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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR THE FISCAL YEAR ENDED MARCH 31, 2004

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, 2003, there were 13,620,240 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, 2003, was approximately $248 million.

At June 10, 2004, there were 13,683,398 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 10, 2004 are incorporated by reference into Part III this Form 10-K.

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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

We are the third largest independent leaf tobacco merchant in the world. Founded in 1910, we have developed an international network through which 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, including the principal export markets for flue-cured, burley and oriental tobacco: the United States; Brazil; Malawi; and Turkey. Our revenues primarily comprise sales of processed tobacco and fees charged for processing and related services to manufacturers of tobacco products. Our customers include all of the world’s leading manufacturers of cigarettes and consumer tobacco products, such as Philip Morris, RJR Tobacco, British American Tobacco (BAT), Japan Tobacco and Imperial Tobacco. These customers are located in approximately 85 countries throughout the world. In the fiscal year ended March 31, 2004, approximately 21.1% of our sales were to customers located in the United States, approximately 41.6% were to customers located in Europe and the remainder were to customers located in Asia, Africa and elsewhere. We do not manufacture cigarettes or other consumer tobacco products.

We have historically been engaged in purchasing, processing and selling various types of wool. However, in the last quarter of fiscal 2002 we determined to discontinue our wool operations in four of our smaller markets because of weak market conditions in the industry. During fiscal 2003, we sold or closed these four wool units. In September 2003, to better focus on our core tobacco business, we determined to exit our remaining wool operations as industry conditions remained distressed. Of the remaining wool operations, the unit in Australia was sold in fiscal 2004, the mill in France was closed in April 2004 and negotiations are progressing for the sale of the remaining operations which are expected to be sold by September 30, 2004. In addition to operating losses of $12.9 million incurred by the wool units during fiscal 2004, estimated losses on disposal totaling $33.3 million were recorded as the carrying value of the net assets of the units exceeded their fair value less estimated disposal costs.

You can find financial information on our geographic sources in Note 17 to our audited consolidated financial statements and locations of our business and properties in Item 2 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

The Food and Agriculture Organization of the United Nations, or FAO, in a 2003 study, reports worldwide demand for tobacco products increased between 1970 and 2000, resulting in leaf tobacco consumption increasing at a 2.0% compound annual growth rate

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for the period. Increased tobacco consumption in developing countries offset declining consumption in developed countries. The FAO and the Tobacco Merchants Association, or TMA, project worldwide consumption of tobacco will continue to increase at a compound rate of 0.5% to 1.0% per year through 2010 due to continued population growth and rising disposable income in the developing countries.

Cigarettes account for over 95% of global tobacco consumption. In recent years, American-blend cigarettes have been gaining market share throughout the world because they contain less tar and nicotine, have a milder taste, enjoy a strong brand image and western caché and are being heavily marketed by expanding multinational manufacturers. This growth is displacing traditional cigarettes in many markets, such as the dark tobacco cigarettes in France and Spain, the 100% oriental tobacco cigarettes consumed throughout Russia and the former Eastern bloc countries and indigenous smoking products such as bidis in India and kreteks in Indonesia. American-blend cigarettes contain a blend of three styles of tobacco. The exact blend varies according to each manufacturer’s recipe, but American-blend cigarettes typically contain approximately 50% flue-cured, 35% burley and 15% oriental tobacco. Another style cigarette gaining share in India and China is the English-blend style - also referred to as “Virginia” cigarettes - which generally contains 100% flue-cured tobacco.

Multinational cigarette manufacturers, with one principal exception, rely primarily on global leaf tobacco merchants like us to process and supply leaf tobacco used in manufacturing cigarettes. Leaf tobacco merchants select, purchase, process, store, pack and ship tobacco, and, in a growing number of emerging markets, provide agronomy expertise and financing to farmers growing leaf tobacco. Currently, we are one of three major independent global tobacco leaf merchants, with the capability to source tobacco on a worldwide basis.

We believe the following are important trends impacting the leaf tobacco industry:

Increased Preference for American-Blend Cigarettes. American-blend cigarettes, the predominant type of international brand cigarette, have gained market share in several major non-U.S. markets, including Asia (particularly Pacific Rim countries), Europe and the Middle East in recent years. According to the TMA, currently, American-blend styles accounted for 36% of all cigarettes consumed in 2003, and this percentage is expected to increase over the next decade. The TMA expects the rate of growth for American-blend cigarettes to outpace the growth of other styles, increasing at slightly over 1.0% per year. The global market penetration of international brand cigarettes is causing an increased demand for export quality blended tobacco.

Expansion of Non-U.S. 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. This expansion has been prompted, in part, by the privatization of former government-run tobacco monopolies in the former Eastern bloc and in Asia, and should continue as the Association of Southeast Asian Nations, or ASEAN, Free Trade Agreement is implemented. 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 tariff rates and freight costs. We also believe that the international expansion of cigarette manufacturers will cause 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.

Growing Importance of Tobacco Leaf Merchants. In an effort to respond to cigarette manufacturers’ increasing demand for lower cost American-blend tobaccos, the global independent leaf tobacco merchants, including us, 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 manufacturers continue to focus on reducing costs and as the quality of non-U.S. grown tobacco continues to improve. Cigarette manufacturers consider the global leaf merchants to be value added partners and all but one have moved away from a vertical integration strategy due to the capital intensive nature of the merchant sector, significant economies of scale and the ability of merchants to sell different parts of the tobacco leaf to customers for various cigarette blends. At the same time, our customers are experiencing increased margin pressure due to the impact of rising excise taxes on cigarette prices and the global competition for market share. As they battle for market share, they are increasingly focused on managing their cost structures and accordingly look to their leaf suppliers for assistance.

Global Market Conditions. Cigarette consumption continues to increase worldwide in part as a result of general economic improvement and tobacco market stabilization since the late 1990’s. We believe cigarette consumption also is increasing because of the change in the mix of tobaccos with which more cigarettes worldwide are produced, such as international brand and American-blend cigarettes. A 2003 study by the FAO projects that between 1998 and 2010, tobacco consumption will increase 26.9% in Africa and the Middle East, 24.2% in Eastern Europe and Russia, and 19.0% in Asia, Australia and the Far East, while it will decrease 8.9% in the Americas and decrease 3.6% in Western Europe. According to the FAO report, worldwide tobacco consumption is forecasted to grow 10.4% between 1998 and 2010.

