EXHIBIT 13.1
J & J SNACK FOODS CORP.
1998 ANNUAL REPORT
TO SHAREHOLDERS
115
Positioned to Welcome a New Era of Growth
1998 Annual Report
6000 Central Highway.Pennsauken, NJ 08109.(609) 665-9533
www.jjsnack.com
Profile
J&J Snack Foods Corp. is a manufacturer, marketer and distributor of an
expanding variety of nutritional, popularly priced, branded snack foods and
beverages for the food service and retail supermarket industries. The
Company is listed on the NASDAQ exchange as "JJSF," and serves both
national and international markets.
Our growing portfolio of products includes soft pretzels; frozen carbonated
beverages; frozen juice bars and desserts; churros, a cinnamon pastry;
funnel cakes; cookies and bakery goods; and other snack foods and drinks.
Consumers can enjoy these tasty products in a variety of settings,
including:
* Snack bars and food stands in leading chain, department, discount and
convenience stores
* Malls and shopping centers
* Fast food outlets
* Stadiums and sports arenas
* Leisure and theme parks
* Movie theatres
* Schools and colleges
* Business and industry and other institutions
* Supermarkets and warehouse club stores
As we prepare for the future, J&J Snack Foods Corp. plans to continue
expanding its unique product offerings and market niches, capitalizing on
new opportunities wherever they may be found.
Contents
Financial Highlights 1
Letter From the President 2
Our Family of Brands 4
Soft Pretzels 5
Frozen Carbonated Beverages (FCB) 8
Frozen Desserts 10
Other Snacks 12
Financial Information 14
Corporate Information 29
Financial Highlights
Fiscal year ended in September
(In thousands except per share data)
1998 1997 1996 1995 1994
Net Sales $ 262,390 $ 220,318 $ 186,018 $ 185,362 $ 174,425
Net Earnings $ 11,850 $ 8,159 $ 5,843 $ 5,804 $ 8,532
Total Assets $ 213,261 $ 136,827 $ 123,128 $ 123,309 $ 127,366
Long-Term Debt $ 48,199 $ 5,028 $ 5,010 $ 5,011 $ 5,028
Stockholders'
Equity $ 119,681 $ 105,904 $ 96,708 $ 96,084 $ 100,545
Common Share Data
Earnings Per
Diluted Share $ 1.26 $ .91 $ .65 $ .61 $ .82
Earnings Per
Basic Share $ 1.32 $ .93 $ .65 $ .62 $ .84
Book Value
Per Share $ 13.25 $ 11.97 $ 11.05 $ 10.53 $ 10.17
Common Shares
Outstanding
At Year End 9,036 8,850 8,749 9,126 9,889
Letter from the President
"Give me your tired, your poor, your huddled masses, yearning to breathe
free. . ." so began poet Emma Lazarus' famous sonnet that was eventually
displayed and made famous with the Statue of Liberty.
We took some creative liberty by placing two of our famous brands, a
SUPERPRETZEL soft pretzel and an ICEE drink, in her gentle but strong
hands. Historical and patriotic monuments aside, both our Company and
these product lines stand as testaments to opportunities and success
stories found only in America.
We had a good year in fiscal '98. No. . .we had a VERY good year and we
are extremely proud of our people and their performance.
1998 Results in Brief
We achieved record sales and earnings for fiscal 1998. For the 27th
consecutive year we increased sales from the prior year. In fiscal '98:
* Sales increased 19% to $262,390,000 from $220,318,000
* Net income rose 45% to $11,850,000 from $8,159,000
* EPS climbed 38% to $1.26 from $.91
And, we continued the growth momentum that we established and have been
sustaining the past few years with further expansion of both our products
and markets.
"The Thinker" - Visions of Tomorrow
I can't speak for Rodin or what "The Thinker" was contemplating, but I can
assure you that my thoughts and those of our management team constantly
revolve around our efforts to grow our business and increase shareholder
value. This past year's performance was due in large part to strategies
and decisions developed over the years which were carefully and decisively
implemented.
Developing and Growing our Niches
Soft pretzel sales again posted an increase in fiscal 1998, led by our
flagship brand, SUPERPRETZEL. Soft pretzel consumption opportunities and
menu positioning ideas continue to be created and developed by our Food
Service and Retail Supermarket divisions. Traditional markets and
occasions of incidence are being expanded by a variety of newly developed
soft pretzel products and eating suggestions. This includes filled soft
pretzel sticks as appetizers, soft pretzel buns and rolls being tested by
restaurants, and Pretzel Gourmet Express, a line of gourmet upscale soft
pretzel products for business and college campus dining. An exciting and
aggressive marketing program to grow our supermarket soft pretzel business
featuring television and billboard advertising is being tested in select
markets beginning in fiscal 1999.
Our West Coast Bakery had an excellent year posting increased sales and
sharp improvements in manufacturing efficiency. Churros and funnel cake
sales also had strong sales gains and further developed their markets and
geography.
Not all was "cool" in J&J land. Like Rodin's "The Thinker", we need to
"think harder and better" in connection with our Scranton plant and frozen
dessert lines, including LUIGI'S and MAMA TISH'S Italian ices and SHAPE-UPS
frozen desserts. Sales and profits were impacted this past year due in
part to delays and start-up problems in connection with the expansion of
our plant.
ICEE - The Vision and Opportunity
Our frozen beverage division now known as The ICEE Company had another
excellent year. Sales grew a whopping 75% with a significant part of the
increase coming from the acquisition of National ICEE in December 1997.
While the acquisition represented a key and significant step to growing
the ICEE brand nationwide, equally important, we were able to consolidate
and integrate the combined entities quickly and efficiently to maximize
operations.
Our vision and strategy for the frozen beverage business mirrors, in large
part, a similar vision and strategy experienced in our soft pretzel
business. We acquired ICEE-USA in May 1987 - an unprofitable company with
sales of $13 million selling, at the time, only in the West. Our vision -
a national company with the dominant brand that would someday be sold
coast-to-coast (internationally too) and complement our snack food
products. Now, further enhanced with a strategic alliance with Coca-Cola,
the world's leading soft drink company, we are excited with the
opportunities to maximize our ICEE frozen beverage business.
Looking ahead to fiscal 1999, we believe we are well positioned to continue
our plans in this land of opportunity. Twenty-seven years ago, I bought
the assets of a bankrupt soft pretzel company with just eight employees
and only $400,000 in sales. And along the way, we acquired other troubled
businesses and defunct product lines also in need of a new opportunity or
another chance. "Give me your tired, your poor, your huddled masses. . ."
- only in America. We remain committed and dedicated to growing our
business and extremely enthused with the opportunity!
Sincerely,
Gerald B. Shreiber
President and Chairman
December 1, 1998
Soft Pretzles: Building on Monumental Success
When a product has one good year, it's a success. When it has several good
years, it's a phenomenon. And when it records more than 25 great years, it
becomes nothing less than an institution.
That's the story of SUPERPRETZEL, America's Favorite Soft Pretzel.
Thanks to the enduring strength of SUPERPRETZEL, our flagship brand, J&J
Snack Foods is the largest manufacturer of soft pretzels in the world. In
fiscal 1998, our Food Service division increased soft pretzel sales by 5%.
With a brand that's part of the American landscape, we're well positioned
to lead the soft pretzel category into the next millennium.
Sold Wherever Appetites are Found
We're proud to say that SUPERPRETZELs are sold just about everywhere.
They're available at tens of thousands of high-traffic snack bars across
the country in malls and shopping centers, chain stores, convenience
stores, stadiums and sports arenas, amusement, leisure and theme parks,
schools and colleges, movie theatres, business and industry cafeterias,
fast food outlets, supermarkets and warehouse club stores.
The Anatomy of a Pretzel Sale
The eye catches a glimpse of a brightly colored merchandiser that displays
warm, soft pretzels. The senses are stimulated. The appetite is engaged.
The brain agrees. The hand reacts. A sale is made.
This scenario, repeated hundreds of thousands of times each day, is the key
to the success of SUPERPRETZEL soft pretzels. It's a matter of being in
the right place at the right time - with the right product and promotion.
And in fiscal 1998, we were in more of the right places than ever, having
ramped up our merchandising initiatives at several major accounts to gain a
larger share of their consumer snack purchases. One result: At a key
account, our innovative custom display cases boosted sales by an impressive
22%.
Making Soft Pretzel History in Schools
SUPERPRETZEL soft pretzels are a real lesson in how to provide both
nutrition and fun to America's schoolchildren. For nutrition, they satisfy
bread requirements for U.S.D.A. approved school lunch and breakfast
programs, making them a natural fit for both menu and a la carte sales.
