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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR THE FISCAL YEAR ENDED MARCH 31, 2003

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 1-9875

STANDARD COMMERCIAL CORPORATION

2201 Miller Road, Wilson, North Carolina 27893

Telephone Number (252) 291-5507

Securities Registered Pursuant to Section 12(b) of the Act:

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

At September 30, 2002, there were 13,483,690 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 September 30, 2002, was approximately $226 million.

At June 12, 2003, there were 13,497,334 shares of the registrant’s common stock outstanding.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the Annual Meeting of Shareholders currently scheduled to be held on August 12, 2003 are incorporated by reference into Part III this Form 10-K.

Some of the statements contained in this report discuss our plans and strategies for our business and are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act. The words “anticipate,” “believe,” “estimate,” “expect”,” plan,” “intend” and similar expressions are meant to identify these statements as forward-looking statements, but they are not the exclusive means of identifying them. The forward-looking statements in this report reflect the current views of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed or implied by these statements, including:

In evaluating these forward-looking statements, you should specifically consider the risks described above and in other parts of this report, including the sections captioned “Risks Relating to Our Operations,” “Risks Relating to the Tobacco Industry,” “Risks Relating to Our Wool Operations” and “Risks Relating to Owning Our Stock” under “ITEM 1. BUSINESS”. These factors might cause our actual results to differ materially from any forward-looking statement.

PART I

ITEM 1. BUSINESS.

Available Information

Our website address is www.sccgroup.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

General

Standard Commercial Corporation is principally engaged in two international businesses—tobacco and wool. We are one of the three global independent leaf tobacco merchants serving the large multinational cigarette manufacturers. We have a major market presence in a number of the emerging and low-cost flue-cured and burley tobacco growing regions, including China, India, Malawi and Thailand. Founded in 1910, we purchase, process, store, sell and ship tobacco grown in over 30 countries, servicing cigarette manufacturers from 22 processing facilities strategically located throughout the world. We also are engaged in purchasing, processing and selling various types of wool and are a world leader in the trading of scoured wool.

The only change in our business segments since April 1, 2002, relates to the sale/closure of four of our wool units, which resulted in our exiting the Argentina, South Africa and New Zealand wool markets as well as closing our specialty fibers business in Holland. Our remaining wool operations are concentrated on the core sourcing, processing and sales markets of Australia and Europe and the carpet and scoured sector of the UK wool industry. Contributions to gross revenue from businesses other than tobacco and wool for the past three years have not been material. You can find financial information on our business segments and geographic sources and locations of our business and properties in Note 17 to our consolidated financial statements included in this report. We do not own any material patents, trademarks, licenses, franchises or concessions, nor do we engage in any significant research activity.

The Leaf Tobacco Industry

Multinational cigarette manufacturers, with one principal exception, rely primarily on global independent leaf tobacco merchants like us to process and supply leaf tobacco used in the manufacturing process. Leaf tobacco merchants select, purchase, process, store, pack and ship tobacco, and, in a growing number of emerging markets, provide agronomy expertise and financing for growing leaf tobacco. We are one of three global independent leaf tobacco merchants currently operating in the world. We believe the following are important trends in the leaf tobacco industry:

Growth of American-Blend Cigarettes. American-blend cigarettes have gained market share in several major foreign markets, including Asia (particularly Pacific Rim countries), Europe and the Middle East in recent years. American-

blend cigarettes contain approximately 50% flue-cured, 35% burley and 15% oriental tobacco, contain less tar and nicotine, and taste milder than locally produced cigarettes containing dark and semi-oriental tobacco historically consumed in other parts of the world. Several multinational cigarette manufacturers have made significant investments in the former Soviet Union, which we believe might lead to increased demand for and sale of American-blend tobacco. As American-blend cigarettes have gained market share, the demand for export quality American-blend tobacco, sourced and processed by the three global independent leaf tobacco merchants, including us, has grown.

Growth in Foreign Operations of Multinational Cigarette Manufacturers. Several multinational cigarette manufacturers have expanded their operations throughout the world, including in Africa, Asia, Central and Eastern Europe and the former Soviet Union, in order to increase presence in these markets. As cigarette manufacturers expand their global operations, we believe there will be increased demand for local sources of leaf tobacco and local tobacco processing facilities, primarily due to the semi-perishable nature of unprocessed leaf tobacco and the existence of domestic tobacco content laws in some foreign countries. We also believe that the international expansion of cigarette manufacturers will cause these manufacturers to place greater reliance on the services of leaf tobacco merchants like us with the ability to source and process tobacco on a global basis and to help develop higher quality local tobacco sources.

Growth in Foreign-Sourced Tobacco. In an effort to respond to cigarette manufacturers’ increasing demand for lower cost American-blend tobacco, the major leaf tobacco merchants have made significant investments in Africa, Asia, Europe and South America, the principal sources of flue-cured, burley and oriental tobacco outside the United States. We expect this trend to continue in the foreseeable future as the quality of foreign-grown tobacco continues to improve.

Global Market Conditions. In the U.S. market, the late November 1998 settlement between the cigarette manufacturers and the states for health care claims resulted in major price increases in the United States, which affected demand negatively. The negative impact of these price increases has lessened in the last two years and U.S. market dynamics are beginning to stabilize. Our supply/demand models indicate that, currently, global supplies of flue-cured and burley tobaccos are basically in line with demand. We believe there currently remains an oversupply of oriental tobacco.

Our Tobacco Operations

We have developed an international network through which we purchase, process and sell tobacco. In addition to processing facilities in North Carolina, we own or have an interest in processing facilities in Brazil and Zimbabwe, both significant exporters of flue-cured tobacco; Malawi, a leading exporter of burley tobacco; and Turkey, the leading exporter of oriental tobacco. We also have processing facilities in Argentina, Italy, Spain and Thailand. In addition, we have entered into contracts, joint ventures and other arrangements for the purchase and processing of tobacco grown in substantially all countries that produce export-quality flue-cured, burley and oriental tobacco, including Brazil, Canada, China, India, Kenya, Kyrgyzstan and Ukraine. We are in the process of building a joint venture tobacco processing facility in Indonesia and expect that facility to be completed in October 2003. We also own and operate cut rolled expanded stem, or CRES, processing facilities in the United States and Russia.

Purchasing. The tobacco in which we deal is grown in over 30 countries. We believe that our diversity in sources of supply, combined with a broad customer base, helps shield us from seasonal fluctuations in quality, yield or price of tobacco crops grown in any one region. We rely primarily on revolving lines of bank credit and internal resources to finance our purchases. Quite often the tobacco serves as collateral for the credit. The period of exposure, with some exceptions, generally is limited to a tobacco season and the maximum exposure is limited to a shorter period.

Leaf tobacco merchants like us generally purchase tobacco at auction or directly from growers. Tobacco grown in the United States, Canada, India, Malawi and Zimbabwe generally is purchased at auction. Beginning in 2000, the U.S. market began shifting from auction purchases to direct contracting with growers. We estimate that 75% of the 2003 crop will be contracted. We expect most of those contracts will be between the farmer and the cigarette manufacturer, with us processing a portion of these tobaccos under long-term processing and service contracts. We generally employ our own buyers to purchase tobacco on auction markets, directly from growers and pursuant to marketing agreements with government monopolies. At present, the largest amounts of tobacco purchased by us outside the United States come from Argentina, Brazil, China, Greece, India, Italy, Malawi, Spain, Thailand, Turkey and Zimbabwe.

Although Argentina, Brazil, China, Greece, Italy, Spain, Thailand and Turkey are major tobacco producers, there are no tobacco auctions in these markets. In these markets, we buy tobacco directly from farmers, agricultural cooperatives or government agencies in advance of firm orders or indications of interest, although these purchases are usually made with some knowledge of our customers’ requirements. In some of these markets we advance or finance the purchase of fertilizer and other supplies to assist farmers in growing the crop and are repaid with deliveries of tobacco. During fiscal 2003, the maximum aggregate amount of such advances by us at any one time was $51.2 million.

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Processing. The tobacco we purchase generally is perishable and must be processed within a relatively short period of time to prevent deterioration in quality. Consequently, we have located our processing facilities near the areas where we purchase tobacco. Prior to and during processing, we take a number of steps to ensure consistent quality of the tobacco. These steps include regrading and removing undesirable leaves, dirt and other foreign matter. Most of the tobacco is then blended to meet customer specifications and threshed; however, some of it is processed in whole-leaf form and sold to some of our customers. Threshing involves mechanically separating the stem from the tissue portions of the leaf, which are called strips, and sieving out small scrap. Considerable expertise is required to produce strips of large particle size and to minimize scrap.

Strips and stems are redried and packed separately. Redrying involves further reducing the natural moisture left in the tobacco after it has been cured by the growers. The objective is to pack tobacco at safe moisture levels so that it can be held by the customer in storage for long periods of time. We continually perform quality control checks during processing to ensure that the product meets customer specifications as to yield, particle size, moisture content and chemistry. Customers are frequently present at the factory to monitor results while their tobacco is being processed.

Redried tobacco is packed in hogsheads, cartons, cases or bales for storage and shipment. Packed tobacco generally is transported in the country of origin by truck or rail, and exports are moved by ship.

We process our tobacco in four wholly-owned plants in the United States and 12 other facilities around the world owned or leased by our subsidiaries and affiliates. In addition, we have access to six other processing plants in which we have no ownership interest. In all cases, tobacco processing is under the direct supervision of our personnel. We maintain modern laboratory facilities to assist in selecting tobacco for purchase and to test tobacco during and after processing.

