-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U1VL/Qbc8pV2pJUQCtCMyv5qf0pYIBTU6Mrig+sYdaUv08djNfOF8z8MLnutfR8i YNaH3mmu/DtLmQgRJGLMmQ== 0000916641-97-000965.txt : 19970926 0000916641-97-000965.hdr.sgml : 19970926 ACCESSION NUMBER: 0000916641-97-000965 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970925 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL CORP /VA/ CENTRAL INDEX KEY: 0000102037 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-FARM PRODUCT RAW MATERIALS [5150] IRS NUMBER: 540414210 STATE OF INCORPORATION: VA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00652 FILM NUMBER: 97685286 BUSINESS ADDRESS: STREET 1: P O BOX 25099 STREET 2: 1501 N HAMILTON ST CITY: RICHMOND STATE: VA ZIP: 23230 BUSINESS PHONE: 8043599311 MAIL ADDRESS: STREET 1: PO BOX 25099 CITY: RICHMOND STATE: VA ZIP: 23260 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSAL LEAF TOBACCO CO INC DATE OF NAME CHANGE: 19880314 10-K405 1 FORM 10-K Page 1 of 64 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended June 30, 1997 ---------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to . --------------- ---------------- Commission file number 1-652 ------- UNIVERSAL CORPORATION ---------------------------------------------------------- (Exact name of Registrant as specified in its charter) VIRGINIA 54-0414210 ------------------------------ ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1501 North Hamilton Street, Richmond, Virginia 23230 - ----------------------------------------------------- ----------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (804) 359-9311 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------------------- ------------------------ Common Stock, no par value New York ------------------------------- ------------------------ Preferred Share Purchase Rights N/A ------------------------------- ------------------------ 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 ----- The aggregate market value of Registrant's voting stock held by non-affiliates was $1,291,000,000 and the total number of shares of common stock outstanding was 35,139,138 at September 23, 1997. INFORMATION INCORPORATED BY REFERENCE Certain information in the September 22, 1997, Proxy Statement for the Annual Meeting of Shareholders of Registrant is incorporated by reference into Part III hereof. - 2 - PART I ITEM 1. BUSINESS 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 additional operations in agri-products and the distribution of lumber and building products. Universal's tobacco operations have been the principal focus of the Company since its founding in 1918, and for the fiscal year ended June 30, 1997, such operations accounted for 74% of revenues and 84% of operating profits. Its agri-products and lumber and building products operations accounted for 12% and 14% of revenues and 5% and 11% of operating profits, respectively, during the same period. See Note 4 to Consolidated Financial Statements for additional business segment and geographical information. B. Description of Tobacco Business General Universal's tobacco business involves selecting, buying, shipping, processing, packing, storing and financing leaf tobacco in the United States and other tobacco growing countries for the account of, or for resale to, 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 for its customers. The Company's sales consist primarily of flue-cured and burley tobaccos that, along with oriental tobaccos, are the major ingredients in American blend cigarettes. American blend cigarettes are enjoying increasing popularity among consumers in many parts of the world. Consumption of cigarettes generally has been declining in the U.S. and certain industrialized countries and the Company expects this trend to continue in the future. At the same time, consumption in many developing countries has increased and, as a result of the elimination of trade barriers in Far Eastern markets and the opening of markets in Eastern and Central Europe, a significant number of the world's tobacco markets are more open to trade as compared to ten years ago. More important, American blend cigarettes have recently gained market share in many foreign markets, including those in Asia, Europe and the Middle East and the demand for flue-cured, burley and oriental tobaccos has risen accordingly. Processing of leaf tobacco is an essential service to the Company's customers, the tobacco product manufacturers, because the quality of the processed leaf tobacco substantially affects the cost and quality of their products. The Company's processing of leaf tobacco includes grading in the factories, blending, separation of leaf lamina from the stems and packing to precise moisture targets for proper aging. To accomplish these tasks according to exacting customer specifications requires considerable skill and significant investment in plants and machinery. - 3 - Universal estimates that in fiscal year 1997 it purchased or processed nearly 39% of the flue-cured and burley tobacco produced in the principal export markets of these tobaccos: United States, Brazil, Zimbabwe and Malawi. 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 broad market presence, its development of processing equipment and technologies, its financial position, its ability to meet customer demand and long standing relationships with customers. For a description of the factors that may affect Universal's operating revenues - See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors that may Affect Future Results." Universal also has a leading position in worldwide dark tobacco markets. Its operations are located in the major producing countries, (i.e., the United States, the Dominican Republic, Indonesia and northern Brazil) and other markets. Dark tobaccos are typically used for cigars and smokeless tobacco products. After decades of sales volume declines, the U.S. cigar industry has experienced recent growth, particularly in the premium segment of the market. Domestic Tobacco Business Universal is represented by its buyers on all significant tobacco markets in the United States, including flue-cured tobacco markets in Virginia, North Carolina, South Carolina, Georgia and Florida; light air-cured (burley and Maryland) tobacco markets in Kentucky, Tennessee, Virginia, North Carolina and Maryland; air-cured tobacco markets in Kentucky and Virginia; dark fired and dark air-cured markets in Virginia, Tennessee and Kentucky; and cigar/chewing tobacco markets in Connecticut, Pennsylvania and Wisconsin. In the United States, flue-cured and burley tobacco is generally sold at public auction to the highest bidder. In addition, the price of such tobacco is supported under an industry-funded federal government program that also restricts tobacco production through a quota system. The price support system has caused U.S. grown tobacco to be more expensive than most non-U.S. tobacco, resulting in a declining trend in exports. Industry leaders continue to explore options including program changes to improve the competitive position of U.S. tobacco. Other factors affecting the competitive position of U.S. tobacco in the world market include the efficiency of the marketing system, relative costs of production and leaf quality in the United States and in foreign countries. From time to time, the Company processes and stores tobacco acquired by the flue-cured and burley stabilization cooperatives under the federal price support program. The Company derives fees for such services, particularly in years when a substantial portion of the domestic tobacco crop is acquired by such cooperatives under the program. While the volume of such business fluctuates from year to year, revenues from this business in each of the past five years were not greater than 1% of consolidated tobacco revenues. Foreign Tobacco Business Universal's business of selecting, buying, shipping, processing, packing, storing, financing and selling tobacco is also carried out in varying degrees in a number of foreign countries including Argentina, Brazil, Canada, Colombia, the Dominican Republic, Ecuador, France, Germany, Greece, Guatemala, Hungary, - 4 - India, Indonesia, Italy, Malawi, Mexico, Mozambique, the Netherlands, Paraguay, the People's Republic of China, the Philippines, Poland, the Republics of the former Soviet Union, Spain, Switzerland, Tanzania, Thailand, Turkey, Uganda, the United Kingdom, Zambia and Zimbabwe. In a number of countries, including Brazil, Hungary, Italy and Mexico, Universal contracts directly with tobacco farmers, in some cases before harvest, and thereby takes the risk that the delivered quality and quantity will not meet market requirements. The price may be set by negotiation with farmers' groups or with agencies of the local government. In some countries, Universal also provides agronomy services and crop advances for seed, fertilizer and other supplies. Tobacco in Zimbabwe, Malawi and Canada, and to a certain extent in India, is purchased under an auction system. The Company has made substantial capital investments in Brazil and in Africa and the profitability of these operations can materially affect the Company's tobacco operating profits. The Company recently acquired a leaf processing plant in Tanzania, and a processing plant together with an agronomy and leaf buying units in Poland. See "Properties." Sales to foreign customers are made by Universal's sales force and through the use of commissioned agents. Most foreign customers are long-established firms or government monopolies. Universal's foreign operations are subject to the usual 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 enumerated above, Universal has advanced substantial sums, has guaranteed local loans or has guaranteed lines of credit in substantial amounts for the purchase of tobacco. Most tobacco sales are denominated in U.S. dollars, thereby limiting some of the Company's currency risk. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations." Recent Developments and Trends and Factors that May Affect Future Results For recent developments and trends in the Company's tobacco business and a discussion of factors that may affect the Company's tobacco business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Seasonality The purchasing and processing aspects of Universal's tobacco business are seasonal in nature. The United States flue-cured tobacco markets usually open the third week of July and last for approximately four months. The United States burley tobacco markets open in late November and last for approximately two and one-half months. Tobacco in Brazil is usually purchased from January through May. Other markets around the world last for similar periods, although at different times of the year, thereby reducing the overall seasonality in the Company's business. Universal normally operates its processing plants for approximately seven to nine months of the year. It purchases most of its U.S. tobacco in the eight-month period from July through February. During this period, inventories of green tobacco, inventories of redried tobacco and trade accounts receivable normally reach peak levels in succession. Current liabilities, particularly - 5 - short-term notes payable to banks, commercial paper and customer advances are a 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, June 30, normally reflects seasonal expansions in South America, Central America and Western Europe. Customers A material part of the Company's tobacco business is dependent upon a few customers, the loss of any one of whom would have an adverse effect on the Company. The Company has long-term contracts (which under certain circumstances may be amended or terminated) with a few of these customers, and, while there are no formal continuing contracts with the others, the Company has done business with each of its major customers for over 40 years. For the year ended June 30, 1997, tobacco sales to Philip Morris Companies, Inc. accounted for greater than 10% of consolidated revenues. See Note 12 to Consolidated Financial Statements. Five other customers accounted for approximately 14% of consolidated revenues during the same period. Universal had orders from customers in excess of approximately $540 million for its tobacco inventories at June 30, 1997. Based upon historical experience, it is expected that at least 90% of such orders will be delivered during the fiscal year ending June 30, 1998. Typically, delays in the delivery of orders result from changing customer requirements. Orders from customers at June 30, 1996, were in excess of approximately $400 million, of which over 90% was delivered in the following fiscal year. Competition The leaf tobacco industry is highly competitive. Competition among leaf tobacco merchants is based on the price charged for products and services as well as the firm's ability to meet customer specifications in the buying, processing and financing of tobacco. Universal has a world-wide buying organization of tobacco specialists and many processing plants equipped with the latest technology which, management believes, give it a competitive edge. See "Properties." Competition varies depending on the market or country involved. Normally, there are at least five buyers on each of the United States flue-cured and burley markets. The number of competitors in foreign markets varies from country to country, but there is competition in all areas to buy the available tobacco. The principal competitors in the industry that do not manufacture consumer tobacco products and that compete with the Company on the United States markets and on foreign markets are as follows: DIMON Incorporated, Export Leaf Tobacco Company, and Standard Commercial Corporation. Of the significant competitors in the United States that are not also manufacturers, Universal believes that it ranks first in total U.S. market share and also first in worldwide market share. - 6 - C. Description of Agri-Products Business The Company's agri-products business involves the selecting, buying, shipping, processing, storing, financing, distribution, importing and exporting of a number of products including tea, rubber, sunflower seeds, nuts, dried fruit, canned meats, spices and seasonings. In the Company's 1996 fiscal year, the Company formed a joint venture with COSUN (a Dutch sugar cooperative) in which the companies merged their spice activities. This joint venture is the market leader in the industrial spice market in the Benelux. 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 (tea, spices and sunflower seeds) contribute to the stability and profitability of the business. Traders are subject to strict trading limits to minimize risks and allow effective management control. Seasonal effects on trading are limited. The Company provides various products to numerous large and small customers in the 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 accounts for 10% or more of the Company's consolidated agri-products 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: Agway, Akbar Brothers, Andrew Weir Commodities, Burns Philip, Ennar, Cargill, Dahlgren, Global, Finlay, Fuchs, Metallgeschellschaft/SAFIC Alcan, Stassens, Symington, Universal Tea, UTT (Unilever) and Verstegen. For recent developments and trends in the Company's agri-products business and a discussion of matters 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 business in the Netherlands and Belgium. The majority of lumber products are sourced outside the Netherlands, principally in North America, Scandinavia, Eastern and Western Europe and the Far East. 