For fun, they provide a delicious treat that kids love.
To make SUPERPRETZEL even more fun, J&J has created special promotions that
help boost the holiday spirit in schools. These promotions include
specialty-shaped SUPERPRETZEL soft pretzels, such as snowmen and
shamrocks, in conjunction with our frozen desserts. It's a combination
that delights school food service directors and students alike.
"What's the Pretzel du Jour?"
With today's busy lifestyles, Americans are dining out more than ever. And
J&J is there.
Our diverse family of soft pretzel products is gaining popularity with
customers at more and more restaurants nationwide, thanks in part to an
aggressive, channel-specific marketing program. This program includes a
print advertising campaign that gives restaurateurs new ideas on how to add
our shaped, flavored and filled varieties to their menus.
J&J also continues to innovate with new restaurant-oriented products like
Gourmet Soft Pretzel Buns, a delicious alternative to an ordinary hot dog
bun that adds an exciting twist to an all-American favorite. We've teamed
up with a leading hot dog chain to launch this new value-added menu item at
all their locations.
Merchandising our Success
In the food service business, great products aren't enough. You've got to
merchandise, merchandise, merchandise. J&J has become one of the
industry's most respected providers of merchandising and branded programs,
offering a wide variety of point-of-sale materials, display cases and
specialty mobile merchandisers. These items, which prominently display our
eye-catching SUPERPRETZEL graphics, provide food service customers with
everything they need to highlight our products - even in non-traditional
locations.
One of our growing branded programs is the upscale PRETZEL GOURMET EXPRESS
(PGX), which targets colleges, businesses, theme parks, stadiums and
arenas. PGX is becoming a hit with customers because it provides a
complete package that includes proprietary merchandising equipment and
point-of-sale materials. Best of all, it features our premium line of
delicious raw and baked flavored soft pretzels. Simply irresistible.
Supermarket. SUPERPRETZEL. Super Challenge.
In the supermarket, our SUPERPRETZEL brand continues to lead its category,
with a commanding 74% market share. However, the supermarket freezer case
where our products are sold continues to be a challenging environment,
with our soft pretzel sales declining by 11% in fiscal 1998. This was
largely due to the discontinuation of underperforming product lines as well
as increased competition in the hot snacks/appetizers category. We are
increasing our consumer driven marketing activities to reverse the trend in
this important category, including television and billboard advertising in
select markets beginning in fiscal 1999.
SUPERPRETZEL SOFTSTIX, which combine SUPERPRETZEL soft pretzel sticks with
KRAFT* cheese filling, experienced a substantial turnaround, with a 13%
sales gain. This can be attributed to both increased sales and
distribution as well as a successful co-branding agreement with KRAFT.
In addition, we redesigned both the supermarket and warehouse club
SUPERPRETZEL packages to highlight the consumer benefits of convenience and
ease of preparation. This redesign and update is part of a total marketing
strategy that is being launched at the start of fiscal 1999. We look
forward to generating good news in the months ahead.
(*KRAFT and the KRAFT logo are registered trademarks owned and licensed by
Kraft General Foods, Inc.)
Going and Growing Where the Traffic Is
Our chain of BAVARIAN PRETZEL BAKERY and PRETZEL GOURMET retail stores,
operated by the J&J Restaurant Group, delivered an 8% sales gain during
fiscal 1998. Located in regional malls primarily in the Mid-Atlantic
states, the chain benefited from a combination of the addition of co-
branded products and improved operating performance. During the year we
closed several poorly performing stores which will have a positive impact
in fiscal 1999.
Frozen Carbonated Beverages (FCB): The People's Choice
ICEE: Now One Company, Indivisible
It's official: From New York to California, from the Arctic regions of
Canada to the tropics of Mexico, The ICEE Company is the source for the
popular and refreshing line of ICEE products. In December 1997, we
acquired National ICEE Corporation which had distributed ICEE frozen
carbonated beverages and products throughout the eastern half of the
country, while our subsidiary, ICEE-USA, distributed in the western United
States.
And now we are one.
The ICEE Company now sells the ICEE brand in over 90% of the U.S. as well
as Canada and Mexico and in addition, sells ARCTIC BLAST and other brands
in select markets. Plans are developing for international market expansion
as well. Thanks to an ICEE-smooth consolidation effort, we achieved a
soaring sales increase of 72% in beverage sales alone for the fiscal year.
ICEE - A "Too Cool" Brand
Consumers can't get enough of our refreshing ICEE drinks, which are served
from proprietary dispensing equipment and can be enjoyed with a straw or a
spoon. They're an ultra-satisfying treat that people of all ages enjoy
year-round. ICEE beverages are now available at over 17,000 food service
locations nationally, many of which also sell our SUPERPRETZEL soft
pretzels and other snack foods.
More locations are being added all the time. During fiscal 1998, we
installed several new major account outlets, and began testing in a number
of fast food chains across the country. We pledge not to stop until
there's an ICEE in the chilly hands of every consumer.
ICEE and Coca-Cola*: Partners For Growth
This past year ICEE joined Coca-Cola in an exciting new venture that offers
great potential in the frozen beverage category for both of these all-
American favorites. We've entered into a long-term marketing agreement
that combines ICEE's operational and service system expertise with the
marketing power of Coca-Cola. In the years ahead, we'll be leveraging this
agreement to expand our business with new selling opportunities for frozen
beverages featuring ICEE and Coca-Cola.
(*"Coca-Cola" is a trademark of The Coca-Cola Company.)
Focused on the Fundamentals
The ICEE Company is more than just great tasting beverages and exciting
brand names. Behind the scenes, there's a modern infrastructure that
maintains our equipment in peak condition, and keeps our trade customers
satisfied.
To stay the best in the business, we've expanded and relocated our training
facility. This technical service center, known as FCB University, provides
comprehensive training and education to keep pace with our planned growth.
In addition, we continue to invest in our centralized Customer Service
Center, which supports our branches and service technicians by providing
state-of-the-art "Service Excellence" to our 17,000+ and growing customer
base.
We continue to improve on the performance and reliability of our beverage
dispensing equipment. This, together with specialized, unique
distribution systems, will help The ICEE Company remain the leader in the
frozen beverage industry.
Frozen Desserts: Ringing in the New
Building for the Future
In fiscal 1998, we completed a major modernization and expansion of our
Italian ice and frozen dessert plant in Scranton, Pennsylvania. This
facility, which was expanded in part to accommodate the MAMA TISH'S
acquisition of a year ago, has more than doubled its production capacity.
And today, modernization has resulted in measurable product quality
improvements that add value to our brands.
Two Category Leaders Get New Images
Combined retail supermarket sales of LUIGI'S and MAMA TISH'S Italian ices
grew by 3% in fiscal 1998, led by an increase of 9% for the LUIGI'S brand.
These two brands continue to lead the category as two of the top selling
Italian ice product lines in the highly competitive supermarket freezer
case.
To increase consumer visibility, we updated the LUIGI'S box with bold
contemporary graphics, and re-positioned MAMA TISH'S as MAMA TISH'S
FRUTTUOSSO SORBETTO - an upscale image to match its premium quality. Both
brands offer consumers a refreshing, anytime taste treat.
The Squeeze is on in Food Service
Our Food Service division sells frozen dessert products under the brand
names of LUIGI'S, SHAPE-UPS, MAMA TISH'S, FROSTAR and SNAPPLE* ICE.
Overall sales experienced a decline of 12% for fiscal year 1998 due to
decreased sales to several key customers. While these results are
disappointing, we continue to aggressively pursue every opportunity to
boost Food Service sales in the future.
As part of our sales building efforts, we introduced new items to the Food
Service market, particularly convenience stores, including ICEE Squeeze-up
Tubes which capture the fizz and taste of a traditional ICEE drink and
extend the brand's equity and awareness.
(SNAPPLE is a registered trademark of Snapple Beverage Corp.)
SHAPE-UPS Go to School
Our SHAPE-UPS frozen juice bars continue to score high marks with America's
schoolchildren and are welcomed by school food service directors since
they carry the U.S.D.A. approved Child Nutrition (CN) Label.
To keep SHAPE-UPS shipping out, we recently introduced bright and colorful
new packaging, along with new creative promotions targeted to school food
service directors.
Other Snacks: Building Bridges to New Markets
Our other niche snack foods, including churros, funnel cakes, cookies and
other baked goods, also had a good year. Sales grew in all four of these
product lines.
West Coast Bakery Rides a Wave of Good News
The surf was up - way up - at our Los Angeles based West Coast Bakery.
Sales increased an awesome 30% and through production improvements,
manufacturing efficiency was riding high, too.
