A N N U A L R E P O R •200 3 • T ® Financial Highlights The J. M. Smucker Company ■ ■ ■ (Dollars in thousands, except per share data) Net sales Net income and net income per common share: Net income Net income per common share – assuming dilution Income and income per common share before restructuring and merger and integration costs: (1) Income Income per common share – assuming dilution Common shares outstanding at year end Number of employees (1) Reconciliation to net income: Income before income taxes Merger and integration costs Cost of products sold – restructuring Other restructuring costs Income before income taxes, restructuring, and merger and integration costs Income taxes Year Ended April 30, 2003 2002 $1,311,744 $687,148 $ 96,342 2.02 $ $ 30,851 $ 1.31 $ 104,432 $ 2.19 $ 34,011 $ 1.45 49,767,540 2,775 23,504,129 2,300 $ 155,390 10,511 1,256 1,281 $ 50,198 5,031 — — 168,438 64,006 55,229 21,218 Income before restructuring and merger and integration costs $ 104,432 $ 34,011 ■ On Our Cover ■ “Making Jam” © Ann Baker The painting featured on this year’s annual report cover depicts American values of home, family, and handmade, quality products. The painting was in the personal collection of Paul H. and Lorraine E. Smucker. California artist Ann Baker, known as “Mrs. B”, is highly regarded for her primitive-style scenes of 19th-century American life. Her whimsical bumblebee “signature” appears on all of her compositions. ■ Contents ■ Letter to Shareholders Five-Year Summary of Selected Financial Data Summary of Quarterly Results of Operations Stock Price Data Management’s Discussion and Analysis Management’s Report on Responsibility for Financial Reporting Report of Independent Auditors Consolidated Financial Statements Notes to Consolidated Financial Statements Directors, Officers, and General Managers Properties Shareholder Information 1 10 11 11 12 18 18 19 24 40 40 41 ■ ■ ■ ■ ■ ■ ■ ■ Dear Fellow Shareholders: ■ “Transformational” is the best way to characterize The J. M. Smucker Company’s 2003 fiscal year. Last year at this time, we described the upcoming merger of the Jif and Crisco brands into our Company. We anticipated that the merger would transform our organization, and we predicted a positive impact on our sales and earnings, our momentum, our brands, and our future. All of these expectations — and more — have been realized. ■ Sales nearly doubled to over $1.3 billion. ■ Earnings after tax increased threefold, to $96.3 million. ■ Earnings per share increased over 50 percent. ■ The Jif and Crisco brands were revitalized, increasing their leadership positions in their respective markets. ■ The traditional Smucker business achieved record results across all of our business units, and the Smucker’s brand remains as strong as ever. In addition, we received two recognitions for which we are very grateful. First, The J. M. Smucker Company ranked eighth on Fortune magazine’s list of “The 100 Best Companies to Work For.” This is the sixth consecutive year that we have been included on this roster. Second, Business Ethics Magazine rated our Company 23rd in the nation for corporate citizenship. To us, these awards acknowledge the integrity of our people and their commitment to our Company’s Basic Beliefs and the time-honored values they reflect — invaluable qualities in an era when the public has taken a wary view of business in general. It is possible to be a good employer and a good corporate citizen and achieve record results. At the beginning of the year, we identified the following key objectives: successfully integrate the Jif and Crisco businesses; ■ maintain the momentum of our core businesses; and ■ begin the revitalization of the Jif and Crisco brands. The integration was extremely successful, thanks to hard work, detailed planning, and outstanding cooperation between The Procter & Gamble Company, its employees, and our employees. In fact, several of our customers commented that the integration was one of the smoothest they had ever seen in our industry. There was absolutely no interruption to our business, and the process was completed two months ahead of schedule. We more than maintained the momentum of our traditional businesses, with sales growing by eight percent for the year. ■ Comments From Our Consumers ■ “My husband, who is 32 years old, has had a Smucker’s red raspberry preserve sandwich every day since he was in the first grade. It has to be Smucker’s and it has to be the red raspberry preserves. He is a diehard Smucker’s fan. My husband is by far the pickiest eater you will ever meet. He literally only eats about ten different things — your preserves being one of them... Keep up the good work.” 1 ■ ■ ■ ■ ■ ■ ■ Our decision to increase marketing support behind Jif and Crisco by nearly 50 percent over the prior year paid significant dividends. Both brands exceeded their sales and profit projections and are well positioned for fiscal 2004. In the coming year, we intend to increase Jif and Crisco marketing support by another 25 percent to continue to enhance the brands’ leadership positions. Momentum across our entire business has never been greater. Following are further details of last year’s accomplishments and our plans for the future. ■ U.S. Retail Segment ■ U.S. Retail, our largest segment, had an outstanding year, with total sales up 175 percent. This segment includes the sales of Smucker’s, Jif, and Crisco products to grocery, club, drug, mass market, and warehouse channels. Of course, a significant portion of the segment’s growth resulted from the addition of Jif and Crisco to our existing business. But even without these brands, segment sales were up four percent. One of our objectives for the year was to leverage the combined strength of the Smucker’s, Jif, and Crisco brands. All three brands are sold to our existing customers and similar consumers. And all are American icon brands — names consumers associate with homemade goodness. We think we have made excellent headway, and we expect to see greater benefits in the coming year and beyond. Smucker’s The Smucker’s brand grew by five percent through our leadership in fruit spreads, toppings, and natural peanut butter, as well as through growth in the distribution and sales of Uncrustables. Smucker’s continues to lead the fruit spread category, with a record market share of 41 percent. Providing options in terms of flavors, varieties, sizes, and packaging is a Smucker’s tradition that contributes to our growth. Consumers welcome the choices we offer, as evidenced by the success in fiscal 2003 of our newly introduced Smucker’s Squeeze fruit spreads in convenient plastic bottle packaging. We continue to focus on developing new segments of the fruit spread category and are especially excited about the growth of our Sugar Free products. Our range of ice cream toppings continues to lead the market, with a 61 percent share of the category. The launch of Twix Magic Shell and Milky Way toppings this past year — a result of our continuing relationship with Masterfoods, USA, a division of Mars, Inc. — helped strengthen our leadership position in this category. We remain extremely excited about our Uncrustables product. Based on very promising test market results from the previous year, in 2003 we rolled out our peanut butter and jelly Uncrustables sandwich ■ Comments From Our Consumers ■ ■ “I have been using Jif all of my life. My mother would TRY to switch peanut butter on me and my siblings, but we could always tell when it was not Jif…and we wouldn’t eat it! She finally only purchased Jif peanut butter. Now that I do my own grocery shopping, I of course, only purchase Jif. It is a wonderful product, and I want to commend you on its superior taste.” 2 ■ ■ ■ ■ ■ ■ ■ to retail stores across 70 percent of the United States. We supported the launch with considerable advertising, especially during back-to-school and return-to-school periods. We will bring the product to the entire country in the first quarter of fiscal 2004. Also in fiscal 2003, we introduced our pre-toasted grilled cheese Uncrustables product to the retail market, and it too has been well received. This new offering is consistent with our aim to provide consumers with convenient, wholesome, tasty foods — in this case, a grilled cheese sandwich that’s ready to eat after just a minute or less in the microwave. Along with completing the rollout of peanut butter and jelly Uncrustables, we will take the grilled cheese product national in fiscal 2004. We will back these efforts with new Uncrustables television ads and a number of exciting consumer promotions. Jif The entire peanut butter category expanded by four percent this past year, as consumers turn to peanut butter as a healthy and inexpensive source of protein. As we mentioned earlier, one of our major accomplishments in 2003 was to revitalize the Jif brand. We significantly increased the amount of consumer advertising behind Jif and are extremely pleased with the way Jif sales outpaced the category’s overall growth rate. The Jif brand commands a 35 percent share of the peanut butter category. This share, combined with our other peanut butter brands — Smucker’s natural peanut butter, Laura Scudder’s, Adam’s, and Goober — gives us a 42 percent share of the total category. In October 2002, the U.S. Congress approved the Farm Bill, resulting in lower peanut prices. We passed along a portion of those savings to our consumers and invested the balance of the savings in the Jif brand, primarily in advertising. Advertising spending against Jif will increase again in 2004, and we are developing new television commercials with our advertising agency, Grey Worldwide. Our Jif plant in Lexington, Kentucky, achieved record production results and did an outstanding job meeting our customers’ demands. We are investing in the Lexington plant to further increase its capacity. Crisco For our Company, cooking oil is a new category that presents a unique set of opportunities. We are extremely pleased with how this business performed in fiscal 2003, and we are especially grateful to our team at the Crisco plant in Cincinnati, Ohio, for their many contributions. As with Jif, our primary emphasis in 2003 was on revitalizing the Crisco brand, and again, we are pleased with the results of our investments. During the holiday baking season, we began to see our market share increase in response to consumer initiatives, including the first television advertising of Crisco in five years. We intend to further strengthen Crisco advertising in fiscal 2004 as part of our strategy to build our brands with consistent levels of high-quality consumer support. ■ Comments From Our Consumers ■ “I was raised in the 1950s when Crisco was used by most cooks. It was a trusted product that meant good flavor. I’m happy to say that after all these years, Crisco remains the number-one product that beats all of the other products when it comes to flavor. Thanks for all the years of enjoyment.” 3 ■ ■ ■ ■ Throughout our Company, we embrace a clearly articulated set of values that guide our behavior and set the tone for our work environment. Our Basic Beliefs— People, Quality, Ethics, Independence, and Growth— have been our guiding principles for more than a century. ■ ■ ■ ■ Special Markets ■ Beverages Our Beverage business set a new record, with a double-digit increase in sales of R.W. Knudsen Family, Santa Cruz Organic, and Smucker’s powdered lemonades. Sales of our natural foods brands in the health and natural foods channel are outpacing the category’s growth, and we continue to gain placement in mainstream grocery stores as they expand their offerings of leading natural food brands. Foodservice Despite weaknesses in the travel and leisure industry, we saw very good growth in our portion control lines in fiscal 2003. In fact, sales of Smucker’s and Dickinson’s portion control products to hotels, restaurants, airlines, and healthcare institutions have never been stronger. Our Foodservice group is also responsible for managing the sales of Smucker’s Uncrustables to schools and restaurants. Uncrustables sales in this channel increased 38 percent in 2003, making it the fastest-growing line in our Foodservice area. With the recent introduction of a pre-toasted grilled cheese sandwich, we anticipate continued significant growth opportunities for this sandwich platform. Uncrustables are now enjoyed by children in more than 4,000 school systems throughout the U.S. Industrial Sales and profits in our Industrial business area also exceeded expectations this past year, primarily due to growth in the business we acquired last year from International Flavors and Fragrances. The U.S. portion of that business is now fully integrated into our production facilities. As we announced last year, in keeping with our brand-focused strategy, we are discontinuing the production of certain less-profitable Industrial items. To date, approximately $21 million of such business has been eliminated, and by the end of 2004, we will discontinue another $24 million. Our strategy for the Industrial business is to focus on our current bakery and dairy customers, doing all we can to secure our place as their preferred supplier of formulated ingredients while maximizing the utilization of existing assets. International The majority of sales in our International business area are in Canada and Australia. Our Canadian business performed well in fiscal 2003, while our Australian operations remain challenged. In 2003, a significant contributor to growth in Canada was the addition of Crisco brand sales. In Canada, as in the U.S., we have dedicated resources to revitalizing this brand, and we are seeing positive results. ■ Comments From Our Consumers ■ “I would like to thank you for your incredibly terrific Smucker’s natural chunky peanut butter! It is, in my opinion, the best peanut butter on the market. It is so good I could eat it straight from the jar (and I have!). Your preserves only add to the superb taste of the peanut butter. When peanut butter and jelly taste this good, who needs bread?!” 