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Shift to Direct Contract Buying in the United States. Traditionally, tobacco grown in the United States was purchased on auction markets. However, beginning in 2000, the larger U.S. tobacco product manufacturers have shifted to purchasing directly from growers. The tobacco our customers purchase directly from growers, in addition to the tobacco we continue to purchase for our customers and for our own account, is still processed to customer specification in our facilities. As a result, we continue to earn and record service revenues for the processing of tobaccos purchased by our customers directly from growers. Although reported revenues have been reduced, our gross profit has not been materially affected due to a concurrent reduction in our cost structure. Profit margins from processing U.S. leaf tobacco have increased and U.S. processing volumes have been growing as we continue to be an important part of the U.S. manufacturers’ value chain. We believe this shift favors companies with relatively low overheads and significant, high quality processing capacity, and have taken steps to capitalize on this opportunity, such as our April 2002 purchase of Brown & Williamson’s Wilson, North Carolina processing facility.

Our 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 processing facilities in Brazil, Argentina, Malawi, Turkey, Spain, Italy and a majority ownership of a new processing facility in Indonesia. In addition, we have minority interests in processing facilities in India, Thailand, Kyrgyzstan and Zimbabwe. We have operating agreements or access to processing facilities in Brazil, Canada, China and Kenya. We also own and operate cut rolled expanded stem, or CRES, processing facilities in the U.S. 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 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 2004 U.S. 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 2004, the maximum aggregate amount of such advances by us outstanding at any one time was $70.6 million.

Processing. The tobacco we purchase generally is perishable and must be processed within a relatively short period of time to prevent deterioration in quality. Consequently, we have located our processing facilities near the areas where we purchase tobacco. Prior to and during processing, we take a number of steps to ensure consistent quality of the 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 stored 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 that our subsidiaries or affiliates own or lease. 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.

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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 2004, our five largest customers accounted for approximately 62% of sales. In fiscal year 2004, three customers, Philip Morris, British American Tobacco and Japan Tobacco each accounted for more than 15% 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, 2004, we had inventory of $292.3 million, compared to $216.3 million at March 31, 2003. 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 customers also purchase tobacco from our major leaf tobacco competitors, Universal Corp. and DIMON, Incorporated, our relationships with our largest customers span many years and we believe that we have the personnel, expertise, facilities and technology to remain successful in the industry. In addition, we believe that the consolidation of the leaf tobacco industry has provided opportunities for us to enhance our relationship with and increase sales to some cigarette manufacturers.

Worldwide 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 manufacturers 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 2004 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 non-U.S. grown tobacco, resulting in a declining trend in exports, which we believe should be offset by increased demand for non-U.S. 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, or BAT, that has approximately 80% of the domestic cigarette market in Brazil. During fiscal 1998, we 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.

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Turkey. We are one of the largest merchants of flue-cured, burley and oriental tobacco in Turkey. In Turkey the oriental tobacco market is 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 have decided to exit the Greek market this year, as we have been unable to find a viable business model from which to operate in Greece.

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.

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. We operate through strategic alliances with the Chinese government tobacco monopoly. 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. In October 2003, we completed and put into service a joint venture tobacco processing facility in Indonesia.

Other Non-U.S. Operations. We also have non-U.S. 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.

Our Wool Operations

We have historically been a world leader in the trading of scoured wool and a major trader and processor of wool tops. As a result of a series of acquisitions commencing in 1985, we own and operate an integrated group of wool companies which purchase, process and sell wool to spinners and knitters of yarn, manufacturers of worsted and woolen products, felting companies and other wool processors. We do not raise sheep or produce textile products.

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 U.K. Accordingly, in fiscal 2003 we sold or closed our South Africa, New Zealand and Argentine units, as well as our specialty fibers operation in Holland and have exited those markets. In September 2003, we decided to exit the wool industry entirely. We sold our operations in Australia in March 2004, the mill in France was closed in April 2004 and negotiations are progressing for the sale of the remaining operations which are expected to be sold by September 30, 2004.

Employees

At March 31, 2004, we had a total of 3,808 full-time employees, including 303 in the United States and 768 full-time employees in affiliated companies. As of that date, 3,463 of our full-time employees were in the tobacco business and 345 were in the wool business. Our tobacco business typically employs an additional 9,500 to 10,000 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 our French wool plant also are represented by labor unions under an agreement subject to renewal every December 31. We reached an agreement with the French workers as to the implementation of a social plan including the payment of termination benefits, in conjunction with the closure of the French mill in April 2004.

Risks Relating to Our Operations

Our financial results will vary according to growing conditions, customer requirements and other factors.

Our financial results, particularly the quarterly financial results, might be significantly affected by fluctuations in tobacco growing seasons and crop sizes, 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 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

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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.

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

Our 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 non-U.S. currencies can significantly affect our operating results.

In addition, the devaluation of non-U.S. currencies, particularly Asian and Eastern European currencies, has resulted and might in the future result in reduced purchasing power of 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.

Various of our outstanding interest-bearing instruments are sensitive to changes in interest rates. With respect to our variable-rate debt, as of March 31, 2004, a 1% change in interest rates would have the effect of increasing or decreasing our annual interest expense by approximately $1.4 million. Substantially all of our long-term borrowings are denominated in U.S. dollars and carry fixed interest rates.

The shift to direct buying of green tobacco by many of our U.S. customers could have an adverse effect on our results of operations.

Our sales have been and will continue to be affected by the shift to direct contract buying in the United States. Traditionally in the United States, we took ownership of all green tobacco we purchased, then processed and resold 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 began 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 revenue associated with its resale. With the shift to direct contract buying, our U.S. sales were negatively impacted in fiscal 2002, 2003 and 2004. 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 have been and will continue to be reduced. In addition, although we expect to purchase the majority of our own 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. We are one of three global competitors in the leaf tobacco industry. 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. The loss or substantial reduction of 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 sales in fiscal 2004, 2003 and 2002, approximately 62%, 62% and 59%, respectively, represented sales to our five largest customers. In fiscal 2004, 2003 and 2002, one customer accounted for 18%, 16% and 10% respectively, of our total sales. In addition, tobacco product manufacturers are currently experiencing a period of consolidation, and further consolidation among our customers could decrease our customers’ demand for our leaf tobacco or processing services. The loss of or a substantial reduction in the services provided to any one or more of our customers could have a material adverse effect on our financial condition or results of operations.