These results are attributable to a number of factors. We grew our frozen
cookie dough business, expanded our contract private label products,
including organically certified baked goods, extended the variety of
offerings in our industrial ingredient business, and built a stronger
presence in the gift pack market with our cookie lines.
Things are also looking good for MRS. GOODCOOKIE, a frozen ready-to-bake
cookie line that we introduced to limited markets late last year. In
fiscal 1998 we refined and expanded our program and were encouraged by the
sales results. Watch for national expansion in the years ahead.
Churros - From Sea to Shining Sea
Through our geographic expansion efforts, more and more consumers are
discovering what people in the West and Southwest have known for years:
TIO PEPE'S churros are a sweet treat anywhere.
These crispy, cinnamon-sugared, doughnut-like snacks of Hispanic origin are
growing in popularity and gaining in sales. And even long-time fans are
discovering the versatility of churros through our delicious new fruit-
filled varieties. As a result, Food Service churros sales grew by 8% this
year. Much of this growth was due to the introduction of TIO PEPE'S fruit-
filled churros to school menus, where they provide both bread and fruit
requirements for U.S.D.A. approved school lunch and breakfast programs.
Retail churros experienced significant growth both in existing and newly
entered geographic markets.
Making Fun with Funnel Cakes
You can't have a funnel cake without "fun." And more people than .ever are
having fun with THE FUNNEL CAKE FACTORY funnel cakes, sold through our Food
Service division.
These tempting treats are available as frozen pre-cooked, pre-shaped funnel
cakes as well as a make-your-own dry mix. They're a huge hit at theme and
amusement parks, and are gaining popularity as a restaurant dessert item as
a result of our innovative menu ideas.
We recently reformulated our funnel cakes to meet two bread requirements
for U.S.D.A. approved school lunch and breakfast programs. As a result,
they're being added to numerous school menus around the country.
It all adds up to a sales increase of 34% in fiscal 1998 - and results like
that are great fun for J&J Snack Foods.
Here in America, brand names have the opportunity and power to become
icons, recognized and enjoyed by millions. J&J Snack Foods is proud that
our many brands continue to grow in popularity, taking their place on the
great landscape of American popular culture.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
In addition to historical information, this discussion and analysis
contains forward-looking statements. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a
difference include, but are not limited to, those discussed in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly revise
or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Net sales increased $42,072,000 or 19% to $262,390,000 in fiscal 1998 from
$220,318,000 in fiscal 1997. Approximately $31,000,000 of the increase in
sales for the year resulted from the December 1997 acquisition of National
ICEE Corporation.
Sales to food service customers increased $1,534,000 or 2% to $103,470,000
in fiscal 1998. Soft pretzel sales to the food service market increased 5%
to $60,589,000. Churro sales increased 8% to $11,195,000. Frozen juice
bar and dessert sales decreased 12% to $24,746,000 primarily due to lower
sales to three customers.
Sales of products to retail supermarkets decreased $1,708,000 or 4% to
$38,594,000 in fiscal 1998. Total soft pretzel sales to retail
supermarkets were $21,849,000, a decrease of 11% from fiscal 1997. Sales
of our flagship brand SUPERPRETZEL soft pretzels, excluding SOFTSTIX and
CINNAMON RAISIN MINI'S, decreased 5% to $17,298,000. SOFTSTIX sales
increased $268,000 or 13% to $2,286,000 from the previous year. Sales of
Italian ice increased $485,000 or 3% to $15,038,000 in 1998 from
$14,553,000 in 1997; sales were impacted by limited production output
during the expansion and modernization of the Company's Italian ice and
frozen dessert plant in Scranton, PA.
Frozen carbonated beverage and related product sales increased $35,884,000
or 75% to $83,799,000 in fiscal 1998. Beverage sales alone increased 72%
to $75,191,000 for the year, including approximately $31,000,000
attributable to the December 1997 acquisition of National ICEE Corporation.
Bakery sales increased $5,351,000 or 30% to $23,307,000 in fiscal 1998 due
primarily to increased product sales to one customer. Sales of our
Bavarian Pretzel Bakery increased 8% to $13,220,000 for the year.
Gross profit on sales increased to 52% of sales in 1998 from 49% of sales
in 1997. The gross profit percentage increase is primarily attributable to
higher gross profit percentages of the acquired National ICEE Corporation
business and lower flour costs, net of higher manufacturing costs of
approximately $1,300,000 incurred during the startup of operations in the
third and fourth quarters at the Company's expanded Italian ice and frozen
dessert plant in Scranton, PA.
Total operating expenses increased $18,598,000 to $115,117,000 in fiscal
1998 but as a percentage of sales were 44% in both 1998 and 1997.
Marketing and distribution expenses were 30% and 9% of sales, respectively,
in both fiscal 1998 and 1997. Administrative expenses decreased to 4% of
sales in fiscal 1998 from 5% in fiscal 1997 due primarily to lower
litigation costs in fiscal 1998.
Operating income increased $8,821,000 or 76% to $20,461,000 in fiscal 1998.
Interest expense increased $2,602,000 to $3,033,000 in fiscal 1998 due to
the purchase and assumption and subsequent refinancing of the debt of
National ICEE Corporation.
Sundry income increased by $696,000 in fiscal 1998 from $112,000 in fiscal
1997 due to the successful settlement of certain litigation. In 1998,
Sundry income was offset by $525,000 in write offs and accruals for the
closing of unprofitable Bavarian Pretzel Bakery retail stores.
The effective income tax rate increased to 37% in fiscal 1998 from 32% in
fiscal 1997. The lower rate in fiscal 1997 is due primarily to
adjustments relating to settlements of federal tax matters.
Net earnings increased $3,691,000 or 45% in fiscal 1998 to $11,850,000.
Fiscal 1997 Compared to Fiscal 1996
Net sales increased $34,300,000 or 18% to $220,318,000 in fiscal 1997 from
$186,018,000 in fiscal 1996. Excluding sales of acquired businesses, net
sales increased $16,395,000 or 9% for the year.
Sales to food service customers increased $15,432,000 or 18% to
$101,936,000 in fiscal 1997. Excluding sales of acquired businesses,
sales to food service customers increased $2,675,000 or 3% for the year.
Soft pretzel sales to the food service market increased 5% to $57,668,000.
Excluding sales of acquired businesses, food service soft pretzel sales
decreased $636,000 or 1% from last year. Two customers accounted for
approximately $2,500,000 of lower pretzel sales in 1997 compared to 1996.
Churro sales increased 3% to $10,403,000. Frozen juice bar and dessert
sales increased 76% to $28,210,000. Approximately 75% of the juice bar and
dessert sales increase resulted from sales of acquired businesses.
Sales of products to retail supermarkets increased $3,384,000 or 9% to
$40,302,000 in fiscal 1997. Total soft pretzel sales to retail
supermarkets were $24,504,000, an increase of 3% from fiscal 1996.
Excluding sales of an acquired business, sales to retail supermarkets
decreased 2% or $919,000 for the year. Sales of our flagship
SUPERPRETZEL brand soft pretzels, excluding SOFTSTIX and CINNAMON RAISIN
MINI'S, decreased 7% to $18,157,000. SOFTSTIX sales decreased $701,000 or
26% to $2,018,000 from the previous year. Sales of Italian ice increased
$2,335,000 or 19% to $14,553,000 in 1997 from $12,218,000 in 1996 due to
sales of Mama Tish's International Foods which was acquired during the
second quarter. Excluding sales of Mama Tish's, Italian ice sales were
down 4% for the year.
Frozen carbonated beverage and related product sales increased $3,558,000
or 8% to $47,915,000 in fiscal 1997. Beverage sales alone increased 4% to
$43,594,000 for the year. Excluding last year's pricing adjustment to one
customer and an unusually high sales of promotional cups to another
customer, beverage sales increased 7%.
Bakery sales increased $10,225,000 or 132% to $17,956,000 in fiscal 1997
due to increased product sales to one customer. Sales of our Bavarian
Pretzel Bakery increased 16% to $12,209,000 for the year. Excluding sales
from an acquired business, Bavarian Pretzel Bakery sales increased 8% or
$856,000 for the year.
Gross profit on sales was 49% of sales in both 1997 and 1996.
Total operating expenses increased $12,449,000 to $96,519,000 in fiscal
1997 but as a percentage of sales decreased to 44% from 45% in fiscal 1996.
Marketing expenses as a percentage of sales dropped to 30% in 1997 from 32%
in 1996. This decline was due primarily to overhead efficiencies
resulting from higher sales levels. Distribution expenses were 9% of sales
in 1997 and 1996. Administrative expenses increased to 5% of sales in 1997
from 4% in 1996 due to increased litigation costs.
