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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-K
 
     
 
x
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 29, 2007
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ­ ­ to ­ ­
 
Commission File No. 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
incorporation or organization)
 
(I.R.S.Employer
Identification No.)
6000 Central Highway
     Pennsauken, New Jersey      
 
  08109  
(Address of principal executive offices)   (Zip Code)
 
 
Registrant’s telephone number, including area code:   (856) 665-9533
 
Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, no par value
 
Securities Registered Pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes     No  X 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes     No  X 
 
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 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. Yes  X  No    
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  X 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer (    ) Accelerated filer ( X  Non-accelerated filer (    )
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes     No  X 
 
As of November 20, 2007, the latest practicable date, 18,709,127 shares of the Registrant’s common stock were issued and outstanding. The aggregate market value of shares held by non-affiliates of the Registrant on such date was $558,242,250 based on the last sale price on March 30, 2007 of $39.49 per share. March 30, 2007 was the last business day of the registrant’s most recently completed second fiscal quarter.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
The Registrant’s 2007 Annual Report to Shareholders for the fiscal year ended September 29, 2007 and Proxy Statement for its Annual Meeting of Shareholders to be held on February 5, 2008 are incorporated herein by reference into Parts II and III as set forth herein.
 


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2007
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J&J Snack Foods Corp. is a manufacturer, marketer and distributor of an expanding variety of nutritional, popularly priced, branded niche snack foods and beverages for the food service and retail supermarket industries. The Company is listed on the NASDAQ Global Select Market as “JJSF”, and serves both national and international markets. Our growing portfolio of products includes soft pretzels, frozen beverages, frozen juice treats and desserts; churros, a cinnamon pastry, funnel cakes, cookies and bakery goods, and other snack foods and drinks. Consumers can enjoy these nutritional and tasty products in a variety of settings where people work, play, travel and shop. The Company’s growth is the result of a strategy that emphasizes active development of new and innovative products, penetration into existing market channels and expansion of established products into new markets. Our four business groups: Food Service, Frozen Beverages, Retail Supermarket, and The Restaurant Group contributed to our 36th consecutive year of record sales in fiscal 2007. As we prepare for the future, J&J Snack Foods Corp. plans to continue expanding its unique niche product offerings by capitalizing on new opportunities wherever they may be found. HIGHLIGHTS Fiscal year ended in September 2007 2006 2005 2004 2003 2002 2001 2000 (In thousands except per share data) Net Sales .....................................$ 568,901 $ 514,831 $ 457,112 $ 416,588 $ 364,567 $ 353,187 $ 328,335 $ 296,832 Net Earnings .. .......................... .......$ 32,112 $ 29,450 $ 26,043 $ 22,710 $ 19,902 $ 18,113 $ 11,876 $ 9,968 Total Assets .................................... $ 380,288 $ 340,808 $ 305,924 $ 277,424 $ 239,478 $ 220,036 $ 224,481 $ 220,039 Long-Term Debt ................................$ —— $ —$ —$ —$ —$ —$ 28,368 $ 42,481 Capital Lease Obligations ........................$ 565 $ —$ —$ —$ —$ —$ —$ —Stockholders’ Equity ............................$ 295,582 $ 263,656 $ 234,762 $ 210,096 $ 182,564 $ 168,709 $ 146,143 $133,274 Common Share Data Earnings Per Diluted Share ....................... $ 1.69 $ 1.57 $ 1.40 $ 1.24 $ 1.10 $ 1.00 $ .68 $ .55 Earnings Per Basic Share ......................... $ 1.72 $ 1.60$ 1.43$ 1.27 $ 1.13 $ 1.04 $ .70 $ .56 Book Value Per Share ...........................$ 15.80 $ 14.28 $ 12.85 $ 11.67 $ 10.43 $ 9.48 $ 8.46 $ 7.82 Common Shares Outstanding At Year End ......... 18,702 18,468 18,272 18,012 17,514 17,806 17,272 17,044 Cash Dividends Declared Per Common Share ......$ .34 $ .30 $ .25 $ —— $ — 51; $ —— $ —— $ —— All share amounts reflect the 2-for-1 stock split effect January 5, 2006. NET SALESNET EARNINGSSTOCKHOLDERS’ EQUITY (In Thousands)$568,901(In Thousands)(In Thousands)$295,582 $32,112$263,656 $514,831$29,450 $457,112$26,043$234,762 $416,588$22,710$210,096 $353,187 $364,567$19,902$168,709 $182,564 $296,832 $328,335$18,113 $133,274 $146,143 $9,968 $11,876 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07

 


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J & J SNACK FOODS CORP.
2007 FORM 10-K ANNUAL REPORT
 
TABLE OF CONTENTS
 
             
        Page
 
  Business     1  
  Risk Factors     6  
  Unresolved Staff Comments     9  
  Properties     9  
  Legal Proceedings     10  
  Submission Of Matters To A Vote Of Security Holders     10  
 
  Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities     11  
  Selected Financial Data     14  
  Management’s Discussion And Analysis Of Financial Condition And Results Of Operations     14  
  Quantitative And Qualitative Disclosures About Market Risk     24  
  Financial Statements And Supplementary Data     24  
  Changes In And Disagreements With Accountants On Accounting And Financial Disclosure     24  
  Disclosure Controls and Procedures     24  
  Other Information     25  
 
  Directors, Executive Officers and Corporate Governance     26  
  Executive Compensation     26  
  Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters     27  
  Certain Relationships And Related Transactions, and Director Independence     27  
  Principal Accountant Fees and Services     27  
 
  Exhibits, Financial Statement Schedules     28  
 Subsidiaries of J&J Snack Foods Corp
 Consent of Independent Registered Public Accounting Firm
 Certification Pursuant to Sec 302
 Certification Pursuant to Sec 302
 Certification Pursuant to 18 USC Section 1350
 Certification Pursuant to 18 USC Section 1350


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PART I
 
Item 1.   Business
 
General
 
J & J Snack Foods Corp. (the “Company” or “J & J”) manufactures nutritional snack foods and distributes frozen beverages which it markets nationally to the food service and retail supermarket industries. The Company’s principal snack food products are soft pretzels marketed primarily under the brand name SUPERPRETZEL and frozen juice treats and desserts marketed primarily under the LUIGI’S, FRUIT-A-FREEZE, WHOLE FRUIT, ICEE, BARQ’S*, MINUTE MAID**, and CHILL*** brand names. J & J believes it is the largest manufacturer of soft pretzels in the United States, Mexico and Canada. Other snack food products include churros (an Hispanic pastry), funnel cake and bakery products. The Company’s principal frozen beverage products are the ICEE brand frozen carbonated beverage and the SLUSH PUPPIE brand frozen uncarbonated beverage.
 
The Company’s Food Service and Frozen Beverages sales are made primarily to food service customers including snack bar and food stand locations in leading chain, department, discount, warehouse club and convenience stores; malls and shopping centers; fast food outlets; stadiums and sports arenas; leisure and theme parks; movie theatres; independent retailers; and schools, colleges and other institutions. The Company’s retail supermarket customers are primarily supermarket chains. The Company’s restaurant group sells direct to the public through its chains of specialty snack food retail outlets, BAVARIAN PRETZEL BAKERY and PRETZEL GOURMET, located primarily in the Mid-Atlantic States.
 
The Company was incorporated in 1971 under the laws of the State of New Jersey.
 
The Company made four acquisitions in fiscal year 2007 as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto.
 
The Company operates in four business segments: Food Service, Retail Supermarkets, The Restaurant Group and Frozen Beverages. These segments are described below.
 
The Chief Operating Decision Maker for Food Service, Retail Supermarkets and The Restaurant Group and the Chief Operating Decision Maker for Frozen Beverages monthly review and evaluate operating income and sales in order to assess performance and allocate resources to each individual segment. In addition, the Chief Operating Decision Makers review and evaluate depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment (see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 — Financial Statements and Supplementary Data for financial information about segments).
 
Food Service
 
The primary products sold by the food service segment are soft pretzels, frozen juice treats and desserts, churros and baked goods. Our customers in the food service segment include snack bars and food stands in chain, department and discount stores; malls and shopping centers; fast food outlets; stadiums and sports arenas; leisure and theme parks; convenience stores; movie theatres; warehouse club stores; schools, colleges and other institutions. Within the food service industry, our products are purchased by the consumer primarily for consumption at the point-of-sale.
 
Retail Supermarkets
 
The primary products sold to the retail supermarket industry are soft pretzel products — including SUPERPRETZEL, frozen juice treats and desserts including LUIGI’S Real Italian Ice, MINUTE MAID Juice
 
 
*     BARQ’S is a registered trademark of Barq’s Inc.
**    MINUTE MAID is a registered trademark of the Coca-Cola Company.
***  CHILL is a registered trademark of Wells Dairy, Inc.


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Bars and Soft Frozen Lemonade, FRUIT-A-FREEZE frozen fruit bars, WHOLE FRUIT Sorbet, BARQ’S FLOATZ and ICEE Squeeze-Up Tubes and TIO PEPE’S Churros. Within the retail supermarket industry, our frozen and prepackaged products are purchased by the consumer for consumption at home.
 
The Restaurant Group
 
We sell direct to the public through our Restaurant Group, which operates BAVARIAN PRETZEL BAKERY and PRETZEL GOURMET, our chain of specialty snack food retail outlets.
 
Frozen Beverages
 
We sell frozen beverages to the food service industry primarily under the names ICEE, SLUSH PUPPIE and ARCTIC BLAST in the United States, Mexico and Canada.
 
Products
 
Soft Pretzels
 
The Company’s soft pretzels are sold under many brand names; some of which are: SUPERPRETZEL, PRETZEL FILLERS, PRETZELFILS, GOURMET TWISTS, MR. TWISTER, SOFT PRETZEL BITES, SOFTSTIX, SOFT PRETZEL BUNS, HOT KNOTS, DUTCH TWIST, TEXAS TWIST, SANDWICH TWIST, CINNAPRETZEL* and SERIOUSLY TWISTED!; and, to a lesser extent, under private labels. Soft pretzels are sold in the Food Service, Retail Supermarket and The Restaurant Group segments. Soft pretzel sales amounted to 22% of the Company’s revenue in fiscal year 2007 and 24% in 2006 and 2005.
 
The Company’s soft pretzels qualify under USDA regulations as the nutritional equivalent of bread for purposes of the USDA school lunch program, thereby enabling a participating school to obtain partial reimbursement of the cost of the Company’s soft pretzels from the USDA.
 