We believe that our plants are efficient and are adequate for our purposes. We also believe that tobacco throughput at our existing facilities could be increased if necessary without major capital expenditures.

Selling. Our customers include all of the world’s leading manufacturers of cigarettes and other consumer tobacco products. These customers are located in approximately 85 countries throughout the world. We employ our own customer relationship managers, who travel extensively to visit our customers and to attend tobacco markets worldwide with our customers, and we also use agents for sales to customers in some countries. Sales are made on open account to customers who qualify based on experience or are made against letters of credit opened by the customer prior to shipment. The majority of sales are made in U.S. dollars. We receive payment for most tobacco we sell after the tobacco has been processed and shipped.

The consumer tobacco business in most markets is dominated by a small number of large multinational cigarette manufacturers and by government controlled entities, all of whom are our customers. In fiscal 2003, our five largest customers accounted for approximately 50% of total sales (62% of tobacco sales). In fiscal year 2003, three customers, Philip Morris, British American Tobacco (BAT) and Japan Tobacco each accounted for more than 10% of total sales. We believe that formal purchase contracts are not customary in the global leaf tobacco industry and that agreements to purchase tobacco generally result from the supplier’s course of dealings with its customers. We have done business with most of our customers for many years. We believe that we have good relationships with our large customers; however, the loss of any one or more of these customers could have a material adverse effect on our operations.

As of March 31, 2003, we had tobacco inventory of $ 216.3 million, compared to $185.7 million at March 31, 2002. The level of tobacco fluctuates from period to period and is significant only to the extent it reflects short-term changes in demand for leaf tobacco in the leaf tobacco industry.

Competition in the Leaf Tobacco Industry

The leaf tobacco industry is highly competitive. Competition among independent leaf tobacco dealers is based primarily on the price charged for products and services; the ability to meet customer demands and specifications in sourcing, purchasing, blending, processing and financing tobacco; and the ability to develop and maintain long-standing customer relationships by demonstrating a knowledge of customer preferences and requirements. Although most of our principal tobacco customers also purchase tobacco from our major leaf tobacco competitors, Universal and Dimon, our relationships with our largest tobacco customers span many years and we believe that we have the personnel, expertise, facilities and technology to remain successful in the industry. In addition, we believe that the consolidation of the leaf tobacco industry has provided opportunities for us to enhance our relationship with and increase sales to some cigarette manufacturers.

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Worldwide Tobacco Presence

United States. We own and operate a total of four processing facilities located in North Carolina and purchase tobacco from 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 historically was sold at public auction to the highest bidder. Commencing in late 2000, the U.S. market began undergoing a shift away from the auction system and moving to direct contracting. In most cases, the cigarette manufactures contract their requirements of leaf tobacco directly with the grower. We often act as an agent to secure these contracts and receive a commission for these services. We continue to receive and process the contracted tobacco and receive fees and processing revenues from the manufacturers. We estimate that as much as 75% of the total 2003 flue-cured crop will be contracted in this manner. The remainder of the crop will continue to be sold at auction. The price of such tobacco is supported under an industry-funded federal program that also restricts tobacco production through a quota system. Tobacco grown in the United States is more expensive than most foreign grown tobacco, resulting in a declining trend in exports, which we believe should be offset by increased demand for foreign tobacco.

South America. We currently sell, as we have for many years, leaf tobacco produced in Brazil by Souza Cruz, a subsidiary of British American Tobacco, plc., or BAT, that has approximately 80% of the domestic cigarette market in Brazil. During fiscal 1998, trusts established by us acquired Meridional de Tobaccos Ltda., the fourth largest leaf tobacco processor in Brazil. The ownership of this operation complements our continuing long-term relationship in Brazil with Souza Cruz, and provides us with direct ownership of a processing facility in the second largest leaf tobacco growing region in the world (excluding China). In fiscal 2002, we purchased the processing assets of Nobleza Picardo, the Argentinean subsidiary of BAT, and signed a long-term processing contract for Nobleza’s domestic processed leaf requirements.

Turkey and Greece. We are one of the largest merchants of flue-cured, burley and oriental tobacco in Turkey. In both Turkey and Greece, the oriental tobacco markets are more fragmented than the major flue-cured and burley tobacco markets in other parts of the world. During fiscal year 2001, we exchanged our 51% ownership of our subsidiary in Greece for the 49% minority ownership position of our Turkish subsidiary. We now own 100% of the Turkish subsidiary. We also maintain our own buying operation for Greek tobaccos and have entered into a processing agreement with SEKE, a Greek entity that is owned by a group of farmer collectives.

Malawi and Zimbabwe. In Malawi, the largest exporter of low-cost burley tobacco in the world, we have a leading market position and service the large multinational cigarette manufacturers from our facilities in Lilongwe. We also are a leader in the purchase and processing of flue-cured and dark-fired tobacco, which are also processed in our facilities. In Zimbabwe, we purchase flue-cured tobacco and to a lesser extent burley tobacco, which we process in our minority-owned facility. In fiscal 2001, we made a decision to exit the Tanzanian market and sold our 20% interest in a privately-owned and-operated processing facility in Morogoro, Tanzania.

China, Thailand, India and Indonesia. We have provided agronomy services and funded a variety of projects in China since 1981 and believe that we are the largest independent exporter of Chinese leaf tobacco. We currently operate three government-owned tobacco processing facilities in China. In fiscal 1999, we expanded our presence in China and expect to increase our production in the area through strategic alliances with the Chinese government. We are also one of the leading exporters of flue-cured, burley and oriental leaf tobacco from Thailand, which we purchase directly from farmers or in some cases from middlemen or curers. Flue-cured tobacco is grown mainly in northern Thailand, burley tobacco is grown in central Thailand and oriental leaf tobacco is grown in northeast Thailand. We currently process tobacco in Thailand in two facilities in which we own a minority interest. In India, an emerging source of low-cost filler tobacco, we purchase primarily flue-cured tobacco. We own a minority interest in a processing facility in Guntur, India, which began operations in fiscal 2001. We are in the process of building a joint venture tobacco processing facility in Indonesia that is expected to be complete in October 2003.

Other Foreign Operations. We also have foreign subsidiaries, joint ventures and affiliates that purchase, process and sell tobacco grown in other countries throughout the world, including Italy, Kenya, Spain and the Congo.

The Wool Industry

We are a world leader in the trading of scoured wool and a major trader and processor of wool tops. As a result of a series of acquisitions commencing in 1985, we own and operate an integrated group of wool companies which purchase, process and sell wool to spinners and knitters of yarn, manufacturers of worsted and woolen products, felting companies

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and other wool processors. We do not raise sheep or produce textile products. For fiscal 2003, we derived approximately 19% of our revenue from our 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.

Global Wool Market Conditions

The global condition of the wool industry reversed from a promising outlook at the end of fiscal 2001 to a depressed state in fiscal 2002 and fiscal 2003. The combination of the effects of the hoof and mouth disease outbreak in Europe in early 2001 that resulted in reduced herd sizes and the continued drought conditions in Western Australia that have had a like effect on herd sizes have reduced the size of the wool clip. The shortage of supply prompted raw wool prices to rise to record levels in fiscal 2002 and remain at record levels in fiscal 2003. These higher prices are not being accepted by the spinning and weaving industries because wool is a substitutable product and the price of alternate fibers currently is low. As a result, demand for wool was slack in fiscal 2002 and 2003. This resulted in poor trading conditions in the wool industry. Until the demand issues are resolved, the industry will most likely remain depressed during FY 2004.

Our Wool Operations

We own and operate processing facilities in four countries, including scouring mills in France and the United Kingdom and combing mills in Chile and France. We also have joint ownership of an aqueous scouring facility in Western Australia, the only one of its type in the region. We also use the services of commission processors in Australia, Belgium, Germany and Italy. In fiscal 2002, as a result of weak market conditions in the industry, we decided to scale back our operations to the core markets of Australia, France, Germany, Chile and the UK. Accordingly, in fiscal 2003 we sold/closed our South Africa, New Zealand and Argentine units, as well as our specialty fibers operation in Holland and have exited those markets.

Purchasing. We deal in wool from all of the major producing areas, the most significant of which are Argentina, Australia, Chile, and the United Kingdom. We have buying offices in all of these areas. Our employees buy wool at auctions and through negotiations with woolgrowers. Although most wool is shorn before it is purchased, some wool is purchased “on the back” before shearing. Most of our purchases are made against specific customer orders. Australia is by far the largest producer of wool in the world and its wool prices generally influence world prices. We typically pay for our wool purchases in the currency of the country of origin, and hedge the currencies of our purchase and sale commitments with forward transactions. We do not engage in currency transactions for the purpose of speculation.

Processing. Wool is purchased in its raw or naturally greasy state, and must be scoured (washed) before it can be further processed. We sell some greasy wool to topmakers, but most of the wool is blended and scoured and/or further processed into tops, to meet customer specifications. The scouring is done at our plants in France and the United Kingdom, and at our jointly owned facilities in Australia, or by commission scourers in Australia and Belgium. Similarly, tops are produced in our plants in Chile and France, and by commission combers in Australia, Italy and Germany. Our French plant also refines wool grease removed during the scouring process into a variety of types of lanolin, a marketable byproduct.

A top is a continuous strand of straightened and combed longer wool fibers that have been separated from the short fibers. Topmaking involves seven processes: blending, scouring, carding, gilling, combing, finishing and packing to quality standards specified by the customer. Carding machines align the fibers to produce a “sliver” of parallel fibers while removing foreign matter. Slivers are combed and combined to produce a stronger “rope” or a top suitable for spinning. Tops are wound into bobbins weighing approximately 22 pounds, which are packed and shipped to customers in the apparel industry for further manufacturing. We maintain laboratory facilities for analyzing and testing wool and lanolin.

