EX-13 2 0002.txt J & J SNACK FOODS CORP. 2000 ANNUAL REPORT TO SHAREHOLDERS 21 J&J Snack Foods 6000 Central Highway Pennsauken, NJ 08109 (856) 665-9533 www.jjsnack.com More Products, for More People, in More Places...Every Day 2000 ANNUAL REPORT FINANCIAL HIGHLIGHTS Fiscal year ended in September (In thousands, except per share data) 2000 1999 1998 1997 1996 Net Sales $321,112 $288,439 $262,390 $220,318 $186,018 Net Earnings $9,968 $14,264 $11,850 $8,159 $5,843 Total Assets $220,039 $213,680 $213,261 $136,827 $123,128 Long-Term Debt $42,481 $34,660 $48,199 $5,028 $5,010 Stockholders' Equity $133,274 $131,169 $119,681 $105,904 $96,708 Common Share Data Earnings Per Diluted Share $1.10 $1.50 $1.26 $.91 $.65 Earnings Per Basic Share $1.13 $1.58 $1.32 $.93 $.65 Book Value Per Share $15.64 $14.57 $13.25 $11.97 $11.05 Common Shares Outstanding At Year End 8,522 9,000 9,036 8,850 8,749 CONTENTS President's Letter 1 2000 in Review 3 Soft Pretzels 4 Frozen Beverages 6 Frozen Desserts 8 More Snacks 10 Family of Brands 12 Financial Information 13 Corporate Information 29 PRESIDENT'S LETTER Last year in my President's Letter I opened with the comment "By most any standards, 1999 was a terrific year for J&J Snack Foods Corp...we achieved record sales and earnings were the highest in our history." Just as we were pleased to report and share with you (with unabashed pride) our previous year's record results, it is with disappointment but candidness that I remark on our fiscal year 2000 results. While our sales grew over 11% to a record $321 million, this, nonetheless, fell short of our budgeted plans. This shortfall, together with a combination of other unrelated factors, resulted in net earnings falling 30% to $9,968,000 and EPS declining 27% to $1.10. The best way to deal with difficult questions is to confront them head on with decisiveness and honesty. Q. What happened this year and why? A. Some of our core business products suffered from sluggish sales. In addition, manufacturing problems related to the start-up of our MINUTE MAID brand licensed products at our frozen dessert plant in Scranton, PA caused both shortfalls in production and increased costs. Additionally, cooler than normal summer weather in the Northeast caused disappointing sales for our ICEE subsidiary and frozen dessert products. We also took a substantial one-time charge related to accounts receivable from movie theater chains and wrote down certain real estate assets. On a positive note, we did increase sales by 11%, and we believe that the factors contributing to our decline in earnings have been corrected. Q. What are you doing to address sluggish sales of soft pretzels? A. Plenty! Although we are disappointed with soft pretzel sales to certain individual specialty markets, we are in the process of addressing this with new and improved product entries--including some exciting, newly created "first of its kind" filled soft pretzel varieties that have been developed by our R&D staff. Q. What can we expect for next year and the future? A. Better than this year! A lot better. Sales will be higher, but more importantly, our commitment and belief is very strong. We expect to achieve strong increases in sales and earnings for fiscal 2001 and beyond. The business strategy is essentially the same...niche products; low cost producer; strong sales and marketing. Complement those ideals with strategic alliances and partnerships with world-class companies, and we have a continuing recipe for success. Our portfolio of brands includes category leaders like SUPERPRETZEL, ICEE, TIO PEPE'S churros, LUIGI'S Italian ice, MINUTE MAID frozen desserts and fast growing new additions, like MRS. GOODCOOKIE and CAMDEN CREEK ready-to-bake cookie dough. Really, there is no other company quite like us. We are a one-of-a-kind company, participating in both the snack and beverage industries...with equity, value and leadership in strong brands. Q. How about acquisitions? A. Over the years, we have grown both organically and from acquisitions. If an acquisition expands our sales and distribution and provides complementary and synergistic value, it is certainly worth considering. Our very recent acquisition of Uptown Bakeries in November 2000, a manufacturer providing fresh bakery products such as bagels, donuts, fancies, muffins and soft pretzels, fits those criteria. It's important -- make that critical -- that we make acquisitions fit properly and provide resources to the acquired company resulting in an overall improvement to the J&J Snack Foods organization. Q. How can you market your products better given the competitiveness and the consolidation of the markets? A. By creating more value for the trade, and ultimately, the final consumer. By marketing better, improving point-of-sale materials as well as dispensing and merchandising equipment, and expanding our distribution alternatives in both frozen and fresh channels. We are learning that the sales and distribution systems that are in place can be diversified and improved by listening, learning and reacting. And there is a wealth of technology being created to advance our manufacturing and distribution capabilities. Q. Will the Company continue to repurchase shares? A. We believe J&J Snack Foods is undervalued and a great investment by any comparable standard. The Company plans to continue to repurchase shares as available. Q. How do you care to sum up? A. We believe we are a terrific company with hard working, talented, dedicated people. We have an excellent customer base and expanding product lines and marketplaces. The foundation is in place to have a banner year and we plan on delivering! 2000 IN REVIEW Consumer enthusiasm over the years has made J&J Snack Foods Corp. a leader in the manufacturing, marketing and distribution of an expanding variety of nutritional, popularly priced, niche snack foods and beverages. During fiscal year 2000 we continued to expand our snack food and beverage business, allowing us to bring more products to more people in more places every day. J&J's expanding portfolio of products includes soft pretzels; frozen beverages; frozen juice bars and desserts; churros, a cinnamon pastry; funnel cakes; cookies and bakery goods; and other snack foods and drinks. They are available to the food service and retail supermarket industries at tens-of-thousands of locations... and growing. Our two business segments, Snack Foods -- which includes Food Service, Retail Supermarket, Bakery and our Restaurant Group -- and Frozen Beverages achieved record sales growth this past year and remain dedicated to the ongoing health, vibrancy and evolution of the Company. * The cornerstone of J&J Snack Foods, our Food Service division, continues to play a vital role in the Company's growth. This fiscal year saw an increase of 4% in sales due in part to a greater focus on a broader product mix and the expansion of our branded frozen cookie dough business. * The growth trend that the Retail Supermarket division established in 1999 continued its momentum this fiscal year in large part due to exciting, new product introductions in frozen desserts. Total sales were up a sharp 29%. * J&J's Los Angeles-based West Coast Bakery division saw sales rise 9% as it continues to sell more and more commercial bakery goods. * And our Restaurant Group, which operates our chain of retail stores, generated an increase of 1% in sales during fiscal year 2000 as well. * Our Frozen Beverage business, driven by the ICEE brand, had an impressive performance in fiscal 2000 posting a double-digit sales increase of 14%. Our strengthened partnership with The Coca-Cola Company was a contributing factor. Overall, 2000 was a solid growth year for J&J Snack Foods... a year of maintaining and building momentum in each of our niche product categories: soft pretzels, frozen beverages, frozen desserts and our other popular snacks. As we approach our 30th anniversary next year, we continue to search for new ways to delight our loyal fans so we can bring them even more products to more places in the days to come. SOFT PRETZELS J&J's flagship soft pretzel brand, SUPERPRETZEL, remained the clear category leader in fiscal 2000 despite the fact that our overall pretzel business was somewhat flat. SUPERPRETZEL, America's Favorite Soft Pretzel, is a good-for-you snack that is perfect for today's busy, health-conscious lifestyles. They're convenient, portable, low fat and above