The Company’s soft pretzels are manufactured according to a proprietary formula. Soft pretzels, ranging in size from one to ten ounces in weight, are shaped and formed by the Company’s proprietary twister machines. These soft pretzel tying machines are automated, high-speed machines for twisting dough into the traditional pretzel shape. Additionally, we make soft pretzels which are extruded or shaped by hand. Soft pretzels, after processing, are primarily quick-frozen in either raw or baked form and packaged for delivery.
 
The Company’s principal marketing program in the Food Service segment includes supplying ovens, mobile merchandisers, display cases, warmers and similar merchandising equipment to the retailer to prepare and promote the sale of soft pretzels. Some of this equipment is proprietary, including combination warmer and display cases that reconstitute frozen soft pretzels while displaying them, thus eliminating the need for an oven. The Company retains ownership of the equipment placed in customer locations, and as a result, customers are not required to make an investment in equipment.
 
Frozen Juice Treats and Desserts
 
The Company’s frozen juice treats and desserts are marketed primarily under the LUIGI’S, FRUIT-A-FREEZE, WHOLE FRUIT, ICEE, BARQ’S, MINUTE MAID and CHILL brand names. Frozen juice treats and desserts are sold in the Food Service and Retail Supermarkets segments. Frozen juice treats and dessert sales were 14% of the Company’s revenue in fiscal year 2007 and 14% in 2006 and 2005.
 
The Company’s MINUTE MAID frozen juice fruit bars are manufactured from an apple or pear juice base to which water, sweeteners, coloring (in some cases) and flavorings are added. The juice bars contain two to three ounces of apple or pear juice and the minimum daily requirement of vitamin C, and qualify as reimbursable items under the USDA school lunch program. The juice bars are produced in various flavors and are packaged in a sealed push-up paper container referred to as the Milliken M-pak, which the Company believes has certain sanitary and safety advantages.
 
 
*     CINNAPRETZEL is a registered trademark of Cinnabon, Inc.


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The balance of the Company’s frozen juice treats and desserts products are manufactured from water, sweeteners and fruit juice concentrates in various flavors and packaging including cups, tubes, sticks, M-paks, pints and tubs. Several of the products contain ice cream and FRUIT-A-FREEZE and WHOLE FRUIT contain pieces of fruit.
 
Churros
 
The Company’s churros are sold primarily under the TIO PEPE’S brand name. Churros are sold to the Food Service and Retail Supermarkets segments. Churro sales were 4% of the Company’s sales in fiscal year 2007, 4% in 2006 and 3% in 2005, respectively. Churros are Hispanic pastries in stick form which the Company produces in several sizes according to a proprietary formula. The churros are deep fried, frozen and packaged. At food service point-of-sale they are reheated and topped with a cinnamon sugar mixture. The Company also sells fruit and crème-filled churros. The Company supplies churro merchandising equipment similar to that used for its soft pretzels.
 
Bakery Products
 
The Company’s bakery products are marketed under the MRS. GOODCOOKIE, CAMDEN CREEK BAKERY, READI-BAKE, COUNTRY HOME, MARY B’S, DADDY RAY’S and PRETZEL COOKIE brand names, and under private labels. Bakery products include primarily cookies, muffins and donuts. In 2007, biscuits and dumplings under the MARY B’S name, and fruit and fig bars under the DADDY RAY’S name, were added through acquisitions. Bakery products are sold to the Food Service segment. Bakery products sales amounted to 32% of the Company’s sales in fiscal year 2007 and 28% in 2006 and 2005.
 
Frozen Beverages
 
The Company markets frozen beverages primarily under the names ICEE, SLUSH PUPPIE and ARCTIC BLAST in the United States, Mexico and Canada. Additional frozen beverages are ICEE PEAK, JAVA FREEZE and CALIFORNIA NATURAL. Frozen beverages are sold in the Food Service, The Restaurant Group and Frozen Beverages segments. Frozen beverage sales amounted to 19% of revenue in fiscal in 2007, 19% in 2006 and 20% in fiscal 2005.
 
Under the Company’s principal marketing program for frozen carbonated beverages, it installs frozen beverage dispensers for its ICEE and ARCTIC BLAST brands at customer locations and thereafter services the machines, arranges to supply customers with ingredients required for production of the frozen beverages, and supports customer retail sales efforts with in-store promotions and point-of-sale materials. In most cases, the Company retains ownership of its dispensers, and as a result, customers are not required to make an investment in equipment or arrange for the ingredients and supplies necessary to produce and market the frozen beverages. In fiscal 1999, the Company began providing installation and maintenance service only to a large, quick-service restaurant and others, which resulted in the increase of customer-owned beverage dispensers beginning in 1999. The Company also provides managed service and sells equipment in its Frozen Beverages segment, revenue from which amounted to 8% of sales in 2007 and 9% and 8% of the Company’s sales in fiscal years 2006 and 2005, respectively. In fiscal 2006, through an acquisition, the Company began to sell frozen uncarbonated beverages under the SLUSH PUPPIE brand through a distributor network.
 
Each new frozen carbonated customer location requires a frozen beverage dispenser supplied by the Company or by the customer. Company-supplied frozen carbonated dispensers are purchased from outside vendors, built new or rebuilt by the Company.
 
The Company provides managed service and/or products to approximately 77,000 Company-owned and customer-owned dispensers.
 
The Company has the rights to market and distribute frozen beverages under the name ICEE to the entire continental United States (except for portions of nine states) as well as internationally.


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Other Products
 
Other products sold by the Company include soft drinks, funnel cakes sold under the FUNNEL CAKE FACTORY brand name, popcorn sold under the AIRPOPT brand name and smaller amounts of various other food products. These products are sold in the Food Service, The Restaurant Group and Frozen Beverages segments.
 
Customers
 
The Company sells its products to two principal customer groups: food service and retail supermarkets. The primary products sold to the food service group are soft pretzels, frozen beverages, frozen juice treats and desserts, churros and baked goods. The primary products sold to the retail supermarket industry are soft pretzels and frozen juice treats and desserts. Additionally, the Company sells soft pretzels, frozen beverages and various other food products direct to the public through its restaurant group, which operates BAVARIAN PRETZEL BAKERY and PRETZEL GOURMET, our chain of specialty snack food retail outlets.
 
We have several large customers that account for a significant portion of our sales. Our top ten customers accounted for 42%, 45% and 43% of our sales during fiscal years 2007, 2006 and 2005, respectively, with our largest customer accounting for 8% of our sales in all three years. Three of the ten customers are food distributors who sell our product to many end users. The loss of one or more of our large customers could adversely affect our results of operations. These customers typically do not enter into long-term contracts and make purchase decisions based on a combination of price, product quality, consumer demand and customer service performance. If our sales to one or more of these customers are reduced, this reduction may adversely affect our business. If receivables from one or more of these customers become uncollectible, our operating income would be adversely impacted.
 
The Food Service, The Restaurant Group and the Frozen Beverages segments sell primarily to the food service industry. The Retail Supermarkets segment sells to the retail supermarket industry.
 
The Company’s customers in the food service segment include snack bars and food stands in chain, department and mass merchandising stores, malls and shopping centers, fast food outlets, stadiums and sports arenas, leisure and theme parks, convenience stores, movie theatres, warehouse club stores, schools, colleges and other institutions, and independent retailers. Machines and machine parts are sold to other food and beverage companies. Within the food service industry, the Company’s products are purchased by the consumer primarily for consumption at the point-of-sale.
 
The Company sells its products to over 90% of supermarkets in the United States. Products sold to retail supermarket customers are primarily soft pretzel products, including SUPERPRETZEL, frozen juice treats and desserts including LUIGI’S Real Italian Ice, MINUTE MAID Juice Bars and Soft Frozen Lemonade, FRUIT-A-FREEZE frozen fruit bars, WHOLE FRUIT Sorbet, MARY B’S biscuits, DADDY RAY’S fig and fruit bars, BARQ’S FLOATZ and ICEE Squeeze-Up Tubes and TIO PEPE’S Churros. Within the retail supermarket industry, the Company’s frozen and prepackaged products are purchased by the consumer for consumption at home.
 
Marketing and Distribution
 
The Company has developed a national marketing program for its products. For Food Service and Frozen Beverages segments’ customers, this marketing program includes providing ovens, mobile merchandisers, display cases, warmers, frozen beverage dispensers and other merchandising equipment for the individual customer’s requirements and point-of-sale materials as well as participating in trade shows and in-store demonstrations. The Company’s ongoing advertising and promotional campaigns for its Retail Supermarket segment’s products include trade shows, newspaper advertisements with coupons, in-store demonstrations and consumer advertising campaigns.
 
The Company develops and introduces new products on a routine basis. The Company evaluates the success of new product introductions on the basis of sales levels, which are reviewed no less frequently than monthly by the Company’s Chief Operating Decision Makers.


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The Company’s products are sold through a network of about 200 food brokers and over 1,000 independent sales distributors and the Company’s own direct sales force. For its snack food products, the Company maintains warehouse and distribution facilities in Pennsauken, Bellmawr and Bridgeport, New Jersey; Vernon (Los Angeles), California; Scranton, Pittsburgh, Hatfield and Lancaster, Pennsylvania; Carrollton (Dallas), Texas; Atlanta, Georgia; Pensacola, Florida; Moscow Mills (St. Louis), Missouri; and Solon, Ohio. Frozen beverages are distributed from 97 Company managed warehouse and distribution facilities located in 44 states, Mexico and Canada, which allow the Company to directly service its customers in the surrounding areas. The Company’s products are shipped in refrigerated and other vehicles from the Company’s manufacturing and warehouse facilities on a fleet of Company operated tractor-trailers, trucks and vans, as well as by independent carriers.
 
Seasonality
 
The Company’s sales are seasonal because frozen beverage sales and frozen juice treats and desserts sales are generally higher during the warmer months and sales of the Company’s retail stores are generally higher in the Company’s first quarter during the holiday shopping season.
 
Trademarks and Patents
 
The Company has numerous trademarks, the most important of which are SUPERPRETZEL, DUTCH TWIST, TEXAS TWIST, MR. TWISTER, SOFT PRETZEL BITES, SOFTSTIX, PRETZEL FILLERS and PRETZELFILS for its pretzel products; FROSTAR, SHAPE-UPS, MAMA TISH’S, FRUIT-A-FREEZE, WHOLE FRUIT and LUIGI’S for its frozen juice treats and desserts; TIO PEPE’S for its churros; ARCTIC BLAST and SLUSH PUPPIE for its frozen beverages; FUNNEL CAKE FACTORY for its funnel cake products, and MRS. GOODCOOKIE, READI-BAKE, COUNTRY HOME, CAMDEN CREEK, MARY B’S and DADDY RAY’S for its bakery products.
 
The trademarks, when renewed and continuously used, have an indefinite term and are considered important to the Company as a means of identifying its products.
 