6 ■ ■ ■ ■ ■ ■ ■ ■ Canadian sales of Smucker’s products remain strong, and we continue to hold the leadership position in that country’s fruit spread category, with 33 percent of the market. We plan to launch a new Smucker’s advertising campaign in Canada in 2004 to further support the brand and help maintain positive momentum. Our Australian business posted mixed results for 2003. Sales of IXL fruit bars, Taylor’s marinades and sauces, and our foodservice and industrial businesses outperformed their goals for the year. While IXL has maintained its leadership position in the Australian retail fruit spread market, we continue to face competitive challenges. Our focus in Australia remains on providing value to our consumers through new product and packaging innovations, and strengthening the IXL brand position through a new advertising campaign. We are also pleased with the performance and margin contributions of our industrial ingredient businesses in Brazil and Scotland. ■ Operations ■ In order to provide our customers with the lowest-possible total-delivered cost, we must continually seek ways to increase the efficiency of our supply chain. To address this key strategic issue, in 2003 we initiated our Supply Chain Optimization Project. Our objectives are threefold: to capitalize on the synergies resulting from the Jif and Crisco transaction; to streamline our supply chain functions; and to provide better focus on our branded product strategy. The initial project decisions were announced in March 2003. These included a significant reduction in our number of SKUs (stock keeping units), decreased involvement in fresh fruit processing, and centralized production and distribution of the Smucker’s Uncrustables line. As part of this process, we will close three facilities: Watsonville, California; Woodburn, Oregon; and West Fargo, North Dakota. Although these were difficult decisions to make, the purpose is to strengthen our Company as a whole and position it for continued growth with very efficient operations. In the coming year, we will make record capital investments, totaling some $80 million, in our manufacturing plants and facilities. This includes a major investment that we are making in a state- of-the-art production plant in Scottsville, Kentucky, where we will produce all Uncrustables beginning in fiscal 2005. Consolidating all of our Uncrustables production in one plant will significantly improve the efficiency of our processes and lower our production and distribution costs. ■ Comments From Our Consumers ■ “I recently purchased your Uncrustables, and I have to let you know that they are absolutely delicious. I knew when buying them that they would be good, but I did not know how good until I tried them. It is so close to homemade I cannot get over it. Thank you once again for coming up with something delicious and affordable.” 7 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ Looking Ahead ■ Four key factors give us confidence in our Company’s ability to continue to grow while benefiting all of our constituencies. First, we have a clear vision for the future. We will own and market number-one food brands, with an emphasis on North America. In addition, we will achieve balanced growth through: increased market share of our core brands; ■ acquisitions of other leading food brands; and ■ new products that are convenient, good and good for you, and that make you smile. Second, we have an extremely talented, dedicated family of employees who take pride in what they do and take pleasure in each other’s accomplishments. This past year, more than 400 Jif and Crisco employees joined our team and played a key role in the success of those businesses. Welcome. Our employees’ dedication, vision, attention to detail, and camaraderie are what make our Company one of America’s best places to work. Third, throughout our Company, we embrace a clearly articulated set of values that guide our behavior and set the tone for our work environment. Our Basic Beliefs — People, Quality, Ethics, Independence, and Growth — have been our guiding principles for more than a century. Fourth, we are committed to maintaining a long-term vision for our business. This has enabled our Company to avoid many of the problems and pitfalls that come from making short-term decisions in response to financial market pressure. Our Company has always taken a long-range approach to building the business — a posture we believe ultimately serves the best interests of our consumers, customers, employees, shareholders, suppliers, and the communities in which we work. We are grateful for what our team has achieved; we are focused on the future; and we believe the best is yet to come. Sincerely, Tim Smucker Richard Smucker ■ Comments From Our Consumers ■ “I just had to tell you how much my family loves Smucker’s Sugar Free jam. You certainly can’t tell it is sugar free, and it has the great Smucker’s taste. We have always loved your products and appreciate the quality. When a company cares about the products it is making, it certainly shows. Thank you very much.” 8 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ Financial Review ■ ■ ■ Five-Year Summary of Selected Financial Data Summary of Quarterly Results of Operations Stock Price Data Management’s Discussion and Analysis Management’s Report on Responsibility for Financial Reporting Report of Independent Auditors Consolidated Financial Statements Notes to Consolidated Financial Statements 10 11 11 12 18 18 19 24 9 Five-Year Summary of Selected Financial Data ■ ■ ■ The following table presents selected financial data for each of the five years in the period ended April 30, 2003, as restated to reflect the effect of the merger exchange ratio discussed in Note C to the consolidated financial statements. The selected financial data was derived from the consolidated financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Results of Operations and Capital Resources and Liquidity” and the consolidated financial statements and notes thereto. Year Ended April 30, (Dollars in thousands, except per share data) 2003 2002 2001 2000 1999 Statement of Income: Net sales Income before cumulative effect of change in accounting method Cumulative effect of change in accounting method $1,311,744 $687,148 $651,242 $641,885 $612,662 $ 96,342 $ 30,851 $ 28,198 $ 26,273 $ 38,233 — — (992) — — Net income $ 96,342 $ 30,851 $ 27,206 $ 26,273 $ 38,233 Financial Position: Long-term debt Total assets Shareholders’ equity Other Data: Earnings per common share: Income before cumulative effect of change in accounting method Cumulative effect of change in accounting method $ 135,000 1,615,407 1,124,171 $135,000 524,892 280,144 $135,000 479,104 250,785 $ 75,000 477,698 320,608 $ — 437,657 331,548 $ 2.04 $ 1.33 $ 1.17 $ 0.97 $ 1.39 — — (0.04) — — Net income $ 2.04 $ 1.33 $ 1.13 $ 0.97 $ 1.39 Income before cumulative effect of change in accounting method – assuming dilution $ 2.02 $ 1.31 $ 1.16 $ 0.97 $ 1.38 Cumulative effect of change in accounting method – assuming dilution — — (0.04) — — Net income – assuming dilution $ 2.02 $ 1.31 $ 1.12 $ 0.97 $ 1.38 Dividends declared per common share $ 0.83 $ 0.68 $ 0.68 $ 0.65 $ 0.60 10 Summary of Quarterly Results of Operations ■ ■ ■ The following is a summary of unaudited quarterly results of operations for the years ended April 30, 2003 and 2002, as restated to reflect the effect of the merger exchange ratio discussed in Note C to the consolidated financial statements. (Dollars in thousands, except per share data) Fiscal 2003 Fiscal 2002 Quarter Ended Net Sales Gross Profit Net Income July 31, 2002 October 31, 2002 January 31, 2003 April 30, 2003 July 31, 2001 October 31, 2001 January 31, 2002 April 30, 2002 $274,936 366,975 340,826 329,007 $169,792 172,844 168,392 176,120 $ 92,352 126,412 122,931 114,386 $ 57,180 55,820 55,001 56,990 $16,017 29,087 27,993 23,245 $ 8,547 7,704 7,947 6,653 Net Income per Net Income per Common Share – Common Share Assuming Dilution $0.39 0.59 0.56 0.47 $0.37 0.34 0.34 0.28 $0.39 0.58 0.56 0.46 $0.37 0.33 0.34 0.28 Annual earnings per share may not equal the sum of the individual quarters due to differences in the average number of shares outstanding during the respective periods. Stock Price Data ■ ■ ■ The Company’s common shares are listed on the New York Stock Exchange — ticker symbol SJM. The table below pres- ents the high and low market prices for the shares and the quarterly dividends declared as restated to reflect the effect of the merger exchange ratio discussed in Note C to the consolidated financial statements. There were 131,570 share- holders of record as of June 16, 2003. Fiscal 2003 Fiscal 2002 Quarter Ended July 31, 2002 October 31, 2002 January 31, 2003 April 30, 2003 July 31, 2001 October 31, 2001 January 31, 2002 April 30, 2002 High $37.50 38.84 42.25 40.80 $29.38 38.20 39.92 38.78 Low $28.71 32.03 33.30 33.00 $25.30 25.29 32.80 32.06 Dividends $0.20 0.20 0.20 0.23 $0.17 0.17 0.17 0.17 11 Management’s Discussion and Analysis ■ ■ ■ On June 1, 2002, the Company merged the Jif peanut butter and Crisco shortening and oils businesses of The Procter & Gamble Company with and into the Company in a tax-free stock transaction. As a result, earnings per share for all fiscal years have been restated to reflect the effect of the merger exchange ratio of 0.9451 on the weighted-average shares outstanding. With the addition of the Jif and Crisco businesses, the Company realigned its business segment structure. Reportable segments have been restated to conform to the new structure, which consists of two reportable seg- ments: U.S. retail market and special markets. The U.S. retail market segment is composed of the Company’s consumer and consumer oils businesses and includes domestic sales of Smucker’s, Jif, and Crisco branded products at retail. The special markets segment is com- posed of the foodservice, international, industrial, and beverage businesses. ■ Results of Operations ■ Comparison of fiscal 2003 with fiscal 2002 Sales in fiscal 2003 were $1,311.7 million, up 91 percent compared to $687.1 million in fiscal 2002. The Jif and Crisco brands contributed $571.0 million to sales from the close of the transaction on June 1, 2002. Excluding the Jif and Crisco contribution, sales increased $53.6 million or eight percent over the prior year. Sales in the U.S. retail market segment were $889.9 million, up $566.3 million, while special markets segment sales were $421.8 million compared to $363.5 million last year. Net income was $96.3 million, or $2.02 per share, in 2003 compared to $30.9 million, or $1.31 per share, last year. Net income includes merger and integration costs of $10.5 million, or $0.14 per share, in 2003 and $5.0 million, or $0.14 per share, in 2002. Also included in 2003 are approximately $2.5 million, or $0.03 per share, in restructuring costs. In the U.S. retail market segment, Jif and Crisco con- tributed nearly 98 percent of the overall sales increase for the segment. Sales of Smucker’s branded products increased five percent for the year as the Company real- ized increased sales in its fruit spreads, toppings, natu- ral peanut butter, and Goober categories. The retail rollout during the year of Smucker’s Uncrustables to 70 percent of the country also contributed to the seg- ment’s growth. The only area within the segment realiz- ing a decline was the Company’s specialty foods channel, which was down nine percent. Following the close of the merger, the Company initiated its strategic plans to increase marketing support for both Jif and Crisco through increased levels of advertising and promotional spending. As a result, both brands realized share-of- market gains, particularly Jif, during the last half of 2003. In the Company’s special markets, sales were up 16 per- cent over 2002 with all business areas recording an increase in sales over the prior year. The majority of the increase occurred in the foodservice, international, and beverage business areas. In foodservice, sales were up 16 percent due to a combination of growth in Smucker’s traditional portion control items and increased distribution of Smucker’s Uncrustables to the schools market. In the international area, sales were up 26 percent due primarily to the addi- tion of Crisco in the Canadian market. Excluding Jif and Crisco, Canada’s business experienced good growth, up six percent in local currency. The Canadian business was favorably impacted by exchange rates throughout the year as sales were up nine percent in U.S. dollars, excluding the impact of Jif and Crisco sales. In Australia, the Henry Jones Foods business was up eight percent in U.S. dollars, but relatively flat in local currency due to competitive activity in the fruit spreads category. In Brazil, sales were up over 61 percent in local currency, but up 21 percent in U.S. dollars due to an unfavorable exchange rate impact. On the whole, exchange rates did not have a significant impact on international results, but they did fluctuate widely by country. Export sales increased 14 percent primarily due to increased sales to Latin American markets. Beverage area sales were up 23 percent over the prior year, due primarily to increased sales of R.W. Knudsen Family and Santa Cruz Organic products and the suc- cess of new products introduced early in the fiscal year. Finally, sales in the Company’s industrial business were up two percent for the year, despite the planned loss of approximately $21 million in sales resulting from the strategic decision to exit certain low-margin contracts. Helping to offset this loss was the full year inclusion of sales from the International Flavors & Fragrances Inc. (IFF) business, acquired in October 2001. The Company’s operating income was $164.5 million or 12.5 percent of sales for the year representing a signifi- cant increase in both dollars and as a percent of sales. This was attributed to improvements in both gross margin and lower selling, distribution, and administra- tive costs (SD&A) as a percent of sales. The Company’s gross margin was 34.8 percent in 2003, compared to 32.7 percent in 2002. The addition of the higher-margin Jif and Crisco businesses and the impact of lower peanut costs resulting from the 2002 Farm Bill drove the overall improvement in gross margin. Excluding Jif and Crisco, cost of products sold for the remainder of the Company’s business was constant with the prior year, as raw mate- rial costs remained essentially flat. SD&A costs were 21.3 percent and 24.0 percent of sales in 2003 and 