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. The business is also subject to exchange risks and other normal market and operational risks associated with lumber operations centered in Europe, including general economic conditions in the countries where the Company is located, and related trends in the building and construction industries. - 7 - The Company's sales activities in this segment are conducted through three business units: regional sales, wholesale/do-it-yourself (DIY) sales and industrial sales. The regional sales unit distributes and sells lumber and related building products through a network of regional outlets, mainly to the building and construction market. The wholesale/DIY business unit supplies lumber merchants and DIY chains with a wide range of lumber related products including panel products and doors. The industrial sales unit primarily distributes value-added softwood products to the construction industry. The Company carries inventories to meet customers' demands for prompt delivery. The level of inventories is based on a balance between providing service and continuity of supply to customers and achieving the highest possible turnover. It is traditional business practice in this industry to insure most accounts and notes receivable against uncollectibility. The Company generally does not provide extended payment terms to its customers. No single customer accounts for 10% or more of the Company's consolidated lumber and building products revenues. The Company's lumber and building products sales in fiscal year 1997 accounted for approximately 20% of the total market volume of the Netherlands, which is slightly above the market share of its largest competitor, Pont-Meyer N.V. Ten additional competitors accounted for approximately 20% to 30% of the market share in this period, and the balance was held by approximately 200 smaller competitors. The primary factors of competition are quality and price, product range and speed and reliability of logistic 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 share of the highly fragmented Belgium lumber and building products market was approximately 3% in fiscal year 1997. For recent developments and trends in the Company's lumber and building products business and further discussion of matters that may affect the Company's lumber and building product business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." E. Employees The Company employed approximately 25,000 employees throughout the world during the fiscal year ended June 30, 1997. This figure is estimated because many of the non-salaried personnel are seasonal employees. Universal believes that in the United States approximately 1,300 of the non-salaried employees of its consolidated tobacco subsidiaries are represented by unions. Most of these are seasonal employees. The Company believes that its labor relations have been good. F. Research and Development No material amounts were expended for research and development during the fiscal years ended June 30, 1997, 1996 and 1995. - 8 - G. Patents, etc. The Company holds no material patents, licenses, franchises or concessions. H. Government Regulation, Environmental Matters and Other Matters 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, environmental compliance and other matters that may affect the Company's business. ITEM 2. PROPERTIES Universal owns the land and building located at Hamilton and Broad Streets in Richmond, Virginia, where it is headquartered. The building contains approximately 83,000 square feet of floor space. The Company also owns two smaller office buildings located on the block adjacent to the Company's headquarters, which contain an aggregate of approximately 18,500 square feet of floor space. In its domestic tobacco processing operations, Universal owns six large, modern, high volume plants that have the capacity to thresh, separate, grade and redry tobacco. Four of these plants are located in North Carolina (Wilson, Henderson, Rocky Mount and Smithfield), one plant is in Danville, Virginia, and one plant is in Lexington, Kentucky. The Henderson plant has approximately 500,000 square feet of floor space and a production capacity of over 140 million pounds of green tobacco . The Wilson plant has approximately 500,000 square feet of floor space and a production capacity of over 130 million pounds of green tobacco. The remaining four plants each have a floor space of 300,000 to 400,000 square feet of floor space and an average annual production capacity of over 100 million pounds of green tobacco. Processing plants in the following foreign locations are used in the Company's tobacco operations: a large processing plant in Canada; one large processing plant and one smaller plant in Malawi; three large processing plants in Italy; three plants in Zimbabwe; and plants in Hungary, Turkey and the Netherlands. In Brazil, Universal owns three large plants, one of which is used for storage. The facilities described above are engaged primarily in processing tobacco used by manufacturers in the production of cigarettes. In addition, Universal operates plants that process cigar/chewing tobaccos in Pennsylvania, Virginia, the Dominican Republic, Colombia, Germany, Indonesia and Brazil. In July 1997, the Company acquired a large processing plant in Tanzania from the Tanzanian government. The Company is in the process of upgrading this facility with modern equipment, but the facility is currently operational. In August 1997, the Company acquired a processing plant and agronomy and leaf buying units in the Grudziadz region of Poland. Universal owns or leases extruder plants (baling operations), packaging stations and warehouse space in the tobacco-growing states and abroad. The Company owns large extruder plants in Lumberton and Rocky Mount, North Carolina; Danville, Virginia; Greeneville, Tennessee; and Lexington and Bowling Green, Kentucky. - 9 - A portion of Universal's tobacco inventory is stored in public storages. The Company also owns the following domestic tobacco storages: (a) Wilson, North Carolina - 12 storages covering 460,000 square feet; (b) Smithfield, North Carolina - 7 storages covering 240,000 square feet; (c) Henderson, North Carolina - 6 storages covering 178,500 square feet; (d) Rocky Mount, North Carolina - 6 storages covering 353,000 square feet; (e) Danville, Virginia - 4 storages covering 153,000 square feet; (f) Lexington, Kentucky - 5 storages covering 127,000 square feet; and (g) Kenbridge, Virginia - 7 storages covering 243,000 square feet; (h) Petersburg, Virginia - 7 storages covering 220,000 square feet. Additional storage space is leased in Danville, Virginia; Lexington, Kentucky; and Smithfield, Henderson and Rocky Mount, North Carolina. Lancaster Leaf Tobacco Company of Pennsylvania, Inc. owns storage space with a capacity of 19,300 tons of tobacco and leases additional storage space. In other U.S. tobacco areas, Universal owns or leases storages on a smaller scale. In foreign areas storage space is owned or leased on a comparable scale. The Company believes that properties are maintained in good operating condition and are suitable and adequate for their purposes at the Company's current sales levels. The facilities owned by the Company are not subject to indebtedness. The Company's agri-products subsidiaries own and operate a tea blending plant in the Netherlands; a tea warehouse and office in Sri Lanka; spice blending facilities (indirectly owned through a joint venture) in the Netherlands; a bean processing plant in Park Rapids, Minnesota; and small grain processing facilities in Delamere, North Dakota and Zevenbergen, the Netherlands. Sunflower seed processing plants are also owned and operated in Lubbock, Texas; Fargo, North Dakota; and Colby, Kansas. The latter facility is financed in part through a governmental industrial development authority. The Company has leased agri-products trading facilities around the world, including locations in New York, London, Warsaw, Rotterdam, Dubai, Belgium, Indonesia, Kenya and Malawi. The lumber and building products business owns or leases 36 sales outlets in the Netherlands and six sales outlets in Belgium. It also has five storage and distribution facilities; a softwood facility for large scale sawing, planing and fingerjointing; and a building components manufacturing facility, all of which are located the Netherlands. Most of these locations are owned. ITEM 3. LEGAL PROCEEDINGS Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the quarter ended June 30, 1997, there were no matters submitted to a vote of security holders. - 10 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Dividend and market price information is as follows:
- -------------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- 1997 Cash dividends declared............... $ .255 $ .265 $ 265 $ .265 Market price range: High............. 28.500 32.375 33.500 36.625 Low.............. 24.625 25.500 28.500 28.000 1996 Cash dividends declared .............. .250 .255 .255 .255 Market price range: High............. 23.000 24.625 28.375 28.500 Low.............. $21.125 $20.250 $22.250 $23.750 - --------------------------------------------------------------------------------------
The Company expects the past trend of dividend payments to continue, subject, to its future earnings and financial condition. At June 30, 1997 there were 3,271 holders of record of the registrant's common stock, which is traded on the New York Stock Exchange. - 11 - ITEM 6. SELECTED FINANCIAL DATA Five-Year Comparison of Selected Financial Data For Years Ended June 30
- --------------------------------------------------------------------------------------------------------------------- (In thousands except per share data, ratios, and number of common shareholders) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Summary of Operations Sales and other operating revenues ............ $4,112,675 $3,570,228 $3,280,880 $3,048,515 $3,077,597 Income before extraordinary item and cumulative effect of change in accounting principle . 100,873 71,350 25,639 42,579 80,066 Net income .................................... 100,873 72,246 25,639 13,173 80,066 Return on beginning common shareholders' equity 24.2% 18.5% 6.7% 3.1% 26.1% Per common share Income before extraordinary item and cumulative effect of change in accounting principle . $ 2.88 $ 2.04 $ .73 $ 1.20 $ 2.38 Net income .................................... $ 2.88 $ 2.06 $ .73 $ .37 $ 2.38 - --------------------------------------------------------------------------------------------------------------------- Financial Position at Year End Current ratio ................................. 1.32 1.29 1.27 1.35 1.34 Total assets .................................. $1,981,979 $1,889,513 $1,807,965 $1,735,866 $1,698,937 Long-term obligations ......................... 291,637 309,543 284,948 304,149 287,796 Working capital ............................... 347,542 299,778 264,713 318,583 309,370 Shareholders' equity .......................... $ 469,593 $ 417,305 $ 389,959 $ 384,598 $ 421,022 - --------------------------------------------------------------------------------------------------------------------- General Number of common shareholders ................. 3,271 3,420 3,741 4,022 4,132 Weighted average common shares outstanding (used as basis for computation of E.P.S.) ..... 35,076 35,038 35,014 35,502 33,599 Dividends declared per common share ........... $ 1.05 $ 1.015 $ .99 $ .94 $ .86 Book value per common share ................... $ 13.39 $ 11.90 $ 11.13 $ 10.99 $ 11.82 - ---------------------------------------------------------------------------------------------------------------------
Fiscal year 1995 includes a $15.6 million ($10.7 million net of tax) restructuring charge. Fiscal year 1994 reflects the cumulative effect of the change in accounting principle ($29.4 million) resulting from the adoption of SFAS 106 "Employer's Accounting for Postretirement Benefits Other Than Pensions" as well as a $17.5 million ($11.8 million net of tax) restructuring charge. Fiscal 1994 and prior years have been restated to reflect the consolidation of certain foreign susidiaries that had been accounted for under the cost or equity method of accounting. - 12 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY & CAPITAL RESOURCES Universal Corporation enjoyed record income in fiscal year 1997, and took advantage of its strong cash flow to continue to reduce its overall debt levels and position its operations to take advantage of future market growth. Working capital increased by approximately $48 million to $348 million primarily due to an increase in accounts receivable and inventories that reflected increased business volume and increased cost of green tobacco during the year. This increase in receivables and inventories was financed primarily using cash balances, customer funding, and trade payables. The Company estimates that its uncommitted flue-cured and burley inventories were approximately 7.5 million kilos, down from approximately 8.6 million kilos last year. The reduction in cash and cash equivalents at June 30, 1997, reflects a reduction in crop prefinancing held in Brazil. The Company's capital needs are predominantly short term in nature and relate to working capital required for financing crop purchases. Working capital needs are seasonal within each geographical region. Generally, the peak need of domestic tobacco operations occurs in the second fiscal quarter. Foreign tobacco operations tend to have higher requirements during the remainder of the year. The geographical dispersion and the timing of working capital needs permit the Company to predict its general level of cash requirements. Each geographic area 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. The working capital needs of individual agri-products operations fluctuate during the year, depending on the product, the country of origin, and the Company's inventory position; however, the total working capital requirements of agri-products remain relatively stable due to offsetting seasonal patterns. Working capital needs of lumber and building products in Europe follow a pattern similar to that of the construction industry, where the third quarter of the fiscal year is typically sluggish. The Company finances its working capital needs with short-term lines of credit, customer advances, and trade payables. The international tobacco trade generally is conducted in U.S. dollars, thereby limiting foreign exchange risk to that which is related to production costs and overhead in the source country. Because there is no forward foreign exchange market in many of the Company's major countries of tobacco origin, the Company manages its risk by matching funding for inventory purchases with the currency of sale and by minimizing the net investment in these countries. In addition, it is a generally accepted practice in the tobacco merchant industry that customers pay a market rate of interest for inventory purchased to their order; thus changes in interest rates do not have a major impact on the Company's income and are not considered a source of significant risk. The agri-products and lumber and building products businesses, which are based in the United States and in the Netherlands, do business in a number of foreign countries. These operations enter into forward exchange contracts to hedge firm purchase and sales commitments in foreign currencies (principally Dutch guilders, U.S. dollars, German marks, Swedish kronas, and pounds sterling). The term of currency hedges is generally from one to six months. Hedging activity is not considered to be material. Acquisitions and investments are reflected in "Net cash used for investing activities." Over the last three years, total investment needs of $193 million were provided by cash flow from operating activities. There were no acquisitions in fiscal year 1997; however, in July 1997, the Company announced the acquisition of the only processing plant in Tanzania, one of the fastest growing sources of flue-cured, filler-style leaf tobacco in Africa, and an agreement to acquire a processing plant in Poland from one of its large customers. In - 13 - addition, in August 1997 the Company announced the signing of a letter of intent to enter into a partnership with Socotab Leaf Tobacco Company, Inc. pursuant to which the oriental leaf tobacco businesses of the two companies would be combined. It is expected that these transactions will be funded with operating cash flow. The Company's capital expenditures are generally limited to those that add value to the customer, replace obsolete equipment, increase efficiency, or position the Company for future growth. During fiscal year 1997, Universal completed improvements to processing lines in Canada and Africa and increased its storage capacity to accommodate its growth in volume. During fiscal year 1998, Universal plans to continue to improve processing lines and facilities of its tobacco operations and to rationalize facilities of its lumber and building products business. Thus, the Company expects its capital expenditures to exceed those of fiscal year 1997. Management believes that these projects represent significant profit opportunities over the long term. At June 30, 1997, the Company had no material commitments for capital expenditures. The Company believes that its financial resources are adequate to support its capital needs. The Company and its subsidiaries currently have $1.7 billion in uncommitted lines of credit, of which $1.1 billion was available at June 30, 1997, to support future seasonal working capital needs in the United States and several foreign countries. In addition, the Company has $100 million in an unused, committed revolving credit facility. This facility is also available to support the issuance of commercial paper. The Company's debt ratings are investment grade, and its ratio of long-term debt to long-term capitalization (including deferred taxes) is approximately 37%. The Company's total debt as a percentage of total capitalization (including deferred taxes) has been reduced from 69% at the end of fiscal year 1996 to 65% at the end of fiscal year 1997. Any excess cash flow from operations after dividends, capital expenditures, and long-term debt payments will be available to reduce short-term debt , fund expansion, or otherwise enhance shareholder value. RESULTS OF OPERATIONS Fiscal Year 1997 Compared to 1996 - --------------------------------- Consolidated revenues in fiscal year 1997 exceeded the $4 billion mark for the first time. Each operating segment of the Company contributed to the increase of $542 million or 15% over fiscal year 1996. Tobacco contributed $486 million, about 90% of the increase. The increase in tobacco revenues reflects a combination of improved market balance and rising demand for tobacco products. Lumber and building products revenues were up approximately 4% despite a stronger U.S. dollar, which adversely affected the U.S. dollar results of this Netherlands-based operation. Agri-products revenues increased 7% compared to fiscal year 1996 on the strength of sunflower seed, nut, and dried fruit sales. Consolidated operating profits in fiscal year 1997 were $237 million compared to $192 million last year, an increase of 23%. Tobacco operating profits were up $41 million or 24% in fiscal year 1997. Increased demand for tobacco and a more balanced supply situation created a favorable operating environment in 1997. In addition, the Company continues to realize benefits from cost reduction programs of previous years' restructuring efforts. Foreign and dark tobacco operating results improved significantly in fiscal year 1997, while U.S. results were down. A combination of larger volumes handled and improved margins in virtually all foreign tobacco operations contributed to the gain. U.S. operations declined due to a combination of reduced crops and sales mix. Adverse weather and crop diseases reduced the domestic crop available to meet export customer needs; thus sales were more heavily weighted toward domestic customers. In addition, in fiscal year 1996 the Company had a higher proportion of old crop tobacco sales, which were not repeated in fiscal year 1997. Dark tobacco operations continued to reflect the increased demand for cigars both in the United States and abroad. Lumber and building products operating profits were $26 million in fiscal year 1997, an increase of $3 million compared to the last fiscal year. Improved performance in both regional sales and industrial units accounted for the majority of the increase, despite the adverse effects of a stronger U.S. dollar - 14 - late in the year on reported results. Management estimates that the stronger dollar reduced operating results by as much as 8% during the fiscal year. Agri-products operating profits increased 2% in fiscal year 1997, despite difficult trading conditions for tea and rubber. 