The Company markets frozen beverages under the trademark ICEE in all of the continental United States, except for portions of nine states, and in Mexico and Canada. Additionally, the Company has the international rights to the trademark ICEE.
 
The Company considers its trademarks important to the success of its business.
 
The Company has numerous patents related to the manufacturing and marketing of its product.
 
Supplies
 
The Company’s manufactured products are produced from raw materials which are readily available from numerous sources. With the exception of the Company’s soft pretzel twisting equipment and funnel cake production equipment, which are made for J & J by independent third parties, and certain specialized packaging equipment, the Company’s manufacturing equipment is readily available from various sources. Syrup for frozen beverages is purchased from The Coca-Cola Company, Dr Pepper/Seven Up, Inc., the Pepsi Cola Company, and Western Syrup Company. Cups, straws and lids are readily available from various suppliers. Parts for frozen beverage dispensing machines are purchased from several sources. Frozen beverage dispensers are purchased primarily from IMI Cornelius, Inc. and Lancer FBD.
 
Competition
 
Snack food and bakery products markets are highly competitive. The Company’s principal products compete against similar and different food products manufactured and sold by numerous other companies, some of which are substantially larger and have greater resources than the Company. As the soft pretzel, frozen juice treat and dessert, bakery products and related markets grow, additional competitors and new competing products may enter the markets. Competitive factors in these markets include product quality, customer service, taste, price, identity and brand name awareness, method of distribution and sales promotions.


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The Company believes it is the only national distributor of soft pretzels. However, there are numerous regional and local manufacturers of food service and retail supermarket soft pretzels as well as several chains of retail pretzel stores.
 
In Frozen Beverages the Company competes directly with other frozen beverage companies. These include several companies which have the right to use the ICEE name in portions of nine states. There are many other regional frozen beverage competitors throughout the country and one large retail chain which uses its own frozen beverage brand.
 
The Company competes with large soft drink manufacturers for counter and floor space for its frozen beverage dispensing machines at retail locations and with products which are more widely known than the ICEE, SLUSH PUPPIE and ARCTIC BLAST frozen beverages.
 
The Company competes with a number of other companies in the frozen juice treat and dessert and bakery products markets.
 
Risks Associated with Foreign Operations
 
Foreign operations generally involve greater risk than doing business in the United States. Foreign economies differ favorably or unfavorably from the United States’ economy in such respects as the level of inflation and debt, which may result in fluctuations in the value of the country’s currency and real property. Further, there may be less government regulation in various countries, and difficulty in enforcing legal rights outside the United States. Additionally, in some foreign countries, there is the possibility of expropriation or confiscatory taxation limitations on the removal of property or other assets, political or social instability or diplomatic developments which could affect the operations and assets of U.S. companies doing business in that country. Sales of our foreign operations were $9,785,000, $7,889,000 and $7,034,000 in years 2007, 2006 and 2005, respectively. At September 29, 2007, the total assets of our foreign operations were approximately $6.5 million or less than 2% of total assets.
 
Employees
 
The Company has approximately 2,600 full-and part-time employees as of September 29, 2007. Certain production and distribution employees at the Pennsauken and Bridgeport, New Jersey plants are covered by a collective bargaining agreement which expires in September 2009.
 
The production employees at our Atlanta, Georgia plant are covered by a collective bargaining agreement which expires in January 2008. The Company considers its employee relations to be good.
 
Available Information
 
The Company’s internet address is www.jjsnack.com. On the investor relations section of its website, the Company provides free access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The information on the website listed above is not and should not be considered part of this annual report on Form 10-K and is not incorporated by reference in this document.
 
Item 1A.  Risk Factors
 
You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem insignificant may also impair our business operations. Following is a discussion of known potentially significant risks which could result in harm to our business, financial condition or results of operations.


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Risks of Shortages or Increased Cost of Raw Materials
 
We are exposed to the market risks arising from adverse changes in commodity prices, affecting the cost of our raw materials and energy. The raw materials and energy which we use for the production and distribution of our products are largely commodities that are subject to price volatility and fluctuations in availability caused by changes in global supply and demand, weather conditions, agricultural uncertainty or governmental controls. We purchase these materials and energy mainly in the open market. If commodity price changes result in increases in raw materials and energy costs, we may not be able to increase our prices to offset these increased costs without suffering reduced volume, revenue and operating income.
 
General Risks of the Food Industry
 
Food processors are subject to the risks of adverse changes in general economic conditions; evolving consumer preferences and nutritional and health-related concerns; changes in food distribution channels; federal, state and local food processing controls or other mandates; consumer product liability claims; and risks of product tampering. The increased buying power of large supermarket chains, other retail outlets and wholesale food vendors could result in greater resistance to price increases and could alter the pattern of customer inventory levels and access to shelf space.
 
Environmental Risks
 
The disposal of solid and liquid waste material resulting from the preparation and processing of foods are subject to various federal, state and local laws and regulations relating to the protection of the environment. Such laws and regulations have an important effect on the food processing industry as a whole, requiring substantially all firms in the industry to incur material expenditures for modification of existing processing facilities and for construction of upgraded or new waste treatment facilities.
 
We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Enactment of more stringent laws or regulations or more strict interpretation of existing laws and regulations may require additional expenditures by us, some of which could be material.
 
Risks Resulting from Several Large Customers
 
We have several large customers that account for a significant portion of our sales. Our top ten customers accounted for 42%, 45% and 43% of our sales during fiscal years 2007, 2006 and 2005, respectively, with our largest customer accounting for 8% of our sales in all three years. Three of the ten customers are food distributors who sell our product to many end users. The loss of one or more of our large customers could adversely affect our results of operations. These customers typically do not enter into long-term contracts and make purchase decisions based on a combination of price, product quality, consumer demand and customer service performance. If our sales to one or more of these customers are reduced, this reduction may adversely affect our business. If receivables from one or more of these customers become uncollectible, our operating income would be adversely impacted.
 
Competition
 
Our businesses operate in highly competitive markets. We compete against national and regional manufacturers and distributors on the basis of price, quality, product variety and effective distribution. Many of our major competitors in the market are larger and have greater financial and marketing resources than we do. Increased competition and anticipated actions by our competitors could lead to downward pressure on prices and/or a decline in our market share, either of which could adversely affect our results. See “Competition” in Item 1 for more information about our competitors.


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Risks Relating to Manufacturing
 
Our ability to purchase, manufacture and distribute products is critical to our success. Damage or disruption to our manufacturing or distribution capabilities due to weather, natural disaster, fire or explosion, terrorism, pandemic, political upheaval, strikes or other reasons could impair our ability to manufacture or distribute our products.
 
Our Certificate of Incorporation may inhibit a change in control that you may favor
 
Our Certificate of Incorporation contains provisions that may delay, deter or inhibit a future acquisition of J & J Snack Foods Corp. not approved by our Board of Directors. This could occur even if our shareholders are offered an attractive value for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition include the following:
 
−  a classified Board of Directors;
 
−  the requirement that our shareholders may only remove Directors for cause;
 
−  limitations on share holdings and voting of certain persons;
 
−  special Director voting rights; and
 
−   the ability of the Board of Directors to consider the interests of various constituencies, including our employees, customers, suppliers, creditors and the local communities in which we operate.
 
Risks Relating to the Control by Gerald B. Shreiber
 
Gerald B. Shreiber is the founder of the Company and the current beneficial owner of 24% of its outstanding stock. Our Certificate of Incorporation provides that he has three votes on the Board of Directors (subject to certain adjustments). Therefore, he and one other director have voting control of the Board. The performance of this Company is greatly impacted by his leadership and decisions. His voting control reduces the restrictions on his actions. His retirement, disability or death will have a significant impact on our future operations.
 
Risk Related to Product Changes
 
There are risks in the marketplace related to trade and consumer acceptance of product improvements, packing initiatives and new product introductions.
 
Risks Related to Change in the Business
 
Our ability to successfully manage changes to our business processes, including selling, distribution, product capacity, information management systems and the integration of acquisitions, will directly affect our results of operations.
 
Risks Associated with Foreign Operations
 
Foreign operations generally involve greater risk than doing business in the United States. Foreign economies differ favorably or unfavorably from the United States’ economy in such respects as the level of inflation and debt, which may result in fluctuations in the value of the country’s currency and real property. Further, there may be less government regulation in various countries, and difficulty in enforcing legal rights outside the United States. Additionally, in some foreign countries, there is the possibility of expropriation or confiscatory taxation limitations on the removal of property or other assets, political or social instability or diplomatic developments which could affect the operations and assets of U.S. companies doing business in that country. Sales of our foreign operations were $9,785,000, $7,889,000, and $7,034,000 in years 2007, 2006


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and 2005, respectively. At September 29, 2007, the total assets of our foreign operations were approximately $6.5 million or less than 2% of total assets.
 
Seasonality and Quarterly Fluctuations
 
Our sales are affected by the seasonal demand for our products. Demand is greater during the summer months primarily as a result of the warm weather demand for our ICEE and frozen juice treats and desserts products. Because of seasonal fluctuations, there can be no assurance that the results of any particular quarter will be indicative of results for the full year or for future years.
 
Item 1B.  Unresolved Staff Comments
 
We have no unresolved SEC staff comments to report.
 
Item 2.   Properties
 
The Company’s primary east coast manufacturing facility is located in Pennsauken, New Jersey in a 70,000 square foot building on a two-acre lot. Soft pretzels are manufactured at this Company-owned facility which also serves as the Company’s corporate headquarters. This facility operates at approximately 70% of capacity. The Company leases a 101,200 square foot building adjacent to its manufacturing facility in Pennsauken, New Jersey through March 2012. The Company has constructed a large freezer within this facility for warehousing and distribution purposes. The warehouse has a utilization rate of 80-90% depending on product demand. The Company also leases, through September 2011, 16,000 square feet of office and warehouse space located next to the Pennsauken, New Jersey plant. The Company leases through January 2011 an additional 23,000 square feet of warehouse space several blocks distant from these facilities.
 
The Company owns a 150,000 square foot building on eight acres in Bellmawr, New Jersey. The facility is used by the Company to manufacture some of its products including funnel cake, pretzels, churros and cookies. The facility operates at about 60% of capacity.
 
The Company’s primary west coast manufacturing facility is located in Vernon (Los Angeles), California. It consists of a 137,000 square foot facility in which soft pretzels, churros and various lines of baked goods are produced and warehoused. Included in the 137,000 square foot facility is a 30,000 square foot freezer used for warehousing and distribution purposes which was constructed in 1996. The facility is leased through November 2017. The Company leases an additional 45,000 square feet of office and warehouse space, adjacent to its manufacturing facility, through November 2017. The manufacturing facility operates at approximately 60% of capacity.
 
