimbabwe, the
Company purchases flue-cured tobacco and to a lesser extent burley tobacco,
which it processes in its minority-owned facility. In Tanzania, one of the key
emerging growing regions of low-cost filler tobacco, the Company has
historically been one of the largest exporters of flue-cured tobacco. The
Company supervised the processing of this tobacco in a government-owned
facility, which was privatized in calendar 1995. The Company recently purchased
a 20% interest in a privately-owned and -operated processing facility in
Morogoro, Tanzania.
China, Thailand and India. The Company has provided agronomy services
and funded a variety of projects in China since 1981 and believes that it is the
largest independent exporter of Chinese leaf tobacco. The Company currently
operates two government-owned tobacco processing facilities in China. In fiscal
1998, the Company expanded its presence in China and expects to increase its
production in the area through strategic alliances with the Chinese government.
The Company is also one of the leading exporters of flue-cured, burley and
oriental leaf tobacco from Thailand, which it purchases directly from farmers or
in some cases from a 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. The Company currently processes tobacco
in Thailand in two facilities in which the Company owns a minority interest. In
India, an emerging source of low-cost filler tobacco, the Company purchases
primarily flue-cured tobacco. The Company has entered into a joint venture with
a local partner in Guntur, India for a new processing facility.
Other Foreign Operations. The Company also has 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
The Company is 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, the Company owns and operates an integrated group of wool
companies which purchase, process and sell wool to other wool processors,
felting companies, knitters and spinners of yarn, and manufacturers of worsted
and woolen products. The Company does not raise sheep or produce textile
products. For fiscal 1998, the Company derived approximately 23.0% of its
revenue from its wool division.
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 Africa and South America. The
main sources of crossbred wool for export are New Zealand, the United Kingdom
and South America.
Following record high prices in 1988, 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 wool growers 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. At present, Wool
International, an organization created by the Australian government, is
responsible for the reduction of the stockpile, which on March 31, 1998 totaled
211,000 metric tons (the equivalent of approximately 35% of one year's current
Australian production). At the present rate of reduction, it is forecast that
the stockpile will be liquidated by the year 2000.
Worldwide wool production during the Company's 1998 fiscal year was
below current demand for the fourth consecutive year, and production by the five
major wool exporting countries has declined by 15.0% over the past five years.
As a result, since 1992, all surplus stocks around the world have been sold with
the exception of the remaining stockpile in Australia.
Operations
From the outset, the Company's strategy has been to build a large
international wool network, primarily through the acquisition of
well-established traders and processors. The Company believes that as a result
of its acquisitions and the continuing consolidation of the wool industry, it
has become one of the world's largest traders and processors of wool. The
Company owns and operates processing facilities in five countries, including
scouring mills in New Zealand, South Africa and the United Kingdom and combing
mills in Chile and France. The Company has entered into a joint venture for an
aqueous scouring facility in Western Australia, the only one of its type in the
region. The Company has also acquired a 33.3% interest in a topmaking facility
in Tasmania. The Company also uses the services of commission processors in
Argentina, Australia, Belgium, Germany and Italy.
Purchasing. The Company deals 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. The Company has buying offices in
all of these areas. The Company's employees buy wool at auctions and through
negotiations with wool growers. Although most wool is shorn before it is
purchased, some wool is purchased "on the back" before shearing. As in its
tobacco business, most of the Company's 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. The Company typically pays
for its wool purchases in the currency of the country of origin, and usually
hedges the currencies of its purchase and sale commitments with forward
transactions. The Company does 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. The Company sells
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 the Company's plants in New Zealand, South Africa and the
United Kingdom, and at its jointly owned facility in Australia, and at its
jointly owned facility in Tasmania, or by commission scourers in Argentina,
Australia and Belgium. Similarly, tops are produced in the Company's plants in
Chile and France, and at its jointly owned facility in Tasmania, and by
commission combers in Argentina, Australia, Italy and Germany. The Company's
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 22.0 pounds
which are packed and shipped to customers in the apparel industry for further
manufacturing. The Company maintains laboratory facilities for analyzing and
testing wool and lanolin.
Selling. The Company currently derives approximately 68.0% of its 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 1998, processed wool
(i.e., scoured and tops) accounted for approximately 67% of the Company's wool
revenues, followed by greasy wool (26%), specialty fibers and lanolin (7%).
