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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended.

OR

For the transition period from July 1, 2003 to March 31, 2004.

Commission file number 1-652

UNIVERSAL CORPORATION

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by “X” mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by “X” mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

The aggregate market value of the registrant’s voting common stock held by non-affiliates was approximately $946 million at December 31, 2003. As of June 1, 2004, the total number of shares of common stock outstanding was 25,465,652.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the June 30, 2004 Proxy Statement for the Annual Meeting of Shareholders of registrant is incorporated by reference into Part III hereof.

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Universal Corporation

Form 10-K

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PART I

Item 1. Business

The Company changed its fiscal year end to March 31 effective March 31, 2004. This change better matches the fiscal reporting period with the crop and operating cycles of the Company’s largest operations and allowed the Company to eliminate a three-month reporting lag previously used for most of its foreign subsidiaries. Fiscal year 2004 results cover the nine-month period from July 1, 2003, through March 31, 2004, and all references to fiscal year 2004 in this document refer to that period. Results for prior fiscal years cover the twelve-month periods from July 1 to June 30.

A. The Company

Universal Corporation (which together with its subsidiaries is referred to herein as “Universal” or the “Company”) is the world’s largest independent leaf tobacco merchant and has operations in agri-products and in the distribution of lumber and building products. The Company’s consolidated revenues and total segment operating income were approximately $2.3 billion and $213.9 million, respectively, in fiscal year 2004. Universal’s tobacco operations have been the principal focus of the Company since its founding in 1918, and for the fiscal year ended March 31, 2004, tobacco operations accounted for 56% of revenues and 85% of segment operating income. In fiscal year 2004, Universal’s agri-products operations accounted for 18% of revenues and 4% of segment operating income. Lumber and building products operations accounted for 26% of revenues and 12% of segment operating income in the same period. Universal conducts its operations in numerous foreign countries. In fiscal year 2004, approximately 22% and 20% of the Company’s revenue arose from products delivered to customer locations in the Netherlands and the United States, respectively. At March 31, 2004, approximately 41% of Universal’s long-lived assets were in the United States, approximately 20% were in the Netherlands, and approximately 14% were in Brazil. See Note 12 of “Notes to Consolidated Financial Statements” for additional business segment and geographical information.

Universal Corporation is a holding company that operates through numerous directly and indirectly owned subsidiaries. The Company’s two primary subsidiaries are Universal Leaf Tobacco Company, Incorporated (“Universal Leaf”) and Deli Universal, Inc. (“Deli”). The Company’s tobacco business is generally conducted through Universal Leaf, and the Company’s non-tobacco business is generally conducted through Deli, although Deli also owns some minor tobacco business interests and approximately 10% of Universal Leaf’s major tobacco operations in Brazil. See Exhibit 21 “Subsidiaries of the Registrant” for additional subsidiary information.

The Company’s business strategy is to enhance shareholder value by achieving several key objectives:

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For a discussion of the impact of current trends on the Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Information Regarding Trends and Management’s Actions.”

The Company’s website address is www.universalcorp.com. On its website, the Company posts the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and Section 16 reports on Forms 3, 4, and 5, and any amendments to those reports filed with or furnished to the Securities and Exchange Commission. All such filings on the Company’s website are available free of charge. Information on the Company’s website is not deemed to be incorporated by reference into this Form 10-K.

In addition, the Company’s Corporate Governance Guidelines, Business Ethics Policy, and charters for the Audit Committee, the Executive Compensation, Nominating, and Corporate Governance Committee, the Pension Investment Committee, and the Finance Committee are available free of charge to shareholders and the public through the “Investors/Corporate Governance” section of the Company’s website. The Business Ethics Policy includes the New York Stock Exchange’s requirements for a “Code of Business Conduct and Ethics” and the Securities and Exchange Commission’s requirements for a “Code of Ethics for Senior Financial Officers.” Printed copies of the foregoing are available to any shareholder upon written request to the Treasurer of the Company at the address set forth on the first page of this Form 10-K.

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B. Description of Tobacco Business

General

Universal’s tobacco business includes selecting, buying, shipping, processing, packing, storing, and financing of leaf tobacco in tobacco growing countries for sale to, or for the account of, manufacturers of tobacco products throughout the world. Universal does not manufacture cigarettes or other consumer tobacco products. Most of the Company’s tobacco revenues are derived from sales of processed tobacco and from fees and commissions for specific services.

The Company’s tobacco sales consist primarily of flue-cured and burley tobaccos, which, along with oriental tobaccos, are the major ingredients in American-blend cigarettes. The Company participates in the sale of oriental tobacco through ownership of a 49% equity interest in what management believes to be the largest oriental leaf tobacco merchant in the world, Socotab, L.L.C.

According to industry sources, worldwide cigarette consumption increased, on average, about 0.6% per year during the ten years that ended in 2003. During the same ten-year period, American-blend cigarette consumption increased about 1.4% per year, a faster growth rate than total world consumption, as the popularity of this style of cigarettes increased. Management believes that American-blend consumption will continue to increase as a percent of the world total, which could increase demand for flavorful flue-cured and burley leaf from areas where the Company sources tobacco. However, management believes that the effect of that increase will be minimal because of increasing efficiencies in the manufacturers’ use of leaf. For a discussion of the impact of current trends on the Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Information Regarding Trends and Management’s Actions.”

Processing of leaf tobacco is an essential service to the Company’s customers because tobacco is a perishable product. The Company’s processing of leaf tobacco includes grading in the factories, blending, quality picking, separation of leaf lamina from the stems, drying, and packing to precise moisture targets for proper aging. Accomplishing these tasks generally requires investment in plants and machinery in areas where the tobacco is grown.

Universal believes it has a leading presence as a purchaser and processor in the major exporting regions for flue-cured and burley tobacco. The Company is also a major flue-cured and burley tobacco processor in the United States, where it sells processed U.S. tobacco to several foreign cigarette manufacturers, and processes U.S. flue-cured and burley tobacco for Philip Morris USA Inc. pursuant to a non-exclusive ten-year contract executed in May 2001. In addition, Universal maintains a presence, and in certain cases, a leading presence, in virtually all other tobacco growing regions in the world. Management believes that its leading position in the leaf tobacco industry is based on its operations in all of the major source areas, its development of processing equipment and technologies, its financial position, its ability to meet customer demand, and its long-standing relationships with customers. Universal also has a leading position in worldwide dark tobacco markets. Its dark tobacco operations are located in most of the major producing countries (i.e. the United States, the Dominican Republic, Indonesia, Paraguay, and Brazil) as well as other markets. Dark tobaccos are typically used in the manufacture of cigars, pipe tobacco, smokeless tobacco products, and components of certain “roll-your-own” products.

Sales are made by Universal’s sales force and, to a lesser degree, through the use of commissioned agents. Most customers are long-established tobacco product manufacturers.

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Universal conducts its tobacco business in varying degrees in a number of countries, including Argentina, Belgium, Brazil, Canada, Colombia, the Dominican Republic, France, Germany, Guatemala, Hungary, India, Indonesia, Italy, Malawi, Mexico, Mozambique, the Netherlands, Paraguay, the People’s Republic of China, the Philippines, Poland, Portugal, Russia, Singapore, South Africa, Spain, Switzerland, Tanzania, Uganda, the United Kingdom, the United States, Zambia, and Zimbabwe. In addition, Socotab, L.L.C. has oriental tobacco operations in Bulgaria, Greece, Macedonia, and Turkey.

In the majority of countries where Universal operates, including Argentina, Brazil, Guatemala, Hungary, Italy, Mexico, Mozambique, Tanzania, the United States, and Zambia, the Company contracts directly with tobacco farmers, in most cases before harvest, and thereby takes the risk that the delivered quality and quantity will not meet market requirements. Universal also provides agronomy services and crop advances of, or for, seed, fertilizer, and other supplies. The Company has also begun contracting directly with flue-cured tobacco farmers in Malawi to expand production of flue-cured tobacco in that country. Tobacco in Canada, and to a certain extent, India, Malawi, the United States, and Zimbabwe is purchased under an auction system.

The Company has substantial capital investments in South America, particularly Brazil, and in southern Africa, and the performance of its operations in these regions can materially affect the Company’s earnings from tobacco operations. For example, the Company has significant operations in Zimbabwe, which continues to experience political and economic unrest. If the political situation in Zimbabwe were to deteriorate significantly, the Company’s ability to recover its assets there could be impaired. The Company’s equity in its net assets of subsidiaries in Zimbabwe was $61.5 million at March 31, 2004. To the extent that the Company could not replace lost volumes of tobacco in any of the regions where it operates with tobacco from other sources, its results of operations would suffer. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors that May Affect Future Results.”

Universal’s foreign operations are subject to international business risks, including unsettled political conditions, expropriation, import and export restrictions, exchange controls, and currency fluctuations. During the tobacco season in many of the countries listed above, Universal advances funds, guarantees local loans, and guarantees lines of credit, each in substantial amounts, for the purchase of tobacco. Most tobacco sales are denominated in U.S. dollars, thereby reducing the Company’s foreign currency exchange risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors that May Affect Future Results.”

Recent Developments and Trends; Factors that May Affect Future Results

For a discussion of recent developments and trends in, and factors that may affect, the Company’s tobacco business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Seasonality

Universal’s tobacco operations are seasonal in nature. Farmers begin to sell U.S. flue-cured tobacco in the third week of July and the marketing season lasts for approximately four months. U.S. burley tobacco farmers deliver their crop from mid November through mid February. Tobacco in Brazil is usually purchased from January through May while the markets in Malawi generally open around March and continue into the fall. These different marketing periods reduce the overall seasonality of the Company’s tobacco business.

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Universal normally operates its processing plants for approximately seven to nine months of the year. During this period, inventories of green tobacco, inventories of redried tobacco, and trade accounts receivable normally reach peak levels in succession. Current liabilities, particularly short-term notes payable to banks, commercial paper, and customer advances, are means of financing this expansion of current assets and normally reach their peak in this period. The Company’s balance sheet at its fiscal year end normally reflects seasonal expansions in working capital in South America, Central America, and Western Europe.