2002, respectively. The improvement in the expense ratio 12 ■ ■ ■ ■ reflects the impact of the merger where the Company has been able to utilize its existing administrative infra- structure and thus allocate costs over a broader revenue base. The reduction in SD&A as a percent of sales was in- line with the Company’s expectations from the merger. Marketing expenses increased at a greater rate than sales as the Company implemented its strategic plans to increase support against both the Jif and Crisco brands and to accelerate its rollout of Uncrustables. As of May 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, and in accordance with this pro- nouncement, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impairment. The adoption of this standard resulted in a decrease in SD&A costs of approximately $3.5 million compared to 2002. Interest expense decreased $0.5 million from 2002 due to the effect of favorable interest rate swaps, that reduced interest expense by $1.4 million. Interest income also decreased slightly despite an overall increase in invest- ment balances due to lower interest rates throughout the year. During the fourth quarter of 2003, the Company announced its plan to restructure certain operations as part of its ongoing efforts to optimize its production capacity, improve productivity and operating efficiencies, and lower the Company’s overall cost base. These initia- tives include reducing the Company’s involvement in fruit processing, centralizing production and distribution of the fast growing Uncrustables product line, and signif- icantly reducing the number of items available for sale. The program calls for the closing of three of the Company’s plants —Watsonville, California; Woodburn, Oregon; and West Fargo, North Dakota. The Company will continue to process the majority of its requirements for strawberries and grapes, its two most significant fruit raw materials. The Company is confident that its decision to reduce its involvement in fresh fruit processing will not materially impact its ability to source fruit raw materials. The Company expects to record a restructuring charge of approximately $18 million, of which approximately $2.5 million was recorded in the fourth quarter of 2003. The balance of the charge will be incurred over the next two fiscal years, with approximately $12 million to be recorded in fiscal 2004. Included in the restructuring charge are cash outlays of approximately $12 million that relate primarily to employee separation costs and equipment relocation expenses. The Company estimates that the annual pretax benefit from the plan will be approximately $10 million upon full implementation in fiscal 2006. These benefits represent a combination of a reduction in overhead related to the closed facilities and a reduction in Uncrustables operating costs. Comparison of fiscal 2002 with fiscal 2001 Sales in fiscal 2002 were $687.1 million, up six percent over the $651.2 million in sales in fiscal 2001. Excluding the impact of acquisitions, sales were up approximately $21 million or three percent. Sales in the U.S. retail market segment were $323.6 million, up three percent, while spe- cial markets segment sales were $363.5 million, an eight percent increase. Fiscal 2002 net income was $30.9 mil- lion, or $1.31 per share, compared to $27.2 million, or $1.12 per share, in 2001. Net income includes merger and inte- gration costs of $5.0 million, or $0.14 per share, in 2002 and restructuring costs of $2.1 million, or $0.06 per share, and the cumulative effect of an accounting change of $1.6 million, or $0.04 per share, in 2001. During the fourth quarter of 2002, the Company elected to change the method of accounting for certain inventory from the last- in, first-out method to the first-in, first-out method. As a result, the Company restated its 2001 financial results, resulting in a reduction in net income of $3.5 million, or $0.14 per share. Sales in the U.S. retail market segment were up three percent due primarily to increases in the grocery, club store, and mass retail business areas. These increases were offset by modest decreases in the military and con- sumer direct business areas. The Company’s retail busi- ness increase was due mostly to new products and growth in Sugar Free fruit spreads, natural peanut but- ters, and Goober products. During the year, the Company discontinued selling its low-margin, value-priced Sunberry Farms brand. The Company’s share of market in the fruit spreads category continued to grow, reaching an all-time high at the time, in excess of 40 percent across all retail segments. Sales in the special markets segment were up eight per- cent due primarily to increases in the foodservice and industrial business areas. In the foodservice area, sales were up nine percent as sales and distribution of Smucker’s Uncrustables to schools continued to increase. This new business helped offset a general softness in traditional foodservice sales, which were impacted during most of the year by the weak economy and declines in the travel and leisure industry following the events of September 11, 2001. Despite those events, the traditional foodservice business area realized an overall increase, up one percent over 2001. 13 Sales in the Company’s industrial business area were up 11 percent for the year as a result of the acquisition of the IFF business. The IFF acquisition contributed approxi- mately $13 million to domestic sales and $0.06 per share to earnings during the year. Sales in the beverage busi- ness area were up seven percent over 2001, due primarily to increased sales of R.W. Knudsen Family and Santa Cruz Organic products. In the international business area, the Company’s Canadian business continued to perform well, with sales increasing four percent in the local currency. Export sales increased three percent and sales in the Company’s Mexican market increased 22 percent over 2001. Approximately $1.9 million of the $3.5 million increase in international sales was due to the addition of that por- tion of the business acquired from IFF that is located in Brazil. In Australia, the Henry Jones Foods business was up one percent in local currency compared to 2001. The impact of the strong U.S. dollar as compared primarily to the local currencies in Australia, Brazil, and Canada resulted in 2002 sales being approximately $5.4 million less than they would have been had exchange rates remained constant with exchange rates in 2001. Company operating income was $54.8 million in 2002 com- pared to $49.2 million in 2001, an increase of 11 percent. The gross profit margin was 32.7 percent in 2002, com- pared to 31.8 percent in 2001. The cost of products sold for the majority of the Company’s businesses was consistent with 2001, as raw material costs remained essentially flat. SD&A costs were 24.0 percent of sales, the same as 2001. The dollar increase in SD&A expenses was primarily due to higher amortization charges associated with pre- viously capitalized information systems implementation costs. Marketing expenses were down one percent from 2001, due to lower expenditures in the beverage and con- sumer direct business areas. Interest expense increased $1.4 million over 2001 as the long-term debt placement that was completed during the second quarter of 2001 was on the books for a full year in 2002. The Company capitalized approximately $0.5 mil- lion in interest during 2002 that was associated with the Company’s information technology reengineering project. Also during the year, the Company entered into interest rate swap agreements in order to manage interest rate exposure and lower financing costs. The interest rate swaps reduced interest expense by approximately $0.6 million in 2002. ■ Capital Resources and Liquidity ■ (Dollars in thousands) 2003 2002 2001 Year Ended April 30, Net cash provided by operating activities Net cash used for $165,965 $67,000 $88,196 investing activities 52,979 20,510 27,612 Net cash used for financing activities 26,784 5,808 32,325 Financial Condition — Liquidity and Capital Resources The financial position of the Company continues to be strong, as cash and cash equivalents have increased to record levels. Cash and cash equivalents increased $89.3 million during the year with cash generated from operations of $166.0 million. The increase in cash is pri- marily the result of strong cash flows generated by the Jif and Crisco businesses. The ratio of working capital, less cash and cash equivalents, to sales has also been favor- ably impacted by the merger, decreasing from 15.6 percent last year to 9.0 percent at April 30, 2003. Cash used for investing activities more than doubled the previous year as 2003 capital expenditures were $49.5 million, up from $23.5 million in 2002. The Company also incurred approximately $10.8 million of capitalized merger costs. This was in addition to the $10.5 million that was expensed during the year. Cash used for financ- ing also increased significantly due mostly to an increase in the payment of dividends to $0.77 per share, or $33.6 million. Looking towards 2004, capital expenditures are expected to increase to approximately $80 million with the majority of the spending attributed to the cost of the new Uncrustables manufacturing facility currently under con- struction in Scottsville, Kentucky. Other primary uses of cash are dividends, estimated at $46 million next year, and payments related to the Company’s restructuring activities. Assuming there are no other material acquisitions or other significant investments, the Company believes that cash on hand, together with cash generated by oper- ations and existing lines of credit totaling $120 million, will be sufficient to meet 2004 cash requirements, includ- ing the payment of dividends and interest on outstand- ing debt. 14 ■ ■ ■ ■ ■ Critical Accounting Estimates and Policies ■ The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that in certain circumstances affect amounts reported in the accompanying consolidated financial statements. In preparing these financial state- ments, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assump- tions as to future uncertainties and, as a result, actual results could differ from these estimates. Accrued Marketing and Merchandising. In order to sup- port the Company’s products, various marketing pro- grams are offered to customers, which reimburse them for a portion, or all of their promotional activities related to the Company’s products. The Company regularly reviews and revises, when it deems necessary, estimates of costs to the Company for these marketing and mer- chandising programs based on estimates of what has been incurred by customers. Actual costs incurred by the Company may differ significantly if factors such as the level and success of the customers’ programs or other conditions differ from expectations. Such differences did not occur during 2003. Impairment of Long-Lived Assets. Historically, long-lived assets have been reviewed for impairment whenever events or changes in circumstances indicate that the car- rying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows estimated to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. However, determining fair value is subject to estimates of both cash flows and interest rates and dif- ferent estimates could yield different results. There are no events or changes in circumstances of which man- agement is aware indicating that the carrying value of the Company’s long-lived assets may not be recoverable, with the exception of planned restructuring activities noted under Restructuring. Goodwill and Other Indefinite-Lived Intangible Assets. Effective May 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). In accordance with SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annu- ally for impairment. As required by SFAS 142, manage- ment performed transitional impairment testing during the second quarter of 2003, and annual impairment test- ing of goodwill and indefinite-lived intangible assets during the fourth quarter of 2003. These tests confirmed that the fair value of the Company’s reporting units exceeds their carrying values, and that no impairment loss needed to be recognized for goodwill upon the adop- tion of SFAS 142. The annual evaluation of goodwill and other indefinite- lived intangible assets requires the use of estimates about future operating results for each reporting unit to determine their estimated fair value. Changes in fore- casted operations can materially affect these estimates. Additionally, other changes in the estimates and assumptions, including the discount rate and expected long-term growth rate, which drive the valuation tech- niques employed to estimate the fair value of goodwill and other indefinite-lived intangible assets could change and, therefore, impact the assessments of impairment in the future. Pension Plans and Other Postretirement Benefit Plans. To determine the Company’s ultimate obligation under its defined benefit pension plans and other postretire- ment benefit plans, management must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works. To record the related net assets and obligations of such ben- efit plans, management uses assumptions related to inflation, investment returns, mortality, employee turnover, rate of compensation increases, medical costs, and discount rates. Management, along with third-party actuaries, reviews all of these assumptions on an ongo- ing basis to ensure that the most reasonable information available is being considered. For 2004 expense recogni- tion, the Company will use a discount rate of 6.25 percent, an expected rate of return on plan assets of 8.75 percent, and a rate of compensation increase of 4.50 percent. Use of these assumptions will result in a higher calculated pension expense. Accrued Expenses. Management estimates certain mate- rial expenses in an effort to record those expenses in the period incurred. The most material accrued estimates 15 ■ ■ ■ ■ are insurance-related expenses, including self-insur- ance. Workers’ compensation and general liability insur- ance accruals are recorded based on insurance claims processed as well as historical claims experience for claims incurred but not yet reported. These estimates are based on historical loss development