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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, 2001
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
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Common Stock, $0.20 par value New York Stock Exchange
7 1/4% Convertible Subordinated New York Stock Exchange
Debentures Due 2007
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 13, 2001, there were 13,261,198 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 13, 2001 was approximately: $210,189,988.
Portions of the registrant's (1) Annual Report to Shareholders for the year
ended March 31, 2001 and (2) proxy statement for the Annual Meeting of
Shareholders to be held on August 14, 2001 are incorporated by reference into
Parts II, III and IV.
PART I
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ITEM 1. BUSINESS.
Founded in 1910, Standard Commercial Corporation, (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 Kenya. 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,
2000. 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.
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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 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 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.
In November 1998 the major U.S. cigarette manufacturers reached agreement to
settle lawsuits with 46 states concerning their claims for reimbursement of
smoking-related health costs. Key provisions of the settlement are as follows:
a. Payments of $206 billion over 25 years from the cigarette manufacturers to
the state's based on each states Medicaid population.
b. Marketing and advertising restrictions, including bans on cartoon characters,
point-of-sale advertising, billboards, bus and taxi placards and sponsorships of
sporting events by brand names.
c. Disband the Tobacco Institute, the Council for Tobacco Research and the
Council for Indoor Air Research.
d. Elimination of vending machine sales and requirements that all tobacco
products be behind a counter.
e. Payments of $1.7 billion for educational efforts about the dangers of smoking
and discouraging youth smoking.
It is not possible to predict the extent to which these 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. Most
recently, a few countries have initiated legal proceedings against the
manufacturers modeled on the US Medicaid claims. It is not possible to predict
the extent to which these actions or claims 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 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.
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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 and ship tobacco, and, in a
growing number of emerging markets, provide agronomy expertise and financing for
growing leaf tobacco. Currently, 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 semi-oriental tobacco historically
consumed in certain parts of the world. 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 presence in 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 semi-perishable 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 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.
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 US, which affected demand
negatively. The negative impact of these price increases has lessened in the
last two years and US market dynamics have stabilized. The supply/demand models
indicate that currently, global supplies of flue-cured and burley tobaccos are
basically in line with demand. There remains an oversupply of oriental types of
tobacco.
Tobacco Operations
The Company has developed an 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 Turkey, the leading
exporter 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 and the 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
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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 US market is shifting from auction purchases to direct contracting
at an accelerating rate. It is estimated that 80% of the 2002 crop will be
contracted. Most of the contracts will be between the farmer and the cigarette
manufacturer, with the Company acting as an agent for the manufacturer. 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
to the Company. During fiscal 2001, the maximum aggregate amount of such
advances by the Company was $42.3 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 three wholly-owned plants in the United
States and 13 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.
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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 2001, the Company's five largest customers accounted for
approximately 44.2% of total sales (55.7% of tobacco sales). In fiscal years
2001, 2000 and 1999, one customer accounted for 16.7%, 18.4% and 20.0% 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, 2001, the Company had tobacco inventory of $183.0 million
compared to $278.3 million at March 31, 2000. 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 three 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.
Commencing in late 2000, the US market is 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. The Company in many cases acts as an agent to secure these contracts
and receives a commission. The Company continues to receive and process the
contracted tobacco and receives fees and processing revenues from the
manufacturers. It is estimated that as much as 80% of the total 2001 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. 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. that 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, trusts established by the Company, acquired
Meridional de Tobaccos Ltda., the fourth largest leaf tobacco processor in
Brazil. The ownership of this operation complements the Company's continuing 27-
year relationship 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. During fiscal year 2001, the Company
effectively exchanged its 51% ownership of its subsidiary in Greece, for the 49%
minority ownership position of the Turkish subsidiary. The Company now owns
100% of the Turkish subsidiary and continues to market the 2001 Greek crop on
sales commission basis for the previous minority investor. The Company believes
that the
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fragmented nature of the oriental tobacco markets and its leading presence in
these markets provides it with an opportunity to expand revenues through
acquisitions and continued strategic investments.
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 facilities in
Lilongwe. 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 fiscal 2001, the Company made a decision to exit the Tanzanian market and
sold its 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 three government-owned tobacco processing facilities in China. In
fiscal 1999, 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, which began operations in the current fiscal year.
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 spinners and knitters of
yarn, manufacturers of worsted and woolen products, felting companies and other
wool processors. The Company does not raise sheep or produce textile products.