all, great tasting! To stimulate sales across this all-important product line, we're developing new marketing, promotional and merchandising initiatives for fiscal 2001. The everywhere snack SUPERPRETZEL soft pretzels are enjoyed by consumers of all ages at tens- of-thousands of high-traffic locations across the country. They're being munched in malls; snapped up at snack bars and supermarkets; and carried out of chain, convenience and warehouse club stores. They're in the hands of cheering fans at sports arenas; a family treat at amusement, leisure and theme parks; part of the show at movie theatres; and always a favorite snack at home or at school. In fact, the SUPERPRETZEL brand is virtually everywhere. And that's exactly where it should be. Not just a pretzel anymore To maintain SUPERPRETZEL's leadership position and meet growing consumer demand, we continue to focus on new soft pretzel shapes, sizes and flavors. SUPERPRETZEL soft pretzels are even more popular in schools since we've introduced custom shapes such as shamrocks, hearts and pumpkins, which create seasonal promotions. They provide students with a fun, great tasting menu change -- while also satisfying bread requirements for the U.S.D.A. National School Lunch/Breakfast Program. SUPERPRETZEL SOFT PRETZEL BITES, a bite-size version that's perfect for parties, and SUPERPRETZEL SOFTSTIX, cheese-filled soft pretzel sticks, are two examples of our innovative soft pretzel line extensions. New initiatives to reformulate and expand our line of gourmet soft pretzel offerings are already under way. Merchandising means business At retail snack bars, where merchandising is everything, we continue to roll out Project 2000. This new display case retrofits existing SUPERPRETZEL merchandising units with eye-catching graphics to increase visibility, enhance brand recognition and stimulate impulse purchases. Strong partnerships in-store The SUPERPRETZEL brand remains soft pretzel king of the crowded supermarket freezer case, with overall retail sales rising 7% in fiscal 2000. One key contributor was SUPERPRETZEL SOFTSTIX -- which combine our soft pretzels with KRAFT* cheese filling -- delivering a huge 40% gain through increased sales and distribution. Successful promotions with complementary leading brands such as Cheez Whiz** and French's*** mustard, which highlighted increased consumer usage of dips and toppings, also helped increase sales. And now, Canadian supermarket shoppers can purchase SUPERPRETZEL soft pretzels, too! Our Restaurant Group, which operates BAVARIAN PRETZEL BAKERY and PRETZEL GOURMET retail stores in the Mid-Atlantic states, saw a modest sales increase for fiscal 2000. This division also developed and opened two new expanded menu snack bar concepts: TREAT ZONE in malls and Cafe Roebucks in Sears stores. * KRAFT and the KRAFT logo are registered trademarks owned and licensed by Kraft Foods, Inc. ** Cheez Whiz is a registered trademark of Kraft Foods, Inc. *** French's is a registered trademark of Reckitt Benckiser. FROZEN BEVERAGES It was another cool year for The ICEE Company, the world's largest distributor of frozen beverages, which experienced a solid sales increase of 14% in fiscal 2000. Very cool, indeed! The ICEE brand is available throughout the U.S., Canada and Mexico. ARCTIC BLAST and other signature brands are also available. Kids of all ages absolutely love our carbonated and uncarbonated semi- frozen beverages. These refreshing drinks are served from our proprietary dispensing equipment and can be enjoyed by sipping through a straw or eating with a spoon. And today, consumers are enjoying them at over 19,000 food service locations nationwide, many of which also offer our SUPERPRETZEL soft pretzels and other snack food products... a sensational combination! Our mascots, JJ SUPERPRETZEL and ICEE BEAR, agree. A world-class partnership We are delighted to report that our long-term marketing agreement with The Coca-Cola Company continues to grow. During fiscal 2000, we installed an additional 3,500 frozen carbonated beverage machines in Burger King* locations nationwide, completing this rollout of the national program to 7,500 locations. Under this partnership, The ICEE Company, Coca-Cola's primary infrastructure partner, provides the ongoing service of the dispensing equipment while The Coca-Cola Company provides the syrup. It's a perfect blend of The ICEE Company's operational and service system expertise and the marketing power of Coca-Cola**. We are excited with the opportunity to develop and execute additional beverage programs as a partner with The Coca-Cola Company for the future. Advancing the vision and opportunities We continue to place ICEE machines in high-traffic locations where people have a thirst for a cold, delicious beverage. In fiscal 2000, we installed an additional 1,400 frozen beverage machines in food service locations, plus more than 500 SMOOTHEE BY ICEE machines in schools nationwide. Behind the scenes, we're working to ensure that every machine is 100% reliable and ready to delight every customer. Our nationwide network of branches and service technicians continues to perform this vital task more effectively each year, thanks to strong support from our centralized state-of-the-art Customer Service Center. We've also moved several high-volume accounts to direct store distribution, providing faster access to equipment and ingredients while more efficiently executing promotional opportunities. Icing the trends Look around, and the trends are clear: People everywhere are flocking to juice bars, coffee bars and in-store snack bars. And The ICEE Company is there to put these trends on ice. Last year, three exciting new frozen uncarbonated beverages were added to the ICEE family. SMOOTHEE BY ICEE is made with real fruit juice, and is available in popular fruit flavors. This healthy and refreshing new taste is receiving high grades in a number of schools, and is being tested in supermarket snack bars. JAVA FREEZE, a frozen delight in gourmet coffee flavors, is available at snack bars and other locations. And, FROZEN COCKTAILS, created expressly for adults to enjoy, is a perfect fit for sports and entertainment venues. And the future is shaping up to be even cooler. * Burger King is a registered trademark of Burger King Corporation. ** "Coca-Cola" is a trademark of The Coca-Cola Company. FROZEN DESSERTS Fiscal 2000 brought continued growth and exciting developments in our Frozen Desserts division through new product introductions and strategic partnerships. Our LUIGI'S, SHAPE UPS, ICEE and MAMA TISH'S brands have been joined by MINUTE MAID* and HI-C*, high-visibility consumer favorites. Got a minute for some great news? The year's most important event: A long-term partnership with The Minute Maid Company. "We are excited to be partnering with J&J Snack Foods, an industry leader, who will market MINUTE MAID and HI-C frozen dessert products to all trade and consumer channels," said Gary Poos, Vice President, New Channel Activation, The Minute Maid Company. This groundbreaking agreement helped sales in our Food Service division to grow by 7% in fiscal 2000. This strategic alliance gives J&J the exclusive rights to manufacture, sell and distribute a dynamic new line of MINUTE MAID and HI-C frozen juice products. Both nationally recognized brands are hits among kids and adults alike and J&J will benefit from their broad consumer acceptance and marketing support. Available in cups, tubes or m-paks, MINUTE MAID Soft Frozen Lemonade and HI-C Frozen Fruit Bars are delicious, refreshing new treats available to cool off consumers at numerous food service locations... sports venues, leisure and theme parks and club stores. And sports fans everywhere helped make sales of MINUTE MAID Soft Frozen Lemonade cups at stadiums and sports arenas extremely successful this fiscal year. How cool is that!?! Welcome to the club Our new MINUTE MAID and HI-C products were also part of our strong sales story in warehouse club stores nationwide. These new products felt right at home next to our other successful brands, LUIGI'S Real Italian Ice, MAMA TISH'S Italian Ice and ICEE Squeeze Tubes, which all continue to perform well in this important channel. New school ties Our SHAPE UPS frozen juice bars continue to be a favorite with students everywhere. SHAPE UPS carry the Child Nutrition (CN) Label and satisfy juice requirements for the U.S.D.A. National