'Selling, General and Administrative Expenses' were up $18 million or 6% compared to last year. The increase was primarily due to larger tobacco volumes shipped. Selling, General and Administrative Expenses as a percentage of total revenues dropped from 8.3% in fiscal year 1996 to 7.7% in fiscal year 1997. Interest expense in fiscal year 1997 was down due to lower average borrowings, reduced interest rates in Holland, and foreign currency translation reductions in fiscal year 1997. In fiscal year 1997, the Company's consolidated income tax rate remained at 40%. The Company continues to realize the benefits of tax planning strategies implemented in 1995. However, the rate exceeds the Federal statutory rate by five percentage points, principally due to state taxes and foreign subsidiary tax rates. Fiscal Year 1996 Compared to 1995 - --------------------------------- Consolidated revenues in fiscal year 1996 increased $289 million or almost 9% over 1995. Tobacco revenues accounted for $228 million of the increase, principally due to improved market conditions. The balance of the increase was attributed to lumber and building products operations, for which revenues were up $61 million. The lumber and building products revenue increase was due to a stronger Dutch guilder, and the inclusion of Heuvelman, a softwood distributor acquired in 1995, for the entire fiscal year versus seven months reported in fiscal year 1995. Total agri-product revenues were comparable year to year as increases in tea revenues were offset by reductions in canned meat and other product offerings. Tobacco operating profits in fiscal year 1996 were $168 million, an increase of $66 million over the prior year. The majority of the improvement was due to handling larger leaf volumes and improved operating margins. Fiscal year 1995's tobacco operating profits were reduced by a $15.6 million restructuring charge and $10.7 million of inventory write-downs. In the United States, results improved on higher volumes of tobacco bought and processed, and shipments of prior years' crops. Overall foreign tobacco operating profits were up due to the aforementioned improved market conditions and lower costs. Included in the increased tobacco operating profits are improved results from dark tobacco operations, reflecting continued strong demand for cigar leaf, particularly in the United States. For fiscal year 1996, operating profits for lumber and building products were up 8%, benefiting from growth in the wholesale and do-it-yourself area, and the inclusion of Heuvelman for the full year. This improvement was partially offset as regional sales outlets suffered from historically low softwood prices and severe winter weather that resulted in the virtual shut down of the construction industry for a number of weeks late in the fiscal year. Agri-products operating profits increased 7% to $13 million in fiscal year 1996, principally due to improved results in all areas except nuts and dried fruits. 'Selling, General and Administrative Expenses' were up $10 million or less than 4% compared to last fiscal year. The majority of the increase is due to the inclusion of Heuvelman. The increase was moderated by approximately $5.5 million of provisions recorded in fiscal year 1995 related to customer obligations in Eastern Europe. Interest expense was down slightly in fiscal year 1996 due to lower average borrowing rates. Fiscal year 1996's income tax rate was 40% compared to 44.6% for fiscal year 1995. Fiscal year 1995's tax rate did not include full statutory benefits on the restructuring charge or on inventory write-downs and provisions related to Eastern Europe. The Company's consolidated income tax rate in both years was affected by a number of factors, including: the mix of domestic and foreign earnings, subsidiary local tax rates, and its ability to utilize foreign tax credits. - 15 - During fiscal year 1996, the Company's 1995 restructuring plan was implemented. The fiscal year 1995 charge included $7.2 million for the expected costs of severance and deferred payments related to approximately 200 employees throughout the Company. The non-severance portion of the charge was for the write-down of assets in operations consolidated ($3.7 million), other non-operating restructuring costs ($1.7 million) and cash payments to terminate occupancy of leased facilities ($3 million). As of June 30, 1996, total cash payments of approximately $4 million had been made to cover severance costs of 195 employees. Other Information Regarding Trends And Management's Actions - ----------------------------------------------------------- After the publicized world oversupply of tobacco leaf, fiscal year 1995 was the first year of a move into a more balanced position. As demand virtually erased excess unsold inventory over the three-year period ending June 30, 1997, the Company benefited from the improved operating environment. However, tobacco production is expected to exceed use in fiscal year 1998. This should result in increased inventories held by the U.S. Stabilization cooperatives and, to some extent, by the dealer industry and could inhibit growth in earnings in fiscal year 1999. The Company is positioning itself to limit any increase in its unsold inventory position. Worldwide tobacco consumption continues to grow with the American-blend cigarette making inroads in Asia and Eastern Europe. American-blend production is estimated at 40% of total world production and is expected to continue increasing at approximately 3% to 4% annually for the foreseeable future. Along with this trend, the multinational manufacturers' percentage of the total cigarette market also is increasing through expanding of licensing agreements, absorbing divested government operations and building new factory sites overseas. Demand for flue-cured, burley, and oriental tobaccos should continue to be strong, and manufacturers will continue to be sensitive to the ratio of value to price in leaf purchases. The possible effects of regulatory factors and industry litigation are more fully described in "Factors That May Affect Future Results" below. Management has estimated that less than 15% of the flue-cured, burley, and oriental tobacco the Company handles is consumed in the United States. During fiscal year 1995, the Brazilian government reduced inflation rates to 20-year lows through fiscal policies included in its Plano Real economic plan, which entails financial control of items such as interest rates and exchange rates. In addition, the Brazilian government exercises control over taxation, trade policies, foreign investment and banking. Although there have been benefits realized from enacting the Plano Real, the long-term viability of the government's plan is dependent on various factors, including whether the current administration can continue to hold office, the level of foreign currency reserves, and the confidence of the Brazilian business sector. Although there are indications that the real is overvalued against the dollar, there have been no significant changes in the Brazilian federal government's economic policies that would lead the Company to believe there would be a significant impact on earnings for the Company's fiscal year ending June 30, 1998. A key trend in the tobacco industry has been consolidation among manufacturers and among leaf tobacco merchants. This concentration should increase the need for better quality tobacco and improved processing, which provides a good opportunity for the Company. However, it may also make demand for particular growths of tobacco less predictable. The Company has a very large presence in the U.S. market, where leaf has not been price competitive with the world market. If not corrected through program reforms and reduced support prices, U.S. pricing could result in a decline in domestic production and marketings in the future. Management believes that the risk of a significant decline in the total U. S. crop in the next year is small. The Company's operations are well placed to supply leaf from many sources in world markets. - 16 - In its lumber and building products area, the Company has been leading a trend toward consolidation of a fragmented industry in Holland and has proved itself an attractive business partner in that environment. 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 words of similar effect. In addition, from time to time, the Company may publish, 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 fiscal year 1998 and any interim period to differ materially from those expressed 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. Tobacco OPERATING FACTORS Universal's financial results are affected by a number of factors that directly or indirectly impact the tobacco operations of the Company's business. Operating factors that may affect the Company's results of operations include: Competition; Reliance on Significant Customers. The leaf tobacco industry is highly competitive. Competition among leaf tobacco merchants is based primarily on the price charged for products and services as well as the firm's ability to meet customer specifications in the buying, processing and financing of tobacco. In addition, there is competition in all countries to buy the available tobacco from suppliers. There are only three major global competitors in the leaf tobacco industry and they are dependent upon a few large tobacco manufacturing customers. The loss of any large or significant customer could have a material adverse effect on the Company's results of operations. Universal has long-term contracts (which under certain circumstances may be amended or terminated) with some of these customers, and, while there are no formal continuing contracts with the others, the Company has done business with each of its major customers for over 40 years. Market Balance. Universal's financial results may be significantly affected by the overall balance of supply and demand for leaf tobacco. Customers purchase tobacco based upon their expectations of future requirements, and those expectations can change from time to time depending upon internal and external and factors affecting their business. Trends in the global consumption of cigarettes and particularly American-blend cigarettes, as well as trends in cigar sales, influence manufacturers' expectations and thus their demand for leaf tobacco. Production of tobacco may be significantly affected by fluctuations in the weather in geographically dispersed regions as well as by crop disease. Any material imbalance in the supply and demand for tobacco may impact the Company's results of operations. Methods of Procuring Tobacco. The Company purchases leaf tobacco from farmers, and other suppliers through public auction and privately negotiated contract purchases. In a number of countries, including Brazil, Hungary, Italy and Mexico, where the Company contracts directly with tobacco farmers, in some cases before harvest, the Company takes the risk that the delivered quality and quantity will not meet market requirements. Company affiliates also have dark tobacco growing operations in Ecuador and Indonesia. Timing of Customer Shipments. The Company recognizes sales and revenue from tobacco operations at the time that title and risk of loss to the tobacco 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. - 17 - GOVERNMENTAL FACTORS Universal's tobacco business is heavily regulated by federal, state and local governments in the United States and by foreign governments in many jurisdictions where the Company operates. Governmental factors that may affect the Company's results of operations include: Government Efforts to Reduce Tobacco Consumption. The United States government has taken or proposed actions that may have the effect of reducing U.S. consumption of tobacco products. These activities have included: (1) the U.S. Environmental Protection Agency's decision to classify environmental tobacco smoke as a "Group A" (known human) carcinogen; (2) restrictions on the use of tobacco products in public places and places of employment including a proposal by the U.S. Occupational Safety and Health Administration to severely restrict smoking in the work place; (3) proposals by the U.S. Food and Drug Administration ("FDA") to regulate nicotine as a drug and sharply restrict cigarette advertising and promotion; (4) proposals to increase the U.S. excise tax on cigarettes; and (5) the recently announced policy of the U.S. government to link certain federal grants to the enforcement of state laws restricting the sale of tobacco products. Numerous other legislative and regulatory anti-smoking measures have also been proposed at the federal, state and local levels. In addition, a number of foreign governments have also taken steps to restrict or prohibit cigarette advertising and promotion, to increase taxes on cigarettes and to discourage cigarette smoking. In some cases, such restrictions are more onerous than those in the U.S. For example, advertising and promotion of cigarettes has been banned or severely restricted for several years in Australia, Canada, Finland, France, Italy, Singapore and a number of other countries. The FDA recently issued rules regulating nicotine as a drug and restricting cigarette access, advertising and promotion in an effort to deter smoking by minors. These rules were scheduled to go into effect in August 1997, but have been challenged in court. In April 1997, a federal district court in Winston-Salem, North Carolina upheld the FDA's authority to regulate nicotine as a drug, but struck down the FDA's rules and restrictions related to advertising. Other issues in the lawsuit remain to be resolved, and the court has stayed the implementation of these rules. Both parties have appealed the court's decision. There can be no assurances as to the outcome of the appeal and no assurances as to the outcome of the issues to be resolved in the trial court, but their resolution could have a negative impact on the Company's operating revenues and operating income in amounts that cannot be determined. The Company cannot predict the extent to which government efforts to reduce tobacco consumption might affect the Company's business. Although the long-term trend in the United States generally has been toward decreased consumption of cigarettes, cigar sales have increased significantly in recent years and the overall worldwide consumption of tobacco products (particularly those products using the milder American blend of tobacco) has continued to grow steadily. However, a significant decrease in overall worldwide tobacco consumption brought about by existing or future governmental laws and regulations would reduce demand for the Company's products and services and adversely affect the Company's results of operations. Political Uncertainties in Foreign Tobacco Operations. The Company's international operations are subject to uncertainties and risks relating to the political stability or instability of certain foreign governments, principally in developing and emerging markets, and to the effects of changes in the trade policies and economic regulations of foreign governments. These uncertainties and risks include the effects of war, insurrection, expropriation or nationalization of assets, undeveloped or antiquated commercial laws, subsidies for local tobacco concerns, licenses to conduct business in foreign jurisdictions, import and export restrictions, the imposition of excise and other taxes on tobacco, monetary and exchange controls, inflationary economies, and restrictions on repatriation of earnings or proceeds from liquidated assets of foreign subsidiaries. The Company has substantial capital investments in - 18 - Brazil and in Africa and the profitability of these operations can materially affect the Company's earnings from tobacco operations. United States Trade Policies. The United States price support system is an industry-funded program that is administered by the US government. The effect of the price support system has been to increase the cost of domestic tobacco relative to most foreign tobacco, resulting in a downward trend in exports of domestic tobacco. In 1995, Congress repealed certain domestic content legislation that had required that all domestically manufactured cigarettes contain at least 75% domestically grown tobacco and replaced it with a less restrictive tariff rate import quota system, which was also designed to assist domestic tobacco growers by limiting imports. It is not possible to predict the extent to which future trade policies or other governmental activities might affect the Company's business. Tax Matters. 