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 manufactures of worsted fabrics. Lanolin is sold primarily to
manufacturers of cosmetics and pharmaceutical products. The Company's largest
wool customer accounted for less than 2% of total sales and 5% of total wool
sales for fiscal 1998. Sales are typically made in local currencies of the
customers.
The Company relies primarily on short-term bank credit and internal
resources to finance its wool purchases. The period of exposure generally is
limited to only a few months. At March 31, 1998 and 1997, the Company had
outstanding orders for wool of approximately $87.0 million and $109.0 million,
respectively.
Competition
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. The
Company believes that its processing and marketing capabilities and buying and
trading expertise enable it to compete effectively, and that its broad
geographical trading base enables it to react quickly to price changes and to
supply wool of similar types and blending quality from different countries or
areas while keeping the highest quality standards.
Other Operations and Investments
The Company is engaged in another small noncore activity: Stancom Home
Center operates a wholesale/retail building materials and home supply center
located in Wilson, North Carolina. Revenues and earnings of this business are
not material.
EMPLOYEES
At March 31, 1998, the Company had a total of approximately 2,187
full-time employees (including approximately 542 in the United States) and
approximately 2,035 full-time employees in affiliated companies. As of that
date, of the Company's full-time employees, approximately 1,573 were in the
tobacco business, approximately 586 were in the wool business and approximately
28 had duties relating to other operations. The tobacco business typically
employs an additional 6,700 to 6,800 part-time employees during peak production
periods.
The Company's principal subsidiary in the United States has a
collective bargaining agreement with a union covering the majority of its hourly
employees, many of whom are seasonal. The agreement expires on May 31, 1999. The
Company believes its relations with employees covered by this agreement are
good. Employees at the French wool plant are also represented by labor unions
under an agreement subject to renewal every December 31. The Company believes
that its relations with its employees in France are good.
GENERAL
The Company does not own any material patents, trademarks, licenses, franchises
or concessions, nor does it engage in any significant research activity.
ITEM 2. PROPERTIES.
Tobacco Operations
The Company generally conducts its tobacco processing operations in
facilities near the area of production. In certain places, long-standing
arrangements exist with local companies to process tobacco in their plants under
the supervision of Company personnel. A current summary showing the principal
tobacco operating properties of the Company or its affiliates is shown below:
AREA
LOCATION PRINCIPAL USE (SQUARE FEET)
-------- ------------- ------------
UNITED STATES
Wilson, NC Factory/storage 1,008,000
Oxford, NC Factory/storage 624,700
King, NC Factory 134,600
Springfield, KY Factory/storage 292,000
TURKEY
Izmir Factories (2)/storage 431,300
Izmir Storage 204,500*
GREECE
Alexandria Factory/storage 402,000
Salonica Factory/storage 772,700
Salonica Factory/storage 236,300*
MALAWI
Limbe Factory/storage 414,000
Lilongwe Factory/storage 776,000
ZIMBABWE
Harare Factory/storage 565,800*
Harare Storage 233,500
THAILAND
Chiengmai Factory/storage 872,000
Banphai Factory/storage 377,000
ITALY
Caserta Factory/storage 800,000*
SPAIN
Benavente Factory/storage 206,000
Benavente Storage 132,400*
Coria Buying Center 18,300*
Talayuela Buying Center 21,500
* Leased facility.
The Company believes its tobacco properties are generally
well-maintained, in good operating condition and are suitable and adequate for
the normal growth of its business.
Wool Operations
The Company generally conducts its scoured wool operations in the
country of origin, and processes wool tops in France and Chile. A current
summary showing the principal wool operating properties of the Company or its
affiliates is shown below:
AREA
LOCATION PRINCIPAL USE (SQUARE FEET)
-------- ------------- -------------
AUSTRALIA
Fremantle Storage 200,000
CHILE
Punta Arenas Factory/storage 57,000
FRANCE
Tourcoing Factory/storage 964,900
NETHERLANDS
Dongen Storage 23,700
NEW ZEALAND
Christchurch Factory/storage 100,300
SOUTH AFRICA
Port Elizabeth Factory/storage 70,000*
UNITED KINGDOM
Bradford Factory/storage 165,000
* Leased facility.
The Company believes its wool properties are generally well-maintained,
in good operating condition and are suitable and adequate for the normal growth
of its business.
ITEM 3 LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is currently involved
in any litigation that the Company believes would, individually or in the
aggregate, have a material adverse effect on the Company's consolidated
financial position, consolidated results of operation or liquidity nor, to the
Company's knowledge, is any such litigation currently threatened against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
quarter ended March 31, 1998.