School Lunch/Breakfast Program. After all, they're made with real fruit juice. And SHAPE UPS are also benefiting from themed school promotions tied in with other wholesome J&J food service products, including SUPERPRETZEL soft pretzels and CAMDEN CREEK cookies. These tasty treats are one of the most popular combos in the lunchroom. Resounding retail results Overall retail supermarket sales of frozen desserts increased by a whopping 61% in fiscal 2000! Credit goes to four new product introductions: MINUTE MAID Juice Bars, MINUTE MAID Soft Frozen Lemonade and HI-C Frozen Fruit Bars were launched nationally and have staked their claim in the freezer case. ICEE Squeeze Tubes, which capture the carbonated fizz and taste of a traditional ICEE drink, were successfully introduced to test markets last year and were rolled out on a national basis during fiscal 2000. These frozen treats, available in two variety packs, are further enhancing the high brand awareness and equity of the ICEE name among consumers of all ages. Sales of LUIGI'S Real Italian Ice, like other frozen novelty products, saw a slight decline due in part to a cool, rainy summer in the Northeast. With our exciting new product line extensions and hopes for warmer weather, sales for all our frozen dessert products look hot for 2001! * "MINUTE MAID" and "HI-C" are registered trademarks of The Coca-Cola Company. MORE SNACKS Yes... there's more! J&J also produces other niche snack foods, including cookies, churros, funnel cakes and other bakery goods. Sunny times on the West Coast Our Los Angeles-based West Coast Bakery put in a golden performance in fiscal 2000, with sales increasing by 9%. Credit goes to our frozen cookie dough, commercial baking ingredients and contract private label products, including organically certified baked goods. And, manufacturing efficiencies continue to improve as a result of capital expenditures on automated equipment. Monster performance in cookies Awesome! That's the word for J&J's Food Service branded cookie business, where sales increased 63% for the year. This phenomenal performance was led by sales of our frozen cookie dough, under the brands MRS. GOODCOOKIE and CAMDEN CREEK. Our recipe for success contains several ingredients. First, fiscal 2000 saw new product entries and reformulations. Second, we expanded distribution nationwide. Third, we added several significant new customers. Fourth, we introduced an updated heated cookie display case. And fifth, we began production at an East Coast manufacturing facility to meet increased demand while creating production and distribution efficiencies. Blend it all together, and you've got some real treats in the corporate cookie jar. TIO PEPE'S... broadening its appeal Another of our niche products, TIO PEPE'S churros, (crispy, cinnamon doughnut-like snacks sold to both the food service and retail marketplaces) has been gradually gaining popularity across the country -- and in international markets. To further support that effort, we've recently placed a sales person in the Asia-Pacific region; a move that has already begun to stimulate increased sales of our churros products in that part of the world. While we experienced a modest decline in overall churros sales this year, TIO PEPE'S fruit-filled churros are experiencing growth in both schools and leisure accounts. They are popular for school food service as they satisfy both bread and fruit requirements for the U.S.D.A. National School Lunch/Breakfast Program. Funnel cakes are always fun No need to sugar-coat these results: Our food service funnel cake business enjoyed another strong year, with a sales growth of 18%. THE FUNNEL CAKE FACTORY brand offers a unique line of frozen, pre- cooked, pre-shaped funnel cakes that are easy to prepare. They're also available as a make-your-own dry mix. Concessionaires love watching their dough rise as funnel cakes continue to attract hungry customers at theme and leisure parks, stadiums, arenas and special events. And because our funnel cakes meet bread standards for the U.S.D.A. National School Lunch/Breakfast Program, sales are also increasing in the school food service market. As J&J begins fiscal year 2001, we remain committed to bringing even more products to more people, in more places... every day. JJ Snack Foods FAMILY OF BRANDS MANAGEMENT'S DISCUSSION & 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 2000 (53 weeks) Compared to Fiscal 1999 (52 weeks) Net sales increased $32,673,000 or 11% to $321,112,000 in fiscal 2000 from $288,439,000 in fiscal 1999. The Company has two reportable segments, as disclosed in the notes to the consolidated financial statements: Snack Foods and Frozen Beverages. The Snack Foods segment manufactures and distributes snack foods and bakery items, which includes sales to food service customers and retail supermarkets. The Frozen Beverages segment markets and distributes frozen beverage products. These segments are managed as strategic business units due to their distinct production processes and capital requirements. Snack Foods Sales to food service customers increased $4,978,000 or 4% to $118,185,000 in fiscal 2000. Soft pretzel sales to the food service market decreased 2% to $60,309,000 due primarily to lower unit sales to two customers. Churro sales decreased 8% to $11,162,000 due primarily to decreased unit sales to two customers. Frozen juice bar and ices sales increased 7% to $29,014,000. Sales of the Company's MINUTE MAID* brand licensed products accounted for the frozen juice bars and ices sales increase. Sales of cookies to food service customers increased $4,471,000, or 63%, to $11,597,000 for the year due to the acquisition of the Camden Creek Bakery cookie business and increased unit sales. * Minute Maid is a registered trademark of the Coca-Cola Company. Sales of products to retail supermarkets increased $12,597,000 or 29% to $56,526,000 in fiscal 2000. Total soft pretzel sales to retail supermarkets were $25,721,000, an increase of 7% from fiscal 1999. Sales of our flagship SUPERPRETZEL brand soft pretzels, excluding SOFTSTIX, increased 3% to $19,340,000. An advertising program which began in last year's first quarter helped boost year ago pretzel sales. SOFTSTIX sales increased $1,203,000 or 40% to $4,234,000 from the previous year. Sales of frozen juice bars and ices increased $10,949,000 or 61% to $28,822,000 in 2000 from $17,873,000 in 1999 due primarily to the introduction of the Company's MINUTE MAID brand licensed products. Bakery sales increased $2,503,000 or 9% to $29,408,000 in fiscal 2000 due to increased unit sales across our customer base. Sales of our Bavarian Pretzel Bakery increased 1% to $12,822,000 for the year. Frozen Beverages Frozen beverage and related product sales increased $12,422,000 or 14% to $104,171,000 in fiscal 2000. Beverage sales alone increased 12% to $88,421,000 for the year and gross profit on beverage sales increased 8%, or $4,694,000 for the year. Service and lease revenue increased $4,378,000 for the year. Consolidated Gross profit decreased to 52% of sales in 2000 from 53% of sales in 1999. The gross profit percentage decrease is primarily attributable to cost overruns during start up manufacturing of our MINUTE MAID brand licensed products which was begun during the Company's second quarter, lower food service pretzel and churro sales, and lower gross profit percentages of the increased service and lease revenue of our frozen beverage business. Total operating expenses increased $19,510,000 to $148,023,000 in fiscal 2000 and as a percentage of sales increased to 46% in 2000 from 45% in 1999. Marketing expenses increased to 32% of sales in fiscal 2000 from 30% in 1999 due to increased depreciation expense of frozen beverage dispensers, increased payroll and vehicle costs for the servicing of frozen beverage dispensers and establishing of reserves for trade receivables from movie theatre chains. Distribution expenses decreased less than one percent to 9% of sales in 2000. Administrative expenses were 4% of sales in both fiscal 2000 and 1999. Operating income decreased $6,151,000 or 25% to $18,812,000 in fiscal 2000. Without the impact of reserving for accounts receivable from movie theatre chains, operating income would have decreased $5,098,000 or 20% to $19,865,000 in fiscal 2000. Interest expense decreased $469,000 to $2,755,000 in fiscal 2000 due to lower debt levels. Sundry expense increased $1,058,000 to $643,000 in 2000 compared to sundry income of $415,000 in 1999 primarily because of the writedown to its net realizable value of property held for sale in 2000. The effective income tax rate was 37% in both fiscal 2000 and fiscal 1999. Net earnings decreased $4,296,000 or 30% in fiscal 2000 to $9,968,000 or $1.10 per fully diluted share. Without the impact of reserving for the trade receivables from movie theatre chains and the writedown of the property held for sale, net earnings in 2000 would have been $11,158,000 or $1.23 per diluted share. Fiscal 1999 (52 weeks) Compared to Fiscal 1998 (52 weeks) Net sales increased $26,049,000 or 10% to $288,439,000 in fiscal 1999 from $262,390,000 in fiscal 1998. The Company has two reportable segments, as disclosed in the notes to the consolidated financial statements: Snack Foods and Frozen Beverages. The Snack Foods segment manufactures and distributes snack foods and bakery items, which includes sales to food service customers and retail supermarkets. The Frozen Beverages segment markets and distributes frozen beverage products. These segments are managed as strategic business units due to their distinct production processes and capital requirements. Snack Foods Sales to food service customers increased $9,737,000 or 9% to $113,207,000 in fiscal 1999. Soft pretzel sales to the food service market increased 2% to $61,833,000. Churro sales increased 8% to $12,075,000. Frozen juice bar and dessert sales increased 10% to $27,196,000. These sales increases were due primarily to increased unit volume to one customer in each of these categories. Sales of cookies to food service customers increased $4,458,000, or 167%, to $7,126,000 for the year. Approximately one-half of the cookies sales increase resulted from the acquisition of the Camden Creek Bakery cookie business. Sales of products to retail supermarkets increased $5,335,000 or 14% to $43,929,000 in fiscal 1999 due in part to a new advertising campaign. Total soft pretzel sales to retail supermarkets were $24,027,000, an increase of 10% from fiscal 1998. Sales of our flagship SUPERPRETZEL brand soft pretzels, excluding SOFTSTIX, increased 9% to $18,816,000. SOFTSTIX sales increased $745,000 or 33% to $3,031,000 from the previous year. Sales of frozen juice bars and ices increased $2,835,000 or 19% to $17,873,000 in 1999 from $15,038,000 in 1998 due, in part, to the introduction of ICEE Squeeze Tubes. Bakery sales increased $3,598,000 or 15% to $26,905,000 in fiscal 1999 due to increased unit sales across our customer base. Sales of our Bavarian Pretzel Bakery decreased 4% to $12,649,000 for the year due to fewer stores. Frozen Beverages Frozen beverage and related product sales increased $7,950,000 or 9% to $91,749,000 in fiscal 1999. Beverage sales alone increased 5% to $78,960,000 for the year, in part due to the December 1997 acquisition of National ICEE Corporation. Sales revenues were impacted by changes in billing practices resulting in lower revenues per gallon purchased by customers but which did not result in an overall drop in profit margin. Gross profit on product sales increased 12%, or $6,372,000 for the year. Service and lease revenue increased approximately $5,000,000 for the year. Consolidated Gross profit increased to 53% of sales in 1999 from 52% of sales in 1998. The gross profit percentage increase is primarily attributable to improved efficiencies at our Italian ice and frozen dessert plant in Scranton, PA and to increased gross profit percentages of frozen beverage sales. Total operating expenses increased $13,396,000 to $128,513,000 in fiscal 1999 and as a percentage of sales increased less than 1% to 45% in 1999 from 1998. Marketing expenses were 30% of sales in both fiscal 1999 and 1998. Distribution expenses increased 1U4 of one percent to 10% of sales in 1999. Administrative expenses were 4% of sales in both fiscal 1999 and 1998. Operating income increased $4,502,000 or 22% to $24,963,000 in fiscal 1999. Interest expense increased $191,000 to $3,224,000 in fiscal 1999 due to the December 1997 purchase and assumption and subsequent refinancing of the debt of National ICEE Corporation. Sundry income decreased by $393,000 in fiscal 1999 from $808,000 in fiscal 1998. The primary reason for the decrease was that 1998 included significant income resulting from the successful settlement of certain litigation. The effective income tax rate was 37% in both fiscal 1999 and fiscal 1998. Net earnings increased $2,414,000 or 20% in fiscal 1999 to $14,264,000. ACQUISITIONS, LIQUIDITY AND CAPITAL RESOURCES On November 20, 2000, the Company acquired the assets of Uptown Bakeries for cash. Uptown Bakeries, located in Bridgeport, NJ, sells fresh bakery products to the food service industry with approximate annual sales of $17,000,000. In February 1999, the Company acquired the Camden Creek Bakery cookie business from Schwan's Sales Enterprises, Inc., Marshall, MN for cash. Camden Creek sells frozen ready-to-bake cookies to the food service industry with approximate annual sales of $5,000,000. 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 had incurred approximately $50 million of debt to complete the acquisition. The following are the unaudited pro forma results of operations for the fiscal year 1998 assuming the above had occurred at the beginning of that fiscal year (in thousands except per share amounts): 1998 Sales $268,390 Net Earnings $11,346 Earnings per diluted share $1.21 All of the Company's acquisitions were accounted for under the purchase method of accounting, and the operations are included in the consolidated financial statements from the respective acquisition date. The Company's future expected operating cash flow along with its borrowing capacity are its primary sources of liquidity. The Company believes that these sources are sufficient to fund future growth and expansion. Fluctuations in the value of the Mexican peso and the resulting revaluation of the net assets of the Company's Mexican frozen beverage subsidiary caused decreases of $15,000 and $285,000 in accumulated comprehensive income (loss) for the 2000 and 1998 fiscal years, respectively and an increase of $93,000 in the 1999 fiscal year. In 2000, sales of the Mexican subsidiary were $2,967,000 as compared to $2,475,000 in 1999. In fiscal year 2000, the Company purchased and retired 614,000 shares of its common stock at a cost of $9,834,000. Under a buyback authorization approved by the Board of Directors in December 1999, 386,000 shares remain to be purchased at September 30, 2000. Subsequent to September 30, 2000 and prior to the issuance of these financial statements, the Company refinanced its unsecured term loan and its general-purpose bank credit line. Outstanding balances under these facilities were $18,000,000 and $21,000,000 at September 30, 2000, respectively. Accordingly, the Company has classified only $2,000,000 of the unsecured term note as short-term based on the refinanced arrangements. The new agreement provides for up to a $75,000,000 revolving credit facility repayable in three years, with the availability of repayments without penalty. The new agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. Subsequent to this statement, SFAS No. 137 was issued, which amended the effective date of SFAS No. 133 to be all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, SFAS 138 was issued, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133." SFAS 133, as amended by SFAS 138, requires that all derivative instruments be recorded on the balance sheet at their respective fair values. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the designation of the hedge transaction. The Company will adopt SFAS 133, as amended by SFAS 138, in the first quarter of fiscal year 2001. Based on the Company's minimal use of derivatives at the current time, management does not anticipate the adoption of this standard to have a significant impact on earnings or financial position of the Company. However, the impact from adopting SFAS No. 133, as amended by SFAS 138, will depend on the nature and purpose of the derivatives instruments in use by the Company at that time. In September 2000, the Emerging Issues Task Force reached a consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" (Issue 00-10). Issue 00-10 requires that all amounts billed to customers related to shipping and handling should be classified as revenues. In addition, Issue 00-10 specifies that the classification of shipping and handling cost is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board (APB) No. 22, "Disclosure of Accounting Policies." The Company's product costs includes amounts for shipping and handling, therefore, it charges its customers shipping and handling fees at the time the products are shipped or when its services are performed. The cost of shipping products to the customer is recognized at the time the products are shipped to the customer and is included in Distribution expenses. Accordingly, this consensus opinion had no effect on the Company's current and previous classifications. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) which addresses certain criteria for revenue recognition. SAB 101, as amended by SAB 101A and SAB 101B, outlines the criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company must implement any applicable provisions of SAB 101 no later than the first quarter of fiscal year 2001. Management believes the Company's revenue recognition policies comply with the guidance contained in SAB 101 and, therefore, the Company's results of operations will not be materially affected. Fiscal 2000 Compared to Fiscal 1999 There were no short-term investments held to maturity at September 30, 2000 as compared to $924,000 at September 25, 1999 because the investment matured during fiscal year 2000. Trade receivables increased $1,564,000 or 5% to $32,968,000 in 2000 primarily due to receivables generated from sales of the Company's MINUTE MAID brand licensed products, introduced in fiscal year 2000. Inventories increased $5,286,000 or 33% to $21,473,000 in 2000 primarily because of the introduction of the MINUTE MAID brand licensed products, parts required to service frozen beverage dispensers in over 7,000 Burger King* restaurants and the start up of cookie manufacturing on the East Coast. * Burger King is a registered trademark of Burger King Corporation. Property, plant and equipment increased $29,071,000 to $261,324,000 primarily because of expenditures for dispensers required for the expansion of the frozen beverage business, for ovens and portable merchandisers required for the expansion of the food service business and for the expansion and upgrading of production capability at the Company's manufacturing facilities. Goodwill, trademarks and rights, net of accumulated amortization decreased $2,053,000 to $48,768,000 due to amortization. Accounts payable and accrued liabilities increased $1,951,000 in 2000 from $31,690,000 in 1999 due primarily to increased levels of business. Current maturities of long-term debt decreased by $6,028,000 to $2,186,000 and long-term debt, less current maturities, increased by $7,821,000 to $42,481,000 because of the reclassification of debt due under an unsecured term loan and a general-purpose bank credit line which was refinanced subsequent to September 30, 2000 and prior to the issuance of these financial statements. Deferred income taxes increased by $638,000 to $8,340,000 which related primarily to disposals and depreciation of property, plant and equipment. Common stock decreased $7,848,000 in 2000 to $28,403,000 because of the repurchase and retirement of 614,000 shares of common stock, net of the exercise of incentive stock options and stock issued under the Company's stock purchase plan for employees. Net cash provided by operating activities decreased $11,162,000 to $37,206,000 in 2000 primarily due to decreased net earnings, and increases in trade receivables and inventories. Net cash used in investing activities increased $6,464,000 to $35,083,000 in 2000 primarily due to increased purchases of property, plant and equipment. Net cash used in financing activities decreased $10,319,000 in 2000 to $6,689,000 from $17,008,000 in 1999. The decrease of $10,319,000 was the result of an increase in borrowings in 2000 of $1,793,000 compared to a net paydown of $13,748,000 in 1999 caused by an increase of $4,209,000 in payments to repurchase common stock in addition to the aforementioned reduction in net cash provided by operating activities and the increase in net cash used in investing activities. Fiscal 1999 Compared to Fiscal 1998 Trade receivables decreased $1,279,000 or 4% to $31,404,000 in 1999, and inventories decreased $260,000 or 2% to $16,187,000 in 1999 from 1998 primarily because of increased efficiencies in the Company's operations. Other receivables decreased $1,228,000 to $477,000 in 1999 due to changes in payment programs from certain suppliers. Property, plant and equipment increased $19,689,000 to $232,253,000 primarily because of expenditures for dispensers required for the expansion of the frozen 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. Goodwill, trademarks and rights, net of accumulated amortization decreased $1,050,000 to $50,821,000 due to amortization, net of goodwill acquired in the Camden Creek Bakery acquisition. Accounts payable and accrued liabilities decreased $446,000 in 1999 from $32,136,000 in 1998 due primarily to a reduction in income taxes payable. Current maturities of long-term debt decreased by $209,000 to $8,214,000 and long-term debt, less current maturities decreased by $13,539,000 to $34,660,000 as a result of the use of available cash flow from operations to pay down other debt as well as make scheduled debt payments. Deferred income taxes increased by $3,315,000 to $7,702,000 which related to disposals and depreciation of property, plant and equipment. Common stock decreased $2,868,000 in 1999 to $36,252,000 because of the repurchase and retirement of common stock from the President and Chief Executive Officer of the Company, net of the exercise of incentive stock options. Net cash provided by operating activities increased $11,189,000 to $48,368,000 in 1999 primarily due to increases in net earnings, deferred taxes and depreciation and amortization of fixed assets and a decrease in accounts receivable. Net cash used in investing activities decreased $16,513,000 to $28,619,000 in 1999 primarily due to a decrease of $12,477,000 in payments for purchase of companies, net of cash acquired and debt assumed. Net cash used in financing activities of $17,008,000 in 1999 compared to net cash provided by financing activities of $9,756,000 in 1998. The change of $26,764,000 was the result of a net paydown in borrowings in 1999 of $13,748,000 compared to an increase of $7,631,000 in borrowings to fund the acquisition of National ICEE Corporation and the subsequent refinancing of its debt in 1998. CONSOLIDATED STATEMENTS OF EARNINGS Fiscal year ended September 30, September 25, September 26, 2000 1999 1998 (in thousands, except per share amounts) (53 weeks) (52 weeks) (52 weeks) Net sales $321,112 $288,439 $262,390 Cost of goods sold 154,277 134,963 126,812 Gross profit 166,835 153,476 135,578 Operating expenses Marketing 103,606 86,809 77,385 Distribution 30,096 28,066 24,846 Administrative 11,470 10,668 10,072 Amortization of intangibles and deferred costs 2,851 2,970 2,814 148,023 128,513 115,117 Operating income 18,812 24,963 20,461 Other income (expenses) Investment income 409 487 573 Interest expense (2,755) (3,224) (3,033) Sundry (643) 415 808 (2,989) (2,322) (1,652) Earnings before income taxes 15,823 22,641 18,809 Income taxes 5,855 8,377 6,959 NET EARNINGS $9,968 $14,264 $11,850 Earnings per diluted share $1.10 $1.50 $1.26 Weighted average number of diluted shares 9,063 9,530 9,368 Earnings per basic share $1.13 $1.58 $1.32 Weighted average number of basic shares 8,819 9,025 8,947 The accompanying notes are an integral part of these statements. CONSOLIDATED BALANCE SHEETS September 30, September 25, 2000 1999 (in thousands, except share amounts) Assets Current Assets Cash and cash equivalents $1,379 $5,945 Receivables Trade, less allowances of $1,573 and $806, respectively 32,968 31,404 Other 658 477 Inventories 21,473 16,187 Prepaid expenses and other 1,418 2,054 Total current assets 57,896 56,067 Property, Plant and Equipment, at cost 261,324 232,253 Less accumulated depreciation and amortization 152,155 130,292 109,169 101,961 Other Assets Goodwill, trademarks and rights, less accumulated amortization of $11,423 and $11,406, respectively 48,768 50,821 Long-term investment securities held to maturity 1,620 1,925 Sundry 2,586 2,906 52,974 55,652 $220,039 $213,680 Liabilities and Stockholders' Equity Current Liabilities Current