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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 non-U.S. 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.

We have expanded our international operations in areas where the export of tobacco has increased due to increased demand for lower priced tobacco. We have significant investments in our purchasing, processing and exporting operations throughout the world, including Argentina, Brazil, Malawi, Zimbabwe, Turkey, Italy and Thailand. In recent years, some of these countries’ economic problems have received wide publicity related to devaluation of the local currency and inflation. While devaluation can affect our purchase costs of tobacco and our processing costs, it has not and is not expected to affect adversely our ability to export tobacco from these countries.

Zimbabwe remains in a period of civil unrest in combination with a deteriorating economy. The government’s forced land resettlement program has caused disruptions to both tobacco and food farm production in Zimbabwe. Should the current political situation continue, we would experience further disruptions and delays associated with our Zimbabwe operations. The volume of the 2004 tobacco crop is projected to decline by approximately 25% in comparison to the prior year crop. If the political situation continues to deteriorate, our ability to recover our assets there could be impaired. Our Zimbabwe subsidiary had long-lived assets of approximately $0.6 million as of March 31, 2004.

Argentina is in a period of political and economic uncertainty. We purchase and process Argentine tobacco for export and we process the domestic Argentine crop requirements of Nobleza Picardo, a subsidiary of British American Tobacco, under a long-term processing contract. We do not foresee any material effects on our operations as a result of Argentina’s current instability. However, we continue to closely monitor events associated with the instability in Argentina and their possible impact on future results.

We do business in countries that have tax regimes in which the rules are not clear or not consistently applied. This is especially true with regard to international transfer pricing. We have not had any significant exposure to date as a result of these risks. However, our results of operations could be adversely impacted by the uncertain and changing nature of these tax regimes.

Our adoption and application of recent standards in financial accounting could negatively affect our earnings.

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

Our operations could subject us to significant liability under environmental laws and regulations.

Our operations are subject to a wide variety of U.S. federal, state, local and non-U.S. laws, rules and regulations relating to pollution and protection of the environment, including those governing air emissions, wastewater discharges, storage, treatment and disposal of wastes and remediation of contaminated sites. From time to time our facilities are subject to investigation by governmental regulators. Failure to comply with environmental requirements can result in fines and penalties and in certain cases may impede our ability to operate. Our wool scouring and top making operations involve discharges of significant amounts of wastewater effluent,

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which could subject us to significant liability, fines and clean-up obligations in the event of non-compliance with applicable requirements, including unpermitted spills. Generally, we would remain liable for any noncompliant discharge even if we sold or terminated these operations. Also historical practices at our current or former facilities may have resulted in releases of hazardous materials which could give rise to clean-up obligations in the future. We believe we are in material compliance with all applicable environmental requirements and, based on available information, do not anticipate any material environmental costs. However, there can be no assurance that changes in environmental laws and regulations or in their enforcement, or discovery of previously unknown contamination or other liabilities relating to our properties and operations, could not result in material costs and negatively impact our financial condition.

Terrorist attacks on the United States or its allies and their interests at home and abroad, the continuing fear of future attacks and the expansion of hostilities 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, the continuing fear of future attacks, the war in Iraq and unrest in the Middle East 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 such as us or U.S. allies. Further terrorist attacks against the United States or U.S. businesses operating outside of the United States may occur, or other hostilities could develop based on the current international situation. We cannot predict what affect the international terrorist threat, including war and other 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 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:

Tobacco 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 and continue to be 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.

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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 products 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, 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 the U.S. 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 U.S. Department of Health and Human Services or regulation under the Consumer Products Safety Act, establish anti-smoking educational campaigns or anti-smoking programs, or provide additional funding for governmental anti-smoking activities, further restrict the advertising of cigarettes, including requiring additional warnings on packages and in advertising, provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act could not be used as a defense against liability under state statutory or common law, allow state and local governments to restrict the sale and distribution of cigarettes, and further restrict certain advertising of cigarettes and eliminate or reduce the tax deductibility of tobacco product advertising. It is not possible to determine the outcome of these regulatory initiatives, or to predict what, if any, other 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 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, Singapore, some countries of the European Union 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 pictorial 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.

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.

We have been, and continue to be, subject to governmental investigations into, and litigation concerning leaf tobacco industry buying practices.

From time to time, the leaf tobacco industry has been the subject of government investigations and private litigation regarding trade practices.

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,

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including our subsidiaries, have jointly agreed with respect to green tobacco prices and purchase quantities. In respect of the Spanish investigation, on December 15, 2003, the DG Comp served on 20 entities within the Spanish leaf tobacco industry, including our company and three of our subsidiaries, a Statement of Objections alleging certain infringements of the antitrust laws of the European Union. On March 1, 2004, the DG Comp served a similar Statement of Objections on 11 entities within the Italian leaf tobacco industry, including our company and one of our subsidiaries. We have responded to the Statement regarding the Spanish investigation and to the Statement regarding the Italian investigation and will continue to cooperate in the investigations. Through the Statements, DG Comp intends to impose, where appropriate and probably late in 2004, administrative penalties on the entities it determines have infringed the EC anticompetition laws. We expect to be assessed penalties in the cases and expect that the penalties could be material to our earnings. DG Comp has, however, indicated that there may be mitigating circumstances in both investigations, including our cooperation with the DG Comp. We are currently unable to assess the amount of such penalties, but expect that the mitigating factors could result in a reduction in any penalties imposed.

In February 2001, 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, along with all but one of the other defendants, entered into a settlement agreement with the plaintiffs which received final approval, and which accorded us a full release from all the claims in exchange for a payment of $7.0 million towards a larger total settlement agreement. On April 22, 2004, the case was settled and the settlement approved by the Court as to the remaining defendant.

Adverse determinations in these or similar proceedings might negatively impact our financial condition and results of operations.

Risks Relating to Our Wool Operations

We might incur charges to earnings as we sell or close our wool operations.

In fiscal 2002, we began the process of selling or closing our wool business. We still have remaining wool operations in France, Germany, United Kingdom and Chile. We expect to sell these operations by September 30, 2004. While we are currently negotiating with prospective purchasers, there is a risk that these negotiations may fail to result in a sale. Even if an agreement is reached, the sale may result in an additional loss. Likewise, if we are forced to seek new prospective purchasers, we may have to sell these operations at an additional loss. Although we have estimated losses on disposal totaling $33.3 million, if we do not dispose of these operations as planned, it could result in additional losses on disposition which could materially adversely affect our results of operations.

