<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1997
REGISTRATION NO. 333-
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STANDARD COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
NORTH CAROLINA 5150 13-1337610
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2201 MILLER ROAD
WILSON, NORTH CAROLINA 27893
919-291-5507
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT E. HARRISON
CHIEF EXECUTIVE OFFICER
STANDARD COMMERCIAL CORPORATION
2201 MILLER ROAD
WILSON, NORTH CAROLINA 27893
919-291-5507
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
LARRY E. ROBBINS, ESQ. STEPHEN A. GREENE, ESQ.
DONALD R. REYNOLDS, ESQ. CAHILL GORDON & REINDEL
WYRICK, ROBBINS, YATES & PONTON L.L.P. 80 PINE STREET
4101 LAKE BOONE TRAIL, SUITE 300 NEW YORK, NEW YORK 10005
RALEIGH, NORTH CAROLINA 27607 212-701-3000
919-781-4000 FAX 212-269-5420
FAX 919-781-4865
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFER-
BE REGISTERED REGISTERED (1) PER SHARE (2) ING PRICE (2)
<S> <C> <C> <C>
Common Stock, $.20 par value
per share................. 4,053,750 shares $17.375 $70,433,906.25
<CAPTION>
TITLE OF EACH CLASS AMOUNT OF
OF SECURITIES TO REGISTRATION
BE REGISTERED FEE
<S> <C>
Common Stock, $.20 par value
per share................. $21,343.61
</TABLE>
(1) Includes 528,750 shares issuable upon exercise of an option which the
Company has granted to the Underwriters solely to cover over-allotments, if
any.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
(Redherring appears on the left side of page rotated. The language is as
follows.)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 24, 1997
3,525,000 SHARES
[STANDARD COMMERCIAL LOGO]
STANDARD COMMERCIAL CORPORATION
COMMON STOCK
Of the 3,525,000 shares (the "Shares") of Common Stock of Standard
Commercial Corporation ("Standard" or the "Company") offered hereby, 3,500,000
shares are being sold by the Company and 25,000 shares are being sold by the
Selling Shareholder. See "Principal and Selling Shareholders." The Company will
not receive any of the proceeds from the sale of Shares offered by the Selling
Shareholder in this offering (the "Offering").
The Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol "STW." On March 20, 1997, the last reported sale price of the
Common Stock was $17.375 per share. See "Price Range of Common Stock and
Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDER
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
Total (3)................... $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering estimated at $475,000, all of
which are payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an additional 528,750 shares of
Common Stock solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount,
Proceeds to Company and Proceeds to Selling Shareholder will be $ ,
$ , $ and $ , respectively. See "Underwriting."
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to certain
conditions. Delivery of the Shares is expected against payment therefor on or
about , 1997, at the offices of Wheat, First Securities, Inc.,
Richmond, Virginia.
Wheat First Butcher Singer BT Securities Corporation
The date of this Prospectus is , 1997.
<PAGE>
[Photos and/or Artwork]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR AND PURCHASE COMMON STOCK IN THE OPEN MARKET AND MAY IMPOSE PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE HEREIN. UNLESS THE
CONTEXT REQUIRES OTHERWISE, "STANDARD" OR THE "COMPANY" REFERS TO STANDARD
COMMERCIAL CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES. EXCEPT WHERE OTHERWISE
INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Standard is one of the three global independent leaf tobacco merchants
serving the large multinational cigarette manufacturers and is one of the
largest independent merchants of oriental leaf tobacco, a key component of
American-blend cigarettes. The Company also has a leading market presence in a
number of the emerging and low-cost flue-cured and burley tobacco growing
regions, including China, India, Malawi and Tanzania. Founded in 1910, the
Company purchases, processes, stores, sells and ships tobacco grown in over 30
countries, servicing cigarette manufacturers from 20 processing facilities
strategically located throughout the world. The Company is also engaged in
purchasing, processing and selling various types of wool and is a world leader
in the trading of scoured wool.
The Company recently achieved substantial improvement in its operating and
financial performance in part as a result of the implementation of a four-point
strategic plan and the enhancement of the Company's senior management team,
including the appointment of the Company's current Chief Executive Officer. The
key areas addressed by the strategic plan include: (i) information systems; (ii)
financial controls; (iii) risk management; and (iv) asset management. The
Company has improved sales from $1.0 billion in fiscal 1994 to $1.3 billion for
the 12 months ended December 31, 1996, reduced SG&A expenses as a percentage of
sales from 7.6% to 5.7% and increased operating income net of interest from
$12.2 million to $80.4 million. The Company's tobacco division has driven this
return to profitability, increasing sales from $671.5 million in fiscal 1994 to
$952.8 million for the 12 months ended December 31, 1996, improving operating
income net of interest from a loss of $1.0 million to income of $70.2 million
and increasing average tobacco inventory turnover from 2.1 turns for the 12
months ended March 31, 1994 to 3.9 turns for the 12 months ended December 31,
1996.
In addition to the benefits which have resulted from the implementation of
the strategic plan, the Company's operating and financial performance has also
been enhanced by substantial improvements in the global leaf tobacco industry as
a result of strong worldwide demand for tobacco products and the decrease in
worldwide tobacco inventories. The global leaf tobacco industry is currently
recovering from a disruption in demand and a reduction in pricing during
calendar 1993 and 1994, which was primarily the result of legislation (the
"75/25 Rule") intended to limit the importation of tobacco into the United
States. This legislation, which was later repealed principally because it was
inconsistent with the General Agreement on Tariffs and Trade ("GATT"), required
that all cigarettes manufactured in the United States, including those
manufactured for export, contain at least 75.0% domestically grown tobacco.
Increased demand and strong brand growth have resulted in increased
production of American-blend cigarettes. American-blend cigarettes contain
flue-cured, burley and oriental tobacco ("American-blend tobacco"), contain less
tar and nicotine, and taste milder than locally produced cigarettes containing
dark and semioriental tobacco historically consumed in certain parts of the
world. According to the Tobacco Merchants Association (the "TMA"),
American-blend cigarette consumption (excluding China) has increased from 1.7
trillion units in calendar 1990 to 1.9 trillion units in calendar 1996, an
increase of 10.8%. The TMA estimates that worldwide American-blend cigarette
consumption (excluding China) will increase an additional 5.5% to more than 2.0
trillion units by the year 2000. The TMA also estimates that worldwide
American-blend cigarette consumption (excluding China), as a percentage of total
consumption, has also experienced substantial growth, increasing from 47.9% in
1990 to 52.5% in 1996, and is projected to reach 54.3% by the year 2000. As
American-blend cigarettes have continued to gain global market share, the demand
for export quality flue-cured, burley and oriental tobacco sourced and processed
by leaf tobacco merchants has grown accordingly. Large multinational cigarette
manufacturers, with one principal exception, rely primarily on the three global
independent leaf tobacco merchants, including the Company, to supply the
majority of their leaf tobacco needs.
The Company sells tobacco to cigarette manufacturers worldwide, including
Philip Morris Companies, Inc., B.A.T. Industries PLC ("B.A.T."), RJR Tobacco
Company, Inc., Rothmans International PLC, Japan Tobacco, Inc. and Reemstma
Cigarettenfabriken GmbH. The Company processes tobacco for these manufacturers
at facilities that are strategically located in the major sourcing areas of
American-blend tobacco, such as Argentina, China, Greece, Italy, Malawi, Spain,
Thailand, Turkey, the United States and Zimbabwe. In addition, the Company has
contracts, joint ventures and other arrangements for the purchase and/or
processing of tobacco grown in substantially all other countries that produce
export quality tobacco.
3
<PAGE>
The Company's wool division, following the termination of an agreement to
sell the division in 1995, was restructured under the leadership of a new
divisional management team which has consolidated operations, increased
operating efficiencies and focused on returning the division to profitability.
The business strategy of the wool division includes: (i) enhancing its global
sourcing and trading network; (ii) developing unified operations; (iii)
expanding its Asian sales efforts; and (iv) integrating proprietary worldwide
information systems and financial controls.
GROWTH STRATEGY
The Company's primary business objective is to expand its position as one
of the leading global suppliers of American-blend tobacco to the major cigarette
manufacturers while increasing profitability through enhanced financial
management and controls. The key elements of the Company's growth strategy
include:
INCREASING PRESENCE IN SOUTH AMERICA AND AFRICA. The Company believes that
its presence in all the major leaf tobacco markets worldwide is critical to
capitalizing on the global expansion of the large multinational cigarette
manufacturers, the recent consolidation of the leaf tobacco merchants and the
anticipated growth in demand for tobacco sourced internationally. A key element
of the Company's growth strategy is to increase its ability to directly source
and process tobacco in South America and Africa, key growing regions for
American-blend tobacco. The Company has recently executed a letter of intent to
acquire 74.9% ownership of the fourth largest tobacco processor in Brazil.
INCREASING PENETRATION OF LOW-COST FILLER TOBACCO AND EMERGING
TOBACCO-GROWING REGIONS. To meet the increasing demand by cigarette
manufacturers throughout the world for low-cost American-blend tobacco, the
Company plans to expand its operations in regions particularly suited for
producing such tobacco. The Company has targeted China, India and Tanzania,
countries in which it has a leading tobacco export position, for expansion and
increased tobacco production. The Company has executed letters of intent for the
construction of new processing facilities in China and India.
STRENGTHENING PRESENCE IN ORIENTAL MARKETS. Demand for oriental tobacco,
which comprises approximately 15.0% of American-blend cigarettes, is rapidly
increasing due to the strong growth in consumption of American-blend cigarettes.
The Company intends to strengthen its position as one of the world's largest
merchants of oriental tobacco through acquisitions and continued strategic
investments in China and Thailand (emerging oriental tobacco markets), and in
Greece and Turkey (leading oriental tobacco markets based on volume).
CAPITALIZING ON ACQUISITION AND OUTSOURCING OPPORTUNITIES. Recent
consolidation within the leaf tobacco industry has been driven by the need to
cost-effectively service multinational cigarette manufacturers on a global
basis. Management believes that there will be increasing opportunities for
acquisitions of smaller independent local leaf tobacco merchants in various
strategic locations throughout the world. In addition, the Company anticipates
further outsourcing of leaf tobacco purchasing and processing by cigarette
manufacturers. This outsourcing trend is driven by the: (i) higher margins in
cigarette production; (ii) increasing sophistication required in sourcing leaf
tobacco on a global basis; and (iii) continued privatization of tobacco and
cigarette production operations in certain countries.
INCREASING FINANCIAL FLEXIBILITY. The Company intends to continue to
strengthen its financial position by reducing its overall leverage and its
reliance on short-term borrowings. In addition to raising equity pursuant to the
Offering, the Company is currently evaluating additional financing alternatives,
including a private or public placement of long-term debt securities, the
proceeds of which would be used to further reduce short-term borrowings. By
strengthening its financial position, the Company will be better positioned to
continue implementing its business strategy and to capitalize on strategic
growth opportunities.
RECENT DEVELOPMENTS
ACQUISITION OF BRAZILIAN LEAF TOBACCO PROCESSING FACILITY. In March 1997,
the Company signed a letter of intent (which is subject to significant
conditions of closing) to purchase a 74.9% ownership interest in Meridional de
Tabacos Ltda. ("Meridional"), the fourth largest leaf tobacco processor in
Brazil. This strategic acquisition complements the Company's 26-year partnership
in Brazil with Souza Cruz S.A. ("Souza Cruz"), a subsidiary of B.A.T., and will
provide the Company with direct ownership of a processing facility in the second
largest leaf tobacco growing region in the world (excluding China).
INDUSTRY CONSOLIDATION. On February 14, 1997, the second largest leaf
tobacco dealer in the world announced that it had signed a definitive agreement
to acquire, on or about April 1, 1997, the fourth largest leaf tobacco dealer in
the world. As a result of this transaction, there will be only three global
independent leaf tobacco merchants, including the Company. Management believes
that this industry consolidation should lead to increased sales for the Company
as the large multinational cigarette manufacturers seek to maintain diversity of
their sources of American-blend tobacco.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by:
The Company................................................. 3,500,000 shares
The Selling Shareholder..................................... 25,000 shares
Common Stock to be outstanding after the Offering............. 13,033,550 shares
Use of Proceeds............................................... Repayment of indebtedness. See "Use of Proceeds."
NYSE Symbol................................................... STW
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
1996 1995 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales........................................ $933,526 $956,716 $1,359,450 $1,213,565 $1,042,014 $1,236,084
Gross profit................................. 71,802 55,546 90,513 81,465 50,682 111,896
Restructuring charges........................ -- 12,500 12,500 -- -- --
Income (loss) before taxes................... 16,914 (14,226) 2,258 9,980 (24,437) 37,291
Income (loss) from continuing operations
(1)........................................ $ 8,899 $(18,470) $ (9,442) $ (20,494) $ (36,498) $ 22,220
Primary earnings (loss) per common share:
-- From continuing operations (1)......... $ 0.92 $ (2.12) $ (1.11) $ (2.43) $ (4.32) $ 2.58
-- Pro forma (2).......................... 0.97 (1.21) (0.38)
Weighted-average shares outstanding:
Primary.................................... 9,264 8,888 8,934 8,619 8,553 8,448
OTHER DATA:
Gross profit, net of interest (3)............ $ 95,597 $ 83,904 $ 131,882 $ 116,446 $ 80,098 $ 143,529
Gross margin, net of interest................ 10.2% 8.8% 9.7% 9.6% 7.7% 11.6%
Operating income, net of interest (4)........ 48,199 20,962 53,186 54,908 12,152 77,107
Operating margin, net of interest............ 5.2% 2.2% 3.9% 4.5% 1.2% 6.2%
Tobacco inventory............................ 255,382 230,734 160,721 194,344 268,948 305,256
Depreciation and amortization................ 14,366 19,391 24,393 16,413 16,260 16,524
Capital expenditures......................... 9,441 9,349 12,211 17,328 27,257 24,096
<CAPTION>
1992
<S> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................ $1,173,300
Gross profit................................. 106,424
Restructuring charges........................ --
Income (loss) before taxes................... 37,672
Income (loss) from continuing operations
(1)........................................ $ 23,843
Primary earnings (loss) per common share:
-- From continuing operations (1)......... $ 2.89
-- Pro forma (2)..........................
Weighted-average shares outstanding:
Primary.................................... 8,246
OTHER DATA:
Gross profit, net of interest (3)............ $ 137,538
Gross margin, net of interest................ 11.7%
Operating income, net of interest (4)........ 75,601
Operating margin, net of interest............ 6.4%
Tobacco inventory............................ 187,079
Depreciation and amortization................ 10,229
Capital expenditures......................... 21,543
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
AS
ACTUAL ADJUSTED (2)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................................................. $ 66,802 $ 123,795
Total assets..................................................................................... 808,509 808,509
Total debt....................................................................................... 507,058 450,065
Shareholders' equity............................................................................. 88,130 145,123
</TABLE>
(1) Before extraordinary items in 1993 and 1992 of $503,000 and $624,000,
respectively, and cumulative effect of change in accounting principles in
1994 of $23,000.
(2) Gives effect to the sale of shares offered by the Company hereby. The $57.0
million estimated net proceeds from the sale of the shares offered by the
Company (after deducting the estimated underwriting discount and offering
expenses) have been applied to reduce the Company's short-term indebtedness.
See "Use of Proceeds."
(3) Excludes interest included in cost of sales.
(4) Defined as income (loss) before taxes, net of interest included in cost of
sales and other interest expense.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS, INCLUDING INFORMATION INCORPORATED BY REFERENCE HEREIN, CONTAINS
CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), WHICH REPRESENT THE
COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS
CONCERNING INDUSTRY PERFORMANCE; THE COMPANY'S OPERATIONS, PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, MARGINS; AND GROWTH IN
SALES OF THE COMPANY'S PRODUCTS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN
THIS PROSPECTUS THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND
ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT
FACTORS, INCLUDING THOSE DESCRIBED IN THIS "RISK FACTORS" SECTION.
VARIABILITY OF ANNUAL AND QUARTERLY FINANCIAL RESULTS
The purchasing and processing of tobacco and wool are dependent on
agricultural cycles and are seasonal in nature. These cycles and this
seasonality, together with the timing of shipments and variations in the mix of
sales, cause quarterly fluctuations in financial results. Sales and revenue
recognition by the Company is based upon the passage of title, which typically
occurs on the date of shipment. The nature of the Company's businesses is such
that it is not possible to predict the timing of shipments or orders with a high
degree of precision, and advances or delays in either are not unusual.
Therefore, the comparability of the Company's financial results, particularly
quarter-to-quarter comparisons, which may be significantly affected by these
factors, should be considered when evaluating the Company's performance. In
addition, the Company's business may be adversely affected by poor weather or
other agricultural factors, many of which are beyond the control of the Company.
For example, the tobacco leaf industry in the United States was disrupted in
calendar 1993 by below average quality tobacco crops.
Total tobacco inventories normally peak in the Company's third fiscal
quarter as large volumes of tobacco grown in the northern hemisphere are
purchased and held in various conditions of processing prior to shipment to
customers. Receivables typically peak in the fourth quarter as those tobaccos
are shipped and invoiced. Revolving credit borrowings and trade payables
normally peak with inventories.
Wool is generally purchased over a greater portion of the year than
tobacco, and wool growing seasons occur at different times of the year in
different countries. Wool trading is generally lower during the first and second
fiscal quarters as a result of reduced demand during the summer for wool
products in the northern hemisphere, when processors and users close down for
holidays and vacations in Europe. Generally, wool revenues reach high levels in
the third fiscal quarter and peak in the fourth fiscal quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Quarterly Results."
SMOKING AND HEALTH ISSUES AND GOVERNMENTAL REGULATION
In recent years, governmental entities in the United States at all levels
have taken or have proposed actions that may have the effect of reducing
consumption of cigarettes. These activities have included: (i) the U.S.
Environmental Protection Agency's classification of tobacco environmental smoke
as a "Group A" (known human) carcinogen; (ii) restrictions on the use of tobacco
products in public places and places of employment including a proposal by the
U.S. Occupational Safety and Health Administration to ban smoking in the work
place; (iii) proposals by the U.S. Food and Drug Administration to sharply
restrict cigarette advertising and promotion and to regulate nicotine as a drug;
(iv) increases in tariffs on imported tobacco; (v) proposals to increase sales
and excise taxes on cigarettes; (vi) the recently announced policy of the U.S.
government to link certain federal grants to the enforcement of state laws
banning the sale of tobacco products to minors; (vii) lawsuits against cigarette
manufacturers by several U.S. states seeking reimbursement of Medicaid and other
expenditures claimed to have been made by such states to treat diseases
allegedly caused by cigarette smoking; and (viii) the recent enactment of
stricter regulations designed to prohibit sales of cigarettes to minors. It is
not possible to predict the outcome of such actions or litigation or the effect
adverse determinations against the manufacturers might have on leaf merchants,
like the Company, or the extent to which governmental activities and litigation
might adversely affect the Company's business directly.
In calendar 1993, Congress enacted the 75/25 Rule, intended to limit the
importation of tobacco into the United States by requiring that all cigarettes
manufactured in the United States, including those manufactured for export,
contain at least 75.0% domestically grown tobacco. Although the 75/25 Rule was
repealed in 1995, principally because it was inconsistent with GATT, and was
replaced with import quotas designed to assist domestic tobacco growers, it had
the effect in calendar
6
<PAGE>
1993 and 1994 of drastically decreasing demand for imports of foreign tobacco
for use in the domestic production of cigarettes. It is not possible to predict
the extent to which future governmental or third-party actions might adversely
affect the Company's business.
A number of foreign countries have also taken steps to restrict or prohibit
cigarette advertising and promotion, to increase taxes on cigarettes and to
discourage cigarette smoking. In some cases, such restrictions are more onerous
than those in the United States. For example, advertising and promotion of
cigarettes has been banned or severely restricted for a number of years in
Australia, Canada, Finland, France, Italy, Singapore and a number of other
countries. It is impossible to predict the extent to which these actions might
adversely affect the Company's business.
In addition, civil litigation is pending against the leading U.S.
manufacturers of consumer tobacco products alleging damages for health problems
resulting from the use of tobacco in various forms. It is not possible to
predict the outcome of such litigation or what effect adverse developments in
pending or future litigation might have on the business of the Company, either
directly or indirectly. See "Business -- Governmental Regulation and
Environmental Compliance."
GLOBAL FINANCIAL AND MANAGEMENT CONTROL RISKS
The broad scope of the Company's worldwide business units has placed
considerable demands on management's ability to oversee the Company's financial
accounting controls, risk management and asset management. While the Company has
implemented and continues to refine a strategic plan specifically addressing
these areas, there can be no assurance that the Company will be successful in
establishing and maintaining the centralized management oversight necessary to
ensure adequate controls of its global operations.
Part of the Company's strategic plan is to focus on tobacco inventory
management. In certain markets where there is no auction system in place, the
Company prefinances and/or buys tobacco directly from growers prior to receipt
of firm orders or indications of interest from customers in amounts based
largely upon past purchasing trends of such customers ("uncommitted inventory").
Because of the strategic importance of these markets to the Company's customers,
the Company desires to maintain a presence in these locations. In addition, the
Company has, from time to time, purchased uncommitted inventory at auction when,
in its opinion, there was a reasonable opportunity to resell the tobacco at a
profit or when it anticipated its customer's needs before receiving firm
indications or orders of interest. As a result, in periods of unexpectedly low
demand, the Company's uncommitted inventory has exceeded desired levels.
Purchases of uncommitted inventory expose the Company to potential losses if the
price of the tobacco it purchases falls prior to receiving a firm order from a
buyer. There is no tobacco futures market to hedge this risk. See
"Business -- Tobacco -- Business Strategy" and " -- Operations -- Purchasing."
RELIANCE ON SIGNIFICANT TOBACCO CUSTOMERS
The Company's tobacco customers are manufacturers of cigarette and tobacco
products located in approximately 85 countries around the world. Several of
these customers individually account for a significant portion of the Company's
sales in a normal year, and the loss of any one or more of such customers could
have a material adverse effect on the Company's results of operations.
Approximately 56.1% of the Company's tobacco sales (38.2% of total sales) for
fiscal 1996 were made to the Company's five largest customers, with its largest
customer representing 25.6% of tobacco sales (17.4% of total sales). See
"Business -- Tobacco -- Operations -- Selling."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the continued services of certain members of
senior management, in particular those of its current Chief Executive Officer.
Currently, the Company does not have any long-term employment agreements with
its executive officers, with the exception of its Chief Executive Officer. The
Company believes the loss of the services of key members of senior management
could have a material adverse effect on the Company. In addition, the Company
believes that its future success will depend in large part upon its continued
ability to attract, retain and motivate additional employees. There can be no
assurance that the Company will be able to attract and retain sufficient
qualified personnel to meet its business needs. See "Business -- Employees" and
"Management."
SIGNIFICANT LEVERAGE AND DEPENDENCE ON SHORT-TERM BORROWINGS
The Company is leveraged. As of December 31, 1996, on a pro forma basis
after giving effect to the Offering and the use of the proceeds therefrom, the
Company's total indebtedness would have been approximately $450.1 million, as
compared to shareholders' equity of approximately $145.1 million. The Company
and its subsidiaries are heavily dependent on
7
<PAGE>
these credit facilities to finance purchases of inventory and to provide working
capital. The Company's principal short-term credit facilities expire in June
1998. Although the Company has always maintained sufficient liquidity to conduct
operations, failure to obtain sufficient short-term borrowings would have a
material adverse effect on the Company. See "Use of Proceeds," "Capitalization"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
INTERNATIONAL BUSINESS RISKS
The Company's international operations are subject to a number of political
and economic risks, including unsettled social and political conditions,
nationalization, expropriation, import and export restrictions, confiscatory
taxation, exchange controls, renegotiation or nullification of existing
contracts, inflationary economies and currency risks, strikes and risks related
to the restrictions of repatriation of earnings or proceeds from liquidated
assets of foreign subsidiaries. In certain countries, the Company has advanced
funds or guaranteed local loans or lines of credit for the purchase of tobacco
from growers, and expects to continue such practices in the future. Risk of
repayment is normally limited to the tobacco season, and the maximum exposure
occurs within a shorter period.
The Company's tobacco business is generally conducted in U.S. dollars, as
is the business of the industry as a whole. However, local country operating
costs, including the purchasing and processing costs for tobaccos, are subject
to the effects of exchange fluctuations of the local currency against the U.S.
dollar. The Company attempts to minimize such currency risks by matching the
timing of its working capital borrowing needs against the tobacco purchasing and
processing funds requirements in the currency of the country of tobacco origin.
Fluctuations in the value of foreign currencies can significantly affect the
Company's operating results.
Wool purchases and sales are typically denominated in the currency of the
source country and destination country, respectively. The Company typically pays
for its wool purchases in the currency of the country of origin, and generally
hedges the currencies of its purchase and sale commitments with forward
transactions.
The Company regularly monitors its foreign exchange position and has not
experienced material gains or losses on foreign exchange fluctuations. The
Company enters into forward contracts solely for the purpose of limiting its
exposure to short-term changes in foreign exchange rates. The Company does not
engage in currency transactions for the purpose of speculation.
COMPETITION
The leaf tobacco industry is highly competitive. Competition among 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. Most of the Company's
principal customers also purchase tobacco from the Company's major competitors,
Universal Corporation ("Universal") and Dimon, Incorporated ("Dimon"). On
February 14, 1997, Dimon announced that it had signed a definitive agreement to
acquire, on or about April 1, 1997, Intabex Holdings Worldwide S.A. As a result
of this transaction, there will be only three global independent leaf tobacco
merchants, including the Company. Unless otherwise indicated, statements in this
Prospectus relating to the leaf tobacco industry and the Company's competition
assume that such acquisition has been consummated. There can be no assurance
that the Company will be able to successfully compete against Universal or
Dimon, which have greater financial resources than the Company. Industry
consolidation may also have an adverse impact on the Company's efforts to
establish and maintain itself as a reliable and preferred supplier of leaf
tobacco to the major multinational cigarette manufacturers. See "Business --
Tobacco -- Competition."