factors. Employee medical insurance accruals are recorded based on med- ical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences in estimates and assumptions could result in an accrual requirement materially differ- ent from the calculated accrual. Recovery of Accounts Receivable. In the normal course of business, the Company extends credit to customers that satisfy predefined criteria. The Company evaluates the collectibility of accounts receivable based on a combina- tion of factors. When aware of a specific customer’s inabil- ity to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s oper- ating results or financial position, the Company records a specific reserve for bad debt to reduce the related receiv- able to the amount the Company reasonably believes is collectible. The Company also records reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due, historical collection experience, and an evaluation of cur- rent and projected economic conditions at the balance sheet date. Actual collections of accounts receivable could differ from management’s estimates due to changes in future economic or industry conditions or specific cus- tomers’ financial condition. Restructuring. During the fourth quarter, the Company announced its plan to restructure certain operations as part of its ongoing efforts to optimize its production capacity, improve productivity and operating efficien- cies, and lower the Company’s overall cost base. The expected restructuring charge includes estimates related to employee separation costs, the closure and consolidation of facilities, contractual obligations, and the valuation of certain assets including property, plant, and equipment, and inventories. Estimates of such costs are determined by contractual agreement or estimated by management based on historical experience. Actual amounts could differ from the original estimates. Other Matters. The Company does not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities.” Transactions with related parties are in the ordinary course of business, are conducted on an arm’s-length basis, and are not material to the Company’s results of operations, financial condi- tion, or cash flows. ■ Recently Issued Accounting Standards ■ The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (SFAS 148). SFAS 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), to provide alternative methods of transition when a company voluntarily changes to the fair value-based method of recognizing expense in the income statement for stock- based employee compensation, including stock options granted to employees. As allowed by SFAS 123, the Company has adopted the disclosure-only provisions of the standard and does not recognize compensation expense for stock options granted to employees. In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit and disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Company’s consolidated finan- cial statements. ■ Derivative Financial Instruments and Market Risk ■ The following discussions about the Company’s market risk disclosures involve forward-looking statements. Actual results could differ from those projected in the for- ward-looking statements. The Company is exposed to market risk related to changes in interest rates, com- modity prices, and foreign currency exchange rates. Interest Rate Risk. The fair value of the Company’s cash and short-term investment portfolio at April 30, 2003, approximate carrying value. Exposure to interest rate risk on the Company’s long-term debt is mitigated since it is at a fixed rate until maturity. Market risk, as meas- ured by the change in fair value resulting from a hypo- thetical ten percent change in interest rates, is not material. Based on the Company’s overall interest rate exposure as of and during the year ended April 30, 2003, including derivative and other instruments sensitive to interest rates, a hypothetical ten percent movement in interest rates (relating to the Company’s variable-rate borrowings) would not materially affect the Company’s results of operations. 16 ■ ■ ■ ■ ■ ■ ■ ■ Foreign Currency Exchange Risk. The Company has con- cluded that its foreign currency exposure on future earn- ings or cash flows is not significant, and has currently chosen not to hedge its foreign currency exposure. The Company has operations outside the United States with foreign currency denominated assets and liabili- ties, primarily denominated in Australian, Brazilian, and Canadian currencies. Because the Company has foreign currency denominated assets and liabilities, financial exposure may result, primarily from the timing of trans- actions and the movement of exchange rates. The foreign currency balance sheet exposures as of April 30, 2003, are not expected to result in a significant impact on future earnings or cash flows. Revenues from customers outside the United States rep- resented approximately nine percent of net sales during 2003. Thus, certain sales and expenses have been, and are expected to be, subject to the effect of foreign cur- rency fluctuations and these fluctuations may have an impact on operating results. Commodity Price Risk. Raw materials used by the Company’s consumer oils business are subject to price volatility caused by supply conditions, political and eco- nomic variables, and other unpredictable factors. To manage the volatility related to anticipated inventory purchases to be made by the consumer oils business, the Company uses futures and options with maturities gen- erally less than one year. These instruments are desig- nated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in other compre- hensive income to the extent effective, and reclassified into cost of products sold in the period during which the hedged transaction affects earnings. The mark-to-market gains or losses on nonqualifying, excluded, and ineffec- tive portions of hedges are recognized in cost of products sold immediately and were not significant. ■ Certain Forward-Looking Statements ■ This annual report includes certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to: the success and cost of marketing and sales programs and strategies intended to promote growth in the Jif and Crisco businesses, as well as the Company’s other businesses; the success and cost of introducing new products, par- ticularly Smucker’s Uncrustables; the ability of the business areas to achieve sales tar- gets and the costs associated with attempting to do so; the exact time frame in which the new Uncrustables facility in Scottsville, Kentucky will be completed and placed into operation; the estimated costs and benefits associated with the Company’s plan to restructure certain of its operations; the strength of commodity markets from which raw materials are procured and the related impact on costs; raw material and ingredient cost trends; the exact time frame in which the loss of sales associ- ated with discontinued industrial contracts will occur; foreign currency exchange and interest rate fluctuations; ■ general competitive activity in the market; costs associated with the implementation of new busi- ness and information systems; and other factors affecting share prices and capital markets generally. 17 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ Management’s Report on Responsibility for Financial Reporting ■ ■ ■ Management of The J. M. Smucker Company is responsible for the preparation, integrity, accuracy, and consistency of the consolidated financial statements and the related financial information in this report. Such information has been prepared in accordance with accounting principles generally accepted in the United States and is based on our best estimates and judgments. The Company maintains systems of internal accounting controls supported by formal policies and procedures that are communicated throughout the Company. There is an extensive program of audits performed by the Company’s internal audit staff and independent auditors designed to evaluate the adequacy of and adherence to these controls, policies, and procedures. Ernst & Young LLP, independent auditors, has audited the Company’s financial statements. Management has made all financial records and related data available to Ernst & Young LLP during its audit. The Company’s audit committee, comprised of three nonemployee members of the Board, meets regularly with the inde- pendent auditors and management to review the work of the internal audit staff and the work, audit scope, timing arrangements, and fees of the independent auditors. The audit committee also regularly satisfies itself as to the ade- quacy of controls, systems, and financial records. The manager of the internal audit department is required to report directly to the chair of the audit committee as to internal audit matters. It is the Company’s best judgment that its policies and procedures, its program of internal and independent audits, and the oversight activity of the audit committee work together to provide reasonable assurance that the operations of the Company are conducted according to law and in compliance with the high standards of business ethics and conduct to which the Company subscribes. Timothy P. Smucker Chairman and Co-Chief Executive Officer Richard K. Smucker President, Co-Chief Executive Officer, and Chief Financial Officer Report of Independent Auditors ■ ■ ■ Board of Directors and Shareholders The J. M. Smucker Company We have audited the accompanying consolidated balance sheets of The J. M. Smucker Company as of April 30, 2003 and 2002, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2003. 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 auditing standards generally accepted in the United States. Those stan- dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state- ments 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 con- solidated financial position of The J. M. Smucker Company at April 30, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2003, in conformity with account- ing principles generally accepted in the United States. As discussed in Note B to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, as of May 1, 2002. Akron, Ohio June 6, 2003 18 Statements of Consolidated Income ■ ■ ■ The J. M. Smucker Company (Dollars in thousands, except per share data) Net sales Cost of products sold Cost of products sold – restructuring Gross Profit Selling, distribution, and administrative expenses Merger and integration costs Other restructuring costs Operating Income Interest income Interest expense Other (expense) income – net Income Before Income Taxes and Cumulative Effect of Change in Accounting Method Income taxes Income Before Cumulative Effect of Change in Accounting Method Cumulative effect of change in accounting method, net of tax benefit of $572 Net Income Earnings per Common Share: Income Before Cumulative Effect of Change in Accounting Method Cumulative effect of change in accounting method Net Income per Common Share Income Before Cumulative Effect of Change in Accounting Method – Assuming Dilution Cumulative effect of change in accounting method – assuming dilution Year Ended April 30, 2003 2002 2001 $1,311,744 854,407 1,256 456,081 279,760 10,511 1,281 164,529 2,039 (8,752) (2,426) 155,390 59,048 $687,148 462,157 — 224,991 165,172 5,031 — 54,788 2,181 (9,207) 2,436 50,198 19,347 $651,242 443,948 — 207,294 155,973 — 2,152 49,169 2,918 (7,787) 192 44,492 16,294 96,342 30,851 28,198 — — (992) $ 96,342 $ 30,851 $ 27,206 $ 2.04 — $ 1.33 — $ 1.17 (0.04) $ 2.04 $ 1.33 $ 1.13 $ 2.02 $ 1.31 $ 1.16 — — (0.04) Net Income per Common Share – Assuming Dilution $ 2.02 $ 1.31 $ 1.12 See notes to consolidated financial statements. 19 Consolidated Balance Sheets ■ ■ ■ The J. M. Smucker Company Assets (Dollars in thousands) Current Assets Cash and cash equivalents Trade receivables, less allowance for doubtful accounts Inventories: Finished products Raw materials Other current assets Total Current Assets Property, Plant, and Equipment Land and land improvements Buildings and fixtures Machinery and equipment Construction in progress Accumulated depreciation Total Property, Plant, and Equipment Other Noncurrent Assets Goodwill Other intangible assets Other assets Total Other Noncurrent Assets April 30, 2003 2002 $ 181,225 $ 91,914 101,364 57,371 85,495 83,632 169,127 14,944 52,817 63,722 116,539 13,989 466,660 279,813 26,250 117,612 331,325 21,503 16,911 87,126 242,590 7,504 496,690 354,131 (221,704) (191,342) 274,986 162,789 525,942 320,409 27,410 873,761 33,510 14,825 33,955 82,290 $1,615,407 $524,892 20 Liabilities and Shareholders’ Equity (Dollars in thousands) Current Liabilities Accounts payable Salaries, wages, and additional compensation Accrued marketing and merchandising Income taxes Dividends payable Other current liabilities Total Current Liabilities Noncurrent Liabilities Long-term debt Postretirement benefits other than pensions Deferred income taxes Other noncurrent liabilities Total Noncurrent Liabilities Shareholders’ Equity Serial preferred shares – no par value: Authorized – 3,000,000 shares; outstanding – none Common shares – no par value: Authorized – 150,000,000 shares; outstanding – 49,767,540 in 2003 and 23,504,129 in 2002 (net of 6,900,393 and 7,140,338 treasury shares, respectively), at stated value Additional capital Retained income Less: Deferred compensation Amount due from ESOP Trust Accumulated other comprehensive loss Total Shareholders’ Equity April 30, 2003 2002 $ 68,704 31,788 29,252 18,783 11,447 7,300 $ 32,390 24,579 11,563 2,078 3,979 5,842 167,274 80,431 135,000 17,614 134,018 37,330 323,962 135,000 14,913 4,105 10,299 164,317 — — 12,442 815,767 323,064 (2,825) (8,093) (16,184) 6,217 33,184 267,793 (2,725) (8,562) (15,763) 1,124,171 280,144 $1,615,407 $524,892 See notes to consolidated financial statements. 