The Company leases through November 2017 a 25,000 square foot frozen juice treat and dessert manufacturing facility located in Norwalk (Los Angeles), California which operates at approximately 20% of capacity.
 
The Company leases an 85,000 square foot bakery manufacturing facility located in Atlanta, Georgia. The lease runs through December 2010. The facility operates at about 50% of capacity.
 
The Company owns a 46,000 square foot frozen juice treat and dessert manufacturing facility located on three acres in Scranton, Pennsylvania. The facility, which was expanded from 26,000 square feet in 1998, operates at approximately 70% of capacity.
 
The Company leases a 29,600 square foot soft pretzel manufacturing facility located in Hatfield, Pennsylvania. The lease runs through June 2017. The facility operates at approximately 65% of capacity.
 
The Company leases a 19,200 square foot soft pretzel manufacturing facility located in Carrollton, Texas. The lease runs through April 2011. The facility operates at approximately 80% of capacity. The Company leases an additional property containing a 6,500 square foot storage freezer across the street from the manufacturing facility, which lease expires May 2016.


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The Company leases an 18,000 square foot soft pretzel manufacturing facility located in Chambersburg, Pennsylvania. The lease runs through September 2010 with options to extend the term. The facility operates at approximately 50% of capacity.
 
The Company’s fresh bakery products manufacturing facility and offices are located in Bridgeport, New Jersey in three buildings totaling 133,000 square feet. Two of the buildings are leased through December 2011 and the third is leased through December 2015. The manufacturing facility operates at approximately 50% of capacity.
 
The Company owns a 65,000 square foot fig and fruit bar manufacturing facility located on 91/2 acres in Moscow Mills (St. Louis), Missouri. The facility operates at about 75% of capacity.
 
The Company leases two buildings in Pensacola, Florida for the manufacturing, packing and warehousing of products for its biscuit business. The buildings total 39,000 square feet and the leases run through April 2008 and December 2008. The manufacturing facility operates at approximately 60% of capacity.
 
The Company’s Bavarian Pretzel Bakery headquarters and warehouse and distribution facilities are owned and located in an 11,000 square foot building in Lancaster, Pennsylvania.
 
The Company also leases approximately 135 warehouse and distribution facilities in 44 states, Mexico and Canada.
 
Item 3.   Legal Proceedings
 
The Company has no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is subject.
 
Item 4.   Submission Of Matters To A Vote Of Security Holders
 
There were no matters submitted to a vote of the security holders during the quarter ended September 29, 2007.


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PART II
 
Item 5.   Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
 
The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “JJSF.” The following table sets forth the high and low sale price quotations as reported by NASDAQ for the common stock for each quarter of the years ended September 30, 2006 and September 29, 2007.
 
                 
    High     Low  
 
Fiscal 2006
               
First quarter
  $ 32.34     $ 26.55  
Second quarter
    35.22       29.09  
Third quarter
    35.51       29.76  
Fourth quarter
    33.94       28.58  
                 
Fiscal 2007
               
First quarter
  $ 42.27     $ 30.76  
Second quarter
    43.51       37.41  
Third quarter
    41.95       37.16  
Fourth quarter
    40.14       33.23  
 
On November 20, 2007, there were 18,701,919 shares of common stock outstanding. Those shares were held by approximately 3,700 beneficial shareholders and shareholders of record.
 
A 2-for-1 stock split per common share was distributed January 5, 2006 to shareholders of record on December 15, 2005. All share amounts in this Form 10-K reflect the stock split.
 
The Company paid cash dividends of $6,123,000, $5,273,000 and $3,400,000 in fiscal years 2007, 2006 and 2005, respectively.
 
The Company’s Board of Directors declared a cash dividend of $.085 per common share payable October 4, 2007 to shareholders of record on September 17, 2007, and a cash dividend of $.0925 per common share payable January 3, 2008 to shareholders of record on December 14, 2007. The cash dividend of $.0925/share represents a 9% increase from the previous quarterly dividend rate of $.085/share.
 
The Company anticipates that its Board of Directors will continue to declare quarterly cash dividends; however, the continuance of cash dividends is not guaranteed and is dependent on many factors.
 
The Company did not repurchase any of its common stock in fiscal years 2007, 2006 and 2005.
 
For information on the Company’s Equity Compensation Plans, please see Item 12 herein.


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Stock Performance Graph
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among J & J Snack Foods Corp., The NASDAQ Composite Index
And The S&P Packaged Foods & Meats Index
 
* $100 invested on 9/30/02 in stock or index-including reinvestment of dividends. Fiscal year ending September 30.
 
Copyright © 2007 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm


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Item 6.   Selected Financial Data
 
The selected financial data for the last five years was derived from our audited consolidated financial statements. The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto, especially as the information pertains to fiscal 2005, 2006 and 2007.
 
                                         
    Fiscal year ended in September
 
    (In thousands except per share data)  
    2007     2006     2005     2004     2003  
 
Net Sales
  $ 568,901     $ 514,831     $ 457,112     $ 416,588     $ 364,567  
Net Earnings
  $ 32,112     $ 29,450     $ 26,043     $ 22,710     $ 19,902  
Total Assets
  $ 380,288     $ 340,808     $ 305,924     $ 277,424     $ 239,478  
Long-Term Debt
  $     $     $     $     $  
Capital Lease Obligations
  $ 565     $     $     $     $  
Stockholders’ Equity
  $ 295,582     $ 263,656     $ 234,762     $ 210,096     $ 182,564  
Common Share Data Earnings Per Diluted Share
  $ 1.69     $ 1.57     $ 1.40     $ 1.24     $ 1.10  
Earnings Per Basic Share
  $ 1.72     $ 1.60     $ 1.43     $ 1.27     $ 1.13  
Book Value Per Share
  $ 15.80     $ 14.28     $ 12.85     $ 11.67     $ 10.43  
Common Shares Outstanding At Year End
    18,702       18,468       18,272       18,012       17,514  
Cash Dividends Declared Per Common Share
  $ .34     $ .30     $ .25     $     $  
 
Item 7.   Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
 
In addition to historical information, this document 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. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.
 
Critical Accounting Policies, Judgments and Estimates
 
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of those financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
The Company discloses its significant accounting policies in the accompanying notes to its audited consolidated financial statements.
 
Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. Following are some of the areas requiring significant judgments and estimates: revenue recognition, accounts receivable, cash flow and valuation assumptions in performing asset impairment tests of long-lived assets, estimates of the useful lives of intangible assets and insurance reserves.
 
There are numerous critical assumptions that may influence accounting estimates in these and other areas. We base our critical assumptions on historical experience, third-party data and various other estimates we believe to be reasonable. A description of the aforementioned policies follows:
 
Revenue Recognition — We recognize revenue from our products when the products are shipped to our customers and when equipment service is performed for our customers who are charged on a time and material


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basis. We also sell equipment service contracts with terms of coverage ranging between 12 and 60 months. We record deferred income on equipment service contracts which is amortized by the straight-line method over the term of the contracts. We record offsets to revenue for allowances, end-user pricing adjustments and trade spending. Off-invoice allowances are deducted directly from the amount invoiced to our customer when our products are shipped to the customer. Offsets to revenue for allowances, end-user pricing adjustments and trade spending are recorded primarily as a reduction of accounts receivable based on our estimates of liability which are based on customer programs and historical experience. These offsets to revenue are based primarily on the quantity of product purchased over specific time periods. For our Retail Supermarket and Frozen Beverages segments, we accrue for the liability based on products sold multiplied by per product offsets. Offsets to revenue for our Food Service segment are calculated in a similar manner for offsets owed to our direct customers; however, because shipments to end-users are unknown to us until reported by our direct customers or by the end-users, there is a greater degree of uncertainty as to the accuracy of the amounts accrued for end-user offsets. Additional uncertainty may occur as customers take deductions when they make payments to us. This creates complexities because our customers do not always provide reasons for the deductions taken. Additionally, customers may take deductions to which they are not entitled and the length of time customers take deductions to which they are entitled can vary from two weeks to well over a year. Because of the aforementioned uncertainties, the process to determine the amount of liability to record is cumbersome and subject to inaccuracies. However, we feel that due to constant monitoring of the process, any inaccuracies would not be material. Our recorded liability for allowances, end-user pricing adjustments and trade spending was approximately $11,793,000 and $8,938,000 at September 29, 2007 and September 30, 2006, respectively. The increase in our recorded liability resulted from the general increase in our business and increased allowance programs.
 
Accounts Receivable — We record accounts receivable at the time revenue is recognized. Bad debt expense is recorded in marketing and administrative expenses. The amount of the allowance for doubtful accounts is based on our estimate of the accounts receivable amount that is uncollectable. It is comprised of a general reserve based on historical experience and amounts for specific customers’ accounts receivable balances that we believe are at risk due to our knowledge of facts regarding the customer(s). We continually monitor our estimate of the allowance for doubtful accounts and adjust it monthly. We usually have 2 to 3 customers with accounts receivable balances of between $1.5 million to $4 million. Failure of these customers, and others with lesser balances, to pay us the amounts owed, could have a material impact on our consolidated financial statements.
 
Accounts receivable due from any of our customers is subject to risk. Our total bad debt expense was $189,000, $300,000 and $112,000 for the fiscal years 2007, 2006 and 2005, respectively. At September 29, 2007 and September 30, 2006, our accounts receivables were $56,772,000 and $53,033,000, net of an allowance for doubtful accounts of $1,052,000 and $963,000.
 
Asset Impairment — In 2006, goodwill of our frozen beverages reporting unit increased by $3,487,000 as a result of the acquisitions of ICEE of Hawaii and SLUSH PUPPIE and the goodwill of our food service reporting unit increased by $839,000 as a result of a smaller acquisition. In 2007, goodwill of our food service reporting unit increased by $1,323,000 as a result of the acquisitions of Hom/Ade Foods and DADDY RAY’S. In 2007, goodwill of our frozen beverages reporting unit increased by $603,000 as the result of the Kansas ICEE acquisition.
 
We have three reporting units with goodwill totaling $60,314,000 as of September 29, 2007. We utilize historical reporting unit cash flows (defined as reporting unit operating income plus depreciation and amortization) as a proxy for expected future reporting unit cash flows to evaluate the fair value of these reporting units. If the fair value estimated substantially exceeds the carrying value of the reporting unit, including the goodwill, if any, associated with that unit, we do not recognize any impairment loss. We do not engage a third party to assist in this analysis as we believe that our in-house expertise is adequate to perform the analysis.
 