Executive Officers and Certain Key Employees of the Company at June 11, 1998
Name Age Positions
- ---- --- ----------
Robert E. Harrison 44 President and Chief Executive Officer
Marvin W. Coghill 64 Chairman - Tobacco Division
Alfred F. Rehm 49 President - Tobacco Division
Paul H. Bicque 54 Managing Director - Wool Division
Henry C. Babb 53 Vice President - Public Affairs, General Counsel
and Secretary
Ery W. Kehaya, II 46 Vice President, and Tobacco Division
Regional Manager - North America
Michael K. McDaniel 48 Vice President-Human Resources
Robert A. Sheets 43 Vice President and Chief Financial Officer
Keith H. Merrick 43 Vice President and Treasurer
Hampton R. Poole, Jr. 46 Vice President and Controller
Timothy S. Price 39 Vice President - Business Planning
and Development
Krishnamurthy Rangarajan 55 Vice President and Assistant Secretary
Information concerning executive officers who are also directors is
contained in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on August 11, 1998 which, except for the material under
the headings "Compensation Committee Report" and "Performance Graph" is
incorporated herein by reference and made a part hereof. Business experience
during the past five years of other executive officers and key employees is set
forth below:
Alfred F. Rehm was appointed Tobacco Division President in April 1998.
He had been Vice President - Sales of the Tobacco Division since February 1995.
He joined the Company in 1978 and his 30 year career in the tobacco industry
includes experience in all phases of the leaf department.
Paul H. Bicque has served as Managing Director of the wool division
since December 1995. From 1992 to December 1995, he served as a Commercial
Director of the wool division. From 1990 until he joined the Company, Mr. Bicque
worked as an international senior management consultant.
Henry C. Babb joined the Company 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 17
years as a partner with a prominent general practice law firm in Wilson, North
Carolina.
Ery W. Kehaya, II was appointed Vice President and Regional Manager of
the tobacco division in 1998. 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. He is the son of Ery W. Kehaya, Chairman Emeritus.
Michael K. McDaniel joined the Company 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 the Company 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 Treasurer of the Company since 1993 and
was elected a Vice President in 1996. Prior to joining the Company, 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 Controller of the Company since 1993. He joined the Company in 1984
and has been an officer of Standard Commercial Tobacco Co., Inc., a subsidiary,
for more than five years. Mr. Poole 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 the 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 the Company
in June 1992. Mr. Price is a Certified Public Accountant.
Krishnamurthy Rangarajan was employed by the Company 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.
The above persons have been appointed for terms continuing until at the
Board of Directors meeting following the Annual Meeting of Shareholders on
August 11, 1998 or until their successors have been duly elected and qualified.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
ITEM 6 - SELECTED FINANCIAL DATA
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information called for by Items 5, 6 and 7 is contained in the
Company's 1998 Annual Report to Shareholders as detailed below and incorporated
herein by reference and made a part hereof.
Item Caption in Annual Report Page No.
---- ------------------------ -------
5 Quarterly Financial Data (Unaudited)` 33
6 Selected Financial Data 33
7 Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-13
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The data appearing on pages 14 through 31 of the Company's 1998 Annual
Report to Shareholders, and the Independent Auditors' Report on page 32, are
incorporated herein by reference and made a part hereof.
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
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by items 10, 11, 12 and 13 is included in
the Company's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on August 11, 1998 and is incorporated herein by reference, except
for the material under the heading "Compensation Committee Report" and
"Performance Graph." The information concerning executive officers of the
Company follows Item 4 of Part I of this Report.
PART IV
ITEM 14 EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements: See Item 8.
2. Financial Statement Schedule:
(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: None were filed during the
quarter ended March 31, 1998.
(c) The following exhibits are filed as part of this Report:
3. (i) There is incorporated by reference
herein the Company's Restated Articles
of Incorporation.
(ii) There is incorporated by reference herein
the Company's amended Bylaws filed as
Exhibit 3(ii) to the Company's report on
Form 10-K for the year ended March 31, 1994.
4. (i) There is incorporated by reference
herein the Company's Shareholder Protection
Rights Agreement filed as Exhibit 4 to the
Company's Report on Form 8-K dated April 5,
1994.