Operating income increased $3,692,000 or 46% to $11,640,000 in fiscal 1997.
Investment income decreased $796,000 or 56% in fiscal year 1997 due to a
sharply lower level of investable funds which were used to pay for
acquisitions. Interest expense increased $66,000 or 18% due to short-term
borrowings.
The effective income tax rate was 32% in 1997 and 35% in 1996. The lower
rate in 1997 is primarily due to adjustments relating to settlements of
federal tax matters.
Net earnings increased $2,316,000 or 40% in fiscal 1997 to $8,159,000.
Acquisitions, Liquidity and Capital Resources
In December 1997, the Company acquired the common stock of National ICEE
Corporation. National ICEE Corporation, with annual sales of
approximately $40 million, markets and distributes frozen carbonated
beverages primarily in the eastern half of the United States. The Company
has incurred approximately $50 million of debt to complete the
acquisition. The following are the unaudited pro forma results of
operations for the fiscal years 1998, 1997 and 1996 assuming the above
had occurred at the beginning of that fiscal year:
1998 1997 1996
Sales $268,390,000 $259,952,000 $222,964,000
Net Earnings $11,346,000 $8,645,000 $7,036,000
Earnings per diluted share $1.21 $.96 $.78
In January 1997, the Company acquired the assets of Mama Tish's
International Foods by assuming certain liabilities. Mama Tish's is a
manufacturer and distributor of Italian ices, sorbets and other frozen
juice products with annual sales of approximately $15 million.
In November 1996, the Company acquired all of the .common stock of
Pretzels, Inc. for cash. Trading as TEXAS TWIST, Pretzels, Inc. is a soft
pretzel manufacturer selling to both the food service and retail
supermarket industries.
In October 1996, the Company acquired the assets of Bakers Best Snack Food
Corp. for cash. Bakers Best is a manufacturer of soft pretzels selling to
both the food service and retail supermarket industries.
In May 1996, the Company acquired the assets of Mazzone Enterprises, Inc.
for cash and by assuming certain of its liabilities. Mazzone Enterprises
is a manufacturer and distributor of Italian ices and other specialty
frozen desserts.
In April 1996, the Company acquired the assets of Pretzel Gourmet Corp. for
cash. Pretzel Gourmet is a chain of retail stores specializing in freshly
baked hand-rolled soft pretzels.
The Company's current cash and marketable securities balances and cash
expected to be provided by future operations are its primary sources of
liquidity. The Company believes that these sources, along with its
borrowing capacity, are sufficient to fund future growth and expansion.
The devaluation of the Mexican peso caused reductions of $285,000, $53,000
and $235,000 in stockholders' equity for the 1998, 1997 and 1996 fiscal
years, respectively, because of the revaluation of the net assets of the
Company's Mexican frozen carbonated beverage subsidiary. In 1998, sales of
the Mexican subsidiary were $2,170,000.
Under various share repurchase programs authorized by the Board of
Directors, the Company purchased and retired 433,000 shares of its common
stock at a cost of $5,029,000 in fiscal year 1996. Under the most recent
share repurchase authorization, 712,000 shares remain to be repurchased.
An unsecured general-purpose bank line of credit totalling $30,000,000 is
available to the Company. Borrowings under the bank line of credit were
$16,000,000 at September 26, 1998.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"
("EPS"), which is effective for financial statements issued after December
31, 1997. The new standard eliminates primary and fully diluted EPS and
instead requires presentation of basic and diluted EPS in conjunction with
the disclosure of the methodology used in computing such EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding during the
period. Diluted EPS takes into consideration the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised and converted into common stock. The Company adopted this new
standard in its financial statements for the second quarter of this fiscal
year. The effect of adopting this new standard is not material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for years beginning after December 15, 1997.
This new standard requires entities presenting a complete set of financial
statements to include details of comprehensive income. Comprehensive
income consists of net income or loss for the current period and income,
expenses, gains and losses that bypass the income statement and are
reported directly in a separate component of equity. The effect of
adopting this new standard is not expected to be material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for all periods
beginning after December 15, 1997. SFAS No. 131 requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate,
and their major customers. The effect of adopting this new standard is
not expected to be material.
Fiscal 1998 Compared to Fiscal 1997
Trade receivables increased $9,301,000 or 40% to $32,683,000 in 1998, and
inventories increased $2,912,000 or 22% to $16,447,000 in 1998 from 1997
primarily because of higher sales levels attributable to the acquisition of
National ICEE Corporation.
Other receivables decreased $371,000 to $1,705,000 in 1998 due to
reimbursement received from the Company's insurance carrier on settlement
of legal matters.
Property, plant and equipment increased $48,216,000 to $212,564,000
primarily because of expenditures for dispensers required for the
expansion of the frozen carbonated beverage business, for ovens and
portable merchandisers required for the expansion of the food service
business and for the expansion and upgrading of production and warehousing
capability at the Company's manufacturing facilities. Additionally,
property, plant and equipment from the National ICEE Corporation
acquisition accounted for approximately one-half of the overall increase.
Goodwill, trademarks and rights, net of accumulated amortization increased
$30,412,000 to $51,871,000 due to goodwill acquired in the National ICEE
Corporation acquisition.
Accounts payable and accrued liabilities increased $10,169,000 in 1998 from
$21,967,000 in 1997 due primarily to the acquisition of National ICEE
Corporation and higher sales levels.
Current maturities of long-term debt increased by $8,407,000 to $8,423,000
and long-term debt, less current maturities increased by $43,171,000 to
$48,199,000 due to borrowings to fund the acquisition of National ICEE
Corporation and the subsequent refinancing of its debt.
Deferred income decreased $97,000 to $435,000 primarily as a result of the
reduction in the Company's guarantees related to the sale of its Hawaiian
ICEE operations.
Deferred Income Taxes increased by $1,007,000 to $4,387,000 in 1998 which
related to depreciation of property, plant and equipment.
Common stock increased $2,212,000 in 1998 to $39,120,000 primarily because
of the exercise of incentive stock options.
Net cash provided by operating activities increased $16,808,000 to
$37,179,000 in 1998 primarily due to increases in net earnings,
depreciation and amortization of fixed assets, amortization of intangibles
and deferred costs and accounts payable and accrued liabilities.
Net cash used in investing activities increased $14,659,000 to $45,132,000
in 1998 primarily due to purchases of property, plant and equipment which
increased by $12,222,000 in 1998. Expenditures increased for dispensers
for the expansion of the frozen carbonated beverage business and for the
expansion and modernization of the Company's Italian ice and frozen dessert
plant in Scranton, PA.
Net cash provided by financing activities of $9,756,000 in 1998 compared to
$956,000 in 1997. The increase was due to a net increase in borrowings to
fund the acquisition of National ICEE Corporation and the subsequent
refinancing of its debt.
Fiscal 1997 Compared to Fiscal 1996
The combined balance of cash and cash equivalents and marketable securities
decreased $10,363,000 from $11,764,000 in 1996 to $1,401,000 in 1997
primarily because of the use of cash for acquisitions.
Trade receivables increased $6,105,000 or 35% to $23,382,000 in 1997, and
inventories increased $2,259,000 or 20% to $13,535,000 in 1997 from 1996
primarily because of higher sales levels.
Other receivables increased $1,151,000 to $2,076,000 in 1997 due to an
increase in reimbursements due from the Company's insurance carrier.
Property, plant and equipment increased $22,248,000 primarily because of
expenditures for dispensers required for the expansion of the frozen
carbonated beverage business, for ovens and portable merchandisers required
for the expansion of the food service business and for the expansion and
upgrading of production and warehousing capability at the Company's
manufacturing facilities. Additionally, property, plant and equipment from
acquisitions accounted for approximately one-third of the overall increase.
Goodwill, trademarks and rights, net of accumulated amortization increased
$12,133,000 to $21,459,000 primarily because of goodwill and restrictive
covenants acquired in the Bakers Best Snack Foods Corp., Pretzels, Inc. and
Mama Tish's International Foods acquisitions. Long-term investments
decreased $6,652,000 to $3,835,000 primarily because proceeds from sales of
these investments were used for acquisitions. Sundry assets increased by
$181,000 from 1996 primarily because of an increase in funding of various
long-term merchandising agreements.
Accounts payable and accrued liabilities increased $4,535,000 in 1997 from
$17,432,000 in 1996 due primarily to higher sales levels.
Deferred income decreased $35,000 primarily as a result of the reduction in
the Company's guarantees related to the sale of its Hawaiian ICEE
operations.
Common stock increased $1,090,000 in 1997 to $36,908,000 primarily because
of the exercise of incentive stock options.