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. HEALTH ISSUES; PUBLIC SENTIMENT Reports and speculation with respect to the alleged harmful physical effects of cigarette smoking have been publicized for many years and, together with decreased social acceptance of smoking and increased pressure from anti-smoking groups, have had an ongoing adverse effect on sales of tobacco products. A significant decrease in global sales of tobacco products brought about by health concerns, decreased social acceptance or other factors would reduce demand for the Company's products and services and adversely affect the Company's results of operations. Industry Litigation - -------------------- Litigation is pending against manufacturers of consumer tobacco products seeking damages for health problems alleged to have resulted from the use of tobacco in various forms. This includes lawsuits against cigarette manufacturers by several states in the United States seeking reimbursement of Medicaid and other expenditures by such states claimed to have been made to treat diseases allegedly caused by cigarette smoking. Neither the Company nor, to the Company's knowledge, any other leaf merchant is a party to this litigation. It is not possible to predict the outcome of such litigation or what effect adverse determinations in pending or future litigation against manufacturers might have on the business of the Company. Proposed Tobacco Litigation Settlement Legislation - -------------------------------------------------- On June 20, 1997, several multinational cigarette manufacturers, certain State Attorneys General and plaintiffs' lawyers issued a Memorandum of Understanding for consideration by Congress and the President. The Memorandum of Understanding outlines an agreement among the parties that, if adopted by Congress and approved by the President, would, among other things, settle certain lawsuits filed against tobacco manufacturers and limit their damages in future lawsuits, provide for payments by the manufacturers to the federal and state governments, impose further restrictions on the sale, advertising and promotion of tobacco products and impose a regulatory framework on the tobacco manufacturers operating in the United States. The Company believes that the legislation as proposed in the Memorandum of Understanding could lead to reduced consumption of tobacco products in the United States, and therefore could affect the volume of sales, operating revenues and operating profit of the Company in amounts that cannot be determined, although management has estimated that less than 15% of the flue-cured, burley, and oriental tobacco the Company handles is consumed in the United States. There can be no assurances as to the content of any legislation that Congress may adopt or that Congress will not enact legislation that would have a more detrimental effect on the domestic consumption of tobacco products, and therefore the operating results of the Company. In addition, some government leaders in several foreign nations, including the United Kingdom, Israel, and the Republic of South Korea have recently announced - 19 - their intention to propose legislation similar to that outlined in the Memorandum of Understanding. To the extent that countries in which the Company operates were to adopt this type of legislation, the Company's volumes, operating revenues and operating profit could be adversely affected. There can be no assurances as to the number of countries that may adopt such legislation or to the content of any such legislation that a country may adopt. FINANCIAL FACTORS Financial factors that may affect the Company's results of operations include: Extensions of Credit. Although the Company's credit experience has been excellent and extensions of credit to customers are evaluated carefully, a significant delay in payment or write-off of amounts due the Company could adversely affect the Company's results. In addition, crop advances to farmers are generally secured by the farmer's agreement to deliver green tobacco; in the event of crop failure, recovery of advances could be delayed until deliveries of future crops. Funds held by subsidiaries are generally invested in local banks or loaned to other subsidiaries. To reduce credit risk, investment limits are established with each bank according to the Company's evaluation of credit standing. Fluctuations in Foreign Currency Exchange Rates. The Company's tobacco business is generally denominated in U.S. dollars, as is the business of the industry as a whole. Accordingly, there is minimal currency risk related to the sale of tobacco, and the Company funds its purchases of local crops for export in U.S. dollars. However, local country operating costs, including processing costs, are subject to the effects of exchange fluctuations of the local currency against the U.S. dollar. Interest Rates. Interest rate risk in the Company's tobacco operations is limited because customers usually pre-finance purchases or pay market rates of interest for inventory purchased on their order. However, on a short-term basis, the Company may be exposed to interest rate fluctuations if customers delay shipments of tobacco such that the timing of revenue recognition does not match the timing of the related expense. Lumber and Building Products 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. The business is also subject to exchange risks and other normal market and operational risks associated with lumber operations centered in Europe, including economic conditions in the countries where the Company is located and related trends in the building and construction industry. Agri-products The agri-products business is affected by operating and other factors that are similar to those that affect the Company's tobacco operations, including crop risks, and market balance, and to governmental factors, such as political uncertainties in countries of crop origin. - 20 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Universal Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------- (In thousands, except per share data) 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Sales and other operating revenues .................. $4,112,675 $3,570,228 $3,280,880 Costs and expenses Cost of goods sold .............................. 3,559,647 3,080,001 2,852,652 Selling, general and administrative expenses .... 316,201 297,752 287,278 Restructuring charges ........................... 15,597 Interest ........................................ 64,886 68,754 69,585 ---------- ---------- ---------- 3,940,734 3,446,507 3,225,112 ---------- ---------- ---------- Income before income taxes and other items .......... 171,941 123,721 55,768 Income taxes .................................... 68,776 49,474 24,866 Minority interests .............................. 8,987 6,696 6,633 ---------- ---------- ---------- Income from consolidated operations ................. 94,178 67,551 24,269 Equity in net income of unconsolidated affiliates 6,695 3,799 1,370 ---------- ---------- ---------- Income before extraordinary item .................... 100,873 71,350 25,639 Extraordinary item .................................. 896 ========== ========== ========== Net income .......................................... $ 100,873 $ 72,246 $ 25,639 ========== ========== ========== Per common share Income before extraordinary item .................... $ 2.88 $ 2.04 $ .73 Extraordinary item .................................. .02 ========== ========== ========== Net income .......................................... $ 2.88 $ 2.06 $ .73 ========== ========== ========== Weighted average common shares outstanding .......... 35,076 35,038 35,014 ========== ========== ========== - ----------------------------------------------------------------------------------------------- See acCompanying notes. - 21 - Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, 1997 and 1996 - ------------------------------------------------------------------------------------------ (In thousands of dollars) 1997 1996 - ------------------------------------------------------------------------------------------ ASSETS Current Cash and cash equivalents ..................... $ 109,070 $ 214,782 Accounts receivable ........................... 428,430 327,421 Advances to suppliers ......................... 79,499 56,857 Accounts receivable - unconsolidated affiliates 7,768 17,843 Inventories - at lower of cost or market: Tobacco ................................... 570,650 490,557 Lumber and building products .............. 105,567 106,916 Agri-products ............................. 80,812 71,145 Other ..................................... 12,444 15,373 Prepaid income taxes .......................... 7,665 5,867 Deferred income taxes ......................... 7,064 5,984 Other current assets ......................... 22,270 16,215 ---------- ---------- Total current assets .................. 1,431,239 1,328,960 Real estate, plant and equipment - at cost Land .......................................... 30,887 33,786 Buildings ..................................... 214,605 218,012 Machinery and equipment ....................... 430,360 414,141 ---------- ---------- 675,852 665,939 Less accumulated depreciation ............. 366,200 345,549 ---------- ---------- 309,652 320,390 Other assets Goodwill ...................................... 117,483 122,579 Other intangibles ............................. 22,703 26,726 Investments in unconsolidated affiliates ...... 33,413 27,191 Deferred income taxes ......................... 1,509 13,029 Other noncurrent assets ....................... 65,980 50,638 ---------- ---------- 241,088 240,163 ---------- ---------- $1,981,979 $1,889,513 ========== ========== - ------------------------------------------------------------------------------------------ See acCompanying notes. - 22 - Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, 1997 and 1996 - ------------------------------------------------------------------------------------------ (In thousands of dollars) 1997 1996 - ------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Notes payable and overdrafts .................. $ 589,648 $ 551,667 Accounts payable .............................. 275,980 222,154 Accounts payable - unconsolidated affiliates .. 10,204 6,813 Customer advances and deposits ................ 144,175 122,894 Accrued compensation .......................... 19,296 18,245 Income taxes payable .......................... 16,166 24,061 Current portion of long-term obligations ...... 28,228 83,348 ---------- ---------- Total current liabilities ................. 1,083,697 1,029,182 Long-term obligations ............................. 291,637 309,543 Postretirement benefits other than pensions ....... 45,553 46,268 Other long-term liabilities ....................... 42,273 44,920 Deferred income taxes ............................. 18,527 13,846 Minority interests ................................ 30,699 28,449 Commitments and contingent liabilities Shareholders' equity Preferred stock, $100 par, 8% cumulative, authorized 75,000 shares, none issued or outstanding Additional preferred stock, no par value, authorized 5,000,000 shares, none issued or outstanding Common stock, no par value, authorized 50,000,000 shares, issued and outstanding 35,139,137 shares (35,056,357 at June 30, 1996) ............. 77,040 76,053 Retained earnings ............................. 424,298 360,273 Foreign currency translation adjustments ...... (31,745) (19,021) ---------- ---------- Total shareholders' equity ............ 469,593 417,305 ---------- ---------- $1,981,979 $1,889,513 ========== ========== - ------------------------------------------------------------------------------------------ - 23 - Universal Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 1997, 1996 and 1995 - ------------------------------------------------------------------------------------------------------------------------ (In thousands of dollars) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................................. $ 100,873 $ 72,246 $ 25,639 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ........................................................... 44,170 43,201 39,828 Amortization ........................................................... 7,400 9,311 8,796 Translation loss, net .................................................. 2,392 3,545 2,563 Deferred taxes ......................................................... 22,892 (3,786) (16,068) Minority interests ..................................................... 8,987 6,696 6,633 Other .................................................................. (3,386) (1,297) 12,134 --------- --------- --------- 183,328 129,916 79,525 Changes in operating assets and liabilities net of effects from purchase of businesses: Accounts and notes receivable .............................................. (126,379) (33,917) 29,640 Inventories and other assets ............................................... (130,509) (26,001) 16,576 Income taxes ............................................................... (8,733) 5,175 7,466 Accounts payable and other accrued liabilities ............................. 80,797 72,336 (70,515) --------- --------- --------- Net cash provided (used) by operating activities ....................... (1,496) 147,509 62,692 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment .................................. (58,817) (35,259) (39,024) Purchase of businesses, net of cash acquired ............................... (19,200) (62,702) Sales of property, plant and equipment ..................................... 19,551 2,135 4,839 Other ...................................................................... (2,671) 1,900 (4,244) --------- --------- --------- Net cash used in investing activities .................................. (41,937) (50,424) (101,131) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of short-term debt, net ........................................... 51,247 (86,318) 69,701 Repayment of long-term debt ................................................ (91,795) (42,258) (10,798) Issuance of long-term debt ................................................. 18,769 118,726 6,550 Proceeds from minority investment in a subsidiary .......................... 10,000 Dividends paid to minority shareholders .................................... (3,657) (4,550) (2,147) Issuance of common stock ................................................... 617 174 248 Dividends paid ............................................................. (37,009) (35,387) (34,313) --------- --------- --------- Net cash provided by (used in) financing activities .................... (61,828) (39,613) 29,241 --------- --------- --------- Effect of exchange rate changes on cash ................................ (451) (783) 471 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ........................... (105,712) 56,689 (8,727) Cash and cash equivalents at beginning of year ................................. 214,782 158,093 166,820 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR ....................................... $ 109,070 $ 214,782 $ 158,093 ========= ========= ========= Supplemental cash flow information: Cash paid during the year for: Interest ................................................................... $ 69,672 $ 64,253 $ 67,755 Income taxes, net of refunds ............................................... $ 63,348 $ 48,771 $ 30,542 - ------------------------------------------------------------------------------------------------------------------------ See acCompanying notes. - 24 - Universal Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended June 30, 1997, 1996 and 1995 - ---------------------------------------------------------------------------------------------------------- (In thousands of dollars) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- COMMON STOCK: Balance at beginning of year ............................... $ 76,053 $ 75,749 $ 75,287 Issuance of common stock ................................... 38 30 214 Exercise of stock options .................................. 949 274 248 --------- --------- --------- Balance at end of year ..................................... 77,040 76,053 75,749 --------- --------- --------- RETAINED EARNINGS: Balance at beginning of year ............................... 360,273 323,595 332,626 Net Income ................................................. 100,873 72,246 25,639 Cash dividends declared ($1.05 per share in 1997; $1.015 per share in 1996, $.99 in 1995) ............................ (36,848) (35,568) (34,670) --------- --------- --------- Balance at end of year ..................................... 424,298 360,273 323,595 --------- --------- --------- FOREIGN CURRENCY TRANSLATION ADJUSTMENTS: Balance at beginning of year ............................... (19,021) (9,385) (23,315) Translation adjustments for the year ....................... (20,068) (14,893) 21,240 Allocated income taxes ..................................... 7,344 5,257 (7,310) --------- --------- --------- Balance at end of year ..................................... (31,745) (19,021) (9,385) --------- --------- --------- SHAREHOLDERS' EQUITY AT END OF YEAR ............................ $ 469,593 $ 417,305 $ 389,959 ========= ========= ========= - ---------------------------------------------------------------------------------------------------------- See acCompanying notes.