Selling. We currently derive approximately 69% of our wool revenues from sales to customers in Europe, with sales to the Far East, North America and other areas making up the balance. Greasy wool is sold primarily to customers in Western Europe, the Far East and the United States. Scoured wool is shipped to carpet, woolen, felting, quilt and mattress manufacturers located in Europe, the Far East and the United States. Tops are sold primarily to Western European yarn spinners for processing and sale to manufacturers of worsted fabrics. Lanolin is sold primarily to manufacturers of cosmetics and pharmaceutical products. Our largest wool customer accounted for 1% of total sales and 5% of total wool sales for fiscal 2003. Sales are typically made in local currencies of our customers.

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We rely primarily on short-term bank credit and internal resources to finance our wool purchases. The period of exposure generally is limited to only a few months. At March 31, 2003 and 2002, we had outstanding orders for wool of approximately $75.5 million and $82.3 million, respectively.

Competition in the Wool Industry

The wool industry is more fragmented than the leaf tobacco industry. Major competitors include Chargeurs, ADF, BWK and a number of Japanese trading firms, the largest of which is Itochu. Key factors for success in the wool business are broad market coverage, a full range of wool types, technical expertise in buying and processing and high quality customer service. We believe that our processing and marketing capabilities and buying and trading expertise enable us to compete effectively and that our broad geographical trading base enables us to react quickly to price changes to supply wool of similar types and blending quality from different countries or areas while keeping the highest quality standards.

Employees

At March 31, 2003, we had a total of approximately 2,821 full-time employees, including approximately 492 in the United States and approximately 926 full-time employees in affiliated companies. As of that date, approximately 2,429 of our full-time employees were in the tobacco business and approximately 392 were in the wool business. Our tobacco business typically employs an additional 5,500 to 6,000 part-time employees during peak production periods.

Our principal subsidiary in the United States has a collective bargaining agreement with a union covering the majority of our hourly employees, many of whom are seasonal. The agreement expires on March 31, 2005. We believe our relations with our employees covered by this agreement are good. Our employees at the French wool plant also are represented by labor unions under an agreement subject to renewal every December 31. We believe that our relations with our employees in France are good.

Risks Relating to Our Operations

Our financial results will vary according to growing conditions, customer requirements and other factors, which reduces your ability to gauge our performance and increases the risk of an investment in our common stock.

Our financial results, particularly the quarterly financial results, might be significantly affected by fluctuations in tobacco growing seasons and crop sizes, and wool growing seasons and production, all of which are dependent upon a number of factors, including governmental agricultural programs in some countries, availability of shipping, and the weather and other natural events, such as hurricanes, tropical storms or droughts.

Further, because of the timing and unpredictability of customer requirements, orders and shipments, we keep tobacco and wool in inventory, which increases our risk and results in variations in quarterly and annual financial results. We may from time to time in the ordinary course of business keep a significant amount of processed tobacco in inventory for our customers to accommodate their inventory management and other needs. Sales recognition by us and our subsidiaries is based on the shipment of the product to customers. Since individual shipments may represent significant amounts of revenue, our quarterly and annual financial results might vary significantly depending on our customers’ needs and shipping instructions.

Our adoption and application of recent standards in financial accounting could cause our annual and quarterly financial results to vary and will reduce your ability to gauge our performance, increasing the risk of an investment in our common stock.

Effective April 1, 2001, we adopted Statement of Financial Accounting Standards No. (SFAS No.) 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 137 and SFAS No. 138. As a result of adoption of SFAS No. 133, we recognize all derivative financial instruments, such as foreign exchange contracts, in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. We use forward contracts to mitigate our exposure to changes in foreign currency exchange rates on forecasted transactions. Generally, the effective portion of unrealized gains and losses associated with forward contracts and the intrinsic value of option contracts are deferred as a component of accumulated other comprehensive income until the underlying hedge transactions are reported on our consolidated statement of earnings. We have not used interest rate swaps to mitigate our exposure to changes in interest rates. Changes in the fair values of derivatives not qualifying as hedges are reported in income. As a result of fluctuations in interest rates and volatility in market expectations, the fair market value of hedging instruments can be expected to appreciate or depreciate over time. We plan to continue the practice of economically hedging various components of our debt. However, as a result of SFAS No. 133, such hedging instruments might create

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volatility in future reported earnings. In accordance with the transition provisions, in fiscal 2002, we recorded a cumulative effect loss adjustment of $2.1 million net of tax in other comprehensive income.

In addition, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, effective April 1, 2002. As a result of adoption of SFAS No. 142, we no longer amortize goodwill and intangible assets, which resulted in increased earnings of approximately $1.5 million in fiscal 2003. However, if we determine that there has been a material impairment to goodwill or other intangible assets with indefinite lives, we will recognize the amount of that impairment as a charge to earnings in the applicable reporting period. This could cause variances in our reported earnings in different quarters and years, which might impair your ability to compare results in those periods.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. We have early adopted SFAS No. 144 and have performed the tests required and have concluded that no impairment exists at March 31, 2003.

In April 2003, SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies accounting for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities under SFAS No. 133. We do not expect that the adoption of SFAS No. 149 will have a material effect on the Company’s Financial Statements.

The shift to direct buying of green tobacco by many of our U.S. customers will affect your ability to compare our quarter-to-quarter or year-to-year results and could have an adverse effect on our results of operations.

Comparability of our sales revenues will be affected by the shift to direct contract buying in the United States. Traditionally in the United States, we have taken ownership of all green tobacco we purchase, then process and resell that tobacco to our customers. Concurrent with the shift from an auction system to a direct contract buying system in the United States, which began with the 2000 U.S. burley crop, major U.S. customers have begun purchasing green tobacco directly from the growers. Although we expect that the tobacco purchased directly from growers by our customers will continue to be processed in our U.S. facilities, we no longer take ownership of that tobacco and no longer record sales revenues associated with its resale. With the shift to direct contract buying, our sales were negatively impacted in fiscal 2001, 2002 and 2003. We expect to continue to earn and record service revenues for the processing of all such tobaccos for our customers. We do not expect that our gross profit will be materially affected by the shift to direct contract buying by our customers, although sales revenues will be reduced and our profit margin might improve. In addition, although we expect to purchase the majority of our flue-cured and burley crop requirements through direct contract buying, we will still need to maintain a buying presence in the residual auction markets, which could affect our ability to manage our costs.

Our extension of credit to tobacco growers could have an adverse effect on our financial condition.

We make advances to tobacco growers in many countries to finance their growing of tobacco for sale to us. Crop advances to growers are generally secured by the grower’s agreement to deliver green tobacco. In the event of crop failure, recovery of advances could be delayed until deliveries of future crops or indefinitely. The temporary or permanent loss of these advances to growers could have a material adverse effect on our financial condition or results of operations.

Competition could adversely affect our operating results.

The leaf tobacco industry is highly competitive. Competition among leaf tobacco merchants is based primarily on the prices charged for products and services as well as the merchant’s ability to meet customer specifications in the buying, processing and financing of tobacco. In addition, there is competition in all countries to buy the available tobacco. We are one of three major global competitors in the leaf tobacco industry, and we are dependent upon a relatively small number of large cigarette manufacturing customers. The number of cigarette manufacturers has declined in recent years due to consolidation. The loss of, or a substantial reduction in the services provided to, any large or significant customer could have a material adverse effect on our financial condition or results of operations.

Our reliance on a small number of significant customers could adversely affect our results of operations.

Our customers are manufacturers of cigarette and tobacco products in many countries around the world. Several of these customers individually account for a significant portion of our sales in a normal year. Of our total tobacco sales in fiscal 2003, 2002 and 2001, approximately 62%, 59% and 56%, respectively, represented sales to our five largest tobacco customers. In fiscal 2003, 2002 and 2001, one customer accounted for 13%, 14% and 17%, respectively, of our total sales. In addition, tobacco product manufacturers are currently experiencing a period of consolidation, and further consolidation

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among our customers could decrease our customer’s demand for our leaf tobacco or processing services. The loss of any one or more of our customers could have a material adverse effect on our financial condition or results of operations.

We face increased risks of doing business due to the extent of our international operations.

We do business in over 30 countries, many of which do not have stable economies or governments. Our international operations are subject to international business risks, including terrorism, unsettled political conditions, expropriation, import and export restrictions, exchange controls, inflationary economies and currency risks and risks related to the restrictions on repatriation of earnings or proceeds from liquidated assets of foreign subsidiaries. These risks are exacerbated in countries where we have advanced substantial sums or guaranteed local loans or lines of credit in substantial amounts for the purchase of tobacco from growers.

Fluctuations in foreign currency exchange rates could adversely affect our results of operations.

Our tobacco business is generally conducted in U.S. dollars, as is the business of the tobacco industry as a whole. However, local country operating costs, including the purchasing and processing costs for tobaccos, are subject to the effects of exchange fluctuations of the local currency against the U.S. dollar. We attempt to minimize such currency risks by matching the timing of our working capital borrowing needs against the tobacco purchasing and processing funds requirements in the currency of the country where the tobacco is grown. Fluctuations in the value of foreign currencies can significantly affect our tobacco operating results.

Our wool business involves many currencies. We typically buy wool in the currency of the source country and sell in the currency of the destination country. We generally hedge our purchase and sale commitments through netting of expenses or with forward currency transactions. No hedging program is completely effective in offsetting currency risks, however, and fluctuations in the value of currencies can significantly affect our wool operating results.