Net cash provided by operating activities decreased $1,509,000 to
$20,371,000 in 1997 from $21,880,000 in 1996 primarily because of an
increase in accounts receivable.
Net cash used in investing activities increased $13,311,000 to $30,473,000
in 1997 from $17,162,000 in 1996 primarily because of payments for
purchases of companies, net of cash acquired and debt assumed and higher
capital expenditures. Capital expenditures increased by $5,101,000 in 1997
from 1996 because of increased expenditures for dispensers for the
expansion of the frozen carbonated beverage business.
There was net cash provided by financing activities of $956,000 in 1997
compared to a net use of $4,867,000 in 1996. The use in 1996 was for the
Company's repurchase of common stock.
Consolidated Statements of Earnings
Fiscal year ended
September 26, September 27, September 28,
1998 1997 1996
Net sales $ 262,390,000 $ 220,318,000 $ 186,018,000
Cost of goods sold 126,812,000 112,159,000 94,000,000
Gross profit 135,578,000 108,159,000 92,018,000
Operating expenses
Marketing 77,385,000 65,231,000 58,604,000
Distribution 24,846,000 19,197,000 17,264,000
Administrative 10,072,000 10,326,000 7,309,000
Amortization of
intangibles and
deferred costs 2,814,000 1,765,000 893,000
115,117,000 96,519,000 84,070,000
Operating income 20,461,000 11,640,000 7,948,000
Other income (deductions)
Investment income 573,000 630,000 1,426,000
Interest expense (3,033,000) (431,000) (365,000)
Sundry 808,000 112,000 34,000
(1,652,000) 311,000 1,095,000
Earnings before
income taxes 18,809,000 11,951,000 9,043,000
Income taxes 6,959,000 3,792,000 3,200,000
NET EARNINGS $ 11,850,00 $ 8,159,000 $ 5,843,000
Earnings per
diluted share $1.26 $.91 $.65
Weighted average number
of diluted shares 9,368,000 8,985,000 9,016,000
Earnings per basic share $1.32 $.93 $.65
Weighted average number
of basic shares 8,947,000 8,781,000 8,940,000
The accompanying notes are an integral part of these statements.
Consolidated Balance Sheets
Fiscal year ended
September 26, September 27,
1998 1997
Assets
Current Assets
Cash and cash equivalents $ 3,204,000 $ 1,401,000
Receivables
Trade, less allowance of
$597,000 and $392,000,
respectively 32,683,000 23,382,000
Other 1,705,000 2,076,000
Inventories 16,447,000 13,535,000
Prepaid expenses and deposits 1,104,000 853,000
Total current assets 55,143,000 41,247,000
Property, Plant and Equipment, at cost 212,564,000 164,348,000
Less accumulated depreciation
and amortization 112,444,000 97,126,000
100,120,000 67,222,000
Other Assets
Goodwill, trademarks and rights,
less accumulated amortization
of $9,712,000 and $6,883,000,
respectively 51,871,000 21,459,000
Long-term investment securities
available for sale _ 495,000
Long-term investment securities
held to maturity 3,127,000 3,340,000
Sundry 3,000,000 3,064,000
57,998,000 8,358,000
$ 213,261,000 $ 136,827,000
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term
debt $ 8,423,000 $ 16,000
Accounts payable 23,222,000 13,315,000
Accrued liabilities 8,914,000 8,652,000
Total current liabilities 40,559,000 21,983,000
Long-Term Debt, less current maturities 48,199,000 5,028,000
Deferred Income 435,000 532,000
Deferred Income Taxes 4,387,000 3,380,000
Commitments _ _
Stockholders' Equity
Capital stock
Preferred, $1 par value;
authorized, 5,000,000 shares; none
issued _ _
Common, no par value; authorized,
25,000,000 shares; issued and
outstanding, 9,036,000 and 8,850,000,
respectively 39,120,000 36,908,000
Foreign currency translation
adjustment (1,694,000) (1,409,000)
Retained earnings 82,255,000 70,405,000
119,681,000 105,904,000
$ 213,261,000 $ 136,827,000
The accompanying notes are an integral part of these statements.
Consolidated Statement of Changes in Stockholders' Equity
Foreign
Currency
Common Stock Translation Retained
Shares Amount Adjustment Earnings Total
Balance at
Oct. 1, 1995 9,126,000 $40,802,000 $(1,121,000) $56,403,000 $ 96,084,000
Issuance of common
stock upon
exercise of stock
options 56,000 199,000 - - 199,000
Adjustments to common
stock for acquisition - (154,000) - - (154,000)
Foreign currency
translation
adjustment - - (235,000) - (235,000)
Repurchase of
common stock (433,000) (5,029,000) - - (5,029,000)
Net earnings for
the fiscal year
ended September 28,
1996 - - - 5,843,000 5,843,000
Balance at
Sep. 28, 1996 8,749,000 35,818,000 (1,356,000) 62,246,000 96,708,000
Issuance of common
stock upon
exercise of stock
options 84,000 945,000 - - 945,000
Issuance of common
stock for employee
stock purchase
plan 17,000 145,000 - - 145,000
Foreign currency
translation
adjustment - - (53,000) - (53,000)
Net earnings for
the fiscal year
ended September 27,
1997 - - - 8,159,000 8,159,000
Balance at
Sep. 27, 1997 8,850,000 36,908,000 (1,409,000) 70,405,000 105,904,000
Issuance of common
stock upon
exercise of stock
options 171,000 2,017,000 - - 2,017,000
Issuance of common
stock for employee
stock purchase
plan 15,000 195,000 - - 195,000
Foreign currency
translation
adjustment - - (285,000) - (285,000)
Net earnings for
the fiscal year
ended September 26,
1998 - - - 11,850,000 11,850,000
Balance at
Sep. 26, 1998 9,036,000 $39,120,000 $(1,694,000) $82,255,000 $119,681,000
The accompanying notes are an integral part of this statement.
Consolidated Statements of Cash Flows
Fiscal year ended
September 26, September 27, September 28,
1998 1997 1996
Operating activities:
Net earnings $11,850,000 $ 8,159,000 $ 5,843,000
Adjustments to reconcile
net earnings to net
cash provided by
operating activities:
Depreciation and
amortization of
fixed assets 21,807,000 17,090,000 15,613,000
Amortization of
intangibles and
deferred costs 3,352,000 2,180,000 1,262,000
Losses (gains) from
disposals of property
and equipment 306,000 (26,000) 44,000
Increase (decrease)
in deferred income
taxes 1,007,000 (23,000) (1,600,000)
Other adjustments 23,000 14,000 (24,000)
Changes in assets and
liabilities, net of
effects from purchase
of companies:
Increase in accounts
receivable (6,378,000) (6,615,000) (488,000)
Decrease (increase)
in inventories 958,000 (1,008,000) (30,000)
(Increase) decrease
in prepaid
expenses (71,000) 174,000 572,000
Increase in accounts
payable and accrued
liabilities 4,325,000 426,000 688,000
Net cash provided
by operating
activities 37,179,000 20,371,000 21,880,000
Investing activities:
Purchases of property,
plant and equipment (31,803,000) (19,581,000) (14,480,000)
Payments for purchases
of companies, net of
cash acquired and
debt assumed (14,813,000) (18,601,000) (2,739,000)
Proceeds from investments
held to maturity 190,000 6,146,000 575,000
Payments for investments
held to maturity - - (2,750,000)
Proceeds from investments
available for sale 495,000 1,710,000 7,133,000
Payments for investments
available for sale - - (4,578,000)
Proceeds from disposals of
property and equipment 1,000,000 273,000 191,000
Other (201,000) (420,000) (514,000)
Net cash used in
investing
activities (45,132,000) (30,473,000) (17,162,000)
Financing activities:
Proceeds from borrowings 56,150,000 35,000 -
Proceeds from issuance
of common stock 2,125,000 930,000 183,000
Payments to repurchase
common stock - - (5,029,000)
Payments of long-term
debt (48,519,000) (9,000) (21,000)
Net cash provided by
(used in) financing
activities 9,756,000 956,000 (4,867,000)
Net increase (decrease)
in cash and cash
equivalents 1,803,000 (9,146,000) (149,000)
Cash and cash equivalents
at beginning of year 1,401,000 10,547,000 10,696,000
Cash and cash equivalents
at end of year $ 3,204,000 $ 1,401,000 $ 10,547,000
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements
Note A - Summary of Significant Accounting Policies
J&J Snack Foods Corp. and Subsidiaries (the Company) manufactures, markets
and distributes a variety of nutritional snack foods and beverages to the
food service and retail supermarket industries. A summary of the
significant accounting policies consistently applied in the preparation of
the accompanying consolidated financial statements follows.
