UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 27, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-14616 J & J SNACK FOODS CORP. (Exact name of registrant as specified in its charter) New Jersey 22-1935537 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6000 Central Highway, Pennsauken, NJ 08109 (Address of principal executive offices) Telephone (609) 665-9533 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of July 15, 1998, there were 9,028,120 shares of the Registrant's Common Stock outstanding. INDEX Page Number Part I. Financial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheets - June 27, 1998 and September 27, 1997................................. 3 Consolidated Statements of Earnings - Three Months and Nine Months Ended June 27, 1998 and June 28, 1997.. 5 Consolidated Statements of Cash Flows - Nine Months Ended June 27, 1998 and June 28, 1997.............. 6 Notes to the Consolidated Financial Statements........ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 11 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K .................. 15 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements J & J SNACK FOODS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS June 27, September 27, 1998 1997 (Unaudited) Current assets Cash and cash equivalents $ 2,740,000 $ 1,401,000 Accounts receivable 31,367,000 25,458,000 Inventories 16,462,000 13,535,000 Prepaid expenses and deposits 1,470,000 853,000 52,039,000 41,247,000 Property, plant and equipment, at cost Land 839,000 819,000 Buildings 5,432,000 5,340,000 Plant machinery and equipment 61,236,000 51,891,000 Marketing equipment 127,735,000 90,988,000 Transportation equipment 2,205,000 1,856,000 Office equipment 5,233,000 4,792,000 Improvements 8,287,000 7,837,000 Construction in progress 984,000 825,000 211,951,000 164,348,000 Less accumulated depreciation and amortization 108,726,000 97,126,000 103,225,000 67,222,000 Other assets Goodwill, trademarks and rights, less accumulated amortization 39,032,000 21,459,000 Long term investment securities available for sale - 495,000 Long term investment securities held to maturity 3,148,000 3,340,000 Sundry 6,970,000 3,064,000 49,150,000 28,358,000 $204,414,000 $136,827,000 See accompanying notes to the consolidated financial statements. 3 J & J SNACK FOODS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - Continued LIABILITIES AND June 27, September 27, STOCKHOLDERS' EQUITY 1998 1997 (Unaudited) Current liabilities Current maturities of long- term debt $ 8,312,000 $ 16,000 Accounts payable 22,825,000 13,315,000 Accrued liabilities 9,213,000 8,652,000 40,350,000 21,983,000 Long-term debt, less current maturities 34,472,000 5,028,000 Revolving credit line 12,000,000 - Deferred income 500,000 532,000 Deferred income taxes 3,385,000 3,380,000 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, 9,016,000 and 8,850,000, respectively 38,863,000 36,908,000 Foreign currency translation adjustment (1,568,000) (1,409,000) Retained earnings 76,412,000 70,405,000 113,707,000 105,904,000 $204,414,000 $136,827,000 See accompanying notes to the consolidated financial statements. 4 J & J SNACK FOODS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three months ended Nine months ended June 27, June 28, June 27, June 28, 1998 1997 1998 1997 Net Sales $73,276,000 $63,448,000 $184,335,000 $157,354,000 Cost of goods sold 34,750,000 32,404,000 91,303,000 80,771,000 Gross profit 38,526,000 31,044,000 93,032,000 76,583,000 Operating expenses Marketing 21,496,000 17,764,000 55,536,000 47,826,000 Distribution 6,807,000 5,263,000 17,799,000 14,380,000 Administrative 2,257,000 2,619,000 7,273,000 6,797,000 Amortization of intangibles and deferred costs 730,000 451,000 1,939,000 1,233,000 31,290,000 26,097,000 82,547,000 70,236,000 Operating income 7,236,000 4,947,000 10,485,000 6,347,000 Other income (deductions) Investment income 87,000 94,000 384,000 490,000 Interest expense (948,000) (111,000) (2,153,000) (326,000) Sundry 1,111,000 83,000 819,000 116,000 Earnings before income taxes 7,486,000 5,013,000 9,535,000 6,627,000 Income taxes 2,770,000 1,855,000 3,528,000 2,452,000 NET EARNINGS $ 4,716,000 $ 3,158,000 $ 6,007,000 $ 4,175,000 Earnings per diluted share $.50 $.35 $.64 $.47 Weighted average number of diluted shares 9,455,000 9,005,000 9,315,000 8,920,000 Earnings per basic share $.52 $.36 $.67 $.48 Weighted average number of basic shares 8,994,000 8,776,000 8,918,000 8,763,000 See accompanying notes to the consolidated financial statements. 