In addition, the devaluation of foreign currencies, particularly Asian and Eastern European currencies, has resulted and might in the future result in reduced purchasing power from customers in these areas. We might incur a loss of business as a result of the devaluation of these currencies now or in the future.

Terrorist attacks on the United States or its allies, and the continuing fear of future attacks, might have unpredictable adverse effects on global economic conditions, the financial markets and our business and results of operations.

The September 11, 2001 terrorist attacks on the United States, and the continuing fear of future attacks, have caused uncertainty and volatility in the U.S. and international economies and financial markets. Terrorist attacks have been aimed at foreigners, including Americans, and might also be targeted against U.S. businesses operating abroad or U.S. allies. We cannot predict what affect the international terrorist threat, including retaliatory measures that have been taken, and those that might be taken in the future, might have on global economic conditions, the financial markets, or on our business and results of operations.

Risks Relating to the Tobacco Industry

Reductions in demand for consumer tobacco products could adversely affect our results of operations.

The tobacco industry, both in the United States and abroad, continues to face a number of issues that might reduce the consumption of cigarettes and adversely affect our business, sales volume, results of operations, cash flows and financial condition.

These issues, some of which are more fully discussed below, include:

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Tobacco product manufacturer litigation may reduce demand for our services.

Our primary customers, the leading cigarette manufacturers, face hundreds of lawsuits brought throughout the United States and, to a lesser extent, the rest of the world. The cumulative effect of the lawsuits on our customers could reduce their demand for tobacco from us. These lawsuits have been brought by (1) individuals and classes of individuals alleging personal injury, (2) governments (including governmental and quasi-governmental entities in the United States and abroad) seeking recovery of health care costs allegedly caused by cigarette smoking, and (3) other groups seeking recovery of health care expenditures allegedly caused by cigarette smoking, including third-party health care payors, such as unions and health maintenance organizations. Damages claimed in some of the smoking and health cases range into the billions of dollars. In September 1999, the United States Department of Justice filed a lawsuit against the leading cigarette manufacturers, seeking to recover billions of dollars in alleged federal smoking-related health care costs. Additional plaintiffs continue to file lawsuits. Several of these cases have resulted in verdicts in the hundreds of millions and even billions of dollars.

In November 1998, several United States tobacco product manufacturers entered into the MSA with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. These manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota and an environmental tobacco smoke and health class action brought on behalf of airline flight attendants. The MSA has received final judicial approval in all 52 settling jurisdictions.

Key provisions of the MSA are as follows:

Other state settlement agreements include provisions relating to advertising and marketing restrictions, public disclosure of industry documents, limitations on challenges to tobacco product control and underage use laws, lobbying activities and other provisions.

It is not possible to predict the outcome of the litigation pending against the U.S. cigarette manufacturers, or the extent to which these actions might adversely affect our customers, their demand for our product or our business generally. Unfavorable outcomes in pending cases could encourage the commencement of additional litigation. Adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco product industry continue to receive widespread media attention. These developments might negatively affect the perception of potential judges and juries with respect to the tobacco product industry, possibly affecting the outcome of litigation. Although we are not a party to this litigation, the MSA or any state settlement agreement, determinations that are adverse to the manufacturers could adversely affect their purchases as our customers.

Legislative and regulatory initiatives could reduce consumption of consumer tobacco products and demand for our services.

In recent years, members of Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would subject cigarettes to various regulations under the Department of Health and Human Services or regulation under the Consumer Products Safety Act, establish antismoking educational campaigns or anti-smoking programs, or provide additional funding for governmental anti-smoking activities, further restrict the advertising of cigarettes, including requiring additional warnings on packages and in advertising, provide that the Federal Cigarette

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Labeling and Advertising Act and the Smoking Education Act could not be used as a defense against liability under state statutory or common law, allow state and local governments to restrict the sale and distribution of cigarettes, and further restrict certain advertising of cigarettes and eliminate or reduce the tax deductibility of tobacco product advertising. It is not possible to determine the outcome of these regulatory initiatives, or to predict what, if any, other foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, our business, volume, results of operations, cash flows and financial condition could be materially adversely affected.

Reports with respect to the harmful physical effects of cigarette smoking have been publicized for many years, and the sale, promotion and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommending various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focus upon the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the addictive nature of cigarette smoking in adolescence.

A number of foreign nations also have taken steps to restrict or prohibit cigarette advertising and promotion, to increase taxes on cigarettes and to discourage cigarette smoking. In some cases, such restrictions are more onerous than those in the United States. For example, advertising and promotion of cigarettes has been banned or severely restricted for a number of years in Australia, Canada, Finland, France, Italy, Singapore and other countries. Further, the World Health Organization and its member states are negotiating a proposed Framework Convention for Tobacco Control, which would require signatory nations to enact legislation that would require, among other things, specific actions to prevent youth smoking; restrict or prohibit tobacco product marketing; inform the public about the health consequences of smoking and the benefits of quitting; regulate the content of tobacco products; impose new package warning requirements including the use of pictoral or graphic images; eliminate cigarette smuggling and counterfeit cigarettes; restrict smoking in public places; increase and harmonize cigarette excise taxes; abolish duty-free tobacco sales and permit and encourage litigation against tobacco product manufacturers. It is impossible to predict the extent to which these and any additional restrictions might affect our business.

In addition, from time to time, the leaf tobacco industry has been the subject of government investigations regarding trade practices. In September 1998, we and several of our employees received subpoenas relating to an investigation by the Antitrust Division of the United States Department of Justice into certain buying practices alleged to have occurred in the industry. We have received notice that this investigation has been concluded without any action taken against us. In addition, we were named as a defendant in a class action claim brought on behalf of U.S. tobacco growers alleging that major cigarette manufacturers and certain leaf tobacco merchants violated U.S. antitrust laws by bid-rigging tobacco auctions and conspiring to undermine the tobacco quota and price support program administered by the Federal government. We have now, along with all but one of the other defendants, entered into a settlement agreement with the plaintiffs which has received preliminary, but not final approval, and which accords us a full release from all the claims in exchange for a payment of $7.0 million towards a larger total settlement agreement.

In October 2001, the Directorate General—Competition of the European Commission, or the DG Comp, began conducting an administrative investigation of certain selling and buying practices alleged to have occurred within the leaf tobacco industry in some countries within the European Union, including Spain, Italy and Greece. We, through our local subsidiaries, are cooperating fully with the investigation and have discovered and voluntarily disclosed information which tends to establish that a number of leaf dealers, including our subsidiaries, have jointly agreed with respect to green tobacco prices and purchase quantities. We believe, however, that there are significant mitigating circumstances relating to the structure of these markets, their historical conduct and the prominence of seller’s cooperatives. The investigation is in its early stages and although the fines, if any, that the DG Comp may assess on our subsidiaries could be material, we are not able to make an accurate assessment of the amount of any such fines at this time.

Due to the present litigation, regulatory and legislative environment, a substantial risk exists that past growth trends in tobacco product sales might not continue and that existing sales might decline. We cannot predict the extent to which any of these issues might affect our business.

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Risks Relating to Our Wool Operations

Downturns in the wool industry could negatively affect our operations.

The hoof and mouth disease epidemic in Europe in early 2001 and drought conditions in Australia in recent years have caused a wool supply shortage, with an attendant increase in prices. As a result, in fiscal 2002 manufacturers increased the use of alternate fibers and the demand for wool has been and remains decreased. Supply and demand imbalances, downturns or other adverse market conditions could occur in the future which might negatively affect the wool industry, which, in turn, could affect our operations.

Widespread disease among livestock could negatively impact our operations.

Wool production is dependant on the supply of sheep for wool shearing. Although the outbreak of hoof and mouth disease in Europe in early 2001 primarily impacted sheep for the meat market rather than for the wool market, a widespread outbreak of any livestock disease could negatively affect wool production and, in turn, our operations.

Our wool operations produce significant effluent waste, which could subject us to significant liability, which could negatively affect our operations and financial condition.

Our wool scouring and top making operations involve discharges of significant amounts of effluent waste, which could subject us to significant liability under applicable foreign laws relating to the protection of the environment in the event we failed to comply with those laws. Any noncompliance could result in fines and clean-up expenses that could negatively impact our financial condition. Any noncompliance also could have a material effect on our competitive position in those countries.

Risks Relating to Owning Our Stock

Anti-takeover provisions could discourage a takeover that you consider to be in your best interest or prevent the removal of our current directors and management.

We have adopted a number of provisions that could have anti-takeover effects or prevent the removal of our current directors and management. We have adopted a shareholder protection rights plan, commonly referred to as a poison pill. The rights plan is intended to deter an attempt to acquire our company in a manner or on terms not approved by our Board of Directors. The rights plan will not prevent an acquisition that is approved by our Board of Directors. Our charter authorizes the Board of Directors to determine the terms of up to 1,000,000 shares of undesignated preferred stock and issue them without stockholder approval. The issuance of preferred stock could make it more difficult for a third party to acquire, or discourage a third party from acquiring, voting control of our company in order to remove our current directors and management. These provisions could make more difficult the removal of our current directors and management or a takeover of our company, even if the events would be beneficial to our stockholders. These provisions could also limit the price that investors might be willing to pay for our common stock.

Our stock price has been volatile, which makes investing in our common stock risky.

Our stock price has been volatile and might continue to be, making an investment in our common stock risky. Between December 2000 and 2002, the price of a share of our common stock varied from $4.56 to $23.00. Between 2002 and March 31, 2003, the price has varied from $23.00 to $14.75. The securities markets have experienced significant price and volume fluctuations unrelated to the performance of particular companies. In addition, the market prices of the common stock of many publicly traded companies have in the past and can in the future be expected to be volatile. In addition, the trading prices of securities of tobacco-related public companies have fluctuated widely. Announcements of tobacco-related lawsuits, tobacco-related medical findings, regulatory developments in both the United States and other countries, public concern as to the safety of tobacco products, and economic and other external factors, as well as period-to-period fluctuations in our financial results, might have a significant impact on the market price of our common stock.