The wool industry is highly fragmented, with substantially more competitors
than the leaf tobacco industry. The Company's major competitors, some of which
have greater financial resources than the Company, include Chargeurs S.A., a
publicly traded French company; Anselme Dewavrin et Fils S.A. ("ADF"), a private
French company; Bremer Woll-Kaemmerei, A.G. ("BWK"), a publicly traded German
company; and a number of Japanese trading firms. There can be no assurance that
the Company will be able to successfully compete in the wool industry. See
"Business -- Wool -- Competition."
POOR MARKET CONDITIONS IN THE WOOL INDUSTRY
The wool industry has suffered from poor market conditions in recent years.
Following record high prices for wool in 1988, the demand for wool decreased
dramatically beginning in 1989 as a result of a number of factors, including the
withdrawal of China from international wool markets, economic and political
turmoil in Eastern Europe and the states of the
8
<PAGE>
Former Soviet Union, and recessionary conditions in Western Europe. The
resulting oversupply of wool led to a decision by the Australian government in
1991 to abandon its price support program. Consequently, under these free market
conditions, wool prices fell immediately and substantially, creating difficult
trading conditions for the wool industry, and establishing the market conditions
necessary for a correction in what had become a major imbalance between supply
and demand. Prior to abandonment of the price support program in 1991, the
Australian government accumulated a large stockpile of wool, equivalent to
approximately one year's Australian production. At present, Wool International,
an organization established by the Australian government to manage and market
the stockpile, is required by law to dispose of 23,625 metric tons of wool per
quarter until June 30, 1997, at which time the disposal rate will be adjusted to
a minimum of 15,750 metric tons per quarter. Although the demand for wool has
strengthened since the late 1980s and the stockpile maintained by Wool
International has been significantly reduced since 1991, there can be no
assurance that the supply/demand imbalance of wool characterizing such periods
will not return. If they do, or if the rate of liquidation of the stockpile were
increased, the Company's wool business could be materially adversely affected.
See "Business -- Wool -- The Wool Industry."
RESTRICTIONS ON DIVIDENDS
Although the Company has historically paid quarterly cash dividends, the
Board of Directors, in response to a tightening of the Company's financial
resources, decided to suspend such dividend payments in December 1995, and has
instead issued quarterly stock dividends since that time. The Board of Directors
intends to return to the Company's historical cash dividend policy at such time
as the Company's financial position justifies such action. The payment and
amount of future dividends will depend upon the Company's financial condition,
earnings and capital requirements and such other factors as the Board of
Directors deems relevant. In addition, certain debt agreements to which the
Company and its subsidiaries are parties contain financial covenants, including
covenants to maintain a designated maximum leverage ratio and a minimum tangible
net worth, which could have the effect of restricting or prohibiting the payment
of cash dividends. At this time, it is uncertain when or if the Company will
resume the payment of cash dividends. See "Price Range of Common Stock and
Dividends."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered by the Company hereby are estimated to be $57.0 million
based upon an assumed offering price of $17.375 per share, after deducting the
estimated underwriting discount and offering expenses. The Company will not
receive any proceeds from the sale of the Common Stock offered by the Selling
Shareholder. The Company intends to use the net proceeds to repay short-term
indebtedness currently outstanding under the $191.0 million Master Facilities
Agreement (the "MFA") between the Company and certain of its subsidiaries and
Deutsche Bank A.G. and a number of other banks. The MFA provides financing for
certain of the Company's non-U.S. tobacco operations and expires in June 1998.
As of February 28, 1997, interest accrued on borrowings outstanding under the
MFA bore interest at LIBOR plus 225 basis points. Under the terms of the MFA,
the anticipated repayment will result in a reduction in the interest rate
thereunder to LIBOR plus 125 basis points.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 on an actual basis and as adjusted to give effect to the sale
of the Shares offered by the Company hereby at an assumed offering price of
$17.375 per share, after deducting the estimated underwriting discount and
offering expenses, and the application of the net proceeds therefrom. The
information in the table below is qualified in its entirety by, and should be
read in conjunction with, the unaudited Consolidated Financial Statements
(including the Notes thereto) of the Company included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1996
ACTUAL AS ADJUSTED
<S> <C> <C>
(IN THOUSANDS)
Cash................................................................................................ $ 55,849 $ 55,849
Short-term debt:
Short-term borrowings............................................................................... $402,598 $ 345,605
Current portion of long-term debt................................................................... 8,418 8,418
Total short-term debt.......................................................................... $411,016 354,023
Long-term debt:
Long-term debt...................................................................................... $ 27,042 $ 27,042
Convertible subordinated debentures................................................................. 69,000 69,000
Total long-term debt........................................................................... 96,042 96,042
Shareholders' equity:
Preferred stock, par value $1.65 per share; 1,000,000 shares authorized;
87,477 shares issued to ESOP, actual and as adjusted (1).......................................... -- --
Common stock, $0.20 par value; 20,000,000 shares authorized;
11,989,564 shares issued, actual; 15,489,564 issued, as adjusted (2).............................. 2,398 3,098
Additional paid-in capital.......................................................................... 47,786 104,079
Unearned restricted stock plan compensation......................................................... (365) (365)
Treasury stock at cost; 2,566,129 shares, actual and as adjusted.................................... (3,340) (3,340)
Retained earnings................................................................................... 51,900 51,900
Cumulative translation adjustments.................................................................. (10,249) (10,249)
Total shareholders' equity..................................................................... 88,130 145,123
Total long-term debt and shareholders' equity................................................ $184,172 $ 241,165
</TABLE>
(1) On January 31, 1997, the Company terminated the Employee Stock Ownership
Plan (the "ESOP") established by W A Adams Company prior to that company's
acquisition by the Company. This termination involved the redemption by the
Company of 24,602 shares of ESOP Preferred Stock for an aggregate of
$2,460,287 in cash and the issuance of 14,075 shares of Common Stock. The
remaining 62,875 shares of unallocated ESOP Preferred Stock were cancelled.
(2) Since December 31, 1996, the Company has issued: (i) the 14,075 share of
Common Stock referred to in footnote 1; (ii) 1,817 shares of Common Stock as
the Company's matching contribution to its 401(k) Savings Incentive Plan;
(iii) 69 shares of Common Stock pursuant to its Dividend Reinvestment Plan;
and (iv) 119,815 shares of Common Stock pursuant to a stock dividend in
March 1997, of which 25,661 shares are treasury stock.
10
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is traded on the NYSE under the symbol "STW."
The Common Stock began trading on the NYSE on April 12, 1988 and traded on the
national over-the-counter market for many years prior thereto. The following
table sets forth for the periods indicated the high and low sales prices of the
Common Stock as reported by the NYSE and the amount of dividends declared per
share for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
<S> <C> <C> <C>
FISCAL YEAR ENDING MARCH 31, 1997:
Fourth Quarter (through March 20, 1997).............................................. $20.125 $17.375 1% Stock
Third Quarter........................................................................ 20.75 11.75 1% Stock
Second Quarter....................................................................... 15.00 11.25 1% Stock
First Quarter........................................................................ 12.00 8.25 1% Stock
FISCAL YEAR ENDED MARCH 31, 1996:
Fourth Quarter....................................................................... 10.375 7.50 1% Stock
Third Quarter........................................................................ 12.25 9.25 1% Stock
Second Quarter....................................................................... 14.75 10.50 1% Stock
First Quarter........................................................................ 15.125 13.25 1% Stock
FISCAL YEAR ENDED MARCH 31, 1995:
Fourth Quarter....................................................................... 15.125 12.125 1% Stock
Third Quarter........................................................................ 15.875 11.125 1% Stock
Second Quarter....................................................................... 16.125 13.125 $0.10
First Quarter........................................................................ 18.875 14.75 $0.10
</TABLE>
The last sale price of the Common Stock as reported on the NYSE on March
20, 1997 was $17.375. As of March 20, 1997, there were approximately 600 holders
of record of the Common Stock.
Although the Company has historically paid quarterly cash dividends, the
Board of Directors, in response to a tightening of the Company's financial
resources, decided to suspend such dividend payments in December 1995, and has
instead issued quarterly stock dividends since that time. The Board of Directors
intends to return to the Company's historical cash dividend policy at such time
as the Company's financial position justifies such action. The payment and
amount of future dividends will depend upon the Company's financial condition,
earnings and capital requirements and such other factors as the Board of
Directors deems relevant. In addition, certain debt agreements to which the
Company and its subsidiaries are parties contain financial covenants, including
covenants to maintain a designated maximum leverage ratio and a minimum tangible
net worth, which could have the effect of restricting or prohibiting the payment
of cash dividends. Under its most restrictive covenant, the Company had
approximately $11.6 million of retained earnings available for distribution as
dividends at December 31, 1996. At this time, it is uncertain when or if the
Company will resume the issuance of cash dividends.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the Company for the periods and at the dates indicated. The selected
financial data, at or for each of the full fiscal years presented below was
derived from, and is qualified by reference to, the Consolidated Financial
Statements of the Company, which have been audited by Deloitte & Touche LLP,
independent auditors. The selected financial data for the nine months ended
December 31, 1996 and 1995 are derived from consolidated financial statements
that have not been audited. In the opinion of management, the unaudited
consolidated financial data include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the consolidated
financial position and results of operations for that period. The results of
operations for the nine months ended December 31, 1995 and 1996 are not
necessarily indicative of the results of operations for a full fiscal year. The
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and with the Consolidated
Financial Statements (including the Notes thereto) appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
1996 1995 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales.......................................... $933,526 $956,716 $1,359,450 $1,213,565 $1,042,014 $1,236,084
Cost of sales:
-- Materials, services and supplies......... 837,929 872,812 1,227,568 1,097,119 961,916 1,092,555
-- Interest................................. 23,795 28,358 41,369 34,981 29,416 31,633
Gross profit................................. 71,802 55,546 90,513 81,465 50,682 111,896
Selling, general and administrative expenses... 54,556 55,850 77,608 80,509 78,731 73,925
Restructuring charges.......................... -- 12,500 12,500 -- -- --
Interest expense............................... 7,490 6,830 9,559 9,947 7,173 8,183
Interest income................................ 3,042 3,293 4,430 4,644 5,884 5,829
Other income (expense), net.................... 4,116 2,115 6,982 14,327 4,901 1,674
Income (loss) before taxes................... 16,914 (14,226) 2,258 9,980 (24,437) 37,291
Income taxes................................... 5,996 2,522 6,836 16,370 5,070 12,546
Income (loss) after taxes.................... 10,918 (16,748) (4,578) (6,390) (29,507) 24,745
Minority interests............................. (2,680) (2,263) (4,795) (9,634) (3,765) (2,421)
Equity in earnings (losses) of affiliates...... 661 541 (69) (4,470) (3,226) (104)
Income (loss) from continuing operations
(1)........................................ 8,899 (18,470) (9,442) (20,494) (36,498) 22,220
Income (loss) from discontinued operations... -- 10,050 10,050 (10,050) 689 (1,547)
Extraordinary items............................ -- -- -- -- -- 503
Cumulative effect of accounting changes........ -- -- -- -- 23 --
ESOP preferred stock dividends, net of tax..... (347) (358) (474) (485) (486) (364)
Net income (loss) applicable to common
stock...................................... $ 8,552 $ (8,778) $ 134 $ (31,029) $ (36,272) $ 20,812
Primary earnings (loss) per common share:
-- From continuing operations (1)........... $ 0.92 $ (2.12) $ (1.11) $ (2.43) $ (4.32) $ 2.58
-- Net of discontinued operations........... 0.92 (0.99) 0.01 (3.60) (4.24) 2.46
Fully diluted earnings (loss) per common share:
-- From continuing operations (1)........... * * * * * $ 2.34
-- Net of discontinued operations........... * * * * * 2.25
Weighted-average shares outstanding:
Primary...................................... 9,264 8,888 8,934 8,619 8,553 8,448
Fully diluted................................ * * * * * 10,771
OTHER DATA:
Gross profit, net of interest (2).............. $ 95,597 $ 83,904 $ 131,882 $ 116,446 $ 80,098 $ 143,529
Gross margin, net of interest.................. 10.2% 8.8% 9.7% 9.6% 7.7% 11.6%
Operating income, net of interest (3).......... 48,199 20,962 53,186 54,908 12,152 77,107
Operating margin, net of interest.............. 5.2% 2.2% 3.9% 4.5% 1.2% 6.2%
Tobacco inventory.............................. 255,382 230,734 160,721 194,344 268,948 305,256
Depreciation and amortization.................. 14,366 19,391 24,393 16,413 16,260 16,524
Capital expenditures........................... 9,441 9,349 12,211 17,328 27,257 24,096
BALANCE SHEET DATA:
Working capital................................ $ 66,802 $ 52,898 $ 55,798 $ 53,187 $ 70,484 $ 167,295
Total assets................................... 808,509 829,163 782,824 813,489 890,771 926,367
Total debt..................................... 507,058 519,381 486,108 492,257 597,232 598,609
Shareholders' equity........................... 88,130 73,664 80,172 84,950 102,649 151,110
<CAPTION>
1992
<S> <C>
STATEMENT OF OPERATIONS DATA:
Sales.......................................... $1,173,300
Cost of sales:
-- Materials, services and supplies......... 1,035,762
-- Interest................................. 31,114
Gross profit................................. 106,424
Selling, general and administrative expenses... 68,412
Restructuring charges.......................... --
Interest expense............................... 6,815
Interest income................................ 4,892
Other income (expense), net.................... 1,583
Income (loss) before taxes................... 37,672
Income taxes................................... 11,048
Income (loss) after taxes.................... 26,624
Minority interests............................. (3,593)
Equity in earnings (losses) of affiliates...... 812
Income (loss) from continuing operations
(1)........................................ 23,843
Income (loss) from discontinued operations... (2,216)
Extraordinary items............................ 624
Cumulative effect of accounting changes........ --
ESOP preferred stock dividends, net of tax..... --
Net income (loss) applicable to common
stock...................................... $ 22,251
Primary earnings (loss) per common share:
-- From continuing operations (1)........... $ 2.89
-- Net of discontinued operations........... 2.70
Fully diluted earnings (loss) per common share:
-- From continuing operations (1)........... $ 2.77
-- Net of discontinued operations........... 2.59
Weighted-average shares outstanding:
Primary...................................... 8,246
Fully diluted................................ 9,059
OTHER DATA:
Gross profit, net of interest (2).............. $ 137,538
Gross margin, net of interest.................. 11.7%
Operating income, net of interest (3).......... 75,601
Operating margin, net of interest.............. 6.4%
Tobacco inventory.............................. 187,079
Depreciation and amortization.................. 10,229
Capital expenditures........................... 21,543
BALANCE SHEET DATA:
Working capital................................ $ 145,649
Total assets................................... 723,819
Total debt..................................... 447,673
Shareholders' equity........................... 132,997
</TABLE>
* Not applicable because fully diluted calculations included adjustments which
are antidilutive.
(1) Before extraordinary items in 1993 and 1992 of $503,000 and $624,000,
respectively, and cumulative effect of change in accounting principles in
1994 of $23,000.
(2) Excludes interest included in cost of sales.
(3) Defined as income (loss) before taxes, net of interest included in cost of
sales and other interest expense.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is principally engaged in purchasing, processing, storing,
selling and shipping leaf tobacco. The Company also purchases, processes and
sells various types of wool. For both the tobacco and wool business, the ability
to obtain raw materials at favorable prices is an important element of
profitability although it is generally more important for wool than for tobacco
because some customers pay the Company to purchase and process tobacco on a
cost-plus basis. Obtaining raw materials at favorable prices must be coupled
with a thorough knowledge of the types and grades of raw materials to assure the
profitability of processing and blending to a customer's specifications.
Processing is capital intensive and profit therefrom depends upon the volume of
material processed and the efficiency of the factory operations. Due to the much
larger number of dealers and customers for wool and the far more numerous trades
involved, wool revenue tends to be more susceptible to market price fluctuations
than tobacco.
Historically, the cost of the Company's materials, services and supplies
has exceeded 85.0% of revenues. In the wool business, freight charges are also a
significant element of the cost of sales. The cost of raw materials, interest
expense and certain processing and freight costs are variable and thus are
related to the level of sales. Most procurement costs (other than raw
materials), certain processing costs, and most selling, general and
administrative expenses ("SG&A") are fixed. The major elements of SG&A are
employee costs, including salaries, and marketing expenses.
Tobacco sales are generally denominated in U.S. dollars whereas wool
purchases and sales are typically denominated in the currency of the source
country and destination country, respectively. The Company regularly monitors
its foreign exchange position and has not experienced material gains or losses
on foreign exchange fluctuations. The Company enters into forward contracts
solely for the purpose of limiting its exposure to short-term changes in foreign
exchange rates.
Assets and liabilities of foreign subsidiaries are translated at period-end
exchange rates. The effects of these translation adjustments are reported as a
separate component of shareholders' equity. 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. See "Risk
Factors -- International Business Risks."
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Income as a percentage of sales for the nine-month periods ended
December 31, 1996 and 1995 and the three most recent fiscal years. Any reference
in the table and the following discussion to any given year is a reference to
the Company's fiscal year ended March 31.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
1996 1995 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales
-- Materials, services and supplies....................... 89.8 91.2 90.3 90.4 92.3
-- Interest............................................... 2.5 3.0 3.0 2.9 2.8
Gross profit............................................ 7.7 5.8 6.7 6.7 4.9
Selling, general and administrative expenses................. 5.8 5.8 5.7 6.6 7.6
Restructuring charges........................................ -- 1.3 0.9 -- --
Interest expense............................................. 0.8 0.7 0.7 0.8 0.7
Interest income.............................................. 0.3 0.3 0.3 0.4 0.6
Other income (expense), net.................................. 0.4 0.2 0.5 1.2 0.5
Income (loss) before taxes.............................. 1.8 (1.5) 0.2 0.8 (2.3)
Income taxes................................................. 0.6 0.3 0.5 1.3 0.5
Minority interests........................................... 0.3 0.2 0.4 0.8 0.4
Equity in earnings (losses) of affiliates.................... 0.1 0.1 0.0 (0.4) (0.3)
Income (loss) from continuing operations................ 1.0% (1.9)% (0.7)% (1.7)% (3.5)%
</TABLE>
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1996 TO NINE MONTHS ENDED DECEMBER
31, 1995
SALES. Sales for the nine months ended December 31, 1996 were $933.5
million, a decrease of 2.4% from the prior year period. Sales for the tobacco
division were $669.3 million, an increase of 4.2% from the corresponding period
in 1995. The increase in tobacco division sales was due to higher average prices
and improved sales mix. Tobacco volumes sold decreased by 6.3% from the prior
year period due to the inclusion in the prior year period of sales of past year
inventories while 1996 sales were mainly of current crop tobacco. Volume
increases in the United States and Turkey partially offset small declines in
other areas.
Nontobacco sales for the nine months ended December 31, 1996 were $264.3
million, a decrease of 16.0% from the prior year period. The decrease in
nontobacco sales was primarily due to lower average wool prices. Wool volumes
sold were level with the prior year period as volume increases in Argentina,
South Africa and the United Kingdom were offset by declines in other markets.
GROSS PROFIT AND COST OF SALES. Gross profit for the nine months ended
December 31, 1996 increased by $16.3 million from $55.5 million in the prior
year period to $71.8 million and increased as a percentage of sales. Gross
profit for the tobacco division increased by $8.1 million from $51.3 million, or
8.0% of tobacco division sales, in the prior period to $59.4 million, or 8.9% of
tobacco division sales. The increase in tobacco division gross profit was due
primarily to the 4.2% increase in tobacco division sales and a 15.6% decrease in
interest.
Nontobacco gross profit for the nine months ended December 31, 1996
increased by $8.1 million from $4.3 million, or 1.4% of nontobacco sales, in the
prior period to $12.4 million, or 4.7% of nontobacco sales. The increase in wool
division gross profit was due to a 18.9% decrease in materials, services and
supplies and a 17.4% decrease in interest.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended December 31, 1996 decreased by
$1.3 million and remained constant as a percentage of sales. Selling, general
and administrative expenses for the tobacco division increased by $1.2 million
from $37.4 million, or 5.8% of tobacco division sales, in the prior period to
$38.6 million, or 5.8% of tobacco division sales.
Nontobacco selling, general and administrative expenses for the nine months
ended December 31, 1996 decreased by $2.4 million from $18.4 million, or 5.9% of
nontobacco sales, in the prior period to $16.0 million, or 6.1% of nontobacco
sales. The increase in nontobacco selling, general and administrative expenses
as a percentage of sales was due to the 16.0% reduction in nontobacco sales.
RESTRUCTURING CHARGES. Restructuring charges for the nine months ended
December 31, 1995 of $12.5 million ($11.0 million after tax) reflect a provision
made for the restructuring of the nontobacco operations. The major components of
the restructuring charges relate to the wool division and include: (i)
approximately $2.1 million associated with the closure of the
14
<PAGE>
wool processing facility in Argentina; (ii) approximately $3.6 million for the
write-off of goodwill; (iii) approximately $2.8 million associated with the
write-off of export incentive allowances; and (iv) approximately $2.5 million of
expenses related to the terminated sale of the wool division and other
miscellaneous restructuring costs. To date in Argentina, the wool processing
operations have been discontinued, the factory has been leased to a third party,
181 employees have been terminated and certain impaired assets have been written
down. In Australia, operations have been consolidated under one management team
to better and more efficiently serve this market. The wool tops departments in
the German and French companies have been reorganized to streamline their
marketing efforts. The Company has undertaken a feasibility study to improve
operational efficiencies in the French topmaking factory. For the nine months
ended December 31, 1996, the restructuring resulted in lower depreciation and
amortization expense of approximately $624,000 and lower personnel costs of
approximately $169,000.
INTEREST EXPENSE, INTEREST INCOME AND OTHER INCOME (EXPENSE), NET. Interest
expense for the nine months ended December 31, 1996 increased by $0.7 million
due to higher borrowings in South Africa and the oriental tobacco business.
Interest income remained constant versus the prior period. Other income
(expense), net for the nine months ended December 31, 1996 increased by $2.0
million due to a sale of marketable securities in a European subsidiary.
INCOME TAXES, MINORITY INTERESTS AND EQUITY IN EARNINGS (LOSSES) OF
AFFILIATES. Income taxes increased $3.5 million for the nine months ended
December 31, 1996 compared to the prior year period. Prior year income tax
provisions were required for certain jurisdictions where profits were earned
despite overall pretax losses. Income tax charges or credits vary as a
percentage of pretax income or loss due to differences in tax rates and relief
available in areas where profits are earned or losses are incurred.
Minority interests for the nine months ended December 31, 1996 increased by
$0.4 million due to sales and earning increases in the Company's 51.0% owned
oriental tobacco businesses in Greece and Turkey.
Equity in earnings (losses) of affiliates for the nine months ended
December 31, 1996 remained essentially constant with the prior year period both
in absolute dollars and as a percentage of sales.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income (loss) from continuing
operations for the nine months ended December 31, 1996 increased by $27.4
million from a loss of $18.5 million in the prior period to $8.9 million. Income
(loss) from discontinued operations in 1995 reflect the reversal of a $10.1
million provision for the loss on the disposal of the wool division. An
agreement to sell this division expired by its terms in December 1995. Net
income for the nine months ended December 31, 1996 was $8.9 million, or $0.92
per share, compared to a net loss of $8.4 million, or $0.99 per share, for the
prior year period.
COMPARISON OF THE YEAR ENDED MARCH 31, 1996 TO THE YEAR ENDED MARCH 31, 1995
SALES. Sales for 1996 were $1,359.5 million, an increase of 12.5% from the
prior year. Sales for the tobacco division were $925.5 million, an increase of
22.4% from 1995. The increase in tobacco division sales was due to a 10.4%
increase in volumes, higher average prices and a change in sales mix. Tobacco
sales in the United States achieved record volumes despite lower processing for
stabilization pools. Gains in Turkey resulted largely from sales of old crop
tobacco purchased from the local monopoly. Increased demand in Greece combined
with the timing of shipments led to substantial increases in sales. Volume
growth continued in Malawi and Zimbabwe and the Company is continuing to expand
in certain secondary markets in Africa.
Nontobacco sales for 1996 were $434.0 million, a decrease of 5.2% from the
prior year. The decrease in nontobacco sales was primarily due to lower wool
volumes, which decreased 13.6% from the prior year. Various factors resulted in
difficult trading conditions in the wool industry. The lowering of worldwide
inventory levels, a drop in European apparel sales, and tighter controls on
imports in China were major factors in the 33.3% year-to-year drop in the
Australian market price indicator. Sales of merino wool for the apparel industry
were affected most drastically. The Company believes that wool prices will
slowly rise over the next few years as the Australian stockpile is further
reduced.
GROSS PROFIT AND COST OF SALES. Gross profit for 1996 increased by $9.0
million from $81.5 million in the prior year to $90.5 million and remained
constant as a percentage of sales. Gross profit for the tobacco division
increased by $31.3 million from $49.2 million, or 6.5% of tobacco division
sales, in the prior year to $80.5 million, or 8.7% of tobacco division sales.
The increase in tobacco division gross profit was primarily due to the 22.4%
increase in the tobacco division sales.
Nontobacco gross profit for 1996 decreased by $22.2 million from $32.2
million, or 7.0% of nontobacco sales, in the prior year to $10.0 million, or
2.3% of nontobacco sales. The decrease in nontobacco gross profit was due to the
5.2% decrease in sales and a 21.3% increase in interest.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1996 decreased by $2.9 million and decreased as a
percentage of sales. Selling, general and administrative expenses for the
tobacco division
15
<PAGE>
decreased by $3.8 million from $57.3 million, or 7.6% of tobacco division sales,
in the prior year to $53.5 million, or 5.8% of tobacco division sales. The
decrease in tobacco division selling, general and administrative expenses as a
percentage of sales in 1996 was due to significant provisions for receivables,
debt restructuring and redundancy costs of $6.5 million, $2.0 million and $0.5
million, respectively, that were taken in 1995.