21 Statements of Consolidated Cash Flows ■ ■ ■ The J. M. Smucker Company (Dollars in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization Cumulative effect of change in accounting method, net of tax benefit Deferred income tax (benefit) expense Changes in assets and liabilities, net of effect from business acquisitions: Trade receivables Inventories Other current assets Accounts payable and accrued items Income taxes Other – net Net Cash Provided by Operating Activities Investing Activities Additions to property, plant, and equipment Businesses acquired, net of cash acquired Disposal of property, plant, and equipment Other – net Net Cash Used for Investing Activities Financing Activities Proceeds from long-term debt Purchase of treasury shares Dividends paid Other – net Net Cash Used for Financing Activities Effect of exchange rate changes on cash Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Year Ended April 30, 2003 2002 2001 $ 96,342 $30,851 $27,206 35,934 1,817 — (3,680) (43,016) (12,062) (889) 56,169 22,645 12,705 165,965 (49,525) (10,767) 1,179 6,134 (52,979) — — (33,603) 6,819 (26,784) 3,109 89,311 91,914 23,932 4,625 — 1,545 (1,217) (2,063) (11) 12,483 25 (3,170) 67,000 (23,464) (5,714) 7,060 1,608 (20,510) — (1,128) (15,568) 10,888 (5,808) 107 40,789 51,125 22,521 4,400 992 2,040 5,196 17,326 3,830 10,558 (1,084) (4,789) 88,196 (29,385) — 278 1,495 (27,612) 60,000 (80,964) (16,686) 5,325 (32,325) (907) 27,352 23,773 Cash and Cash Equivalents at End of Year $181,225 $91,914 $51,125 ( ) Denotes use of cash See notes to consolidated financial statements. 22 Statements of Consolidated Shareholders’ Equity ■ ■ ■ The J. M. Smucker Company (Dollars in thousands) Common Shares Additional Capital Retained Income Deferred Compen- sation Amount Due From ESOP Trust Accumulated Other Compre- hensive Loss Total Shareholders’ Equity Balance at May 1, 2000 $ 7,081 $ 17,190 $317,978 $(3,091) $(9,223) $ (9,327) $ 320,608 Net income Foreign currency translation adjustment Comprehensive Income Purchase of treasury shares Stock plans Cash dividends declared – $0.68 a share Tax benefit of stock plans Other 27,206 (75,863) (16,095) (1,074) 83 (4,027) 4,820 1,295 (7,308) 27,206 (7,308) 19,898 (80,964) 5,746 (16,095) 1,295 297 843 297 Balance at April 30, 2001 6,090 19,278 253,226 (2,248) (8,926) (16,635) 250,785 Net income Foreign currency translation adjustment Minimum pension liability Comprehensive Income Purchase of treasury shares Stock plans Cash dividends declared – $0.68 a share Tax benefit of stock plans Other 30,851 (634) (15,650) (11) 138 (483) 11,590 2,799 (477) 364 1,669 (797) 30,851 1,669 (797) 31,723 (1,128) 11,251 (15,650) 2,799 364 Balance at April 30, 2002 6,217 33,184 267,793 (2,725) (8,562) (15,763) 280,144 Net income Foreign currency translation adjustment Minimum pension liability Loss on available-for-sale securities Gains on cash flow hedging derivatives Comprehensive Income Merger share exchange Business acquired Stock plans Cash dividends declared – $0.83 a share Tax benefit of stock plans Other 96,342 (341) 6,506 60 341 774,979 5,628 (100) (41,071) 1,635 469 8,268 (8,629) (296) 236 96,342 8,268 (8,629) (296) 236 95,921 — 781,485 5,588 (41,071) 1,635 469 Balance at April 30, 2003 $12,442 $815,767 $323,064 $(2,825) $(8,093) $(16,184) $1,124,171 See notes to consolidated financial statements. 23 Notes to Consolidated Financial Statements ■ ■ ■ The J. M. Smucker Company ■ Note A: Accounting Policies ■ Principles of Consolidation: The consolidated financial statements include the accounts of the Company, its wholly- owned subsidiaries, and its majority-owned equity investment. All significant intercompany transactions and accounts are eliminated in consolidation. Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles gen- erally accepted in the United States requires management to make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates in these consolidated financial statements include: restructuring costs, allowances for doubtful accounts receivable, estimates of future cash flows associated with assets, asset impairments, useful lives for depreciation and amortization, loss con- tingencies, net realizable value of inventories, accruals for marketing and merchandising programs, and the determi- nation of discount and other rate assumptions for defined benefit pension and other postretirement benefit expenses. Actual results could differ from these estimates. Revenue Recognition: The Company recognizes revenue when products are shipped and title has transferred to the customer. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance, clarified the Staff’s view on various rev- enue recognition and reporting matters. The implementation of SAB 101 was accounted for as a change in accounting method and applied cumulatively as if the change occurred as of May 1, 2000. The effect of the change was a one-time, noncash reduction to the Company’s earnings of $992,000 (net of tax of $572,000), or approximately $0.04 per share. Financial Instruments: Financial instruments, other than derivatives, that potentially subject the Company to signifi- cant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one insti- tution. The Company considers all short-term investments with a maturity of three months or less when purchased to be cash equivalents. With respect to accounts receivable, concentration of credit risk is limited due to the large number of customers. The Company does not require collateral from its customers. The fair value of the Company’s financial instruments, other than certain of its fixed-rate long-term debt, approximates their carrying amounts. The fair value of the Company’s fixed-rate long-term debt, estimated using current market rates and a discounted cash flow analysis was approximately $130,350,000 at April 30, 2003. Major Customer: Sales to Wal-Mart Stores, Inc., and subsidiaries amounted to approximately 14 percent of consolidated net sales in fiscal 2003. These sales are included in the U.S. retail market. No other customer exceeded ten percent of consolidated net sales for any year. Derivative Financial Instruments: The Company utilizes derivative instruments such as commodity futures contracts and interest rate swaps to hedge exposure to changes in commodity prices, interest rates, and foreign currency exchange rates. The Company accounts for these derivative instruments under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 requires that all derivative instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. For derivatives that are designated as a hedge and used to hedge an existing asset or lia- bility, both the derivative and hedged item are recognized at fair value with any changes recognized immediately in the Statements of Consolidated Income. For derivatives designated as a hedge that are used to hedge an anticipated transaction, changes in fair value are deferred and recorded in shareholders’ equity as a component of accumulated other comprehensive loss to the extent the hedge is effective and then recognized in cost of products sold in the period during which the hedged transaction affects earnings. Any ineffectiveness associated with the hedge or changes in fair value of derivatives that are nonqualifying are recognized immediately in earnings. By policy, the Company has not historically entered into derivative financial instruments for trading purposes or for speculation. Allowance for Doubtful Accounts: On a regular basis, the Company evaluates its accounts receivable and establishes the allowance for doubtful accounts based on a combination of specific customer circumstances, credit conditions, and historical write-offs and collections. A receivable is considered past due if payments have not been received within the agreed upon invoice terms. The allowance for doubtful accounts at April 30, 2003 and 2002, was $972,000 and $515,000, respectively. 24 ■ ■ ■ ■ Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Goodwill and Other Intangible Assets: Goodwill is the excess of the purchase price paid over the fair value of the net assets of the business acquired. As discussed in Note B, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective May 1, 2002. In accordance with SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impair- ment. The Company conducts its annual test of impairment for goodwill and indefinite-lived intangible assets in the fourth quarter. In addition, the Company will test again for impairment if events or circumstances occur subsequent to the Company’s annual impairment tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Other finite-lived intangible assets will continue to be amortized over their useful lives. Prior to fiscal 2003, goodwill and other intangible assets, principally trademarks and patents, were amortized using the straight-line method over periods ranging from 5 to 40 years for acquisitions prior to July 1, 2001. Property, Plant, and Equipment: Property, plant, and equipment are recorded at cost and are depreciated on a straight- line basis over the estimated useful lives of the assets (3 to 15 years for machinery and equipment, and 10 to 40 years for buildings, fixtures, and improvements). The Company leases certain land, buildings, and equipment for varying periods of time, with renewal options. Leases of cold storage facilities are continually renewed. Total rental expense in fiscal 2003, 2002, and 2001 totaled $17,324,000, $10,430,000, and $11,827,000, respectively. Rental expense for cold storage facilities, which is based on quantities stored, amounted to $2,801,000, $2,324,000, and $3,319,000 in fiscal 2003, 2002, and 2001, respectively. Impairment of Long-Lived Assets: Effective May 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of, to supply a single accounting approach for measuring impairment of long-lived assets, including finite-lived intangible assets, businesses accounted for as a discontinued operation, assets to be sold, and assets to be disposed of other than by sale. The initial adoption of SFAS 144 did not have a significant impact on the Company’s results of operations or financial position. Under SFAS 144, long-lived assets, except goodwill and indefinite-lived intangible assets, are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows estimated by the Company to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are recorded at the lower of carrying value or estimated net realizable value. Software Costs: The Company capitalizes significant costs associated with the development and installation of inter- nal use software. Amounts capitalized are amortized over the estimated useful lives of the software, ranging from three to seven years, beginning with the project’s completion. Net capitalized software costs as of April 30, 2003 and 2002, were $27,504,000 and $28,173,000, respectively, of which $4,400,000 and $3,484,000 were included in construction in progress. Shipping and Handling Costs: Shipping and handling costs are included in cost of products sold. Advertising Expense: Advertising costs are expensed as incurred. Advertising expense was $45,783,000, $15,525,000, and $14,178,000 in fiscal 2003, 2002, and 2001, respectively. Stock Compensation: As provided under Statement of Financial Accounting Standards No. 123, Accounting for Stock- Based Compensation (SFAS 123), the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 25 If compensation costs for the stock options granted had been determined based on the fair market value method of SFAS 123, the Company’s pro forma net income and earnings per share would have been as follows: (Dollars in thousands, except per share data) Net income, as reported Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit Net income, as adjusted Earnings per common share: Net income, as reported Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit Net income, as adjusted Net income, as reported – assuming dilution Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit – assuming dilution Net income, as adjusted – assuming dilution Year Ended April 30, 2003 2002 2001 $96,342 $30,851 $27,206 (2,581) (1,061) (1,188) $93,761 $29,790 $26,018 $ 2.04 $ 1.33 $ 1.13 (0.06) $ 1.98 $ 2.02 (0.04) (0.05) $ 1.29 $ 1.31 $ 1.08 $ 1.12 (0.06) (0.04) (0.05) $ 1.96 $ 1.27 $ 1.07 The fair value of each option grant was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Average expected term (years) Risk-free interest rate Dividend yield Volatility Fair value of options granted Year Ended April 30, 2003 5 4.08% 2.50% 27.70% $8.06 2001 5 5.75% 2.60% 27.00% $6.49 The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly sub- jective assumptions, including the expected share price volatility. Income Taxes: The Company accounts for income taxes pursuant to the asset and liability method. Under that method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Foreign Currency Translation: Assets and liabilities of the Company’s foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date, while income and expenses are translated using average rates. Translation adjustments are reported as a component of shareholders’ equity in accumulated other comprehensive loss. Recently Issued Accounting Standards: The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation —Transition and Disclosure (SFAS 148). SFAS 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), to provide alternative methods of transition when a company voluntarily changes to the fair value-based method of recognizing expense in the income statement for stock-based employee compensation, including stock options granted to employees. As allowed by SFAS 123, the Company has adopted the disclosure-only provisions of the standard and does not recognize compensation expense for stock options granted to employees. 