Licenses and rights are being amortized by the straight-line method over periods ranging from 4 to 20 years and amortization expense is reflected throughout operating expenses. The gross carrying amount of intangible assets increased by $17,034,000 in 2006 primarily as a result of the acquisition of $15,188,000 of


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intangible assets of the SLUSH PUPPIE business. The gross carrying amount of intangibles increased by $39,633,000 in 2007 primarily as a result of the acquisitions of $23,771,000 and $12,799,000 of intangible assets of Hom/Ade Foods and DADDY RAY’S, respectively. Long-lived assets, including fixed assets and intangibles, are reviewed for impairment as events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. Cash flow analyses are used to assess impairment. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, economic conditions, competition and consumer preferences.
 
Insurance Reserves — We have a self-insured medical plan which covers approximately 1,100 of our employees. We record a liability for incurred but not yet paid claims based on our historical experience of claims payments and a calculated lag time period. We maintain a spreadsheet that includes claims payments made each month according to the date the claim was incurred. This enables us to have an historical record of claims incurred but not yet paid at any point in the past. We then compare our accrued liability to the more recent claims incurred but not yet paid amounts and adjust our recorded liability up or down accordingly. Our recorded liability at September 29, 2007 and September 30, 2006 was $801,000 and $1,101,000, respectively. Considering that we have stop loss coverage of $125,000 for each individual plan subscriber, the general consistency of claims payments and the short time lag, we believe that there is not a material exposure for this liability. Because of the foregoing, we do not engage a third party actuary to assist in this analysis.
 
We self-insure, up to loss limits, worker’s compensation and automobile liability claims. Accruals for claims under our self-insurance program are recorded on a claims-incurred basis. Under this program, the estimated liability for claims incurred but unpaid in fiscal years 2007 and 2006 was $1,900,000 and $2,800,000, respectively. Our total recorded liability for all years’ claims incurred but not yet paid was $6,800,000 and $7,650,000 at September 29, 2007 and September 30, 2006, respectively. We estimate the liability based on total incurred claims and paid claims adjusting for loss development factors which account for the development of open claims over time. We estimate the amounts we expect to pay for some insurance years by multiplying incurred losses by a loss development factor which is based on insurance industry averages and the age of the incurred claims; our estimated liability is then the difference between the amounts we expect to pay and the amounts we have already paid for those years. Loss development factors that we use range from 1.0 to 2.0. However, for some years, the estimated liability is the difference between the amounts we have already paid for that year and the maximum we could pay under the program in effect for that particular year because the calculated amount we expect to pay is higher than the maximum. For other years, where there are few claims open, the estimated liability we record is the amount the insurance company has reserved for those claims. We evaluate our estimated liability on a continuing basis and adjust it accordingly. Due to the multi-year length of these insurance programs, there is exposure to claims coming in lower or higher than anticipated; however, due to constant monitoring and stop loss coverage on individual claims, we believe our exposure is not material. Because of the foregoing, we do not engage a third party actuary to assist in this analysis. In connection with these self-insurance agreements, we customarily enter into letters of credit arrangements with our insurers. At September 29, 2007 and September 30, 2006, we had outstanding letters of credit totaling $9,595,000 and $8,620,000, respectively.
 
Refer to Note A to the accompanying consolidated financial statements for additional information on our accounting policies.
 
RESULTS OF OPERATIONS
 
Fiscal 2007 (52 weeks) Compared to Fiscal 2006 (53 weeks)
 
Net sales increased $54,070,000, or 11%, to $568,901,000 in fiscal 2007 from $514,831,000 in fiscal 2006. Adjusting for sales related to the acquisitions of ICEE of Hawaii in January 2006, SLUSH PUPPIE in May 2006, DADDY RAY’S in January 2007, HOM/ADE Foods in January 2007, and WHOLE FRUIT Sorbet and FRUIT-A-FREEZE Frozen Fruit Bar brands in April 2007, sales increased approximately 2%, or $9,236,000.


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We have four reportable segments, as disclosed in the accompanying notes to the consolidated financial statements: Food Service, Retail Supermarkets, The Restaurant Group and Frozen Beverages.
 
The Chief Operating Decision Maker for Food Service, Retail Supermarkets and The Restaurant Group and the Chief Operating Decision Maker for Frozen Beverages monthly review and evaluate operating income and sales in order to assess performance and allocate resources to each individual segment. In addition, the Chief Operating Decision Makers review and evaluate depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment.
 
Food Service
 
Sales to food service customers increased $35,597,000, or 11%, to $355,764,000 in fiscal 2007. Excluding the benefit of Hom/Ade sales of $22,409,000, DADDY RAY’S sales of $15,468,000, and WHOLE FRUIT and FRUIT-A-FREEZE sales of $1,781,000, sales increased approximately 1%. Soft pretzel sales to the food service market decreased $722,000, or 1%, to $98,859,000 for the year. Sales of bakery products, excluding Hom/Ade and DADDY RAY’S, increased $3,648,000, or 3%, for the year. Churro sales were essentially unchanged for the year with $22,069,000 of sales in 2007. Frozen juice bar and ices sales increased $3,235,000 or 7% to $47,571,000 for the year. Without WHOLE FRUIT and FRUIT-A-FREEZE, sales increased 3% for the year with sales to school food service customers accounting for most of the increase. Sales of our funnel cake products were down $1,198,000, or 15%, as sales declined to one customer. The changes in sales throughout the Food Service segment were from a combination of volume changes and price increases.
 
Retail Supermarkets
 
Sales of products to retail supermarkets increased $5,183,000 or 11% to $52,131,000 in fiscal 2007. Total soft pretzel sales to retail supermarkets were $24,867,000, an increase of 10% from fiscal 2006 due to volume and pricing. Sales of frozen juice bars and ices increased $3,626,000, or 14%, to $29,426,000 in 2007 from $25,800,000 in 2006 due to volume and pricing. Coupon costs, a reduction of sales, were up $687,000, or 33%, for the year, because of increased distribution of coupons.
 
The Restaurant Group
 
Sales of our Restaurant Group, which operates BAVARIAN PRETZEL BAKERY and PRETZEL GOURMET retail stores in the Mid-Atlantic region, declined by 29% primarily due to closings or licensings of stores in the past year. At September 29, 2007, we had 9 stores open. Sales of stores open for both years were down 8% for the year.
 
Frozen Beverages
 
Frozen beverage and related product sales increased $14,421,000 or 10% to $158,420,000 in fiscal 2007. Excluding the benefit of sales from the acquisitions of ICEE of Hawaii and SLUSH PUPPIE, frozen beverages and related product sales would have been up 2% for the year. Beverage sales alone were up 9% for the year. Excluding sales from the acquisitions, beverage sales alone would have been up 1% for the year. Gallon sales were down 3% for the year in our base ICEE business. Service revenue increased $5,831,000, or 23%, to $31,249,000 for the year as we continue to emphasize growing this part of our business. Frozen carbonated machine sales decreased $1,111,000 to $16,473,000 for the year.
 
Consolidated
 
Other than as commented upon above by segment, there are no material specific reasons for the reported sales increases or decreases. Sales levels can be impacted by the appeal of our products to our customers and consumers and their changing tastes, competitive and pricing pressures, sales execution, marketing programs, seasonal weather, customer stability and general economic conditions.


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Gross profit as a percent of sales decreased .71 of a percentage point in 2007 from 2006 although it remained at 33% of sales for both 2007 and 2006. Excluding the lower gross profit margin of the acquired DADDY RAY’S business, gross profit percentage would have declined only .26 of a percentage point for the year.
 
We were impacted by higher commodity costs of over $8,000,000 for the year with over $3,500,000 impacting us in the fourth quarter. Reduced trade spending in our retail supermarket segment, other pricing and lower utility and insurance costs of approximately $1,100,000 helped to offset some of the commodity costs increase.
 
We expect to continue to be impacted by higher commodity costs going forward.
 
Total operating expenses increased $10,592,000 to $137,947,000 in fiscal 2007 but as a percentage of sales decreased .49 of a percentage point to 24% of sales in 2007. An impairment charge last year of $1,193,000 in the Food Service segment for the writedown of robotic packaging equipment and an increase of other general income of $1,312,000 this year accounted for virtually all of the .49 percentage point decrease. Other general income of $1,388,000 this year primarily consists of $495,000 and $321,000 insurance gains in the Frozen Beverages and The Restaurant Group segments, respectively and a royalty settlement of $569,000 in the Food Service segment reduced by other general expense items. Marketing expenses increased .38 of a percentage point but stayed at 12% of sales. Marketing expenses this year include $1,940,000 of costs for a TV/Internet advertising campaign for our retail SUPERPRETZEL product.
 
Operating income increased $3,516,000, or 8%, to $48,580,000 in fiscal 2007 as a result of the aforementioned items. Excluding the writedown of robotic packaging equipment last year, operating income increased $2,323,000, or 5%. Excluding the impact of the writedown of the robotic packaging equipment last year and the increase in other general income this year, operating income was up $1,011,000, or 2%, this year.
 
Investment income decreased by $417,000 to $2,720,000 primarily due lower investable balances of cash and marketable securities.
 
The effective income tax rate decreased to 37% in fiscal year 2007 from 39% in fiscal 2006 due primarily from the resolution of state and foreign tax matters.
 
Net earnings increased $2,662,000, or 9%, in fiscal 2007 to $32,112,000, or $1.69 per diluted share as a result of the aforementioned items.
 
There are many factors which can impact our net earnings from year to year and in the long run, among which are the supply and cost of raw materials and labor, insurance costs, factors impacting sales as noted above, the continuing consolidation of our customers, our ability to manage our manufacturing, marketing and distribution activities, our ability to make and integrate acquisitions and changes in tax laws and interest rates.
 
RESULTS OF OPERATIONS
 
Fiscal 2006 (53 weeks) Compared to Fiscal 2005 (52 weeks)
 
Net sales increased $57,719,000, or 13%, to $514,831,000 in fiscal 2006 from $457,112,000 in fiscal 2005. Adjusting for sales related to the acquisitions of Snackworks, LLC in March 2005, ICEE of Hawaii in January 2006 and SLUSH PUPPIE in May 2006, sales increased approximately 10%, or $43,576,000.
 
We have four reportable segments, as disclosed in the accompanying notes to the consolidated financial statements: Food Service, Retail Supermarkets, The Restaurant Group and Frozen Beverages.
 
The Chief Operating Decision Maker for Food Service, Retail Supermarkets and The Restaurant Group and the Chief Operating Decision Maker for Frozen Beverages monthly review and evaluate operating income and sales in order to assess performance and allocate resources to each individual segment. In addition, the Chief Operating Decision Makers review and evaluate depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment.