Nontobacco selling, general and administrative expenses for 1996 increased
by $0.8 million from $23.3 million, or 5.1% of nontobacco sales, in the prior
year to $24.1 million, or 5.6% of nontobacco sales. The increase in nontobacco
selling, general and administrative expenses as a percentage of sales was
primarily due to the effect of lower prices on sales.
RESTRUCTURING CHARGES. Restructuring charges for 1996 of $12.5 million
($11.0 million after tax) reflect a provision made for the restructuring of the
nontobacco operations. The major components of the restructuring charges relate
to the wool division and include: (i) approximately $2.1 million for closure of
a wool processing facility in Argentina; (ii) approximately $3.6 million for the
write-off of goodwill; (iii) approximately $2.8 million associated with the
write-off of export incentive allowances; and (iv) approximately $2.5 million
for expenses related to the terminated sale of the wool division and other
miscellaneous restructuring costs.
INTEREST EXPENSE, INTEREST INCOME AND OTHER INCOME (EXPENSE), NET. Interest
expense and interest income for 1996 remained essentially constant with the
prior year. Other income (expense), net for 1996 decreased by $7.3 million from
1995, as a $13.5 million pretax gain on the disposal of assets in Korea in 1995
more than offset a 1996 gain on the sale of marketable securities in Turkey and
proceeds from staff training subsidies in Greece.
INCOME TAXES, MINORITY INTERESTS AND EQUITY IN EARNINGS (LOSSES) OF
AFFILIATES. Income taxes for 1996 totaled $6.8 million compared to $16.4 million
the prior year. Income taxes in 1995 included a provision of $1.8 million for an
income tax assessment under appeal and a nonrecurring charge of $1.6 million on
dividends remitted by a foreign subsidiary that could not be offset by foreign
tax credits. In both years, income tax provisions were required for certain
jurisdictions where profits were earned despite overall pretax losses. Tax
charges or credits vary as a percentage of pretax income or loss due to
differences in tax rates and relief available in areas where profits are earned
or losses are incurred.
Minority interests for 1996 decreased by $4.8 million from the prior year.
The portion of income attributable to minority interest of $9.6 million in 1995
included the gain on the sale of property in Korea discussed above.
Equity in earnings (losses) of affiliates for 1996 decreased by $4.4
million from the prior year. The Company's share of losses in affiliates
decreased to $69,000 in 1996 from $4.5 million in 1995 primarily because the
prior year included losses by an Italian affiliate which became a consolidated
subsidiary in December 1996.
INCOME (LOSS) FROM CONTINUING OPERATIONS. The loss from continuing
operations for 1996 decreased by $11.1 million from the prior year. Income
(loss) from discontinued operations reflects the $10.1 million provision made in
1995 for a loss on the disposal of the wool division. When the sales agreement
lapsed in December 1995 due principally to difficulty in obtaining certain
regulatory approvals and declining market conditions, the provision was reversed
in 1996 and overall net income in 1996 was $608,000, or $0.01 per share,
compared to a net loss of $30.5 million, or $3.60 per share, in 1995.
COMPARISON OF THE YEAR ENDED MARCH 31, 1995 TO THE YEAR ENDED MARCH 31, 1994
SALES. Sales for 1995 were $1,213.6 million, an increase of 16.5% from the
prior year. Sales for the tobacco division were $756.0 million, an increase of
12.6% from 1994. The increase in tobacco division sales was due to higher
volumes, partly offset by lower prices reflecting the lagging effect of the
worldwide surplus that began in 1993 and only started to be corrected in 1995.
Tobacco volumes increased 17.8% from the prior year due to increases in the
oriental tobacco business and a special order for old tobacco stocks purchased
from the Turkish tobacco monopoly.
Nontobacco sales for 1995 were $457.6 million, an increase of 23.5% from
the prior year. The increase in nontobacco sales was primarily due to higher
wool prices, changes in the sales mix and increased volumes of 1.5% from the
prior year.
GROSS PROFIT AND COST OF SALES. Gross profit for 1995 increased by $30.8
million from $50.7 million in the prior year to $81.5 million and increased as a
percentage of sales. Gross profit for the tobacco division increased by $25.2
million from $24.0 million, or 3.6% of tobacco division sales, in the prior year
to $49.2 million, or 6.5 % of tobacco division sales. The increase in tobacco
division gross profit as a percentage of tobacco sales was due to sales gains
and inventory write-offs necessary in 1994. The inventory write-offs were due to
severely depressed tobacco prices during 1994 and deferrals of purchases by many
manufacturers that resulted in the Company having a much higher level of tobacco
inventory.
Nontobacco gross profit for 1995 increased by $5.5 million from $26.7
million in the prior year to $32.2 million and remained constant as a percentage
of nontobacco sales. The increase in nontobacco gross profit was due to the
23.5% increase in sales.
16
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1995 increased by $1.8 million from the prior year
and decreased as a percentage of sales. Selling, general and administrative
expenses for the tobacco division increased by $0.6 million from $56.7 million,
or 8.4% of tobacco division sales, in the prior year to $57.3 million, or 7.6%
of tobacco division sales. Significant items included in 1995 were provisions
against receivables from an Italian affiliate of $6.5 million and redundancy and
debt restructuring costs of $2.5 million.
Nontobacco selling, general and administrative expenses for 1995 increased
by $1.2 million from $22.1 million, or 6.0% of nontobacco sales, in the prior
year to $23.3 million, or 5.1% of nontobacco sales. The increase in nontobacco
selling, general and administrative expenses was due to the 23.5% increase in
nontobacco sales.
INTEREST EXPENSE, INTEREST INCOME AND OTHER INCOME (EXPENSE), NET. Interest
expense for 1995 increased $2.8 million from the prior year primarily due to an
increase in the weighted-average interest rate on borrowings from 6.7% to 9.8%.
Interest income decreased $1.2 million due to reduced earnings on short-term
deposits. Other income (expense), net for 1995 increased by $9.4 million from
the prior year due primarily to a $13.5 million pretax gain on the disposal of
properties in Korea in 1995 as compared to a $3.2 million gain on sale of
property in Turkey in 1994.
INCOME TAXES, MINORITY INTERESTS AND EQUITY IN EARNINGS (LOSSES) OF
AFFILIATES. Income taxes for 1995 were $11.3 million higher than for 1994 and
included a provision of $1.8 million for an income tax assessment under appeal
and $1.6 million on dividends remitted by a foreign subsidiary that could not be
offset by foreign tax credits. In both years, income tax provisions were
required in certain jurisdictions where profits were earned despite overall
pretax losses from the prior year. Income tax charges or credits vary as a
percentage of pretax income or loss due to differences in tax rates and relief
available in areas where profits are earned or losses incurred.
Minority interests for 1995 increased by $5.9 million from the prior year
due primarily to the gain on sale of property by a subsidiary in Korea where the
Company has a 52.8% interest.
Equity in earnings (losses) of affiliates for 1995 increased by $1.2
million from the prior year due to further losses incurred by an Italian
affiliate.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income (loss) from continuing
operations for 1995 increased by $16.0 million from a loss of $36.5 million in
the prior year to a loss of $20.5 million. Income (loss) from discontinued
operations in 1995 reflects the anticipated loss on disposal of the wool
division (which was reversed in 1996) versus a gain in 1994 on disposal of the
nursery business. For 1995, the Company recorded a loss of $30.5 million, or
$3.60 per share, compared to a loss of $35.8 million, or $4.24 per share, in
1994.
SEASONALITY AND QUARTERLY RESULTS
The purchasing and processing of tobacco and wool are dependent on
agricultural cycles and are seasonal in nature. These cycles and this
seasonality, together with the timing of shipments and variations in the mix of
sales, causes quarterly fluctuations in financial results. See "Risk
Factors -- Variability of Annual and Quarterly Results." The following table
sets forth items from the Company's interim Consolidated Statements of Income
for the quarterly periods indicated and does not take account of certain
reconciliations and adjustments made at year end.
<TABLE>
<CAPTION>
1995 1996 1997
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Sales...................... $253,249 $225,049 $301,880 $433,387 $296,964 $282,196 $377,555 $402,735 $310,391
Cost of sales
-- Materials, services and
supplies............... 230,961 202,599 269,159 394,400 272,700 258,311 341,799 354,758 280,894
-- Interest............... 6,213 7,460 9,471 11,837 9,790 9,123 9,445 13,011 7,611
Gross profit, net of
interest................. 22,288 22,450 32,721 38,987 24,264 23,885 35,756 47,977 29,497
Operating income, net of
interest (1)............. 5,065 4,637 14,990 11,245 5,456 5,543 4,555 26,220 11,501
Income (loss) from
continuing operations.... (1,171) (4,077) 296 (15,542) (6,255) (3,175) (9,040) 9,028 1,508
<CAPTION>
Q2 Q3
<S> <C> <C>
Sales...................... $249,005 $374,130
Cost of sales
-- Materials, services and
supplies............... 218,881 338,154
-- Interest............... 8,152 8,032
Gross profit, net of
interest................. 30,124 35,976
Operating income, net of
interest (1)............. 11,852 17,688
Income (loss) from
continuing operations.... 2,911 4,480
</TABLE>
(1) Defined as income (loss) before taxes, net of interest included in cost of
sales and other interest expense.
LIQUIDITY AND CAPITAL EXPENDITURES
Working capital at December 31, 1996 was $66.8 million, up from $52.9
million at December 31, 1995 as contributions from operating activities resulted
in reduced borrowings. Compared to March 31, 1996, working capital improved by
$11.0 million due to a $3.2 million reduction in the current portion of
long-term debt as well as seasonal business factors. Capital
17
<PAGE>
expenditures of $9.4 million for the nine months ended December 31, 1996 related
mostly to expansion of warehouse facilities in Greece and routine expenditures
in the U.S. tobacco division. The Company continues to closely monitor its
inventories which were down $2.6 million from the prior year primarily because
of reduced wool inventory which offset higher tobacco inventory attributable to
increased business activity and higher tobacco prices.
For 1996, cash provided by operating activities totaled $49.8 million
primarily due to an $85.6 million reduction of inventories which more than
offset a $41.3 million increase of receivables related to higher sales and an
$11.3 million reduction of payables. Cash employed in investing activities of
$16.4 million for 1996 related primarily to capital expenditures of $12.2
million mostly for tobacco activities of $10.3 million, including $5.8 million
in Turkey, $1.1 million in the United States, $1.0 million in Greece and $1.9
million for the nontobacco segment. Additionally, $7.7 million related to the
payment to the minority shareholder on the liquidation of the Korean operation.
For 1997, the Company projects capital spending of approximately $12.5 million,
excluding potential acquisitions.
FINANCING ARRANGEMENTS. The Company's revolving credit facilities include a
$100.0 million facility for U.S. tobacco operations and the $191.0 million MFA,
both of which expire in June 1998. In addition, the Company has local lines
totaling approximately $245.0 million for the African and oriental tobacco
business. Separate facilities are in place for the wool division totaling
approximately $145.0 million. In 1996, the Company's total borrowing
requirements ranged from a high of $434.0 million in November 1995 to a low of
$349.0 million in May 1995. The Company normally uses short-term bank facilities
to support working capital requirements, which typically peak in the third
quarter.
The U.S. and MFA loan agreements contain certain financial and reporting
covenants with which the Company was in compliance at December 31, 1996 and
March 31, 1996. Under its most restrictive covenant, the Company had
approximately $11.6 million of retained earnings available for distribution as
dividends at December 31, 1996. The loan agreements also include restrictions on
the amount of dividends, management fees or other distributions of capital or
income that can be upstreamed to the parent Company by its subsidiaries. Because
the subsidiaries are the Company's principal source of cash, depending on their
operating results, these restrictions could further limit the Company's ability
to pay dividends to its shareholders. See "Risk Factors -- Restrictions on
Dividends" and "Price Range of Common Stock and Dividends."
Based on the improving outlook for the business and the restructuring of
the wool division, management anticipates that it will be able to service the
interest and principal on its indebtedness, maintain adequate working capital
and provide for capital expenditures out of operating cash flow and available
borrowings under its credit facilities. The Company's future operating
performance will be subject to economic conditions and to financial, political,
agricultural and other factors, many of which are beyond the Company's control.
On January 31, 1997, the Company terminated the Employee Stock Ownership
Plan (the "ESOP") established by W A Adams Company prior to that company's
acquisition by the Company. This termination involved the redemption by the
Company of 24,602 shares of ESOP Preferred Stock for an aggregate price of
$2,460,287 in cash and the issuance of 14,075 shares of Common Stock. The
remaining 62,875 shares of unallocated ESOP Preferred Stock were cancelled.
The Company intends to continue to strengthen its financial position by
reducing its overall leverage and its reliance on short-term borrowings. In
addition to raising equity pursuant to the Offering, the Company is currently
evaluating additional financing alternatives, including a private or public
placement of long-term debt securities, the proceeds of which would be used to
further reduce short-term borrowings. There can be no assurance, however, that
the Company will be able to complete any such transactions. See "Risk
Factors -- Significant Leverage and Dependence on Short-Term Borrrowings."
TAX AND REPATRIATION MATTERS
The Company and its subsidiaries are subject to income tax laws in each of
the countries in which they do business through wholly-owned subsidiaries and
through affiliates. The Company makes a comprehensive review of the income tax
requirements of each of its operations, files appropriate returns and makes
appropriate income tax planning analyses directed toward the minimization of its
income tax obligations in these countries. Appropriate income tax provisions are
determined on an individual subsidiary level and at the corporate level on both
an interim and annual basis. These processes are followed using an appropriate
combination of internal staff at both the subsidiary and corporate levels as
well as independent outside advisors in review of the various tax laws and in
compliance reporting for the various operations.
The undistributed earnings of certain foreign subsidiaries are not subject
to additional foreign income taxes nor considered to be subject to U.S. income
taxes unless remitted as dividends. The Company intends to reinvest such
undistributed earnings indefinitely; accordingly, no provision has been made for
U.S. taxes on those earnings. The Company regularly reviews the status of the
accumulated earnings of each of its U.S. and foreign subsidiaries as part of its
overall financing plans.
18
<PAGE>
BUSINESS
Standard is principally engaged in purchasing, processing, storing, selling
and shipping leaf tobacco. The Company also purchases, processes and sells
various types of wool. In fiscal 1996, the Company derived approximately 70.0%
of its revenue from its tobacco division.
TOBACCO
The Company is one of the three global independent leaf tobacco merchants
serving the large multinational cigarette manufacturers and is one of the
largest independent merchants of oriental leaf tobacco, a key component of
Amercan-blend cigarettes. The Company also has a leading market presence in a
number of the emerging and low-cost flue-cured and burley tobacco growing
regions, including China, India, Malawi and Tanzania. Founded in 1910, the
Company purchases, processes, stores, sells and ships tobacco grown in over 30
countries, servicing cigarette manufacturers from 20 processing facilities
strategically located throughout the world.
THE LEAF TOBACCO INDUSTRY
Multinational cigarette manufacturers, with one principal exception, rely
primarily on global independent leaf tobacco merchants, such as the Company, to
process and supply leaf tobacco used in the manufacturing process. Leaf tobacco
merchants select, purchase, process, store, pack, ship and, in a growing number
of emerging markets, provide agronomy expertise and financing for growing leaf
tobacco. Presently, there are three global independent leaf tobacco merchants,
including the Company. Important trends in the leaf tobacco industry include:
GROWTH OF AMERICAN-BLEND CIGARETTES. American-blend cigarettes have gained
market share in several major foreign markets, including Asia (particularly
Pacific Rim countries), Europe and the Middle East in recent years.
American-blend cigarettes contain approximately 50.0% flue-cured, 35.0% burley
and 15.0% oriental tobacco, contain less tar and nicotine, and taste milder than
locally produced cigarettes containing dark and semioriental tobacco
historically consumed in certain parts of the world. According to the TMA,
American-blend cigarette consumption (excluding China) has increased from 1.7
trillion units in calendar 1990 to 1.9 trillion units in calendar 1996, an
increase of 10.8%. The TMA estimates that worldwide American-blend tobacco
consumption (excluding China) will increase an additional 5.5% to more than 2.0
trillion units by the year 2000. The TMA also estimates that worldwide
American-blend cigarette consumption (excluding China), as a percentage of total
consumption, has also experienced substantial growth, increasing from 47.9% in
1990 to 52.5% in 1996, and is projected to reach 54.3% by the year 2000. As
American-blend cigarettes have continued to gain global market share, the demand
for export quality flue-cured, burley and oriental tobacco sourced and processed
by leaf tobacco merchants has grown accordingly. Several multinational cigarette
manufacturers have made significant investments in the Former Soviet Union,
which the Company believes may lead to increased demand for and sale of
American-blend tobacco. As American-blend cigarettes have gained market share,
the demand for export quality American-blend tobacco sourced and processed by
the three global independent leaf tobacco merchants, including the Company, has
grown accordingly.
GROWTH IN FOREIGN OPERATIONS OF MULTINATIONAL CIGARETTE MANUFACTURERS.
Several multinational cigarette manufacturers have expanded their operations
throughout the world, including in Africa, Asia, Central and Eastern Europe and
the Former Soviet Union, in order to increase their access to and penetration of
these markets. As cigarette manufacturers expand their global operations, the
Company believes there will be increased demand for local sources of leaf
tobacco and local tobacco processing facilities, primarily due to the
semiperishable nature of unprocessed leaf tobacco and the existence of domestic
tobacco content laws in certain countries. The Company also believes that the
international expansion of cigarette manufacturers will cause these
manufacturers to place greater reliance on the services of financially strong
leaf tobacco merchants with the ability to source and process tobacco on a
global basis and to help develop higher quality local tobacco sources.
GROWTH IN FOREIGN SOURCED TOBACCO. In an effort to respond to cigarette
manufacturers' increasing demand for lower cost American-blend tobacco, the
major leaf tobacco merchants have made significant investments in Africa, Asia,
Europe and South America, the principal sources of flue-cured, burley and
oriental tobacco outside the United States. The Company expects this trend to
continue in the foreseeable future as the quality of foreign grown tobacco
continues to improve.
IMPROVED MARKET CONDITIONS. The global leaf tobacco industry is currently
recovering after experiencing a disruption in demand and reduction in pricing
during calendar 1993 and 1994. The disruption of the industry in the United
States during these years arose from a convergence of adverse factors,
including: (i) enactment of the 75/25 Rule, which was later repealed; (ii) a
below average quality 1993 tobacco crop in the United States; and (iii) the
proposal of legislation in the summer of 1993 to increase significantly the
federal excise tax on cigarettes (although such legislation was never enacted),
that resulted
19
<PAGE>
in reluctance by manufacturers to build inventories. Concurrent with the
reduction in demand for imported tobacco related to the 75/25 Rule and lower
than expected initial demand for tobacco in Africa, Asia, Central and Eastern
Europe and the Former Soviet Union, the worldwide price of tobacco declined due
to oversupply attributable to record foreign tobacco crops. This combination of
reduced demand and lower prices had a negative impact on the financial
performance of the leaf tobacco merchants and resulted in significant increases
in uncommitted tobacco inventories held by merchants.
In calendar 1994 and 1995, the demand and supply imbalance in the worldwide
tobacco market began to improve. Leaf tobacco production outside the United
States was curtailed in response to the lower prices and high levels of
uncommited inventories. The 75/25 Rule was repealed principally because it was
inconsistent with GATT, and was replaced by a series of less stringent import
quotas. This resulted in cigarette manufacturers in the United States resuming
traditional purchases of foreign sourced tobacco. The combination of lower
levels of tobacco production and increased demand had a positive impact on
worldwide tobacco prices and a corresponding positive impact on the
profitability of the industry, and resulted in significant reductions in
uncommitted tobacco inventories.
CONSOLIDATION OF TOBACCO MERCHANTS. Leaf tobacco merchants continue to
consolidate through worldwide acquisitions and mergers. As recently as 1989,
there were eight major international merchants. Presently, there are three
global independent leaf tobacco merchants, including the Company, which
purchase, process, store, sell and ship leaf tobacco worldwide. The Company
believes that it has experienced growth in tobacco revenue as a result of this
industry consolidation as the multinational cigarette manufacturers diversify
their sourcing partners of quality leaf tobacco.
BUSINESS STRATEGY
The Company recently achieved substantial improvement in its operating and
financial performance in part as a result of the implementation of a four-point
strategic plan and the enhancement of the Company's senior management team,
including the appointment of the Company's current Chief Executive Officer. The
key areas addressed by the strategic plan include: (i) information systems; (ii)
financial controls; (iii) risk management; and (iv) asset management. The
Company has improved sales from $1.0 billion in fiscal 1994 to $1.3 billion for
the 12 months ended December 31, 1996, reduced SG&A expenses as a percentage of
sales from 7.6% to 5.7% and increased operating income net of interest from
$12.2 million to $80.4 million. The Company's tobacco division, has driven this
return to profitability, increasing sales from $671.5 million in fiscal 1994 to
$952.8 million for the 12 months ended December 31, 1996, improving operating
income net of interest from a loss of $1.0 million to income of $70.2 million
and increasing average tobacco inventory turnover from 2.1 turns for the 12
months ended March 31, 1994 to 3.9 turns for the 12 months ended December 31,
1996.
INFORMATION SYSTEMS
In order to manage financial performance more effectively, the Company has
designed and developed, and is implementing worldwide, proprietary information
systems. These systems provide rapid access to critical operational, financial
and risk management information.
WORLDWIDE AVAILABLE FOR SALE ("WAFS"). WAFS provides management with daily
updates of tobacco inventories and allows management to more closely align
customer demand with the supply of tobacco on a global basis. The Company
believes it has significantly improved its ability to control and manage its
tobacco inventory risks and increase profitability through the implementation of
WAFS.
INTEGRATED ACCOUNTING. The Company has developed a fully integrated
proprietary system to monitor the flow of leaf tobacco from the date of purchase
through factory processing and shipment. The system has been implemented in the
United States, and management believes it will be installed for use in
approximately 80.0% of the tobacco division by early fiscal 1998 and will be
installed worldwide by fiscal 2000. The integrated accounting system provides
divisional, regional and area managers better methods to track and measure their
performance under corporate accountability programs.
WORLDWIDE STRATEGIC PLANNING. In fiscal 1996, the Company initiated a major
project focused on matching anticipated leaf tobacco supply with customer's
projected needs over a rolling three-year period. The Company's strategic
planning now involves review and analysis of the various grades of leaf tobacco
that will be required by customers and the Company's ability to supply them. The
strategic planning initiatives assist management in planning capital expenditure
and investment projects and in controlling inventory levels by evaluating supply
and demand on a country-by-country, customer-by-customer basis.
20
<PAGE>
FINANCIAL CONTROLS
The Company's worldwide operations include subsidiaries and affiliates
organized under local laws and structured to minimize, to the extent possible,
the adverse impact of international taxation of its global earnings. In certain
instances, the Company elected foreign organizational structures focused on
local issues rather than a centralized approach to financial and corporate
governance. Recent initiatives taken by the Company focus on shifting control
over critical decision-making from the area level to the corporate level.
ORGANIZATIONAL STRUCTURE. For operational and financial control purposes,
the tobacco division is divided into five regions (North America, South America,
Africa, Asia and Europe) and each region is subdivided into areas (usually by
country). In each division, region and area, the Company has controllers
dedicated to monitoring operational and financial performance in relation to the
Company's core corporate objectives. To ensure compliance with these objectives,
the Company has also created a five-member tobacco division executive committee,
comprised of the Company's Chief Executive Officer, and the tobacco division's
Chairman, Operations Director, Financial Director and Sales Director. Decisions
made at each level are now reviewed by the executive committee to ensure
consistency and compliance with the Company's corporate operational and
financial parameters.
CASH FLOW MANAGEMENT. The Company believes that rapid access to information
regarding divisional, regional and area level cash flow results in better
corporate decision-making. Awareness of the Company's cash flow is important to
improving risk and asset management.
BUSINESS UNIT ACCOUNTABILITY. As the Company refines its divisional,
regional and area level controls and information systems, its managers at each
level are given more specific performance objectives to achieve. These managers
have ready access to financial information in order to measure their performance
against budget. The Company believes that improved access to information will
permit the Company to make adjustments more quickly in response to performance
that may not be consistent with corporate financial objectives or budgets.
PERFORMANCE MEASUREMENT SYSTEMS. In order to more closely align divisional,
regional and area level decision-making with the corporate level objective of
significantly improving the Company's profitability, the Company's
performance-based incentive compensation plan has been restructured. Because the
leaf tobacco business requires short-term financing of relatively large
inventory positions, the Company has instituted a plan based on return on assets
designed to focus divisional, regional and area managers on optimizing working
capital utilization through the reduction of uncommitted inventory levels and
the short-term financing required to make tobacco purchases.
RISK MANAGEMENT
Historically, the Company's operating units have been given responsibility
for managing risks and making certain financial decisions. Recently, the Company
has instituted a centralized risk management system to manage uncommitted
inventory levels, customer exposure limits, capital expenditures and investment
projects to maximize profitability while maintaining an acceptable level of
corporate risk.
UNCOMMITTED INVENTORY. The Company continues to centralize its inventory
monitoring functions and believes that it is achieving levels of inventory which
are more closely aligned with current customer demand and market conditions. The
Company distinguishes between "committed" inventories, which consist of packed
tobacco for which customer orders or indications of interest have been received,
and "uncommitted" inventories, which are not designated by the Company to fill a
specific customer order or indication of interest. While the Company believes it
must purchase a certain amount of uncommitted inventory to maintain its presence
in certain strategic tobacco growing regions or to capitalize on favorable
prices, the Company's business strategy has emphasized the need to reduce risks
associated with tobacco price fluctuations by generally reducing its uncommitted
inventory levels. The tobacco division executive committee has set a limit on
the amount of uncommitted tobacco inventory, which may not be exceeded without
its prior approval.
CUSTOMER EXPOSURE LIMITS. In response to the cancellation of tobacco
contracts totalling approximately $23.0 million by customers in the Former
Soviet Union and financial problems of certain cigarette manufacturers in fiscal
1994, the Company instituted credit risk procedures which are monitored by the
tobacco division executive committee. Pursuant to these procedures, the total
exposure to, and payment history of, each customer is reviewed monthly. Since
instituting these procedures, the Company has not experienced any material
losses due to contract cancellations or over-extended credit.