Customers

A material part of the Company’s tobacco business is dependent upon a few customers. For the year ended March 31, 2004, each of Altria Group, Inc. and Japan Tobacco Inc., including its respective affiliates, accounted for more than 10% of the Company’s revenues. The loss of, or substantial reduction in business from, either of these customers would have a material adverse effect on the Company. The Company has long-standing relationships with these customers.

Universal had orders from customers for approximately $457 million of its tobacco inventories at March 31, 2004. Based upon historical experience, it is expected that at least 90% of such orders will be delivered during the following twelve months. Typically, delays in the delivery of orders result from changing customer requirements.

The Company recognizes sales and revenue from tobacco operations at the time that title to the tobacco and risk of loss passes to the customer. Individual shipments may be large, and since the customer typically specifies shipping dates, the Company’s financial results may vary significantly between reporting periods.

Competition

The leaf tobacco industry is highly competitive. Competition among leaf tobacco merchants is based on the firm’s ability to satisfy customer specifications in the buying, processing, and financing of tobacco as well as the price charged for products and services. Competition varies depending on the market or country involved. The number of competitors in foreign markets varies from country to country, but there is competition in most areas to buy the available tobacco. The Company’s principal competitors are DIMON Incorporated and Standard Commercial Corporation. In addition, British American Tobacco p.l.c., a multinational tobacco product manufacturer, has subsidiaries that compete with the Company in some markets. Of the independent leaf tobacco industry competitors, Universal believes that it holds the largest worldwide market share.

C. Description of Agri-Products Business

The Company’s agri-products business involves selecting, buying, processing, storing, shipping, financing, and distributing as well as importing and exporting of a number of products, including tea, rubber, sunflower seeds, nuts, dried fruit, and canned and frozen foods. The Company sources products from numerous countries, including Argentina, China, Egypt, Indonesia, Kenya, Malawi, Mexico, Sri Lanka, Thailand, Turkey, and the United States.

The emphasis of the Company’s agri-products business is on value-adding activities and trading of physical products in markets where a service can be performed in the supply system from the countries of origin to the consuming industries. In a number of countries, long-standing sourcing arrangements for certain products or value-adding activities through modern processing facilities for tea, sunflower seeds, and nuts contribute to the stability and profitability of the business. Seasonal effects on trading are limited.

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The Company provides various products to numerous large and small customers in the retail food and food packaging industry and in the rubber and tire manufacturing industry. Generally, there are no formal, continuing contracts with these customers, although business relationships may be long standing. No single customer accounted for 10% or more of the Company’s consolidated revenues.

Competition among suppliers in the agricultural products in which Universal deals is based on price as well as the ability to meet customer requirements in product quality, buying, processing, financing, and delivery. The number of competitors in each market varies from country to country, but there is competition for all products and markets in which the Company operates. Some of the main competitors are: Akbar Brothers, American Eagle, Centrotrade, CHS, Dahlgren, Ennar, James Finlay, Global, Kaytee, LAB, Lipton, Pennington, Safic Alcan & Cie, Stassens, STT/Wurfbain, Sunshine, and Universal Tea.

For a discussion of recent developments and trends in, and factors that may affect, the Company’s agri-products business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

D. Description of Lumber and Building Products Business

The Company is engaged in the lumber and building products distribution and processing business in the Netherlands and other countries in Europe. The majority of lumber products are purchased outside the Netherlands, principally in the Far East, Central Europe, North America, Russia, Scandinavia, and South America.

The Company’s lumber and building products business is seasonal to the extent that winter weather may temporarily interrupt the operations of its customers in the building industry. In addition, some lumber and building products, such as garden timbers, are seasonal in nature. The business is also subject to exchange risks and other normal market and operational risks associated with lumber and building materials operations centered in Europe. Those risks include general economic conditions in the countries where the Company is located, and related trends in the building and construction industries and Do-it-Yourself (DIY) and garden center markets. Labor costs are a significant portion of the total costs for this segment, and most of the employees in the segment are subject to industry-wide collective labor agreements that determine wage increases.

The Company’s activities in this segment are conducted through two business units: construction supplies and retail supplies. The construction supplies unit, with its customer base in the Dutch building construction sector, sells a broad range of lumber and related building products through a nationwide network of regional outlets. In addition to the regional outlets, the construction supplies unit also operates specialized units that manufacture window frames, prefabricated elements, and doors. They also process and distribute value-added softwood products and distribute ceiling and partition products. During fiscal year 2004, the Company sold its small Belgian construction supplies unit due to its unfavorable market position. The resulting gain on this sale was not material.

The retail supplies unit has a strong customer base in the Benelux and is expanding in Europe. It supplies DIY retailers, home improvement stores, and garden center outlets with a broad range of lumber and related products, including softwood, moldings, panel products, doors, decorative materials, floors, and garden furniture, as well as Company-manufactured garden timbers and garden houses.

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The Company carries inventories to meet customer demands for prompt delivery. Inventory levels are based on a balance between providing service and continuity of supply to customers and achieving the highest possible inventory turns. It is traditional business practice in the construction supplies industry in the Netherlands to insure most accounts and notes receivable against uncollectibility for the majority of the amount owed. The Company generally does not provide extended payment terms to its customers. No single customer accounted for 10% or more of the Company’s consolidated revenues.

The Company’s construction supplies sales in fiscal year 2004 accounted for about 12% of the market volume for similar products in the Netherlands. This is similar to the market share of its largest competitor in this sector, PontMeyer N.V. Five additional competitors in this sector accounted for approximately 30% of the market in this period, and the balance was held by approximately 200 smaller competitors. However, traditional market boundaries are fading, and the Company increasingly competes in the wider building and construction supplies market, which is approximately four times larger than the market for lumber and building products. The primary factors of competition are quality, price, customer relationship, product range, and speed and reliability of logistics systems. The Company believes that its full geographical market coverage, its automated inventory control and billing system, and its efficient logistics give it a competitive advantage in the Netherlands.

The Company’s retail supplies business unit is one of the largest suppliers to European DIY retailers and garden centers with a clear market leadership in the Benelux, but has a low single digit market share in the fragmented European market. The primary factors of competition are concept and product development, quality and price, customer relationships, product range, and speed and reliability of logistics systems. The Company believes that its strong market position in the Benelux, growing pan-European presence, and its strength in concept development and logistics give it a solid base to expand this business.

For a discussion of recent developments and trends in, and factors that may affect, the Company’s lumber and building products business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

E. Employees

The Company employed over 30,000 employees throughout the world during the fiscal year ended March 31, 2004. This figure is estimated because the majority of the Company’s personnel are seasonal employees.

F. Research and Development

No material amounts were expended for research and development during the fiscal year ended March 31, 2004, and the fiscal years ended June 30, 2003, and 2002.

G. Patents, etc.

The Company holds no material patents, licenses, franchises, or concessions.

H. Government Regulation, Environmental Matters and Other Matters

The Company’s business is subject to general governmental regulation in the United States and in foreign jurisdictions where it conducts business. Such regulation includes, but is not limited to, matters

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relating to environmental protection. To date, governmental provisions regulating the discharge of material into the environment have not had a material effect upon the capital expenditures, earnings, or competitive position of the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors that May Affect Future Results” for a discussion of government regulation and other factors that may affect the Company’s business.

Item 2. Properties

The following table lists the Company’s significant properties (greater than 500,000 square feet), all of which are owned by the Company:

Universal owns the land and building located at 1501 North Hamilton Street in Richmond, Virginia, where it is headquartered. The building contains approximately 83,000 square feet of floor space, which is more than adequate for the Company’s needs.

Tobacco segment

Universal’s tobacco business involves, among other things, storing green tobacco, processing the green tobacco, and storing processed tobacco. Thus, the Company operates processing facilities in major tobacco growing areas. In addition, Universal requires tobacco storage facilities that are in close proximity to the processing facilities. Most of the tobacco storage facilities are owned by the Company, but it leases additional space, as the need arises, and expenses related to such leases are not material. The Company believes that the properties currently utilized in its tobacco operations are maintained in good operating condition and are suitable and adequate for their purposes at the Company’s current

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volumes. In its domestic tobacco processing operations, Universal currently owns and operates two large, high-volume plants that have the capacity to thresh, separate, grade, and redry tobacco. These plants are located in Nash County, North Carolina, and Danville, Virginia. The machinery in the Danville facility and the real estate and machinery in the Nash County facility are encumbered by liens associated with a secured financing. The balance of the loan was $72.5 million at March 31, 2004.

In addition to the Company’s significant properties listed above, Universal owns other processing facilities in the following countries: Brazil, Hungary, Italy, the Netherlands, Poland, and the United States. In addition, the Company has ownership interests in processing plants in Guatemala and Mexico and has access to smaller processing facilities in other areas, such as Argentina, India, the Philippines, the People’s Republic of China, South Africa, Uganda, and Zambia. The Company is currently building a new factory in Mozambique. The estimated cost of the project is $45 million and will include infrastructure, such as school facilities and a clinic. Socotab L.L.C., a joint venture in which Universal owns a minority interest, owns two oriental tobacco-processing plants in both Turkey and Macedonia, one each in Greece and Bulgaria, and a storage complex in the United States.

The facilities described above are engaged primarily in processing tobacco used by manufacturers in the production of cigarettes. In addition, Universal operates plants in Pennsylvania, Virginia, Brazil, the Dominican Republic, Germany, Indonesia, and Paraguay that process tobacco used in making cigar, pipe, and smokeless products as well as components of certain “roll-your-own” products.

Agri-products segment

The Company’s agri-products business involves processing and storing a number of products, including tea, sunflower seeds, and nuts. The Company owns processing facilities for sunflower seeds and beans in the United States as well as tea blending facilities in the Netherlands and Sri Lanka and leases a nut processing facility in the United States. The Company leases agri-products trading facilities around the world, including locations in Canada, Egypt, Indonesia, Kenya, Malawi, Poland, Russia, the United Kingdom, and the United States. The lease expense on these facilities is not material to the Company. None of the Company’s agri-products facilities exceeds 500 thousand square feet in floor space.