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Food Service
 
Sales to food service customers increased $40,044,000, or 14%, to $320,167,000 in fiscal 2006. Excluding sales from the acquisition of Snackworks, LLC, sales increased $34,303,000, or 12%. Soft pretzel sales to the food service market increased $12,273,000, or 14%, to $99,581,000 for the 2006 year due primarily to the acquisition of Snackworks, LLC. Excluding Snackworks sales, pretzel sales increased $6,532,000, or 7%, with much of the increase coming from new business generated by Snackworks’ products. Sales of bakery products increased $15,189,000, or 12%, for the year. The increased sales were primarily to our private label and industrial business customers. Two customers accounted for 75% of the sales increase. Churro sales increased 50% to $22,154,000 due primarily to increased sales to one customer. Frozen juice bar and ices sales increased $4,643,000, or 12%, to $44,336,000 for the year with sales to school food service customers accounting for most of the increase. The changes in sales throughout the Food Service segment were from a combination of volume changes and price increases.
 
Retail Supermarkets
 
Sales of products to retail supermarkets increased $4,601,000 or 11% to $46,948,000 in fiscal 2006. Total soft pretzel sales to retail supermarkets were $22,552,000, an increase of 3% from fiscal 2005 mainly due to pricing. Sales of frozen juice bars and ices increased $2,212,000, or 9%, to $25,800,000 in 2006 from $23,588,000 in 2005 primarily due to the introduction of several new products. Coupon costs, a reduction of sales, were down $1,778,000, or 46%, for the year, because of decreased distribution of coupons.
 
The Restaurant Group
 
Sales of our Restaurant Group, which operates BAVARIAN PRETZEL BAKERY and PRETZEL GOURMET retail stores in the Mid-Atlantic region, declined by 28% primarily due to closings or licensings of 5 stores. At September 30, 2006, we had 13 stores open. Sales of stores open for both years were down 1.7% for the year.
 
Frozen Beverages
 
Frozen beverage and related product sales increased $14,586,000, or 11%, to $143,819,000 in fiscal 2006. Excluding the benefit of sales from the acquisitions of ICEE of Hawaii and SLUSH PUPPIE, frozen beverages and related product sales would have been up 5% for the year. Beverage sales alone were up 9% for the year. Excluding sales from the acquisitions, beverage sales alone would have been up 1% for the year. Service revenue increased $1,180,000, or 5%, to $25,418,000 for the year as we continue to emphasize growing this part of our business. Machine sales increased $4,327,000 to $17,584,000 for the year. Sales to two customers accounted for more than half of the machine sales increase.
 
Consolidated
 
Other than as commented upon above by segment, there are no material specific reasons for the reported sales increases or decreases. Sales levels can be impacted by the appeal of our products to our customers and consumers and their changing tastes, competitive and pricing pressures, sales execution, marketing programs, seasonal weather, customer stability and general economic conditions.
 
Gross profit as a percent of sales decreased .43 of a percentage point to 33% of sales from 34% in 2005. The drop in gross profit percentage resulted from increased sales of lower margin beverage machines in our Frozen Beverage segment, continuing commodity and utility cost increases and slotting expense to introduce new retail supermarket products along with lower unit sales in our base frozen carbonated beverage business. Partially offsetting these factors were increased efficiencies from higher volume and pricing, which included reduced coupon expense in our Retail Supermarkets segment. Our slotting expense for the year was about $1.9 million more in 2006 than in 2005. We were impacted by higher commodity and packaging cost increases of over $4.5 million and higher utility costs of approximately $2.3 million for the year. We expect to continue to be impacted by higher commodity and packaging pricing and higher utility costs over at least the short term.


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Total operating expenses increased $12,557,000 to $127,355,000 in fiscal 2006 but as a percentage of sales decreased .37 of a percentage point and were 25% of sales in both years. Marketing expenses dropped .54 of a percentage point to 12% of sales. The decrease in marketing expense as a percent of sales was the result of controlled spending and higher sales throughout all our business. Distribution expenses were 9% of sales in both years even though our gasoline costs increased by over $1 million. Administrative expenses were 4% of sales in both years. Operating expenses this year include an impairment charge of $1,193,000 in the Food Service segment for the writedown of robotic packaging equipment based on a determination made during the year that we would not be able to make the equipment work as intended. Other general income of $76,000 in 2006 compared to other general expense of $430,000, which included expense related to Hurricane Katrina.
 
Operating income increased $4,815,000, or 12%, to $45,064,000 in fiscal 2006 as a result of the aforementioned items. Operating income also benefited by lower group and liability insurance costs of about $1.3 million. Adjusting for share-based compensation expense that would have been recognized in 2005 if Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which revised Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation had been followed, operating income increased 16%. Adjusting for share-based compensation expense that would have been recognized in 2005 if Statement 123(R) had been followed and excluding the impact of the writedown of impaired robotic packaging equipment, operating income increased 19%.
 
Investment income increased by $1,448,000 to $3,137,000 primarily due to an increase in the general level of interest rates.
 
The effective income tax rate increased to 39% in fiscal year 2006 from 38% in 2005 due to estimated increases in state tax payments and a lower tax benefit on share-based compensation.
 
Net earnings increased $3,407,000, or 13%, in fiscal 2006 to $29,450,000, or $1.57 per fully diluted share, as a result of the aforementioned items. Adjusting for share-based compensation expense that would have been recognized in 2005 if Statement 123(R) had been followed, net earnings increased $4,534,000 or 18%. Adjusting for share-based compensation expense that would have been recognized in 2005 if Statement 123(R) had been followed and excluding the impact of the writedown of impaired robotic packaging equipment, net earnings increased $5,274,000 or 21%.
 
There are many factors which can impact our net earnings from year to year and in the long run, among which are the supply and cost of raw materials and labor, insurance costs, factors impacting sales as noted above, the continuing consolidation of our customers, our ability to manage our manufacturing, marketing and distribution activities, our ability to make and integrate acquisitions and changes in tax laws and interest rates.
 
ACQUISITIONS
 
In March 2005, we acquired all of the assets of Snackworks LLC, d/b/a Bavarian Brothers, a manufacturer of soft pretzels headquartered in Rancho Cucamonga, California. Snackworks operates production facilities in California and Chambersburg, Pennsylvania and markets its products under the brand names SERIOUSLY TWISTED!, BAVARIAN BROTHERS and CINNAPRETZEL. Snackworks sells throughout the continental United States primarily to mass merchandisers and theatres.
 
On January 31, 2006, we acquired the stock of ICEE of Hawaii. ICEE of Hawaii, headquartered in Waipahu, Hawaii, distributes ICEE frozen beverages and related products throughout the Hawaiian islands. Annual sales were approximately $2.3 million for the year ended December 2005.
 
On May 26, 2006, The ICEE Company, our frozen carbonated beverage distribution company, acquired the SLUSH PUPPIE branded business from Dr. Pepper/Seven Up, Inc., a Cadbury Schweppes Americas Beverages Company for $18.1 million plus approximately $4.3 million in working capital. SLUSH PUPPIE, North America’s leading brand for frozen non-carbonated beverages, is sold through an existing established distributor network to over 20,000 locations in the United States and Canada as well as to certain international markets. Sales of the SLUSH PUPPIE business were approximately $18 million in 2005.


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On January 9, 2007, we acquired the assets of Hom/Ade Foods, Inc. Hom/Ade Foods, Inc., based in Pensacola, Florida is a manufacturer and distributor of biscuits and dumplings sold under the MARY B’s and private label store brands predominately to the retail supermarket trade. Annual sales of the business were approximately $30 million for the year ended December 2006.
 
On January 31, 2007, we acquired the assets of Radar, Inc. Radar, Inc. is a manufacturer and seller of fig and fruit bars selling its products under the brand DADDY RAY’S. Headquartered and with its manufacturing facility in Moscow Mills, Missouri (outside of St. Louis), Radar, Inc. has annual sales of approximately $23 million dollars selling to the retail grocery segment and mass merchandisers, both branded and private label.
 
On April 2, 2007, we acquired the WHOLE FRUIT Sorbet and FRUIT-A-FREEZE Frozen Fruit Bar brands, along with related assets including a manufacturing facility located in Norwalk, California, selling primarily to the supermarket industry. Sales for 2007 were $2,429,000.
 
On June 25, 2007, we acquired the assets of an ICEE distributor in Kansas with annual sales of less than $1 million.
 
These acquisitions were accounted for under the purchase method of accounting, and their operations are included in the accompanying consolidated financial statements from their respective acquisition dates.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Although there are many factors that could impact our operating cash flow, most notably net earnings, we believe that our future operating cash flow, along with our borrowing capacity, is sufficient to fund future growth and expansion.
 
Fluctuations in the value of the Mexican peso and the resulting translation of the net assets of our Mexican frozen beverage subsidiary caused an increase of $42,000 in accumulated other comprehensive loss in 2007 and an increase of $46,000 in 2006 and a decrease of $143,000 in 2005. In 2007, sales of the Mexican subsidiary were $7,495,000 as compared to $6,285,000 in 2006 and $5,399,000 in 2005.
 
In fiscal years 2007, 2006 and 2005, we did not repurchase or retire any of our Company stock.
 
In December 2006, we entered into an amended and restated loan agreement with our existing banks which provides for up to a $50,000,000 revolving credit facility repayable in December 2011. The agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. There were no outstanding balances under the prior facility at September 29, 2007 and September 30, 2006. The significant financial covenants are:
 
  •   Earnings before interest expense and income taxes divided by interest expense shall not be less than 1.5 to 1.
 
  •   Tangible net worth must initially be more than $170 million.
 
  •   Total funded indebtedness divided by earnings before interest expense, income taxes, depreciation and amortization shall not be greater than 2.25 to 1.
 
  •   Total liabilities divided by tangible net worth shall not be more than 2.0 to 1.
 
We were in compliance with the restrictive covenants described above at September 29, 2007.
 
We self-insure, up to loss limits, certain insurable risks such as worker’s compensation and automobile liability claims. Accruals for claims under our self-insurance program are recorded on a claims-incurred basis. Under this program, the estimated liability for claims incurred but unpaid in fiscal years 2007 and 2006 was $1,900,000 and $2,800,000, respectively. In connection with certain self-insurance agreements, we customarily enter into letters of credit arrangements with our insurers. At September 29, 2007 and September 30, 2006, we had outstanding letters of credit totaling $9,595,000 and $8,620,000, respectively.


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The following table presents our contractual cash flow commitments on long-term debt, operating leases and purchase commitments for raw materials and packaging. See Notes to the consolidated financial statements for additional information on our long-term debt and operating leases.
 