1. Principles of Consolidation
The consolidated financial statements include the accounts of J&J Snack
Foods Corp. and its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated in the consolidated financial statements.
2. Revenue Recognition
The Company recognizes revenue when its product is shipped.
The Company sells service contracts covering frozen carbonated beverage
machines sold. The terms of coverage range between 12 and 48 months. The
Company records deferred income on service contracts which is amortized by
the straight-line method over the term of the contracts.
3. Foreign Currency
Assets and liabilities in foreign currencies are translated into U.S.
dollars at the rate of exchange prevailing at the balance sheet date.
Revenues and expenses are translated at the average rate of exchange for
the period. The cumulative translation adjustment is recorded as a
separate component of stockholders' equity.
4. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
5. Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original
maturities of three months or less.
6. Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited
due to the dispersion of the Company's customers over different industries
and geographies.
7. Inventories
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
8. Depreciation and Amortization
Depreciation of equipment and buildings is provided for.by the straight-
line and accelerated methods over the assets' estimated useful lives.
Amortization of improvements is provided for by the straight-line method
over the term.of the lease or the assets' estimated useful life,
whichever is shorter. Goodwill, trademarks and rights arising from
acquisitions are amortized by the straight-line method over periods ranging
from 5 to 30 years. Management reviews the realization of goodwill based
upon past and expected performance of individual acquired businesses.
In fiscal year 1997, the Company adopted a new standard issued by the
Financial Accounting Standards Board ("FASB"), Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
provides guidance on when to recognize and how to measure impairment losses
of long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. There was no material impact as a
result of the adoption of SFAS No. 121 on the financial position and
results of operations of the Company.
9. Fair Value of Financial Instruments
Financial instruments consist primarily of cash and cash equivalents,
investments and long-term debt. Based on the borrowing rates currently
available to the Company, long-term debt approximates fair value at
September 26, 1998 and September 27, 1997.
10. Income Taxes
The Company accounts for its income taxes under the liability method.
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense is
the result of changes in deferred tax assets and J&J liabilities. The
principal types of differences between assets and liabilities for financial
statement and tax return purposes are vacation accruals, insurance
accruals, deferred income and accumulated depreciation.
11. Earnings Per Common Share
Earnings per common share are based on the weighted average number of
common shares outstanding, including common stock equivalents (stock
options).
The Company adopted a new standard issued by the FASB, SFAS No. 128,
"Earnings Per Share" ("EPS") in its fiscal 1998 second quarter financial
statements. The new standard eliminates primary and fully diluted EPS and
instead requires presentation of basic and diluted EPS in conjunction with
the disclosure of the methodology used in computing such EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding during the
period. Diluted EPS takes into consideration the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised and converted into common stock. The effect of adopting this new
standard was not material.
12. Accounting for Stock-Based Compensation
In fiscal 1997, the Company adopted a new standard issued by the FASB, SFAS
No. 123, "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. The Company has chosen an
alternative, permitted by the standard, to continue accounting for employee
stock options and similar equity instruments under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
13. Advertising Costs
Advertising costs are expensed as incurred. Total advertising expense was
$4,128,000, $3,892,000, and $4,119,000 for the fiscal years 1998, 1997 and
1996, respectively.
14. Interest Rate Risk Management
As part of its risk management activities, the Company uses interest rate
swaps to modify the interest rate characteristics of certain long-term
debt. The Company holds no other derivatives or similar instruments. The
derivatives contracts are designated as hedges when acquired. They are
expected to be effective economic hedges and have high correlation with the
items being hedged at inception and throughout the hedge period. The
variable interest rate of a swap contract is referenced to the same index
as the variable interest rate of the debt being hedged.
Interest rate swaps are accounted for using the accrual method, with an
adjustment to interest expense in the income statement. The effects of
swap positions are included in financing activities in the Statement of
Cash Flows. Interest receivable or payable under the swap contracts is
included in Receivables or Accounts Payable. Unrealized gains and losses
on the swaps are not recognized in the balance sheet. Realized gains and
losses from disposition or settlement of swap contracts are deferred on the
balance sheet and amortized to interest expense over the appropriate
period.
If the hedged item is settled or terminated, deferred and/or unrecognized
gains or losses on the hedging instrument on that date are recognized as an
adjustment to the gain or loss on disposition or termination of the related
hedged item. Future accruals on the swap and subsequent gains and losses
on the swap or forward contract are included in income in the period they
occur.
15. Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for years beginning after December 15, 1997.
This new standard requires entities presenting a complete set of financial
statements to include details of comprehensive income. Comprehensive
income consists of net income or loss for the current period and income,
expenses, gains and losses that bypass the income statement and are
reported directly in a separate component of equity. The effect of
adopting this new standard is not expected to have a material impact
on.financial statement presentation.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for all periods
beginning after December 15, 1997. SFAS No. 131 requires that public
business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate,
and their major customers.
Note B - Acquisition
In December 1997, the Company acquired the common stock of National ICEE
Corporation. National ICEE Corporation, with annual sales of approximately
$40 million, markets and distributes frozen carbonated beverages primarily
in the eastern half of the United States. The Company incurred
approximately $50 million of debt to complete the acquisition. The
following are the unaudited pro forma results of operations for the fiscal
years 1998, 1997 and 1996 assuming the above had occurred at the beginning
of that fiscal year:
1998 1997 1996
Sales $268,390,000 $259,952,000 $222,964,000
Net Earnings $11,346,000 $8,645,000 $7,036,000
Earnings per. diluted share $1.21 $.96 $.78
In January 1997, the Company acquired the assets of Mama Tish's
International Foods by assuming certain of its liabilities. Mama Tish's is
a manufacturer and distributor of Italian ices, sorbets and other frozen
juice products.
In November 1996, the Company acquired all of the common stock of
Pretzels, Inc. for cash. Trading as TEXAS TWIST, Pretzels, Inc. is a soft
pretzel manufacturer selling to both the food service and retail
supermarket industries.
In October 1996, the Company acquired the assets of Bakers Best Snack Food
Corp. for cash. Bakers Best is a manufacturer of soft pretzels selling to
both the food service and retail supermarket industries.
The acquisitions were accounted for under the purchase method of
accounting, and the operations are included in the consolidated financial
statements from the respective acquisition dates.
Note C - Credit Arrangements
To fund the acquisition of National ICEE Corporation in December 1997, and
to retire most of its debt, the Company incurred the following debt:
$40,000,000 unsecured term note, at an interest rate of 6.61% fixed through
swap agreements, with 60 monthly principal payments of $666,667 plus
interest beginning January 8, 1998. At September 26, 1998, $8,000,000 of
the note was .classified under current maturities of long-term debt. At
September 26,1998, the principal balance of the note was $34,000,000. (See
Note H.)
$10,000,000 borrowing under a $30,000,000 unsecured general-purpose bank
line of credit. Interest payments on the balance borrowed under the line
are due monthly. The interest rate on the outstanding borrowings under
the line was 6.54% at September 26, 1998. Borrowings under the credit line
were $16,000,000 at September 26, 1998. (See Note H.)
Note D - Investment Securities
The Company classifies its investments in securities in one of three
categories: held to maturity, trading and available for sale. Debt
securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and are reported at amortized
cost. As the Company does not engage in securities trading, the balance of
its debt securities and any equity securities are classified as available
for sale. Net unrealized gains and losses on such securities, net of
income tax, are reported as a separate component of stockholders' equity
and excluded from the determination.of net income.
Proceeds from sales of securities classified as available for sale were
$495,000, $1,710,000 and $7,133,000 for fiscal years 1998, 1997 and 1996,
respectively. The Company uses the specific identification method to
determine the cost of securities sold. No material gains or losses were
realized.on sales of investment securities.