CAPITAL EXPENDITURES AND INVESTMENTS. The tobacco division executive
committee now evaluates all significant capital expenditures and investments
pursuant to strict criteria. These criteria include projected cash flows,
required capital expenditures, sources of financing, internal rates of return
and the impact on profitability. In centralizing the analysis underlying
21
<PAGE>
capital expenditure and investment proposals, the Company believes that a more
rational approach will be achieved and that a sharper focus on return on assets
will permit the Company to continue its trend of improved profitability, growth
and cash flow management.
ASSET MANAGEMENT
The Company believes that it is positioned to continue to improve its
financial performance as a result of several asset management initiatives. These
initiatives include a comprehensive analysis of inventory levels, noncore assets
and accounts receivable.
INVENTORY. The Company has increased average tobacco inventory turnover
from a low of approximately 2.1 turns in fiscal 1994 to approximately 3.9 turns
in the 12 months ended December 31, 1996. Increased inventory turnover, which is
in part attributable to management more closely aligning customer demand with
the supply of tobacco, has resulted in savings due to reduced interest,
insurance and warehousing costs associated with holding tobacco inventory.
RECEIVABLES COLLECTION. The Company has instituted revised policies
relating to the collection of receivables, including centralized review of
credit extended to each customer. Although individual subsidiaries have
historically monitored collections, in certain cases current information was not
available to managers, and in certain circumstances local relationships
precluded the institution of strict adherence to corporate collection policies.
NONCORE AND NONSTRATEGIC ASSETS. The Company has sold substantially all of
its noncore and nonstrategic assets. Management believes that these assets have
historically required a disproportionate amount of administrative services.
Selling these assets and the consequent reduction in associated costs has been
fundamental to focusing management's attention on maximizing the profitability
of core assets. See "Risk Factors -- Global Financial and Management Control
Risks."
GROWTH STRATEGY
The Company's primary business objective is to expand its position as one
of the leading global suppliers of American-blend tobacco to the major cigarette
manufacturers while increasing profitability through enhanced financial
management and control. The key elements of the Company's growth strategy
include:
INCREASING PRESENCE IN SOUTH AMERICA AND AFRICA. The Company believes that
its presence in all the major leaf tobacco markets worldwide is critical to
capitalizing on the global expansion of the large multinational cigarette
manufacturers, the recent consolidation of the leaf tobacco merchants and the
anticipated growth in demand for tobacco sourced internationally. A key element
of the Company's growth strategy is to increase its ability to directly source
and process tobacco in South America and Africa, key growing regions for
American-blend tobacco. The Company has recently executed a letter of intent to
acquire 74.9% ownership of the fourth largest tobacco processor in Brazil. See
"Business -- Tobacco -- Worldwide Tobacco Presence -- Brazil."
INCREASING PENETRATION OF LOW-COST FILLER TOBACCO AND EMERGING
TOBACCO-GROWING REGIONS. To meet the increasing demand by cigarette
manufacturers throughout the world for low-cost American-blend tobacco, the
Company plans to expand its operations in regions particularly suited for
producing such tobacco. The Company has targeted China, India and Tanzania,
countries in which it has a leading tobacco export position, for expansion and
increased tobacco production. The Company has executed letters of intent for the
construction of new processing facilities in China and India.
STRENGTHENING PRESENCE IN ORIENTAL MARKETS. Demand for oriental tobacco,
which comprises approximately 15.0% of American-blend cigarettes, is rapidly
increasing due to the strong growth in consumption of American-blend cigarettes.
The Company intends to strengthen its position as one of the world's largest
merchants of oriental tobacco through acquisitions and continued strategic
investments in China and Thailand (emerging oriental tobacco markets), and in
Greece and Turkey (leading oriental tobacco markets based on volume).
CAPITALIZING ON ACQUISITION AND OUTSOURCING OPPORTUNITIES. Recent
consolidation within the leaf tobacco industry has been driven by the need to
cost-effectively service multinational cigarette manufacturers on a global
basis. Management believes that there will be increasing opportunities for
acquisitions of smaller independent local leaf tobacco merchants in various
strategic locations throughout the world. In addition, the Company anticipates
further outsourcing of leaf tobacco purchasing and processing by cigarette
manufacturers. This outsourcing trend is driven by the: (i) higher margins in
cigarette production; (ii) increasing sophistication required in sourcing leaf
tobacco on a global basis; and (iii) continued privatization of tobacco and
cigarette production operations in certain countries.
22
<PAGE>
INCREASING FINANCIAL FLEXIBILITY. The Company intends to continue to
strengthen its financial position by reducing its overall leverage and its
reliance on short-term borrowings. In addition to raising equity pursuant to the
Offering, the Company is currently evaluating additional financing alternatives,
including a private or public placement of long-term debt securities, the
proceeds of which would be used to further reduce short-term borrowings. By
strengthening its financial position, the Company will be better positioned to
continue implementing its business strategy and to capitalize on strategic
growth opportunities.
OPERATIONS
The Company has developed an extensive international network through which
it purchases, processes and sells tobacco. In addition to processing facilities
in North Carolina and Kentucky, the Company owns or has an interest in
processing facilities in Zimbabwe, a significant exporter of flue-cured tobacco;
Malawi, a leading exporter of burley tobacco; and Greece and Turkey, the leading
exporters of oriental tobacco. The Company also has processing facilities in
Italy, Spain and Thailand. In addition, the Company has entered into contracts,
joint ventures and other arrangements for the purchase and processing of tobacco
grown in substantially all countries that produce export-quality flue-cured,
burley and oriental tobacco, including Argentina, Brazil, Canada, China, India,
Kenya, Kyrgyzstan, Tanzania and Ukraine.
PURCHASING. The tobacco in which the Company deals is grown in over 30
countries. Management believes that its diversity in sources of supply, combined
with a broad customer base, helps shield the Company from seasonal fluctuations
in quality, yield or price of tobacco crops grown in any one region. The Company
relies primarily on revolving lines of bank credit and internal resources to
finance its purchases. Quite often the tobacco serves as collateral for the
credit. The period of exposure, with some exceptions, generally is limited to a
tobacco season and the maximum exposure is limited to a shorter period.
Tobacco is generally purchased at auction or directly from growers. Tobacco
grown in the United States, Canada, India, Malawi and Zimbabwe is purchased at
auction. The Company generally employs its own buyers to purchase tobacco on
auction markets, directly from growers and pursuant to marketing agreements with
government monopolies. At present, the largest amounts of tobacco purchased by
the Company outside the United States come from Argentina, Brazil, China,
Greece, India, Italy, Malawi, Spain, Thailand, Turkey and Zimbabwe.
FISCAL 1996 PURCHASES AND SALES IN DOLLARS
<TABLE>
<CAPTION>
PURCHASES BY ORIGIN SALES BY DESTINATION
<S> <C>
United States...........................................29% Europe..................................................51%
Europe..................................................24% United States...........................................24%
Africa..................................................20% Far East................................................17%
Central & South America.................................17% Africa...................................................4%
Far East.................................................9% Other....................................................4%
Other....................................................1%
</TABLE>
Although Argentina, Brazil, China, Greece, Italy, Spain, Turkey and
Thailand are major tobacco producers, there are no tobacco auctions in these
markets. In these markets, the Company buys (or, in Brazil, intends to buy
through Meridional) tobacco directly from farmers, agricultural cooperatives or
government agencies in advance of firm orders or indications of interest
although such purchases are usually made with some knowledge of its customers'
requirements. In certain of these markets the Company advances or finances the
purchase of fertilizer and other supplies to assist farmers in growing the crop.
These advances generally are repaid with deliveries of tobacco by the farmers.
During fiscal 1996 and the nine months ended December 31, 1996, the maximum
aggregate amount of advances by the Company was $29.8 million and $37.1 million,
respectively. See "Risks Factors -- Global Financial and Management Control
Risks."
PROCESSING. Tobacco purchased by the Company generally is perishable and
must be processed within a relatively short period of time to prevent
deterioration in quality. Consequently, the Company has located its processing
facilities near the areas where it purchases tobacco. Prior to and during
processing, the Company takes a number of steps to ensure consistent quality of
the tobacco. These steps include regrading and removing undesirable leaves, dirt
and other foreign matter. Most of the tobacco is then blended to meet customer
specifications and threshed; however, some of it is processed in whole-leaf form
and sold to certain customers of the Company. Threshing involves mechanically
separating the stem from the tissue portions of the leaf, which are called
strips, and sieving out small scrap. Considerable expertise is required to
produce strips of large particle size and to minimize scrap.
23
<PAGE>
Strips and stems are redried and packed separately. Redrying involves
further reducing the natural moisture left in the tobacco after it has been
cured by the growers. The objective is to pack tobacco at safe moisture levels
so that it can be held by the customer in storage for long periods of time.
Quality control checks are continually performed during processing to ensure
that the product meets customer specifications as to yield, particle size,
moisture content and chemistry. Customers are frequently present at the factory
to monitor results while their tobacco is being processed.
Redried tobacco is packed in hogsheads, cartons, cases or bales for storage
and shipment. Packed tobacco generally is transported in the country of origin
by truck or rail, and exports are moved by ship.
The Company processes its tobacco in four wholly-owned plants in the United
States and 12 other facilities around the world owned or leased by subsidiaries
and affiliates. In addition, the Company has access to four other processing
plants in which it has no ownership interest. In all cases, tobacco processing
is under the direct supervision of Company personnel. Modern laboratory
facilities are maintained by the Company to assist in selecting tobacco for
purchase and to test tobacco during and after processing.
The Company believes that its plants are highly efficient and are adequate
for its purposes. The Company also believes that tobacco throughput at its
existing facilities could be increased without major capital expenditures.
SELLING. The Company's customers include all of the world's leading
manufacturers of cigarettes and other consumer tobacco products. These customers
are located in approximately 85 countries throughout the world. The Company
employs its own salesmen, who travel extensively to visit customers and to
attend tobacco markets worldwide with these customers, and it also uses agents
for sales to customers in certain countries. Sales are made on open account to
customers who qualify based on experience or are made against letters of credit
opened by the customer prior to shipment. Virtually all sales are made in U.S.
dollars. Payment for most tobacco sold by the Company is received after the
tobacco has been processed and shipped.
The consumer tobacco business in most markets is dominated by a small
number of large multinational cigarette manufacturers and by government
controlled entities. In fiscal 1996, the Company's five largest customers
accounted for approximately 38.2% of total sales (56.1% of tobacco sales). In
fiscal years 1996 and 1995, one customer accounted for 17.4% and 14.2% of total
sales, respectively. In fiscal 1994, another customer accounted for 10.4% of
total sales. The Company believes that formal purchase contracts are not
customary in the global leaf tobacco industry and agreements to purchase tobacco
generally result from the supplier's course of dealings with its customers. The
Company has done business with most of its customers for many years. The Company
believes that it has good relationships with its large customers. See "Risk
Factors -- Reliance on Significant Tobacco Customers."
As of December 31, 1996, the Company had tobacco inventory of $255.4
million compared to $230.7 million at December 31, 1995. The level of tobacco
fluctuates from period to period and is significant only to the extent it
reflects short-term changes in demand for leaf tobacco.
COMPETITION
The leaf tobacco industry is highly competitive. Competition among
independent leaf tobacco dealers is based primarily on the price charged for
products and services; the ability to meet customer demands and specifications
in sourcing, purchasing, blending, processing and financing tobacco; and the
ability to develop and maintain long-standing customer relationships by
demonstrating a knowledge of customer preferences and requirements. Although
most of the Company's principal customers also purchase tobacco from the
Company's major competitors, Universal and Dimon, the Company's relationships
with its largest customers span many years and the Company believes that it has
the personnel, expertise, facilities and technology to remain successful in the
industry. In addition, the Company believes that the consolidation of the leaf
tobacco industry may provide opportunities for it to enhance its relationship
with and increase sales to certain cigarette manufacturers. See "Risk
Factors -- Competition."
WORLDWIDE TOBACCO PRESENCE
UNITED STATES. The Company owns and operates a total of four processing
facilities located in North Carolina and Kentucky and purchases tobacco at all
major markets in the United States, including flue-cured tobacco markets in
North Carolina, South Carolina, Virginia, Georgia and Florida; burley tobacco
markets in Kentucky, Tennessee, Virginia and North Carolina; and light air-cured
tobacco markets in Maryland and Pennsylvania. In the United States, flue-cured
and burley tobacco are generally sold at public auction to the highest bidder.
The price of such tobacco is supported under an industry-funded federal program
that also restricts tobacco production through a quota system. U.S. grown
tobacco is more expensive
24
<PAGE>
than most non-U.S. tobacco, resulting in a declining trend in exports, which
management believes should be offset by increased demand for foreign tobacco.
BRAZIL. The Company currently purchases leaf tobacco in Brazil as the agent
for Souza Cruz, a subsidiary of B.A.T. which has approximately 80.0% of the
domestic cigarette market in Brazil. The Company fills orders and earns a
commission from Souza Cruz based upon the sales price of the tobacco. In March
1997, the Company signed a letter of intent (which is subject to significant
conditions of closing) to purchase a 74.9% ownership interest in Meridional, the
fourth largest leaf tobacco processor in Brazil. This strategic acquisition
complements the Company's continuing 26-year partnership in Brazil with Souza
Cruz, and will provide the Company with direct ownership of a processing
facility in the second largest leaf tobacco growing region in the world
(excluding China).
TURKEY AND GREECE. The Company is one of the largest merchants of
flue-cured, burley and oriental tobacco in Turkey. In both Turkey and Greece,
the oriental tobacco markets are more fragmented than the major flue-cured and
burley tobacco markets in other parts of the world. The Company believes that
the fragmented nature of the oriental tobacco markets and its leading presence
in these markets provides it with an excellent opportunity to expand revenues
through acquisitions and continued strategic investments. The Company also
purchases and processes flue-cured and burley tobacco in Greece. The Company
processes tobacco in Turkey and Greece in two 51.0% owned facilities.
MALAWI, ZIMBABWE AND TANZANIA. In Malawi, the largest exporter of low-cost
burley tobacco in the world, the Company has a leading market position and
services the large multinational cigarette manufacturers from its 51.9% owned
facility in Lilongwe and its 50.0% owned facility in Limbe. The Company also is
a leader in the purchase and processing of flue-cured and dark-fired tobacco,
which are also processed in the Company's facilities. In Zimbabwe, the Company
purchases flue-cured tobacco and to a lesser extent burley tobacco, which it
processes in its minority-owned facility. In Tanzania, one of the key emerging
growing regions of low-cost filler tobacco, the Company has historically been
one of the largest exporters of flue-cured tobacco. The Company supervised the
processing of this tobacco in a government-owned facility, which was privatized
in calendar 1995. The Company is currently exploring other alternatives,
including the construction of a new Company-owned and -operated processing
facility strategically located in the Tanzanian flue-cured tobacco growing
region.
CHINA, THAILAND AND INDIA. The Company has provided agronomy services and
funded a variety of projects in China since 1981 and believes that it is the
largest independent exporter of Chinese leaf tobacco. The Company currently
operates two government-owned tobacco processing facilities in China. The
Company is expanding its presence in China and expects to increase its
production in the area through strategic alliances with the Chinese government.
The Company has an executed letter of intent (subject to certain conditions) to
build its third processing facility in China, which will process low-cost filler
tobacco in the Guizhou province. The Company is also one of the leading
exporters of flue-cured, burley and oriental leaf tobacco from Thailand, which
it purchases directly from farmers or in some cases from a middlemen or curers.
Flue-cured tobacco is grown mainly in Northern Thailand, burley tobacco is grown
in Central Thailand and oriental leaf tobacco is grown in Northeast Thailand.
The Company currently processes tobacco in Thailand in two facilities in which
the Company owns a minority interest. In India, an emerging source of low-cost
filler tobacco, the Company purchases primarily flue-cured tobacco. The Company
has executed a letter of intent with a local partner, who has started
construction of a new processing facility in Guntur.
OTHER FOREIGN OPERATIONS. The Company also has foreign subsidiaries, joint
ventures and affiliates that purchase, process and sell tobacco grown in other
countries throughout the world, including Italy, Kenya, Spain and Zaire.
25
<PAGE>
PROPERTIES
The Company generally conducts its tobacco processing operations in
facilities near the area of production. In certain places, long-standing
arrangements exist with local companies to process tobacco in their plants under
the supervision of Company personnel. A current summary showing the principal
tobacco operating properties of the Company or its affiliates is shown below:
<TABLE>
<CAPTION>
AREA
LOCATION PRINCIPAL USE (SQUARE FEET)
<S> <C> <C>
UNITED STATES
Wilson, NC Factory/storage 1,008,000
Oxford, NC Factory/storage 624,700
King, NC Factory 134,600
Springfield, KY Factory/storage 292,000
TURKEY
Izmir Factories (2)/storage 431,300
Izmir Storage 204,500*
GREECE
Alexandria Factory/storage 402,000
Salonica Factory/storage 772,700
Salonica Factory/storage 236,300*
MALAWI
Limbe Factory/storage 414,000
Lilongwe Factory/storage 776,000
ZIMBABWE
Harare Factory/storage 565,800*
Harare Storage 233,500
THAILAND
Chiengmai Factory/storage 872,000
Banphai Factory/storage 377,000
ITALY
Caserta Factory/storage 800,000*
SPAIN
Benavente Factory/storage 206,000
Benavente Storage 132,400*
Coria Buying Center 18,300*
Talayuela Buying Center 21,500
</TABLE>
* Leased facility.
The Company believes its tobacco properties are generally well-maintained,
in good operating condition and are suitable and adequate for the normal growth
of its business.
WOOL
The Company is a world leader in the trading of scoured wool and a major
trader and processor of wool tops. As a result of a series of acquisitions
commencing in 1985, the Company owns and operates an integrated group of wool
companies which purchase, process and sell wool to other wool processors,
felting companies, knitters and spinners of yarn, and manufacturers of worsted
and woolen products. The Company does not raise sheep or produce textile
products. In fiscal 1996, the Company derived approximately 30.0% of its revenue
from its wool division.
26
<PAGE>
THE WOOL INDUSTRY
The wool industry is highly fragmented, with a large number of small
dealers handling wool, often from limited origins. There are two broad
categories of wool fibers: fine wool from merino sheep and coarse wool from
crossbred sheep. Merino wool is used to make products for the apparel trade such
as fine sweaters and worsted fabrics for high quality suits. Crossbred wool is
used to make carpets, coarser worsted fabrics such as upholstery and draperies,
and woolens used in knitwear and hand-knitting yarns. Most merino wool for
export is produced in Australia followed by South Africa and South America. The
main sources of crossbred wool for export are New Zealand, the United Kingdom
and South America.
Following record high prices in 1988, the wool industry experienced a
severe downturn beginning in 1989 that was triggered by the withdrawal of China
from international wool markets, economic turmoil in Eastern Europe and the
states of the Former Soviet Union and recessionary conditions in Western Europe.
These events led to a decrease in demand for wool on the world market. At the
same time a worldwide oversupply of wool had developed, largely due to
artificially high prices caused by the Australian support program.
Prior to 1991, Australian wool growers operated under a government price
support program. Under this program, the Australian government accumulated a
stockpile of 827,000 metric tons (raw weight) of wool. In 1991 the Australian
government abandoned its price support program, effectively creating a free
market for wool. Under free market conditions, prices fell substantially and
immediately, creating difficult trading conditions for the wool industry, and
leading to the development of market conditions necessary for a correction in
what had become a major imbalance between supply and demand. At present, Wool
International, an organization created by the Australian government, is
responsible for the reduction of the stockpile, which on February 28, 1997
totaled 324,000 metric tons (the equivalent of approximately 50% of one year's
current Australian production). Wool International has announced its intention
to reduce this stockpile at a fixed rate of 23,625 metric tons per quarter to a
level of approximately 297,000 metric tons by June 30, 1997, at which time the
disposal rate will be adjusted to a minimum of 15,750 metric tons per quarter.
Worldwide wool production in 1996 was below current demand for the second
consecutive year, and production by the five major wool exporting countries has
declined by 15.0% over the past five years. As a result, since 1992, all surplus
stocks around the world have been sold with the exception of the remaining
stockpile in Australia. See "Risk Factors -- Poor Market Conditions in the Wool
Industry."
BUSINESS STRATEGY
In January 1995, the Company made the strategic decision to focus on the
tobacco division due to existing conditions in the wool industry and the
Company's desire to reduce its financial leverage. In September 1995, the
Company signed an agreement to sell its wool division to Chargeurs of France.
Due to difficulty in obtaining certain regulatory approvals and declining market
conditions, the parties agreed in December 1995 to allow the agreement to lapse.
Following the lapse of the Company's agreement to sell the wool division in
December 1995, the Company instituted, and continues to refine, measures
designed to streamline its wool division. Since December 1995, the Company has:
(i) installed a new wool division management team, including appointment of a
new Managing Director reporting directly to the Company's Chief Executive
Officer, and a Financial Director solely responsible for the wool division; (ii)
closed an unprofitable scouring mill in Argentina; (iii) reorganized the
management teams for Eastern and Western Australia into one unit; (iv)
consolidated two European topmaking units, which had been competing against one
another, under a unified management team with a jointly staffed office in Italy,
the Company's single largest market for wool tops; (v) installed new management
to run operations in France; (vi) restructured the majority of the wool division
under a single holding company; and (vii) begun implementing a proprietary
management information system designed to significantly improve its control over
its wool trading position. Primarily as a result of these initiatives, the
Company believes that the wool division is positioned to return to
profitability, although no assurance can be given to this effect.
The Company believes that it will be able to implement in the wool division
its information systems, financial controls and risk and asset management
strategies similar to those implemented by the tobacco division in order to
continue to improve its operating and financial performance. As part of the wool
division restructuring, many wool units were recently recapitalized, thereby
solidifying their banking facilities. The Company's primary business objectives
for the wool division are to increase profitability and to strengthen the
Company's competitive position.
EXPANDING SALES EFFORTS IN THE ASIAN MARKET. The Company plans to
capitalize on the increasing demand for wool in the Asian market, primarily
through an increased and focused selling effort in China and the Pacific Rim.
The Company believes that by opening a new sales office in China's Shanghai
province and by improving coordination of the efforts of its local
27
<PAGE>
representatives in the Company's two existing Chinese offices with those of its
experienced wool traders from various origin countries, the Company will be able
to increase its market share in China. The Company believes that its expansion
efforts in China will increase wool sales from its Australian and New Zealand
sourcing bases to meet the anticipated growth in demand.
IMPLEMENTING WOOL TRADING SYSTEM. The Company plans for the wool division
to implement many information system initiatives similar to those employed in
the tobacco division. The Company has developed a proprietary software system
known as the Wool Trading System that enables users to: (i) determine the most
cost-efficient means of processing particular blends of wool to meet customer
specifications; and (ii) monitor the Company's trading position on a daily
basis. Because this system is integrated into the units' accounting systems, the
Company expects it to improve administrative and reporting efficiencies. This
system is currently used by the Company in the United Kingdom and the Company
intends to deploy it throughout its worldwide operations as rapidly as
practicable.
ENHANCING CUSTOMER RELATIONSHIPS. The Company intends to improve its
relationship with major customers by improving the coordination of sales
efforts, logistics and intergroup communications. This approach is designed to
eliminate customer confusion from arising when a particular customer is served
by or has relationships with multiple units within the Company's wool division.
The Company believes this approach will allow it to present itself to its
customers in a more unified and global manner than it has in the past.
OBTAINING ISO 9002 CERTIFICATIONS. The Company intends to obtain ISO 9002
certification for each of its wool operating facilities in an effort to enhance
its image as an international supplier of quality wool. ISO 9002 certification
is available to wool operators that comply with high consistency and quality
standards. The Company's wool processing operations in the United Kingdom have
already obtained certification, and its French and South African operations are
in the process of obtaining certification. The Company believes that the
measures implemented to qualify for ISO 9002 certification will increase
operating efficiencies, reduce costs and strengthen marketing efforts while
enhancing the division's reputation as a preferred and reliable supplier of
quality wool.
OPERATIONS
From the outset, the Company's strategy has been to build a large
international wool network, primarily through the acquisition of
well-established traders and processors. The Company believes that as a result
of its acquisitions and the continuing consolidation of the wool industry, it
has become one of the world's largest traders and processors of wool. The
Company owns and operates processing facilities in five countries, including
scouring mills in New Zealand, South Africa and the United Kingdom and combing
mills in Chile and France. The Company is participating in negotiations with the
Western Australian government to set up a joint venture scouring facility. The
Company also uses the services of commission processors in Argentina, Australia,
Belgium, Germany and Italy.
PURCHASING. The Company deals in wool from all of the major producing
areas, the most significant of which are Argentina, Australia, Chile, New
Zealand, South Africa and the United Kingdom. The Company has buying offices in
all of these areas. The Company's employees buy wool at auctions and through
negotiations with wool growers. Although most wool is shorn before it is
purchased, some wool is purchased "on the back" before shearing. As in its
tobacco business, most of the Company's purchases are made against specific
customer orders. Australia is by far the largest producer of wool in the world
and its wool prices generally influence world prices. The Company typically pays
for its wool purchases in the currency of the country of origin, and usually
hedges the currencies of its purchase and sale commitments with forward
transactions. The Company does not engage in currency transactions for the
purpose of speculation.
FISCAL 1996 PURCHASES AND SALES IN DOLLARS
<TABLE>
<CAPTION>
PURCHASES BY ORIGIN SALES BY DESTINATION
<S> <C>
Australia...............................................59% Europe..................................................62%
New Zealand.............................................13% Far East................................................26%
Europe...................................................9% United States............................................8%
South America............................................9% Africa & Others..........................................4%
South Africa.............................................7%
Far East & Others........................................3%
</TABLE>
28
<PAGE>
PROCESSING. Wool is purchased in its raw or naturally greasy state, and
must be scoured (washed) before it can be further processed. The Company sells
some greasy wool to topmakers, but most of the wool is blended and scoured
and/or further processed into tops, to meet customer specifications. The
scouring is done at the Company's plants in New Zealand, South Africa and the
United Kingdom or by commission scourers in Argentina, Australia and Belgium.