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ITEM 2. PROPERTIES.

Tobacco Operations

We generally conduct our tobacco processing operations in facilities near the area of production. In some places, long-standing arrangements exist with local companies to process tobacco in their plants under the supervision of our personnel. A current summary showing our or our affiliates’ principal tobacco operating properties is shown below:

We believe our tobacco operating properties are generally well-maintained, in good operating condition and are suitable and adequate for the normal growth of our business.

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Wool Operations

We generally conduct our scoured wool operations in the country of origin, and process wool tops in France and Chile. A current summary showing our or our affiliates’ principal wool operating properties is shown below:

We believe our wool operating properties are generally well maintained, in good operating condition and are suitable and adequate for the normal growth of our business.

ITEM 3. LEGAL PROCEEDINGS.

On February 26, 2001, we were served with a Third Amended Complaint, naming us and other leaf merchants as defendants in Deloach, et al. V. Philip Morris Inc., et al., a suit originally filed against U.S. cigarette manufacturers in the United States District Court for the District of Columbia and now pending in the United States District Court for the Middle District of North Carolina, Greensboro Division (Case No. 00-CV-1235). The Deloach suit is a class action claim brought on behalf of U.S. tobacco growers and quota holders alleging that defendants violated antitrust laws by bid-rigging at tobacco auctions and by conspiring to undermine the tobacco quota and price support program administered by the federal government. Plaintiffs seek injunctive relief, trebled damages in an unspecified amount, pre- and post-judgment interest, attorney’s fees and costs of litigation. On April 3, 2002, the Court granted the plaintiffs’ motion for class action certification. We have now, along with all but one of the other defendants, entered into a settlement agreement with the plaintiffs which has received preliminary, but not final approval, and which accords us a full release from all the claims in exchange for a payment of $7.0 million towards a larger total settlement agreement.

In October 2001, the Directorate General—Competition of the European Commission, or DG Comp, began conducting an administrative investigation of certain selling and buying practices alleged to have occurred within the leaf tobacco industry in some countries within the European Union, including Spain, Italy and Greece. We, through our local subsidiaries, are cooperating fully with the investigation and have discovered and voluntarily disclosed information which tends to establish that a number of leaf dealers, including our subsidiaries, have jointly agreed with respect to green tobacco prices and purchase quantities. We believe, however, that there are significant mitigating circumstances relating to the structure of these markets, their historical conduct and the prominence of seller’s cooperatives. The investigation is in its early stages and although the fines, if any, that the DG Comp may assess on our subsidiaries could be material, we are not able to make an accurate assessment of the amount of any such fines at this time.

Except for the above, neither we nor any of our subsidiaries are currently involved in any litigation that we believe would, individually or in the aggregate, have a material adverse effect on our consolidated financial position, consolidated results of operations, or liquidity nor, to our knowledge, is any such litigation currently threatened against us or our subsidiaries.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of our security holders during the quarter ended March 31, 2003.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

Our common stock is traded on the New York Stock Exchange under the symbol “STW.” The following table sets forth the high and low sale prices of our common stock, as reported on the New York Stock Exchange, and the cash dividend declared per share for the periods presented.

At June 12, 2003, there were approximately 544 shareholders of record of our common stock and we estimate that there were approximately 2,500 beneficial owners of our common stock.

We have paid a quarterly cash dividend since 1998. We anticipate the payment of quarterly dividends in the future. However, the declaration and payment of dividends to the holders of our common stock is at the discretion of our board of directors and will be dependent upon our future earnings, financial condition, and capital requirements. Under our current revolving bank facility, we must meet financial covenants relating to minimum tangible net worth, minimum working capital, and maximum levels of long-term debt. If we are not in compliance with these covenants, we would not be able to pay dividends. We were in compliance with all such covenants at March 31, 2003. We do not believe the terms of our revolving bank facility will limit our ability to pay cash dividends.

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ITEM 6. SELECTED FINANCIAL DATA.

A comparison of selected financial data for the five years ended March 31, 2003 is presented below.

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements for the years ended March 31, 2003, 2002 and 2001 and the related Notes to Consolidated Financial Statements herein. This discussion presented below reflects the restatement of previously issued consolidated financial statements for fiscal year 2001. See below and Note 19 to the Consolidated Financial Statements for further discussion of this matter.

Discontinued Operations

As conditions in the wool industry deteriorated throughout the fiscal 2002 year, we decided to close and dispose of certain of our wool operating units for strategic reasons in fiscal 2002. Given the extremely difficult trading environment in the wool industry, we decided to shrink the wool division down to its core markets, namely, the key sourcing areas of Australia, the key processing/marketing areas of Europe and the carpet and scoured sectors of the UK and it’s subsidiary in Chile, which has remained relatively healthy throughout the cyclical downturn we are in. Accordingly, in fiscal 2002 we discontinued operations in four of our wool operating units located in Argentina, Holland, New Zealand and South Africa. We have identified these assets as held for sale and recorded the loss to discontinue these operations as $15.3 million for fiscal year 2002 and $1.2 million on a restated basis for fiscal 2001. The current-year charge of $3.8 million includes the operating loss and estimated closure/sale costs of these operations for the year.

Subsequent to the issuance of our financial statements for the year ended March 31, 2001, we discovered that the accounting records for our specialty fibers unit in Holland had been falsified by local unit management to avoid disclosure of trading losses incurred in fiscal year 2001. As a result, we restated our 2001 financial statements to recognize these trading losses. The net income effect of the restatement resulted in a decrease of $1.5 million, net of taxes. As described

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above and in Note 1 under the subheading, “Basis of Presentation and Reclassification”, we disposed of our specialty fibers unit, as well as certain other non-core wool operating units, and consequently the restatement is reflected in the results of discontinued operations for the prior year.

General

We are principally engaged in purchasing, processing, storing, selling and shipping leaf tobacco. We also purchase, process and sell various types of wool. For both the tobacco and wool businesses, the ability to obtain raw materials at favorable prices is an important element of profitability, although it is generally more important for wool than for tobacco because some customers pay us to purchase and process tobacco on a cost-plus basis. Obtaining raw materials at favorable prices must be coupled with a thorough knowledge of the types and grades of raw materials to assure the profitability of processing and blending to a customer’s specifications. Processing is capital-intensive and profit depends on the volume of material processed and the efficiency of the factory operations. Due to the much larger number of dealers and customers for wool and the far more numerous trades involved, wool revenue tends to be more susceptible to market price fluctuations than tobacco.

Historically, the cost of our materials, services and supplies has exceeded 80% of revenues. In the wool business, freight charges are also a significant element of the cost of sales. The cost of raw materials, interest expense and certain processing and freight costs are variable and thus are related to the level of sales. Most procurement costs (other than raw materials), certain processing costs, and most selling, general and administrative expenses, or SG&A, are fixed. The major elements of SG&A are employee costs, including salaries, and marketing expenses.

Tobacco purchases and sales are generally denominated in U.S. dollars, whereas wool purchases and sales are typically denominated in the currency of the source country and destination country, respectively. We regularly monitor our foreign exchange position and have not experienced material gains or losses on foreign exchange fluctuations. We enter into forward contracts solely for the purpose of limiting our exposure to short-term changes in foreign exchange rates.

Assets and liabilities of foreign subsidiaries are translated at period-end exchange rates. The effects of these translation adjustments are reported in other comprehensive income/(loss). Exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved and translation adjustments in countries with highly inflationary economies are included in net income.

Critical Accounting Policies and Estimates.

The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from the estimates. Such differences could be material to our financial statements.

A critical accounting policy is one that is both important to the portrayal of our financial condition and results and requires our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that our following accounting policies fit this definition:

Discontinued operations. In August 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS No. 144 a component of a business that is held for sale is reported in discontinued operations if the operations and cash flows will be, or have been eliminated from the on-going operations of the company and the company will not have any significant continuing involvement in such operations. In the quarter ended March 31, 2002, we adopted the provisions of SFAS No. 144. Accordingly our financial statements include certain wool units as discontinued operations.

While we believe our current estimates of discontinued operations liabilities are adequate, it is possible that future events could require us to make significant adjustments for revisions to these estimates.

Inventory. We review inventories for changes in market value based on assumptions related to future demand and worldwide and local market conditions. If actual demand and market conditions are less favorable than our projections, adjustments to lower of cost or market value may be required. We provide for the adjustments to lower of cost or market value through our valuation reserves which total $10.9 and $10.0 million at March 31, 2003 and 2002, respectively.

Income Taxes. We, through our subsidiaries, are subject to the tax laws of many jurisdictions. We are subject to a tax audit in each jurisdiction in which our subsidiaries operate, which could result in changes in taxes. For financial statement purposes, the tax benefit of net operating loss and credit carry forwards is recognized as a deferred tax asset,

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subject to appropriate valuation allowances when it is determined that recovery of the deferred tax asset is unlikely. We evaluate the tax benefits of net operating loss and credit carry forwards on an ongoing basis. These assumptions could be affected by changes in future taxable income and its sources and changes in U.S. and foreign tax laws and rates. Our effective tax rate could be impacted by changes in these assumptions.