5 J & J SNACK FOODS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months ended June 27, June 28, 1998 1997 Cash flows from operating activities: Net earnings $ 6,007,000 $ 4,175,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of fixed assets 16,101,000 1 2,532,000 Amortization of intangibles and deferred costs 2,318,000 1,454,000 Other adjustments 217,000 - Changes in assets and liabilities, net of effects from purchase of companies Increase in accounts receivable (3,114,000) (10,209,000) Decrease (increase) in inventories 406,000 (1,803,000) (Increase) decrease in prepaid expenses (314,000) 264,000 Increase in accounts payable and accrued liabilities 6,273,000 6,394,000 Net cash provided by operating activities 27,894,000 12,807,000 Cash flows from investing activities: Purchases of property, plant and equipment (23,271,000) (14,147,000) Payments for purchase of companies, net of cash acquired and debt assumed (12,200,000) (18,873,000) Proceeds from investments held to maturity 175,000 6,116,000 Proceeds from investments available for sale 495,000 1,710,000 Other 498,000 (18,000) Net cash used in investing activities (34,303,000) (25,212,000) Cash flows from financing activities: Proceeds from borrowings 53,120,000 1,500,000 Proceeds from issuance of common stock 1,955,000 396,000 Payments of long-term debt (47,327,000) (6,000) Net cash used in financing activities 7,748,000 1,890,000 Net increase (decrease) in cash and cash equivalents 1,339,000 (10,515,000) Cash and cash equivalents at beginning of period 1,401,000 10,547,000 Cash and cash equivalents at end of period $ 2,740,000 $ 32,000 See accompanying notes to the consolidated financial statements. 6 J & J SNACK FOODS CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1 In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows. The results of operations for the three months and nine months ended June 27, 1998 and June 28, 1997 are not necessarily indicative of results for the full year. Sales of the Company's retail stores are generally higher in the first quarter due to the holiday shopping season. Sales of the Company's frozen carbonated beverages and Italian ice products are generally higher in the third and fourth quarters due to seasonal factors. While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company's Annual Report on Form 10-K for the year ended September 27, 1997. Note 2 The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Earnings per share calculations for 1997 have been restated to reflect the adoption of SFAS No. 128. The Company's calculation of earnings per share in accordance with SFAS No. 128, "Earnings Per Share," is as follows: 7 Three Months Ended June 27, 1998 Income Shares Per Share (Numerator) (Denominator) Amount Basic EPS Net Income available to common stockholders $4,716,000 8,994,000 $.52 Effect of Dilutive Securities Options - 461,000 (.02) Diluted EPS Net Income available to common stockholders plus assumed conversions $4,716,000 9,455,000 $.50 Nine Months Ended June 27, 1998 Income Shares Per Share (Numerator) (Denominator) Amount Basic EPS Net Income available to common stockholders $6,007,000 8,918,000 $.67 Effect of Dilutive Securities Options - 397,000 (.03) Diluted EPS Net Income available to common stockholders plus assumed conversions $6,007,000 9,315,000 $.64 Three Months Ended June 28, 1997 Income Shares Per Share (Numerator) (Denominator) Amount Basic EPS Net Income available to common stockholders $3,158,000 8,776,000 $.36 Effect of Dilutive Securities Options - 229,000 (.01) Diluted EPS Net Income available to common stockholders plus assumed conversions $3,158,000 9,005,000 $.35 8 Nine Months Ended June 28, 1997 Income Shares Per Share (Numerator) (Denominator) Amount Basic EPS Net Income available to common stockholders $4,175,000 8,763,000 $.48 Effect of Dilutive Securities Options - 157,000 (.01) Diluted EPS Net Income available to common stockholders plus assumed conversions $4,175,000 8,920,000 $.47 Note 3 Inventories consist of the following: June 27, September 27, 1998 1997 Finished goods $ 9,131,000 $ 7,108,000 Raw materials 1,902,000 1,789,000 Packaging materials 2,247,000 2,262,000 Equipment parts & other 3,182,000 2,376,000 $16,462,000 $13,535,000 Note 4 The amortized cost, unrealized gains and losses, and fair market values of the Company's long-term investment securities held to maturity at June 27, 1998 are summarized as follows: Gross Gross Fair Amortized Unrealized Unrealized Market Cost Gains Losses Value Held to Maturity Securities Corporate Debt Securities $ 953,000 $36,000 $ - $ 989,000 Municipal Government Securities 1,695,000 24,000 - 1,719,000 Other 500,000 - - 500,000 $3,148,000 $60,000 $ - $3,208,000 The amortized cost, unrealized gains and losses, and fair market values of the Company's long-term investment securities available for sale and held to maturity at September 27, 1997 are summarized as follows: 9 Gross Gross Fair Amortized Unrealized Unrealized Market Cost Gains Losses Value Available for sale Corporate debt securities $ 495,000 $ - $ - $ 495,000 Held to maturity securities 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 $22,000 $ (8,000) $3,354,000 Note 5 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 June 27, 1998, $8,000,000 of the note was classified under current maturities of long-term debt. At June 27, 1998, the balance on the note was $36,000,000. $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 made monthly. The interest rate on the outstanding borrowings under the line was 6.16% at June 27, 1998. At June 27, 1998, $12,000,000 in borrowings was classified as a long-term liability. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources The Company's cash expected to be provided by future operations and its available lines of credit are its primary sources of short- term liquidity. The Company believes that these sources, along with its borrowing capacity, are sufficient to fund future growth and expansion. In the nine months ended June 27, 1998, the devaluation of the Mexican peso caused a reduction of $159,000 in stockholders' equity because of the revaluation of the net assets of the Company's Mexican frozen carbonated beverage subsidiary. In December 1997, the Company acquired the common stock of National ICEE Corporation, a marketer and distributor of frozen carbonated beverages under the tradename ICEE, with approximate annual sales of $40,000,000. As a result of the acquisition, the Company now has the rights to market and distribute frozen carbonated beverages under the name ICEE to all of the continental United States, except for portions of eleven states. The purchase price paid to the former shareholders of National ICEE Corporation was $9,000,000 in the form of cash. Additionally, the Company assumed approximately $44,000,000 of debt, of which approximately $42,000,000 was retired at closing. The source of cash utilized to retire the debt and to fund the purchase price was a $40,000,000 unsecured term loan and an unsecured revolving line of credit with the Company's existing banks. In January 1997, the Company acquired the assets of Mama Tish?s International Foods for the assumption of some of its liabilities. Mama Tish 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 with annual sales of approximately $1.4 million. In October 1996, the Company acquired the assets of Bakers Best Snack Foods Corp. for cash. Bakers Best is a manufacturer of soft pretzels selling to both the food service and retail supermarket industries with annual sales of approximately $4 million. Available to the Company are unsecured general purpose bank lines of credit totaling $30,000,000. Borrowings under the lines at June 27, 1998 were $12,000,000. 11 Results of Operations Net sales increased $9,828,000 or 15% to $73,276,000 for the three months and $26,981,000 or 17% to $184,335,000 for the nine months ended June 27, 1998 compared to the nine months ended June 28, 1997. Excluding sales of acquired businesses, net sales decreased approximately $400,000 or less than 1% for the three months and increased approximately $5,200,000 or 3% for the nine months. Sales to food service customers decreased $1,651,000 or 6% in the third quarter to $28,289,000 and were essentially unchanged for the nine months. Excluding sales of acquired businesses, sales to food service customers decreased $1,651,000 or 6% for the quarter and decreased $1,132,000 or 1% for the nine months. Soft pretzel sales to the food service market increased 8% to $15,371,000 in the third quarter and 4% to $45,184,000 in the nine months. Increased sales of soft pretzels to one customer in the third quarter accounted for approximately 40% of the third quarter sales increase and 30% of the nine month sales increase. Excluding sales of acquired businesses, food service soft pretzel sales increased $1,188,000 or 8% in the third quarter and increased $1,467,000 or 3% in the nine month period. Italian ice and frozen juice treat and dessert sales decreased 29% to $8,099,000 in the three months and 15% to $17,493,000 in the nine months. Decreased sales to three customers during the three months accounted for essentially all of the third quarter and nine month sales decrease, respectively. Excluding sales of an acquired business, the sales decrease was $3,264,000 or 29% in the third quarter and $3,828,000 or 19% in the nine month period. Churro sales to food service customers increased 7% to $3,017,000 in the third quarter and 7% to $8,212,000 in the nine months. Sales of products to retail supermarkets decreased $660,000 or 6% to $10,445,000 in the third quarter and 6% to $26,999,000 in the nine months. Excluding sales of acquired businesses, sales to retail supermarkets were down 6% in the quarter and 8% for the nine months. Soft pretzel sales for the third quarter were down 3% and for the nine months were down 13% from last year to $4,766,000 and $16,423,000, respectively. SOFTSTIX sales increased $206,000 or 61% to $543,000 in the third quarter and $111,000 or 7% in the nine months. Sales of the flagship SUPERPRETZEL brand soft pretzels, excluding SOFTSTIX and CINNAMON RAISIN, decreased 2% in the third quarter and 5% for the nine months. Sales of Italian ice decreased $615,000 or 10% to $5,264,000 in the third quarter and increased $223,000 or 2% to $9,272,000 in the nine months. 