Similarly, tops are produced in the Company's plants in Chile and France and by
commission combers in Argentina, Australia, Italy and Germany. The Company's
French plant also refines wool grease removed during the scouring process into a
variety of types of lanolin, a marketable byproduct.
A top is a continuous strand of straightened and combed, longer wool fibers
that have been separated from the short fibers. Topmaking involves seven
processes: blending, scouring, carding, gilling, combing, finishing and packing
to quality standards specified by the customer. Carding machines align the
fibers to produce a "sliver" of parallel fibers while removing foreign matter.
Slivers are combined to produce a stronger, more parallel sliver which is combed
to make a top suitable for spinning. Tops are wound into bobbins weighing
approximately 22.0 pounds which are packed and shipped to customers in the
apparel industry for further manufacturing. The Company maintains laboratory
facilities for analyzing and testing wool and lanolin.
SELLING. The Company currently derives approximately 62.0% of its wool
revenues from sales to customers in Europe, with sales to the Far East, North
America and other areas making up the balance. In fiscal 1996, processed wool
(i.e., scoured and tops) accounted for approximately 61.1% of the Company's wool
revenues, followed by greasy wool (30.8%), specialty fibers (7.1%) and lanolin
(1.0%). Greasy wool is sold primarily to customers in Western Europe, the Far
East and the United States. Scoured wool is shipped to carpet, woolen, felting,
quilt and mattress manufacturers located in Europe, the Far East and the United
States. Tops are sold primarily to Western European yarn spinners for processing
and sale to manufactures of worsted fabrics. Lanolin is sold primarily to
manufacturers of cosmetics and pharmaceutical products. The Company's largest
wool customer accounted for less than 1.6% of total sales and 5.0% of total wool
sales for fiscal 1996. Sales are typically made in local currencies of the
customers.
The Company relies primarily on short-term bank credit and internal
resources to finance its wool purchases. The period of exposure generally is
limited to only a few months. At March 31, 1996 and 1995, the Company had
outstanding orders for wool for approximately $140.0 million and $136.0 million,
respectively.
COMPETITION
The wool industry is more fragmented than the leaf tobacco industry. Major
competitors include Chargeurs, ADF, BWK, and a number of Japanese trading firms,
the largest of which is Itochu. Key factors for success in the wool business are
broad market coverage, a full range of wool types, technical expertise in buying
and processing and high quality customer service. The Company believes that its
processing and marketing capabilities and buying and trading expertise enable it
to compete effectively, and that its broad geographical trading base enables it
to react quickly to price changes and to supply wool of similar types and
blending quality from different countries or areas while keeping the highest
quality standards. See "Risk Factors -- Competition."
PROPERTIES
The Company generally conducts its scoured wool operations in the country
of origin, and processes wool tops in France and Chile. A current summary
showing the principal wool operating properties of the Company or its affiliates
is shown below:
<TABLE>
<CAPTION>
AREA
LOCATION PRINCIPAL USE (SQUARE FEET)
<S> <C> <C>
Australia (FREMANTLE) Storage 200,000
Chile (PUNTA ARENAS) Factory/storage 57,000
France (TOURCOING) Factory/storage 964,900
Netherlands (DONGEN) Storage 23,700
New Zealand (CHRISTCHURCH) Factory/storage 100,300
South Africa (PORT ELIZABETH) Factory/storage 70,000 *
United Kingdom (BRADFORD) Factory/storage 165,000
</TABLE>
* Leased facility.
29
<PAGE>
The Company believes its wool properties are generally well-maintained, in
good operating condition and are suitable and adequate for the normal growth of
its business.
EMPLOYEES
At January 31, 1997, the Company had a total of approximately 2,225
full-time employees (including approximately 560 in the United States). As of
that date, of the Company's full-time employees, approximately 1,590 were in the
tobacco business, approximately 605 were in the wool business and approximately
30 had duties relating to other operations. The tobacco business typically
employs an additional 6,700 to 6,800 part-time employees during peak production
periods.
The Company's principal subsidiary in the United States has a collective
bargaining agreement with a union covering the majority of its hourly employees,
many of whom are seasonal. The agreement expires on May 31, 1999. The Company
believes its relations with employees covered by this agreement are good.
Employees at the French wool plant are also represented by labor unions under an
agreement subject to renewal every December 31. The Company believes that its
relations with its employees in France are good. See "Risk Factors -- Dependence
on Key Personnel."
GOVERNMENT REGULATION AND ENVIRONMENTAL COMPLIANCE
In recent years, governmental entities in the United States at all levels
have taken or have proposed actions that may have the effect of reducing
consumption of cigarettes. These activities have included: (i) the U.S.
Environmental Protection Agency's classification of tobacco environmental smoke
as a "Group A" (known human) carcinogen; (ii) restrictions on the use of tobacco
products in public places and places of employment including a proposal by the
U.S. Occupational Safety and Health Administration to ban smoking in the work
place; (iii) proposals by the U.S. Food and Drug Administration to sharply
restrict cigarette advertising and promotion and to regulate nicotine as a drug;
(iv) increases in tariffs on imported tobacco; (v) proposals to increase sales
and excise taxes on cigarettes; (vi) the recently announced policy of the U.S.
government to link certain federal grants to the enforcement of state laws
banning the sale of tobacco products to minors; (vii) lawsuits against cigarette
manufacturers by several U.S. states seeking reimbursement of Medicaid and other
expenditures by such states claimed to have been made to treat diseases
allegedly caused by cigarette smoking; and (viii) the recent enactment of
stricter regulations designed to prohibit sales of cigarettes to minors. It is
not possible to predict the outcome of such actions or litigation or the effect
adverse determinations against the manufacturers might have on leaf merchants,
like the Company, or the extent to which governmental activities and litigation
might adversely affect the Company's business directly.
In calendar 1993, Congress enacted the 75/25 Rule, intended to limit the
importation of tobacco into the United States by requiring that all cigarettes
manufactured in the United States, including those manufactured for export,
contain at least 75.0% domestically grown tobacco. Although the 75/25 Rule was
repealed in 1995, principally because it was inconsistent with GATT, and was
replaced with import quotas designed to assist domestic tobacco growers, it had
the effect in calendar 1993 and 1994 of drastically decreasing demand for
imports of foreign tobacco for use in the domestic production of cigarettes. It
is not possible to predict the extent to which future governmental or third
party actions might adversly affect the Company's business.
A number of foreign countries have also taken steps to restrict or prohibit
cigarette advertising and promotion, to increase taxes on cigarettes and to
discourage cigarette smoking. In some cases, such restrictions are more onerous
than those in the U.S. For example, advertising and promotion of cigarettes has
been banned or severely restricted for a number of years in Australia, Canada,
Finland, France, Italy, Singapore and a number of other countries. It is not
possible to predict the extent to which these actions might adversely affect the
Company's business.
Although the Company's wool scouring and top making operations involve
discharges of significant amounts of effluent waste, the Company believes that
it is currently in compliance with applicable foreign laws which have been
enacted or adopted regulating the discharge of such materials into the
environment or otherwise relating to the protection of the environment. Such
compliance has not had, and is not anticipated to have, any material effect upon
the competitive position of the Company. See "Risk Factors -- Smoking and Health
Issues and Governmental Regulation."
LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is currently involved in
any litigation that the Company believes would, individually or in the
aggregate, have a material adverse effect on the Company's consolidated
financial position, consolidated results of operation or liquidity nor, to the
Company's knowledge, is any such litigation currently threatened against the
Company.
30
<PAGE>
MANAGEMENT
The executive officers, certain key employees and directors of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
CORPORATE
Robert E. Harrison (1) 43 President, Chief Executive Officer,
Chief Financial Officer and Director
Mark W. Kehaya 29 Vice President-Planning and
Financial Director-Tobacco Division
Keith H. Merrick 42 Vice President and Treasurer
Hampton R. Poole, Jr. 45 Vice President and Controller
Krishnamurthy Rangarajan 54 Vice President and Assistant Secretary
Guy M. Ross 63 Vice President and Secretary
TOBACCO DIVISION
Marvin W. Coghill (1) 63 Chairman and Director
Thomas M. Evins, Jr. 57 Regional Manager-North and
Central America, and Director
Ery W. Kehaya II 44 Vice President-Operations and
Corporate Vice President
Alfred F. Rehm 49 Vice President-Sales
John H. Saunders 46 Senior Vice President and Regional
Manager-Africa
WOOL DIVISION
Paul H. Bicque 53 Managing Director
Timothy S. Price 39 Financial Director
OTHER DIRECTORS
Ery W. Kehaya 73 Chairman Emeritus
J. Alec G. Murray (1) 60 Chairman of the Board
William S. Barrack, Jr. (2)(3) 67 Director
Fred G. Bond (2) 68 Director
Henry R. Grunzke 65 Director
Charles H. Mullen (2)(3) 69 Director
Daniel M. Sullivan (2)(3) 72 Director
William A. Ziegler (2)(3) 72 Director
</TABLE>
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
ROBERT E. HARRISON has served as the President and Chief Executive Officer
of the Company since August 1996 and as Chief Financial Officer since July 1995.
Prior to joining the Company, Mr. Harrison was employed by RJR Nabisco for 17
years in various financial and management positions, including responsibilities
as General Manager for the tobacco business in the Philippines and Indochina,
Vice President for the food business in the Asia Pacific region, and Vice
President of Finance in Southeast Asia. Mr. Harrison has been a director of the
Company since November 1995.
MARK W. KEHAYA was appointed Financial Director of the tobacco division in
August 1996 after being named Vice President-Planning in August 1994. Prior to
joining the Company in 1992, he was employed as an associate of Fieldstone
Private Capital Group from 1990 to 1992 and as an analyst at Bankers Trust
Company from 1989 to 1990. Mr. Kehaya attended Duke University Fuqua School of
Business. He is the son of Ery W. Kehaya, Chairman Emeritus.
KEITH H. MERRICK has served as Treasurer of the Company since 1993 and was
elected a Vice President in 1996. Prior to joining the Company, he was employed
as a Vice President of First Union National Bank of North Carolina.
31
<PAGE>
HAMPTON R. POOLE, JR. was appointed Vice President in 1996 and has served
as Controller and Assistant Treasurer of the Company since 1993. He joined the
Company in 1984 and has been an officer of Standard Commercial Tobacco Co.,
Inc., a subsidiary, for more than five years. Mr. Poole is a Certified Public
Accountant.
KRISHNAMURTHY RANGARAJAN was employed by the Company in 1978 after
qualifying as a Chartered Accountant. He was elected a Vice President in 1988
after being named Assistant Vice President in 1986 and Chief Accountant in 1981.
GUY M. ROSS became Treasurer in 1980 and Secretary in 1981 following the
Company's purchase of the American leaf business of Imperial Tobacco Ltd. (UK).
He was employed by Imperial for 14 years including 10 years as Vice President of
Finance and Administration. He became a Vice President of the Company in 1992.
MARVIN W. COGHILL has served as the Chairman of the Company's tobacco
division since April 1994. From 1981 to April 1994, he served as President and
Chief Operating Officer of the Company with responsibility for tobacco
operations. Mr. Coghill has been a director since 1974.
THOMAS M. EVINS, JR., a director since December 1992, served as President
of W.A. Adams Company prior to its acquisition by the Company in June 1992. He
has served as Regional Manager -- North and Central America Tobacco Operations
since 1993.
ERY W. KEHAYA II was appointed Vice President-Operations of the tobacco
division in 1995 after being named Sales Director in 1993 and a Corporate Vice
President in 1992. He has been an officer of Standard Commercial Tobacco Co.,
Inc., a subsidiary, for more than five years, serving as Executive Vice
President since 1992. He is the son of Ery W. Kehaya, Chairman Emeritus.
ALFRED F. REHM was appointed Vice President-Sales of the tobacco division
in February 1995. He joined the Company in 1978 and his 29-year career in the
tobacco industry includes experience in leaf buying, leaf supervision and sales.
JOHN H. SAUNDERS was appointed Senior Vice President of the tobacco
division in August 1995. He has served as Regional Manager-Africa since 1994 and
was Area Manager-Malawi from 1984 to 1994. Mr. Saunders has been employed by the
Company since 1974.
PAUL H. BICQUE has served as Managing Director of the wool division since
December 1995. From 1992 to December 1995, he served as a Commercial Director of
the wool division. From 1990 until he joined the Company, Mr. Bicque worked as
an international senior management consultant.
TIMOTHY S. PRICE was appointed Financial Director of the wool division in
December 1995. Previously, he served as Vice President and Controller of W A
Adams Company from the time it was acquired by the Company in June 1992. Mr.
Price is a Certified Public Accountant.
ERY W. KEHAYA joined the Company in 1945, and served as President from 1955
until 1981 and as Chief Executive Officer from 1955 until 1990. He served as
Chairman of the Board of Directors from 1955 until he was appointed Chairman
Emeritus in August 1996.
J. ALEC G. MURRAY has served as Chairman of the Board since August 1996.
Prior thereto he served as Vice Chairman and Chief Executive Officer of the
Company from January 1991 to August 1996 and as President from April 1994 to
August 1996. Mr. Murray joined the Company in 1969 and has been a director since
1977.
WILLIAM S. BARRACK, JR. has been a director of the Company since his
retirement in 1992 from his position as Senior Vice President of Texaco, Inc. He
serves on the boards of directors of Caltex Petroleum Corporation, a private
company, and Consolidated Natural Gas Company, a public company.
FRED G. BOND, a director of the Company since November 1996, is the former
Chief Executive Officer of the Flue-Cured Tobacco Cooperative Stabilization
Corporation.
HENRY R. GRUNZKE served as the Chairman of the wool division from January
1996 to August 1996. Prior thereto he served as Commercial Director of the wool
division since the Company's acquisition of Lohmann and Co. GmbH in 1985. He has
been in the wool industry for over 40 years and is currently President of the
Wool Committee of the International Wool and Textile Organization. He has been a
director since 1987.
CHARLES H. MULLEN, a director of the Company since June 1995, is the
retired Chairman and Chief Executive Officer of The American Tobacco Company and
formerly served as a Vice President and director of American Brands, Inc. He
also serves as a director of Swisher International Group Inc., a public company.
32
<PAGE>
DANIEL M. SULLIVAN has been a director of the Company since June 1995. He
founded and served as the Chief Executive Officer of Frost & Sullivan, Inc. from
1961 to 1989. He is Chairman of Jim Hjelms Private Collections, Ltd. and serves
as a director of four private companies.
WILLIAM A. ZIEGLER is a retired partner of the law firm of Sullivan &
Cromwell and has been a director of the Company since 1985. He is currently a
consultant and also serves as a director and chairman of the executive committee
of a private company and a director of another private company.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Seven meetings of the Company's Board of Directors were held during the
fiscal year ended March 31, 1996. No Director attended less than 75.0% of the
total number of meetings held by (i) the Board of Directors and (ii) all
committees of the Board on which the Director served.
The business of the Company is under the general management of a Board of
Directors as provided by the laws of North Carolina, the Company's state of
incorporation. The Company's Articles of Incorporation divide the Board of
Directors into three classes as nearly equal in number as possible, each of
which class of directors serves for three years. The term of office of one class
of directors expires each year in rotation so that one class is elected at each
annual meeting of shareholders for a full three-year term. At the Annual Meeting
of Shareholders held in August 1996, the following four persons were nominated
by management and elected as directors for terms expiring in 1999: Marvin W.
Coghill, Thomas M. Evins, Jr., Robert E. Harrison and William A. Ziegler. The
Company's seven other current directors, elected for terms expiring at the 1997
and 1998 annual meetings of the shareholders, are Henry R. Grunzke, Ery W.
Kehaya, Daniel M. Sullivan, William S. Barrack, Jr., Charles H. Mullen, J. Alec
G. Murray and Fred G. Bond.
The Committees established by the Board of Directors to assist it in the
discharge of its responsibilities are an Executive Committee, an Audit
Committee, a Compensation Committee and a Nominating Committee.
The Executive Committee consists of Mr. Murray, Mr. Coghill and Mr.
Harrison. This committee meets on call and has authority to act on most matters
during the intervals between Board meetings. During the last fiscal year, the
committee acted on various matters by unanimous written consent.
The Audit Committee consists of Mr. Barrack, Mr. Bond, Mr. Mullen, Mr.
Sullivan and Mr. Ziegler, none of whom have been employees of the Company. This
committee is primarily concerned with assisting the Board in fulfilling its
fiduciary responsibilities relating to accounting policies and auditing and
reporting practices, and assuring the independence of the Company's public
accountants, the integrity of management and the adequacy of disclosure to
shareholders. Its duties include recommending the selection of independent
accountants, reviewing the scope of the audits and the results thereof, and
reviewing the organization and scope of the Company's internal systems of
financial control and accounting policies followed by the Company.
The Compensation Committee consists of Mr. Ziegler, Mr. Barrack, Mr. Mullen
and Mr. Sullivan. No current officer of the Company serves on the Committee and
there are no interlocking relationships. This committee is primarily concerned
with administering the Performance Improvement Compensation Plan, determining
compensation of officers and oversight of the Company's pension plans.
The Nominating Committee consists of Mr. Ziegler, Mr. Harrison, Mr. Mullen
and Mr. Murray. This committee is primarily concerned with recommending to the
full Board of Directors candidates for election as directors.
EXECUTIVE COMPENSATION
In March 1997, the Company entered into a three-year Employment Agreement
with Robert E. Harrison, its President, Chief Executive Officer and Chief
Financial Officer. The agreement provides for an initial base salary, which
shall be $350,000 per year as of April 1, 1997, annual cash bonuses upon
achievement of performance goals, as determined by the Compensation Committee
of the Board of Directors of the Company, and other employee benefits. In
addition, the agreement grants Mr. Harrison nonqualified options to purchase
100,000 shares of Common Stock of the Company at an exercise price equal to
fair market value as of the date of the grant. These options will become
exercisable, based on Mr. Harrison's continued employment with the Company,
in equal annual installments over a three-year period. Mr. Harrison's
employment agreement is renewable for successive two-year periods after its
initial three-year term. The agreement also contains a covenant by Mr.
Harrison not to compete with the Company until one year after his termination,
except if he is terminated by the Company without cause. The agreement also
provides that in the event Mr. Harrison's employment is terminated by the
Company without cause he shall receive termination pay in a lump sum equal to
two years' base salary and one year's bonus. See "Risk Factors -- Dependence
on Key Personnel."
33
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of the Common Stock as of February 28, 1997, and as adjusted
to reflect the sale of the shares offered hereby, by: (i) the Selling
Shareholder; (ii) each person (including any "group" as that term is used in
Section 13(d) of the Exchange Act) who is known by the Company to own
beneficially more than five percent of the outstanding shares of the Common
Stock; (iii) each of the Company's directors; and (iv) all directors, certain
key employees and executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING(1)
NAME SHARES PERCENT OFFERED SHARES PERCENT
<S> <C> <C> <C> <C> <C>
Ery W. Kehaya (2)........................................ 2,834,872 30.0% -- 2,834,872 21.9%
810 Saturn Street
Jupiter, Florida 33477-4456
Dimensional Fund Advisors Inc. (3)....................... 466,882 5.0% -- 466,882 3.6%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Marvin W. Coghill (4).................................... 285,311 3.0% 25,000 260,311 2.0%
J. Alec G. Murray (5).................................... 200,006 2.1% -- 200,006 1.5%
Thomas M. Evins, Jr. (6)................................. 106,880 1.1% -- 106,880 *
William A. Ziegler....................................... 5,690 * -- 5,690 *
William S. Barrack, Jr. (7).............................. 2,127 * -- 2,127 *
Henry R. Grunzke......................................... 2,296 * -- 2,296 *
Charles H. Mullen........................................ 1,765 * -- 1,765 *
Daniel M. Sullivan....................................... 1,137 * -- 1,137 *
Robert E. Harrison (8)................................... 1,155 * -- 1,155 *
Fred G. Bond............................................. 0 * -- 0 *
All directors, certain key employees and
executive officers as a group (21 persons)(9).......... 3,986,749 42.3% 25,000 3,961,749 30.7%
</TABLE>
* Less than one percent
(1) Assumes the sale of 3,500,000 shares by the Company pursuant to this
offering and no exercise of the Underwriters' over-allotment option.
(2) Includes (i) 603,045 shares held by Mr. Kehaya as trustee for the benefit of
his children; (ii) 3,404 shares underlying $100,000 principal amount of the
Company's 7 1/4 Convertible Subordinated Debentures held by his wife
assuming conversion thereof at the current conversion price of $29.38 per
share; and (iii) 42,493 shares held by his wife. Excludes 109,366 shares
held by a charitable remainder trust established by Mr. Kehaya as to which
shares he disclaims beneficial ownership.
(3) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, was deemed to have beneficial ownership of 466,882 shares of Common
Stock as of December 31, 1996, all of which shares were held in portfolios
of DFA Investment Dimensions Group Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, all of which
Dimensional Fund Advisors Inc. serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares.
(4) Includes 878 shares owned by Mr. Coghill's wife and 3,134 shares held for
his account by the trustee of the Company's 401(k) Savings Plan.
(5) Includes 11,339 shares owned by Mr. Murray's wife.
(6) Includes 1,004 shares held for Mr. Evins' account by the trustee of the
Company's 401(k) Savings Plan.
(7) Includes 545 shares owned by Mr. Barrack's wife.
(8) Includes 122 shares held for Mr. Harrison's account by the trustee of the
Company's 401(k) Savings Plan. Does not include 100,000 shares underlying
options recently granted to Mr. Harrison. See "Management -- Executive
Compensation."
(9) Includes the shares discussed in footnotes (2) and (4) -(8). Also includes
545,510 outstanding shares held beneficially by other executive officers and
certain key employees.
34
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and Wheat, First Securities, Inc. and BT Securities Corporation, as
representatives of the Underwriters (the "Representatives"), the Underwriters
have severally agreed to purchase from the Company and the Selling Shareholder,
and the Company and the Selling Shareholder have agreed to sell to the
Underwriters, the respective number of Shares set forth opposite each
Underwriter's name below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
Wheat, First Securities, Inc....................................................................
BT Securities Corporation.......................................................................
Total........................................................................................... 3,525,000
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all the
Shares if any are purchased.
The Underwriters propose to offer the Shares directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain securities dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such selected dealers may
reallow, a concession not in excess of $ per share to certain brokers and
dealers. After the offering, the price to the public, concession, allowance and
reallowance may be changed by the representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 528,750
additional Shares to cover over-allotments, if any, at the same price per share
as the initial Shares to be purchased by the Underwriters from the Company. To
the extent that the Underwriters exercise this option, each of the Underwriters
will be committed, subject to certain conditions, to purchase such additional
Shares of Common Stock in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such Shares solely to cover
over-allotments made in connection with this Offering.
The Company has agreed not to issue, and all directors and executive
officers of the Company have agreed not to offer, sell or contract to sell, or
otherwise dispose of, directly or indirectly, or announce an offering of, any
shares of Common Stock or other equity securities of the Company for 180 days
after the date of this Prospectus without the prior written consent of the
representatives of the Underwriters.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
Wheat, First Securities, Inc., BT Securities Corporation and/or their
respective affiliates from time to time provide financial advisory services to
the Company for which they receive customary fees, some of which are success
based.
In connection with the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock. Specifically, the Underwriters may bid for and
purchase Common Stock in the open market to stabilize the price of the Common
Stock. The Underwriters may also overallot the Offering, creating a syndicate
short position, and may bid for and purchase Common Stock in the open market to
cover the syndicate short position. In addition, the Underwriters may impose
penalty bids. These activities may stabilize or maintain the market price of the
Common Stock above market levels that may otherwise prevail. The Underwriters
are not required to engage in these activities, and may end these activities at
any time.
35
<PAGE>
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Wyrick, Robbins, Yates & Ponton L.L.P., Raleigh, North Carolina.
Certain legal matters with respect to the Offering will be passed upon for the
Underwriters by Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York.
EXPERTS
The Consolidated Financial Statements of the Company included in this
Prospectus and the Consolidated Financial Statements as of and for each of the
years in the five-year period ended March 31, 1996, from which the Statement of
Operations Data and Balance Sheet Data appearing on pages 5 and 12 of this
Prospectus have been derived, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the Registration Statement. Such Consolidated Financial Statements and
Statement of Operations Data and Balance Sheet Data have been included herein
and elsewhere in the Registration Statement in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300,
New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports, proxy statements and
other information concerning the Company may also be inspected at the offices of
the New York Stock Exchange, Inc. at 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission in Washington, D.C. a
Registration Statement (herein, together with all amendments and exhibits
thereto, referred to as the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Shares to which
this Prospectus relates. As permitted by the Rules and Regulations of the
Commission, this Prospectus does not contain all the information set forth in
the Registration Statement, including the exhibits and schedules thereto. Such
documents may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates or may be
examined without charge at the public reference facilities of the Commission.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's web-site is
http:\\www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus: the Company's Annual Report on
Form 10-K for the year ended March 31, 1996; the Company's Quarterly Reports on
Form 10-Q for the quarters ended June 30, September 30 and December 31, 1996;
and the Company's Registration Statement on Form 8-A dated April 13, 1994.
All reports and other documents subsequently filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to the termination of this offering
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date of filing of such reports and documents. Any statement contained
or incorporated or deemed to be incorporated herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon written or oral request of such person, a copy of any or all of
the foregoing
36
<PAGE>
documents incorporated herein by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated herein by
reference into such documents). Requests for such documents should be submitted
in writing to the Company's Corporate Secretary at its principal executive
offices at 2201 Miller Road, Wilson, North Carolina 27893 or by telephone at
919-291-5507.