The amortized cost, gross unrealized gains and losses, and fair market
values of the Company's investment securities held to maturity at September
26, 1998 are summarized.as follows:
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Corporate debt.
securities $ 947,000 $ 38,000 $ - $ 985,000
Municipal
government
securities 1,680,000 28,000 - 1,708,000
Other debt.
securities 500,000 - - 500,000
$3,127,000 $ 66,000 $ - $ 3,193,000
The amortized cost, gross unrealized gains and losses, and fair market
values of the Company's investment securities available for sale and held
to maturity at September 27, 1997 are summarized as follows:
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for sale
Corporate debt
securities $ 495,000 $ - $ - $ 495,000
Held to maturity
Corporate debt
securities $ 970,000 $ 19,000 $ - $ 989,000
Municipal
government
securities 1,870,000 3,000 (8,000) 1,865,000
Other debt
securities 500,000 - - 500,000
$3,340,000 $ 22,0000 $ (8,000) $3,354,000
The following table lists the maturities of investment securities
classified as held to maturity at September 26, 1998:
Amortized Fair Market
Cost Value
Due after one year.
through five years $ 3,127,000 $ 3,193,000
Due after five years - -
$ 3,127,000 $ 3,193,000
Note E - Inventories
Inventories consist of the following:
September 26, September 27,
1998 1997
Finished goods $ 8,054,000 $ 7,108,000
Raw materials 2,190,000 1,789,000
Packaging materials 2,239,000 2,262,000
Equipment parts and other 3,964,000 2,376,000
$ 16,447,000 $ 13,535,000
Note F - Property, Plant and Equipment
Property, plant and equipment consist of the following:
September 26, September 27, Estimated
1998 1997 Useful Lives
Land $ 839,000 $ 819,000 -
Buildings 5,432,000 5,340,000 15-39.5 years
Plant machinery
and equipment 60,275,000 51,891,000 5-10 years
Marketing. equipment 126,653,000 90,988,000 5 years
Transportation equipment 2,149,000 1,856,000 5 years
Office equipment 5,446,000 4,792,000 3-5 years
Improvements 10,616,000 7,837,000 5-20 years
Construction in progress 1,154,000 825,000 -
$212,564,000 $164,348,000
Note G - Accrued Liabilities
Included in accrued liabilities is accrued compensation of $4,297,000 and
$3,275,000 as of September 26, 1998 and September 27, 1997, respectively.
Note H - Long-Term Debt
Long-term debt consists of the following:
September 26, September 27,
1998 1997
$40,000,000 unsecured term note,
with 60 monthly principal payments
of $666,667 plus 6.61% interest
beginning January 8, 1998 (subject
to financial covenants) $ 34,000,000 $ -
$30,000,000 unsecured general-
purpose bank credit line, with
interest rate tied to LIBOR with
interest payments due monthly
(subject to financial covenants) 16,000,000 -
7.25% redeemable economic
development revenue bonds payable
December 2005; interest payable
semiannually (subject to financial
covenants) 5,000,000 5,000,000
Other 1,622,000 44,000
56,622,000 5,044,000
Less current maturities 8,423,000 16,000
$ 48,199,000 $ 5,028,000
Annual principal payments of long-term debt as of September 26, 1998 are as
follows:
1999 $ 8,423,000
2000 8,382,000
2001 24,317,000
2002 8,131,000
2003 2,369,000
2004 and thereafter 5,000,000
$ 56,622,000
Note I - Deferred Income
1. Sale of ICEE Operations in Hawaii
Deferred income consists of the Company's unrecognized gain on the sale of
its ICEE operations in Hawaii to the former President of ICEE-USA Corp. in
July 1994 for $1,100,000 in cash. Under the terms of the sale, the Company
has guaranteed the payment of a bank note by the purchaser, ICEE of Hawaii,
Inc., through the issuance of a letter of credit. The Company's guarantee
is collateralized by the assets of ICEE of Hawaii, Inc. The Company
recognizes gain on the sale as the principal due on the bank note is
reduced through payments by ICEE of Hawaii, Inc. The Company recognized
gains of $94,000, $76,000 and $83,000 for the fiscal years ended 1998, 1997
and 1996, respectively.
2. Service Contracts
During the years ended September 26, 1998 and September 27,1997, the
Company sold $509,000 and $296,000, respectively, of service contracts
related to its frozen carbonated beverage machines. At September26,1998,
deferred income on service contracts was $199,000, of which $173,000 is
reflected as short-term and included in accrued liabilities on the
consolidated balance sheet. Service contract income of $578,000 and
$179,000 was recognized for the fiscal years ended 1998 and 1997,
respectively.
Note J - Income Taxes
Income tax expense is as follows:
Fiscal year ended
September 26, September 27, September 28,
1998 1997 1996
Current (Benefit)
U.S. Federal $ 5,389,000 $ 3,381,000 $ 4,538,000
Foreign 38,000 40,000 (31,000)
State 525,000 394,000 293,000
5,952,000 3,815,000 4,800,000
Deferred (Benefit)
U.S. Federal 913,000 (3,000) (1,552,000)
Foreign 7,000 (23,000) _
State 87,000 3,000 (48,000)
1,007,000 (23,000) (1,600,000)
$ 6,959,000 $ 3,792,000 $ 3,200,000
The provisions for income taxes differ from the amounts computed by
applying the federal income tax rate of approximately 34% to earnings
before income taxes for the following reasons:
Fiscal year ended
September 26, September 27, September 28,
1998 1997 1996
Income taxes at
statutory rates $ 6,395,000 $ 4,063,000 $ 3,075,000
Increase (decrease)
in taxes resulting
from:
State income taxes,
net of federal income
tax benefit 404,000 267,000 193,000
Nontaxable
income (55,000) (120,000) (343,000)
Other net 215,000 (418,000) 275,000
$ 6,959,000 $ 3,792,000 $ 3,200,000
Deferred tax assets and liabilities consist of the following:
September 26, September 27,
1998 1997
Deferred tax assets
Vacation accrual $ 298,000 $ 296,000
Insurance accrual 515,000 404,000
Deferred income 206,000 272,000
Other, net 458,000 537,000
1,477,000 1,509,000
Deferred tax liabilities
Depreciation of property
and equipment 5,628,000 4,237,000
Other, net 236,000 652,000
5,864,000 4,889,000
$ 4,387,000 $ 3,380,000
Note K - Earnings Per Share
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"), which eliminates primary and fully diluted EPS and requires
presentation of basic and diluted EPS in conjunction with the disclosure of
the methodology used in computing such EPS. Basic EPS excludes dilution
and is computed by dividing income available to common shareholders by the
weighted-average common shares outstanding during the period. Diluted EPS
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into
common stock. EPS calculations for 1997 and 1996 have been restated to
reflect the adoption of SFAS No. 128.
The Company's calculation of EPS in accordance with SFAS No. 128, "Earnings
Per Share," is as follows:
Fiscal Year Ended September 26, 1998
Income Shares Per Share.
(Numerator) (Denominator) Amount
Earnings Per
Basic Share
Net Income
available to common
stockholders $11,850,000 8,947,000 $1.32
Effect of
Dilutive Securities
Options - 421,000 (.06)
Earnings Per
Diluted Share
Net Income available
to common
stockholders plus
assumed conversions $11,850,000 9,368,000 $1.26
Fiscal Year Ended September 27, 1997
Income Shares Per Share.
(Numerator) (Denominator) Amount
Earnings Per
Basic Share
Net Income available
to common
stockholders $ 8,159,000 8,781,000 $.93
Effect of
Dilutive Securities
Options - 204,000 (.02)
Earnings Per
Diluted Share
Net Income available to
common stockholders
plus assumed
conversions $ 8,159,000 8,985,000 $.91
Fiscal Year Ended September 28, 1996
Income Shares Per Share
(Numerator) (Denominator) Amount
Earnings Per
Basic Share
Net Income available
to common
stockholders $ 5,843,000 8,940,000 $.65
Effect of
Dilutive Securities
Options - 76,000 _
Earnings Per
Diluted Share
Net Income available to
common stockholders
plus assumed
conversions $ 5,843,000 9,016,000 $.65
Note L - Commitments
1. Lease Commitments
The following is a summary of approximate future minimum rental commitments
for noncancelable operating leases with terms of more than one year as of
September 26, 1998:
Plants and
Offices Equipment Total
1999 $ 3,727,000 $ 3,153,000 $ 6,880,000
2000 3,117,000 2,595,000 5,712,000
2001 2,548,000 1,728,000 4,276,000
2002 2,332,000 479,000 2,811,000
2003 2,029,000 223,000 2,252,000
2004 and thereafter 11,256,000 103,000 11,359,000
$ 25,009,000 $ 8,281,000 $ 33,290,000
Total rent expense was $7,766,000, $6,002,000 and $5,748,000 for fiscal
years 1998, 1997 and 1996, respectively.
2. Other Commitments
The Company is a party to litigation which management currently believes
will not have a material adverse effect on the Company's financial
condition or results of operations.
Note M - Capital Stock
Under share repurchase programs authorized by the Board of Directors,
712,000 shares remain to be repurchased.
Note N - Stock Options
The Company has a Stock Option Plan (the "Plan"). Pursuant to the Plan,
stock options may be granted to officers and key employees of the Company
which qualify as incentive stock options as well as stock options which are
nonqualified. The exercise price of incentive stock options is at least
the fair market value of the common stock on the date of grant. The
exercise price for nonqualified options is determined by a committee of the
Board of Directors. The options are generally exercisable after three
years and expire no later than ten years from date of grant. There were
1,500,000 shares reserved under the Plan; options for 472,000 shares remain
unissued as of September 26, 1998.