- 25 - Universal Corporation and Subsidiaries Notes to Consolidated Financial Statements (All dollar amounts are in thousands, except as otherwise noted) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements include the accounts of all controlled domestic and foreign subsidiaries. All material interCompany items and transactions have been eliminated. The fiscal years of foreign subsidiaries generally end March 31 or April 30 to facilitate timely reporting. The Company uses the equity method of accounting for its investments in affiliates, which are owned 50% or less. Effective fiscal year 1995, the Company consolidated the results of subsidiaries located in Malawi and Zimbabwe into its financial statements. Prior to fiscal year 1995, subsidiaries located in Malawi were accounted for under the equity method and subsidiaries in Zimbabwe under the cost method. Financial data for all prior periods presented has been restated to reflect the consolidation. Cash and Cash Equivalents - ------------------------- The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Inventories - ----------- Inventories of tobacco and agri-products are valued at the lower of specific cost or market. All other inventories are valued principally at lower of average cost or market. Real Estate, Plant and Equipment - -------------------------------- Depreciation of plant and equipment is based upon historical cost and the estimated useful lives of the assets. Depreciation of properties used in tobacco operations is calculated using both the straight line and declining balance methods, while lumber and building products and agri-products utilize the straight line method. Buildings include tobacco and agri-product processing and blending facilities, lumber outlets, offices and warehouses. Machinery and equipment represent processing and packing machinery, transportation, office and computer equipment. Estimated useful lives range as follows: buildings - 15 to 40 years; processing and packing machinery - 3 to 11 years; transportation equipment - 3 to 10 years; office and computer equipment - 3 to 10 years. Goodwill and Other Intangibles - ------------------------------ Goodwill and other intangibles include principally the excess of the purchase price of acquired companies over the net assets. Goodwill and other intangibles are generally amortized using the straight-line method over periods not exceeding 40 years. Goodwill and other intangible assets are periodically reviewed for impairment, including a determination of whether events or circumstances have changed that may indicate that an impairment of value exists, based on an assessment of future operations. Accumulated amortization at June 30, 1997 and 1996, was $28.6 and $21.4 million, respectively. - 26 - Income Taxes - ------------ The Company provides deferred income taxes on temporary differences arising from employee benefit accruals, depreciation, deferred compensation, and undistributed earnings of consolidated subsidiaries and unconsolidated affiliates not permanently reinvested. At June 30, 1997, the cumulative amount of undistributed earnings of consolidated subsidiaries on which no provision for U.S. income taxes had been made was $61.7 million. Fair Values of Financial Instruments - ------------------------------------ The fair values of the Company's long-term obligations have been estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of all other current assets and liabilities that qualify as financial instruments, approximates fair value. Derivative Financial Instruments - -------------------------------- Forward foreign currency exchange contracts are used by the Company in the management of its foreign currency exposures. The Company does not enter into contracts for trading purposes. None of these contracts contain multiplier or leverage features. The Company enters into such contracts only with financial institutions of good standing and the total credit exposure related to non-performance by those institutions is not material to the operations of the Company. Realized and unrealized gains and losses on the Company's foreign currency contracts that are designated and effective as hedges are deferred and recognized as a component of the underlying transaction when it occurs. Realized gains or losses from matured and terminated hedge contracts are recorded in other assets or liabilities until the underlying hedge transaction is consummated. Realized and unrealized gains or losses on hedge contracts relating to transactions that are not subsequently expected to occur are recognized in results currently. Contracts used to manage foreign currency risks are not material. Translation of Foreign Currencies - --------------------------------- The financial statements of foreign subsidiaries, for which the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from translation of financial statements are reflected as a separate component of shareholders' equity. The financial statements of foreign subsidiaries, for which the U.S. dollar is the functional currency and which have certain transactions denominated in a local currency, are remeasured as if the functional currency were the U.S. dollar. The remeasurement of local currencies into U.S. dollars creates translation adjustments that are included in net income. Exchange losses in 1997, 1996 and 1995 resulting from foreign currency transactions were $3.1, $3.6 and $4.7 million, respectively (including $2.4, $3.5 and $2.6 million resulting from foreign currency translation losses) and are included in the respective statements of income. Estimates and Assumptions - -------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and acCompanying notes. Actual results could differ from those estimates. Accounting Pronouncements - ------------------------- Effective July 1,1996 the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"("SFAS 121"). SFAS 121 standardizes the accounting practices for the recognition and measurement of impairment losses for certain long-lived assets. The adoption of SFAS 121 did not have a material impact on the Company's results of operations or financial position. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"("SFAS - 27 - 128") which is required to be adopted in the quarter ending December 31, 1997. SFAS 128 simplifies the calculation of earnings per share and changes the calculation related to dilution. The impact of SFAS 128 on the calculation of earnings per share for the Company is not expected to be material due to the Company's simple capital structure. Reclassifications - ----------------- Certain amounts in prior years' statements have been reclassified to be reported on a consistent basis with the current year's presentation. NOTE 2 - RESTRUCTURING In the fourth quarter of fiscal year 1995, plans were developed to reduce the Company's worldwide cost structure, including the consolidation of certain tobacco operations and a reduction in the number of employees. The Company's 1995 consolidated statements of income included a pretax restructuring charge of $15.6 million. The restructuring plan has been completed. NOTE 3 - EXTRAORDINARY ITEM During fiscal year 1996, the Company recovered $1.4 million related to receivables from the Iraqi State Tobacco Monopoly written off in fiscal year 1991. The Company had recorded, as an extraordinary item, a pretax provision of $6.2 million for the uncollectability of outstanding receivables as a result of the war in the Persian Gulf. NOTE 4 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company operates principally in three business segments: Tobacco - ------- Selecting, buying, shipping, processing, packing, storing and financing leaf tobacco in the United States and other tobacco growing countries for the account of, or for resale to, manufacturers of tobacco products throughout the world. Lumber and Building Products - ---------------------------- Distribution of lumber and building products to the building and construction market in Europe, primarily in Holland. Agri-Products - ------------- Trading and processing tea and sunflower seeds and trading other products from the countries of origin to various customers throughout the world. Generally, sales between geographic areas are priced to generate a reasonable profit margin. Sales between business segments are insignificant. Operating profit is total revenue less operating expenses. In computing operating profit, none of the following items have been added or deducted: general corporate expenses, interest expense, income taxes and equity in net income of unconsolidated affiliates. Identifiable assets are those of the Company that are identified with the operations in each industry group. Corporate assets are principally the fixed assets of the Company's administrative offices. - 28 - The Company's dominant business, tobacco, is generally conducted in U.S. dollars. In most countries, the Company funds its major cost, the purchase of green tobacco, in U.S. dollars thereby limiting foreign exchange risk to that which is related to production costs and overhead in the country of tobacco origin. U.S. Export Sales by Geographic Area - ------------------------------------ - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Europe ...................... $358,276 $304,008 $266,682 Asia ........................ 203,754 189,904 179,737 Other Areas ................. 41,966 45,751 51,962 -------- -------- -------- $603,996 $539,663 $498,381 ======== ======== ======== - -------------------------------------------------------------------------------- - 29 -
- --------------------------------------------------------------------------------------------------------------------------- Lumber and Business Segments Tobacco Building Products Agri-products Consolidated - --------------------------------------------------------------------------------------------------------------------------- 1997 Sales and other operating revenues ........... $ 3,028,419 $ 597,069 $ 487,187 $ 4,112,675 =========== =========== =========== =========== Operating profit ............................. 209,090 26,338 13,095 248,523 =========== =========== =========== General corporate expenses ................... (11,696) Interest expense ............................. (64,886) ----------- Income before income taxes and other items 171,941 =========== Identifiable assets .......................... 1,528,495 273,149 144,849 1,946,493 =========== =========== =========== Investments in unconsolidated affiliates ..... 33,413 Corporate assets ............................. 2,073 ----------- Total assets ............................. 1,981,979 =========== Depreciation and amortization ................ 39,677 9,774 2,119 51,570 =========== =========== =========== =========== Capital expenditures ......................... 45,363 10,162 3,292 58,817 =========== =========== =========== =========== - --------------------------------------------------------------------------------------------------------------------------- 1996 Sales and other operating revenues ........... 2,541,956 574,171 454,101 3,570,228 =========== =========== =========== =========== Operating profit ............................. 168,196 22,874 12,797 203,867 =========== =========== =========== General corporate expenses ................... (11,392) Interest expense ............................. (68,754) ----------- Income before income taxes and other items 123,721 =========== Identifiable assets .......................... 1,433,489 289,749 137,094 1,860,332 =========== =========== =========== Investments in unconsolidated affiliates ..... 27,191 Corporate assets ............................. 1,990 ----------- Total assets ............................. 1,889,513 =========== Depreciation and amortization ................ 41,357 9,485 1,670 52,512 =========== =========== =========== =========== Capital expenditures ......................... 26,756 6,589 1,914 35,259 =========== =========== =========== =========== - --------------------------------------------------------------------------------------------------------------------------- 1995 Sales and other operating revenues ........... 2,313,768 512,375 454,737 3,280,880 =========== =========== =========== =========== Operating profit (net of restructuring charge) 102,542 21,162 11,942 135,646 =========== =========== =========== General corporate expenses ................... (10,293) Interest expense ............................. (69,585) ----------- Income before income taxes and other items 55,768 =========== Identifiable assets .......................... 1,305,967 333,379 143,366 1,782,712 =========== =========== =========== Investments in unconsolidated affiliates ..... 23,433 Corporate assets ............................. 1,820 ----------- Total assets ............................. 1,807,965 =========== Depreciation and amortization ................ 39,809 7,051 1,764 48,624 =========== =========== =========== =========== Capital expenditures ........................ $ 28,590 $ 8,537 $ 1,897 $ 39,024 =========== =========== =========== =========== - --------------------------------------------------------------------------------------------------------------------------- - 30 - - ------------------------------------------------------------------------------------------------------------------------------------ Consolidated Operations United South/Central Other by Geographic Area States America Europe Areas Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ 1997 Revenues from unaffiliated customers ......... $ 2,005,603 $ 260,076 $ 1,591,385 $ 255,611 $ 4,112,675 Transfers between geographic areas ........... 14,071 215,277 105,823 467,500 $ (802,671) ----------- ----------- ----------- ----------- ----------- ----------- Sales and other operating revenues ........... 2,019,674 475,353 1,697,208 723,111 (802,671) 4,112,675 =========== =========== =========== =========== =========== =========== Operating profit ............................. 49,114 62,974 81,973 56,985 (2,523) 248,523 =========== =========== =========== =========== =========== General corporate expenses ................... (11,696) Interest expense ............................. (64,886) ----------- Income before income taxes and other items 171,941 =========== Identifiable assets .......................... 909,955 529,171 772,797 369,750 (635,180) 1,946,493 =========== =========== =========== =========== =========== Investments in unconsolidated affiliates ..... 33,413 Corporate assets ............................. 2,073 ----------- Total assets ............................. 1,981,979 =========== 1996 Revenues from unaffiliated customers ......... 1,800,204 222,223 1,370,767 177,034 3,570,228 Transfers between geographic areas ........... 962 138,607 38,431 339,862 (517,862) ----------- ----------- ----------- ----------- ----------- ----------- Sales and other operating revenues ....... 1,801,166 360,830 1,409,198 516,896 (517,862) 3,570,228 =========== =========== =========== =========== =========== =========== Operating profit ............................. 64,388 49,079 50,967 40,643 (1,210) 203,867 =========== =========== =========== =========== =========== General corporate expenses ................... (11,392) Interest expense ............................. (68,754) ----------- Income before income taxes and other items 123,721 =========== Identifiable assets .......................... 867,229 558,045 884,021 194,768 (643,731) 1,860,332 =========== =========== =========== =========== =========== Investments in unconsolidated affiliates ..... 27,191 Corporate assets ............................. 1,990 ----------- Total assets ............................. 1,889,513 =========== 1995 Revenues from unaffiliated customers ......... 1,650,868 236,496 1,218,525 174,991 3,280,880 Transfers between geographic areas ........... 1,073 93,781 42,316 289,362 (426,532) ----------- ----------- ----------- ----------- ----------- ----------- Sales and other operating revenues ....... 1,651,941 330,277 1,260,841 464,353 (426,532) 3,280,880 =========== =========== =========== =========== =========== =========== Operating profit (net of restructuring charge) 47,996 15,643 32,929 41,194 (2,116) 135,646 =========== =========== =========== =========== =========== General corporate expenses ................... (10,293) Interest expense ............................. (69,585) ----------- Income before income taxes and other items 55,768 =========== Identifiable assets .......................... $ 588,078 $ 454,453 $ 837,085 $ 225,279 $ (322,183) 1,782,712 =========== =========== =========== =========== =========== Investments in unconsolidated affiliates ..... 23,433 Corporate assets ............................. 1,820 ----------- Total assets ............................. $ 1,807,965 - ------------------------------------------------------------------------------------------------------------------------------------
- 31 - Note 5 - INCOME TAXES The components of income before income taxes and other items consist of the following: - ---------------------------------------------------------------------- Year Ended June 30, 1997 1996 1995 - ---------------------------------------------------------------------- United States .... $ 33,575 $ 26,420 $ 21,386 Foreign .......... 138,366 97,301 34,382 -------- -------- -------- $171,941 $123,721 $ 55,768 ======== ======== ======== - ---------------------------------------------------------------------- Income taxes consist of the following: - ---------------------------------------------------------------------- Year Ended June 30, 1997 1996 1995 - ---------------------------------------------------------------------- Current United States . $ 2,600 $ 6,562 $ 5,396 State and local 1,128 1,828 751 Foreign ....... 42,156 44,870 34,787 -------- -------- -------- 45,884 53,260 40,934 Deferred United States . 19,025 983 (7,322) State and local (180) 729 235 Foreign ....... 4,047 (5,498) (8,981) -------- -------- -------- 22,892 (3,786) (16,068) -------- -------- -------- Total ............. $ 68,776 $ 49,474 $ 24,866 ======== ======== ======== - ---------------------------------------------------------------------- A reconciliation of the statutory U.S. federal rates is as follows: - -------------------------------------------------------------------------------- Year Ended June 30, 1997 1996 1995 - -------------------------------------------------------------------------------- Tax at statutory rate .................... 35.0% 35.0% 35.0% State income taxes, net of federal benefit 0.4 1.3 1.4 Income taxed at other than the U.S. rate . 4.3 5.0 7.0 Increase in federal statutory rate Other, net ............................... 0.3 (1.3) 1.2 ------ ------ ------ 40.0% 40.0% 44.6% ====== ====== ====== - -------------------------------------------------------------------------------- - 32 - Significant components of deferred tax liabilities and assets as of June 30 were as follows: - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Liabilities Nonrepatriated earnings ....... $28,209 $15,593 Tax over book depreciation .... 13,881 15,640 Goodwill ...................... 4,987 2,886 All other ..................... 11,177 15,345 ------- ------- Total deferred tax liability $58,254 $49,464 ------- ------- Assets Employee benefit plans ........ $15,772 $16,243 Foreign currency translation .. 10,466 3,162 Foreign tax credits ........... 1,167 16,267 Deferred compensation ......... 6,086 5,394 All other ..................... 14,810 13,565 ------- ------- Total deferred tax asset ... $48,301 $54,631 - -------------------------------------------------------------------------------- - 33 - NOTE 6 - SHORT-TERM CREDIT FACILITIES The Company maintains lines of credit in the United States and in a number of foreign countries. Foreign borrowings are generally in the form of overdraft facilities at rates competitive in the countries in which the Company operates. Generally, each foreign line is available only for borrowings related to operations of a specific country. At June 30, 1997, unused, uncommitted lines of credit were approximately $1.1 billion. The weighted average interest rate on short-term borrowings outstanding as of June 30, 1997 and 1996 was approximately 6.0% and 6.2%, respectively. NOTE 7 - LONG-TERM OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- 6.14% Senior notes payable in five annual installments from 1996 to 2000.......... $ 80,000 $ 100,000 9.25% Medium-term notes due February 2001........................................ 100,000 100,000 6.5% Medium-term notes due February 2006......................................... 100,000 100,000 Medium-term notes due January 1997 at an average rate of 7.3%..................... 50,000 Other notes due through 1999 at various interest rates ranging from 5% to 11%... 37,726 36,357 Revenue bonds due through 2001 at various interest rates below prime.............. 2,139 6,534 ------------ ------------ 319,865 392,891 Less current portion.............................................................. (28,228) (83,348) ============ ============ Long-term obligations............................................................. $ 291,637 $ 309,543 ============ ============ - ----------------------------------------------------------------------------------------------------------------------------