maturities of long-term debt $2,186 $8,214 Accounts payable 24,913 23,272 Accrued liabilities 8,728 8,418 Total current liabilities 35,827 39,904 Long-Term Debt, less current maturities 42,481 34,660 Deferred Income Taxes 8,340 7,702 Other long-term liabilities 117 245 Stockholders' Equity Preferred stock, $1 par value; authorized, 5,000,000 shares; none issued - - Common stock, no par value; authorized, 25,000,000 shares; issued and outstanding, 8,522,000 and 9,000,000 respectively 28,403 36,251 Accumulated other comprehensive income (1,616) (1,601) Retained earnings 106,487 96,519 133,274 131,169 $220,039 $213,680 The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Accumulated Other Common Stock Comprehensive Retained Comprehensive Shares Amount Loss Earnings Total Income (in thousands) Balance at September 28, 1997 8,850 $36,908 $(1,409) $70,405 $105,904 Issuance of common stock upon exercise of stock options 171 2,017 - - 2,017 Issuance of common stock for employee stock purchase plan 15 195 - - 195 Foreign currency translation adjustment - - (285) - (285) $(285) Net earnings for the fiscal year ended September 26, 1998 - - - 11,850 11,850 11,850 Comprehensive Income - - - - - $11,565 Balance at September 26, 1998 9,036 39,120 (1,694) 82,255 119,681 Issuance of common stock upon exercise of stock options 200 2,487 - - 2,487 Issuance of common stock for employee stock purchase plan 14 269 - - 269 Foreign currency translation adjustment - - 93 - 93 $93 Repurchase of common stock (250) (5,625) - - (5,625) Net earnings for the fiscal year ended September 25, 1999 - - - 14,264 14,264 14,264 Comprehensive Income - - - - - $14,357 Balance at September 25, 1999 9,000 36,251 (1,601) 96,519 131,169 Issuance of common stock upon exercise of stock options 118 1,688 - - 1,688 Issuance of common stock for employee stock purchase plan 18 298 - - 298 Foreign currency translation adjustment - - (15) - (15) $(15) Repurchase of common stock (614) (9,834) - - (9,834) Net earnings for the fiscal year ended September 30, 2000 - - - 9,968 9,968 9,968 Comprehensive Income - - - - - $9,953 Balance at September 30, 2000 8,522 $28,403 $(1,616) $106,487 $133,274 The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal year ended September 30, September 25, September 26, 2000 1999 1998 (in thousands) (53 weeks) (52 weeks) (52 weeks) Operating activities: Net earnings $9,968 $14,264 $11,850 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of fixed assets 26,947 24,179 21,807 Amortization of intangibles and deferred costs 3,435 3,459 3,352 Losses from disposals and writedowns of property and equipment 830 168 306 Increase (decrease) in deferred income taxes 638 3,315 1,007 Changes in assets and liabilities, net of effects from purchase of companies: (Increase) decrease in accounts receivable (1,783) 2,609 (6,378) (Increase) decrease in inventories (4,997) 700 958 (Increase) in pre- paid expenses and other (288) 52 (48) Increase (decrease) in accounts payable and accrued liabilities 2,456 (378) 4,325 Net cash provided by operating activities 37,206 48,368 37,179 Investing activities: Purchases of property, plant and equipment (34,928) (26,606) (31,803) Payments for purchases of companies, net of cash acquired and debt assumed (1,280) (2,336) (14,813) Proceeds from invest- ments held to maturity 1,229 255 190 Proceeds from invest- ments available for sale - - 495 Proceeds from disposal of property and equipment 428 518 1,000 Other (532) (450) (201) Net cash used in investing activities (35,083) (28,619) (45,132) Financing activities: Proceeds from borrowings 11,000 4,000 56,150 Proceeds from issuance of common stock 1,352 2,365 2,125 Payments to repurchase common stock (9,834) (5,625) - Payments of long-term debt (9,207) (17,748) (48,519) Net cash (used in) provided by financing activities (6,689) (17,008) 9,756 Net (decrease) increase in cash and cash equivalents (4,566) 2,741 1,803 Cash and cash equivalents at beginning of year 5,945 3,204 1,401 Cash and cash equivalents at end of yea $1,379 $5,945 $3,204 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 sales and the related cost of sales at the time the products are shipped to customers or when its services are performed. The Company provides an allowance for doubtful receivables after taking into consideration historical experience and other factors. In September 2000, the Emerging Issues Task Force reached a consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" (Issue 00-10). Issue 00-10 requires that all amounts billed to customers related to shipping and handling should be classified as revenues. In addition, Issue 00-10 specifies that the classification of shipping and handling cost is an accounting policy decision that should be disclosed pursuant to APB 22, "Disclosure of Accounting Policies." The Company's product costs includes amounts for shipping and handling, therefore, it charges its customers shipping and handling fees at the time the products are shipped or when its services are performed. The cost of shipping products to the customer is recognized at the time the products are shipped to the customer and is included in Distribution expenses. Accordingly, this consensus opinion had no effect on the Company's current and previous classifications. The Company also sells service contracts covering frozen beverage machines sold. The terms of coverage range between 12 and 60 months. The Company records deferred income on service contracts which is amortized by the straight-line method over the term of the contracts. During the years ended September 30, 2000 and September 25, 1999, the Company sold $1,090,000 and $836,000, respectively, of service contracts related to its frozen beverage machines. At September 30, 2000 and September 25, 1999, deferred income on service contracts was $85,000 and $138,000, respectively, all of which is reflected as short-term and included in accrued liabilities on the consolidated balance sheet. Service contract income of $1,143,000, $897,000 and $578,000 was recognized for fiscal years 2000, 1999 and 1998, respectively. 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. Investment Securities The Company classifies its investments in securities in one of two categories: held to maturity 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. The balance of its debt securities and any equity securities are classified as available for sale. Net unrealized gains and losses, if significant on such securities, net of income tax, are reported as a separate component of stockholders' equity and excluded from the determination of net income. 9. 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. The Company follows 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. 10. Fair Value of Financial Instruments The carrying value of the Company's short-term financial instruments, such as receivables and accounts payable, approximate their fair values, based on the short-term maturities of these instruments. The carrying value of long-term debt obligations, consisting primarily of unsecured term note and an unsecured general purpose credit line with interest rates based on current short-term market rates, approximates the fair value at September 30, 2000 and September 25, 1999. 11. 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 liabilities. 12. Earnings Per Common Share The Company follows SFAS No. 128, "Earnings Per Share" (EPS). This standard eliminated 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 (stock options) or other contracts to issue common stock were exercised and converted into common stock. 13. Accounting for Stock-Based Compensation The Company follows 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 APB Opinion No. 25, "Accounting for Stock Issued to Employees." 14. Advertising Costs Advertising costs are expensed as incurred. Total advertising expense was $4,878,000, $5,537,000, and $4,128,000 for the fiscal years 2000, 1999 and 1998, respectively. 15. 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 obligations. 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 Statements 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. 16. Comprehensive Income In fiscal year 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 established standards for reporting and display of comprehensive income and its components in the financial statements. These financial statements were reclassified in fiscal year 1999 to reflect the provisions of SFAS No. 130. 