Lumber and building products segment

The construction supplies business unit owns or leases 41 sales outlets and distribution facilities in the Netherlands. Most of these locations are owned. In the Netherlands, the Company also owns a facility for large-scale sawing, planing, and finger jointing of softwood products, and a manufacturing facility for building components.

The retail supplies business unit owns or leases 12 larger scale warehousing and distribution facilities in the Netherlands. Most of these locations are owned. In the Netherlands, the Company also owns a large production facility for a wide range of wood products for the DIY retail sector. The Company leases facilities for the processing and production of garden timbers in Hungary, the Netherlands, and Poland. The Company owns or leases sales offices and distribution facilities in Austria, Belgium, France, Hungary, Poland, Portugal, and Spain.

The lumber and building products business has production plants, warehouses, and distribution centers covering over 6 million square feet, with no one facility in excess of 500 thousand square feet.

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Item 3. Legal Proceedings

The Competition Directorate-General of the European Commission (“DG Comp”) is investigating the buying practices of Spanish tobacco processors with the stated aim of determining to what extent the tobacco processing companies have jointly agreed on raw tobacco qualities and prices offered to Spanish tobacco growers. After conducting an investigation, the Company believes that Spanish tobacco processors, including the Company’s Spanish subsidiary, Tabacos Espanoles, S.A. (“TAES”), have jointly agreed to the terms of sale of green tobacco and quantities to be purchased from associations of farmers and have jointly negotiated with those associations. TAES is cooperating fully with the DG Comp in its investigation and believes that there are unusual, mitigating circumstances peculiar to the highly structured market for green tobacco in Spain. Current guidelines allow the DG Comp to assess fines in this case in amounts that would be material to the Company’s earnings. Although the Company expects to be assessed a fine, management is unable to estimate an amount at this time, and no liability has been recorded in the consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

During the quarter ended March 31, 2004, no matters were submitted to a vote of security holders.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities

Common Equity

The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “UVV.” The following table sets forth the high and low sales prices per share of the common stock on the NYSE Composite Tape, based upon published financial sources, and the dividends declared on each share of common stock for the quarter indicated.

The Company’s current dividend policy anticipates the payment of quarterly dividends in the future. However, the declaration and payment of dividends to holders of common stock is at the discretion of the Board of Directors and will be dependent upon the future earnings, financial condition, and capital requirements of the Company. Under certain of its credit facilities, the Company must meet financial covenants relating to minimum tangible net worth, minimum working capital, and maximum levels of long-term debt. If the Company were not in compliance with them, these financial covenants would restrict the Company’s ability to pay dividends or repurchase shares of common stock under its repurchase plan. The Company was in compliance with all such covenants at March 31, 2004. At June 1, 2004, there were 2,126 holders of record of the Company’s common stock.

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Common Equity Compensation Plans

Shares of the Company’s common stock are authorized for issuance with respect to the Company’s compensation plans. The following table sets forth information as of March 31, 2004, with respect to compensation plans under which shares of the Company’s common stock are authorized for issuance.

Purchases of Equity Securities

There were no purchases of the Company’s securities by the Company or any affiliated purchaser during the three months ended March 31, 2004.

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Item 6. Selected Financial Data

The calculation of the ratio of earnings to fixed charges is shown in Exhibit 12. Earnings during fiscal year 2003 reflected $15.8 million in net charges as set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.” The absence of those charges was a major factor in the improvement of the ratio of earnings to fixed charges in the nine months ended March 31, 2004.

The Company changed its fiscal year end from June 30 to March 31, effective for fiscal year 2004. Concurrent with the year-end change, the Company eliminated a three-month reporting lag for foreign subsidiaries. Selected financial data for fiscal year 2004 is presented for the nine-month transition year ended March 31, 2004. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

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The following table illustrates the impact of the adoption of the non-amortization provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” The Company adopted those provisions effective at the beginning of fiscal year 2002.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Universal Corporation, through its subsidiaries, is the world’s largest independent leaf tobacco merchant and has operations in agri-products and the distribution of lumber and building products. The Company derives most of its tobacco revenues from sales of processed tobacco to manufacturers of tobacco products throughout the world and from fees and commissions for specific services.

During the three fiscal years ended March 31, 2004, Universal has operated in tobacco markets that were in balance or in a slightly short supply situation with little excess inventory available to supply customers. The Company has been diversifying its sources of supply in the wake of the four-year decline in supply from Zimbabwe, previously one of the world’s largest exporters of tobacco, and the consequent increases in volume from South America to fill requirements. In addition, Universal has been rationalizing its operations and improving its processing capabilities in the United States amid continued declining demand for, and production of, U.S. flue-cured and burley tobacco due to uncompetitive pricing. The lumber and building products segment has been weathering a recalcitrant recession in Europe while expanding its operations through small acquisitions, culminating in the purchase of JéWé, a large molding manufacturer and distributor of DIY supplies in January 2003. During the recession, the strength of the euro helped buoy U.S. dollar-translated income. During the period, the agri-products segment has found difficult markets for many of its products, especially sunflower seeds and tea. Although income has been consistent during these three fiscal years, heavy demands for capital to diversify tobacco sources, improve U.S. processing capabilities, and expand the lumber and building products business have required the Company to increase debt. In the three fiscal years ended March 31, 2004, the Company has increased inventories, advances to suppliers, and receivables by $447 million and spent $394 million on capital projects and acquisitions. In addition, the Company has returned funds to its shareholders in the form of $100 million in dividends and $104 million in share repurchases. Total debt increased by $352 million during that time, and the Company has used funds from operations, bank debt, public debt, and secured financing to fund its needs over the period.

Management expects to see much larger flue-cured and burley crops for fiscal year 2005, although in the near term, adverse weather conditions in Brazil have reduced the amount and style of ripe leaf required by some customers. Production in Brazil has expanded rapidly to replace lost volume from Zimbabwe, but the Company continues to make significant investments in African countries to provide a more diverse supply base. Universal expects to see larger volumes of African leaf beginning in fiscal year 2006. U.S. volumes continue to decline due to non-competitive leaf prices and the absence of any meaningful change in the federal tobacco program. There are some early indications that economic conditions in Europe that ultimately will affect the Company’s lumber operations are improving.

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CHANGE IN FISCAL YEAR END

In August 2003, Universal’s board of directors approved a change in Universal’s fiscal year end from June 30 to March 31. This change better matches the fiscal reporting period with the crop and operating cycles of the Company’s largest operations and allowed the Company to eliminate a three-month reporting lag previously used for most of its foreign subsidiaries. In view of this change, the forthcoming discussion compares the consolidated financial statements as of and for the nine months ended March 31, 2004 (the transition period) with the consolidated financial statements as of and for the nine months ended March 31, 2003.

In the consolidated financial statements for the nine months ended March 31, 2004, net income for the foreign subsidiaries for the three-month period ended March 31, 2004, representing the elimination of the reporting lag, is reflected as an addition to retained earnings in the consolidated statement of shareholders’ equity. In addition, the net change in cash and cash equivalents for foreign subsidiaries for this three-month period is reported on a separate line item in the consolidated statement of cash flows.

Throughout this discussion, data for all periods except as of and for the nine months ended March 31, 2003, are derived from the Company’s consolidated financial statements, which appear in this report. All data as of and for the nine months ended March 31, 2003, are derived from our unaudited consolidated financial statements, which are presented in Note 14 of “Notes to Consolidated Financial Statements.” Summary financial information for the twelve months ended March 31, 2004, recast to show historical results without the reporting lag for foreign subsidiaries can also be found in Note 14 of “Notes to Consolidated Financial Statements.”

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RESULTS OF OPERATIONS

Nine-Month Transition Year Ended March 31, 2004, Compared to Unaudited Nine Months Ended March 31, 2003

Net income for the nine-month period that ended on March 31, 2004, was $99.6 million, or $3.94 per diluted share compared to $79.0 million, or $3.08 per diluted share for the same period last year. Last year’s results included $14.8 million of restructuring charges before taxes, or $9.5 million after taxes ($.37 per diluted share). The charges related to rationalizing U.S. operations.

Gross revenues were approximately $2.3 billion for the nine months compared to about $2.0 billion in the same period last year. Revenues were higher in all business segments. Most of the increase in tobacco segment revenue for the nine months came from larger volumes shipped from South

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America. The nine months benefited from the impact of a stronger euro on translation of revenues from European operations in both tobacco and lumber. In addition, revenues increased due to the addition of JéWé, acquired in January 2003. Agri-products revenues were up due to increased volume and prices in tea and rubber and the acquisition of a small nut processor.

Tobacco segment earnings increased by about 9% to about $181.0 million for the nine months compared to the same period last year. Tobacco operations benefited from larger shipments from South America and processing improvements in the United States despite smaller crops in both areas. The U.S. improvements were due to efficiencies and yield enhancements from a new North Carolina plant and a refurbished Virginia plant. The impact of lower shipments from Africa in the nine months was partially offset by interest income in Zimbabwe, which increased by $8.8 million due to higher interest rates on larger local currency cash balances accumulated because of limitations on uses of those funds.

Near the end of the nine-month transition year, a customer of a foreign subsidiary rejected certain shipments of tobacco because they did not meet that customer’s requirements. No sales revenue or profit has been reported on these shipments, which were made during the four months after the subsidiary’s second fiscal quarter. Management has estimated the cost associated with this tobacco, primarily shipping costs. The Company has also written down the inventory to its estimated net realizable value. The Company recorded a charge related to this matter of $10.8 million, before taxes, during the period ended March 31, 2004. Of the charge, $7.6 million is related to shipments delivered in the three months ended December 31, 2003, and is reflected in the Consolidated Statements of Income for the nine months ended March 31, 2004. The balance of the $3.2 million related to shipments delivered in January 2004 and reduced the income of foreign subsidiaries recorded as a direct addition to retained earnings on the Consolidated Balance Sheets. Management is working with the customer to mitigate the effects of its claim and develop a strategy to meet customer requirements for future crops.