Contingencies. A contingency is an existing condition that involves a degree of uncertainty that will ultimately be resolved upon the occurrence of future events. Under generally accepted accounting principles, provisions for contingencies are required to be established when the future event is probable and its impact can be reasonably estimated. An example is the establishment of a reserve for losses in connection with unresolved legal matters. Litigation is subject to many uncertainties, and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against us. We are unable to predict the outcome of the litigation or to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. Accordingly, no liability is currently recorded in the consolidated financial statements for such litigation.

Retirement benefits. We have pension and other postretirement benefit (i.e. health care and life insurance) costs and obligations that are dependent on assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, health care cost trends, inflation, salary growth, long-term return on plan assets, retirement rates, mortality rates and other factors. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in such future periods. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect our pension and other postretirement benefits costs and obligations.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for our judgment in their application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto, which contain accounting policies and other disclosures required by generally accepted accounting principles.

Global Market Conditions

A variety of external factors affected both the tobacco and wool markets worldwide during the fiscal year ended March 31, 2003.

Tobacco Market Conditions

In general, the supply/demand models for flue-cured and burley styles of tobacco indicate a relatively balanced position globally. There is still an oversupply condition for the oriental styles. Most of the oriental oversupply is held by the Turkish monopoly.

In the United States, cigarette manufacturers began contracting in 2000 directly with tobacco farmers for their requirements, rather than purchasing tobacco at auction, and continue to do so. Consequently, our sales revenues have been and will be lower going forward. However, we still process the tobacco in our facilities for which we receive processing revenue. As a result, the trend toward direct purchasing by the cigarette manufactures has not had a material impact on our earnings because of the service income.

Political and economic turmoil continues to affect the Zimbabwe tobacco crop. This has not had a material impact on our operations in this country. The calendar 2003 crop is expected to be down from 165 million kilos last year, to approximately 75 to 85 million kilos. This crop is coming to market currently. There is a great deal of uncertainty regarding future production. It is widely believed that any shortfalls in the supply of flue-cured leaf that may occur in Zimbabwe can be offset by other markets, primarily Brazil and Argentina.

Wool Market Conditions

The global condition of the wool industry remains depressed. Even though production is projected to decline as a result of the prolonged drought in Australia, which has led to reduced herd size, and the effects of the 2001 hoof and mouth disease epidemic, demand continues to be weak. The prospect of lower supplies has pushed raw wool prices to record high levels. However, the high prices are resulting in the end user markets, spinners and weavers, withdrawing or otherwise holding back from the market. Some consolidation is occurring within the industry, but overcapacity is still a concern. China remains the dominant buyer in the current market. Wool is an easily substitutable product and manufacturers turned to alternative fibers in fiscal 2002 and 2003. Until prices stabilize, the outlook remains depressed. This is further impacted by the current low prices of other fibers, mainly cotton.

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Acquisitions and Dispositions

During fiscal year 2003, we completed the purchase of the processing assets of Export Leaf Tobacco, a subsidiary of Brown and Williamson Tobacco Company in the US. As part of the purchase agreement, we entered into a long-term processing contract for their US leaf requirements. We also have begun construction of a leaf processing facility on a joint venture basis in Indonesia that is expected to be completed in October 2003. Both of these acquisitions were made with internally generated cash flows.

During the fiscal year ended March 31, 2002, we completed one major acquisition. In December 2001, we finalized the purchase of the processing assets of Nobleza Picardo, a subsidiary of British American Tobacco (BAT), in Argentina. As part of the purchase, we also signed a long-term contract with Nobleza for the processing of their Argentine leaf requirements.

As noted above and in Note 2 to the Consolidated Financial Statements, we discontinued four wool operating units in fiscal 2002. The New Zealand business was sold to a management led group and was finalized in December 2002. The South African processing facility was closed and the assets sold. The sales company was sold to the existing management team. The Argentina unit and the Tentler specialty fibers operation were closed and are in the process of final liquidation. Proceeds from these sales and closures were not material.

For the year ended March 31, 2001, we exited or exchanged ownership interest in two areas. Based on weak market fundamentals, we exited the Tanzanian tobacco market. All assets were sold and a net loss of $5.7 million was recorded. Also in fiscal 2001, the Company traded its 51% ownership interest in its Greek subsidiary for the remaining 49% ownership interest in its Turkish operation. This was accomplished for tax purposes, as a tax-free exchange of assets subject to a private-letter ruling from the Internal Revenue Service of the US. For financial statement purposes, the transaction was recorded at fair value. Consequently, we now own 100% of the Turkish subsidiary and have only a limited trading presence in Greece.

Recent Accounting Developments

On April 1, 2001, we adopted Statement of Financial Accounting Standards No. (SFAS No.) 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes new accounting and disclosure requirements for most derivative instruments and hedge transactions involving derivatives. SFAS No. 133 also requires formal documentation procedures for hedging relationships and effectiveness testing when hedge accounting is to be applied.

In accordance with the transition provisions of SFAS No. 133, in the year ended March 31, 2002 we recorded a cumulative effect loss adjustment of $2.1 million, net of applicable taxes, in other comprehensive income to recognize the fair value of all derivatives designated as cash flow hedging instruments. Our derivative usage is principally foreign currency forwards. These contracts typically have maturities of less than one year. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure. Our foreign currency forwards have been designated and qualify as cash flow hedges under the criteria of SFAS No. 133. SFAS No. 133 requires that changes in fair values of derivatives that qualify as cash flow hedges be recognized in other comprehensive income, while the ineffective portion of change in derivatives in fair value be recognized immediately in earnings. At March 31, 2003, we had foreign exchange contracts outstanding with a notional value of $36 million and a fair value of $37 million.

In June 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and the use of the pooling-of-interest method is no longer allowed. SFAS No. 142 requires upon adoption that the amortization of goodwill cease and the carrying value of goodwill be evaluated for impairment on a periodic basis. We were required to implement SFAS No. 142 during fiscal 2003, which resulted in the discontinuance of approximately $1.5 million of goodwill amortization.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. In addition, the statement broadens the presentation of discontinued operations to include more disposal transactions. We early adopted SFAS No. 144 during fiscal 2002, and accordingly recognized as discontinued operations the results from four wool operating units that we targeted for sale in fiscal 2002.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections. One of the major changes of this statement is to change the accounting for the classification of gains and losses from the extinguishment of debt. Upon adoption, we will follow APB 30, Reporting the

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Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions in determining whether such extinguishment of debt may be classified as extraordinary. The provisions of this statement related to the rescission of FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002. We will adopt this statement in fiscal 2004.

Results of Operations

Regional Review of Tobacco Operations

African Region:

Political and economic turmoil continues to impact the Zimbabwe crop size, which is expected to continue to decrease from 165 million kilos in crop year 2002 to between 75 and 85 million kilos in crop year 2003. The Company’s organization in Zimbabwe has been restructured to reflect the decrease in Zimbabwe’s crop. This situation has also led to an overall decrease of flue-cured tobacco available on the world market. Customers have begun sourcing flue-cured tobacco from other areas in the world, such as Brazil. The Company’s Malawi operation primarily sources and processes burley tobaccos. However, in response to the decrease in the Zimbabwe crop size, the Malawi operation is also pursuing various projects to grow the Company’s share of the expanding flue-cured crop in Malawi. In addition, over the past several years, the Company has developed additional sources of flue-cured and burley tobacco in Zambia and Mozambique and those operations continue to be expanded. These tobaccos are processed at the Malawi factory, thereby providing economies of scale efficiencies for the Malawi operation. In Kenya, the Company had a successful first year in operating its own Dark Fired tobacco growing venture.

Asian Region

The Company continues to leverage its leading market positions in China, Thailand and India in order to provide its customers with low cost, high quality tobacco. The construction of a new processing facility in Indonesia will also provide a high quality product, produced to international standards. This joint venture is a partnership, based on long-standing relationships, in which the Company has a 55% ownership, and is in direct response to customer’s needs and is part of the Company’s ASEAN strategies. Completion and start-up of the facility is expected in October 2003. There have already been many positive indications of strong customer support.

European Region

For the upcoming crop year, the Company’s Spanish operation has increased its sourcing of Spanish tobacco by an estimated 55%. This will allow additional tobaccos to be offered to customers, as well as improving the cost structure through economies of scale benefits, which are expected to be achieved by the additional volumes processed. Volumes for the Italian operation have increased by approximately 66%. These increases are mainly the result of contracting additional leaf tobaccos and increased volumes related to the Toasted Burley and Blended strip facility, which is expected to come on-line in July 2003. There has been a major shift in Turkey as the result of the New Turkish Tobacco Law. The Law makes it necessary for Tobacco Merchants to carry out direct contract buying with the farmers. However, it no longer requires Tekel, the Turkish Tobacco Monopoly, to purchase excess stocks from the farmers as a means of a price support system. Throughout the European region, the strengthening Euro versus the US Dollar has had a significant impact on the cost of tobacco. Some US dollar based sales have underlying Euro based costs, which shrinks the margins as the Euro gains against the US dollar. Some of the increase is mitigated through increased US dollar prices to combat the increased costs due to exchange rate losses.

CIS Region

The CRES operation in Russia faced increasing pressures to maintain its performance targets this year. No growth occurred in the overall market and a new competitor has moved into the market place that has forced a reduction in volumes and gross margins. The Kyrgyzstan operation continues to increase the availability of tobaccos that it can source and sell to customers.

South American Region

In December 2001, the Company finalized the acquisition of a new processing facility in Argentina. During its second season of operations, customer support has grown and the Argentine operation is making a strong contribution to net income this year. In line with the Company’s worldwide ISO 9002 certification program, and its commitment to producing quality tobaccos for customers, the Argentine operation was recently ISO 9002 certified. Brazil continues its solid contributions to net income. There has been some transitioning by customers from the Zimbabwe crop to the Brazilian crop and this is expected to continue in fiscal 2004.