The fair value of the Company's long-term obligations was approximately $292 million at June 30, 1997 and $313 million at June 30, 1996. Certain notes are denominated in local currencies of foreign subsidiaries. The Company maintains a $100 million revolving credit facility to support short-term borrowings, including the issuance of commercial paper. Under its terms, the facility is renewed each year for the next two years; the current maturity date is December 31, 1998. Under certain of the debt agreements, the Company must meet financial covenants relating to minimum tangible net worth and restrictions on the issuance of long-term debt. The Company was in compliance with all such covenants at June 30, 1997 and 1996. Other information: Maturities of long-term debt for the fiscal years succeeding June 30, 1997 are as follows: 1998-$28,228; 1999-$31,126; 2000-$27,873; 2001-$125,374; 2002-$4,763; 2003 and after-$102,501. - 34 - NOTE 8 - PENSION PLANS The Company and its subsidiaries have several defined benefit pension plans covering United States and foreign salaried employees and certain other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of service. The Company's funding policy for domestic plans is to make contributions currently to the extent deductible under existing tax laws and regulations, subject to the full-funding limits of the Employee Retirement Income Security Act of 1974. Foreign plans are funded in accordance with local practices. Domestic and foreign plan assets consist primarily of fixed income securities and equity investments. Prior service costs are amortized equally over the average remaining service period of employees. Information regarding net pension cost and the funded status of domestic and foreign plans was as follows: Pension costs
- --------------------------------------------------------------------------------------------------------------------------- Domestic Foreign --------------------------------- ---------------------------------- 1997 1996 1995 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Service cost for benefits earned during the period $ 3,324 $ 2,657 $ 2,923 $ 3,424 $ 2,932 $ 2,803 Interest cost on projected benefit obligation .... 7,409 7,312 6,626 6,658 6,383 5,784 Actual return on plan assets ..................... (9,865) (16,537) (4,158) (9,413) (5,916) (4,942) Net amortization and deferral .................... 3,847 10,583 (967) 2,602 (758) (1,397) -------- -------- -------- -------- -------- -------- Total pension cost .......................... $ 4,715 $ 4,015 $ 4,424 $ 3,271 $ 2,641 $ 2,248 - --------------------------------------------------------------------------------------------------------------------------- Funded status - ------------------------------------------------------------------------------------------------------- Domestic - March 31 measurement date Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------- Vested benefit obligation ........................ $ 79,851 $ 80,313 $ 3,657 $ 3,179 ========= ========= ========= ========= Accumulated benefit obligation ................... 80,263 81,130 3,657 3,305 ========= ========= ========= ========= Projected benefit obligation ..................... 100,577 100,025 6,910 5,818 Plan assets at fair value ........................ 99,839 92,272 --------- --------- --------- --------- Plan assets less than projected benefit obligation (738) (7,753) (6,910) (5,818) Unrecognized net (asset) liability at transition . (1,986) (2,573) 286 473 Unrecognized prior service costs ................. 478 630 4,229 4,845 Unrecognized net loss ............................ 6,561 13,990 1,386 744 Additional minimum liability ..................... (2,648) (3,549) ========= ========= ========= ========= Prepaid (accrued) pension cost ............... $ 4,315 $ 4,294 $ (3,657) $ (3,305) ========= ========= ========= ========= - ------------------------------------------------------------------------------------------------------- - 35 - - -------------------------------------------------------------------------------------------------- Foreign - April 30 measurement date Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets 1997 1996 1996 1997 - -------------------------------------------------------------------------------------------------- Vested benefit obligation ...................... $ 76,323 $ 71,840 $ 10,645 $ 11,082 ======== ======== ======== ======== Accumulated benefit obligation ................. 80,088 75,227 11,264 11,968 ======== ======== ======== ======== Projected benefit obligation ................... 89,711 82,679 11,937 12,850 Plan assets at fair value ...................... 97,008 92,065 3,670 3,234 -------- -------- -------- -------- Plan assets in excess of (less than) projected benefit obligation ......................... 7,297 9,386 (8,267) (9,616) Unrecognized net (asset) liability at transition (3,984) (5,981) (194) (143) Unrecognized net (gain) loss ................... (1,018) (3,218) 241 290 -------- -------- -------- -------- Prepaid (accrued) pension cost ............. $ 2,295 $ 187 $ (8,220) $ (9,469) - --------------------------------------------------------------------------------------------------
Assumptions used in the computations were: - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Discount rate: Domestic .................................... 7.50% 7.25% 8.00% Foreign ..................................... 7.00% 7.00% 7.00% Rate of increase in future compensation levels: Domestic .................................... 5.50% 5.50% 5.50% Foreign ..................................... 5.50% 5.50% 5.50% Expected long-term rate of return on plan assets: Domestic .................................... 8.75% 8.75% 8.75% Foreign ..................................... 7.00% 7.00% 7.00% - -------------------------------------------------------------------------------- - 36 - NOTE 9 - POSTRETIREMENT BENEFITS The Company provides postretirement health and life insurance benefits for eligible U.S. employees attaining specific age and service requirements. The health plan is funded by the Company as the costs of the benefits are incurred and contains cost-sharing features such as deductibles and coinsurance. The Company funds the life insurance plan with deposits to a retired life reserve account held by an insurance Company. The Company reserves the right to amend or discontinue the plans at any time. Net periodic postretirement benefit expense was as follows: - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost .............................. $ 872 $ 875 $ 857 Interest cost ............................. 3,108 2,673 2,517 Return on plan assets ..................... (153) (190) (219) Net amortization and deferral ............. (2,634) (3,063) (2,925) ======= ======= ======= Net periodic postretirement benefit expense $ 1,193 $ 295 $ 230 ======= ======= ======= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following table sets forth the components of the postretirement benefit obligation:
- ---------------------------------------------------------------------------------------------- June 30 measurement date 1997 1996 - ---------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees ....................................................... $ 27,790 $ 32,050 Fully eligible active plan participants ........................ 5,867 6,080 Other active plan participants ................................. 5,251 5,569 -------- -------- Accumulated postretirement benefit obligation ........................ 38,908 43,699 Fair value of plan assets ............................................ 3,803 3,865 -------- -------- Accumulated postretirement benefit obligation in excess of plan assets 35,105 39,834 Unrecognized gain on plan amendment .................................. 12,941 16,000 Unrecognized net loss ................................................ (2,493) (9,566) ======== ======== Accrued postretirement benefit cost .................................. $ 45,553 $ 46,268 ======== ======== - ----------------------------------------------------------------------------------------------
- 37 - The accumulated postretirement benefit obligation was determined using an assumed annual health care cost trend rate of 10.5% for fiscal year 1997 and 10% for fiscal year 1998. That cost trend rate is assumed to decrease gradually to 6.6% by fiscal year 2006. A one percentage point increase in the assumed health care cost trend rate would increase the accumulated benefit obligation by approximately $3.6 million and the aggregate of the service and interest cost components of net periodic postretirement benefit expense for the fiscal year by approximately $400 thousand. Assumptions used in the computations were: - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Discount rate .................................. 7.50% 7.25% 8.00% Rate of increase in future compensation levels . 5.50% 5.50% 5.50% Expected long-term rate of return on plan assets 4.30% 4.30% 4.30% - -------------------------------------------------------------------------------- NOTE 10 - SHARE PURCHASE RIGHTS PLAN In 1989, the Company distributed as a dividend one preferred share purchase right for each outstanding share of common stock. Each right entitles the shareholder to purchase one-half of one-hundredth of a share of Series A Junior Participating Preferred Stock ("Preferred Stock") at an exercise price of $110, subject to adjustment. The rights will become exercisable only if a person or group acquires or announces a tender offer for 20% or more of the Company's outstanding common stock. The Board of Directors may reduce this threshold percentage to 10%. If a person or group acquires the threshold percentage of common stock, each right will entitle the holder, other than the acquiring party, to buy shares of common stock or Preferred Stock having a market value of twice the exercise price. If the Company is acquired in a merger or other business combination, each right will entitle the holder, other than the acquiring person, to purchase securities of the surviving Company having a market value equal to twice the exercise price of the rights. Following the acquisition by any person of more than the threshold percentage of the Company's outstanding common stock but less than 50% of such shares, the Company may exchange one share of common stock for each right (other than rights held by such person). Until the rights become exercisable, they may be redeemed by the Company at a price of one cent per right. The rights expire on February 13, 1999. - 38 - NOTE 11 - EXECUTIVE STOCK PLAN Under the Company's Executive Stock Plan ("the Plan"), executives, key employees, and directors may receive grants and/or awards including common stock, restricted stock, incentive stock or non-qualified stock options and "reload options." Reload options allow a participant to exercise an option and receive new options by exchanging previously acquired common stock for the shares received from the exercise. One new option may be granted for each share exchanged with an exercise price equivalent to the market price at the date of exchange. Accordingly, the issuance of reload options does not result in a greater number of shares potentially outstanding than that reflected in the grant of the original option. Up to 2 million shares of the Company's common stock may be issued under the Plan. Pursuant to the Plan, non-qualified and reload options have been granted to executives and key employees at an option price equal to the fair market value of a share of common stock on the date of grant. In addition, no restricted stock was issued in 1997 and 4,200 shares were issued in 1996. Options granted under the Plan prior to December 5, 1991 became exercisable one year after date of grant except those granted on December 4, 1991, which became exercisable November 1, 1992. Options granted after December 4, 1991 are fully exercisable six months after the date of grant and qualify for reload options, which are also fully exercisable six months after the date of the grant. All options expire ten years after date of grant. Further information regarding options in the Plan for 1997, 1996, and 1995 is summarized as follows:
- --------------------------------------------------------------------------------------------- For the year ended: 1997 1996 1995 Price Range Outstanding, beginning of year 1,275,353 1,264,473 656,064 $ 11.06 - 28.00 Granted ...................... 193,950 213,329 717,999 $ 21.50 - 35.38 Exercised .................... (244,830) (151,672) (78,678) $ 11.06 - 23.63 Forfeited/expired ............ (50,777) (30,912) Outstanding, end of year ..... 1,224,473 1,275,353 1,264,473 $ 27.38 - 28.00 Exercisable .................. 1,137,778 1,205,715 1,204,974 $ 11.06 - 35.38 Available for future grant ... 3,466,489 2,872,617 2,338,763 $ 11.06 - 31.00 - --------------------------------------------------------------------------------------------- Of those available for future grant, 2,859,562; 2,321,885; and 1,742,280 for 1997, 1996 and 1995, respectively, are reload options and may only be granted on a share for share basis to replace shares surrendered to the Company to excersise other stock options. The following table summarizes information concerning currently outstanding and exercisable options: Range of exercise prices, per share $10 - $15 $16 - $20 $21 - $25 $26 - $30 $31 - $35 Number outstanding 23,342 40,100 400,510 643,326 117,195 Weighted average remaining contractual life 3.5 2.5 7.3 5.2 5.8 Weighted average exercise price, per share $ 11.06 $ 17.88 $ 22.37 $ 27.55 $ 34.24 Number exercisable 23,342 40,100 400,510 643,326 30,500 Weighted average exercise price, per share $ 11.06 $ 17.88 $ 22.37 $ 27.55 $ 31.00
During fiscal 1997, options to purchase common stock were granted at exercise prices ranging from $29.375 - $35.375 per common share. Effective in fiscal year 1997, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As permitted under SFAS 123 the Company will continue to apply the Accounting Principles Board - 39 - Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. If compensation expense for the Company's stock options issued in 1997 and 1996 had been determined based on the fair value method of accounting, as defined in SFAS 123, the Company's net income and earnings per share would have been reduced by approximately $800 or $.02 per share in 1997, and $500 or $.01 per share in 1996. These pro forma amounts may not be representative of future disclosures because the estimated fair value of the stock options is amortized to expense over the vesting period, and additional options may be granted in future years. The Black-Sholes option valuation model was used to estimate the fair value of the options granted in fiscal year 1997 and 1996. Such models include subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. The Plan has characteristics that differ from traded options. In management's opinion, such valuation models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Principle assumptions used in applying the Black-Scholes model were as follows: 1997 1996 ---- ---- Risk-free interest rate 6.37% 6.04% Expected life, in years 6.63 7.53 Expected volatility .298 .298 Expected dividend yield 4.60% 4.60% Fair value of options granted $7.81 $5.84 - 40 - NOTE 12 - COMMITMENTS AND OTHER MATTERS A material part of the Company's tobacco business is dependent upon a few customers, the loss of any one of whom would have an adverse effect on the Company. For the years ended June 30, 1997, 1996 and 1995, one customer accounted for revenues of $1.5 billion, $1.3 billion and $1.1 billion, respectively. The Company provides guarantees for seasonal pre-export crop financing for some of its subsidiaries and unconsolidated affiliates. In addition, certain subsidiaries provide guarantees that ensure that Common Market subsidies and value-added taxes will be repaid if the crops are not exported or if the subsidies are not properly distributed to Common Market farmers. At June 30, 1997, total exposure under guarantees and performance bonds was approximately $44 million. The Company considers the possibility of loss on any of these guarantees to be remote. The Company's Brazilian subsidiaries have been notified by the tax authorities of proposed adjustments to the income tax returns filed in prior years. The total adjustments, including penalties and interest, approximate $55 million. The Company believes the Brazilian tax returns filed were in compliance with the applicable tax code. The numerous proposed adjustments vary in complexity and amount. While it is not feasible to predict the precise amount or timing of each proposed adjustment, the Company believes that the ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company's operating subsidiaries within each industry segment perform credit evaluations of customers' financial condition prior to the extension of credit. Generally, accounts and notes receivable are not secured with collateral and are due within 30 days. When collection terms are extended for longer periods, interest and carrying costs are usually recovered. Credit losses are provided for in the financial statements and such amounts have not been material except for the write-off of an account receivable from Iraq in fiscal year 1991 (See Note 3). In the lumber and building product operations in Europe, it is traditional business practice to insure accounts and notes receivable against uncollectibility. At June 30, accounts and notes receivable by operating segment were as follows (in millions of dollars): - ------------------------------------------------------------------ 1997 1996 - ------------------------------------------------------------------ Tobacco .............................. $288 $185 Lumber and Building Products ......... 89 90 Agri-products ........................ 51 52 ---- ---- $428 $327 ==== ==== - ------------------------------------------------------------------ - 41 - NOTE 13 - UNAUDITED QUARTERLY FINANCIAL DATA Due to the seasonal nature of the tobacco, lumber and building products, and agri-products businesses, it is always more meaningful to focus on cumulative rather than quarterly results.