U.S. tobacco operations reflected the benefit of a one-time shift in the allocation of fixed factory overhead associated with the change in the Company’s fiscal year end. Universal recognizes its fixed factory overhead expense in the United States in the quarters in which the tobacco is processed. Since processing does not normally occur during the period between April 1 and June 30, the projected overhead expense for that period has historically been allocated to the preceding three quarters of each fiscal year, based on volumes processed. Because of the change in fiscal year end to March 31, the factory overhead expense for the period from April 1 through June 30, 2004, will be reported in fiscal year 2005 results, and will be allocated to the subsequent quarters of that fiscal year. Operating income for each quarter of the nine-month transitional year ending March 31, 2004, reflects this benefit. Had fiscal year 2004 included the estimated fixed factory overhead expense for April 1 through June 30, 2004, tobacco segment operating income would have been $11 million lower for the nine months. Including the estimated effect of the U.S. fixed factory overhead allocation, pro forma tobacco segment operating earnings were up by $3.6 million, or 2.2%, for the nine months. The following table provides data that is comparable to the prior year’s results.

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Segment operating income from lumber and building products improved by about 46% for the nine months to $24.7 million. The increase is due to the strength of the euro, which gained more than 18% on average compared to the same period last year, and the acquisition of JéWé. Throughout the nine-month period, volume, especially in the construction supplies markets, suffered from the effects of an economic recession in the Netherlands and other European countries. With improvements in sunflower seeds and rubber businesses, results from the agri-products segment were down, due to disappointing performance of a small nut processor acquired last year.

“Selling, general and administrative expenses” for the nine months increased by $38 million primarily due to the strength of the euro and the acquisition of JéWé.

“Interest expense” increased by $1 million due to higher average debt balances during the nine months.

The Company’s effective tax rate was 36.5% compared to 35.5% last year. The increase was primarily caused by changes in the mix of foreign earnings.

Results of Foreign Subsidiaries for the Three Months Ended March 31, 2004

Along with its change in fiscal year end, the Company has also eliminated a three-month reporting lag previously used by most of its foreign subsidiaries. Reported income for the nine-month transition year includes the results of the Company’s foreign subsidiaries for the nine months ended December 31, 2003. Results of foreign subsidiaries for the three months ended March 31, 2004, which represents the reporting lag (the “Lag Quarter”), were not reflected in the reported income, but were recorded as an addition to retained earnings. Operating income for the Lag Quarter was $25.9 million, the major components of which arose from shipments of African, European, and Oriental tobaccos and from lumber and building products operations. A new currency auction system, sanctioned in Zimbabwe in January 2004, effectively reduced currency rates and caused remeasurement losses on local currency cash balances held there. Those remeasurement losses were $10.2 million, and were partially offset by interest income of $4.4 million on local currency balances. Lag Quarter results were also reduced by a $3.2 million charge, discussed above, which was part of the total $10.8 million recorded to recognize the estimated cost of a claim against tobacco that did not meet customer requirements. Net income for the Lag Quarter was $18.9 million.

Fiscal Year Ended June 30, 2003, Compared to Fiscal Year Ended June 30, 2002

“Sales and other operating revenues” were approximately $2.6 billion for fiscal year 2003 compared to about $2.5 billion for fiscal year 2002. Fiscal year 2003 benefited from the impact of the stronger euro on translation of revenues from the Company’s Dutch lumber and building products operations into U.S. dollars and the fourth quarter addition of the revenues of JéWé. Most of the tobacco segment revenue increase for the fiscal year came from the larger volumes shipped from South America. Agri-products segment revenue was up modestly due to good results in the Company’s dried fruit and nuts business.

During fiscal year 2003, Universal recognized approximately $33 million in restructuring charges, of which $12.5 million resulted from the reduction of operations in Zimbabwe due to the decline in

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crops there. The remaining $20.5 million represented costs of rationalizing U.S. operations. See Note 3 of “Notes to Consolidated Financial Statements.” In May 2003, the Company entered an agreement to settle the DeLoach lawsuit, which involved alleged industry violation of antitrust laws, and accordingly recorded a charge of $12 million in fiscal year 2003. In addition, during the fourth quarter of fiscal year 2003, the Company recognized a $9.0 million gain on the sale of assets in Africa and the Netherlands as well as a $20.2 million gain on remeasurement of local currency liabilities after export rates were adjusted in Africa. The remeasurement gain was not taxable in the country of origin, and consistent with Universal’s policy regarding permanently reinvested earnings, no provision for U.S. income taxes was made on the gain. The aggregate of the charges and gains for fiscal year 2003 was a charge of $15.8 million. In fiscal year 2002, the Company recorded charges of $7.5 million related to the consolidation of U.S. operations and $10.3 million related to Argentine currency devaluation.

Fiscal year 2003 segment operating income as described in Note 12 of “Notes to Consolidated Financial Statements” was $275 million, up $35 million from that of fiscal year 2002. As listed above, that increase included a $32.3 million net gain in the tobacco segment and a $2.7 million gain in the lumber and building products segment.

Tobacco segment earnings benefited from larger crops in Brazil, Argentina, and several African countries, and those increases more than offset the decline in Zimbabwe crops. Shipments of Brazilian and Argentine tobaccos increased substantially, as customers shifted purchase requirements from Zimbabwe to Brazil and purchased more Argentine tobacco following the currency devaluation there in 2002. Dark tobacco volumes were down for fiscal year 2003 due to lower sales of old crop tobacco and smaller crops in several origins. The oriental tobacco joint venture’s results for fiscal year 2003 also declined primarily due to customers’ delay of shipments until fiscal year 2004, expenses related to the new plants in Greece and Bulgaria, and smaller shipments of old crop tobacco. Excluding the $32.3 million net effect of the charges and gains listed in the table above, tobacco segment earnings decreased by $5.2 million for fiscal year 2003.

Buoyed by the strong euro, which gained more than 14% on average during fiscal year 2003 against the U.S. dollar, results from the lumber and building products segment improved by $5.1 million, or 20.4% for the year, excluding the $2.7 million gain on sale of assets. Throughout the fiscal year 2003, volume suffered from the effects of an economic slowdown in the Netherlands and other

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European countries. However, the results benefited from the Company’s acquisition of JéWé. Earnings from the agri-products segment were flat for fiscal year 2003 as stronger results in the Company’s dried fruit and nut business offset the impact of difficult market conditions in the remainder of the segment.

“Selling, general and administrative expenses” for fiscal year 2003 increased by $4 million or 1.3% due to the $12 million charge for the settlement of the DeLoach lawsuit, the impact of the strong euro on euro-based expenses, the addition of JéWé, and higher legal expenses as well as insurance costs. These amounts were partially offset by a net remeasurement gain of $12.6 million.

“Interest expense” decreased by $3 million to $45 million due to lower interest rates in fiscal year 2003 compared to 2002. The Company capitalized approximately $2 million in interest related to the construction of the Nash facility in fiscal year 2003 and approximately $600 thousand in fiscal year 2002.

Universal’s consolidated income tax rate for fiscal year 2003 was 30.7% compared to 35% in fiscal year 2002. The major factor that generated the decrease in the tax rate for the Company was the impact of lower taxes in subsidiaries in which it is the Company’s policy to permanently reinvest earnings. The Company did not record U.S. tax expense on earnings not distributed from most countries in Africa. The Company generated over $15 million in remeasurement gains that were not subject to local tax expense in these countries. See Note 4 of “Notes to Consolidated Financial Statements.”

Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (“FASB”) issued a revision of Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“Statement No. 132”). The revised Statement expands the disclosure requirements of the original Statement No. 132 and incorporates pension and postretirement benefits disclosures for interim financial periods. The Company adopted the provisions of the revised Statement No. 132 during the quarter ended March 31, 2004. The expanded disclosures are presented in Note 8 of “Notes to Consolidated Financial Statements.”

In January 2004, the FASB issued Staff Position No. 106-1 (FSP No. 106-1), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003.” FSP No. 106-1 provided accounting and disclosure guidance related to the effects on a company’s postretirement benefit costs and obligations of recent legislation that added a prescription drug benefit to the federal Medicare program. That legislation also provides a federal subsidy to companies that sponsor retiree medical programs with drug benefits that are actuarially equivalent to those now available under Medicare. As allowed under FSP No. 106-1, the Company elected to defer accounting recognition for the subsidy until detailed implementation guidance was made available. The FASB issued that guidance in May 2004 with the release of FSP No. 106-2, which replaces FSP No. 106-1. The Company believes that its postretirement benefit plan currently provides prescription drug coverage that is at least actuarially equivalent to the new benefit available under Medicare, and it will therefore qualify for the subsidy. As required under FSP No. 106-2, the Company will adopt accounting recognition for the subsidy as of July 1, 2004. The financial statements for the interim period ending September 30, 2004, the second quarter of fiscal year 2005, will reflect the effect of the subsidy on the Company’s benefit obligation and related cost. The adoption of FSP No. 106-2 is not expected to have a material effect on the Company’s consolidated financial statements.

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LIQUIDITY AND CAPITAL RESOURCES

Overview

Universal’s liquidity and capital resource requirements are predominantly short term in nature and primarily relate to working capital required for tobacco crop purchases. Working capital needs are seasonal within each geographic region. The geographic dispersion and the timing of working capital needs permit Universal to predict its general level of cash requirements. The marketing of the crop in each geographic area is heavily influenced by weather conditions and follows the cycle of buying, processing, and shipping of the tobacco crop. The timing of individual customer shipping requirements may change the level or the duration of crop financing. Despite a predominance of short-term needs, the Company maintains a relatively large portion of its total debt as long-term to reduce liquidity risk.