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North American Region

The USA tobacco market has become a predominantly domestic market. For tobacco merchants, the US tobacco business has evolved into a processing operation for domestic cigarette manufacturers as most manufacturers in the United States are purchasing their tobacco directly from the farmers. Opportunities for tobacco export sales are limited due to the availability of lower cost, but similar quality, tobacco is available in other countries such as Brazil. The Company’s processing volume increased by approximately 76% mainly as a result of acquiring an additional processing facility in April 2002. The Company processes approximately one-third of the total Flue-cured and Burley tobacco grown in the USA.

Comparison of the Year ended March 31, 2003 to the Year ended March 31, 2002

Sales: Consolidated Sales of $993.7 million in fiscal 2003 were 5.5% higher than the prior year. Sales for the Tobacco Division’s operations for the twelve months ended March 31, 2003 increased by $24.1 million to $804.5 million. Overall, excluding the US market, tobacco unit volume was up 2.3%. Increased sales in South America were driven by a full year inclusion of the acquisition of a tobacco processing facility in Argentina in December 2001 and the continued increase in volumes sold from the Brazilian operation. In Africa, sales revenue gains were achieved in Kenya/Congo, Malawi and South Africa. Zimbabwe sales continue to decrease as the Zimbabwe crop size shrinks as a result of the prolonged political and economic turmoil. Sales growth was also achieved in China, India, Italy, Spain, Indonesia, Thailand and Canada. Sales declined in Greece, Turkey and in the value-added processing units. Sales for the Wool Division were $189.2 million, an increase of 16.9% increase versus the prior year, driven mostly by higher wool prices in Australia and higher volumes in the UK.

Gross Profit and Cost of Sales: Consolidated gross profits increased 7.5% versus the prior year mainly due to the Tobacco Division’s performance. For tobacco, gross profit for the twelve-month period of $143.0 million was up 7.5% from the prior period. This was due primarily to the Company’s recent acquisition of tobacco processing facilities in the USA and Argentina. In addition to the sales gains noted above, improved mix and throughput efficiencies also led to gains in certain operations.

Selling, General and Administrative Expenses: SG&A expenses were up $11.0 million compared to the prior year. The increases in SG&A are largely due to the $7.0 million settlement of the Deloach case in the US, the first full year of inclusion of the acquired processing facilities in the USA and Argentina, the weaker US dollar, higher insurance, legal and professional expenses and normal inflationary increases. These increases were partly offset by a $3.5 million reduction in estimated costs of non-US employee benefit plans.

Interest Expense and Other Income (Expense), Net: Interest expense was lower due to reduced long-term debt levels as a result of the Company’s debt buy-back program and lower interest rates. Other income (expense), net was higher than the prior year due to the recovery of a previously written-off receivable and higher gains on asset sales and insurance proceeds.

Income Taxes, Minority Interest and Equity in Earnings of Affiliates: Income tax charges or credits as a percentage of pretax income can vary due to differences in tax rates and relief available in areas where profits are earned or losses are incurred. The effective tax rate was slightly lower than a year earlier. Equity in earnings of affiliates was higher than the prior year primarily due to the improved performance of the Company’s Kyrgyzstan joint venture. Minority interest relates to the construction of the Indonesia processing facility being undertaken by the Company’s new Indonesia joint venture. The completion and start-up of the facility is expected to be in October 2003.

Income from Continuing Operations. Income from continuing operations was $41.7 million versus $36.2 million in the prior year. Our tobacco division generated all of the improvement as conditions continued to improve and investments in key markets were brought fully on line. Key areas that improved were the U.S., Brazil, Argentina and Thailand. The tobacco division income from continuing operations was $43.9 million versus $38.1 million in the prior year. For the remaining wool units, trading conditions remained difficult. The loss from continuing operations was $2.2 million, versus a loss of $1.9 million in the prior year.

Loss from Discontinued Operations. The loss from discontinued operations was $3.8 million for fiscal 2003 versus $15.3 million for the prior year. This expense includes the operating losses of the discontinued wool units up to the time these units were sold/closed.

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Extraordinary Item: An extraordinary after-tax income of $16,000 was recorded on the repurchase of over $23.7 million face amount of long-term debt. This includes $18.8 million of 8 ⁷/8% Senior Notes and $4.9 million of 7¼% the Convertible Subordinated Debentures. The prior year included a loss of $1.1 million on the repurchase of debt.

Net Income: Consolidated Net Income was $37.9 million an increase of 91% over the prior year, which was heavily impacted by the decision to discontinue four wool operating units. Net income for the Tobacco Division was $44.0 million, after extraordinary items, an increase of 19% from the $37.0 million net income for the twelve months ended March 31, 2002. The net loss for the remaining wool units was $2.2 million versus $1.9 million last year.

Comparison of the Year ended March 31, 2002 to the Year ended March 31, 2001

Sales. Sales from continuing operations for the 12 months ended March 31, 2002 were $942 million, down 11.7% from a year earlier. This reduction is due to the changes in the way U.S. cigarette manufacturers now purchase the majority of their leaf supplies directly from the farmer. We still perform handling and processing services for the leaf. Sales of $780 million for the tobacco division were lower than the prior year as this is the first full year of the direct contracting by the manufacturers. Total volumes processed in the U.S. were basically level with the prior year. Overall, excluding the U.S. market, tobacco unit volume was up 15%. Sales revenue increases in South America were driven by the addition of additional processing capacity in Brazil and continued strong sales in our core business there. In Africa, sales revenue gains were achieved in Kenya/Congo and Zimbabwe. Sales gains were also achieved in China, Italy and increases were recorded for Canada. Sales in our CRES operation in the CIS were level with the prior year as that unit continues to operate at full capacity.

Wool sales from continuing operations for the 12 months ended March 31, 2002 of $162 million were down 10.6% from the prior year primarily as the result of continuing poor conditions in the global wool industry.

Gross Profit and Cost of Sales. Gross profit for the 12-month period of $144.0 million was up 12.7% from the prior period. This was due mostly to the sales gains noted above in the tobacco business, improved mix and throughput efficiencies. This was partly offset by deterioration in the Wool Division gross profit due to higher prices and weak demand.

Selling, General and Administrative Expenses. SG&A expenses were lower than the prior year as the prior year included expenses associated with exiting Tanzania, current year cost-cutting programs and lower headcount in our wool division.

Interest Expense and Other Income (Expense), Net. Interest expense was lower due to reduced long-term debt levels. Other income (expense), net was $4.2 million higher because the prior year included losses on sales of assets and investments related to exiting Tanzania.

Income Taxes, Minority Interests and Equity in Earnings of Affiliates. Income tax charges or credits as a percentage of pretax income can vary due to differences in tax rates and relief available in areas where profits are earned or losses are incurred. The effective tax rate was lower than a year earlier, but remained high due mainly to losses in areas where tax relief is not available and the impact of hyperinflation on taxes in Turkey.

There were no earnings attributed to minority interests in fiscal 2002 as fiscal 2001 was the last year of our minority partner structure in the Greece and Turkey markets. Equity in earnings of affiliates was down from the prior year primarily due to seasonal business factors.

Income from Continuing Operations. Income from continuing operations was $36.2 million versus $19.2 million in the prior year. Our tobacco division generated all of the improvement as conditions continued to improve and investments in key markets were brought fully on line. Key areas that improved were the U.S., Brazil and Thailand. The tobacco division income from continuing operations was $38.1 million versus $17.1 million in the prior year. For the remaining wool units, trading conditions remained difficult. The loss from continuing operation was $1.9 million, versus $1.1 million profit in the prior year.

Loss from Discontinued Operations. The loss related to discontinued operations was $15.3 million for fiscal 2002 and $1.2 million for the prior year on a restated basis. This expense includes the operating losses of the aforementioned units, estimated closure costs and the write-off of associated foreign currency translation adjustments. As noted above, we had early adopted the provisions of SFAS No. 144 and have reflected the exit from these businesses as discontinued operations.

Extraordinary Item. An extraordinary after-tax loss of $1.1 million was recorded on the repurchase of over $32 million face amount of long-term debt. This includes the call of $25 million of 8 ⁷/8% senior notes at a call premium

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announced in February 2002. The prior year included the gain of $3.2 million on the repurchase of debt in the open markets.

Net Income. Net income was $19.8 million versus $21.1 million for the 12 months ended March 31, 2001.

Liquidity and Capital Expenditures

Working capital at March 31, 2003 was $182.3 million, essentially unchanged from the $182.2 million at March 31, 2002. Increases in inventories and receivables stemming from the addition of new operations and increased sales were offset by increases in short-term borrowings. The Company has used cash to repurchase long-term debt. The Company continues to closely monitor its inventories, which fluctuate depending on seasonal factors and business conditions.

Capital expenditures were $37.3 million, $14.8 million and $16.8 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. Capital expenditures for 2003 related mostly to the purchase of a processing facility in the US, the construction of a new tobacco processing facility in Indonesia and routine expenditures and construction of warehousing space in several areas. Capital expenditures for 2002 related mostly to routine expenditures in the tobacco and wool divisions, purchase of the tobacco processing assets in Argentina, the completion of a second processing line in Brazil and installation of a lanolin facility in the French wool operation. We expect routine capital expenditures to total approximately $16.0 million for the fiscal year ending March 31, 2004.

For 2003, cash provided by operating activities totaled $22.3 million, primarily due to higher net income, and an increase in payables. Cash used for investing activities of $34.8 million for 2003 included capital expenditures of $37.3 million mostly for tobacco activities including $2.5 million in Brazil, $20.6 million in the United States, $2.9 million in Africa and $1.1 million for the wool division.