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. 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. In addition, our Articles of Incorporation require the vote of two-thirds of our outstanding common stock to approve the merger or sale of our company. 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.

Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely affect us.

The indenture governing our senior notes and our revolving credit facility contain various restrictive covenants that limit our discretion in operating our business. In particular, these agreements limit our ability to, among other things:

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In addition, our revolving credit facility requires us to maintain minimum tangible net worth and comply with specific liquidity and interest coverage ratios, borrowing base restrictions and debt limitations. These covenants and ratios could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund our operations. A breach of a covenant in our debt instruments could cause acceleration of a significant portion of our outstanding indebtedness. Any future debt could also contain financial and other covenants more restrictive than those imposed under the indenture governing our senior notes and our revolving credit facility.

A breach of a covenant or other provision in any debt instrument governing our current or future indebtedness could result in a default under that instrument and, due to cross-default and cross-acceleration provisions, could result in a default under our other debt instruments. Upon the occurrence of an event of default under our revolving credit facility or any other debt instrument, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them, if any, to secure the indebtedness.

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 March 31, 2002 and March 31, 2004, the price has varied from $14.75 to $23.00. 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 and in good operating condition.

ITEM 3. LEGAL PROCEEDINGS

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.

In respect of the Spanish investigation, on December 15, 2003, the DG Comp served on 20 entities within the Spanish leaf tobacco industry, including our company and three of our subsidiaries, a Statement of Objections alleging certain infringements of the antitrust laws of the European Union. On March 1, 2004, the DG Comp served a similar Statement of Objections on 11 entities within the Italian leaf tobacco industry, including our company and one of our subsidiaries. We have responded to the Statement regarding the Spanish investigation and to the Statement regarding the Italian investigation and will continue to cooperate in the investigations. Through the Statements, DG Comp intends to impose, where appropriate and probably late in 2004, administrative penalties on the entities it determines have infringed the EC anticompetition laws. We expect to be assessed penalties in the cases and expect that the penalties could be material to our earnings. DG Comp has, however, indicated that there may be mitigating circumstances in both investigations, including our cooperation with the DG Comp. We are currently unable to assess the amount of such penalties, but expect that the mitigating factors could result in a reduction in any penalties imposed.

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 subsequently moved to the United States District Court for the Middle District of North Carolina, Greensboro Division (Case No. 00-CV-1235). The Deloach suit was 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 sought 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. In May 2003, we along with all but one of the other defendants, entered into a settlement agreement with the plaintiffs which received final approval, and which accorded us a full release from all the claims in exchange for a payment of $7.0 million towards a larger total settlement agreement. On April 22, 2004, the case was settled and the settlement approved by the Court as to the remaining defendant.

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, 2004.

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EXECUTIVE OFFICERS AND KEY EMPLOYEES

At April 30, 2004, our executive officers and key employees were as follows:

Business experience during the past five years of our executive officers and key employees is set forth below.

Robert E. Harrison was appointed President and Chief Executive Officer in August 1996. He was employed in July 1995 as Senior Vice President and Chief Financial Officer and retained the latter position until April 1998. Prior to joining us, he was employed by RJ Reynolds Tobacco International in a number of positions in the Far East.

Robert A. Sheets was appointed Executive Vice President and Chief Financial Officer in April 2004 after being Vice President and Chief Financial Officer since April 1998. He joined us in October 1995 as Assistant Controller. His previous experience included 10 years in the foods and international tobacco divisions at RJR Nabisco. Mr. Sheets is a Certified Public Accountant.

Alfred F. Rehm was appointed Executive Vice President for Global Sales in April 2004 after being Tobacco Division President since April 1998. He had been Vice President – Sales of our Tobacco Division since February 1995. He joined in 1978 and his 33-year career in the tobacco industry includes experience in all phases of the leaf department.

Henry C. Babb was appointed Senior Vice President for Legal in April 2004. He joined us in December 1997 as Vice President – Public Affairs and General Counsel. He was appointed Secretary in June 1998. Prior to joining us, Mr. Babb practiced law for 28 years, including 27 years as a partner with a law firm in Wilson, North Carolina.

Ery W. Kehaya, II was appointed Senior Vice President and Chief Information Officer in April 2004 after being Vice President and Chief Information Officer since 2002. Prior to that, he was Vice President and Regional Manager-North America in our Tobacco Division. Prior to that, he had been named Tobacco Division Vice President – Operations in 1995 and Sales Director in 1993, and has been a Corporate Vice President since 1992.

Michael K. McDaniel was appointed Senior Vice President for Human Resources in April 2004. He joined as Director-Human Resources in November 1996 and was elected Vice President - Human Resources in June 1997. From 1995 to November 1996 he was a partner in a human resources consulting firm, and from 1978 to 1995 he was Director of Human Resources and Organizational Development for the City of Wilson, North Carolina.

John H. Saunders was appointed Senior Vice President – Americas in April 2004. He was appointed as Senior Vice President for Global Sales in 1998 after transferring from Malawi to the U.S. to become Senior Vice President and Regional Manager – Africa in 1997. He became the Regional Manager - Africa in 1987 after becoming the Area Manager of Malawi in 1981and joining us as a trainee in 1974.

Robin H. Kilner was appointed Senior Vice President – Africa in April 2004. He was appointed as the Regional Manager - Africa in 1998 after serving as assistant Regional Manager – Africa since 1996. He joined us as a tobacco buyer in 1978.

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J. Pieter Sikkel was appointed Senior Vice President – Asia in April 2004 after being the Vice President and Regional Manager – Asia since 2000. He served as assistant Regional Manager – Asia since 1997 after becoming the Area Manager – China in 1992. He joined us as a trainee in 1981.

Simon J. Green was appointed Senior Vice President – Europe and CIS in April 2004 after being Vice President and Regional Manager – CIS since 1998. He became the European Sales Manager in 1995 after joining us in 1979 as assistant Sales Manager.

Hampton R. Poole, Jr. was appointed Vice President in 1996 and has served as our Controller since 1993. He joined in 1984 and is a Certified Public Accountant.