For fiscal 2001, the Company derived approximately 20.6% 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 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
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frozen in October 1998 and the operation was privatized. In mid-1999, the newly
created company, WoolStock, resumed sales from the stockpile, which at March 31,
2001 was estimated at 49,000 metric tons. It is anticipated that the stockpile
will be completely liquidated in fiscal year 2002.
Global Wool Market Conditions
The recent price increases in the synthetic fiber markets, as a result of
rising oil prices, have opened up new opportunities for natural fibers in
textiles. Major fashion houses have brought natural fibers into their
collections and as a result demand for wool has improved.
The steady reduction of the old wool stockpile, and the gradual reduction of
wool production overall with slow growth forecast for Australia only, are
expected to lead to shortages of certain wool types within the next 12 months.
Asian markets are stabilizing, with China showing steady increased demand for
wool. Consequently wool prices have increased substantially with the benchmark
Australian Eastern Market Indicator moving up from 682 cents (Australian) at
March 31, 2000, to 839 cents (Australian) at March 31, 2001.
Consumer spending in key areas in Europe and the US has improved and the
fashion world continues to show positive signs towards the use of natural
fibers, with wool being the major component. Notwithstanding the improvement,
and considering the volatile and changing nature of fashion, caution is
recommended and the industry continues its research into new application fields
for the wool fiber.
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. As a result of its acquisitions and the
continuing consolidation of the wool industry, the Company has become one of the
world's largest traders and processors of wool. The Company owns and operates
processing facilities in four countries, including scouring mills in South
Africa, France 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 closed
its wholly owned scouring facility in New Zealand and invested in a 20.0%
ownership interest in another facility. The Company acquired a 35.7% interest in
a topmaking facility in Tasmania. However, the Tasmanian operation was facing
severe financial difficulties, which culminated in the closure of the operation
in May 1999. 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 woolgrowers. 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 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 South Africa, France and the United Kingdom, and
at its jointly owned facilities in Australia and New Zealand, or by commission
scourers in Argentina, Australia and Belgium. Similarly, tops are produced in
the Company's plants in Chile and France, 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
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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 75% 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 2001, processed wool (i.e., scoured
and tops) accounted for approximately 71% of the Company's wool revenues,
followed by greasy wool (17%), specialty fibers and lanolin (12%). 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
2001. 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, 2001 and 2000, the Company had outstanding
orders for wool of approximately $99 million and $94 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 to supply wool of similar types and blending
quality from different countries or areas while keeping the highest quality
standards.
Other Operations and Investments
In early fiscal year 1999, the Company closed and liquidated a small noncore
activity: Stancom Home Center, which operated a wholesale/retail building
materials and home supply center located in Wilson, North Carolina. Revenues
and earnings of this business were not material.
EMPLOYEES
At March 31, 2001, the Company had a total of approximately 2,591 full-time
employees (including approximately 416 in the United States) and approximately
945 full-time employees in affiliated companies. As of that date, of the
Company's full-time employees, approximately 2,060 were in the tobacco business
and approximately 531 were in the wool business. The tobacco business typically
employs an additional 5,200 to 5,800 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, 2002. 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.
-9-
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 1,088,406
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
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
INDIA
Guntur Factory/storage 820,421
RUSSIA
St. Petersburg Factory/storage 147,886
* 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.
-10-
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
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.
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
On February 26, 2001, the Company was served with a Third Amended
Complaint, naming it and other leaf merchants as defendants in Deloach, et al.
V. Philip Morris Inc., et al., a suit originally filed against US cigarette
manufacturers in the US 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 purported class action brought on behalf of US tobacco growers
and quota holders that alleges 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 March 14, 2001,
the Company and other leaf tobacco merchants filed a joint motion to dismiss the
Third Amended Complaint. The Company intends to vigorously defend the Deloach
Suit, which is in its initial stages and at this time no estimate of the amount
or range of loss that could result from an unfavorable outcome can be made.
-11-
Except for the above, 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, 2001.