26 In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit and disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Company’s consoli- dated financial statements. Risks and Uncertainties: In the domestic markets, the Company’s products are primarily sold through brokers to food retailers, food wholesalers, club stores, mass merchandisers, military commissaries, health and natural food stores, foodservice distributors, and chain operators including: hotels and restaurants, schools and other institutions, and other food manufacturers. The Company’s operations outside the United States is principally in Canada, Australia, and Brazil. The Company believes there is no concentration of risk with any single customer or supplier whose failure or nonperformance would materially affect the Company’s results. In addition, the Company insures its business and assets in each country against insurable risks, to the extent that it deems appropriate, based upon an analysis of the relative risks and costs. The Company believes that the risk of loss from noninsurable events would not have a mate- rial adverse effect on the Company’s operations as a whole. Reclassifications: Certain prior year amounts have been reclassified to conform to current year classifications. ■ Note B: Changes in Accounting Principle ■ Effective May 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). In accordance with SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Prior to the adoption of SFAS 142, amortization expense was recorded for goodwill and other intangible assets. The following table sets forth a reconciliation of net income and earnings per share information adjusted for the non- amortization provisions of SFAS 142. (Dollars in thousands, except per share data) Net income, as reported Goodwill and indefinite-lived intangible asset amortization, net of tax benefit Net income, as adjusted Earnings per common share: Net income, as reported Goodwill and indefinite-lived intangible asset amortization, net of tax benefit Net income, as adjusted Net income, as reported – assuming dilution Goodwill and indefinite-lived intangible asset amortization, net of tax benefit – assuming dilution Net income, as adjusted – assuming dilution Year Ended April 30, 2003 2002 2001 $96,342 $30,851 $27,206 — 2,177 2,347 $96,342 $33,028 $29,553 $ 2.04 $ 1.33 $ 1.13 — $ 2.04 $ 2.02 0.10 $ 1.43 $ 1.31 0.10 $ 1.23 $ 1.12 — 0.10 0.10 $ 2.02 $ 1.41 $ 1.22 In fiscal 2003, the Company completed its initial and annual impairment tests for goodwill, under SFAS 142. These tests confirmed that the fair value of the Company’s reporting units exceeds their carrying values, and that no impairment loss needed to be recognized for goodwill during fiscal 2003. 27 ■ ■ ■ ■ ■ Note C: Merger ■ On June 1, 2002, the Company merged the Jif peanut butter and Crisco shortening and oils businesses of The Procter & Gamble Company (P&G) with and into the Company in a tax-free stock transaction. Under the terms of the agreement, P&G spun off its Jif and Crisco businesses to its shareholders and immediately thereafter those businesses were merged with and into the Company. P&G shareholders received one Company common share for every 50 P&G common shares that they held as of the record date for the distribution of the Jif and Crisco businesses to the P&G shareholders. The Company’s shareholders received 0.9451 of a new Company common share for each Company common share that they held immediately prior to the merger. Approximately 26,000,000 common shares were issued to the P&G share- holders, valued at approximately $781,485,000 based on the average market price of the Company’s common shares over the period from three days before to three days after the terms of the merger were announced. Upon completion of the merger, the Company had 49,531,376 common shares outstanding. The conversion of the Company’s common shares into new Company common shares has been treated in a manner sim- ilar to a reverse stock split. All per share data for all periods presented have been restated to reflect the effects of the conversion. The merger and the combination of three brands—Smucker’s, Jif, and Crisco—enhances the Company’s strategic and market position. The merger was accounted for as a purchase business combination and for accounting purposes, the Company was the acquiring enterprise. Accordingly, the results of the Jif and Crisco operations are included in the Company’s consolidated financial statements from the date of the merger. The aggregate purchase price was approx- imately $792,252,000 including $10,767,000 of capitalized acquisition related expenses. In addition, the Company incurred costs of $10,511,000 and $5,031,000 in fiscal 2003 and 2002, respectively, that were directly related to the merger and integration of Jif and Crisco. Due to the nature of these costs, they were expensed as incurred. The assets acquired and liabilities assumed in the merger of the Jif and Crisco businesses were recorded at estimated fair values as determined by Company management. The Company obtained independent appraisals for the fair value of property, plant, and equipment and identified intangible assets. A summary of the assets acquired and liabilities assumed in the merger follows: (Dollars in thousands) Assets: Tangible assets Intangible assets not subject to amortization Intangible assets subject to amortization (ten year useful life) Goodwill Total assets acquired Total liabilities assumed Net assets acquired $ 138,152 305,000 1,000 488,950 $ 933,102 $(140,850) $ 792,252 The $488,950,000 of goodwill relates to the U.S. retail market segment and will not be deductible for tax purposes. Had the merger of the Jif and Crisco businesses with and into the Company occurred at the beginning of fiscal 2002, pro forma consolidated results would have been as follows: (Dollars in thousands) Net sales Operating income, excluding indirect expenses of the Jif and Crisco businesses Year Ended April 30, 2003 2002 $1,355,000 $1,283,000 $ 188,000 $ 235,000 28 ■ ■ ■ ■ ■ Note D: Restructuring ■ During fiscal 2003, the Company announced its plan to restructure certain operations as part of its ongoing efforts to optimize its production capacity, improve productivity and operating efficiencies, and lower the Company’s overall cost base. These initiatives include reducing the Company’s involvement in fruit processing, centralizing production and distribution of the Uncrustables product line, and significantly reducing the number of items available for sale. The program calls for the closing of three of the Company’s plants —Watsonville, California; Woodburn, Oregon; and West Fargo, North Dakota. The closings will result in the elimination of approximately 335 full-time positions. The Company expects to record a restructuring charge of approximately $18,000,000, of which $2,537,000 was recorded in fiscal 2003. The balance of the charge will be incurred over the next two fiscal years, with approximately $12,000,000 to be recorded in fiscal 2004. The following table summarizes the activity with respect to the restructuring and asset impairment charges recorded and reserves established during fiscal 2003 and the total amount expected to be incurred in connection with the initiative: (Dollars in thousands) Total expected restructuring charge Balance at April 30, 2002 Current period charges Current period utilization Balance at April 30, 2003 Remaining expected restructuring charge Employee Separation Long-Lived Asset Charges Equipment Relocation Other Costs Total $8,068 $ — 1,116 — $1,116 $6,952 $5,158 $ — 1,055 — $1,055 $4,103 $3,380 $ — — — $ — $3,380 $1,394 $ — 366 (366) $ — $1,028 $18,000 $ — 2,537 (366) $ 2,171 $15,463 Approximately $1,256,000 of the total restructuring charge of $2,537,000 was reported in costs of products sold in the accompanying Statements of Consolidated Income, while the remaining charges were reported in other restructuring costs. In accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, expected employee separation costs of approximately $8,068,000 are being recognized over the future service period. Long-lived asset charges include accelerated depreciation related to machinery and equipment that will be used by the production facilities until they close. During fiscal 2001, the Company finalized the sale of the Pottstown manufacturing facility, representing a continuation of the Company’s divestiture of the Mrs. Smith’s pie business. In connection with this sale, the Company recorded a non- cash restructuring charge of $2,152,000. ■ Note E: Reportable Segments ■ Effective June 1, 2002, the Company realigned its business segment structure in recognition of the changes resulting from the addition of the Jif and Crisco businesses. Prior year segment information has been restated to conform to the new structure. The Company operates in one industry: the manufacturing and marketing of food products. The Company has two reportable segments: U.S. retail market and special markets. The U.S. retail market segment includes the consumer and the consumer oils businesses. This segment represents the primary strategic focus area for the Company—the sale of branded food products with leadership positions to consumers through mainstream domestic retail outlets. The special markets segment represents the aggregation of the foodservice, international, industrial, and beverage businesses. Special markets segment products are distributed through foreign countries, foodservice distributors and operators (i.e., restaurants, schools and universities, health care operations), other food manufacturers, and health and natural food stores. 29 ■ ■ ■ ■ ■ ■ ■ ■ The following table sets forth reportable segment and geographical information: (Dollars in thousands) Net sales: U.S. retail market Special markets Total net sales Segment profit: U.S. retail market Special markets Total segment profit Interest income Interest expense Amortization expense Restructuring costs Merger and integration costs Corporate administrative expenses Other unallocated (expenses) income Income before income taxes and cumulative effect of change in accounting method Net sales: Domestic International Total net sales Assets: Domestic International Total assets Long-lived assets: Domestic International Total long-lived assets Year Ended April 30, 2003 2002 2001 $ 889,871 421,873 $323,636 363,512 $313,598 337,644 $1,311,744 $687,148 $651,242 $ 197,709 53,960 $ 68,691 42,788 $ 59,502 36,189 $ 251,669 $111,479 $ 95,691 2,039 (8,752) (1,817) (2,537) (10,511) (72,110) (2,591) 2,181 (9,207) (4,625) — (5,031) (46,681) 2,082 2,918 (7,787) (4,400) (2,152) — (39,443) (335) $ 155,390 $ 50,198 $ 44,492 $1,190,190 121,554 $590,327 96,821 $557,921 93,321 $1,311,744 $687,148 $651,242 $1,511,553 103,854 $438,644 86,248 $402,021 77,083 $1,615,407 $524,892 $479,104 $1,109,859 38,888 $211,380 33,699 $210,222 33,640 $1,148,747 $245,079 $243,862 Segment profit represents revenue less direct and allocable operating expenses. 30 The following table presents product sales information: Peanut butter Shortening and oils Fruit spreads Industrial ingredients Portion control Juices and beverages Toppings and syrups Other Total Year Ended April 30, 2003 26% 22 20 8 6 5 5 8 2002 7% — 37 16 11 10 8 11 2001 7% — 38 15 12 10 9 9 100% 100% 100% The following table sets forth the computation of earnings per common share and earnings per common share— assuming dilution: ■ Note F: Earnings per Share ■ (Dollars in thousands, except per share data) Numerator: Net income for earnings per common share and earnings per common share – assuming dilution Denominator: Denominator for earnings per common share – weighted-average shares Effect of dilutive securities: Stock options Restricted stock Denominator for earnings per common share – assuming dilution Net income per common share Net income per common share – assuming dilution Year Ended April 30, 2003 2002 2001 $96,342 $30,851 $27,206 47,309,257 23,114,494 24,032,113 366,629 88,891 318,104 60,767 140,535 76,971 47,764,777 23,493,365 24,249,619 $ 2.04 $ 2.02 $ 1.33 $ 1.31 $ 1.13 $ 1.12 A summary of changes in the Company’s goodwill during the year ended April 30, 2003, by reportable segment is as follows: ■ Note G: Goodwill and Other Intangibles ■ (Dollars in thousands) U.S. retail market Special markets Total Balance at April 30, 2002 $13,353 20,157 $33,510 Acquisitions $488,950 — $488,950 Other $ — 3,482 $3,482 Balance at April 30, 2003 $502,303 23,639 $525,942 31 ■ ■ ■ ■ ■ ■ ■ ■ The Company’s other intangible assets and related accumulated amortization is as follows: (Dollars in thousands) Finite-lived intangible assets: Patents Customer lists and formulas Total intangible assets subject April 30, 2003 April 30, 2002 Acquisition Accumulated Amortization Cost Net Acquisition Accumulated Amortization Cost Net $ 1,000 3,887 $ 91 583 $ 909 3,304 $ — 3,887 $ — 194 $ — 3,693 to amortization $ 4,887 $674 $ 4,213 $ 3,887 $194 $ 3,693 Indefinite-lived intangible assets: Trademarks $316,196 $ — $316,196 $11,132 $ — $11,132 Total intangible assets not subject to amortization Total other intangible assets $316,196 $321,083 $ — $674 $316,196 $320,409 $11,132 $15,019 $ — $194 $11,132 $14,825 Amortization expense for finite-lived intangible assets was approximately $480,000 in fiscal 2003. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding five years is $490,000. Pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, the Company is required to review goodwill and indefinite-lived intangible assets at least annually for impairment. The annual impairment review of all appropriate assets was performed as of February 1, 2003. ■ Note H: Pensions and Other Postretirement Benefits ■ The Company has pension plans covering substantially all of its domestic employees. Benefits are based on the employee’s years of service and compensation. The Company’s plans are funded in conformity with the funding requirements of applicable government regulations. In addition to providing pension benefits, the Company sponsors several unfunded, defined postretirement plans that provide health care and life insurance benefits to substantially all active and retired domestic employees not covered by certain collective bargaining agreements, and their covered dependents and beneficiaries. These plans are con- tributory, with retiree contributions adjusted periodically, and contain other cost-sharing features, such as deductibles and coinsurance. Covered employees generally are eligible for these benefits when they reach age 55 and have attained ten years of credited service. Net periodic benefit cost included the following components: (Dollars in thousands) Year Ended April 30, Service cost Interest cost Expected return on plan assets Amortization of prior service cost (credit) Amortization of initial net asset Recognized net actuarial loss (gain) Defined Benefit Pension Plans Other Postretirement Benefits 2003 2002 2001 2003 2002 2001 $3,121 5,976 (6,106) 1,239 (234) 131 $2,414 5,504 (6,444) 1,087 (234) (177) $2,133 5,303 (6,571) 1,086 (142) (823) $ 695 990 — (45) — (78) $ 506 737 — (61) — (160) $424 673 — (61) — (218) Net periodic benefit cost $4,127 $2,150 $ 986 $1,562 $1,022 $818 32 ■ ■ ■ ■ The following table sets forth the combined status of the plans as recognized in the Consolidated Balance Sheets: (Dollars in thousands) 2003 2002 2003 2002 Defined Benefit Pension Plans Other Postretirement Benefits April 30, April 30, Change in benefit obligation: Benefit obligation at beginning of the year Service cost Interest cost Amendments Acquisition Actuarial loss Participant contributions Benefits paid $ 81,453 3,121 5,976 5,252 — 15,331 — (3,415) $ 74,898 2,414 5,504 197 — 1,457 — (3,017) $ 11,788 695 990 214 2,018 6,908 205 (1,084) $ 9,991 506 737 — — 887 193 (526) Benefit obligation at end of the year $107,718 $ 81,453 $ 21,734 $ 11,788 Change in plan assets: Fair value of plan assets at beginning of the year Actual return on plan assets Company contributions Participant contributions Benefits paid $ 68,747 (4,160) 3,001 — (3,415) $ 72,685 (2,499) 1,578 — (3,017) $ — — 879 205 (1,084) $ — — 333 193 (526) Fair value of plan assets at end of the year $ 64,173 $ 68,747 $ — $ — Net amount recognized: Funded status of the plans Unrecognized net actuarial loss (gain) Unrecognized prior service cost (credit) Unrecognized initial asset $ (43,545) 26,836 13,345 (531) $(12,706) 1,370 9,332 (765) $(21,734) 4,553 (433) — $(11,788) (2,433) (692) — Net benefit liability recognized $ (3,895) $ (2,769) $(17,614) $(14,913) Accrued benefit liability Prepaid benefit costs Intangible asset Minimum pension liability Net benefit liability recognized Weighted-average assumptions: Discount rate Expected return on plan assets Rate of compensation increase $ (32,385) — 13,345 15,145 $(13,996) 5,589 4,410 1,228 $(17,614) — — — $(14,913) — — — $ (3,895) $ (2,769) $(17,614) $(14,913) 6.25% 9.00% 4.50% 7.25% 9.00% 4.50% 6.25% — — 7.25% — — For fiscal 2004, the assumed health care cost trend rates are 8.5 percent for all participants. The rate for participants under age 65 is assumed to decrease to five percent in fiscal 2008. The health care cost trend rate assumption has a sig- nificant effect on the amount of the other postretirement benefits obligation and periodic other postretirement benefits cost reported. A one-percentage point annual change in the assumed health care cost trend rate would have the fol- lowing effect as of April 30, 2003: (Dollars in thousands) Effect on total service and interest cost components Effect on benefit obligation One Percentage Point Increase Decrease $ 357 $4,031 $ (277) $(3,169) 33 Pension plan assets consist of listed stocks and government obligations, including 317,552 of the Company’s common shares at April 30, 2003 and April 30, 2002. The market value of these shares is $11,521,000 at April 30, 2003. The Company paid dividends of $245,000 on these shares during fiscal 2003. Prior service costs are being amortized over the average remaining service lives of the employees expected to receive benefits. The Company also charged to operations approximately $1,129,000, $958,000, and $870,000 in fiscal 2003, 2002, and 2001, respectively, for contributions to foreign pension plans and to plans not administered by the Company on behalf of employees subject to certain labor contracts. These amounts were determined in accordance with foreign actuarial computations and provisions of the labor contracts. The Company is unable to determine its share of either the accu- mulated plan benefits or net assets available for benefits under such plans. In addition, certain of the Company’s active employees participate in multiemployer plans that provide defined post- retirement health care benefits. The aggregate amount contributed to these plans, including the charge for net periodic postretirement benefit costs, totaled $2,316,000, $1,851,000, and $1,719,000 in fiscal 2003, 2002, and 2001, respectively. ■ Note I: Savings Plans ■ ESOP: The Company sponsors an Employee Stock Ownership Plan and Trust (ESOP) for certain domestic, nonrepre- sented employees. The Company has entered into loan agreements with the Trustee of the ESOP for purchases by the ESOP of the Company’s common shares in amounts not to exceed a total of 1,134,120 unallocated common shares of the Company at any one time. These shares are to be allocated to participants over a period of not less than 20 years. ESOP loans bear interest at one-half percentage point over prime and are payable as shares are allocated to participants. Interest incurred on ESOP debt was $406,000, $538,000, and $768,000 in fiscal 2003, 2002, and 2001, respectively. Contributions to the plan are made annually in amounts sufficient to fund ESOP debt repayment. Dividends on unal- located shares are used to reduce expense and were $368,000, $336,000, and $362,000 in fiscal 2003, 2002, and 2001, respec- tively. The principal payments received from the ESOP in fiscal 2003, 2002, and 2001 were $469,000, $364,000, and $297,000, respectively. As permitted by Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans, the Company will continue to recognize future compensation using the cost basis as all shares currently held by the ESOP were acquired prior to 1993. At April 30, 2003, the ESOP held 458,419 unallocated shares. All shares held by the ESOP were considered outstanding in earnings per share calculations for all periods presented. 401(k) Plan: The Company offers employee savings plans under Section 401(k) of the Internal Revenue Code for all domestic employees not covered by certain collective bargaining agreements. The Company’s contributions under these plans are based on a specified percentage of employee contributions. Charges to operations for these plans in fiscal 2003, 2002, and 2001 were $2,635,000, $1,445,000, and $1,421,000, respectively. ■ Note J: Stock Benefit Plans ■ The Company provides for equity-based incentives to be awarded to key employees through the 1998 Equity and Performance Incentive Plan, the Restricted Stock Bonus Plan adopted in 1979, and the 1987 Stock Option Plan, and to nonemployee directors through the Nonemployee Director Stock Option Plan adopted in fiscal 2002. 1998 Equity and Performance Incentive Plan: This plan provides for the issuance of stock options and restricted stock, which may include performance criteria, as well as stock appreciation rights, deferred shares, and performance shares. At April 30, 2003, there were 2,472,779 common shares available for future issuance under this plan. Of this total amount available for issuance, the amount of restricted stock available for issuance is limited to 891,726 common shares. Restricted stock issued under this plan is subject to a risk of forfeiture for at least three years in the event of termina- tion of employment or failure to meet performance criteria, if any. All restricted shares issued to date under the plan are subject to a four-year forfeiture period. Options granted under this plan become exercisable at the rate of one-third per year, beginning one year after the date of grant, and the option price is equal to the market value of the shares on the date of the grant. 34 ■ ■ ■ ■ ■ ■ ■ ■ Restricted Stock Bonus Plan: Shares awarded under this plan contain certain restrictions for four years relating to, among other things, forfeiture in the event of termination of employment and to transferability. Shares awarded are issued as of the date of the award and a deferred compensation charge is recorded at the market value of the shares on the date of the award. The deferred compensation charge is recognized as expense over the period during which restrictions are in effect. In fiscal 2002, 46,499 common shares were awarded under this plan. No awards were granted in fiscal 2001 and 2003. There are no common shares available for future issuance under this plan. 1987 Stock Option Plan: Options granted under this plan become exercisable at the rate of one-third per year, begin- ning one year after the date of grant, and the option price is equal to the market value of the shares on the date of the grant. There are 18,162 common shares available for future grant under this plan. Nonemployee Director Stock Option Plan: This plan provides for the issuance of stock options to nonemployee directors annually, on September 1 of each year. Options granted under this plan become exercisable six months after the date of grant, and the option price is equal to the market value of the shares on the date of the grant. There are 69,510 common shares available for future grant under this plan. A summary of the Company’s stock option activity, and related information follows: Outstanding at May 1, 2000 Granted Exercised Forfeited Outstanding at April 30, 2001 Granted Exercised Forfeited Outstanding at April 30, 2002 Granted Exercised Forfeited Outstanding at April 30, 2003 Exercisable at April 30, 2001 Exercisable at April 30, 2002 Exercisable at April 30, 2003 Weighted- Average Exercise Price $22.47 25.00 19.52 25.32 $23.41 — 24.96 31.63 $22.69 33.72 22.69 30.15 $28.03 $23.69 $22.45 $22.73 Options 2,496,692 388,408 (531,394) (168,532) 2,185,174 — (581,062) (29,424) 1,574,688 1,275,000 (220,356) (13,247) 2,616,085 1,518,431 1,279,258 1,258,103 The following table summarizes the range of exercise prices and weighted-average exercise prices for options out- standing and exercisable at April 30, 2003, under the Company’s stock benefit plans: Range of Exercise Prices $16.87–$24.99 $25.00–$36.64 Outstanding 688,899 1,927,186 Weighted- Average Exercise Price $19.99 $30.90 Weighted- Average Remaining Contractual Life (years) 4.8 7.9 Exercisable 688,899 569,204 Weighted- Average Exercise Price $19.99 $26.05 35 The following table summarizes the Company’s stock benefit plans in two categories—plans that have been approved by shareholders, and plans that have not: Plan Category Number of Common Shares to be Issued Upon Exercise of Outstanding Options Weighted-Average Exercise Price of Outstanding Options Stock benefit plans approved by shareholders Stock benefit plans not approved by shareholders Total stock benefit plans 2,616,085 — 2,616,085 $28.03 — $28.03 ■ Note K: Long-Term Debt and Financing Arrangements ■ Long-term debt consists of the following: (Dollars in thousands) 6.77% Senior Notes due June 1, 2009 7.70% Series A Senior Notes due September 1, 2005 7.87% Series B Senior Notes due September 1, 2007 7.94% Series C Senior Notes due September 1, 2010 Total long-term debt Number of Common Shares Available for Future Issuance Under Equity Compensation Plans 2,560,451 — 2,560,451 April 30, 2003 2002 $ 75,000 17,000 33,000 10,000 $ 75,000 17,000 33,000 10,000 $135,000 $135,000 The notes are unsecured and interest is paid semiannually. Among other restrictions, the note purchase agreements contain certain covenants relating to liens, consolidated net worth, and sale of assets as defined in the agreements. The Company is in compliance with all covenants. Interest paid totaled $10,613,000, $9,800,000, and $8,328,000 in fiscal 2003, 2002, and 2001, respectively. Financing arrangements: The Company has uncommitted lines of credit providing up to $120,000,000 for short-term bor- rowings. No amounts were outstanding at April 30, 2003. The interest rate to be charged on any outstanding balance is based on prevailing market rates. ■ Note L: Derivative Financial Instruments ■ The Company is exposed to market risks, such as changes in interest rates, currency exchange rates, and commodity pricing. To manage the volatility relating to these exposures, the Company enters into various derivative transactions. Commodity price management: In connection with the purchase of raw materials used by the Company’s consumer oils business, primarily soybean and canola oils, the Company enters into commodity futures and options contracts to manage the price volatility related to anticipated inventory purchases. The commodity futures contracts generally have maturities of less than one year, meet the hedge criteria according to Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and are accounted for as cash flow hedges. The mark-to-market gains or losses on qualifying hedges are deferred and included as a component of other compre- hensive income/loss to the extent effective, and then recognized in earnings in the period during which the hedged transaction affects earnings. In order to qualify as a hedge of commodity price risk, it must be demonstrated that the changes in the fair value of the commodities futures contracts are highly effective in hedging price risks associated with commodity purchases and related transportation costs. Hedge ineffectiveness is measured on a quarterly basis and the ineffective portion of gains and losses is recorded in cost of products sold in accordance with SFAS 133. As of April 30, 2003, the deferred gain included in accumulated other comprehensive loss was $236,000, net of tax. This entire amount is expected to be recognized in earnings during fiscal 2004. Gains on commodities futures contracts and options recognized in earnings during fiscal 2003 were $4,050,000. 36 ■ ■ ■ ■ ■ ■ ■ ■ Interest rate hedging: The Company’s policy is to manage interest cost using a mix of fixed- and variable-rate debt. To manage this mix in a cost efficient manner, the Company may periodically enter into interest rate swaps in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts cal- culated by reference to an agreed-upon notional principal amount. The interest rate swap agreements effectively modify the Company’s exposure to interest risk by converting a portion of the Company’s fixed-rate debt to a floating rate. The interest rate swap and the instrument being hedged is marked to market in the balance sheet. The mark-to- market value of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains or losses in other (expense) income. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination, and usually represents the net present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract. Any gains or losses upon the early termination of the interest rate swap contracts are deferred and recognized over the remaining life of the contract. During fiscal 2003, the Company terminated its interest rate swap agreements prior to maturity. These agreements were originally entered in fiscal 2002 and then subsequently again in December 2002. As a result of the early terminations, the Company received $4,092,000 in cash and realized a corresponding gain, which has been deferred. This deferred gain will be recognized in earnings over the remaining lives of the original swap agreements as a reduction of future interest expense. At April 30, 2003, the balance of the deferred gains related to the terminated swaps was $3,640,000 and is included in other noncurrent liabilities. Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and lia- bilities for financial reporting purposes and the amounts used for income tax reporting. Significant components of the Company’s deferred tax assets and liabilities are as follows: ■ Note M: Income Taxes ■ (Dollars in thousands) Deferred tax liabilities: Intangible assets Depreciation Software and other deferred expenses Change in inventory accounting method Other (each less than five percent of total liabilities) Total deferred tax liabilities Deferred tax assets: Postretirement benefits other than pensions Other employee benefits Pensions Intangible assets Marketing accruals Other (each less than five percent of total assets) Total deferred tax assets Valuation allowance for deferred tax assets Total deferred tax assets less allowance Net deferred tax liability April 30, 2003 2002 $118,925 28,109 6,408 — 1,574 $155,016 $ 7,217 7,267 6,715 4,041 2,036 3,915 31,191 (1,755) $ 29,436 $125,580 $ 872 10,150 4,898 1,769 910 $18,599 $ 6,136 5,091 — 4,146 405 2,825 18,603 (1,560) $17,043 $ 1,556 The Company has recorded a valuation allowance related to certain foreign deferred tax assets due to the uncertainty of their realization. Domestic income and foreign withholding taxes have not been recorded on undistributed earnings of foreign sub- sidiaries since these amounts are considered to be permanently reinvested. Any additional taxes payable on the earn- ings of foreign subsidiaries, if remitted, would be partially offset by domestic tax credits and deductions for foreign taxes already paid. 37 ■ ■ ■ ■ Income before income taxes and cumulative effect of change in accounting method is as follows: (Dollars in thousands) Domestic Foreign Income before income taxes and cumulative effect of change in accounting method The components of the provision for income taxes are as follows: (Dollars in thousands) Current: Federal Foreign State and local Deferred Total income tax expense Year Ended April 30, 2003 2002 2001 $147,581 7,809 $44,668 5,530 $40,809 3,683 $155,390 $50,198 $44,492 Year Ended April 30, 2003 2002 2001 $ 53,767 2,881 6,080 (3,680) $ 59,048 $13,447 2,449 1,906 1,545 $10,681 1,938 1,635 2,040 $19,347 $16,294 A reconciliation of the statutory federal income tax rate and the effective income tax rate follows: Percent of Pretax Income (Dollars in thousands) Statutory federal income tax rate Increase (decrease) in income taxes resulting from: State and local income taxes, net of federal income tax benefit Research credits Other items Effective income tax rate Income taxes paid Year Ended April 30, 2003 35.0% 2.5 (0.1) 0.6 2002 35.0% 2.5 (1.9) 2.9 2001 35.0% 2.1 (0.8) 0.3 38.0% 38.5% 36.6% $ 46,119 $18,003 $19,783 ■ Note N: Accumulated Other Comprehensive Loss ■ Comprehensive income is included in the Statements of Consolidated Shareholders’ Equity. The components of accu- mulated other comprehensive loss as shown on the Consolidated Balance Sheets are as follows: (Dollars in thousands) Balance at May 1, 2000 Current period charge Income tax benefit Balance at April 30, 2001 Current period (credit) charge Income tax benefit Balance at April 30, 2002 Current period (credit) charge Income tax (benefit) expense Balance at April 30, 2003 Minimum Pension Liability $ — — — $ — 1,228 (431) $ 797 13,917 (5,288) $ 9,426 Loss on Available- for-Sale Securities $ — — — $ — — — $ — 477 (181) $ 296 Foreign Currency Translation Adjustments $ 9,327 7,308 — $16,635 (1,669) — $14,966 (8,268) — $ 6,698 38 Gains on Cash Flow Accumulated Other Hedging Comprehensive Loss Derivatives $ — — — $ — — — $ — (381) 145 $(236) $ 9,327 7,308 — $16,635 (441) (431) $15,763 5,745 (5,324) $16,184 ■ ■ ■ ■ ■ Note O: Common Shares ■ Reclassification of Common Shares: In August 2000, the Company combined its Class A and Class B common shares into a single class of common shares with terms similar to the former Class A common shares. In conjunction with this combination, on August 28, 2000, the Company repurchased 4,037,962 common shares at $19.57 per share. The Company incurred approximately $1,363,000 of cost related to the combination and repurchase of common shares. Such costs were recorded as a reduction of shareholders’ equity. Voting: The Company’s Amended Articles of Incorporation provide that holders of the Company’s common shares gen- erally will be entitled to cast one vote per share on matters submitted to a vote of the shareholders. There are certain matters specified in the Amended Articles (including any matters that relate to or would result in the dissolution or liq- uidation of the Company; the amendment of the articles of incorporation or regulations of the Company other than any amendment that increases the number of votes to which holders of new common shares are entitled or expand the mat- ters to which time phase voting applies; any proposal or other action to be taken by shareholders relating to the Company’s shareholder rights plan or any successor plan; any matter relating to any benefit, stock option, compensa- tion, or other similar plan; any matter that relates to or may result in a change in control of the Company including any merger, consolidation, majority share acquisition, control share acquisition, sale or other disposition of all, or substan- tially all, of the Company’s assets; or any matter relating to the issuance, redemption, or repurchase of shares of the Company or any of its subsidiaries), however, with respect to which parties acquiring the Company’s common shares will be entitled to cast one vote per share until they have held their shares for four years, after which time they will be entitled to cast ten votes per share on those specified matters. Shareholders’ Rights Plan: Pursuant to a shareholders’ rights plan established during fiscal 1999, one share purchase right is associated with each of the Company’s outstanding common shares. Under the plan, the rights will initially trade together with the Company’s common shares and will not be exercisable. In the absence of further action by the directors, the rights generally will become exercisable and allow the holder to acquire the Company’s common shares at a discounted price if a person or group acquires ten percent or more of the outstanding common shares. Rights held by persons who exceed the applicable thresholds will be void. Shares held by members of the Smucker family are not subject to the thresholds. If exercisable, each right entitles the shareholder to buy one common share at a discounted price. Under certain circumstances, the rights will entitle the holder to buy shares in an acquiring entity at a discounted price. The plan also includes an exchange option. In general, if the rights become exercisable, the directors may, at their option, effect an exchange of part or all of the rights, other than rights that have become void, for common shares. Under this option, the Company would issue one common share for each right, in each case subject to adjustment in certain circumstances. The Company’s directors may, at their option, redeem all rights for $0.01 per right, generally at any time prior to the rights becoming exercisable. The rights will expire May 14, 2009, unless earlier redeemed, exchanged, or amended by the directors. 39 ■ ■ ■ ■ Directors, Officers, and General Managers ■ ■ ■ The J. M. Smucker Company Directors Vincent C. Byrd Officers & General Managers Richard K. Smucker John W. Denman Vice President and General Manager, President, Co-Chief Executive Officer, Assistant Corporate Controller Consumer Market The J. M. Smucker Company R. Douglas Cowan Chairman and Chief Executive Officer The Davey Tree Expert Company Kent, Ohio Kathryn W. Dindo Vice President and Chief Risk Officer FirstEnergy Corp. Akron, Ohio Fred A. Duncan Vice President – Special Markets The J. M. Smucker Company Elizabeth Valk Long Former Executive Vice President Time Inc. New York, New York Charles S. Mechem, Jr. Retired Chairman Convergys Corporation Cincinnati, Ohio and Chief Financial Officer Timothy P. Smucker Chairman and Co-Chief Executive Officer Mark R. Belgya Treasurer Vincent C. Byrd Vice President and General Manager, Consumer Market Barry C. Dunaway Vice President – Corporate Development Fred A. Duncan Vice President – Special Markets Robert E. Ellis Vice President – Human Resources M. Ann Harlan General Counsel and Secretary Donald D. Hurrle, Sr. Gary A. Oatey Vice President – Sales, Grocery Market Chairman and Chief Executive Officer Oatey Company Cleveland, Ohio Richard K. Smucker President, Co-Chief Executive Officer, and Chief Financial Officer The J. M. Smucker Company Timothy P. Smucker Chairman and Co-Chief Executive Officer The J. M. Smucker Company William H. Steinbrink Partner Jones Day Cleveland, Ohio Richard G. Jirsa Vice President – Information Services and Corporate Controller John D. Milliken Vice President – Logistics and Western Operations Steven Oakland Vice President and General Manager, Consumer Oils Mark T. Smucker Vice President and General Manager, International Market Richard F. Troyak Vice President – Operations Paul Smucker Wagstaff Vice President and General Manager, Foodservice Market Adam M. Ekonomon Assistant Secretary Debra A. Marthey Assistant Treasurer Gary A. Jeffcott General Manager, Industrial Market Julia L. Sabin General Manager, Beverage Market Properties Corporate Offices: Orrville, Ohio Domestic Manufacturing Locations: Chico, California Cincinnati, Ohio Havre de Grace, Maryland Lexington, Kentucky Memphis, Tennessee New Bethlehem, Pennsylvania Orrville, Ohio Ripon, Wisconsin Salinas, California West Fargo, North Dakota* Fruit Processing Locations: Grandview, Washington Oxnard, California Watsonville, California Woodburn, Oregon International Manufacturing Locations: Kyabram, Victoria, Australia Livingston, Scotland São José do Rio Pardo, Brazil Ste-Marie, Quebec, Canada Sales Offices: * Bentonville, Arkansas Carlton, Victoria, Australia Mexico City, Mexico São Paulo, Brazil Staffordshire, England Toronto, Ontario, Canada *Leased properties 40 Shareholder Information The J. M. Smucker Company ■ ■ ■ Stock Listing The J. M. Smucker Company’s common Shareholder Inquiries Inquiries regarding dividend payments, shares are listed on the New York Stock loss or nonreceipt of a dividend check, Exchange — ticker symbol SJM. address changes, stock transfers (including Company’s Principal Place of Business The J. M. Smucker Company Strawberry Lane Orrville, Ohio 44667 (330) 682-3000 Annual Meeting The annual meeting will be held at 11:00 a.m. Eastern Daylight Time, Thursday, August 14, 2003, in the Fisher Auditorium at the Ohio Agricultural Research and Development Center 1680 Madison Avenue Wooster, Ohio Transfer Agent and Registrar for the Company’s Shares The transfer agent and registrar for the Company’s common shares is: Computershare Investor Services, LLC 2 North LaSalle Street P.O. Box A3504 Chicago, Illinois 60602-3504 (800) 456-1169 The transfer agent has primary responsibility for administering the Form 10-K A copy of the Company’s Form 10-K is common shares held by registered share- holders in the direct registration system, available on the Company’s Web site at share transfers, payment of dividends www.smuckers.com. It is also available whether by check or reinvestment, and without cost to shareholders who request issuance of Form 1099 information. it by writing to: The J. M. Smucker Company Strawberry Lane Orrville, Ohio 44667 Attention: Secretary Dividend Reinvestment/Direct Stock Purchase Plan Computershare Trust Company, Inc. sponsors and administers a direct stock purchase plan that includes dividend reinvestment, Computershare BYDSSM, for investors in common shares of The J. M. Smucker Company. The plan brochure can be downloaded from www.computershare.com. Dividends The Company’s Board of Directors normally declares a cash dividend each quarter. Dividends are generally payable on the first business day of March, June, September, and December. The record date is two weeks before the payment date. The Company’s dividend disburse- ment agent is Computershare Investor Services, LLC. name changes, gifts, and inheritances), lost share certificates, and Form 1099 information should be addressed to: Computershare Investor Services, LLC 2 North LaSalle Street P.O. Box A3504 Chicago, Illinois 60602-3504 (800) 456-1169 All questions, inquiries, remittances, and other correspondences related to direct stock purchases and dividend reinvestment services should be addressed to: Computershare Investor Services, LLC 2 North LaSalle Street P.O. Box A3309 Chicago, Illinois 60602-3309 (800) 456-1169 All other inquiries may be directed to: The J. M. Smucker Company Shareholder Relations Strawberry Lane Orrville, Ohio 44667 (330) 684-3838 For Additional Information To learn more about The J. M. Smucker Company, visit us at www.smuckers.com. Independent Auditors Ernst & Young LLP 222 South Main Street Akron, Ohio 44308 This annual report includes certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Please reference “Certain Forward-Looking Statements” located on page 17 in the Management’s Discussion and Analysis section. Twix and Milky Way are registered trademarks of Mars, Inc. All other brand references in italics throughout this Annual Report represent trademarks of The J. M. Smucker Company. All the Goodness ofSmucker’s® In a Store ■ ■ ■ You’ve come to love our delicious jams, jellies, and toppings. Now there’s a store with a whole lot more. It’s Simply Smucker’s, a showcase store brimming with all of your favorites. We have over 300 different flavors and varieties, as well as a wide array of household accessories, specialty gifts and gift baskets. We’re just south of Orrville, so stop by when you’re in the neighborhood, or learn more about us online at www.smuckers.com. ■ ■ ■ 333 Wadsworth Road (Rt. 57, one-quarter mile north of Rt. 30) Orrville, Ohio 44667 (330)684-1500 Monday – Saturday 9:00 a.m. to 6:00 p.m. Closed Sunday ©2003 The J. M. Smucker Company The J. M. Smucker Company Strawberry Lane Orrville, Ohio 44667 (330)682-3000 www.smuckers.com