The Company has a nonqualified stock option plan for nonemployee directors
and the Chief Executive Officer of the Company whereby a total of 340,000
shares of common stock may be issued. Under this plan, each nonemployee
director is granted options to purchase 3,000 shares of common stock, and
the Chief Executive Officer is granted options to purchase 25,000 shares
annually. The option price is equal to the fair market value of the common
stock at the date of grant, and the options expire ten years after date of
grant. Other nonqualified options have been issued to the Chief Executive
Officer, directors and certain employees.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies APB Opinion No. 25
and related interpretations in accounting for its plans and does not
recognize compensation expense for its stock-based compensation plans. Had
compensation cost for the plans been determined based on the fair value of
the options at the grant date consistent with SFAS No. 123, the Company's
net earnings and earnings per common share would have been reduced to the
pro forma amounts indicated below:
Fiscal year ended
September 26, September 27, September 28,
1998 1997 1996
Net Earnings:
As reported $ 11,850,000 $ 8,159,000 $ 5,843,000
Pro forma 11,112,000 7,697,000 5,786,000
Earnings Per
Common Share:
As reported $1.26 $.91 $.65
Pro forma 1.18 .86 .64
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants before October 1, 1995. The fair value of these options is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for grants in fiscal 1998,
1997 and 1996, respectively; expected volatility of 30% for all years;
risk-free interest rates of 5.12%, 6.71% and 6.45%; and expected lives
ranging between 4.5 and 10 years for all years.
A summary of the status of the Company's option plans as of fiscal years
1998, 1997 and 1996 and the changes during the years ended on those dates
is represented below:
Incentive Nonqualified
Stock Options Stock Options
Stock Weighted- Stock Weighted-
Options Average Options Average
Out- Exercise Out- Exercise
standing Price standing Price
Balance,
October 1, 1995 642,812 $11.42 326,000 $ 9.88
Granted 292,826 $10.00 34,000 $12.25
Exercised (21,000) $ 8.71 (45,000) $ 2.50
Cancelled (169,145) $12.03 - -
Balance,
September 28, 1996 745,493 $10.97 315,000 $11.27
Granted 267,743 $11.53 34,000 $12.75
Exercised (84,200) $ 9.38 - -
Cancelled (52,650) $11.15 - -
Balance,
September 27, 1997 876,386 $11.26 349,000 $11.41
Granted 223,396 $15.77 34,000 $19.25
Exercised (150,949) $12.56 (22,500) $ 6.63
Cancelled (52,500) $11.40 - -
Balance,
September 26, 1998 896,333 $12.18 360,500 $12.41
Exercisable Options,
September 26, 1998 274,113 326,500
The weighted-average fair value of incentive options granted during fiscal
years ended September 26, 1998, September27, 1997 and September 28, 1996
was $5.31, $4.24 and $3.62, respectively. The weighted-average fair
value of nonqualified stock options granted during fiscal years ended
September 26, 1998, September 27, 1997 and September 28, 1996 was
$10.56, $5.97 and $5.70, respectively.
The following table summarizes information.about incentive stock options
outstanding at September 26, 1998:
Options Outstanding Options Exercisable
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
at Remaining Average at Average
Range of September Contractual Exercise September Exercise
Exercise Prices 26, 1998 Life Price 26, 1998 Price
$ 7.25-$10.75 202,981 2.6 years $ 9.43 34,900 $ 7.86
$11.00-$16.38 693,352 3.2 years $12.98 239,213 $11.82
896,333 274,113
The following table summarizes information about nonqualified options
outstanding at September 26, 1998:
Options Outstanding Options Exercisable
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
at Remaining Average at Average
Range of September Contractual Exercise September Exercise
Exercise Prices 26, 1998 Life Price 26, 1998 Price
$ 7.25-$10.75 44,500 3.1 years $ 9.92 44,500 $ 9.92
$11.00-$13.63 282,000 4.7 years $11.98 282,000 $11.98
$19.25 34,000 9.6 years $19.25 - -
360,500 326,500
Note O - 401(k) Profit-Sharing Plan
The Company maintains a 401(k) profit-sharing plan for its employees.
Under this plan, the Company may make discretionary profit-sharing and
matching 401(k) contributions. Contributions of $512,000, $404,000 and
$313,000 were made in fiscal years 1998, 1997 and 1996, respectively.
Note P - Major Customer Information
One customer accounted for 10% of the Company's sales in each of the
fiscal years 1998 and 1997.
Note Q - Cash Flow Information
The following is supplemental cash flow information:
Fiscal year ended
September 26, September 27, September 28,
1998 1997 1996
Cash paid for:
Interest $ 2,870,000 $ 431,000 $ 367,000
Income taxes 6,461,000 4,469,000 3,077,000
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
J & J SNACK FOODS CORP.
We have audited the accompanying consolidated balance sheets of J&J Snack
Foods Corp. and Subsidiaries as of September 26, 1998 and September 27,
1997, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the fiscal years in the
three-year period ended September 26, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of J&J Snack
Foods Corp. and Subsidiaries as of September 26, 1998 and September 27,
1997, and the consolidated results of their operations and their
consolidated cash flows for each of the fiscal years in the three-year
period ended September 26, 1998 in conformity with generally accepted
accounting principles.
Philadelphia, Pennsylvania
November 3, 1998
Corporate Information
Directors
Gerald B. Shreiber
Chairman of the Board,
President and Chief Executive Officer
Dennis G. Moore
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Robert M. Radano
Senior Vice President and
Chief Operating Officer
Stephen N. Frankel
President,
Stephen N. Frankel Realtor, Inc.
Peter G. Stanley
Consultant
Leonard M. Lodish, Ph.D.
Samuel R. Harrell Professor,
Marketing Department of the
Wharton School,
University of Pennsylvania
Officers
Gerald B. Shreiber
Chairman of the Board,
President and Chief Executive Officer
Dennis G. Moore
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
Robert M. Radano
Senior Vice President and
Chief Operating Officer
Robyn Shreiber Cook
Senior Vice President, West
Paul L. Hirschman
Vice President, Information Systems
Officers of Subsidiary Companies
J&J SNACK FOODS CORP. OF NEW JERSEY
John Duckett
Vice President, Service & Assembly
Anthony P. Harrison II
Vice President, Quality Control and Research & Development
John P. Heim
Vice President, Engineering & Manufacturing
Michael Karaban
Vice President, Marketing
H. Robert Long
Vice President, Distribution
Craig S. Parker
Vice President, School Food Service & Branded Concepts
Milton L. Segal
Vice President, Purchasing
Steven J. Taylor
Vice President, Sales
J&J SNACK FOODS CORP. OF CALIFORNIA
Don Smith
Vice President, Research and Development
MIA PRODUCTS
T.J. Couzens
Vice President/General Manager
THE ICEE COMPANY
Dan Fachner
President of The ICEE Company
Kent Galloway
Vice President and Chief Financial Officer
Joe Boulanger
Vice President/General Manager
Western Zone
Lou Fiorentino
Vice President/General Manager
Eastern Zone
Rick Naylor
Vice President/General Manager
Central Zone
Rod Sexton
Vice President of Service Operations
ICEE DE MEXICO, S.A. DE C.V.
Andres Gonzalez
Vice President
PRETZELS, INC.
Gary Powell
President
Quarterly Common Stock Data
Market Price
Fiscal 1998 High Low
1st Quarter 17 3/8 13 1/2
2nd Quarter 19 1/2 12 1/2
3rd Quarter 20 3/4 17 7/8
4th Quarter 22 1/4 14 3/4
Fiscal 1997
1st Quarter 14 1/8 10 5/8
2nd Quarter 14 1/8 10 1/2
3rd Quarter 16 1/8 11 1/4
4th Quarter 17 1/4 14 1/2
Stock Listing
The common stock of J&J Snack Foods Corp. is traded on the
over-the-counter market on the NASDAQ National Market System
with the symbol JJSF.
Transfer Agent and Registrar
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Independent Accountants
Grant Thornton LLP
Counsel
Blank, Rome, Comisky & McCauley LLP
Annual Meeting
The Annual Meeting of Shareholders is scheduled for
Thursday, February 11, 1999 at 10:00 a.m. at the Hilton at
Cherry Hill, 2349 W. Marlton Pike,
Cherry Hill, New Jersey.
Form 10-K
Copies of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K may be obtained without charge by writing to:
J&J Snack Foods Corp..6000 Central Highway.Pennsauken, NJ 08109
Attention: Dennis G. Moore
Web Site
www.jjsnack.com