Timothy S. Price was appointed Vice President of Treasury and Investor Relations in April 2004. He was appointed Vice President – Business Planning and Development in June 1998. He had been Financial Director of our Wool Division since December 1995. Previously, he served as Vice President and Controller of W. A. Adams Company from the time it was acquired by us in June 1992. Mr. Price is a Certified Public Accountant.

Krishnamurthy Rangarajan was hired in 1978 after qualifying as a Chartered Accountant. He was elected a Vice President in 1988 after being named Assistant Vice President in 1986 and Chief Accountant in 1981.

Robert J. Zonneveld was appointed Vice President – Business Planning and Development in April 2004. He joined us in 1995 as Manager of Business Planning. He was appointed as Vice President Finance – Tobacco Division in 1998. Mr. Zonneveld is a Certified Public Accountant.

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 10, 2004, there were approximately 531 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 the terms of the revolving bank facility in effect on March 31, 2004 and also the revolving bank facility we entered into on March 31, 2004, we must meet financial covenants relating to minimum tangible net worth, maximum levels of long-term debt and other covenants. 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, 2004. 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, 2004 is presented below.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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, 2004, 2003 and 2002 and the related Notes to Consolidated Financial Statements herein. We have amended and restated our consolidated financial statements for the years ended March 31, 2003 and 2002 to reflect our September 2003 decision to exit the wool business entirely. See Note 1 to our audited consolidated financial statements for further discussion of this matter.

General

We are principally engaged in purchasing, processing, storing, selling and shipping leaf tobacco. The ability to obtain raw materials at favorable prices is an important element of profitability. Obtaining raw materials at favorable prices must be coupled with

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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.

Historically, the cost of our materials, services and supplies has exceeded 80% of revenues. 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.

Purchases and sales are generally denominated in U.S. dollars. We regularly monitor our currency exchange position and have not experienced material gains or losses on currency exchange fluctuations. We enter into forward contracts solely for the purpose of limiting our exposure to short-term changes in exchange rates.

Assets and liabilities of non-U.S. 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.

Results of Operations

Tobacco Market Conditions

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

In the United States, cigarette manufacturers began contracting in 2000 directly with tobacco farmers for their leaf requirements, rather than purchasing tobacco at auction, and continue to do so. Consequently, our U.S. sales revenues have been, and will be, lower going forward. The first full fiscal year to reflect the effects of direct contracting on our sales revenues was 2002. 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 manufacturers 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. Other than the reduced crop size this has not had a material impact on our operations in this country as our presence in this market is limited. The calendar 2004 crop is expected to be down from 80 million kilos last year, to approximately 60 million kilos. 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. The Brazilian crop is expected to increase from 595 million kilos to a record crop of 850 million kilos. Additional sources of flue-cured leaf from our new tobacco growing programs in Zambia and Mozambique will also lessen the effects of a reduced Zimbabwe crop.

Regional Review of Operations

African Region. Political and economic turmoil persists in Zimbabwe and continues to decrease the crop size. The flue-cured crop has decreased from 165 million kilos in crop year 2002 to 80 million kilos in crop year 2003, to a projected 60 million kilos in crop year 2004. Our organization in Zimbabwe has been restructured to reflect the decrease in Zimbabwe’s crop. Customers have begun sourcing flue-cured tobacco from other areas in the world, such as Brazil. We continue to evaluate various options for continued operation in Zimbabwe. Our Malawi operation primarily sources and processes burley tobaccos. However, in response to the decrease in the Zimbabwe crop size, the Malawi operation has established various projects to grow our share of the expanding flue-cured crop in Malawi. In addition, over the past several years, we have 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 for the Malawi operation. In Kenya, we have embarked on a flue-cured tobacco-growing program following a successful first year of operation of our own Dark Fired tobacco-growing venture.

Asian Region. We continue to leverage our leading market positions in China, Thailand, Indonesia and India in order to provide our customers with low cost, high quality tobacco. The new processing facility in Indonesia has been completed and has been operational since October 2003. This facility provides a high quality product, produced to international standards. This joint venture is a partnership, based on long-standing relationships, in which we have a 55% ownership, and is in direct response to customers needs and is part of our ASEAN strategy. Customer response has been positive and we believe the facility will enable us to build a strong business base in Indonesia. The joint venture factory in India has undergone an expansion in its threshing line and will offer increased throughput capacity, improved yields and greater economies of scale.

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European Region. We have decided to exit the Greek market this year. We have been unable to find a viable business model from which to operate in Greece. After an extensive review of the Greek market, we determined it was not viable to invest in a wholly owned processing facility in Greece or to operate under current conditions. Turkey continues to be a strong contributor to our bottom line. 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. On April 22, 2004, the EU Council of Ministers approved a reform of the EU subsidies. The current levels of subsidies will continue for the tobacco crops 2004 and 2005. For crop years 2006-2009, the subsidy per kilo remains the same but is split into two parts. A minimum of 40% of the subsidy will be paid if they continue to farm, without being obliged to grow tobacco. If they continue to grow tobacco, the remaining 60% of the subsidy will also be paid to them. Effectively, the subsidy remains the same for the next six years should a farmer choose to grow tobacco. Beginning in 2010, 50% of the subsidy will be paid if they continue to farm with no additional subsidy available for producing tobacco. The detailed regulations will only be released later this year.

CIS Region. The CRES (Cut Rolled Expanded Stem) operation in Russia faced increasing pressures to maintain its performance targets this year. Strong competition and a shift in the market share of the major manufacturers, along with declining inclusion rates of CRES in manufacturers’ blends, have impacted the market for CRES tobaccos. The joint venture factory in Kyrgyzstan intends to start contracting farmers to ensure the right volumes and quality of tobacco is grown. Overall demand for Kyrgyzstan tobaccos currently exceeds the available supply.

South American Region. The Argentina facility that was purchased in fiscal year 2002 continues to have a solid earnings base and a solid volume growth. Strong customer support in this market has helped the Argentine operation become a key contributor in an already strategic region for tobacco. Argentina is transitioning to become a main stream supplier of tobacco. Brazil is expected to have a record crop size of 850 million kilos, up from 595 million last year, which will enhance the operation’s solid contributions to net income. There has been some transitioning by customers from the Zimbabwe and USA crops to the Brazilian crop and this is expected to continue in fiscal 2005.