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. Excluding sales of an acquired business, Italian ice sales were down 2% for the nine months. Frozen carbonated beverage and related product sales increased $11,876,000 or 85% to $25,915,000 in the third quarter and $23,823,000 or 76% to $55,165,000 in the nine months. Beverage and beverage cup and lid sales alone 12 increased 87% in the third quarter and 72% in the nine months to $23,341,000 and $48,655,000, respectively. Excluding sales resulting from the acquisition of National Icee Corporation in December 1997, frozen carbonated beverage and related product sales increased $1,719,000 or 12% in the third quarter from last year and $3,800,000 or 12% in the nine months. Bakery sales increased $97,000 or 2% to $5,644,000 in the third quarter and $4,218,000 or 35% to $16,389,000 in the first nine months due to increased product sales to one customer. Sales of our Bavarian Pretzel Bakery increased 6% to $2,983,000 in the third quarter and 9% to $836,000 in the nine month period. Excluding sales of an acquired business, sales were up 6% in the nine months. Gross profit as a percentage of sales increased to 53% and 50% in the third quarter and nine months, respectively, from 49% in the corresponding periods last period. The gross profit percentage increases are primarily attributable to higher gross profit percentages of the acquired National Icee Corporation business and lower flour costs offset by higher manufacturing costs of approximately $1,000,000 incurred during the startup of operations in the third quarter at the Company's expanded Italian ice and frozen dessert plant in Scranton, PA. Total operating expenses increased $5,193,000 in the third quarter and as a percentage of sales increased to 43% from 41% in last year's same quarter. For the nine months, operating expenses increased $12,311,000 and as a percentage of sales were 45% in both years' periods. Marketing expenses increased to 29% of sales in this year's third quarter from 28% last year and were 30% of sales in the nine month period this year and last. Distribution expenses increased to 9% of sales in this year's third quarter from 8% of sales last year and to 10% of sales in this year's nine month period from 9% in the year ago period. The increases in marketing and distribution expenses as a percentage of sales were due to higher operating expenses of the acquired National Icee Corporation business. Administration expenses decreased to 3% of sales in the third quarter from 4% in all other periods due primarily to higher sales levels. Operating income increased $2,289,000 or 46% to $7,236,000 in the third quarter and $4,138,000 or 65% to $10,485,000 in the nine months. Investment income decreased 7% in the third quarter and 22% in the nine months due to sharply lower levels of investable funds which were used to pay for acquisitions. Interest expense increased $837,000 and $1,827,000 in the quarter and nine months, respectively, due to the assumption and subsequent refinancing of the debt of National Icee Corporation. 13 Sundry income increased by $1,028,000 in the third quarter and $703,000 in the nine months due to the successful settlement of certain litigation. For the nine month period, sundry income was offset by $419,000 in write offs and reserves for the closing down of unprofitable retail stores of our Bavarian Pretzel Bakery. The effective income tax rate has been estimated at 37% in all periods reported. Net earnings increased $1,558,000 or 49% in the current three month period to $4,716,000 and $1,832,000 or 44% in the current nine month period to $6,007,000. Excluding the impact of National Icee Corporation, net earnings would have been approximately $4,200,000, or 33% higher than last year in the third quarter and $6,500,000 or 56% higher than last year for the nine month period. 14 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits - None b) Reports on Form 8-K - There were no reports on Form 8-K for the three months ended June 27, 1998. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. J & J SNACK FOODS CORP. Dated: August 7, 1998 /s/ Gerald B. Shreiber Gerald B. Shreiber President Dated: August 7, 1998 /s/ Dennis G. Moore Dennis G. Moore Senior Vice President and Chief Financial Officer 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. J & J SNACK FOODS CORP. Dated: August 7, 1998 Gerald B. Shreiber President Dated: August 7, 1998 Dennis G. Moore Senior Vice President and Chief Financial Officer 16