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. 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.  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.  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. Results of Operations Comparison of fiscal 2003 with fiscal 2002 Management’s Discussion and Analysis 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 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. 12