As a result of the Company’s change in year end and elimination of its reporting lag, the change in the Company’s asset and liability balances from June 30, 2003 to March 31, 2004, reflect nine months of cash flows for its domestic subsidiaries and twelve months of cash flows for its foreign subsidiaries. The net change in cash and cash equivalents for foreign subsidiaries for the additional three-month period caused by the elimination of the reporting lag is reported as a single line item in the Company’s Consolidated Statement of Cash Flows. To more fully explain the Company’s financial position at March 31, 2004, the following table presents the components of the net change in cash and cash equivalents for foreign subsidiaries for the additional three-month period caused by the elimination of the reporting lag as well as the summarized components for the nine months ended March 31, 2004. It also combines them to show the net cash flow that affected the Company’s Consolidated Balance Sheets as of March 31, 2004.

Working Capital

Working capital at March 31, 2004, which includes the cash flows of the Company’s foreign subsidiaries for the three-month period ended March 31, 2004, was $788 million, up $237 million from the level at June 30, 2003. Most of the increase was driven by increases in accounts receivable, advances to suppliers, tobacco and agri-product inventory levels, and decreases in notes payable and the current portion of long-term obligations. The weakness of the U.S. dollar in relation to the strength of the euro, which gained more than 18% on average compared to the same period last year, caused a $20 million increase in receivables and a $32 million increase in inventory, each as translated into U.S. dollars. Seasonal changes in working capital components are normal as tobacco inventories usually

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fluctuate during the year based on when tobacco is received, processed, and shipped to customers. Due to the elimination of the reporting lag for the Company’s foreign subsidiaries, tobacco inventory levels for the periods ended March 31, 2004, and June 30, 2003, are seasonally comparable because both reflect large seasonal expansions in South and Central America. At June 30, 2003, tobacco inventories were unusually high due to early purchases in Brazil and delayed shipments from Africa, and they had increased again by March 31, 2004. Tobacco inventories during the nine months and the Lag Quarter increased about $33 million to $563 million as of March 31, 2004, and the Company’s uncommitted inventories increased to approximately $106 million compared to $61 million at June 30, 2003. A primary factor in the increases in both total and uncommitted inventories was a customer’s rejection of certain shipments of tobacco because they did not meet that customer’s requirements. Uncommitted tobacco stocks increased from 12% of total tobacco inventory at June 30, 2003, to 19% of total tobacco inventory at March 31, 2004. Management does not consider these levels excessive. Over the same period, agri-products inventories and accounts receivable increased by $24 million and $16 million, respectively, due to the higher prices for tea and rubber and an extension of the nut business. Advances to suppliers increased by $25 million primarily due to the expansion of tobacco sources in Africa. Customer advances and deposits increased by $18 million to $60 million as of March 31, 2004, in part because of the larger Brazilian crop. The level of customer advances can vary from year to year as customers review their circumstances. Accordingly, the Company treats such advances as borrowing when it reviews its balance street structure. Accounts receivable increased by $62 million, primarily due to the strength of the euro as well as the change in fiscal year end, which caused a change in the timing of the elimination of intercompany accounts. The decline in the current portion of long-term debt was a key factor in the working capital increase as the Company repaid maturing debt with a long-term debt issue.

Capital Spending

At March 31, 2004, the Company’s balance of property, plant, and equipment, before depreciation, increased by $86 million from the balance at June 30, 2003. The Company’s capital expenditures are generally limited to those that add value to the customer, replace equipment, increase efficiency, or position the Company for future growth. Universal’s capital expenditures were approximately $63.2 million in nine months ended March 31, 2004, before considering the Lag Quarter, and $87.4 million in the nine months ended March 31, 2003. During the Lag Quarter, the Company’s capital expenditures were approximately $19.5 million. Approximately $14 million of the capital expenditures in the nine months ended March 31, 2004, related to the completion of a major investment in leaf processing in the United States.

Outstanding Debt and Other Financing Arrangements

Universal’s total debt increased by about $79 million during the nine months ended March 31, 2004, and Lag Quarter, and its total debt as a percentage of total capitalization (including total debt, deferred taxes, minority interests, and shareholders’ equity) decreased to about 56% from approximately 60% at June 30, 2003. The increase in debt reflected the effect of the stronger euro and the Company’s working capital investments and capital expenditures in Africa and Brazil. The Company has invested in these regions to expand tobacco sources for its customers. The decrease in total debt to total capitalization was caused by a $140 million increase in shareholders’ equity, which was primarily attributable to $90 million excess of income over dividends as well as a $30 million increase in accumulated other comprehensive income due to the weakness of the U.S. dollar and the reduction in the minimum pension liability. Total long-term obligations, including current maturities, increased by $101 million to $816 million while notes payable decreased by $22 million to $244 million. The increase in long-term obligations was primarily due to the Company’s issuance of $200 million of 5.2% medium-term

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notes due October 15, 2013. The proceeds were used to repay maturing long-term debt of $63 million in 8% medium-term notes, $20 million in 7.5% medium-term notes, and for other general corporate purposes. The Company has $200 million remaining under a $400 million shelf registration that became effective in August 2003, and expects to use the proceeds of any sales of these securities for general corporate purposes, which may include the repayment of indebtedness, capital expenditures, acquisitions, and funding of working capital needs. In February 2004, Moody’s Investors Service affirmed the Company’s credit ratings, but changed its outlook for the ratings from stable to negative. If the Company’s credit ratings are lowered in the future, then the interest rates on any new debt issued by the Company and some of the Company’s existing debt could increase, and the Company’s access to debt markets could be reduced.

During the nine months ended March 31, 2004, the Company terminated interest rate swaps on $323.5 million notional amount of long-term debt for a gain of approximately $5.1 million, which will be amortized over the remaining life of the underlying debt. From time to time, the Company uses interest rate swap agreements to manage its exposure to changes in interest rates. These agreements typically adjust interest rates on designated long-term obligations from fixed to variable. The swaps are accounted for as fair value hedges. There were no interest rate swap agreements in place at March 31, 2004.

Near the end of fiscal year 2004, Universal entered a foreign currency swap with a third party to mitigate its exposure to changes in exchange rates related to a foreign currency-denominated receivable from a subsidiary. The swap converts a fixed-rate, foreign currency-denominated receivable to a fixed rate receivable denominated in U.S. dollars. It is accounted for as a cash flow hedge, and its notional amount was approximately $140 million.

As of March 31, 2004, Universal had approximately $941 million in uncommitted lines of credit, of which approximately $697 million was unused and available to support seasonal working capital needs. The Company’s committed bank facilities total $375 million. The facilities include a $250 million revolving credit facility and a $125 million term loan, each of which will mature on April 7, 2006. As of March 31, 2004, the Company had no amounts outstanding under the revolving credit facility. Universal’s commercial paper program, which provides flexibility in the Company’s short-term borrowings, is supported by the revolving credit facility. Under the terms of its bank agreements, the Company must maintain certain levels of tangible net worth and working capital and observe restrictions on debt levels. The Company was in compliance with all such covenants at March 31, 2004.

In May 1998, Universal’s Board of Directors approved a share purchase program that has since been expanded to permit the purchase of up to $450 million of the common stock of the Company. The purchases are carried out from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market prices. Over time, the purchases have been, and are expected to be, funded primarily from operating cash flow of the Company. On May 27, 2004, the Board of Directors of the Company extended the expiration of the share repurchase program to June 30, 2005. At March 31, 2004, Universal had approximately 25.4 million common shares outstanding and has purchased approximately 12.2 million common shares for about $356 million pursuant to the program.

Funds supporting the Company’s ERISA-regulated domestic defined benefit pension plans increased to $129 million because of positive market activity during the nine months ended December 31, 2003, the measurement date for the plan. As of April 30, 2004, the market value of the fund was about $129 million, compared to the accumulated benefit obligation (“ABO”) of $135 million and the projected benefit obligation (“PBO”) of $157 million. The ABO and PBO are calculated on the basis of certain assumptions that are outlined in Note 8 of “Notes to Consolidated Financial Statements.” The

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Company plans to contribute approximately $4 million to the domestic pension fund during the next year, which is more than the contribution required by ERISA. It is the Company’s policy to monitor the market performance of the funds and to review the adequacy of its funding and its contributions to those funds. The fund is managed for long-term returns, and the Company has not changed its investment allocation in response to recent market returns.

Contractual Obligations

The Company’s contractual obligations as of March 31, 2004, were as follows:

In addition to principal and interest payments on notes payable and long-term debt, the Company’s contractual obligations include operating lease payments, inventory purchase commitments, and capital expenditure commitments. Operating lease obligations represent minimum payments due under leases for various production, storage, distribution, and other facilities, as well as vehicles and equipment. Tobacco inventory purchase obligations primarily represent contracts to purchase tobacco from farmers. The amounts shown above are estimates since actual quantities purchased will depend on crop yield and prices will depend on the quality of the tobacco delivered. More than half of the Company’s contracts to purchase tobacco are with farmers in Brazil. Tobacco purchase obligations have been partially funded by advances to farmers, which totaled approximately $141 million as of March 31, 2004. Commitments to purchase agri-products inventories are frequently matched to forward sales contracts with customers. Capital expenditure obligations represent the Company’s outstanding contractual commitments to complete and equip a new tobacco processing factory and related facilities in Mozambique.

Management believes that its financial resources are adequate to support its capital needs. Those resources include cash from operations, cash balances, the potential to issue debt to the public under its shelf registration statement and the commercial paper market and committed and uncommitted bank lines. Any excess cash flow from operations after dividends and capital expenditures will be available to fund expansion, purchase the Company’s stock, or otherwise enhance shareholder value.