17. Segment Reporting In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 superceded SFAS 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management approach." The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments, as well as disclosures about products and services and major customers. The adoption of SFAS No. 131 did not affect the results of operations or the financial position of the Company. 18. Recent Accounting Pronouncements In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. Subsequent to this statement, SFAS No. 137 was issued, which amended the effective date of SFAS No. 133 to be all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, SFAS 138 was issued, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133." SFAS 133, as amended by SFAS 138, requires that all derivative instruments be recorded on the balance sheet at their respective fair values. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the designation of the hedge transaction. The Company will adopt SFAS 133, as amended by SFAS 138, in the first quarter of fiscal year 2001. Based on the Company's minimal use of derivatives at the current time, management does not anticipate the adoption of this standard to have a significant impact on earnings or financial position of the Company. However, the impact from adopting SFAS No. 133, as amended by SFAS 138, will depend on the nature and purpose of the derivatives instruments in use by the Company at that time. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) which addresses certain criteria for revenue recognition. SAB 101, as amended by SAB 101A and SAB 101B, outlines the criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company must implement any applicable provisions of SAB 101 no later than the first quarter of fiscal year 2001. Management believes the Company's revenue recognition policies comply with the guidance contained in SAB 101 and, therefore, the Company's results of operations will not be materially affected. 19. Reclassifications Certain prior year financial statement amounts have been reclassified to be consistent with the presentation for the current year. NOTE B - ACQUISITIONS On November 20, 2000, the Company acquired the assets of Uptown Bakeries for cash. Uptown Bakeries, located in Bridgeport, NJ, sells fresh bakery products to the food service industry with approximate annual sales of $17,000,000. In February 1999, the Company acquired the Camden Creek Bakery cookie business from Schwan's Sales Enterprises, Inc., Marshall, MN. Camden Creek sells frozen ready-to-bake cookies to the food service industry with approximately $4.6 million of sales in 1998. 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 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 fiscal year 1998 assuming the above had occurred at the beginning of that fiscal year (in thousands, except per share amounts): 1998 Sales $268,390 Net Earnings $11,346 Earnings per diluted share $1.21 These 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 - INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses, and fair values of the Company's long-term investment securities held to maturity at September 30, 2000 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value (in thousands) Municipal government securities $1,120 $ - $64 $1,056 Other debt securities 500 - - 500 $1,620 $ - $64 $1,556 The amortized cost, gross unrealized gains and losses, and fair values of the Company's long-term investment securities available for sale and held to maturity at September 25, 1999 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value (in thousands) Municipal government securities $1,425 $ - $17 $1,408 Other debt securities 500 - - 500 $1,925 $ - $17 $1,908 The following table lists the maturities of long-term investment securities classified as held to maturity at September 30, 2000: Amortized Cost Fair Value (in thousands) Due in less than one year $ - $ - Due after one year through five years 1,620 1,556 $1,620 $1,556 Proceeds from sales of securities were $495,000 for fiscal year 1998. The Company uses the specific identification method to determine the cost of securities sold. No materials gains or losses were realized on sales of investment securities. NOTE D - INVENTORIES Inventories consist of the following: September 30, September 25, 2000 1999 (in thousands) Finished goods $10,714 $8,118 Raw materials 2,136 1,579 Packaging materials 2,532 1,770 Equipment parts and other 6,091 4,720 $21,473 $16,187 NOTE E - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: September 30, September 25, Estimated 2000 1999 Useful Lives (in thousands) Land $795 $745 - Buildings 5,586 5,386 15-39.5 years Plant machinery and equipment 75,817 66,305 5-10 years Marketing equipment 156,093 138,335 5 years Transportation equipment 2,043 2,049 5 years Office equipment 6,981 6,308 3-5 years Improvements 12,705 11,769 5-20 years Construction in progress 1,304 1,356 - $261,324 $232,253 NOTE F - ACCRUED LIABILITIES Included in accrued liabilities is accrued compensation of $4,134,000 and $5,024,000 as of September 30, 2000 and September 25, 1999, respectively. NOTE G - LONG-TERM DEBT Subsequent to September 30, 2000 and prior to the issuance of these financial statements, the Company refinanced its unsecured term loan and its general-purpose bank credit line. Outstanding balances under these facilities were $18,000,000 and $21,000,000 at September 30, 2000, respectively. Accordingly, the Company has classified only $2,000,000 of the unsecured term note as short-term based on the refinanced arrangements. The new agreement provides for up to a $75,000,000 revolving credit facility repayable in three years, with the availability of repayments without penalty. The new agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. Long-term debt consists of the following: September 30, September 25, 2000 1999 (in thousands) $40,000,000 unsecured term note, with 60 monthly principal payments of $666,667 plus 6.61% interest fixed through swap agreements beginning January 8, 1998 (subject to financial covenants), subsequently refinanced as long-term, discussed above $18,000 $26,000 $30,000,000 unsecured general- purpose bank credit line, with interest rate tied to LIBOR with interest payments due monthly (subject to financial covenants), subsequently refinanced as long-term, discussed above 21,000 11,000 7.25% redeemable economic development revenue bonds payable December 2005; interest payable semiannually (subject to financial covenants) 5,000 5,000 Other 667 874 44,667 42,874 Less current maturities 2,186 8,214 $42,481 $34,660 Annual principal payments of long-term debt as of September 30, 2000 are as follows (in thousands): 2001 $2,186 2002 113 2003 368 2004 37,000 2005 - 2006 and thereafter 5,000 $44,667 NOTE H - INCOME TAXES Income tax expense is as follows: Fiscal year ended September 30, September 25, September 26, 2000 1999 1998 (in thousands) Current U.S. Federal $4,697 $4,516 $5,389 Foreign 41 55 38 State 479 491 525 5,217 5,062 5,952 Deferred U.S. Federal 606 3,046 913 Foreign - - 7 State 32 269 87 638 3,315 1,007 $5,855 $8,377 $6,959 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 30, September 25, September 26, 2000 1999 1998 (in thousands) Income taxes at statutory rates $5,341 $7,698 $6,395 Increase (decrease) in taxes resulting from: State income taxes, net of federal income tax benefit 337 324 404 Nontaxable income (28) (38) (55) Other, net 205 393 215 $5,855 $8,377 $6,959 Deferred tax assets and liabilities consist of the following: September 30, September 25, 2000 1999 (in thousands) Deferred tax assets: Vacation accrual $427 $391 Insurance accrual 1,162 862 Allowances 1,187 566 Other, net 1,062 765 3,838 2,584 Deferred tax liabilities: Depreciation of property and equipment 12,046 10,151 Other, net 132 135 12,178 10,286 $8,340 $7,702 NOTE I - EARNINGS PER SHARE The Company's calculation of EPS is as follows: Fiscal Year Ended September 30, 2000 Income Shares Per Share (Numerator)(Denominator) Amount (in thousands, except per share amounts) Earnings Per Basic Share Net Income available to common stockholders $9,968 8,819 $1.13 Effect of Dilutive Securities Options - 244 (.03) Earnings Per Diluted Share Net Income available to common stockholders plus assumed conversions $9,968 9,063 $1.10 241,363 anti-dilutive weighted shares have been