Financing Arrangements. We incur short-term debt to finance our seasonal working capital needs, which typically peak in the third quarter, under secured lines of credit with several banks. At March 31, 2003, total available short-term credit facilities for continuing operations was $478.2 million, compared to $477.9 million at March 31, 2002, with $22.2 million versus $13.6 million in 2002 being utilized for letters of credit and guarantees and $273.9 million was unused in 2003 versus $331.9 million in 2002.

On August 1, 1997, our major tobacco subsidiaries entered into a revolving bank facility. The facility provides for borrowings of $200.0 million for working capital and other general corporate purposes, and the interest rate on borrowings under the facility is subject to change depending on our financial performance. The rate is currently LIBOR plus 0.625%. The borrowings under the facility are guaranteed by the Company and certain of our tobacco subsidiaries and secured by substantially all of the assets of the borrowing subsidiaries and a pledge of all of the capital stock of the subsidiaries not otherwise pledged to secure other obligations.

On May 19, 1999, the amount of the facility was increased from $200.0 million to $233.0 million and the maturity date was extended from July 31, 2000 to July 31, 2002. In fiscal 2000, this facility was increased to $250.0 million with the addition of two banks. Terms of the facility were unchanged.

On June 7, 2001, our major tobacco subsidiaries amended their revolving bank credit facility. The facility was decreased from $250.0 million to $230.0 million and the maturity date was extended to July 31, 2003 from July 31, 2002. Financial covenants and other terms and conditions were essentially unchanged.

On August 26, 2002, our major tobacco subsidiaries amended their revolving bank credit facility. The facility was decreased from $230.0 million to $210.0 million and the maturity date was extended to July 31, 2005 from July 31, 2003. Financial covenants and other terms and conditions were essentially unchanged.

Additionally, as of March 31, 2003, local lines were available for the remainder of the tobacco division of approximately $167.1 million in addition to separate facilities for the wool division of $101.1 million.

On November 13, 1991, we issued $69.0 million of our 7 ¹/4% convertible subordinated debentures, which are due March 31, 2007. The debentures are currently convertible into shares of our common stock at a conversion price (as adjusted for subsequent stock dividends) of $29.38. The debentures are subordinated in right of payment to all senior indebtedness. As of March 31, 1995, the debentures became redeemable in whole or in part at our option. Beginning March 31, 2003, we are obligated to make annual sinking fund payments sufficient to retire at least 5% of the principal amount of issued debentures reduced by earlier conversions, redemptions and repurchases. Holders of the debentures have the right to demand redemption under certain conditions, including a change in control of our company, mergers and consolidations and distributions with respect to our capital stock. We may elect to redeem debentures under these circumstances for common stock in lieu of cash. In fiscal 2001, we repurchased $17.3 million of these notes at an after-tax gain of $3.2

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million. In fiscal 2002, we purchased an additional $1.7 million of these debentures at an after-tax gain of $0.1 million. In fiscal 2003, we repurchased an additional $4.9 million of these debentures near par value. The after tax gain of $0.1 million is classified as an extraordinary item in the income statement consistent with the Statement of Financial Accounting Standard 4. Due to these repurchases, the sinking fund requirements noted above have been satisfied in full.

On August 1, 1997, our U.S. tobacco subsidiary consummated the sale and issuance of $115.0 million of 8 ⁷/8% senior notes. The notes are due in 2005. In fiscal 2002, we repurchased/called a total of $31.0 million of the notes. The net loss after tax on the repurchase of these notes was $1.2 million and is included in the extraordinary items. In fiscal 2003, we repurchased an additional $18.8 million of these notes at prices slightly below par value. The write-off of associated issue expenses resulted in an after-tax loss of $121.5 thousand, which was classified as an extraordinary item in the income statement.

Our contractual obligations, excluding long term debt, are outlined in Note 12 to our financial statements and consist mostly of lease payments for facilities that in the aggregate are not material amounts. Additionally, we make advances to suppliers that will be repaid by delivery of tobacco at the end of the respective growing season and are a routine feature of our business in certain parts of the world. The maximum amount of advances outstanding during the last fiscal year was $51.2 million.

Based on the outlook for the business for the next 12 months, we anticipate that we will be able to service the interest and principal on our indebtedness, maintain adequate working capital and provide for capital expenditures out of operating cash flow and available borrowings under our credit facilities. Our future operating performance will be subject to economic conditions and to financial, political, agricultural and other factors, many of which are beyond our control.

Debt agreements to which our subsidiaries and we are parties contain financial covenants, which could restrict the payment of cash dividends. Under the most restrictive covenant, we had approximately $33.3 million of retained earnings available for distribution as dividends at March 31, 2003.

Tax and Repatriation Matters

Our subsidiaries and we are subject to income tax laws in each of the countries in which we do business. We make a comprehensive review of the income tax requirements of each of our operations, file appropriate returns and make appropriate income tax provisions. These are determined at the individual subsidiary level and at the corporate level on both an interim and annual basis. We provide valuation allowances on deferred tax assets for our subsidiaries that have a history of losses. We cannot assert that there will likely be sufficient profits generated by these subsidiaries in the near future to offset these losses. We follow these processes using an appropriate combination of internal staff at both the subsidiary and corporate levels as well as independent outside advisors in review of the various tax laws and in compliance reporting for the various operations.

The undistributed earnings of certain foreign subsidiaries are not subject to additional foreign income taxes nor considered to be subject to U.S. income taxes unless remitted as dividends. We intend to reinvest such undistributed earnings indefinitely; accordingly, no provision has been made for U.S. taxes on those earnings. We regularly review the status of the accumulated earnings of each of our U.S. and foreign subsidiaries as part of our overall financing plans.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to market risk primarily related to foreign exchange and interest rates. We actively monitor these exposures. To manage the volatility relating to these exposures, we enter into derivative financial instruments. The objective is to reduce, where we deem appropriate, fluctuations in earnings and cash flows associated with changes in interest rates and foreign currency rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures.

Because we use currency rate-sensitive instruments to hedge only existing transactions, any loss in value for those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue any significant derivative financial instruments for trading or speculation purposes.

Foreign exchange rates: We are exposed to foreign exchange movements. Consequently, we enter into various contracts, primarily for the wool division, which change in value as foreign exchange rates change to preserve the value of commitments and anticipated transactions. We use foreign currency contracts to hedge revenue streams and raw material purchases. As of March 31, 2003, we had short-term forward exchange contracts with U.S. dollar equivalents of $36 million notional value and $37 million current fair value.

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Interest rates: We manage our exposure to interest rate risk through the proportion of fixed rate and variable rate debt in our total debt portfolio. A one percentage-point change in interest rates would increase our interest cost by approximately $1.9 million. Substantially all of our long-term borrowings are denominated in U.S. dollars and carry fixed interest rates.

The use of derivative financial instruments did not had a material impact on our financial position at March 31, 2003 and 2002 or our results of operations or cash flows for the years ended March 31, 2003, 2002, and 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

COMPANY REPORT ON FINANCIAL STATEMENTS

Standard Commercial is responsible for the preparation of the financial statements, related financial data and other information in this annual report. The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on estimates and judgment where appropriate.

In meeting its responsibility for both the integrity and fairness of these statements and information, the Company depends on the accounting system and related internal controls that are designed to provide reasonable assurance that transactions are authorized and recorded in accordance with established procedures, that assets are safeguarded and that proper and reliable records are maintained.

The concept of reasonable assurance is based on the recognition that the cost of an internal control system should not exceed the related benefits. Because of inherent limitations in any system of controls, there can be no absolute assurance that errors or irregularities will not occur. Nevertheless, we believe that our internal controls provide reasonable assurance as to the integrity and reliability of our financial records.

As an integral part of the internal control system, Standard maintains a professional staff of internal auditors who monitor compliance with and assess the effectiveness of the internal controls and recommend improvements thereto. The Audit Committee of the Board of Directors, composed solely of outside directors, meets quarterly with Standard’s management and internal auditors, and at least annually with its independent auditors, to review matters relating to financial reporting, internal controls and the extent and results of the audit effort. The internal auditors and independent auditors have direct access to the Audit Committee with or without management present.

The financial statements have been examined by Deloitte & Touche LLP, independent auditors, who render an independent professional report on the Company’s financial statements. Their appointment was approved by the Audit Committee, and ratified by the shareholders. Their report on the financial statements is based on auditing procedures, which include performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide reasonable assurance that the financial statements are fairly presented in all material respects.

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of and Shareholders of Standard Commercial Corporation

We have audited the accompanying consolidated balance sheets of Standard Commercial Corporation, (the Company) as of March 31, 2003 and 2002 and the related consolidated statements of income and comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As discussed in Note 19, the accompanying fiscal 2001 consolidated financial statements have been restated.

As discussed in Note 1 to the consolidated financial statements, on April 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. As discussed in Note 1 to the consolidated financial statements, on March 31, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As discussed in Note 1 to the consolidated financial statements, on April 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities

/s/    Deloitte & Touche LLP

Deloitte & Touche LLP

Raleigh, North Carolina

June 4, 2003

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STANDARD COMMERCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2003 AND 2002 (IN THOUSANDS, EXCEPT SHARE DATA)

See notes to consolidated financial statements.

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STANDARD COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

YEARS ENDED MARCH 31, 2003, 2002 AND 2001

(IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements.

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STANDARD COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

YEARS ENDED MARCH 31, 2003, 2002, and 2001

(IN THOUSANDS, EXCEPT SHARE DATA)