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CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

In preparing the financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), management is required to make estimates and assumptions that have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk, and financial condition. The Company believes, given current facts and circumstances, its estimates and assumptions are reasonable, adhere to GAAP, and are consistently applied. However, changes in the assumptions used could result in a material adjustment to the financial statements. The Company’s most critical accounting estimates and assumptions are in the following areas:

Inventories

Inventories of tobacco and agri-products are valued at the lower of cost or market with cost determined under the specific cost method. In the tobacco and agri-product businesses, raw materials are clearly identified at the time of purchase. The Company tracks the costs associated with raw materials in the final product lots, and maintains this identification through the time of sale. The Company also capitalizes direct and indirect costs related to processing raw materials. This method of cost accounting is referred to as the specific cost or specific identification method. Lumber and building products inventory is valued at the lower of cost or market, with cost determined under the first-in, first-out method. The Company writes down inventory for changes in market value based upon assumptions related to future demand and market conditions. Future demand assumptions can be impacted by changes in customer sales, changes in customers’ inventory positions and policies, competitors’ pricing policies and inventory positions, changing customer needs, and varying crop sizes and qualities. Market conditions that differ significantly from those assumed by management could result in additional write downs. The Company experiences inventory write downs routinely. Inventory write downs in the nine months ended March 31, 2004, and fiscal years 2003 and 2002 were $7.7 million, $3.3 million, and $8.5 million, respectively.

Intangible Assets

The Company reviews the carrying value of goodwill as necessary, and at least annually, utilizing a discounted cash flow model. The preparation of discounted future operating cash flow analyses requires significant management judgment with respect to operating earnings growth rates and the selection of an appropriate discount rate. The majority of the Company’s goodwill is from acquisitions in the tobacco segment. Neither a one-percentage-point increase in the discount rate assumption nor a one-percentage-point decline in the cash flow growth rate assumption would result in an impairment charge. However, significant changes in estimates of future cash flows, such as those caused by unforeseen events or changes in market conditions, could result in an impairment charge.

Income Taxes

The Company’s effective tax rate is based on its expected income, statutory tax rates, and tax planning opportunities in the various jurisdictions in which the Company operates. Significant judgment is required in determining the effective tax rate and evaluating the tax position of the Company. The effective tax rate is applied to quarterly operating results. The Company, through its subsidiaries, is subject to the tax laws of many jurisdictions, and could be subject to a tax audit in each of these jurisdictions, which could result in changes to estimated taxes. In the event that there is a significant, unusual, or one-time item recognized in the Company’s results, the tax attributed to that item would be recorded at the same time as the item. For example, in fiscal year 2003, a significant adjustment in a

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currency export rate generated a remeasurement gain in Africa that did not result in local taxation. Consistent with Company policy regarding permanently reinvested earnings, no provision for U.S. income taxes was recorded on the gain, which reduced the consolidated tax rate.

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. As a result, the Company’s effective tax rate reflected in the financial statements is different than that reported in its tax returns. Some of these differences are permanent, such as expenses that are not tax deductible, while others are related to timing issues, such as differences in depreciation methods. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future tax returns for which the Company has already recorded the tax benefit in its financial statements. The Company has recorded valuation allowances for deferred tax assets when the amount of estimated future taxable income was not likely to support the use of the deduction or credit. During the nine months ended March 31, 2004, the Company received a significant dividend from a foreign subsidiary that enabled the Company to fully utilize its foreign tax credit carryforwards of approximately $33 million. However, the Company expects foreign tax carryforwards to be generated in future periods. Any significant reduction in future taxable income and changes in its sources or changes in U.S. or foreign tax laws could result in the expiration of foreign tax credit carryforwards. Deferred tax liabilities generally represent tax expense recognized in the Company’s financial statements for which payment has been deferred or an expense that has not yet been recognized in the financial statements and has been deducted in the Company’s tax return.

For additional disclosures on income taxes, see Notes 1 and 4 of “Notes to Consolidated Financial Statements.”

Pension Plans and Postretirement Benefits

The measurement of the Company’s pension and postretirement obligations and costs are dependent on a variety of assumptions used by the Company’s actuaries. These assumptions include estimating the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. The assumptions made by the Company may have an effect on the amount and timing of future contributions. The plan trustee conducts an independent valuation of the fair value of pension plan assets. The significant assumptions used in the calculation of pension and postretirement obligations are:

Discount rate – The discount rate is based on investment yields available at the measurement date on corporate long-term bonds rated AA.

Salary growth – The salary growth assumption is a factor of the Company’s long-term actual experience, the near-term outlook, and assumed inflation.

Expected return on plan assets – The expected return reflects asset allocations and investment strategy.

Retirement and mortality rates – Retirement rates are based on actual plan experience along with the Company’s near-term outlook. Early retirement assumptions are based on actual Company experience. Mortality rates are based on standard group annuity (GA-83) mortality tables.

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Health care cost trends – For postretirement medical plan obligations and costs, the Company makes assumptions on future increases in medical costs. These assumptions are based on the actual experience of the Company along with third-party forecasts of long-term medical cost trends.

The effect of actual results differing from the Company’s assumptions are accumulated and amortized over future periods and, therefore, generally affect its recognized expense in such future periods.

Sensitivity Analysis. The effect of the indicated decrease or increase in the selected assumptions is shown below, assuming no change in benefit levels:

See Note 8 of “Notes to Consolidated Financial Statements” for additional information on pension and postretirement benefit plans.

OTHER INFORMATION REGARDING TRENDS

AND MANAGEMENT’S ACTIONS

The Company’s financial performance depends on its ability to maintain efficient operations and to secure the tobacco volumes desired by its customers. In fiscal year 2005, worldwide flue-cured production by exporting countries (excluding China) is forecast to increase by 16%, on the strength of a very large Brazilian crop, and burley crops are expected to be up by more than 7%. Due to adverse weather, however, the Brazilian crop has not produced as much ripe leaf as normal, which will make it difficult to provide all of the leaf qualities and styles needed to meet some customers’ requirements. African flue-cured leaf volumes will continue to be depressed following the four-year decline in Zimbabwean crops as a result of instability in that country. Production in Brazil has expanded rapidly to replace that volume, but the Company continues to make significant investments in African countries to provide a more diverse supply base. Universal expects to see the benefits from these investments in the

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form of larger volumes of African leaf beginning in fiscal year 2006. U.S. volumes continue to slide, reflecting non-competitive leaf prices and the absence of any meaningful change in the federal tobacco program. Although the Company’s recent investments in state-of-the-art U.S. processing facilities are enabling it to operate efficiently in this environment, comparisons in fiscal 2005 will be unfavorably affected due to the overhead cost allocation in fiscal year 2004. Because of the change in fiscal year end, results for fiscal year 2004 excluded approximately $11 million in overhead costs. Fiscal year 2005 will treat overhead normally. There are some early indications that economic conditions in Europe that ultimately will affect the Company’s lumber operations are improving. Management remains confident that the Company is well structured to deal with the challenges of its markets and well positioned to capitalize on opportunities in the year ahead.

The Company expects that demand for leaf tobacco will be flat or declining slightly for the near term primarily due to the flattening trend in world cigarette consumption and to improved leaf utilization by cigarette manufacturers. On a year-to-year basis, the Company is susceptible to fluctuations in leaf supply due to crop size and leaf demand as manufacturers adjust inventories or respond to changes in the cigarette market.

The Company estimates that industry worldwide uncommitted flue-cured and burley inventories totaled about 130 million kilos, excluding inventories of Asian government-owned monopolies, at March 31, 2004. Uncommitted inventories have declined in each of the last four years. At March 31, 2004, the U.S. stabilization cooperatives held about 61 million kilos. With large crops in South America, this trend may reverse in fiscal year 2005.

Although cigar consumption continues to grow at a modest pace in the United States, consumption within the main European Union markets has declined slightly. Supplies of filler and binder tobaccos, which over the last several years have been in surplus due to overproduction in certain countries, have generally returned to a balance between supply and demand. Supply and demand of cigar wrapper continues to be firm. Within the smokeless segment of the dark tobacco business, consumption of loose-leaf chewing tobacco continues to decline by about four percent annually, while the consumption of snuff products has been growing between three and four percent per year. Management believes that there is an adequate supply of suitable dark tobacco in the world market to meet the demand of the manufacturers of smokeless tobacco products.

The high price of U.S. leaf relative to the world market has reduced exports, which, combined with declining purchases by U.S. manufacturers, have reduced the amount of U.S. tobacco that can be produced and sold in the United States. Domestic leaf purchases are unlikely to increase because of the continued decline of cigarette consumption in the United States. Exports of U.S. leaf are likely to continue to decline unless the U.S. tobacco program is significantly modified or eliminated, and the competitive position of U.S. leaf improves dramatically. Several proposals to change that program are currently being discussed in the U.S. Congress. These proposals generally call for quota buy-out and some modifications in the existing tobacco program. Management believes that a quota buy-out will not provide sufficient improvement unless the entire system of government supports is dismantled. Should the declines continue, the Company has the risk that its U.S. processing facilities would have excess capacity. Without substantial improvement in the market attractiveness of U.S. leaf, foreign manufacturers are likely to continue to shift their purchases to other tobacco producing areas, such as Brazil and Africa where the Company has significant operations.

On June 4, 2004, the Flue-Cured Tobacco Cooperative Stabilization Corporation (the “Cooperative”) announced that it had signed a purchase agreement with Vector Group Ltd. (“Vector”) to acquire Vector’s leaf-processing operation and cigarette plant in Timberlake, North Carolina. The

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Company processes tobacco for the Cooperative from time to time, and in some years, including fiscal year 2004, the volume is significant to Universal’s U.S. operations. The Company believes that as a result of this transaction, its U.S. processing volumes could be reduced.

Because the Company expects that most of the shortfall from the four-year decline in Zimbabwe tobacco will be replaced with crops from areas where the Company contracts with and provides financing to farmers, the Company could face increased financing and inventory risk since Zimbabwe tobacco is purchased at auction. The Company has been working to expand sources of African tobacco, and those efforts require investments in working capital and operating facilities. In some cases, the Company has financed clearing virgin land and building dams for irrigation, which expands the Company’s risk profile. Should tobacco production fail to fully develop in areas where the Company is making these investments, tobacco volumes may not be sufficient for the Company to operate profitably in those areas. The Company expects to benefit from these investments in the form of larger volumes of African leaf beginning in fiscal year 2006.