excluded in the computation of 2000 diluted EPS because the options' exercise price is greater than the average market price of the common stock. Fiscal Year Ended September 25, 1999 Income Shares Per Share (Numerator)(Denominator) Amount (in thousands, except per share amounts) Earnings Per Basic Share Net Income available to common stockholders $14,264 9,025 $1.58 Effect of Dilutive Securities Options - 505 (.08) Earnings Per Diluted Share Net Income available to common stockholders plus assumed conversions $14,264 9,530 $1.50 29,484 anti-dilutive weighted shares have been excluded in the computation of 1999 diluted EPS because the options' exercise price is greater than the average market price of the common stock. Fiscal Year Ended September 26, 1998 Income Shares Per Share (Numerator)(Denominator) Amount (in thousands, except per share amounts) Earnings Per Basic Share Net Income available to common stockholders $11,850 8,947 $1.32 Effect of Dilutive Securities Options - 421 (.06) Earnings Per Diluted Share Net Income available to common stockholders plus assumed conversions $11,850 9,368 $1.26 34,000 anti-dilutive weighted shares have been excluded in the computation of 1998 diluted EPS because the options' exercise price is greater than the average market price of the common stock. NOTE J - 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 30, 2000: Plants and Offices Equipment Total (in thousands) 2001 $4,323 $4,418 $8,741 2002 3,910 3,737 7,647 2003 3,407 3,142 6,549 2004 2,947 1,803 4,750 2005 2,497 395 2,892 2006 and thereafter 11,225 12 11,237 $28,309 $13,507 $41,816 Total rent expense was $9,330,000, $8,547,000 and $7,766,000 for fiscal years 2000, 1999 and 1998, 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 K - CAPITAL STOCK Under share repurchase programs authorized by the Board of Directors, 386,000 shares remain to be repurchased. In fiscal year 2000, the Company purchased and retired 614,000 shares of its common stock at a cost of $9,834,000. In fiscal year 1999, the Company purchased and retired 250,000 shares of its common stock at a cost of $5,625,000. The Company purchased the stock in 1999 from its President and Chief Executive Officer. NOTE L - 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 2,000,000 shares reserved under the Plan; options for 690,000 shares remain unissued as of September 30, 2000. The Company has a nonqualified stock option plan for nonemployee directors and the Chief Executive Officer of the Company whereby a total of 440,000 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 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 30, September 25, September 26, 2000 1999 1998 (in thousands, except per share amounts) Net Earnings: As reported $9,968 $14,264 $11,850 Pro forma 8,609 13,054 11,112 Earnings Per Diluted Share: As reported $1.10 $1.50 $1.26 Pro forma .95 1.37 1.18 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 2000, 1999 and 1998, respectively; expected volatility of 30% for all years; risk-free interest rates of 6.35%, 6.21% and 5.12%; 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 2000, 1999 and 1998 and the changes during the years ended on those dates is represented below: Incentive Nonqualified Stock Options Stock Options Weighted Weighted Stock Average Stock Average Options Exercise Options Exercise Outstanding Price Outstanding Price Balance, September 28, 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 Granted 241,860 21.87 34,000 21.75 Exercised (149,960) 11.62 (62,000) 11.39 Cancelled (37,574) 12.22 - - Balance September 25, 1999 950,659 14.67 332,500 13.56 Granted 186,334 13.68 34,000 15.94 Exercised (113,253) 10.43 (10,500) 7.00 Cancelled (108,446) 15.55 - - Balance, September 30, 2000 915,294 $14.92 356,000 $13.99 Exercisable Options, September 30, 2000 337,171 322,000 The weighted average fair value of incentive options granted during fiscal years ended September 30, 2000, September 25, 1999 and September 26, 1998 was $4.93, $9.22 and $5.31, respectively. The weighted average fair value of nonqualified stock options granted during fiscal years ended September 30, 2000, September 25, 1999 and September 26, 1998 was $8.95, $13.75 and $10.56, respectively. The following table summarizes information about incentive stock options outstanding at September 30, 2000: 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 30, 2000 Life Price 30, 2000 Price $7.25 - $10.50 112,900 .8 years $9.73 112,900 $9.73 $11.00 - $16.38 579,281 2.9 years $13.40 224,271 $11.64 $17.57 - $24.50 223,113 3.8 years $21.56 - - 915,294 337,171 The following table summarizes information about nonqualified stock options outstanding at September 30, 2000: 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 30, 2000 Life Price 30, 2000 Price $10.75 34,000 1.6 years $10.75 34,000 $10.75 $11.00 - $15.94 254,000 4.7 years $12.66 220,000 $12.16 $19.25 - $21.75 68,000 9.1 years $20.50 68,000 $20.50 356,000 322,000 NOTE M - 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 $819,000, $684,000 and $512,000 were made in fiscal years 2000, 1999 and 1998, respectively. NOTE N - CASH FLOW INFORMATION The following is supplemental cash flow information: Fiscal year ended September 30, September 25, September 26, 2000 1999 1998 (in thousands) Cash paid for: Interest $2,649 $3,231 $2,870 Income taxes 3,474 5,617 6,461 NOTE O - SEGMENT REPORTING Using the guidelines set forth in SFAS No. 131, the Company has two reportable segments: Snack Foods and Frozen Beverages. Snack Foods manufactures and distributes snack foods and bakery items. Frozen Beverages markets and distributes frozen beverage products. The segments are managed as strategic business units due to their distinct production processes and capital requirements. The Company evaluates each segment's performance based on income or loss before taxes, excluding corporate and other unallocated expenses and non-recurring charges. Information regarding the operations in these reportable segments is as follows: Fiscal year ended September 30, September 25, September 26, 2000 1999 1998 (in thousands) Sales: Snack Foods $216,941 $196,690 $178,591 Frozen Beverages 104,171 91,749 83,799 $321,112 $288,439 $262,390 Depreciation and Amortization: Snack Foods $14,273 $13,039 $12,167 Frozen Beverages 16,109 14,599 12,992 $30,382 $27,638 $25,159 Earnings Before Taxes: Snack Foods $13,071 $17,227 $14,418 Frozen Beverages 2,752 5,414 4,391 $15,823 $22,641 $18,809 Capital Expenditures: Snack Foods $17,706 $12,332 $15,604 Frozen Beverages 17,222 14,274 16,199 $34,928 $26,606 $31,803 Assets: Snack Foods $117,244 $112,271 $109,378 Frozen Beverages 102,795 101,409 103,883 $220,039 $213,680 $213,261 Sales to a single Snack Foods' customer accounted for approximately 10% of the Company's sales in fiscal 1998. 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 30, 2000 and September 25, 1999, 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 30, 2000 (53 weeks, 52 weeks and 52 weeks, respectively). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 30, 2000 and September 25, 1999, 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 30, 2000 in conformity with accounting principles generally accepted in the United States of America. Grant Thorton LLP Philadelphia, Pennsylvania November 7, 2000 (except for Notes B and G, as to which the date is November 20, 2000) 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 Vice President, Emerging Growth Equities, Ltd. 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 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 Michael Karaban Vice President, Marketing H. Robert Long Vice President, Distribution Milton L. Segal Vice President, Purchasing Don Smith Vice President, Research & Development, West Steven J. Taylor Vice President, Sales MIA PRODUCTS T.J. Couzens Vice President/General Manager THE ICEE COMPANY Dan Fachner President 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 2000 High Low 1st Quarter 22 3/4 15 1/2 2nd Quarter 21 7/8 16 13/16 3rd Quarter 20 1/2 14 4th Quarter 19 12 1/2 Fiscal 1999 High Low 1st Quarter 22 1/2 15 3/4 2nd Quarter 25 19 5/16 3rd Quarter 24 19 3/4 4th Quarter 24 7/16 20 1/4 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 Philadelphia, PA Counsel Blank, Rome, Comisky & McCauley LLP Annual Meeting The Annual Meeting of Shareholders is scheduled for Thursday, February 8, 2001 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