                                         
    Payments Due by Period
 
    (in thousands)  
          Less
                   
          Than
    1-3
    4-5
    After
 
    Total     1 Year     Years     Years     5 Years  
 
Long-term debt, including current maturities
  $     $     $     $     $  
Capitalized lease obligations
    565       91       189       199       86  
Purchase commitments
    31,266       31,266                    
Operating leases
    43,366       10,224       15,408       8,457       9,277  
                                         
Total
  $ 75,197     $ 41,581     $ 15,597     $ 8,656     $ 9,363  
 
The purchase commitments do not exceed our projected requirements over the related terms and are in the normal course of business.
 
Fiscal 2007 Compared to Fiscal 2006
 
Cash and cash equivalents and marketable securities available for sale decreased $19,602,000, or 26%, to $57,019,000 from a year ago primarily because net cash provided by operating activities of $57,843,000 was less than cash used for purchases of property, plant and equipment and for purchase of companies by $17,669,000.
 
Trade receivables increased $3,739,000, or 7%, to $56,772,000 in 2007 due primarily to an increased level of business resulting from acquisitions and internal growth. Inventories increased $8,809,000 or 23% to $46,599,000 in 2007. The increases were due primarily to increased levels of business and higher unit costs of inventories.
 
Net property, plant and equipment increased $7,775,000 to $93,222,000 because purchases of fixed assets and fixed assets acquired in acquisitions exceeded depreciation of existing assets.
 
Other intangible assets, less accumulated amortization increased $35,664,000 to $58,333,000 primarily because of the purchase of intangible assets of $23,771,000, $12,799,000, $2,731,000 and $413,000 in the Hom/Ade Foods, DADDY RAY’S, WHOLE FRUIT and FRUIT-A-FREEZE and Kansas ICEE acquisitions, respectively.
 
Goodwill increased $2,366,000 to $60,314,000 as a result of the purchases of the aforementioned acquisitions.
 
Accounts payable and accrued liabilities increased $5,033,000, or 10% from 2006 to 2007 primarily because of increased levels of business, higher costs of raw materials and packaging and higher income taxes payable.
 
Deferred income tax liabilities increased by $969,000 to $19,180,000 which related primarily to amortization of goodwill and other intangible assets.
 
Common stock increased $6,182,000 to $47,280,000 in 2007 because of the exercise of incentive and nonqualified stock options, stock issued under our stock purchase plan for employees and share-based compensation expense.
 
Net cash provided by operating activities increased $2,878,000 to $57,843,000 in 2007 primarily because of an increase to net earnings of $2,662,000 and higher amortization of intangibles and deferred costs of $2,797,000 compared to 2006.
 
Net cash used in investing activities increased $7,205,000 to $57,834,000 in 2007 from $50,629,000 in 2006 primarily because purchases of property, plant and equipment and payments for purchases of companies, net of cash acquired were higher by $29,509,000, which was offset by the net difference between proceeds


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from sales of marketable securities and purchases of marketable securities of $22,782,000 this year compared to last year.
 
Net cash used in financing activities of $1,769,000 in 2007 compared to net cash used by financing activities of $2,464,000 in 2006. The decrease was caused by increased proceeds from the issuance of common stock.
 
In 2007, the major variables in determining our net increase in cash and cash equivalents and marketable securities available for sale were our net earnings, depreciation and amortization of fixed assets, purchases of property, plant and equipment and payments for the purchase of companies. Other variables which in the past have had a significant impact on our change in cash and cash equivalents are payments for the repurchase of common stock, proceeds from borrowings and payments of long-term debt. As discussed in results of operations, our net earnings may be influenced by many factors. Depreciation and amortization of fixed assets is primarily determined by past purchases of property, plant and equipment although it could be impacted by a significant acquisition in the current year. Purchases of property, plant and equipment are primarily determined by our ongoing normal manufacturing and marketing requirements but could be increased significantly for manufacturing expansion requirements or large frozen beverage customer needs. From time to time, we have repurchased common stock and we anticipate that we will do so again in the future. We are actively seeking acquisitions that could be a significant use of cash. Although the balance of our long-term debt is $0 at September 29, 2007, we may borrow in the future depending on our needs.
 
Fiscal 2006 Compared to Fiscal 2005
 
Cash and cash equivalents and marketable securities available for sale increased $6,601,000, or 9%, to $76,621,000 from a year ago primarily because net cash provided by operating activities of $54,965,000 exceeded cash used for purchases of property, plant and equipment and for purchase of companies by $8,962,000.
 
Trade receivables increased $6,772,000 or 15% to $53,033,000 in 2006 due primarily to an increased level of business resulting from acquisitions and internal growth. Inventories increased $4,106,000 or 12% to $37,790,000 in 2006. The increases were due primarily to increased levels of business and higher unit costs of inventories.
 
Net property, plant and equipment decreased $3,598,000 to $85,447,000 because depreciation of fixed assets exceeded purchases of fixed assets and assets acquired in acquisitions.
 
Other intangible assets, less accumulated amortization increased $15,626,000 to $22,669,000 primarily because of the purchase of intangible assets of $15,188,000 in the SLUSH PUPPIE acquisition.
 
Goodwill increased $4,326,000 to $57,948,000 primarily as a result of the purchase of SLUSH PUPPIE.
 
Accounts payable and accrued liabilities increased $4,391,000 from 2005 to 2006 primarily because of increased levels of business, higher accruals for our insurance reserves and higher income taxes payable.
 
Deferred income tax liabilities increased by $224,000 to $18,211,000 which related primarily to amortization of goodwill and other intangible assets.
 
Common stock increased $4,505,000 to $41,098,000 in 2006 because of the exercise of incentive and nonqualified stock options, stock issued under our stock purchase plan for employees and share-based compensation expense.
 
Net cash provided by operating activities increased $2,321,000 to $54,965,000 in 2006 primarily because of an increase to net earnings of $3,407,000 offset by an increase in working capital of $1,363,000.
 
Net cash used in investing activities decreased $4,804,000 to $50,629,000 in 2006 from $55,433,000 in 2005 primarily because purchases of marketable securities, net of proceeds from marketable securities, were $12,950,000 lower in 2006 than in 2005 and purchases of property, plant and equipment were $1,893,000 lower in 2006 than in 2005. This was partially offset by $10,176,000 of higher payments in 2006 for purchases of companies.


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Net cash used in financing activities of $2,464,000 in 2006 compared to net cash used by financing activities of $1,159,000 in 2005. The increase was primarily caused by the increased payments of cash dividends of $1,873,000 in 2006, in which we paid four quarterly cash dividends compared to three in 2005, the first year in which we paid cash dividends.
 
In 2006, the major variables in determining our net increase in cash and cash equivalents and marketable securities available for sale were our net earnings, depreciation and amortization of fixed assets, purchases of property, plant and equipment and payments for the purchase of companies. Other variables which in the past have had a significant impact on our change in cash and cash equivalents are payments for the repurchase of common stock, proceeds from borrowings and payments of long-term debt. As discussed in results of operations, our net earnings may be influenced by many factors. Depreciation and amortization of fixed assets is primarily determined by past purchases of property, plant and equipment although it could be impacted by a significant acquisition in the current year. Purchases of property, plant and equipment are primarily determined by our ongoing normal manufacturing and marketing requirements but could be increased significantly for manufacturing expansion requirements or large frozen beverage customer needs.
 
Item 7A.  Quantitative And Qualitative Disclosures About Market Risk
 
The following is the Company’s quantitative and qualitative analysis of its financial market risk:
 
Interest Rate Sensitivity
 
The Company has in the past entered into interest rate swaps to limit its exposure to interest rate risk and may do so in the future if the Board of Directors feels that such non-trading purpose is in the best interest of the Company and its shareholders. As of September 29, 2007, the Company had no interest rate swap contracts.
 
Interest Rate Risk
 
At September 29, 2007, the Company had no long-term debt obligations.
 
Purchasing Risk
 
The Company’s most significant raw material requirements include flour, shortening, corn syrup, chocolate, and macadamia nuts. The Company attempts to minimize the effect of future price fluctuations related to the purchase of raw materials primarily through forward purchasing to cover future manufacturing requirements, generally for periods from 1 to 24 months. Futures contracts are not used in combination with forward purchasing of these raw materials. The Company’s procurement practices are intended to reduce the risk of future price increases, but also may potentially limit the ability to benefit from possible price decreases.
 
Foreign Exchange Rate Risk
 
The Company has not entered into any forward exchange contracts to hedge its foreign currency rate risk as of September 29, 2007 because it does not believe its foreign exchange exposure is significant.
 
Item 8.   Financial Statements And Supplementary Data
 
The financial statements of the Company are filed under this Item 8, beginning on page F-1 of this report.
 
Item 9.   Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
 
None.
 
Item 9A.  Controls And Procedures
 
Disclosure Controls and Procedures
 
We carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation


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of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended for financial reporting, as of September 29, 2007. Based on that evaluation, our chief executive officer and chief financial officer concluded that these controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported as specified in Securities and Exchange Commission rules and forms. There were no changes in these controls or procedures identified in connection with the evaluation of such controls or procedures that occurred during our last fiscal quarter, or in other factors that have materially affected, or are reasonably likely to materially affect these controls or procedures. There were no changes in the Company’s internal controls over financial reporting that occurred during our last fiscal quarter.
 
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. These disclosure controls and procedures include, among other things, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors and management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
  •   Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 
  •   Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and board of directors;
 
  •   Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management assessed the effectiveness of our internal control over financial reporting as of September 29, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Based on our assessment, our management believes that, as of September 29, 2007, our internal control over financial reporting is effective.
 
Item 9B.  Other Information
 
There was no information required on Form 8-K during the quarter that was not reported.


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PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance
 
Portions of the information concerning directors and executive officers, appearing under the captions “Information Concerning Nominees For Election To Board” and “Information Concerning Continuing Directors And Executive Officers” and information concerning Section 16(a) Compliance appearing under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s Proxy Statement filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held on February 5, 2008 (“2007 Proxy Statement”) is incorporated herein by reference.
 
Portions of the information concerning the Audit Committee, the requirement for an Audit Committee Financial Expert and the Nominating Committee in the Company’s 2007 Proxy Statement filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held on February 5, 2008, is incorporated herein by reference.
 
The Company has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, which applies to the Company’s principal executive officer and senior financial officer. The Company has also adopted a Code of Business Conduct and Ethics which applies to all employees. The Company will furnish any person, without charge, a copy of the Code of Ethics upon written request to J & J Snack Foods Corp., 6000 Central Highway, Pennsauken, New Jersey 08109, Attn: Dennis Moore. A copy of the Code of Ethics can also be found on our website at www.jjsnack.com. Any waiver of any provision of the Code of Ethics granted to the principal executive officer or senior financial officer may only be granted by a majority of the Company’s disinterested directors. If a waiver is granted, information concerning the waiver will be posted on our website www.jjsnack.com for a period of 12 months.
 