North American Region. The USA tobacco market has become predominantly a 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 being available in other countries such as Brazil. We estimate that we process approximately one-quarter to one-third of the total Flue-cured and Burley tobacco grown in the USA. We have ceased all operations in Honduras. The Honduran operation has not met expectations for several years despite improvements in cost and quality. Over the last few years, we have been unable to raise production levels to achieve the necessary economies of scale.

For additional information on revenues and long-lived assets, see Note 17 of these financial statements.

Comparison of the Year ended March 31, 2004 to the Year ended March 31, 2003

Sales. For the 12 months ended March 31, 2004, consolidated shipment volume of 267.6 million kilos was basically level with the prior year’s 268.2 million kilos. Consolidated sales decreased by $24.5 million, to $780 million as average selling prices per average kilo decreased from $3.00 per kilo to $2.91 per kilo. All the operations in Asia reported volume driven sales increases, including Indonesia where our processing facility began operations in October 2003. Increased sales in South America were the result of increased volumes and processing revenues in Argentina, while Brazilian sales were basically level with the prior year. In Africa, volumes and sales increased in Kenya/Congo, while volumes in Malawi were lower due to a weather-related smaller crop. Zimbabwe continued to decline as the crop size shrinks as a result of the prolonged political and economic turmoil in that country. Volumes and sales increased only marginally in Europe with increases in Italy offset by decreases in Spain and Turkey. Volumes and sales also declined in the U.S. and the value-added products group in Russia.

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Gross Profit and Cost of Sales. Gross profit for the 12 month period of $114.8 million was down 19.7% from the prior period. This was due primarily to more difficult trading conditions related to continued customer pressure on pricing and the reduced margins in European tobaccos due to the appreciation of the Euro against the US Dollar. Higher costs related to the start-up of our new tobacco growing projects in Africa and the start-up of our Indonesian processing facility also had a negative effect.

Selling, General and Administrative Expenses. SG&A expenses were down $2.4 million, or 3.2%, compared to the prior year. The decrease in SG&A was largely due to the $7.0 million settlement of the DeLoach case in the U.S. last year. This decrease was partially offset by the effect of the weak US Dollar against other currencies in which certain expenses were incurred of $1.6 million, start-up costs for the Indonesian operations of $0.8 million, expenses related to the implementation of the Sarbanes-Oxley Act of $0.3 million, higher legal and professional fees of $0.7 million and higher pension and medical expenses of $0.8 million.

Interest Expense and Other Income (Expense), Net. Interest expense was lower due to reduced long-term debt levels as a result of our debt buy-back program and lower interest rates. Other income (expense), net was $0.9 million lower than the prior year due to lower interest income and lower gains on the sales of assets.

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 decreased to 26.0% from 36.2% in the prior year. This was due to a payment of withholding taxes on dividends from subsidiary companies in the prior year periods and variances in tax rates in areas where profits are earned or losses are incurred. Equity in earnings of affiliates was higher than the prior year primarily due to the Kyrgyzstan joint venture.

Income from Continuing Operations. Income from continuing operations was $32.5 million versus $44.0 million in the prior year. This decrease is attributable to the lower sales and start-up costs associated with various growing projects and the continued weakening of the US Dollar which has had a significant impact on margins.

Loss from Discontinued Operations. As previously disclosed, we have made the decision to exit the wool business. During the last quarter, the operations in Argentina and Australia were sold. The French mill closed in April, 2004 and negotiations are progressing for the sale of the remaining wool operations. The assets and liabilities of the Wool Division have been reclassified as “held for sale” and shown separately in the consolidated balance sheet, with the exception of $45.5 million of wool debt guaranteed by us which will be included in consolidated debt until the disposition is complete. The wool operating loss for the fiscal year was $12.9 million versus a loss of $0.3 million in the prior year. In addition to the operating losses, an estimated loss on disposition of $26.6 million was recorded in the second fiscal quarter and an additional estimated loss of $6.7 million was recorded in the last quarter due to changes in pension losses in Germany and severance costs in France and Germany and the writeoff of intercompany loans for the specialty fibers unit which is being liquidated. The combined effects of the losses and the disposal charge are reported as Loss from Discontinued Operations. The total loss for discontinued operations for the current year was $46.2 million. The basic loss per share for the discontinued operations was $3.39, versus a loss of $0.45 in the prior year.

Net Income. The consolidated net loss was $13.6 million, primarily due to the charges taken to exit the wool business, versus the prior year net income of $37.9 million.

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

Sales. Consolidated volumes for fiscal 2003 were 268.2 million kilos only slightly higher than the prior year. Average selling prices per kilo increased from $2.92 per kilo in fiscal year 2002 to $3.00 per kilo in fiscal 2003. As a result, sales for the 12 months ended March 31, 2003 increased by $24.1 million to $804.5 million. Overall, excluding the U.S. 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 continued to decrease as the Zimbabwe crop size shrank 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.

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Gross Profit and Cost of Sales. Gross profit for continuing operations for the 12 month period of $143.0 million was up 7.5% from the prior period. This was due primarily to our recent acquisition of tobacco processing facilities in the U.S. 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 $9.3 million compared to the prior year. The increases in SG&A were largely due to the $7.0 million settlement of the Deloach case in the U.S., the first full year of inclusion of the acquired processing facilities in the U.S. and Argentina, the weaker U.S. dollar, higher insurance, legal and professional expenses and normal inflationary increases. These increases were partly offset by a $3.0 million reduction in estimated costs of non-U.S. 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 our 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 our Kyrgyzstan joint venture. Minority interest relates to the construction of the Indonesia processing facility being undertaken by our new Indonesia joint venture. The completion and start-up of the facility occurred in October 2003.

Income from Continuing Operations. Income from continuing operations was $44.0 million versus $37.0 million in the prior year 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.

Loss from Discontinued Operations. The loss from discontinued operations was $6.1 million for fiscal 2003 versus $17.2 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.

Net Income. Consolidated net income was $37.9 million, an increase of 91.0% over the prior year, which was heavily impacted by the decision to discontinue the wool operating units.

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 its subsidiary in Chile, which had remained relatively healthy throughout the cyclical industry downturn. Accordingly, we discontinued operations in four of our wool units located in Argentina, Holland, New Zealand and South Africa. The closure of these units was completed in fiscal 2003.