37
<PAGE>
STANDARD COMMERCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors....................................................................................... F-2
Consolidated Balance Sheet as of December 31, 1996 and March 31, 1996 and 1995....................................... F-3
Consolidated Statement of Income and Retained Earnings for the nine months ended December 31, 1996 and 1995 and the
years ended March 31, 1996, 1995 and 1994......................................................................... F-4
Consolidated Statement of Cash Flows for the nine months ended December 31, 1996 and 1995 and the years ended March
31, 1996, 1995 and 1994........................................................................................... F-5
Notes to Consolidated Financial Statements........................................................................... F-6
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF STANDARD COMMERCIAL CORPORATION
We have audited the accompanying consolidated balance sheets of Standard
Commercial Corporation as of March 31, 1996 and 1995 and the related
consolidated statements of income and retained earnings and of cash flows for
each of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 the
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, 1996
and 1995 and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1996 in conformity with generally
accepted accounting principles.
We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets as of March 31, 1994, 1993
and 1992, and the related consolidated statements of income and retained
earnings and of cash flows for the years ended March 31, 1993 and 1992 (none of
which are presented herein); and we expressed unqualified opinions on those
consolidated financial statements. In our opinion, the information set forth in
the statement of operations data and the balance sheet data for each of the five
years in the period ended March 31, 1996, appearing on pages 5 and 12, is fairly
stated in all material respects in relation to the consolidated financial
statements from which it has been derived.
DELOITTE & TOUCHE, LLP
Raleigh, North Carolina
June 28, 1996
F-2
<PAGE>
STANDARD COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996 1995
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash................................................................................... $ 55,849 $ 78,688 $ 56,214
Receivables (Note 3)................................................................... 234,205 252,117 210,863
Inventories (Notes 1 and 4)............................................................ 331,594 259,781 345,410
Prepaid expenses....................................................................... 8,037 3,690 3,995
Marketable securities (Note 1)......................................................... 971 5,325 471
Current assets....................................................................... 630,656 599,601 616,953
Property, plant and equipment (Notes 1 and 5).......................................... 130,797 134,498 134,407
Investment in affiliates (Notes 1 and 6)............................................... 11,920 11,442 12,905
Other assets (Notes 1, 7, 11 and 15)................................................... 35,136 37,283 49,224
Total assets......................................................................... $808,509 $782,824 $813,489
LIABILITIES
Short-term borrowings (Note 8)......................................................... $402,598 $373,625 $378,955
Current portion of long-term debt (Note 10)............................................ 8,418 11,665 11,899
Accounts payable (Note 9).............................................................. 125,554 133,737 145,083
Taxes accrued (Note 16)................................................................ 27,284 24,776 27,829
Current liabilities.................................................................. 563,854 543,803 563,766
Long-term debt (Note 10)............................................................... 27,042 31,818 32,403
Convertible subordinated debentures (Note 10).......................................... 69,000 69,000 69,000
Retirement and other benefits (Note 11)................................................ 19,432 18,498 17,791
Deferred taxes (Notes 1 and 16)........................................................ 8,917 9,632 11,711
Commitments and contingencies (Note 12)................................................ -- -- --
Total liabilities.................................................................... 688,245 672,751 694,671
MINORITY INTERESTS (Note 1)............................................................ 29,706 27,473 31,336
ESOP redeemable preferred stock (Note 13).............................................. 8,748 8,748 9,132
Unearned ESOP compensation (Note 13)................................................... (6,320) (6,320) (6,600)
SHAREHOLDERS' EQUITY
Preferred stock, $1.65 par value (Note 13)
Authorized shares 1,000,000; 87,477, 87,477 and 91,319 shares issued to ESOP at
December 31, 1996 and March 31, 1996 and 1995, respectively.......................... -- -- --
Common stock, $0.20 par value (Note 13)
Authorized shares 20,000,000; 11,989,564, 11,624,275 and 11,160,289 shares issued at
December 31, 1996 and March 31, 1996 and 1995, respectively.......................... 2,398 2,325 2,232
Additional paid-in capital (Note 13)................................................... 47,786 43,660 38,288
Unearned restricted stock plan compensation (Note 13).................................. (365) (435) (548)
Treasury stock at cost, 2,566,129, 2,490,661 and 2,398,478 shares at December 31, 1996
and March 31, 1996 and 1995, respectively (Note 13).................................. (3,340) (2,384) (1,233)
Retained earnings...................................................................... 51,900 46,450 50,530
Cumulative translation adjustments (Notes 1 and 14).................................... (10,249) (9,444) (4,319)
Total shareholders' equity........................................................... 88,130 80,172 84,950
Total liabilities and equity......................................................... $808,509 $782,824 $813,489
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
STANDARD COMMERCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
1996 1995 1996 1995 1994
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Sales.................................................. $ 933,526 $ 956,716 $1,359,450 $1,213,565 $1,042,014
Cost of sales
-- Materials, services and supplies (Note 4).......... 837,929 872,812 1,227,568 1,097,119 961,916
-- Interest........................................... 23,795 28,358 41,369 34,981 29,416
Gross profit...................................... 71,802 55,546 90,513 81,465 50,682
Selling, general and administrative expenses........... 54,556 55,850 77,608 80,509 78,731
Restructuring charges (Note 2)......................... -- 12,500 12,500 -- --
Interest expense....................................... 7,490 6,830 9,559 9,947 7,173
Interest income........................................ 3,042 3,293 4,430 4,644 5,884
Other income (expense), net (Note 15).................. 4,116 2,115 6,982 14,327 4,901
Income (loss) before taxes........................ 16,914 (14,226) 2,258 9,980 (24,437)
Income taxes (Notes 1 and 16).......................... 5,996 2,522 6,836 16,370 5,070
Income (loss) after taxes......................... 10,918 (16,748) (4,578) (6,390) (29,507)
Minority interests (Note 1)............................ (2,680) (2,263) (4,795) (9,634) (3,765)
Equity in earnings (losses) of affiliates (Note 6)..... 661 541 (69) (4,470) (3,226)
Income (loss) from continuing operations.......... 8,899 (18,470) (9,442) (20,494) (36,498)
Income (loss) from discontinued operations
(Note 2)............................................. -- 10,050 10,050 (10,050) 689
Cumulative effect of accounting changes (Notes 11 and
16).................................................. -- -- -- -- 23
Net income (loss)................................. 8,899 (8,420) 608 (30,544) (35,786)
ESOP preferred stock dividends, net of tax............. (347) (358) (474) (485) (486)
Net income (loss) applicable to common
stock........................................... 8,552 (8,778) 134 (31,029) (36,272)
Retained earnings at beginning of year................. 46,450 50,530 50,530 84,807 125,139
Common stock dividends................................. (3,102) (3,347) (4,214) (3,248) (4,060)
Retained earnings at end of year.................. $ 51,900 $ 38,405 $ 46,450 $ 50,530 $ 84,807
Earnings (loss) per common share:
Primary -- from continuing operations.................. $ 0.92 $ (2.12) $ (1.11) $ (2.43) $ (4.32)
-- from discontinued operations............... -- 1.13 1.12 (1.17) 0.08
-- net........................................ 0.92 (0.99) 0.01 (3.60) (4.24)
-- average shares outstanding................. 9,264 8,888 8,934 8,619 8,553
Fully diluted.......................................... * * * * *
</TABLE>
* Not applicable because fully diluted calculations included adjustments which
are antidilutive.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
STANDARD COMMERCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
1996 1995 1996 1995 1994
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................. $ 8,899 $ (8,420) $ 608 $(30,544) $(35,786)
Depreciation and amortization.................................... 14,366 19,391 24,393 16,413 16,260
Minority interests............................................... 2,680 2,263 4,795 9,634 3,765
Deferred income taxes............................................ (490) (502) (968) 793 (1,047)
Undistributed losses of affiliates net of dividends received..... (514) (540) 166 4,626 3,976
Gain on disposition of property, plant and equipment............. (199) (1,145) (1,093) (13,581) (4,729)
Loss (income) from discontinued operations....................... -- (10,050) (10,050) 10,050 --
Other............................................................ 1,850 (190) (5,244) 3,404 (1,190)
26,592 807 12,607 795 (18,751)
Net changes in working capital other than cash
Receivables...................................................... 15,085 (7,170) (24,752) 59,665 35,799
Inventories...................................................... (73,539) 12,753 85,901 38,342 5,691
Current payables................................................. (5,547) (1,060) (23,909) (3,382) 24,918
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES................... (37,409) 5,330 49,847 95,420 47,657
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment
-- additions..................................................... (9,441) (9,349) (12,211) (17,328) (27,257)
-- dispositions................................................. 504 2,883 3,151 16,274 9,460
Minority interest.................................................. -- (7,740) (7,740) -- --
Business (acquisitions) dispositions............................... 2,993 279 440 (2,605) (2,427)
CASH USED FOR INVESTING ACTIVITIES................................. (5,944) (13,927) (16,360) (3,659) (20,224)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings................................. 10,011 9,658 9,645 10,442 14,332
Repayment of long-term borrowings.................................. (18,123) (12,226) (14,968) (29,113) (23,309)
Net change in short-term borrowings................................ 28,973 20,133 (5,330) (86,406) 8,111
Dividends paid, net of tax......................................... (347) (362) (474) (485) (4,546)
Other.............................................................. -- (1,515) 114 213 229
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES................... 20,514 15,688 (11,013) (105,349) (5,183)
Increase (decrease) in cash for year............................... (22,839) 7,091 22,474 (13,588) 22,250
Cash at beginning of year.......................................... 78,688 56,214 56,214 69,802 47,552
CASH AT END OF YEAR................................................ $ 55,849 $ 63,305 $78,688 $ 56,214 $ 69,802
Cash payments for
-- interest...................................................... $ -- $ -- $44,426 $ 47,588 $ 34,610
-- income taxes................................................. -- -- 6,433 8,441 5,708
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES -- During 1996 the Company assumed
100% ownership of Transcatab, SpA, a previously 50%-owned affiliate. The assets
and corresponding liabilities assumed totaled $32.4 million.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
a) CONSOLIDATION. The accounts of all subsidiary companies are included in
the consolidated financial statements and all intercompany transactions have
been eliminated. Investments in affiliated companies are accounted for by the
equity method of accounting.
b) UNAUDITED FINANCIAL STATEMENTS. In the opinion of management, the
consolidated statements of income and retained earnings and of cash flows for
the nine months ended December 31, 1996 and 1995 and the consolidated balance
sheet as of December 31, 1996 include all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position and
results of operations and cash flows for the periods then ended in accordance
with generally accepted accounting principles.
c) FOREIGN CURRENCY. Assets and liabilities of foreign subsidiaries are
translated at year-end exchange rates. The effects of these translation
adjustments are reported in a separate component of shareholders' equity.
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.
d) MARKETABLE SECURITIES. Marketable securities are classified as available
for sale and consist of liquid equity securities. The specific identification
method is used to determine gains and losses when securities are sold.
e) INTANGIBLE ASSETS. The Company's policy has been to amortize goodwill on
a straight-line basis over its estimated useful life not to exceed 40 years. The
Company assesses recoverability of goodwill based on management's projections of
future cash flows of acquired businesses.
f) PROPERTY, PLANT AND EQUIPMENT. The cost of significant improvements to
property, plant and equipment is capitalized. Maintenance and repairs are
expensed as incurred. Provision for depreciation is charged to operations over
the estimated useful lives, primarily 3-30 years, of the assets on a
straight-line basis.
g) INVENTORIES. Inventories, which are primarily packed leaf tobacco and
wool, are stated at the lower of specific cost or estimated net realizable
value. Cost of tobacco includes a proportion of interest, buying commission
charges and factory overheads which can be related directly to specific items of
inventory. Cost of wool includes all direct costs except interest. Items are
removed from inventory on an actual cost basis.
h) REVENUE RECOGNITION. Sales and revenue are recognized on the passage of
title.
i) INCOME TAXES. Certain policies used for financial statement purposes
differ from those used for income tax purposes, thereby causing a deferral of
taxes on income.
j) MINORITY INTERESTS. Minority interests represent the interest of third
parties in the net assets of certain subsidiary companies.
k) COMPUTATION OF EARNINGS PER COMMON SHARE. Primary earnings per share are
computed by dividing earnings, less preferred stock dividends payable to ESOP,
net of tax, by the weighted average number of shares outstanding during each
year. Fully diluted earnings per share assumes the conversion into common stock
of all the 7 1/4% Convertible Subordinated Debentures and ESOP preferred stock
at the date of issue, thereby increasing the weighted average number of shares
deemed to be outstanding during each period, and adding back to primary earnings
the after-tax interest expense.
l) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS. In May 1995, STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, was issued. This
Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed. The Company does not believe the adoption of SFAS
No. 121 will have a material effect on its consolidated financial statements.
The Statement is required to be implemented by the Company in fiscal 1997.
In October 1995, SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, was
issued and is effective for the Company beginning April 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be measured
based on the fair value of the equity
F-6
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES -- Continued
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share for the year
ending March 31, 1997.
m) USE OF ESTIMATES AND ASSUMPTIONS. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
n) RECLASSIFICATION. Certain amounts in prior year statements have been
reclassified for conformity with current statement presentation.
NOTE 2 -- DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES
a) DISCONTINUED OPERATIONS. In fiscal 1995, the Company entered into an
agreement to sell its wool operations. During the third quarter of fiscal 1996,
the proposed sale was terminated. Accordingly, the results of operations of the
wool business for the prior periods have been reclassified from discontinued
operations to continuing operations. The estimated loss on disposal of $10.1
million in 1995 was reversed in 1996. The estimated loss was determined by
deducting the $56 million estimated net asset value of discontinued wool
operations (i.e., sales price) from the $66.1 million value of net assets held
for sale.
Assets, liabilities, revenues and operating profits (losses) for fiscal
years ending 1995 and 1994, the years the wool operations were reported as
discontinued operations, were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
(IN THOUSANDS)
Total assets.............................................................................. $294,290 $232,265
Total liabilities......................................................................... 216,326 166,123
Revenues.................................................................................. 440,112 346,420
Pretax operating income................................................................... 10,002 4,446
</TABLE>
In December 1993, the Company completed the sale of its Caro-Green Nursery
business to Zelenka Nursery Inc. The operating results and gain on disposal for
Caro-Green Nursery are reported as discontinued operations and, accordingly,
prior period results have been restated. Following is a summary of amounts
included in discontinued operations for fiscal year ending 1994:
<TABLE>
<CAPTION>
1994
<S> <C>
(IN THOUSANDS)
Sales.............................................................................................. $4,993
Pretax operating income............................................................................ 89
Income tax benefit................................................................................. (30)
Gain on disposal, less income taxes of $325........................................................ 630
Income from discontinued operations................................................................ 689
</TABLE>
At March 31, 1996, the consolidated balance sheet includes notes receivable
from the purchaser totaling approximately $3.2 million.
b) RESTRUCTURING CHARGES. As a result of the termination of the sale of the
wool operations, the Company implemented a reorganization plan for its
nontobacco businesses and determined that a pretax restructuring charge of $12.5
million ($11.0 million after-tax) was appropriate. The costs include $3.6
million for the impairment of goodwill (determined by third-party negotiations);
$2.8 million for export incentive allowances; $2.1 million for plant closure;
$2.5 million for expenses related to the wool sale and other miscellaneous
restructuring costs. It is currently anticipated that substantially all incurred
but unpaid amounts ($3.5 million at March 31, 1996) will be expended during
fiscal 1997.
F-7
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- RECEIVABLES
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
(IN THOUSANDS)
Trade accounts............................................................................ $173,413 $147,910
Advances to suppliers..................................................................... 36,701 20,539
Affiliated companies...................................................................... 17,357 17,190
Other..................................................................................... 30,196 30,591
257,667 216,230
Allowances for doubtful accounts.......................................................... (5,550) (5,367)
$252,117 $210,863
</TABLE>
NOTE 4 -- INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1996 1995
<S> <C> <C> <C>
(UNAUDITED) (IN THOUSANDS)
Tobacco................................................................. $ 255,382 $160,721 $194,344
Nontobacco.............................................................. 76,212 99,060 151,066
$ 331,594 $259,781 $345,410
</TABLE>
Tobacco inventories at March 31, 1996 and 1995 included capitalized
interest, totaling $4.2 million and $7.8 million, and valuation reserves for
tobacco and wool of $5.2 million and $14.2 million, respectively. Inventory
valuation provisions included in cost of sales totaled approximately $8.4
million, $5.3 million and $23.8 million in 1996, 1995 and 1994, respectively.
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
(IN THOUSANDS)
Land...................................................................................... $ 15,318 $ 14,222
Buildings................................................................................. 76,464 76,281
Machinery and equipment................................................................... 133,959 120,084
Furniture and fixtures.................................................................... 12,023 10,472
Construction in progress.................................................................. 1,210 1,161
238,974 222,220
Accumulated depreciation.................................................................. (104,476) (87,813)
$134,498 $134,407
</TABLE>
Depreciation expense was $18.1 million, $14.7 million and $14.1 million in
1996, 1995 and 1994, respectively.
F-8
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- AFFILIATED COMPANIES
a) Net investment in affiliated companies are represented by the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
(IN THOUSANDS)
Net current assets (liabilities)...................................................... $ 4,445 $ (3,924)
Fixed assets.......................................................................... 24,156 45,178
Long-term liabilities................................................................. 1,977 (7,856)
Interests of other shareholders....................................................... (19,018) (20,184)
Company's interest.................................................................... 11,560 13,214
Provision for withholding taxes....................................................... (118) (309)
$ 11,442 $ 12,905
</TABLE>
b) The results of operations of affiliated companies were:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Sales..................................................................... $ 82,527 $99,236 $112,237
Income (loss) before taxes................................................ 2,493 (2,468) (4,236)
Income taxes.............................................................. 2,259 1,074 1,140
Net income (loss)......................................................... 234 (3,542) (5,376)
Company's share........................................................... (260) (4,567) (3,162)
Amortization of goodwill.................................................. -- -- (40)
Withholding taxes......................................................... 191 97 (24)
Equity in losses.......................................................... (69) (4,470) (3,226)
Dividends received........................................................ 96 154 750
</TABLE>
NOTE 7 -- OTHER ASSETS
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
(IN THOUSANDS)
Cash surrender value of life insurance policies (face amount $42,765)....................... $12,567 $12,313
Policy loans................................................................................ 6,780 6,550
5,787 5,763
Bank deposits............................................................................... 118 170
Receivables................................................................................. 17,851 11,355
Due from affiliates......................................................................... 823 15,478
Investments................................................................................. 3,294 3,573
Excess of purchase price of subsidiaries over net assets acquired -- net of accumulated
amortization of $7,231 (1995 -- $3,367)................................................... 4,347 8,211
Other....................................................................................... 5,063 4,674
$37,283 $49,224
</TABLE>
Due from affiliates in 1995 includes a total of $26.7 million less a $11.2
million reserve due from Transcatab SpA, a 50%-owned affiliate. In 1996, this
affiliate became a majority-owned, consolidated subsidiary.
F-9
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Weighted average interest on borrowings at end of year................................... 8.5% 9.8% 6.7%
Weighted average interest rate on borrowings during the year (1)......................... 9.0% 9.2% 6.7%
Maximum amount outstanding at any month-end.............................................. $433,646 $450,590 $487,046
Average month-end amount outstanding..................................................... 388,875 401,923 453,214
Amount outstanding at year-end........................................................... 373,625 378,955 465,361
</TABLE>
(1) Computed by dividing short-term interest expense and amortized financing
costs by average short-term debt outstanding.
At March 31, 1996, under agreements with various banks, total short-term
credit facilities for continuing operations of $694 million (1995 -- $644
million) were available to the Company of which $53 million (1995 -- $100
million) were being utilized for letters of credit and guarantees and $287
million (1995 -- $167 million) were unused.
The Company's tobacco credit facilities include a $100 million facility
expiring in June 1998 for U.S. operations and a two-year $200 million master
credit facility for European operations in addition to local lines of
approximately $245 million. Also, separate facilities totaling $145 million are
in place for wool operations.
The US and European loan agreements contain certain financial and reporting
covenants with which the Company was in compliance at March 31, 1996. Under its
most restrictive covenant, the Company had approximately $269,000 of retained
earnings available for distribution as dividends at March 31, 1996.
At March 31, 1996, substantially all of the Company's assets were pledged
against current and long-term borrowings.
NOTE 9 -- ACCOUNTS PAYABLE
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
(IN THOUSANDS)
Trade accounts........................................................................................ $100,286 $105,948
Affiliated companies.................................................................................. 18 1,098
Other accruals and payables........................................................................... 33,433 38,037
$133,737 $145,083
</TABLE>
F-10
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
(IN THOUSANDS)
Senior notes, at 1.75% above LIBOR repayable quarterly through March 1999.............................. $ 3,103 $ 3,835
Floating rate loan, at 1.75% above three-month negotiable CD rate, repayable quarterly through March
2002................................................................................................. 6,533 6,600
Floating rate loan, at 1.75% above LIBOR, repayable quarterly through March 1999....................... 1,535 4,927
Floating rate note, at 82% of prime, repayable in 2001................................................. 2,940 2,940
6.48% fixed rate loans repayable annually through 1998................................................. 6,472 10,308
Floating rate loan at 1.5% above LIBOR repayable annually through 1998................................. 1,175 1,762
9.25% fixed rate loan repayable annually through 1997.................................................. 820 1,640
9.82% fixed rate loan repayable annually through 2005.................................................. 3,566 3,823
10.4% loan repayable annually through 2000............................................................. 6,000 --
9.25% note repayable through 2005...................................................................... 1,978 2,118
Italian prime + 1/8% payable through 2002.............................................................. 4,273 --
11.95% loan repayable through 2001..................................................................... 3,129 3,536
Other.................................................................................................. 1,959 2,813
43,483 44,302
Current portion........................................................................................ (11,665) (11,899)
$ 31,818 $ 32,403
</TABLE>
Long-term debt maturing after one year is as follows: 1998 -- $9,148;
1999 -- $6,508; 2000 -- $4,939; 2001 -- $5,711; and thereafter -- $5,512.
CONVERTIBLE SUBORDINATED DEBENTURES
On November 13, 1991 the Company issued $69.0 million of 7 1/4% Convertible
Subordinated Debentures due March 31, 2007. The debentures are convertible into
shares of common stock of the Company at a conversion price of $30.57 after
adjustments for stock dividends. The debentures are subordinated in right of
payment to all senior indebtedness, as defined, of the Company, and as of March
31, 1995 became redeemable in whole or in part at the option of the Company any
time. Beginning March 31, 2005 the Company will make annual payments to a
sinking fund which will be sufficient to retire at least 5% of the principal
amount of issued Debentures reduced by earlier conversions, redemptions and
repurchases.
At March 31, 1996, substantially all of the Company's assets were pledged
against current and long-term borrowings.
NOTE 11 -- BENEFITS
The Company has a noncontributory defined benefit pension plan covering
substantially all full-time salaried employees in the United States. Various
other pension plans are sponsored by foreign subsidiaries. Benefits under the
plans are based on employees' years of service and eligible compensation.
Foreign plans which are significant and considered to be defined benefit pension
plans have adopted SFAS No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS. The
Company's policy is to contribute amounts to the U.S. plan sufficient to meet or
exceed funding requirements of federal benefit and tax laws.
F-11
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- BENEFITS -- Continued
U.S. PLAN
A summary of pension costs follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost -- benefits earned during the year..................................................... $ 433 $ 421 $ 415
Interest cost on projected benefit obligation....................................................... 549 501 522
Recognized return on plan assets.................................................................... (670) (583) (764)
Net amortization.................................................................................... (72) (37) (40)
Net pension cost.................................................................................... $ 240 $ 302 $ 133
</TABLE>
The funded status of the U.S. plan follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of benefit obligations:
-- vested............................................................................................... $6,429 $5,884
-- nonvested benefits................................................................................... 56 46
Accumulated benefit obligation............................................................................. 6,485 5,930
Benefits attributable to projected salaries................................................................ 1,989 1,835
Projected benefit obligation............................................................................... 8,474 7,765
Plan assets at fair value.................................................................................. 10,391 8,372
Assets in excess of projected obligation................................................................... 1,917 607
Unamortized net transition gain............................................................................ (367) (428)
Unrecognized prior service cost (benefit).................................................................. (55) 9
Unrecognized experience loss (gain)........................................................................ (389) 782
Prepaid pension costs...................................................................................... $1,106 $ 970
</TABLE>
The projected benefit obligation at March 31, 1996, 1995 and 1994 was determined
using an assumed discount rate of 7.25%, and assumed future compensation
increases of 5.25%, 5.25% and 5.5%, respectively. The assumed long-term rate of
return on plan assets was 8.0%, 8.0% and 10.0% at March 31, 1996, 1995 and 1994,
respectively. Assets consist of pooled equity and fixed income funds managed by
an independent trustee.
NON-U.S. PLANS
A summary of pension costs follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost -- benefits earned during the year............................................... $ 1,507 $ 1,428 $ 1,353
Interest cost on projected benefit obligation................................................. 2,646 2,414 2,262
Recognized return on plan assets.............................................................. (2,004) (1,655) (1,364)
Net amortization.............................................................................. 222 147 140
Net pension cost.............................................................................. $ 2,371 $ 2,334 $ 2,391
</TABLE>
F-12
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- BENEFITS -- Continued
The funded status of non-U.S. plans, which includes non-qualified defined
benefit plans, follows:
<TABLE>
<CAPTION>
ASSETS EXCEED ABO ABO EXCEEDS ASSETS
(IN THOUSANDS)
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
-- vested...................................................................... $11,575 $10,684 $12,945 $15,173
-- nonvested benefits.......................................................... 454 397 48 45
Accumulated benefit obligation (ABO).............................................. 12,029 11,081 12,993 15,218
Benefits attributable to projected salaries....................................... 4,394 3,861 1,200 1,424
Projected benefit obligation...................................................... 16,423 14,942 14,193 16,642
Plan assets at fair value......................................................... 17,402 14,427 4,484 6,060
Assets in excess of (less than) projected obligation.............................. 979 (515) (9,709) (10,582)
Unamortized net transition loss................................................... 854 932 943 1,008
Unrecognized prior service cost (benefit)......................................... (113) (124) 913 1,003
Unrecognized experience loss (gain)............................................... (1,193) 110 (817) 357
Additional minimum liability...................................................... -- -- (914) (1,271)
Prepaid (accrued) pension costs................................................... $ 527 $ 403 $(9,584) $(9,485)
</TABLE>
The assumptions used in 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Discount rates...................................................... 7.75% to 8.5% 7.5% to 8.5% 8.5%
Compensation increases.............................................. 3.25% to 6.5% 5.5% to 7.0% 5.5% to 7.0%
Long-term rates of return on plan assets............................ 10.0% 10.0% 8.5%
</TABLE>
Plan assets consist primarily of common stocks, pooled equity and fixed income
funds. The pension costs and obligations for non-U.S. plans shown above also
include certain non-qualified plans.