Executive Officers and Key Employees of the Company at June 13, 2001
Name Age Positions
- ---- --- ---------
Robert E. Harrison 47 President and Chief Executive Officer
Alfred F. Rehm 52 President - Tobacco Division
Paul H. Bicque 57 Managing Director - Wool Division
Henry C. Babb 56 Vice President - Public Affairs, General Counsel
and Secretary
Ery W. Kehaya, II 49 Vice President, and Tobacco Division
Regional Manager - North America
Michael K. McDaniel 51 Vice President-Human Resources
Robert A. Sheets 46 Vice President and Chief Financial Officer
Keith H. Merrick 46 Vice President and Treasurer
Hampton R. Poole, Jr. 49 Vice President and Controller
Timothy S. Price 42 Vice President - Business Planning
and Development
Krishnamurthy Rangarajan 58 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 14, 2001 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 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 the Wool Division since
December 1995. From 1992 to December 1995, he served as a Commercial Director of
the Wool Division
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 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 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.
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.
-12-
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 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 the Board
of Directors meeting following the Annual Meeting of Shareholders on August 14,
2001 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
ITEM 7A - QUANTITATIVE AND QUALATATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Items 5, 6, 7 and 7A is contained in the
Company's 2001 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)` 34
6 Selected Financial Data 33
7 and 7A Management's Discussion and Analysis of
Results of Operations and Financial Condition 5-10
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The data appearing on pages 13 through 33 of the Company's 2001 Annual
Report to Shareholders, and the Independent Auditors' Report on page 11, are
incorporated herein by reference and made a part hereof.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-13-
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 14, 2001 and is incorporated herein by reference, except for
the material under the heading "Compensation Committee Report" and "Performance
Graph." The information concerning executive officers who are not directors 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: March 31, 2001.
(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
-14-
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.
(v) There is incorporated herein by reference the Fourth
Supplemental Agreement dated May 18, 1999 between the
Company and certain subsidiaries and Deutsche Bank A.G. et
al filed as Exhibit 4(I) for the quarter ended June 30, 1999
which amends 4(ii), (iii) and (iv) above.
(vi) There is incorporated herein by reference the Fifth
Supplemental Agreement dated May 15, 2000 between the
Company and certain subsidiaries and Deutsche Bank A.G. et
al filed as Exhibit 4(I) for the quarter ended June 30, 2000
which amends 4(ii), (iii), (iv) and (v) 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 the 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.
4) There is incorporated herein by reference the Agreement
dated as of December 1997 between the Company and Henry C.
Babb filed as exhibit 10.3 to the Company's Report on Form
10-K for the year ended March 31, 1999.
5) There is incorporated by reference the Agreement dated as of
August 1998 between the Company and Paul H. Bique filed as
exhibit 10.4 to the Company's Report on Form 10K for the
year ended March 31, 1999.
11. Computation of Earnings per Common Share.
13. The Company's Annual Report to Shareholders for the year ended
March 31, 2001 which, except for information expressly
incorporated by reference into Items 5, 6, 7, 7A and 8 is not
deemed to be "filed" as a part of this Report.
21. List of subsidiaries.
23. Consent of Independent Public Accountants.
-15-
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 13, 2001 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 13, 2001 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/ Marvin W Coghill Director
- --------------------------------------------------
Marvin W Coghill
/s/ William A Ziegler Director
- --------------------------------------------------
William A Ziegler
/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
/s/ B Clyde Preslar Director
- --------------------------------------------------
B Clyde Preslar
/s/ Mark W Kehaya Director
- --------------------------------------------------
Mark W Kehaya
-16-
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, 2001 and 2000, and for each of the three years in
the period ended March 31, 2001, and have issued our report thereon dated June
8, 2001; such consolidated financial statements and report are included in your
2001 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 8, 2001
-17-
STANDARD COMMERCIAL CORPORATION
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, 1999
Deducted from asset accounts
Allowance for doubtful accounts......... $ 4,535,160 $ 891,348 $ - $ 423,240 $ 5,003,268
Inventory............................... 4,969,927 7,038,223 - 1,324,561 10,683,589
---------------------------------------------------------------------------
Total................................ $ 9,505,087 $ 7,929,571 $ - $1,747,801 $15,686,857
===========================================================================
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............................... 10,683,589 3,701,344 - 2,338,796 12,046,137
---------------------------------------------------------------------------
Total................................ $15,686,857 $ 5,984,342 $ - $3,058,953 $18,612,246
===========================================================================
Year ended March 31, 2001
Deducted from asset accounts
Allowance for doubtful accounts......... $ 6,566,109 $ 2,974,088 $ - $3,293,804 $ 6,246,393
Inventory............................... 12,046,137 4,385,335 - 2,890,735 13,540,737
---------------------------------------------------------------------------
Total................................ $18,612,246 $ 7,359,423 $ - $6,184,539 $19,787,130
===========================================================================
-18-