During the second quarter of fiscal 2004, we decided to focus on our core tobacco operations and accordingly, to exit all of the remaining wool operations. As a result of this decision to dispose of these operations, they have been classified as available for sale and qualify for held for disposal treatment under Statement of Financial Accounting Standards (SFAS) No. 144. Of the remaining operations, the unit in Australia was sold in fiscal 2004, the mill in France was closed in April 2004 and the remaining trading operations in France and Germany, and the trading and processing operations in the UK and Chile are expected to be sold or terminated by September 30, 2004.

The assets and liabilities of the Wool Division have been reclassified as “held for sale” and shown separately in the consolidated balance sheets, with the exception of $45.5 million of wool debt guaranteed by us which will be included in consolidated debt until the disposition is complete. The wool operating loss for the year ended March 31, 2004, was $12.9 million, versus a loss of $0.3 million in the prior year. In addition to the operating losses, an estimated loss on disposition of $26.6 million was recorded in the second fiscal quarter and an additional estimated loss of $6.7 million was recorded in the last quarter due to changes in pension losses in Germany and severance costs in France and Germany and the write-off of intercompany loans for the specialty fibers unit which is being liquidated. The combined effects of the losses and the disposal charge are reported as Loss from Discontinued Operations. The total loss for discontinued operations for the current year was $46.2 million. The basic loss per share for the discontinued operations for the year ended March 31, 2004 was $3.39, versus a loss of $0.45 in the prior year.

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Liquidity and Capital Resources

The following table is a summary of items from our consolidated balance sheet and our statement of consolidated cash flows at the dates or for the periods presented (in thousands, except for current ratio).

Working capital at March 31, 2004 was $166.9 million, down from the $196.9 million at March 31, 2003. Increases in inventories and receivables stemming from the addition of new operations and increased sales were offset by increases in short-term borrowings. A contributing factor to the decline in working capital was the write-down in assets of the discontinued operations. We continue to closely monitor our inventories, which fluctuate depending on seasonal factors and the timing of deliveries to customers. Working capital at March 31, 2003 was $196.9 million, essentially unchanged from the $196.3 million at March 31, 2002.

For 2004, cash used for operating activities totaled $48.4 million, primarily due to increases in inventory of $69.1 million, receivables of $34.9 million and a reduction in payables of $2.8 million, partly offset by net cash flows from discontinued operations. For 2003, cash provided by operating activities totaled $21.2 million, primarily due to higher net income and an increase in payables.

Cash used for investing activities of $34.3 million for 2004 included capital expenditures of $36.7 million related mostly to the completion of the new tobacco processing facility in Indonesia, various growing projects in Africa, investment in a global ERP system, routine expenditures and construction of warehousing space in several areas. Cash used for investing activities of $34.8 million for 2003 including capital expenditure of $36.2 million related mostly to the purchase of a processing facility in the U.S., the construction of a new tobacco processing facility in Indonesia and routine expenditures and construction of warehousing space in several areas. We expect routine capital expenditures to total approximately $19.0 million for the fiscal year ending March 31, 2005.

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, 2004, total available short-term credit facilities for continuing operations was $481.1 million, compared to $478.2 million at March 31, 2003, with $40.0 million versus $22.2 million in 2003 being utilized for letters of credit and guarantees and $187.3 million was unused in 2004 versus $273.9 million in 2003. These amounts include the credit available for our discontinued wool operations as the borrowing for the wool companies are guaranteed by us and remain in consolidated debt amounts. The total available short-term credit facilities included a revolving bank facility of $210 million.

On April 2, 2004, our major tobacco subsidiaries entered into a new three year unsecured revolving bank facility to replace the existing revolving bank credit facility. The new facility provides for borrowings of $150.0 million for working capital and other general corporate purposes, and the interest rate on borrowings under the facility is variable. The rate is currently LIBOR plus 2.0%. The borrowings under the facility are guaranteed by us and certain of our tobacco subsidiaries. The new facility includes certain financial covenants such as tangible net worth, current ratio, borrowing base, etc.

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 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

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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 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. 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. 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.

On April 2, 2004, we issued $150.0 million of 8% senior notes due 2012. The proceeds were used to redeem the remaining $45.1 million outstanding 7 ¹/4% convertible subordinated debentures and to retire the remaining $65.2 million 8 ⁷/8% senior notes due 2005. The new notes are guaranteed by our U.S. tobacco subsidiary on a senior unsecured basis. Prior to April 2, 2007, we can redeem up to 35% of the outstanding notes. The indentures governing our senior notes contain certain covenants that, among other things, limit our ability to (i) pay dividends, (ii) incur additional indebtedness, (iii) transfer or issue shares of capital stock of subsidiaries to third parties, (iv) sell assets, (v) issue preferred stock, (vi) incur or assume any liens that secures obligations under any indebtedness on any asset or property, or (vii) merge with or into any entity.

Our contractual obligations, excluding long term debt, are outlined below and 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 $70.6 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 $45.1 million of retained earnings available for distribution as dividends at March 31, 2004.

Contractual Obligations

Our contractual obligations, excluding long term debt, are outlined in Note 12 to our audited consolidated financial statements and consist mostly of lease payments for facilities that in the aggregate are not material amounts.

We have tobacco purchase obligations that result from contracts with growers to buy either specified quantities of tobacco or the grower’s total tobacco production. This is a normal and routine practice in our industry in some areas, notably South America. At March 31, 2004 we had contractual obligations with tobacco growers in Brazil and Turkey to purchase tobacco for approximately $109.2 million for the next fiscal year and $50.6 between 1 to 3 years.

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 $70.6 million. Future minimum payments for all contractual obligations for years subsequent to March 31, 2004 are as follows (in thousands):

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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 non-U.S. subsidiaries are not subject to additional non-U.S. income taxes nor considered to be subject to U.S. income taxes unless remitted as dividends. We intend to re-invest such undistributed earnings indefinitely with the exception of funds to help in the disposition of the wool group. A total of $5.1 million of deferred taxes have been provided for a portion of the undistributed earnings of our subsidiaries. As to the remainder, these earnings have been, and under current plans, will continue to be reinvested and it is not practicable to estimate the amount of additional taxes which may be payable upon distribution.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources as defined under the rules of SEC release No. FR-67.