The Company also sponsors a 401(k) savings incentive plan for most full-time
salaried employees in the United States. The expense for this plan was $144,000
in 1996, $127,000 in 1995 and $145,000 in 1994.
Effective April 1, 1993, the Company adopted SFAS No. 106, EMPLOYERS' ACCOUNTING
FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, with respect to benefits
provided under U.S. plans. The Company provides certain health care and life
insurance benefits for substantially all of its retired salaried employees. SFAS
No. 106 requires the Company to accrue the estimated cost of retiree benefit
payments during the years the employee provides services.
The components of the net periodic cost of postretirement benefits for 1996,
1995 and 1994 were:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
Service cost............................................................... $ 176,148 $ 168,613 $ 427,774
Interest cost on accumulated benefit obligation............................ 522,164 405,299 550,651
Amortization of plan amendments............................................ (136,649) (138,904) --
Net periodic cost.......................................................... $ 561,663 $ 435,008 $ 978,425
</TABLE>
F-13
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- BENEFITS -- Continued
The components of the liability included in the consolidated balance sheet at
March 31, 1996 and 1995 of the actuarial present value of benefits for services
rendered to date were:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current retirees...................................................................... $ 504,723 $ 286,798
Active employees eligible to retire................................................... 2,423,723 2,182,208
Active employees not eligible to retire............................................... 4,041,795 2,857,240
6,970,241 5,326,246
Unrecognized net gain (loss).......................................................... (672,154) 495,368
Unrecognized prior service cost....................................................... 1,111,227 1,250,131
Accumulated postretirement benefit obligation......................................... $7,409,314 $7,071,745
</TABLE>
The accumulated postretirement benefit obligation (APBO) was determined using an
8.0% weighted-average discount rate. The medical cost trend rate used in
determining the APBO was assumed to be 13.25% in 1996. This rate was assumed to
gradually decline to 6.5% in 2003, and remain at that level thereafter.
Assuming a one percent increase in the medical cost trend rates, the aggregate
of the service and interest cost components of the net periodic pension cost for
1996 would increase by $121,000 and the APBO as of March 31, 1996 would increase
by $917,000. In general, postretirement benefit costs are insured or paid as
claims are incurred.
The ongoing impact of SFAS No. 106 as it relates to employees of foreign
subsidiaries is immaterial. The Company expenses the cost of these benefits as
incurred.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company is obligated under operating leases for equipment, office and
warehouse space with minimum annual rentals as follows: 1997 -- $3,530,476;
1998 -- $3,016,303; 1999 -- $2,486,829; 2000 -- $2,043,153; 2001 -- $2,030,936;
thereafter $2,383,122. Some of the leases are subject to escalation. Expenses
under operating leases for continuing operations in 1996, 1995 and 1994 were
$3,811,000, $963,000 and $788,000, respectively.
The Company operates a processing facility under a service agreement which
guarantees reimbursement of all of the facility's costs including operating
expenses and management fees. This lease is not considered a commitment of the
Company.
The Company has commitments for capital expenditures of approximately $12.5
million, all of which are expected to be incurred in fiscal 1997.
The previously reported joint Canadian-U.S. criminal investigation into alleged
violations of law relating to the importation, exportation and taxation of
tobacco is continuing. All Canadian charges have now been dismissed and no
charges are pending against the Company or any of its employees. The
investigation by the office of the United States Attorney for the Eastern
District of North Carolina is continuing. Although the extent of liability, if
any, which the Company or any of its subsidiaries might have as a result of that
investigation cannot be determined, management does not believe that it will
have a material adverse effect on the Company's Consolidated Financial
Statements.
Third-party borrowings guaranteed by the Company at March 31, 1996 totaled
approximately $34 million.
On May 1, 1993 a foreign subsidiary of the Company received notices of proposed
tax adjustments of approximately $4 million to its returns for the years 1985
through 1992. A special arbitrator ruled that the Company was liable for taxes
of $1.8 million for the years under review. The Company has found fault with and
appealed the ruling. The Company believes the assessments are without merit and
intends to vigorously contest the proposed deficiencies, and that any adjustment
which might result would not have a material effect on the Company's
Consolidated Financial Statements.
Other contingencies, consisting of guarantees, pending litigation and other
claims, in the opinion of management, are not considered to be material in
relation to the Company's Consolidated Financial Statements.
F-14
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- COMMITMENTS AND CONTINGENCIES -- Continued
CONCENTRATION OF CREDIT AND OFF-BALANCE SHEET RISKS
Financial instruments that potentially subject the Company to a concentration of
credit risks consist principally of cash and trade receivables relating to
customers in the tobacco and wool industries. Cash is deposited with
high-credit-quality financial institutions. Concentration of credit risks
related to receivables is limited because of the diversity of customers and
locations.
NOTE 13 -- COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
COMMON ADDITIONAL
STOCK PAR PAID-IN
ISSUED TREASURY VALUE CAPITAL
(IN THOUSANDS)
<S> <C> <C> <C> <C>
March 31, 1993.............................................................. 10,863,023 2,346,318 $ 2,172 $ 33,928
401(k) contributions........................................................ 8,591 -- 2 143
Dividends reinvested........................................................ 5,565 -- 1 89
RSP shares issued........................................................... 36,280 -- 8 715
March 31, 1994.............................................................. 10,913,459 2,346,318 2,183 34,875
401(k) contributions........................................................ 8,585 -- 2 125
Dividends reinvested........................................................ 19,391 -- 4 302
RSP shares forfeited........................................................ (435) -- -- --
Stock dividends............................................................. 219,289 47,160 43 2,986
March 31, 1995.............................................................. 11,160,289 2,393,478 2,232 38,288
401(k) contributions........................................................ 12,283 -- 3 141
Dividends reinvested........................................................ 729 -- -- 8
RSP shares forfeited........................................................ (1,359) -- -- (37)
Stock dividends............................................................. 452,333 97,183 90 5,260
March 31, 1996.............................................................. 11,624,275 2,490,661 $ 2,325 $ 43,660
</TABLE>
The Company maintains a Performance Improvement Compensation Plan administered
by the Compensation Committee of the Board of Directors as an incentive for
designated employees. In June 1993, the Board adopted a Restricted Stock Plan
("RSP") as a means of awarding those employees, to the extent that certain
performance objectives were met, restricted shares of the Company's common stock
pursuant to the RSP. The Compensation Committee of the Board awarded 36,454
shares of Restricted Stock in fiscal 1994, of which 36,280 were issued as of
March 31, 1994. The shares were issued subject to a seven-year restriction
period.
The Company has a 401(k) savings incentive plan in the United States to which
the employer contributes shares of common stock under a matching program, and a
dividend reinvestment plan.
Treasury stock represents shares in the Company acquired by a foreign affiliate
prior to its becoming a wholly-owned subsidiary.
An Employee Stock Ownership Plan (the "ESOP"), established by W A Adams Company
("Adams") prior to its acquisition, exchanged the Adams common stock held by the
ESOP for 92,005 shares of Series A Cumulative Preferred Stock (the "ESOP
Stock"), issued by the Company, of which 3,842 shares were redeemed in 1996 (686
in 1995). The ESOP Stock has a stated value of $100 per share and a par value of
$1.65 per share. In return for the Adams stock, the Company guaranteed a bank
loan taken out by the ESOP to acquire the Adams stock. The loan is included in
long-term debt and a related reduction is offset by the ESOP Stock as "unearned
ESOP compensation". The outstanding ESOP Stock is convertible into 257,892
shares of the Company's common stock, subject to adjustment under certain
conditions, and bears cumulative dividends at a rate of 8% of stated value per
annum payable quarterly in arrears when, as and if declared. The ESOP Stock is
redeemable at the option of the Company, in whole or in part, on or after August
1, 1996 at a price of $100 per share plus accrued and unpaid dividends, and ESOP
participants have a put option at the stated value on any ESOP Stock received.
Holders of the
F-15
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13 -- COMMON STOCK -- Continued
ESOP Stock have voting rights with respect to certain matters that may be
submitted to a vote of holders of the Company's common stock.
The Company has filed a Determination Letter Request with the Internal Revenue
Service to terminate the ESOP; however, no distributions have been made as a
result of the request. The Company's Board of Directors has indicated that it
may adjust the conversion price to encourage conversion of the ESOP Stock in
lieu of redemption.
NOTE 14 -- FOREIGN CURRENCY
Changes in the translation adjustment component of shareholders' equity are
shown below:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Beginning balance April 1................................................................... $(4,319) $(17,984) $ (9,546)
Net change in translation of foreign financial statements................................... (5,125) 13,665 (8,438)
Ending Balance March 31..................................................................... $(9,444) $ (4,319) $(17,984)
</TABLE>
Net amounts included in the consolidated statement of income relating to foreign
currency losses from continuing operations were $276, $756, and $26 in 1996,
1995 and 1994, respectively.
NOTE 15 -- OTHER INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Other income
Gain on asset sales and dispositions......................................................... $ 4,476 $14,650 $4,358
Rents received............................................................................... 441 233 659
Other........................................................................................ 4,976 2,162 701
9,893 17,045 5,718
Other expense
Amortization of goodwill..................................................................... (197) (582) (413)
Other........................................................................................ (2,714) (2,136) (404)
(2,911) (2,718) (817)
$ 6,982 $14,327 $4,901
</TABLE>
NOTE 16 -- INCOME TAXES
Effective April 1, 1993 the Company adopted SFAS No. 109, ACCOUNTING FOR INCOME
TAXES, which required a change in the method of accounting for income taxes from
the deferred method to the liability method. The cumulative effect of adopting
SFAS No. 109 was to increase income by $3.7 million. Deferred income taxes
reflect the net tax effect of (a) temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and (b) operating-loss carryforwards.
F-16
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16 -- INCOME TAXES -- Continued
a) Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
(IN THOUSANDS)
Deferred tax liabilities:
Depreciation.......................................................................................... $11,377 $12,202
Capitalized interest.................................................................................. 763 1,010
Income recognition in foreign subsidiaries............................................................ 16,673 10,943
Prepaid pension assets................................................................................ 898 1,178
All other, net........................................................................................ -- 3,344
Total deferred tax liabilities........................................................................ 29,711 28,677
Deferred tax assets:
NOL carried forward................................................................................... 8,766 4,996
Valuation allowance................................................................................... (7,021) (4,671)
Postretirement benefits other than pensions........................................................... 2,919 2,786
Uniform capitalization................................................................................ 186 292
All other, net........................................................................................ 1,925 --
Total deferred tax assets............................................................................... 6,775 3,403
Net deferred tax liabilities............................................................................ $22,936 $25,274
</TABLE>
The net deferred tax liabilities include approximately $13,304 and $13,563 of
current liabilities at March 31, 1996 and 1995, respectively.
b) Income tax provisions are detailed below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Current
Federal....................................................................................... $ 130 $ 3,686 $ (356)
Foreign....................................................................................... 7,455 11,470 5,839
State and local............................................................................... 219 421 634
7,804 15,577 6,117
Deferred
Federal....................................................................................... (1,131) (1,154) 96
Foreign....................................................................................... 160 1,938 (1,144)
State and local............................................................................... 3 9 1
(968) 793 (1,047)
Income tax provision............................................................................ $6,836 $16,370 $5,070
</TABLE>
F-17
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16 -- INCOME TAXES -- Continued
c) Components of deferred taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Tax on differences in timing of income recognition in foreign subsidiaries.................... $(2,565) $ 2,055 $(1,370)
Utilization of NOL carried forward............................................................ 185 -- 31
Capitalized interest.......................................................................... (248) (29) 366
DISC income................................................................................... -- (89) (89)
Other......................................................................................... 1,660 (1,144) 15
$ (968) $ 793 $(1,047)
</TABLE>
d) The provision for income taxes is determined on the basis of the jurisdiction
imposing the tax liability. As some of the income of foreign companies may also
be currently subject to U.S. tax, the U.S. and foreign income taxes shown do not
compare directly with the segregation of pretax income between domestic and
foreign companies that follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Pretax income
Domestic.................................................................................... $ 264 $ (89) $ 5
Foreign..................................................................................... 1,994 10,069 (24,442)
$2,258 $ 9,980 $(24,437)
</TABLE>
e) The following is a reconciliation of the income tax provision to the expense
calculated at the U.S. federal statutory rate.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
Expense (benefit) at U.S. federal statutory tax rate.......................................... $ 768 $ 3,393 $ (7,629)
Foreign tax losses for which there is no relief available..................................... 4,359 9,750 13,467
U.S. tax on foreign income.................................................................... 200 2,912 408
Different tax rates in foreign subsidiaries................................................... (177) (1,073) (1,482)
Other -- net.................................................................................. 1,686 1,388 306
$6,836 $16,370 $ 5,070
</TABLE>
NOTE 17 -- DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments as of March 31,
1996 is provided below in accordance with SFAS No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS. Certain estimates and judgments were required to
develop the fair value amounts, which are not necessarily indicative of the
amounts that would be realized upon disposition, nor do they indicate the
Company's intent or ability to dispose of such instruments.
CASH AND CASH EQUIVALENTS: The estimated fair value of cash and cash equivalents
approximates carrying value.
OTHER ASSETS: Included in other assets are certain long-term investments,
amounting to $3.3 million, which are carried on a cost basis. The estimated fair
values of these investments is $4.2 million.
SHORT-TERM AND LONG-TERM DEBT: The fair value of the Company's short-term
borrowings, which primarily consists of bank borrowings, approximates its
carrying value. The estimated fair value of long-term debt, including the
current portion, is approximately $89.2 million, compared with a carrying value
of $112.5 million, based on discounted cash flows for fixed rate borrowings,
with the fair value of floating rate borrowings considered to approximate
carrying value.
F-18
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 18 -- SEGMENT INFORMATION
The Company is engaged primarily in purchasing, processing and selling leaf
tobacco and wool. Its activities other than these are minimal. Geographic
information is determined by the areas in which the companies conducting these
activities are registered. Generally, sales between segments are made at
prevailing market prices.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
GEOGRAPHIC AREAS
Sales
United States..................................................................... $ 375,842 $ 288,143 $ 299,914
Europe............................................................................ 781,910 702,606 585,062
Other areas....................................................................... 319,428 355,529 267,899
Intersegment eliminations......................................................... (117,730) (132,713) (110,861)
$1,359,450* $1,213,565* $1,042,014*
Income (loss) before taxes
United States..................................................................... $ 3,576 $ 2,598 $ 3,648
Europe............................................................................ 10,616 (9,406) (24,645)
Other areas....................................................................... (8,609) 20,425 1,423
Corporate expenses................................................................ (3,325) (3,637) (4,863)
$ 2,258 $ 9,980 $ (24,437)
Assets
United States..................................................................... $ 163,002 $ 142,793 $ 182,429
Europe............................................................................ 469,247 503,397 562,300
Other areas....................................................................... 133,075 148,359 123,483
Investment in affiliates.......................................................... 11,442 12,905 14,601
Corporate assets.................................................................. 6,058 6,035 7,958
$ 782,824 $ 813,489 $ 890,771
U.S. Exports
Europe............................................................................ $ 103,526 $ 69,348 $ 79,105
Far East.......................................................................... 46,726 80,474 92,641
Other areas....................................................................... 5,007 12,369 1,900
$ 155,259 $ 162,191 $ 173,646
</TABLE>
* Includes sales in excess of 10% to one tobacco customer.
F-19
<PAGE>
STANDARD COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 18 -- SEGMENT INFORMATION -- Continued
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
BUSINESS SEGMENTS
Sales
Tobacco........................................................................... $ 925,549 $ 755,971 $ 671,495
Nontobacco........................................................................ 433,901 457,594 370,519
$1,359,450* $1,213,565* $1,042,014*
Income (loss) before taxes
Tobacco........................................................................... $ 28,373 $ 2,759 $ (26,699)
Nontobacco........................................................................ (22,790) 10,858 7,125
Corporate expenses................................................................ (3,325) (3,637) (4,863)
$ 2,258 $ 9,880 $ (24,437)
Interest expense included above
Tobacco........................................................................... $ 39,381 $ 35,207 $ 29,487
Nontobacco........................................................................ 11,547 9,721 7,103
$ 50,928 $ 44,928 $ 36,590
Depreciation and amortization expense
Tobacco........................................................................... $ 12,914 $ 11,004 $ 9,398
Nontobacco........................................................................ 9,778 5,135 4,704
$ 22,692 $ 16,139 $ 14,102
Equity in earnings of affiliates
Tobacco........................................................................... $ (217) $ (4,489) $ (3,514)
Nontobacco........................................................................ 148 19 288
$ (69) $ (4,470) $ (3,226)
Assets
Tobacco........................................................................... $ 532,627 $ 499,587 $ 630,492
Nontobacco........................................................................ 244,139 307,867 252,321
Corporate assets.................................................................. 6,058 6,035 7,958
$ 782,824 $ 813,489 $ 890,771
Capital expenditures
Tobacco........................................................................... $ 10,398 $ 11,177 $ 21,954
Nontobacco........................................................................ 1,813 6,151 5,303
$ 12,211 $ 17,328 $ 27,257
</TABLE>
* Includes sales in excess of 10% to one tobacco customer.
F-20
<PAGE>
NOTE 19 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1996 and 1995:
<TABLE>
<CAPTION>
QUARTER
1ST 2ND 3RD 4TH ANNUAL
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 Sales.................................................. $296,965 $282,196 $377,555 $402,734 $1,359,450
Gross profit........................................... 14,473 14,762 26,311 34,967 90,513
Income (loss) from continuing operations............... (6,255) (3,175) (9,040) 9,028 (9,442)
Income (loss) from discontinued operations............. (4,500) 3,751 10,799 -- 10,050
Net income (loss)...................................... (10,755) 576 1,759 9,028 608
Earnings (loss) per share
Primary -- from continuing operations............. (0.73) (0.37) (1.02) 0.98 (1.11)
-- from discontinued operations.......... (0.51) 0.42 1.20 -- 1.12
-- net................................... (1.24) 0.05 0.18 0.98 0.01
Fully diluted..................................... * * * 0.84 *
Dividends paid per share............................... ** ** ** **
1995 Sales.................................................. $253,249 225,049 301,880 433,387 1,213,565
Gross profit........................................... 16,075 14,990 23,250 27,150 81,465
Income (loss) from continuing operations............... (1,171) (4,077) 296 (15,542) (20,494)
Income (loss) from discontinued operations............. -- -- -- (10,050) (10,050)
Net income (loss)...................................... (1,171) (4,077) 296 (25,592) (30,544)
Earnings (loss) per share
Primary -- from continuing operations............. (0.15) (0.49) 0.02 (1.84) (2.43)
-- from discontinued operations.......... -- -- -- (1.15) (1.17)
-- net................................... (0.15) (0.49) 0.02 (2.99) (3.60)
Fully diluted..................................... * * * * *
Dividends paid per share............................... 0.10 0.10 ** ** 0.20
</TABLE>
* Not applicable because fully diluted calculations include adjustments which
are antidilutive.
** Distributed one percent stock dividend.
F-21
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER, AGENT OR DEALER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 6
Use of Proceeds...................................... 10
Capitalization....................................... 10
Price Range of Common Stock and Dividends............ 11
Selected Consolidated Financial Data................. 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 13
Business............................................. 19
Management........................................... 31
Principal and Selling Shareholders................... 34
Underwriting......................................... 35
Legal Matters........................................ 36
Experts.............................................. 36
Available Information................................ 36
Incorporation of Certain Documents by Reference...... 36
Index to Consolidated Financial Statements........... F-1
</TABLE>
3,525,000 SHARES
[STANDARD COMMERCIAL LOGO]
COMMON STOCK
PROSPECTUS
WHEAT FIRST BUTCHER SINGER
BT SECURITIES CORPORATION
, 1997
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a schedule of the various expenses, all of which will be
paid by the Company in connection with the offering of the Common Stock
registered hereby, other than underwriting discounts and commissions. All
amounts shown are estimates except the SEC registration fee, the NASD filing fee
and the NYSE listing fee:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee...................................................................... $ 21,344
NASD filing fee........................................................................... 7,543
NYSE listing fee.......................................................................... 10,500
Blue Sky fees and expenses (including counsel fees)....................................... 10,000
Accounting fees and expenses.............................................................. 150,000
Legal fees and expenses................................................................... 175,000
Printing and engraving expenses........................................................... 75,000
Miscellaneous............................................................................. 25,613
Total................................................................................ $475,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant's Articles of Incorporation and Bylaws include provisions to
(i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the fullest extent permitted
by Section 55-8-30(e) of the North Carolina Business Corporation Act (the "North
Carolina Law"), and (ii) require the Registrant to indemnify its directors and
officers to the fullest extent permitted by Sections 55-8-50 through 55-8-58 of
the North Carolina Law, including circumstances in which indemnification is
otherwise discretionary. Pursuant to Sections 55-8-51 and 55-8-57 of the North
Carolina Law, a corporation generally has the power to indemnify its present and
former directors, officers, employees and agents against expenses incurred by
them in connection with any suit to which they are, or are threatened to be
made, a party by reason of their serving in such positions so long as they acted
in good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful. The
Registrant believes that these provisions are necessary to attract and retain
qualified persons as directors and officers. These provisions do not eliminate
the directors' duty of care, and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under North Carolina Law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for acts or omissions that the director
believes to be contrary to the best interests of the Registrant or its
shareholders, for any transaction from which the director derived an improper
personal benefit, for acts or omissions involving a reckless disregard for the
director's duty to the Registrant or its shareholders when the director was
aware or should have been aware of a risk of serious injury to the Registrant or
its shareholders, for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
Registrant or its shareholders, for improper transactions between the director
and the Registrant and for improper distributions to shareholders and loans to
directors and officers. These provisions do not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Registrant's Bylaws require the Registrant to indemnify in directors
and officers against expenses, judgments, fines, settlement and other amounts
actually and reasonably incurred (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interest of the Registrant and,
with respect to any criminal proceeding, had no reasonable cause to believe his
or her conduct was unlawful. The Registrant's Bylaws also set forth certain
procedures that will apply in the event of a claim for indemnification
thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its directors and officers, and by the Registrant of the Underwriters, for
certain liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"), or otherwise.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
1.1 Form of Underwriting Agreement (to be filed by amendment)
3.1* Restated Articles of Incorporation, as amended
3.2** Amended Bylaws
4.1+ Shareholder Protection Rights Agreement
4.2++ Master Facilities Agreement dated May 5, 1995 between the Company and certain subsidiaries and Deutsche
Bank A.G. and a number of other banks
4.3++ Loan and Security Agreement dated as of May 2, 1995 among Standard Commercial Tobacco, Inc.,
a subsidiary of the Company, and NationsBank of Georgia, N.A.
4.4++ Guaranty Agreement dated May 2, 1995 with respect to the Loan and Security Agreement referred to as
Exhibit 4.3 above
4.5+++ Amendment No. 3 dated July 15, 1996 amending the Loan and Security Agreement referred to as Exhibit 4.3
above
4.6+++ Second Amended and Restated Parent Guaranty Agreement dated July 15, 1996 between the Company and
NationsBank, N.A. (South), formerly known as NationsBank of Georgia, N.A., amending and restating the
Guaranty Agreement referred to as Exhibit 4.4 above
4.7+++ Second Supplemental Agreement dated July 16, 1996 between the Company and certain subsidiaries and
Deutsche Bank A.G. and a number of other banks amending the Master Facilities Agreement referred to as
Exhibit 4.2 above
5.1 Opinion of Wyrick, Robbins, Yates & Ponton L.L.P.
10.1*** Performance Improvement Compensation Plan
10.2++ Agreement dated May 2, 1995 between the Company and Ery W. Kehaya
10.3 Employment Agreement, dated March 21, 1997, with Robert E. Harrison
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Wyrick, Robbins, Yates & Ponton L.L.P. (contained in Exhibit 5.1)
24.1 Power of Attorney (see page II-3)
</TABLE>
* Incorporated by reference to the Company's Registration Statement on S-8
(File No. 33-59760).
** Incorporated by reference to the Company's Report on Form 10-K for the year
ended March 31, 1994.
*** Incorporated by reference to the Company's Report on Form 10-K for the year
ended March 31, 1993.
+ Incorporated by reference to the Company's Report on Form 8-K dated April 5,
1994.
++ Incorporated by reference to the Company's Report on Form 10-K for the year
ended March 31, 1995.
+++ Incorporated by reference to the Company's Report on 10-Q for the quarter
ended September 30, 1996.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to include
any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to provisions described in Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certified that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wilson, State of North Carolina, on the 21st day of
March 1997.
STANDARD COMMERCIAL CORPORATION
By: /S/ ROBERT E. HARRISON
ROBERT E. HARRISON,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
Each persons whose signature appears below constitutes and appoints Robert
E. Harrison and Guy M. Ross, and each of them, his true and lawful
attorney-in-fact and agent, with full powers of substitution, for him and his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
related Registration Statements filed pursuant to Rule 462(b) promulgated under
the Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his or her substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/S/ ROBERT E. HARRISON Director and President, Chief Executive Officer March 21, 1997
and Chief Financial Officer (Principal Executive
ROBERT E. HARRISON and Financial Officer)
/S/ GUY M. ROSS Vice President (Principal Accounting Officer) March 21, 1997
GUY M. ROSS
/S/ MARVIN W. COGHILL Director March 21, 1997
MARVIN W. COGHILL
/S/ THOMAS M. EVINS, JR. Director March 21, 1997
THOMAS M. EVINS, JR.