The European Union, (“E.U.”) has recently taken action toward modifying the system of granting subsidies to tobacco farmers. The E.U. subsidy makes up well over half of the revenue that a European farmer receives on a tobacco crop. For example, in the 2003 crop, the net premium on flue-cured tobacco paid to farmers was €2.83 per kilogram, and the average purchase price paid for European flue-cured tobacco was around €0.90 per kilogram. Under the recently announced regime, no change in the current system is foreseen in crop years 2004 and 2005 which will be reflected in Universal’s 2006 and 2007 fiscal years respectively. Beginning with the 2006 crop (fiscal year 2008) and through the 2009 crop (fiscal year 2011), however, 40% of the subsidy has been “decoupled” from production. The “decoupling” of the subsidy from production essentially means that a farmer can receive the subsidy granted in a reference period even if the farmer does not plant tobacco, so long as he keeps the land associated with that subsidy in good agricultural and environmental conditions. However, the relevant member states, such as Italy, Greece, Spain, and France, can increase the decoupled portion of the subsidy up to 100%. The remaining portion of the subsidy (60%, or less) shall remain subject to actual production of tobacco. This means, in practical terms, that the total aid to tobacco farmers remains unchanged. In each of the Company’s main European tobacco sources, such as Italy, Greece, Spain, and France, tobacco production and processing is extremely important to the local economy. Consequently, management believes that the major tobacco producing countries will choose not to decouple more than 40% of the subsidy, with the possible exception of some varieties less in demand by the market. The Company does not handle those varieties. Before the end of 2009, the E.U. Commission shall submit to the Council of Ministers a report on the implementation of the new tobacco subsidy system accompanied by appropriate proposals, if necessary. In 2013, the whole E.U. Common Agricultural Policy will be under revision. Unless the system in place for the four crop years 2006-2009 is extended to 2013, as a consequence of the “interim” report prepared by the Commission, then the decoupled portion would increase to 50%, while the remaining 50% would be used to finance restructuring activities in the tobacco regions. The Company has operations in new acceding countries, Poland and Hungary, who joined the E.U. on May 1, 2004. In those countries, the new system will not be “de facto” implemented before crop 2007, and in the meantime, tobacco farmers will receive subsidies mainly financed by the domestic budget.

Management believes that some farmers will cease tobacco production, mainly in the marginal varieties for which member states will decide to increase decoupling to the maximum and to some extent in the market-oriented growths. This decline in production will accelerate with the 2010 crop, unless action is taken to extend the system through year 2013 or alternative funds are made available at the national level. The number of farmers who cease producing tobacco will depend on their efficiencies in production and the purchase price received for their tobacco. Management believes that after the 2005

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crop, the major influence on the farmers’ decisions to produce tobacco will be the possibility of increasing commercial prices for green tobaccos. This will be possible depending on enhanced attention to quality and on whether the system can become more efficient by eliminating unproductive costs. In addition, confirmed support from European tobacco product manufacturers will be crucial to the long-term viability of tobacco production in Europe. Management believes that if actions are not taken to increase farmer prices or, alternatively, if the member states do not choose to implement subsidies for tobacco production, the volume of tobacco produced in Europe will decline over time. The Company’s results of operations would be negatively affected if it were not able to replace any lost volumes of European tobacco. The recorded value of the Company’s equity in net fixed assets that could be affected by these changes was approximately $30.5 million. In addition, unrealized currency losses for tobacco operations there were $12.7 million, net of taxes, at March 31, 2004.

An important trend in the tobacco industry has been consolidation among manufacturers of tobacco products. This trend is expected to continue, particularly as further privatization of state monopolies occurs, providing opportunities for acquisitions by international manufacturers. This concentration could provide additional opportunities for international leaf merchants, including Universal. A key success factor for leaf dealers is the ability to provide customers with the quality of leaf and the level of service they desire at the lowest cost possible. In addition, the leaf dealers have larger historical market shares with some customers than with others. Consequently, the Company’s potential growth will be affected by the growth of its major customers, and consolidation of customers may have at least a short-term favorable or unfavorable impact on the Company’s business.

Decreased social acceptance of smoking and increased pressure from anti-smoking groups have had an ongoing adverse effect on sales of tobacco products, particularly in the United States. The European Union and other countries have also imposed limitations on the advertising of cigarettes. A significant decrease in global sales of tobacco products brought about by health concerns, decreased social acceptance, advertisement limitations, or other factors would reduce demand for the Company’s products and services.

A number of foreign governments have also taken or proposed steps to restrict or prohibit cigarette advertising and promotion, to increase taxes on cigarettes, and to discourage cigarette consumption. A number of such measures are included in the Framework Treaty on Tobacco Control, which was negotiated under the auspices of the World Health Organization. In some cases, such restrictions are more onerous than those proposed or in effect in the United States. The French government has enacted tax increases of 11% and 20% in 2003, and preliminary estimates show French cigarette sales falling by 12% to 13% during that year. It is not known how much of the decline in sales represents changes to roll-your-own cigarettes or purchases in other countries with lower taxes. The Company cannot predict the extent to which government efforts to reduce tobacco consumption might affect the business of its primary customers. However, a significant decrease in worldwide tobacco consumption brought about by existing or future governmental laws and regulations would reduce demand for the Company’s products and services and could have a material adverse effect on its results of operations.

In the nine months ended March 31, 2004, the weakness in the U.S. dollar in relation to the euro benefited the lumber and building products sector, which uses the euro as its functional currency. Further changes in exchange rates will affect the translation of the euro earnings of the Company into U.S. dollars. In addition, a continued decline in construction activity in the Netherlands could negatively affect sales volumes and margins. Conversely, an increase of such activity could provide an opportunity for volume and margin expansion. There are some early indications that economic conditions in Europe that ultimately will affect the Company’s lumber operations are improving. In May 2004, Fitch Ratings affirmed the Netherlands’ “AAA” ratings, citing a return to positive changes in

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GDP and an economy-wide social accord to freeze wages in 2004-2005. In addition in May 2004, the European Central Bank noted the economies making up the E.U. had grown in the first quarter of 2004 at the fastest pace in three years.

The Company, through its subsidiaries, is subject to the tax laws of many jurisdictions, and from time to time contests assessments of taxes due. Changes in tax laws or the interpretation of tax laws can affect the Company’s earnings, as can the resolution of various pending and contested tax issues. The consolidated income tax rate is affected by a number of factors, including, but not limited to, the mix of domestic and foreign earnings and investments, local tax rates of subsidiaries, repatriation of foreign earnings, and the Company’s ability to utilize foreign tax credits.

In recent years, the Company’s domestic income has declined while foreign income has increased. If this trend continues and tax rates remain constant worldwide, the Company’s ability to utilize its foreign tax credits could be diminished. As a result, its consolidated income tax rate could increase. During the nine months ended March 31, 2004, the Company received a significant dividend from a foreign subsidiary that enabled the Company to fully utilize its foreign tax credit carryforwards of approximately $33 million. However, the Company expects foreign tax credit carryforwards to be generated in future periods.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The foregoing discussion contains certain forward-looking statements, which may be identified by phrases such as “the Company expects” or “Management believes” or words of similar effect. In addition, the Company may publish, from time to time, forward-looking statements relating to such matters as anticipated financial performance, business prospects, and similar matters. The following important factors, among other things, in some cases have affected, and in the future could affect, the Company’s actual results and could cause the Company’s actual results for a fiscal year and any interim period to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, the Company. The Company assumes no duty to update any of the statements in this report.

Operating Factors

The leaf tobacco industry is highly competitive and Universal is heavily reliant on a few large customers.

The Company is one of three major independent global competitors in the highly competitive leaf tobacco industry, all of whom are reliant upon a few large customers. The loss of one of those large customers or a significant decrease in their respective demand for the Company’s products or services could further increase competition and significantly decrease the Company’s sales of products or services, which would have a material adverse effect on Universal’s results of operations. The competition among leaf tobacco merchants is based on the ability to meet customer specifications in the buying, processing, and financing of tobacco, as well as the price charged for products and services. However, because Universal, like its competitors, relies upon a few significant customers, the consolidation or failure of any of these large or significant customers could contribute to a significant decrease in its sales of products and services.

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The Company’s financial results can be significantly affected by the changes in the balance of supply and demand for leaf tobacco or other agricultural products.

Because Universal is a leaf tobacco merchant, its financial results can be significantly affected by changes in the overall balance of worldwide supply and demand for leaf tobacco. The demand for tobacco, which is based upon customers’ expectations of their future tobacco requirements, can change from time to time depending upon internal and external factors affecting the demand for their products. The Company’s customers’ expectations, and thus their demand for leaf tobacco, is influenced by a number of factors, including:

The total supply of tobacco at any given time is a function of current tobacco production and the volumes of uncommitted stocks of processed tobacco from prior years’ production. Production of tobacco in a given year may be significantly affected by such factors as:

Any significant change in these factors could cause a material imbalance in the supply and demand for tobacco, which would affect the Company’s results of operations. Similar factors can affect results for its agri-products businesses.

In areas where Universal purchases its leaf tobacco directly from farmers, the Company bears the risk that the tobacco it receives will not meet quality and quantity requirements.

In countries where Universal contracts directly with tobacco farmers, including Argentina, Brazil, Italy, the United States, and several African countries, the Company bears the risk that the tobacco delivered will not meet quality and quantity requirements. If the tobacco does not meet such market requirements, the Company may not be able to meet all of its customers’ orders, which would have an adverse effect on its profitability and its results of operations. In U.S. markets, the high price of U.S. tobacco magnifies the risk of purchasing tobacco that does not meet those requirements. In addition, in many foreign countries, when Universal purchases tobacco directly from farmers, it provides them with financing. Unless the Company receives marketable tobacco that meets the quality and quantity specifications of its customers, it bears the risk that it will not be able to fully recover its crop advances or recover them in a reasonable period of time. The Company also has dark leaf tobacco growing operations in Indonesia and Brazil, where it has similar financing risks. Although the Company purchases a portion of its leaf tobacco through public auction, as well as privately-negotiated contract purchases, several countries where auction markets are used today may be moving toward direct purchasing, thus increasing the areas subject to this risk.