We have both capital and operating leases. In accordance with accounting principles generally accepted in the U.S., operating leases are not reflected in the accompanying consolidated balance sheet. The operating leases are generally for land, buildings, automobiles and other equipment. The capital leases are primarily for production machinery and equipment. The capitalized lease obligations are payable through 2012.

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 our company and we 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 our wool units as discontinued operations. The loss on disposal is determined by comparing carrying value of the wool operations with their estimated fair value less selling costs. Estimated fair value has been determined using appraisals, preliminary offers and experience with other transactions.

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 totaled $4.7 million, $8.0 million and $8.5 million at March 31, 2004, 2003 and 2002, respectively. Valuation reserves are determined based on established sales prices for similar inventory.

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, subject to appropriate valuation allowances when it is determined that recovery of the deferred tax asset is more likely than not that some portion of the deferred tax assets will not be realized. 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 non-U.S tax laws and rates. Our effective tax rate could be impacted by changes in these assumptions.

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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. Provisions may be required as circumstances change with respect to ongoing matters or as new issues emerge.

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.

Acquisitions and Dispositions

As noted above and in Note 2 to our audited consolidated financial statements, we discontinued four wool operating units in fiscal 2002. The New Zealand business was sold to a management led group 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 in Holland were closed and are in the process of final liquidation. Proceeds from these sales and closures were not material. In September 2003, we decided to exit the remaining wool units and began a divestiture plan that resulted in the sale of our wool unit located in Australia in March 2004 and should result in the sale or closure of the remaining wool units located in the U.K., Chile, France and Germany. We expect to complete the exit by September 30, 2004.

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 U.S. As part of the purchase agreement, we entered into a long-term processing contract for their U.S. leaf requirements. We also began construction of a leaf processing facility on a joint venture basis in Indonesia that was completed in October 2003. Both of these acquisitions were made with internally generated cash flows.

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.

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, we traded our 51% ownership interest in our Greek subsidiary for the remaining 49% ownership interest in our Turkish operation. This was accomplished, for tax purposes, as a tax-free exchange of assets subject to a private-letter ruling from the U.S. Internal Revenue Service. 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 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.

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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 non-U.S. 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 non-U.S. currency forwards have been designated and qualify as cash flow hedges under the criteria of SFAS No. 133. SFAS No. 133 requires that the effective portion of the changes in fair values of derivatives that qualify as cash flow hedges be recognized in other comprehensive income, while the ineffective portion be recognized immediately in earnings. At March 31, 2004, we had non-U.S. exchange contracts outstanding with a notional value of $3.7 million and a fair value of $3.7 million.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, to provide clarification on the meaning of an underlying, the characteristics of a derivative that contains financing components and the meaning of an initial investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. This statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of this statement should be applied prospectively. The provisions of this statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of this statement did not have a material impact on our financial condition or results of operations.

In June 2001, the 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 March 31, 2003 and 2004.

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 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 adopted this statement in fiscal 2004 and accordingly reclassified on a pre-tax basis $16,000, $1.1 million and $3.2 million as previously reported, net of tax as an extraordinary item, for the fiscal years ended March 31, 2003, 2002 and 2001, respectively, to other income/(expense) to conform with the requirements of SFAS No. 145.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which requires unconsolidated variable interest entities (VIEs) to be consolidated by their primary beneficiaries. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities (FIN 46R). FIN 46R replaces FIN 46 to incorporate several FASB Staff Positions issued relating to FIN 46. FIN 46R is effective for periods ending after December 15, 2003 for public companies that have VIE’s or potential VIE’s. Otherwise, FIN 46R is effective for public companies for periods ending after March 15, 2004. Neither FIN 46 nor FIN 46R had an impact on our financial condition and results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Accordingly we adopted the provisions of SFAS No. 150 on July 1, 2003. The adoption of this statement did not have a material impact on our financial position or results of operations.

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In January 2004, the FASB issued FASB Staff Position (“FSP”) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, as amended by FSP No. 106-2. The FSP permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Regardless of whether a sponsor elects that deferral, the FSP requires certain disclosures pending further consideration of the underlying accounting issues. We have elected to defer financial recognition of this legislation.

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.

The global nature of our business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global basis, we have assets, liabilities and cash flows in currencies other than the U.S. Dollar. The primary objective of our foreign exchange risk management is to optimize the U.S. Dollar value of net assets and cash flows, keeping the adverse impact of currency movements to a minimum. To achieve this objective, on occasion, we hedge using foreign currency forward contracts. Main exposure are related to assets and liabilities denominated in the currencies of Europe and South America and economic exposure derived from the risk that currency fluctuations could affect the U.S. Dollar value of future cash flows. The majority of the foreign exchange exposure is related to European currencies.

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 rate. 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, 2004, we had short-term forward exchange contracts with U.S. dollar equivalents of $3.7 million notional value and $3.7 million current fair value.

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 on our variable-rate debt, as of March 31, 2004, would increase our interest cost by approximately $1.4 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, 2004 and 2003 or our results of operations or cash flows for the years ended March 31, 2004, 2003 and 2002.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

COMPANY REPORT ON FINANCIAL STATEMENTS

We are 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, we depend 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, we maintain 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 our Board of Directors, composed solely of outside directors, meets quarterly with our management and internal auditors, and at least annually with our 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.

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The financial statements have been examined by Deloitte & Touche LLP, an independent registered public accounting firm, who render an independent professional report on our financial statements. Their appointment was approved by the Audit Committee, and ratified by our 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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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of and Shareholders of

Standard Commercial Corporation:

We have audited the accompanying consolidated balance sheets of Standard Commercial Corporation and subsidiaries (the “Company”) as of March 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2004. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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, 2004 and 2003, and the results of its operations and cash flows for each of the three years in the period ended March 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, 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 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. As discussed in Note 1 to the consolidated financial statements, the Company applied the provisions of SFAS No. 145, Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections and reclassified the extraordinary loss on early retirement of debt in 2001 to continuing operations.

/s/ Deloitte & Touche LLP

Raleigh, North Carolina

June 14, 2004

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STANDARD COMMERCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2004 AND 2003 (IN THOUSANDS, EXCEPT SHARE DATA)

See notes to consolidated financial statements.

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STANDARD COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED MARCH 31, 2004, 2003 AND 2002

(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, 2004, 2003, and 2002

(IN THOUSANDS, EXCEPT SHARE DATA)