Last week’s question and answer

Founded in 1889 and employing about 8,000 people today, I’m the world leader in the making, marketing and distribution of spices, seasonings and flavors to the entire food industry. One of my brand names is Zatarain’s. My industrial division serves most of the top 100 food processors, restaurant chains, distributors and warehouse clubs, offering spices, blended seasonings, condiments, coatings and compound flavors. My name may not be on many packages, but my products are in a wide range of snack foods, savory side dishes, desserts, beverages, confectionery items, cereals, baked goods and more. Who am I? (Answer: McCormick)

Thinner and poorer

I once saw an article about a new product to help people lose weight. It worked great, instantly killing my appetite. I contacted the company and was convinced of the potential for numerous products. The firm also seemed close to being purchased by a big drug company. The owner kept convincing me that everything was going as planned. After a year of buying more than 100,000 shares, I was shocked one day to find that the company was locked and trades frozen. A lawyer contacted shareholders to save the company. I put up several grand. A few months later, the company went bankrupt. — Stan Victoriano, Vacaville, Calif.

The Fool Responds: Ouch. After companies go bankrupt, holders of common stock are typically left with shares worth nothing or close to nothing. You were on the right track investing in a company you were familiar with and whose products you liked. But that’s not enough. You must learn whether the firm has the funds, strategies and competence to compete and succeed in the marketplace. You can invest with less risk by focusing on bigger, older firms with established track records.

Highly capitalized

What does it mean if a company is “highly capitalized”? — R.M., Tuscaloosa, Ala.

It might suggest that a company is asset-heavy, overloaded with unproductive assets such as cash. Lots of cash is generally good for a company, but if it’s just sitting around unused, that’s not ideal.

The term might also suggest that the firm’s market capitalization is too high. Market capitalization is the total price tag the market slaps on a company; it’s calculated by multiplying the current share price by the total number of shares.

Is Pepsi losing fizz?

There were plenty of things to like about PepsiCo’s (NYSE: PEP) strong second-quarter results.

For the quarter, net income increased 12 percent, with sales growing 8 percent. Snack sales increased by 6 percent, while beverages were up 10 percent. Still, weak sales of some of its snacks, such as Quaker’s Crisp’ums and Fruit & Oatmeal Toastables, caused Pepsi to lower its earnings outlook.

Many see Pepsi’s snack portfolio, featuring brands such as Tostitos, Ruffles, Lay’s, Fritos, Doritos and Cheetos, as an advantage over rival Coca-Cola (NYSE: KO).

PepsiCo is more diversified, though with Atkins and South Beach low-carb diets all the rage, snacks have been a tougher sell.

In the drink category, Pepsi’s vanilla-flavored Pepsi, launched last year, is doing well. Many are likely waiting to see how the new mid-calorie, mid-carb Pepsi Edge fares. There already are rumors that Coke’s competing C2 is gearing up to be a high-profile flop, and not least of the reasons is the predicted abatement of interest in low-carb options. And of course, an ebbing of the low-carb craze will bode well for Pepsi’s snack line.

Maybe PepsiCo’s slightly lowered guidance is a tad disappointing after last year’s stellar 21 percent earnings gain, but when thinking about the long term, Pepsi has shown that it’s resilient and in tune with consumer trends and innovations. Given this, the recent troubles may be just a temporary dip.

Tax tips II

These tax tips may help you pay less to Uncle Sam in 2004.

• Have you recently refinanced your home? You may be able to take advantage of a deduction for points paid on your mortgage.
• If you use your auto for charitable purposes, you can deduct 14 cents per mile for qualified charitable travel. You also can deduct out-of-pocket expenses when serving a qualified organization. If you use your auto for medical travel, such as for doctor visits, medical travel is deductible at 14 cents per mile in 2004. If you travel far for medical treatment, airfare and lodging also can be deductible.
• Donating an old car can get you a great deduction.
• Consider shifting your income to your children, perhaps by giving them appreciated stock.

You might want to wait until a child turns 14 to avoid the child tax rules. If you gift the stock to a child and the child then sells the stock, the long-term gain will be taxed at the child’s tax rate, which is likely much lower than your 15 percent rate. Depending on the child’s other income and the amount of the gain, the tax on the gain could be zero.

• Look into the new depreciation rules on assets purchased this year. You’ll receive a 50 percent first-year bonus depreciation for qualifying assets purchased after May 5, 2003, and you might be able to deduct the full cost of business equipment purchased up to $100,000 in the first year. Both of these benefits are set to expire at the end of 2004.
• If you’re an unincorporated business owner, consider putting your children or other lower-income family members on the payroll. Children younger than 18 won’t have to pay any Social Security/Medicare (FICA) taxes on their wages, and those younger than 21 aren’t subject to Federal Unemployment Tax Act (FUTA) taxes. With the 2004 standard deduction at $4,850, you can pay that amount to your child with no income tax consequences.