- ------------------------------------------------------------------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------ 1997 Sales and other operating revenues ............................... $ 820,840 $1,337,221 $1,013,715 $ 940,899 Gross profit ..................................................... 120,539 152,139 141,820 138,530 Net income ....................................................... 20,022 31,402 27,614 21,835 Per common share Net income ................................................... .570 .900 .790 .620 Cash dividends declared ...................................... .255 .265 .265 .265 Market price range: High ........................................ 28.500 32.375 33.500 36.625 Low ......................................... 24.625 25.500 28.500 28.000 1996 Sales and other operating revenues ............................... $ 842,454 $1,032,829 $ 942,587 $ 752,358 Gross profit ..................................................... 97,629 143,608 130,864 118,126 Income before extraordinary item ................................. 10,189 27,403 18,427 15,331 Net income ....................................................... 10,189 27,403 18,427 16,227 Per common share Income before extraordinary item ............................. .290 .780 .530 .440 Net income ................................................... .290 .780 .530 .460 Cash dividends declared ...................................... .250 .255 .255 .255 Market price range: High ........................................ 23.000 24.625 28.375 28.500 Low ......................................... 21.125 20.250 22.250 23.750 - ------------------------------------------------------------------------------------------------------------------------------
- 42 - REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Universal Corporation We have audited the acCompanying consolidated balance sheets of Universal Corporation and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal Corporation and subsidiaries at June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Richmond, Virginia August 7, 1997 - 43 - REPORT OF MANAGEMENT To the Shareholders of Universal Corporation The consolidated financial statements of Universal Corporation have been prepared under the direction of management, which is responsible for their integrity and objectivity. The statements have been prepared in accordance with generally accepted accounting principles and, where appropriate, include amounts based on the judgment of management. Management is also responsible for maintaining an effective system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel, and an internal audit program to monitor its effectiveness. Ernst & Young LLP, independent auditors, are retained to audit our financial statements. Their audit provides an objective assessment of how well management discharged its responsibility for fairness in financial reporting. The Audit Committee of the Board of Directors is composed solely of outside directors. The committee meets periodically with management, the internal auditors and the independent auditors to assure that each is properly discharging its responsibilities. Ernst & Young LLP and the internal auditors have full and free access to meet privately with the Audit Committee to discuss accounting controls, audit findings and financial reporting matters. /s/ Hartwell H. Roper Hartwell H. Roper Vice President & Chief Financial Officer August 7, 1997 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE For the three years ended June 30, 1997, there were no changes in and disagreements between the Company and its independent auditors on any matter of accounting principles, practices or financial disclosures. - 44 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Refer to the caption, "Election of Directors" in the September 22, 1997 Proxy Statement which information is incorporated herein by reference. The following are Executive Officers as of September 22, 1997. Name Position Age - ---- -------- --- H. H. Harrell Chairman and Chief 58 Executive Officer A. B. King President and Chief 51 Operating Officer H. H. Roper Vice President and 49 Chief Financial Officer W. L. Taylor Vice President and 56 Chief Administrative Officer D.G. Cohen Tervaert President and Chairman of the 44 Board of Deli Universal, Inc. J. M. White, III Secretary and General Counsel 58 There are no family relationships between any of the above officers. All of the above officers have been employed by the Company in various capacities during the last five years. - 45 - ITEM 11. EXECUTIVE COMPENSATION Refer to the caption, "Executive Compensation," in the September 22, 1997, Proxy Statement which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Refer to the caption, "Stock Ownership," in the September 22, 1997, Proxy Statement which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Refer to the caption, "Certain Relationships," in the September 22, 1997, Proxy Statement which information is incorporated herein by reference. - 46 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following consolidated financial statements of Universal Corporation and Subsidiaries are included in Item 8: Consolidated Statements of Income for the years ended June 30, 1997, 1996 and 1995 Consolidated Balance Sheets at June 30, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements for the years ended June 30, 1997, 1996 and 1995 Report of Ernst & Young LLP, Independent Auditors (2) Financial Statement Schedules: None (3) List of Exhibits: 3.1 Restated Articles of Incorporation (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, File No. 1-652). 3.2 Bylaws (incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, File No. 1- 652). 4.1 Indenture between the Registrant and Chemical Bank, as trustee (incorporated herein by reference to Registrant's Current Report on Form 8-K, dated February 25, 1991, File No. 1-652). 4.2 Form of Fixed Rate Medium-Term Note, Series A (incorporated herein by reference to the Registrant's Current Report on Form 8-K, dated February 25,1991, File No. 1-652). - 47 - 4.3 Form of 9 1/4% Note due February 15, 2001 (incorporated herein by reference to the Registrant's Current Report on Form 8-K, dated February 25, 1991, File No. 1-652). 4.4 Rights Agreement, dated February 2, 1989, between the Registrant and Sovran Bank, N.A., as Rights Agent (incorporated herein by reference to the Registrant's Form 8-A Registration Statement, dated February 9, 1989, File No. 1-652). 4.5 Amendment to Rights Agreement, dated May 2, 1991, between the Registrant and Sovran Bank, N.A., as Rights Agent (incorporated herein by reference to the Registrant's Form 8 Amendment No. 1, dated May 7, 1991, to Form 8-A Registration Statement, dated February 9, 1989, File No. 1-652). 4.6 Amendment to Rights Agreement, dated July 17, 1992, between the Registrant, NationsBank, N.A., as Rights Agent, and Wachovia Bank of North Carolina, N.A., as Successor Rights Agent (incorporated herein by reference to the Registrant's Form 8 Amendment No. 2, dated July 17, 1992, to Form 8-A Registration Statement, dated February 9, 1989, File No. 1-652). 4.7 Specimen Common Stock Certificate (incorporated herein by reference to the Registrant's Form S-3, dated February 25, 1993, File No. 1-652). 4.8 Form of 6 1/2% Note due February 15, 2006 (incorporated herein by reference to the Registrant's Current Report on Form 8-K, dated February 20, 1996, File No. 1-652). The Registrant, by signing this Report on Form 10-K, agrees to furnish the Securities and Exchange Commission, upon its request, a copy of any instrument that defines the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries, and for any unconsolidated subsidiaries for which financial statements are required to be filed that authorizes a total amount of securities not in excess of 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. 10.1 Universal Corporation Restricted Stock Plan for Non-Employee Directors (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991, File No. 1-652). - 48 - 10.2 Universal Leaf Tobacco Company, Incorporated Supplemental Stock Purchase Plan, as amended June 24, 1991 (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991, File No. 1-652). 10.3 Universal Corporation Management Performance Plan (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, File No. 1-652). 10.4 Universal Leaf Tobacco Company, Incorporated Management Performance Plan (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, File No. 1-652). 10.5 Universal Leaf Tobacco Company, Incorporated Executive Life Insurance Agreement (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 1-652). 10.6 Universal Leaf Tobacco Company, Incorporated Deferred Income Plan (incorporated herein by reference to the Registrant's Report on Form 8, dated February 8, 1991, File No. 1-652). 10.7 Universal Leaf Tobacco Company, Incorporated Benefit Replacement Plan (incorporated herein by reference to the Registrant's Report on Form 8, dated February 8, 1991, File No. 1-652). 10.8 Universal Leaf Tobacco Company, Incorporated Senior Executive Severance Plan (incorporated herein by reference to the Registrant's Report on Form 8, dated February 8, 1991, File No. 1-652). 10.9 Universal Leaf Tobacco Company, Incorporated 1996 Benefit Restoration Plan.* 10.10 Universal Corporation 1989 Executive Stock Plan, as amended on December 1, 1994 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, File No. 1-652). 10.11 Universal Corporation 1991 Stock Option and Equity Accumulation Agreement (incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1991, File No. 1-652). 10.12 Amendment to Universal Corporation 1991 Stock Option and Equity Accumulation Agreement (incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-652). - 49 - 10.13 Deli Universal, Inc. Management Performance Plan (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, File No. 1-652). 10.14 Universal Leaf Tobacco Company, Incorporated 1994 Deferred Income Plan, as amended as of June 1, 1995 (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal years ended June 30, 1994 and June 30, 1995, File No. 1-652). 10.15 Universal Corporation Outside Directors' 1994 Deferred Income Plan (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 1-652). 10.16 Universal Leaf Tobacco Company, Incorporated 1994 Benefit Replacement Plan (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 1-652). 10.17 Universal Corporation 1994 Stock Option and Accumulation Agreement (incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, File No. 1-652). 10.18 Universal Corporation 1994 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, File No. 1-652). 10.19 Universal Corporation Non-Employee Director Non-Qualified Stock Option Agreement (incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, File No. 1-652). 10.20 Universal Leaf Tobacco Company, Incorporated Benefit Restoration Plan Trust, dated June 25, 1997 , among Universal Leaf Tobacco Company, Incorporated, Universal Corporation and Wachovia Bank, N.A., as trustee.* 12 Ratio of Earnings to Fixed Charges* 21 Subsidiaries of the Registrant.* 23 Consent of Ernst & Young LLP.* 27 Financial Data Schedule.* * Filed herewith. - 50 - (b) Reports on Form 8-K None filed in the quarter ended June 30, 1997. (c) Exhibits The exhibits listed in Item 14(a)(3) are filed as part of this annual report. (d) Financial Statement Schedules All schedules are omitted since the required information is not present in amounts sufficient to require submission or because the information required is included in the consolidated financial statements and notes therein. - 51 - Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (REGISTRANT) September 24, 1997 By /s/ Henry H. Harrell - ------------------------ -------------------------------------- Henry H. Harrell Chairman and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Henry H. Harrell Chairman, Chief Executive September 24, 1997 - --------------------------------------- Officer and Director ---------------------------- Henry H. Harrell (Principal Executive Officer) /s/ Allen B. King President, Chief Operating September 24, 1997 - --------------------------------------- Officer and Director ---------------------------- Allen B. King /s/ William W. Berry Director September 24, 1997 - --------------------------------------- ---------------------------- William W. Berry /s/ Wallace L. Chandler Director September 24, 1997 - --------------------------------------- ---------------------------- Wallace L. Chandler /s/ Richard G. Holder Director September 24, 1997 - --------------------------------------- ---------------------------- Richard G. Holder /s/ Hubert R. Stallard Director September 24, 1997 - --------------------------------------- ---------------------------- Hubert R. Stallard /s/ Charles H. Foster, Jr. Director September 24, 1997 - --------------------------------------- ---------------------------- Charles H. Foster, Jr. /s/ Hartwell H. Roper Vice President and September 24, 1997 - --------------------------------------- Chief Financial Officer ---------------------------- Hartwell H. Roper /s/ William J. Coronado Controller (Principal September 24, 1997 - --------------------------------------- Accounting Officer) ---------------------------- William J. Coronado