(ii) There is incorporated herein by reference
the Master Facilities Agreement dated May 5,
1995 between the Company and certain
subsidiaries and Deutsche Bank A.G. and a
number of other banks filed as Exhibit 4(ii)
to the Company's Report on Form 10-K for the
year ended March 31, 1995.
(iii) There is incorporated herein by reference,
the Second Supplemental Agreement dated July
16, 1996 between the Company and certain
subsidiaries and Deutsche Bank A.G. et al
filed as Exhibit 4(iii) to the Company's
report on Form 10-Q for the quarter ending
September 30, 1996 which amends Exhibit
4(ii) above.
(iv) There is incorporated herein by reference
the Third Supplemental Agreement dated
August 1, 1997 between the Company and
certain subsidiaries and Deutsche Bank A.G.
et al filed as Exhibit 4(I) for the quarter
ended September 30, 1997 which amends 4(ii)
and (iii) above.
10. (i) There is incorporated herein by reference
the Company's Performance Improvement
Compensation Plan filed as Exhibit 10 to the
Company's Report on Form 10-K for the year
ended March 31, 1993.
(ii) There is incorporated herein by reference
Agreement dated as of March 24, 1998 between
the Company and Robert E. Harrison filed as
Exhibit 10.3 to the Company's Registration
Statement on Form S-3 dated May 8, 1998.
11. Computation of Earnings per Common Share.
13. The Company's Annual Report to Shareholders for the
year ended March 31, 1998 which, except for
information expressly incorporated by reference into
Items 1, 5, 6, 7 and 8 is not deemed to be "filed" as
a part of this Report.
21. List of subsidiaries.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Standard 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 11, 1998 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 11, 1998 by the following persons on behalf of the
Registrant in the capacities indicated.
/s/ Robert E Harrison President, and Director
- ------------------------------------------------- (Principal Executive Officer)
Robert E Harrison
/s/ Robert A Sheets Vice President
- ------------------------------------------------- (Principal Financial and Accounting Officer)
Robert A Sheets
/s/ J Alec G Murray Chairman of the Board of Directors
- -------------------------------------------------
J Alec G Murray
/s/ Ery W Kehaya Chairman Emeritus and Director
- -------------------------------------------------
Ery W Kehaya
/s/ Marvin W Coghill Director
- -------------------------------------------------
Marvin W Coghill
/s/ William A Ziegler Director
- -------------------------------------------------
William A Ziegler
/s/ Henry R Grunzke Director
- -------------------------------------------------
Henry R Grunzke
/s/ William S Barrack Jr Director
- -------------------------------------------------
William S Barrack Jr
/s/ Charles H Mullen Director
- -------------------------------------------------
Charles H Mullen
/s/ Daniel M Sullivan Director
- -------------------------------------------------
Daniel M Sullivan
/s/ William S Sheridan Director
- -------------------------------------------------
William S Sheridan
Independent Auditors' Report
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, 1998 and 1997, and for each of the three years in
the period ended March 31, 1998, and have issued our report thereon dated June
10, 1998; such consolidated financial statements and report are included in your
1998 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 10, 1998
STANDARD COMMERCIAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Changed to Charged to Deductions Balance at
Beginning Costs and Other End of
Of Period Expenses Accounts See Note A Period
------------- ----------- ---------- ---------- ---------
Year ended March 31, 1996
Deducted from asset accounts
Allowance for doubtful accounts......... $ 5,367,270 $ 328,156 $ - $ 145,199 $ 5,550,227
Inventory............................... 14,207,391 1,394,334 - 10,427,299 5,174,426
---------------------------------------------------------------------------
Total................................ $19,574,661 $1,722,490 $ - $10,572,498 $10,724,653
=========================================================================
Year ended March 31, 1997
Deducted from asset accounts
Allowance for doubtful accounts......... $ 5,550,227 $1,055,067 $ - $ 3,004,567 $ 3,600,727
Inventory............................... 5,174,426 877,403 - 1,116,004 4,935,825
---------------------------------------------------------------------------
Total................................ $10,724,653 $1,932,470 $ - $ 4,120,571 $ 8,536,552
=========================================================================
Year ended March 31, 1998
Deducted from asset accounts
Allowance for doubtful accounts......... $ 3,600,727 $1,337,765 $ - $ 403,332 $ 4,535,160
Inventory............................... 4,935,825 2,719,009 - 2,684,907 4,969,927
---------------------------------------------------------------------------
Total................................ $ 8,536,552 $4,056,774 $ - $3,088,239 $ 9,505,087
===========================================================================