/S/ ERY W. KEHAYA Director March 21, 1997
ERY W. KEHAYA
/S/ J. ALEC G. MURRAY Director March 21, 1997
J. ALEC G. MURRAY
/S/ WILLIAM S. BARRACK, JR. Director March 21, 1997
WILLIAM S. BARRACK, JR.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
Director March , 1997
FRED G. BOND
/S/ HENRY R. GRUNZKE Director March 21, 1997
HENRY R. GRUNZKE
/S/ CHARLES H. MULLEN Director March 21, 1997
CHARLES H. MULLEN
/S/ DANIEL M. SULLIVAN Director March 21, 1997
DANIEL M. SULLIVAN
/S/ WILLIAM A. ZIEGLER Director March 21, 1997
WILLIAM A. ZIEGLER
</TABLE>
II-4
<PAGE>
EXHIBIT 5.1
March 24, 1997
Standard Commercial Corporation
2201 Miller Road
Wilson, North Carolina 27893
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 to be filed by
Standard Commercial Corporation, a North Carolina corporation (the "Company"),
with the Securities and Exchange Commission on or about March 24, 1997 (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of 4,053,750 shares of the Company's
Common Stock, $.20 par value per share (the "Shares"), which includes an
over-allotment option for 528,750 shares granted to the underwriters, as
described in the Registration Statement. The Shares are to be sold to the
underwriters for resale to the public as described in the Registration
Statement and pursuant to the Underwriting Agreement filed as an exhibit
thereto. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity with the original of all documents submitted to us as copies
thereof.
As your legal counsel, we have examined the proceedings taken, and are
familiar with the proceedings proposed to be taken, in connection with the sale
and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares when issued and sold in the manner referred to in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
THIS AGREEMENT, made effective the 21st day of March, 1997, by and
between ROBERT E. HARRISON (hereinafter "Executive"), and STANDARD COMMERCIAL
CORPORATION, a North Carolina corporation with principal offices in Wilson,
North Carolina (hereinafter "Company").
R E C I T A L S:
WHEREAS, Company is primarily engaged in the business of purchasing,
processing and selling tobacco and wool at wholesale internationally and within
the United States of America, and
WHEREAS, the Company and Executive desire to provide for Executive's
continued employment with Company as an executive, and
WHEREAS, Company is willing to employ Executive and Executive is
willing to accept such employment upon the terms and conditions set forth
herein.
NOW THEREFORE, the parties hereby agree as follows:
SECTION ONE - EMPLOYMENT OF EXECUTIVE/DUTIES
A. Company hereby employs the Executive and the Executive agrees to be
employed by the Company in the capacity of Chief Executive Officer, subject to
the terms and conditions set forth herein. It is the understanding of the
parties that the Company's Board of Directors shall elect Executive as President
of the Company annually until this Agreement is terminated or expires.
B. The Executive shall perform the duties and exercise the powers of
the President/Chief Executive Officer of the Company. Executive, subject to his
election or re-election by the Shareholders of the company, shall serve as a
member of the Board of Directors of the Company. The Executive shall supervise
and control the day to day business, activities and affairs of the Company,
subject at all times to the policies established by the Board of Directors of
the Company. Executive's power and authority with respect to all matters shall
be subject to the matters which require board approval as laid down from time to
time by the Board of Directors but shall be superior to those of any other
officer or employee of the Company or any subsidiary thereof. Executive shall
perform such other duties as are customarily performed by one holding such an
executive position in other similar businesses or enterprises as that engaged in
by Company, including services as an officer or director of any affiliated or
subsidiary corporations of Company.
C. The Executive shall devote his time, skill, attention and best
efforts to the business of the Company. Such time of the Executive shall be
devoted as shall be reasonably required to promote and protect the best
interests of the Company. The Executive may serve as a director or consultant to
other corporations only to the extent that such duties are known and to the
extent they involve any substantial expenditure of time that the service shall
be approved by
<PAGE>
the Board of Directors. The Executive shall not be restricted in making personal
investments unless prohibited under this Agreement or otherwise which may
detract from the time and attention devoted to the business of the Company.
D. The Executive shall perform his employment duties at the principal
executive offices of the Company which are presently located in Wilson, North
Carolina. Executive shall not be required to relocate his residence during the
term of this Agreement. Executive agrees that he will be required from time to
time to travel on behalf of Company to meet with customers, attorneys,
accountants or conduct such other business activity necessary to the conduct of
the Company's business or that of its affiliates and subsidiaries.
SECTION TWO - TERM
The initial term of Executive's employment hereunder shall be three (3)
years commencing as of the effective date set forth hereinabove. Unless sooner
terminated at the end of the initial term, any renewal at term or as otherwise
provided herein, Executive's employment with the Company shall be automatically
renewed for additional two (2) year periods unless terminated by written notice
by either party at least one hundred twenty (120) days prior to expiration of
such initial or renewal term hereof as the case may be. There shall be no limit
on the number of renewals of the term of this Agreement.
SECTION THREE - COMPENSATION
A. Company shall pay Executive an annual base salary (exclusive of
bonus payments, fringe benefits and expense allowances at the rate of Three
Hundred Fifteen Thousand and no/100ths Dollars ($315,000.00) per year, payable
in equal monthly installments unless the Company sets a different periodic basis
for payment of salaries, less deductions authorized by law. The Company shall
review the Executive's salary annually and may increase such salary each year in
the discretion of the Compensation Committee.
B. The Board of Directors in consultation with the Executive shall
determine after the beginning of each fiscal year of the Company a reasonable
business plan for the Company for the ensuing fiscal year. Each year the
Executive shall be entitled to earn a bonus and the amount of the Executive's
annual bonus shall be determined based upon the reasoned, good faith
determination by the Compensation Committee of the Board of Directors of the
degree to which the Company achieved the various aspects of the said business
plan. The amount of the annual bonus which the Executive shall be entitled to
earn shall be not less than one half of Executive's annual base salary nor more
than one times such annual base salary. Such bonus shall be computed on an
annual basis and shall be payable at such date as cash bonuses for other
executives of the Company, or in any event, within sixty (60) days of the
delivery to the Company of the audited results of operations for the prior
fiscal year.
2
<PAGE>
C. Executive shall be entitled to participate in the Company's Medical
and Hospitalization Insurance Program and Disability Insurance Program and in
any other fringe benefit program which Company may establish and modify from
time to time for the benefit of all its executive and management employees,
including, but not limited to, qualified stock option plans, non-qualified stock
option plans, qualified retirement plans, non-qualified retirement plans, life
insurance plans and executive incentive compensation plans, provided that
benefits shall not be duplicated for any specific benefit afforded Executive
under the terms of this Agreement.
SECTION FOUR - VACATION AND SICK LEAVE
A. During the term of his employment hereunder, Executive shall be
entitled to and receive as an additional benefit annual vacation leave of four
(4) weeks per year, during which time his compensation shall be paid in full.
Such vacation shall be taken by the Executive at such times as may be reasonably
mutually agreed upon by the Executive and the Company. Earned vacations not
taken in a calendar year may be accrued and carried forward to the following
calendar year, or for such longer period, if any, as shall be consistent with
the vacation policy of the Company for its executive officers. Any unused
vacation leave existing at time Executive ceases to be employed by Company shall
be paid to him in cash at his then current Annual Base Salary.
B. Executive shall also eligible for, and receive as an additional
benefit, annual sick leave in accordance with the then existing rules and
regulations adopted and modified by Company from time to time for its executive
officers.
SECTION FIVE - EXECUTIVE EXPENSES
A. The Company will provide the Executive, without charge, with an
executive automobile ("Automobile") and reimburse the Executive for all of the
Automobile's operation and maintenance expenses incurred for business use
including but not limited to insurance, maintenance, repairs, gasoline and oil.
The Automobile shall be replaced at least every three (3) years with a new model
of similar quality to the Automobile currently being used by the Executive, with
the first such replacement being in April, 1999. The income associated with such
Automobile shall be allocated to Executive in accordance with the applicable
provisions of the Internal Revenue Code of 1986, as amended. Upon cessation of
employment by the Executive with the Company, Executive shall receive without
charge to Executive, the automobile he is utilizing at the time of such
cessation.
B. Company will reimburse Executive for all reasonable expenses
incurred for the purpose of promoting the business of Company, including
expenses for entertainment, travel, and other similar items, provided that
Executive submits to Company no later than thirty days following his incurring
the expense an account book, diary, or similar itemized record in which
3
<PAGE>
Executive has recorded the required information as set forth in Treasury
Regulations promulgated under Section 274 of the Internal Revenue Code of 1986,
as amended from time to time. The right to reimbursement is also subject to the
requirement that Executive submit to Company within such 30 days supporting
documents, such as receipts or paid bills, sufficient to establish the amount,
date, place, and essential character of any expenditure for lodging or any
expenditure. The Company will consider, on a case by case basis, the
reimbursement of Executive for legal fees incurred by Executive in connection
with the routine review from time to time of reasonable legal documents
affecting Executive. The Company shall reimburse Executive for up to $5,000 for
review of this Agreement.
SECTION SIX - STOCK OPTIONS
Company will grant Executive non-qualified stock options to purchase
100,000 shares, adjusted for any stock split, stock dividend or like event, of
Company's common stock ($1 par value) at a per share purchase price of 100
percent of fair market value of the stock on the date of grant, one third of
such grant to, if he is still an employee of Company, become exercisable by him
on the first anniversary of the date of grant, one third on the second
anniversary of the date of grant and one third on the third anniversary of the
date of grant, all to remain exercisable, so long as Executive is still an
employee for a period ending seven years following the date of grant. Any
options granted shall fully vest upon termination of the employment of Executive
except in the event that Executive is terminated pursuant to Section 8(A)(3).
Other terms and conditions regarding these arrangements will be determined by
the Compensation Committee of the Board of Directors.
SECTION SEVEN - RESTRICTIVE COVENANTS AND CONFIDENTIALITY
OF CUSTOMER LISTS AND TRADE SECRETS
A. (1) Company, directly and through its affiliates and subsidiaries,
is primarily engaged in the business of purchasing, processing and selling at
wholesale tobacco and wool in the domestic and international markets.
(2) The Company will disclose to Executive confidential
information and knowledge about its business policies, products, customers,
procedures and methods. It is acknowledged by the parties that the Company has
established a valuable and extensive trade in its products and services and has
developed unique and creative corporate organization, customer lists, management
procedures financial procedures and technologies which directly relate to
profitability, which business has been developed at a considerable expense to
Company. The nature of the business is such that disclosure of such confidential
information to Executive is necessary for a Executive to carry out his duties as
an officer and employee to the Executive Company.
(3) By virtue of employment by Company, Executive will become
familiar with and possessed of the manner, methods, secrets, and confidential
information pertaining to
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such business, and with names and lists of its customers, suppliers, financial
institutions and clientele. It is acknowledged by the parties that the same has
substantial value to the Company.
(4) In consideration of the promises of the Company set forth
herein, the employment of Executive as herein provided, the disclosure by the
Company to Executive of the knowledge and information above described and other
good and valuable consideration, receipt and sufficiency of which are hereby ac
knowledged, Company exacts and Executive makes the covenants hereinafter set
forth. Further, Executive understands and acknowledges that such covenants are
required for the fair and reasonable protection of the business and goodwill of
the Company carried on in the area to which the covenants are applicable and
that without the limited restrictions on his activities imposed by the covenants
the business and goodwill of the Company would suffer irreparable and
substantial damage.
B. During the term of his employment with Company and for a period of
one (1) year commencing after the date of termination of his employment with
Company, except in the case of termination pursuant to Subsection 8(A)(2),
Executive shall not directly or indirectly, own, manage, operate, join or
control or participate in the ownership, management, operation or control of, or
be a director, partner or employee of, or a consultant to, any business, firm,
partnership, venture, corporation or entity which is conducting any business
which competes with the business of the Company. It is understood by the parties
that Executive may be employed by either an affiliate or subsidiary of Company
during the term of this Agreement. In such event, said employment is expressly
understood as not being in violation hereof.
C. Executive agrees that during the term of his employment with Company
and for a period of one (1) year after the date of termination of his employment
with Company, except in the case of termination pursuant to Subsection 8(A)(2),
he will not, on behalf of himself or on behalf of any other person, firm,
partnership, other corporation or entity, call on any of the customers of
Company, its affiliates, subsidiaries or successors for the purpose of
soliciting and/or providing to any of said customers the products and/or
services which are similar to the products and/or services of Company, its
affiliates, subsidiaries or successors, nor will Executive in any way, directly
or indirectly, for himself, or on behalf of any other person, firm, partnership,
venture, or corporation, solicit, divert or take away any customer of Company,
its affiliates or subsidiaries, or urge such customers to discontinue in whole
or in part business with Company. The term "customers of Company" shall be
deemed to include for purposes hereof any past or present customers of Company,
its affiliates, subsidiaries or successors, and third parties which Company had
actively solicited to be a customer during the six (6) month period immediately
preceding date of termination of employment.
D. Executive further covenants and agrees that during the term of his
employment with Company and for a period of one (1) year after date of
termination of employment with Company, he will not, directly or indirectly, (1)
induce or attempt to induce any employee to quit employment with Company, its
successor, affiliates or subsidiaries; (2) interfere with or disrupt Company's
relationship with any person employed by Company, its successors, affiliates or
subsidiaries or (3) solicit, entice, take away or employ any person employed by
Company, its successor, affiliates or subsidiaries.
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E. Executive further covenants and agrees that during the term of his
employment and permanently following termination of such employment for any
reason whatsoever, he will not disclose to any person, firm, association,
partnership, entity or corporation, other than in discharge of his duties
hereunder or pursuant to order of court, any governmental agency or body, or at
request of Company, any information the disclosure of which is adverse to the
business of the Company, including such information related to: (1) the business
operations or internal structure of Company; (2) the customers of Company; (3)
the financial condition of Company and (4) other information including but not
limited to trade secrets, technical data, sales figures and forecasts, marketing
analysis and studies, customer and price lists, including any and all of the
foregoing confidential information of any affiliates or subsidiaries of Company.
All papers and records of every kind, including all memoranda, lists, tapes,
notes, sketches, designs, plans, data and other documents, whether made by
Executive or not, relating to the business and affairs of Company, its
successors, affiliates and subsidiaries or to any business or field of
investigation of Company which shall at any time come into possession or control
of Executive, shall be surrendered to Company, at the Company's expense, upon
written request received while either Executive is in the employ of Company or
after such employment shall have ceased.
F. Executive further covenants and agrees that all inventions,
improvements, developments and/or discoveries (whether or not of a patentable
nature) that are related to the product lines or products manufactured,
processed or distributed by Company, its subsidiaries or affiliates which he may
conceive or make during his employment whether solely or jointly with another or
others, or during or out of the usual hours of work or at the request and upon
suggestion of the Company or otherwise, shall be the sole and exclusive property
of Company, or its successors, assigns or nominees. Executive further agrees
that he shall promptly and fully disclose to Company all such inventions,
improvements, developments and discoveries and shall execute, acknowledge and
deliver to Company, upon request by Company and without further compensation,
either during or subsequent to his employment, all instruments which Company may
deem desirable or necessary to enable Company to prosecute an application for an
to acquire, maintain and enforce all letters patent, trademarks, registration
and copyrights covering such developments in all countries and to assign and
transfer his entire right, title and interest in and to such invention,
improvement, development and/or discovery to Company and otherwise more fully
evidence and perfect Company's ownership of same.
G. Executive agrees that for a material violation of any of the
provisions of this Section Seven Company shall, in addition to any other rights
and remedies available hereunder, at law or otherwise, be entitled to an
injunction to be issued by any court of competent jurisdiction restraining
Executive from committing any material violation of this Section Seven and
Executive hereby consents to the issuance of such an injunction without need of
a bond or showing of actual damages, seek legal or equitable relief against
Executive under this Section Seven. In the event that Executive shall prevail in
defending such action, or the same shall be settled without restriction on the
Executive and/or dismissed, the Company shall pay Executive's costs of defense,
including without limitation, his attorney's fees.
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SECTION EIGHT - TERMINATION
A. The employment of Executive shall be terminated upon the occurrence
of any of the following:
1. Death during the term of employment of Executive.
2. Resignation of Executive within thirty (30) days following the
occurrence of any of the following events: (i) the failure or refusal without
cause of the Board of Directors of Company to elect Executive as President and
Chief Executive Office of the Company, (ii) The removal of the Executive from
the office of President and Chief Executive Officer of the Company without
cause, (iii) Executive ceasing without cause to be vested by Company with the
full power and authority of the Chief Executive Officer of Company as described
above without Executive's prior written consent, (iv) a change in control of the
Company either through a sale of its stock or through a sale of its assets and
the acquiror of control does not offer Executive, employment in an executive
position acceptable to Executive, comparable to that presently held and at a
salary at least equal to his then Annual Base Salary and/or (v) material breach
of this Agreement by the Company.
3. Discharge of Executive or removal of Executive from the position of
President and Chief Executive Officer upon a majority vote of all of the
Directors of the Company for cause at any time by Company. The term "cause" as
used herein shall be a breach of the terms of this Agreement by Executive after
written notice thereof by the Board of Directors to Executive and thirty (30)
days elapsing without the same being cured, or conviction of theft or
embezzlement, or a criminal act committed by the Executive which involves moral
turpitude.
4. Notice given in accordance with the terms of Section 2 of
this Agreement.
5. Mutual agreement of Company and Executive.
6. Permanent disability of Executive as referred to in
Subsection 8(C)(2).
B. (1) If at any time prior to expiration of the term hereof, the
Executive's employment is terminated in accordance with Section A(2) above, the
Company shall pay to the Executive in a lump sum within one (1) week of such
termination the following: (a) a sum equal to two (2) years' salary based on
Executive's then Annual Base Salary and (b) one (1) year's bonus under
Subsection 3 in an amount equal to the actual bonus paid to Executive on account
of the fiscal year immediately preceding such termination ("Termination Pay").
In addition, the Executive shall also be entitled to receive at such time in one
lump sum such portion of his Annual Base Salary earned prior to date of such
termination but then unpaid. Despite any such termination, Company shall
continue to provide at its sole costs health and life insurance coverage to
Executive for a period of one (1) year following such termination. The foregoing
provisions of this Subsection B(1) notwithstanding, the total termination Pay
payable to the Executive resulting from a change of ownership and/or control of
the Company shall not exceed the maximum sum payable pursuant to the provisions
of Section 280 of the Internal Revenue
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Code of 1986, as amended from time to time, which shall not cause the Executive
to be deemed a "disqualified individual" and subject to an excise tax pursuant
to the aforesaid provisions of the Internal Revenue Code.
(2) In the event of termination for any reason other than by
reason of Subsection A(2) above, Executive shall be entitled to such portion of
his then Annual Base Salary earned and any bonus awarded prior to the date of
termination but then unpaid, plus payment for earned but unused vacation or sick
pay all in accordance with the Company's policy for its executive officers.
C. (1) If, during term hereof, the Executive should become temporarily
disabled, through illness or otherwise, from performing his duties hereunder, he
shall be entitled to a leave of absence from the Company for the duration of any
such disability up to, but not exceeding, a total of one hundred eighty (180)
calendar days in any calendar year. The Executive's compensation and status as
President/Chief Executive Officer of the Company hereunder shall continue during
any disability leave or absence.
(2) For purposes of this Agreement, the Executive shall be
deemed to be permanently disabled upon medical certification by a physician to
the Company that the disability will substantially impair his ability to perform
his duties hereunder. Executive agrees, if requested by Company, to submit to a
medical examination by a physician of Company's choosing and at Company's
expense for purposes of making such determination. The Company shall compensate
Executive for the longer of one (1) year or the duration of the term of this
Agreement in an amount equivalent to his Annual Base Salary at the time of
termination, provided that the Company may reduce those amounts by amounts equal
to the proceeds of any disability insurance received by Executive on account of
disability insurance maintained by the Company on Executive's behalf
("Disability Pay").
D. Following any termination of his employment hereunder, Executive
shall, upon reasonable notice, and if able to do so, furnish such information
and proper assistance to the Company as may reasonably be required by the
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party.
E. The provisions of Section Seven shall survive the termination or
expiration of this Agreement.
SECTION NINE - DEATH BENEFITS
In the event of Executive's death during the term of his employment
hereunder, the Company shall pay to the beneficiaries whom the Executive has
designated in writing, or in the absence of such designation, to the Executive's
surviving spouse, or if none, to his estate, the Annual Base Salary and any
bonus in each case awarded but unpaid through the date of death, plus earned but
unused vacation and sick pay all in accordance with the Company's practices for
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its executive officers. In the event of Executive's death while receiving
Termination Pay pursuant to Subsection 8(B) above or Disability Pay pursuant to
Subsection 8(C) above any remaining Termination Pay or Disability Pay, as the
case may be which the deceased Executive would otherwise have been entitled to
absent his death shall be paid in a lump sum to the beneficiaries whom the
Executive has designated in writing, or in the absence of such designation, to
the Executive's surviving spouse, or if none, to his estate.
SECTION TEN - INSURANCE
A. The Executive shall have no direct rights in any policy purchased by
the Corporation. The Executive agrees to cooperate with the application and
maintenance of such insurance as may be reasonably required by the insurance
carrier or the Company. Company shall pay the entire premium cost of any such
policy.
B. If the employment of Executive is terminated for any reason other
than death, Executive may, at his own election, acquire any life or disability
insurance policies insuring his life or disability income owned by Company by
giving written notice of his election to Company within thirty (30) days after
her termination of employment. Said insurance policies shall be transferred to
the Executive upon his payment to the employer of the then interpolated terminal
reserved value of the insurance, if any.
C. The Company shall maintain to the extent Executive is insurable,
life and accident insurance consistent with the Company's policies for its
executive officers residing in the United States.
SECTION ELEVEN - MISCELLANEOUS
A. The Company shall indemnify Executive in his capacity as an
executive officer and director of the Company consistent with and subject to the
terms and conditions relating to indemnification contained in the Articles of
Incorporation and Bylaws of the Company, and consistent with the treatment
afforded senior management and directors of the Company. This indemnity
obligation shall survive the termination of this Agreement.
B. This Employment Agreement shall not be assignable by Executive nor
shall the duties under it be delegable by Executive, and shall inure to the
benefit of and be binding upon any corporate or other successors of the Company
which shall acquire, directly or indirectly, by merger, consolidation or
purchase or otherwise, all or substantially all of the assets of the Company,
and shall otherwise be binding upon the parties hereto, and their respective
heirs, executors, administrators, successors or assigns.
C. This Employment Agreement supersedes and cancels all prior
agreements and understandings between the parties and constitutes the entire
agreement between the parties.
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This Agreement may be amended or modified from time to time only pursuant to the
written agreement of both parties.
D. If the Board of Directors shall find that any person to whom any
amount is or was payable hereunder is unable to care for his affairs because of
illness or accident, or is a minor, or has died, then the Board of Directors, if
it so elects, may direct that any payment due him or his estate (unless a prior
claim therefor has been made by a duly appointed legal representative) or any
part thereof be paid or applied for the benefit of such person or to or for the
benefit of his spouse, children or other defendants, or institution maintaining
or having custody of such person, any other person deemed by said Board of
Directors to be a proper recipient on behalf of such person otherwise entitled
to payment, or any of them, in such manner and proportion as said Board of
Directors may deem proper. Any such payment shall be in complete discharge of
the liability of the Company therefor.
E. This Agreement shall be interpreted, construed, and governed
according to the laws of the State of North Carolina. Neither Executive nor any
beneficiary shall acquire by virtue of this Agreement any secured right to or
interest in any specific assets of the Company or any insurance policies or the
proceeds therefrom purchased by the Company to provide or fund any benefits
under this Agreement. This Agreement shall be supported only by the general
unsecured promise of the Company to pay the benefits hereinabove described and
shall not be deemed to create any trust or fiduciary relationship. However, this
Agreement shall be legally enforceable and shall give Executive, his
beneficiaries, heirs and personal representatives, as the case may be, the
rights of any unsecured creditor. Neither Executive nor his beneficiaries, heirs
or personal representatives shall have the right to pledge, hypothecate,
encumber or assign any right to receive any payments hereunder and any alleged
transfer or assignment thereof shall be null and void for all purposes. The
designation of a beneficiary or contingent beneficiary pursuant to the
provisions of this Agreement shall not be prohibited hereby and any designation
of a beneficiary by Executive hereunder shall be revocable by Executive during
his lifetime. For purposes of this Agreement, an individual shall not be
considered a surviving spouse if such person and Executive were legally divorced
at the time the employment of Executive terminates hereunder.
F. The provisions of this Agreement are severable, and if any one or
more provisions are determined to be illegal, invalid or otherwise
unenforceable, in whole or in part, the remaining provisions, and any partially
unenforceable provision to the extent enforceable, shall, nevertheless, be
binding and enforceable.
G. Except as otherwise set forth in Section 7(G), in the event any
legal or equitable action is brought by or against a party to this Agreement or
any asserted breach thereof and that party shall prevail in such action, the
court shall award that party all costs and expenses, including reasonable
attorneys' fees and expert witness' fees, incurred in such action.
H. Any notice to be given to Company under the terms of this Agreement
shall be addressed to Company at the address of its principal place of business,
and any notice to be given to Executive shall be addressed to him at his home
address last shown on the records of Company, or at such other address as either
party may hereafter designate in writing to the
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other. Any such notice shall have been deemed duly given when enclosed in a
properly sealed envelope addressed as aforesaid, registered or certified, and
deposited, postage paid, in the United States Mail.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have signed this Agreement as of the date first above written.
/s/ ROBERT E. HARRISON
Robert E. Harrison
STANDARD COMMERCIAL CORPORATION
By: /S/ J. ALEC G. MURRAY
Chairman of the Board
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INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Standard Commercial
Corporation on Form S-3 of our report dated June 28, 1996, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
March 21, 1997