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Weather and other conditions can affect the marketability of the Company’s products.

Tobacco and many other agricultural crops that the Company buys, such as sunflower seeds and tea, are subject to vagaries of the weather and the environment that can, in some cases, change the quality or size of the crops. If a weather event is particularly severe, such as a major drought or hurricane, the affected crop could be destroyed or damaged to an extent that it would be less desirable to manufacturers, which would result in a reduction in revenues. If such an event is also widespread, it could affect the Company’s ability to acquire the quantity of products required by its customers. In addition, other items can affect the marketability of tobacco and other agricultural products, including, among other things, the presence of:

A significant event impacting the condition or quality of a large amount of any of the crops that Universal buys could make it difficult for the Company to sell these products or to fill customers’ orders.

A significant slowdown in home improvement or construction markets in the Netherlands could have an adverse effect on the Company’s results of operations.

The majority of the customers who purchase lumber and building products from Universal are located in the Netherlands. Therefore, a significant slowdown in the home improvement or construction market in the Netherlands could reduce demand for these products, which would have an adverse effect on the Company’s results of operations.

Regulatory and Governmental Factors

Government efforts to reduce tobacco consumption could have a significant impact on the businesses of Universal’s customers, which would, in turn, affect the Company’s results of operations.

The U.S. federal government and certain state and local governments have taken or proposed actions that may have the effect of reducing U.S. consumption of tobacco products and indirectly reducing demand for the Company’s products and services. These activities have included:

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Numerous other legislative and regulatory anti-smoking measures have been proposed at the federal, state, and local levels. Excluding the effect of tobacco contained in cigarettes imported into the United States, the Company estimates that between 12% and 15% of the flue-cured and burley tobaccos that it handles worldwide is ultimately consumed in the United States. Universal’s tobacco sales consist primarily of flue-cured and burley tobaccos, which, along with oriental tobaccos, are the major ingredients in American-blend cigarettes.

A number of foreign governments have also taken or proposed steps to restrict or prohibit cigarette advertising and promotion, to increase taxes on cigarettes, and to discourage cigarette consumption. A number of such measures are included in the Framework Treaty on Tobacco Control, which was negotiated under the auspices of the World Health Organization. In some cases, such restrictions are more onerous than those proposed or in effect in the United States. The Company cannot predict the extent to which government efforts to reduce tobacco consumption might affect the business of its primary customers. However, a significant decrease in worldwide tobacco consumption brought about by existing or future governmental laws and regulations would reduce demand for the Company’s products and services and could have a material adverse effect on its results of operations.

Because Universal conducts a significant portion of its operations internationally, political uncertainties in certain countries could have an adverse effect on its performance and results of operations.

The Company’s international operations are subject to uncertainties and risks relating to the political stability of certain foreign governments, principally in developing countries and emerging markets, and to the effects of changes in the trade policies and economic regulations of foreign governments. These uncertainties and risks, which include, among other factors, undeveloped or antiquated commercial law and the expropriation or nationalization of assets, may adversely impact the Company’s ability to effectively manage its operations in those countries. For example, in the past, Universal has experienced significant year-to-year fluctuations in earnings due to changes in the Brazilian government’s economic policies, and government actions in Zimbabwe have reduced the tobacco crop there, causing the Company to shift sourcing of tobacco to other countries. Universal has substantial capital investments in South America and Africa, and the performance of its operations in these regions can materially affect its earnings from tobacco operations. If the political situation in any of the countries where the Company conducts business were to deteriorate significantly, the Company’s ability to recover assets located there could be impaired. To the extent that Universal does not replace any lost volumes of tobacco with tobacco from other sources, or incurs increased costs related to such replacement, its results of operations would suffer.

Financial Factors

Failure of Universal’s customers or farmers to repay extensions of credit could materially impact the Company’s results of operations.

Universal extends credit to both farmers and customers. A significant delay in payment or a significant bad debt provision related to amounts due to the Company could adversely affect its results of operations. In addition, crop advances to farmers are generally secured by the farmers’ agreement to deliver green tobacco. In the event of crop failure, recovery of advances could be delayed until future crops are delivered.

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Failure of foreign banks in which Universal’s subsidiaries deposit funds or the failure to transfer funds or honor withdrawals may affect its results of operations.

Funds held by the Company’s foreign subsidiaries are often deposited in their local banks. In certain circumstances, the Company’s ability to gain access to these funds could be impaired, which could have a material adverse effect on Universal’s results of operations. Banks in certain foreign jurisdictions may be subject to a higher rate of failure or may not honor withdrawals of deposited funds. In addition, the countries in which these local banks operate may lack sufficient regulatory oversight or suffer from structural weaknesses in the local banking system. Due to uncertainties and risks relating to the political stability of certain foreign governments, these local banks also may be subject to exchange controls and therefore unable to perform transfers of certain currencies.

Fluctuations in foreign currency exchange rates and interest rates may affect Universal’s results of operations.

Although the international tobacco trade generally is conducted in U.S. dollars, thereby limiting foreign exchange risk to that which is related to production costs, overhead, and income taxes in the source country, the Company’s purchases of tobacco are often made in local currency. As a result, changes in local currency can make a particular crop more or less attractive in the world market thereby affecting the profitability of such crop and Universal’s results of operations. Because there is no forward foreign exchange market in many of the major countries where the Company sources tobacco, Universal manages its foreign exchange risk by matching funding for inventory purchases with the currency of sale and by minimizing its net investment in these countries. To the extent that the Company is not able to continue match funding, or otherwise hedge its exposure, the Company could have a disproportionate exposure to local currency in which the tobacco was purchased.

Certain of the Company’s operations use their local currency as the functional currency. For example, the lumber and building products operations, which are based in the Netherlands, use the euro as their functional currency. In certain tobacco markets that are primarily domestic, the Company uses the local currency as the functional currency. Examples of these domestic markets are Hungary and Poland. In each case, reported earnings are affected by the translation of the local currency into the U.S. dollar. See also “Qualitative and Quantitative Disclosure About Market Risk.”

In Universal’s tobacco business, customers usually pre-finance purchases or pay market rates of interest for inventory purchased on order. Because of changes in financial markets, the Company, like many others, has moved away from short-term credit markets. The Company is borrowing more long-term debt, and through hedging agreements, it is swapping the interest rates on its existing fixed-rate debt to floating market interest rates to better match the interest rates that the Company charges its customers. To the extent Universal is unable to match these interest rates, a decrease in interest rates could increase its net financing costs.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rates

Interest rate risk is limited in the tobacco business because customers usually pre-finance purchases or pay market rates of interest for inventory purchased for their accounts.

The Company’s tobacco customers pay interest on tobacco purchased for their order. That interest is paid at rates based on current markets for variable rate debt. If Universal were to fund its committed tobacco inventory with fixed-rate debt, the Company might not be able to recover interest at that fixed rate if current market interest rates were to fall. As of March 31, 2004, tobacco inventory of $563 million included $457 million in inventory that was committed for sale to customers and $106 million

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that was not committed. Committed inventory, after deducting $60 million in customer deposits, represents the Company’s net exposure of $397 million. Universal maintains a substantial portion of its debt at variable interest rates in order to substantially mitigate interest rate risk related to carrying fixed-rate debt. Debt carried at variable interest rates was $468 million at March 31, 2004. Although a hypothetical 1% change in short-term interest rates would result in a change in annual interest expense of approximately $4.7 million, about 85% of that amount could be offset with changes in charges to customers.

Currency

The international tobacco trade generally is conducted in U.S. dollars, thereby limiting foreign exchange risk to that which is related to production costs, overhead, and income taxes in the source country. Most of the tobacco operations are accounted for using the U.S. dollar as the functional currency. Because there are no forward foreign exchange markets in many of Universal’s major countries of tobacco origin, the Company manages its foreign exchange risk by matching funding for inventory purchases with the currency of sale, which is usually the U.S. dollar, and by minimizing its net investment in individual countries. In these countries, the Company is vulnerable to currency gains and losses to the extent that any local currency balances do not offset each other. The Company recognized a $100 thousand exchange loss due to remeasurement for the nine-month transitional year ended March 31, 2004, versus a $12.6 million remeasurement gain and a $2.9 million remeasurement loss for the fiscal years ended June 30, 2003 and 2002, respectively. The Company recognized $1.7 million in exchange gains from foreign currency transactions for the transition year ended March 31, 2004, versus exchange losses of $900 thousand and $1.4 million for the fiscal years ended June 30, 2003 and 2002, respectively.

The lumber and building products operations, which are based in the Netherlands, use the euro as their functional currency. In certain tobacco markets that are primarily domestic, the Company uses the local currency as the functional currency. Examples of these domestic markets are Hungary and Poland. In each case, reported earnings are affected by the translation of the local currency into the U.S. dollar.

Commodity

Universal uses commodity futures in its rubber trading business to reduce the risk of price fluctuations. The Company does not enter into rubber contracts for trading purposes. All forward commodity contracts are adjusted to fair market value during the year, and gains and losses are recorded in income at that time. The amounts recorded during 2004, 2003, and 2002 were not material.

Derivatives Policies

Hedging interest rate exposure using swaps and hedging foreign exchange exposure using forward contracts are specifically contemplated to manage risk in keeping with management’s policies. Universal may use derivative instruments, such as swaps, forwards, or futures, which are based directly or indirectly upon interest rates, currencies, and commodities, to manage and reduce the risks inherent in interest rate, currency, and price fluctuations.

The Company does not utilize derivatives for speculative purposes, and it does not enter into market risk-sensitive instruments for trading purposes. Derivatives are transaction specific so that a specific debt instrument, contract, or invoice determines the amount, maturity, and other specifics of the hedge. Counterparty risk is limited to institutions with long-term debt ratings of A or better.

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Item 8. Financial Statements and Supplementary Data

UNIVERSAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes.

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UNIVERSAL CORPORATION

CONSOLIDATED BALANCE SHEETS