EX-10.9 2 BENEFIT RESTORATION PLAN - 52 - UNIVERSAL LEAF TOBACCO COMPANY, INCORPORATED BENEFIT RESTORATION PLAN TRUST THIS TRUST AGREEMENT, effective as of the date of execution by the Trustee, by and between UNIVERSAL LEAF TOBACCO COMPANY, INCORPORATED, a Virginia corporation, UNIVERSAL CORPORATION, a Virginia corporation, and WACHOVIA BANK, N.A., a national banking association (the "Trustee"); RECITALS A. Universal Leaf Tobacco Company, Incorporated, or any successor thereto, Universal Corporation, and any of its subsidiaries, which are Participating Employers in the Employees' Retirement Plan of Universal Leaf Tobacco Company, Incorporated, and Designated Affiliated Companies, as the context may require (the "Company"), has adopted the 1996 Benefit Restoration Plan (the "Plan") identified in Appendix A. B. The Company wishes to establish a trust (the "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to participants in the Plan and their beneficiaries in such manner and at such times as specified in the Plan. C. The parties intend that the Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974. D. The Company intends to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. ESTABLISHMENT OF THE TRUST. (a) The Company hereby deposits with the Trustee in trust the sum of $10.00, which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against the Company. - 53 - Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) The Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Plan participant (or his or her beneficiary) shall have any right to compel such additional deposits except as provided below. (f) Notwithstanding the above, upon a Change of Control, the Company shall, as soon as possible, but in no event longer than 30 days following the Change of Control, as defined herein, make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Plan participant or beneficiary the benefits to which Plan participants or their beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred. The Trustee may, in its discretion, compel such contribution after a Change of Control. Section 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES. (a) The Company shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to the Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, the Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by the Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan, except after a Change of Control, the Trustee may make such determination in its sole discretion. (c) The Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, the Company shall make the balance of each such payment as it falls due. The Trustee shall notify the Company if such principal and earnings are not sufficient. Section 3. RESPONSIBILITY OF THE TRUSTEE REGARDING PAYMENTS TO TRUST BENEFICIARIES WHEN THE COMPANY IS INSOLVENT. (a) The Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. - 54 - (b) At all times during the continuance of the Trust, as provided in Section l(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below: (i) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing of the Company's Insolvency. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (ii) Unless the Trustee has actual knowledge of the Company's Insolvency, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (iii) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Plan or otherwise. (iv) The Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. RESTORATION TO THE COMPANY OF EXCESS TRUST ASSETS To the extent that the principal of the Trust, and any earnings thereon become sufficient to pay each plan participant or beneficiary, exceed one hundred and twenty-five percent (125%) of the benefits to which plan participants or their beneficiaries would be entitled pursuant to the terms of the Plan measured as of each December 31, then any such excess shall be returned to the Company within thirty (30) days of the Company delivering a written notice to the Trustee. The notice shall set forth the existence of the excess, the Company's desire to have the amount which exceeds 125% of the total benefits due the participant restored to the Company, a calculation of the amount of the excess and a direction to distribute the funds to the Company. - 55 - Section 5. PAYMENTS TO THE COMPANY. Except as provided in Section 3, Section 4 and Section 13(b) hereof, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan. Section 6. INVESTMENT AUTHORITY. (a) The Trustee may invest, by way of illustration and not limitation, in securities (including stock or rights to acquire stock) or obligations issued by the Company or its affiliates, contracts, including contracts issued by an insurance Company, instruments issued by a bank, including the Trustee, or such other investments as may be permitted by law. All rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee and shall in no event be exercisable by or rest with Plan participants, except that voting rights with respect to securities issued by the Company or its affiliates will be exercised by the Company. (b) Prior to a Change of Control, the Company shall have the right at any time, and from time to time, in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. Section 7. DISPOSITION OF INCOME. During the term of the Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 8. ACCOUNTING BY THE TRUSTEE. The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Section 9. RESPONSIBILITY OF THE TRUSTEE. (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Plan or the Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute. - 56 - (b) If the Trustee undertakes or defends any litigation arising in connection with the Trust, the Company agrees to indemnify the Trustee against the Trustee's costs, expenses (including, without limitation, reasonable attorneys' fees) and liabilities relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. This indemnity shall survive the termination of this Agreement. (c) The Trustee may consult with legal counsel (who may also be counsel for the Company) with respect to any of its duties or obligations hereunder. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) The Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor the Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) Notwithstanding the provisions of Section 8(e), the Trustee may loan to the Company the proceeds of any borrowing against an insurance policy held as an asset of the Trust. (g) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give the Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. Section 10. COMPENSATION AND EXPENSES OF THE TRUSTEE. The Company shall pay all administrative expenses and fees of the Trustee. If not so paid, the fees and expenses shall be paid from the Trust. Section 11. RESIGNATION AND REMOVAL OF THE TRUSTEE. (a) The Trustee may resign at any time by written notice to the Company, which shall be effective sixty (60) days after receipt of such notice unless the Company and the Trustee agree otherwise. (b) The Trustee may be removed by the Company on sixty (60) days notice or upon shorter notice accepted by the Trustee. (c) If the Trustee resigns or is removed within one (1) year of a Change of Control, as defined herein, the Company shall select a successor Trustee with total trust assets exceeding $1 billion prior to the effective date of the Trustee's resignation or removal. (d) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within ninety (90)days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. - 57 - (e) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraphs (a) or (b) of this section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 12. APPOINTMENT OF SUCCESSOR TRUSTEE. (a) If the Trustee resigns or is removed in accordance with Section 11(a) or (b) hereof, the Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trust powers under state law, as a successor Trustee to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the successor Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer. (b) The appointment of a successor Trustee shall be effective when accepted in writing by the new Trustee. The new Trustee shall have all the rights and powers of the former Trustee, including ownership rights in trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer. (c) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing trust assets, subject to sections 7 and 8 hereof. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. Section 13. AMENDMENT OR TERMINATION. (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no such amendment shall (i) conflict with the terms of the Plan, or (ii) add any additional plans to the trust obligations, or shall make the Trust revocable after it has become irrevocable in accordance with Section 1(b) hereof or (iii) make the Trust revocable. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan. Upon termination of the Trust, any assets remaining in the Trust shall be returned to the Company. (c) Upon written approval of Plan participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plan, the Company may terminate the Trust prior to the time all benefit payments under the Plan have been made. All assets in the Trust at termination shall be returned to the Company. Section 14. MISCELLANEOUS. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. - 58 - (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. (d) For purposes of this Trust Agreement, a Change of Control means and shall be deemed to have taken place if: (i) a third person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the beneficial owner of shares of Universal Corporation having 20 percent or more of the total number of votes that may be cast for the election of Directors of Universal Corporation; or, (ii) as a result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who were Directors of Universal Corporation before the Transaction shall cease to constitute a majority of the Board of Universal Corporation or any successor to Universal Corporation. - 59 - Section 15. EFFECTIVE DATE. The effective date of this Trust Agreement shall be as set forth above. UNIVERSAL LEAF TOBACCO COMPANY, INCORPORATED Date: June 24, 1997 By /s/Karen M. L. Whelan --------------- ---------------------------------- Name: Karen M. L. Whelan Title: Vice President, Treasurer Date: June 24, 1997 By /s/James M. White III --------------- ---------------------------------- Name: James M. White III Title: Secretary and General Counsel UNIVERSAL CORPORATION Date: June 24, 1997 By /s/Karen M. L. Whelan --------------- ---------------------------------- Name: Karen M. L. Whelan Title: Vice President, Treasurer Date: June 24, 1997 By /s/James M. White III --------------- ---------------------------------- Name: James M. White III Title: Secretary and General Counsel WACHOVIA BANK, N.A. Date: June 25, 1997 By /s/Peter D. Quinn --------------- ---------------------------------- Name: Peter D. Quinn Title: Vice President EX-12 3 RATIO OF EARNINGS TO FIXED CHARGES - 60 - EXHIBIT 12. Universal Corporation and Subsidiaries RATIO OF EARNINGS TO FIXED CHARGES Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995 -------- -------- -------- Pretax income from continuing operations . $171,941 $123,721 $ 55,768 Pretax income of unconsolidated affiliates 11,862 4,305 2,232 Fixed charges ............................ 65,798 69,527 71,147 -------- -------- -------- Earnings ................................. $249,601 $197,553 $129,147 ======== ======== ======== Interest ................................. $ 64,886 $ 68,754 $ 69,585 Interest of unconsolidated affiliates .... 581 492 1,328 Debt discount amortization ............... 331 281 234 -------- -------- -------- Fixed Charges ............................ $ 65,798 $ 69,527 $ 71,147 ======== ======== ======== Ratio of Earnings to Fixed Charges ....... 3.8 2.8 1.8 ======== ======== ========
EX-21 4 SUBSIDIARIES OF THE REGISTRANT - 61 - EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
ORGANIZED UNDER LAW OF ------------ UNIVERSAL CORPORATION Virginia Universal Leaf Tobacco Company, Incorporated Virginia Universal Leaf North America NC, Inc. North Carolina Casa Export Limited Virginia Grassland Holding, Incorporated Kentucky Tabacos Del Pacifico Norte, S.A. De C.V. Mexico Tabacos Argentinos S.A. Argentina Procesadora Unitab, S.A.* Guatemala Latin America Tobacco Company Virginia Maclin-Zimmer-McGill Tobacco Company, Incorporated Virginia Simcoe Leaf Tobacco Company, Limited Canada Dunnington-Beach Tobacco Company, Incorporated Virginia Universal Leaf Export Company, Incorporated Guam Universal Leaf International, Inc. Virginia B. V. European Tobacco Company Netherlands L'Agricola, S.p.A. Italy Deltafina, S.p.A. Italy Forestab, S.p.A. Italy Itofina, S.A. Switzerland Orient Leaf Tobacco Co., Inc. Philippines Universal Leaf Tabacos Limitada Brazil Tebe-Ele S.A. Comercio Exterior Ltda. Brazil Universal Leaf Far East, Limited Hong Kong Universal Yaprak Tutun Sanayi Ve Ticaret A.S. Turkey Continental Tobacco, S.A. Switzerland Toutiana, S.A. Switzerland Nyiregyhazi Dohanyfermentalo Rt. Hungary Ultoco, S.A. Switzerland - 62 - Limbe Leaf Tobacco Company, Limited Malawi Lytton Tobacco Company (Malawi) Limited Malawi Tanzania Leaf Tobacco Co., Ltd Tanzania Gebruder Kulenkampff, Inc. Virginia Gebruder Kulenkampff AG Germany Tutuntex Ticaret A.S. Turkey Industria AG Switzerland Trestina Azienda Tabacchi, S.p.A.* Italy Latina Tabacchi Greggi Italiani, S.p.A. Italy Zimleaf Holdings (Private), Limited Zimbabwe Lytton Tobacco Company (Private), Limited Zimbabwe Zimbabwe Leaf Tobacco Company (Private) Limited Zimbabwe Casalee, Inc. Virginia Madison Management Ltd. British Virgin Isles Tobacco Trading International, Inc. British Virgin Isles Casalee Transtobac Lieferanten A.G. Switzerland Casalee Transtobac (PVT) Ltd. Zimbabwe Universal Leaf P.H., Inc Virginia Lancaster Leaf Tobacco Company of Pennsylvania, Inc. Virginia Lancotab, N.V. Belgium Lancaster Philippines, Incorporated Philippines Southern Processors, Incorporated Virginia Southwestern Tobacco Company, Incorporated Virginia J. P. Taylor Company, Incorporated Virginia Tobacco Processors, Incorporated Virginia W. H. Winstead Company, Incorporated Virginia Universal DC Holdings Ltd. USA/United Kingdom Universal Leaf (UK) Limited USA/United Kingdom C.G. Services Ltd. United Kingdom Casalee (UK) Ltd. United Kingdom Universal Eastern Europe Limited United Kingdom Deli Universal, Inc. Virginia Imperial Commodities Corporation California Red River Foods, Inc. Virginia HTC Commodities, Inc. Virginia Red River Commodities, Incorporated North Dakota Ermor Tabarama-Tabacos do Brasil Ltda. Brazil - 63 - Deli-Mij Holdings Ltd. United Kingdom Corrie, MacColl & Son Ltd. United Kingdom Van Rees Ltd. United Kingdom N.V. Deli Universal Netherlands Deli Maatschappij B.V. Netherlands Deli Services B.V. Netherlands Jongeneel Holding B.V. Netherlands Jongeneel B.V. Netherlands Heuvelman Holding B.V. Netherlands Heuvelman Hout Beheer B.V. Netherlands Steffex Beheer B.V. Netherlands Handelmatschappij Steffex B.V. Netherlands Unifine * Netherlands B.V. Deli-HTL Tabak Maatschappij Netherlands Van Rees B.V. Netherlands Van Rees Ceylon B.V. Netherlands Beleggings-en Beheermaatschappij "DE Amstel' B.V. Netherlands Indoco International B.V. Netherlands Industria Exportadora de Tabacos Dominicanos "Inetab" C. por Dominican Republic Companhia Panamericana de Tabacos "Copata" Dominican Republic
* Company is 20 percent or more owned by parent and earnings of such company are recorded under the equity method of accounting. EX-23 5 CONSENT OF INDEPENDENT AUDITORS - 64 - EXHIBIT 23. CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of our report dated August 7, 1997 with respect to the consolidated financial statements of Universal Corporation and subsidiaries included in this Annual Report (Form 10-K) for the year ended June 30, 1997. Registration Statement Number Description ---------------------- ------------ 33-38652 Form S-8 33-55140 Form S-8 33-38148 Form S-8 33-56719 Form S-8 33-65079 Form S-3 /s/ ERNST & YOUNG LLP Richmond, Virginia September 24, 1997 EX-27 6 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.
5 0000102037 UNIVERSAL CORPORATION 1,000 YEAR JUN-30-1997 JUN-30-1997 109,070 0 515,697 0 769,473 1,431,239 675,852 366,200 1,981,979 1,083,697 291,637 0 0 77,040 392,553 1,981,979 4,112,675 4,112,675 3,559,647 3,559,647 0 0 64,886 171,941 68,776 100,873 0 0 0 100,873 2.88 0
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