Item 11.   Executive Compensation
 
Information concerning executive compensation appearing in the Company’s 2007 Proxy Statement under the caption “Management Remuneration” is incorporated herein by reference.
 
The following is a list of the executive officers of the Company and their principal past occupations or employment. All such persons serve at the pleasure of the Board of Directors and have been elected to serve until the Annual Meeting of Shareholders on February 5, 2008 or until their successors are duly elected.
 
             
Name
 
Age
  Position
 
Gerald B. Shreiber
    66    
Chairman of the Board, President, Chief Executive Officer and Director
Dennis G. Moore
    52    
Senior Vice President, Chief Financial Officer, Secretary, Treasurer and Director
Robert M. Radano
    58    
Senior Vice President, Sales and Chief Operating Officer
Dan Fachner
    47    
President of The ICEE Company Subsidiary
Vincent Melchiorre
    47    
Executive Vice President and Chief Marketing Officer
 
Gerald B. Shreiber is the founder of the Company and has served as its Chairman of the Board, President, and Chief Executive Officer since its inception in 1971. His term as a director expires in 2010.
 
Dennis G. Moore joined the Company in 1984. He served in various controllership functions prior to becoming the Chief Financial Officer in June 1992. His term as a director expires in 2012.
 
Robert M. Radano joined the Company in 1972 and in May 1996 was named Chief Operating Officer of the Company. Prior to becoming Chief Operating Officer, he was Senior Vice President, Sales responsible for national food service sales of J & J.
 
Dan Fachner has been an employee of ICEE-USA Corp., which was acquired by the Company in May 1987, since 1979. He was named Senior Vice President of The ICEE Company in April 1994 and became President in May 1997.


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Vincent Melchiorre joined the Company in June 2007. Prior to joining the Company, he had been employed in management positions with Weston Foods, USA for one year, The Tasty Baking Company for three years and The Campbell Soup Company for over twenty years.
 
Item 12.   Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
 
Information concerning the security ownership of certain beneficial owners and management appearing in the Company’s 2008 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management” is incorporated herein by reference.
 
The following table details information regarding the Company’s existing equity compensation plans as of September 29, 2007.
 
                         
    (a)     (b)     (c)  
                Number of
 
                securities
 
                remaining
 
                available for
 
    Number of
          future issuance
 
    securities to be
          under equity
 
    issued upon
    Weighted-average
    compensation
 
    exercise of
    exercise price
    plans
 
    outstanding
    of outstanding
    (excluding
 
    options,
    options,
    securities
 
    warrants and
    warrants and
    reflected in
 
Plan Category
  rights     rights     column (a))  
 
Equity compensation plans approved by security holders
    1,145,000     $ 19.67       1,409,000  
Equity compensation plans not approved by security holders
                 
                         
Total
    1,145,000     $ 19.67       1,409,000  
                         
 
Item 13.   Certain Relationships And Related Transactions, and Director Independence
 
None to report.
 
Item 14.   Principal Accountant Fees And Services
 
Information concerning the Principal Accountant Fees and Services in the Company’s 2008 Proxy Statement is incorporated herein by reference.


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PART IV
 
Item 15.   Exhibits, Financial Statement Schedules
 
(a) The following documents are filed as part of this Report:
 
(1) Financial Statements
 
The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements and Financial Statements Schedule on page F-1.
 
(2) Financial Statement Schedules — Page S-1
 
Schedule II — Valuation and Qualifying Accounts
 
All other schedules are omitted either because they are not applicable or because the information required is contained in the financial statements or notes thereto.
 
(b) Exhibits
 
         
  3 .1   Amended and Restated Certificate of Incorporation filed February 28, 1990. (Incorporated by reference from the Company’s Form 10-Q dated May 4, 1990.)
  3 .2   Revised Bylaws adopted May 17, 2006. (Incorporated by reference from the Company’s Form 10-K dated December 6, 2006.)
  4 .3   Amended and Restated Loan Agreement dated December 1, 2006 by and among J & J Snack Foods Corp. and Certain of its Subsidiaries and Citizens Bank of Pennsylvania, as Agent. (Incorporated by reference from the Company’s Form 10-K dated December 6, 2006.)
  10 .1   Proprietary Exclusive Manufacturing Agreement dated July 17, 1984 between J & J Snack Foods Corp. and Wisco Industries, Inc. (Incorporated by reference from the Company’s Form S-1 dated February 4, 1986, file no. 33-2296).
  10 .2*   J & J Snack Foods Corp. Stock Option Plan. (Incorporated by reference from the Company’s Definitive Proxy Statement dated December 19, 2002.)
  10 .3*   Adoption Agreement for MFS Retirement Services, Inc. Non-Standardized 401(K) Profit Sharing Plan and Trust, effective September 1, 2004. (Incorporated by reference from the Company’s Form 10-K dated December 6, 2006.)
  10 .4*   J & J Snack Foods Corp. Directors’ and Consultants’ Deferred Compensation Plan adopted November 21, 2005. (Incorporated by reference from the Company’s Form 10-K dated December 6, 2006.)
  10 .6   Lease dated September 24, 1991 between J & J Snack Foods Corp. of New Jersey and A & H Bloom Construction Co. for the 101,200 square foot building next to the Company’s manufacturing facility in Pennsauken, New Jersey. (Incorporated by reference form the Company’s Form 10-K dated December 17, 1991.)
  10 .7   Lease dated August 29, 1995 between J & J Snack Foods Corp. and 5353 Downey Associated Ltd. for the lease of the Vernon, CA facility. (Incorporated by reference from the Company’s Form 10-K dated December 21, 1995.)
  10 .8*   J & J Snack Foods Corp. Employee Stock Purchase Plan (Incorporated by reference from the Company’s Form S-8 dated May 16, 1996).
  10 .11   Amendment No. 1 to Lease dated August 29, 1995 between J & J Snack Foods Corp. and 5353 Downey Associated Ltd. for the lease of the Vernon, CA facility. (Incorporated by reference from the Company’s Form 10-K dated December 18, 2002).
  10 .12   Employment agreement between Vincent A. Melchiorre and J & J Snack Foods Corp. (Incorporated by reference from the Company’s 8-K dated June 5, 2007).


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  14 .1   Code of Ethics Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002. (Incorporated by reference from the Company’s 10-Q dated July 20, 2004).
  21 .1**   Subsidiaries of J & J Snack Foods Corp.
  23 .1**   Consent of Independent Registered Public Accounting Firm.
  31 .1**   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .2**   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .1**   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002.
  32 .2**   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002.
 
Compensatory Plan
 
** Filed Herewith

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SIGNATURES
 
Pursuant to the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
   
J & J SNACK FOODS CORP.
     
December 6, 2007
 
By 
/s/  Gerald B. Shreiber

   
    Gerald B. Shreiber,
Chairman of the Board,
President, Chief Executive
  Officer and Director
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
     
December 6, 2007
  /s/ Gerald B. Shreiber
    Gerald B. Shreiber,
Chairman of the Board,
President, Chief Executive
  Officer and Director
     
December 6, 2007
  /s/ Dennis G. Moore
    Dennis G. Moore, Senior Vice
President, Chief Financial
  Officer and Director
     
December 6, 2007
  /s/ Sidney R. Brown
    Sidney R. Brown, Director
     
December 6, 2007
  /s/ Peter G. Stanley
    Peter G. Stanley, Director
     
December 6, 2007
  /s/ Leonard M. Lodish
    Leonard M. Lodish, Director


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J & J SNACK FOODS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
 
         
Financial Statements:
       
       
    F-2  
       
    F-4  
       
    F-5  
       
    F-6  
       
    F-7  
       
    F-8  
       
Financial Statement Schedule:
       
       
    S-1  
       
    S-2  


F-1


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Shareholders and
Board of Directors
J&J Snack Foods Corp. and Subsidiaries
 
We have audited the accompanying consolidated balance sheets of J & J Snack Foods Corp. and Subsidiaries as of September 29, 2007 and September 30, 2006, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended September 29, 2007 (52 weeks, 53 weeks, and 52 weeks, respectively). We have also audited J & J Snack Foods Corp. and Subsidiaries internal control over financial reporting as of September 29, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). J & J Snack Foods Corp. and Subsidiaries’ management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting which is included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on J & J Snack Foods Corp. and Subsidiaries internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
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 29, 2007 and September 30, 2006, 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 29, 2007 (52 weeks, 53 weeks and 52 weeks) in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, J & J Snack Foods Corp. and Subsidiaries maintained, in all material respects, effective internal control over


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financial reporting as of September 29, 2007, based on criteria established in Internal Control-Integrated Framework issued COSO.
 
We do not express an opinion or any other form of assurance on Management’s Report on Internal Control over Financial Reporting.
 
    /s/ GRANT THORNTON LLP
 
 
Philadelphia, Pennsylvania
November 20, 2007


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
                 
    September 29,
    September 30,
 
    2007     2006  
    (in thousands, except share amounts)  
 
Assets
               
Current Assets
               
Cash and cash equivalents
  $ 15,819     $ 17,621  
Marketable securities available for sale
    41,200       59,000  
Receivables
               
Trade, less allowances of $1,052 and $963, respectively
    56,772       53,033  
Other
    424       630  
Inventories
    46,599       37,790  
Prepaid expenses and other
    1,425       1,457  
Deferred income taxes
    3,125       2,713  
                 
Total current assets
    165,364       172,244  
                 
                 
Property, Plant and Equipment, at cost
    352,829       333,838  
Less accumulated depreciation and amortization
    259,607       248,391  
                 
      93,222       85,447  
                 
Other Assets
               
Goodwill
    60,314       57,948  
Other intangible assets, net
    58,333       22,669  
Other
    3,055       2,500  
                 
      121,702       83,117  
                 
    $ 380,288     $ 340,808  
                 
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Current obligations under capital leases
  $ 91     $  
Accounts payable
    45,278       40,835  
Accrued liabilities
    8,309       7,719  
Accrued compensation expense
    9,335       8,367  
Dividends payable
    1,588       1,385  
                 
Total current liabilities
    64,601       58,306  
                 
                 
Long-term obligations under capital leases
    474        
Deferred income taxes
    19,180       18,211  
Other long-term liabilities
    451       635  
                 
Stockholders’ Equity
               
Preferred stock, $1 par value; authorized, 10,000,000 shares; none issued
           
Common stock, no par value; authorized, 50,000,000 shares; issued and outstanding 18,702,000 and 18,468,000 respectively
    47,280       41,098  
Accumulated other comprehensive loss
    (2,006 )     (1,964 )
Retained earnings
    250,308       224,522  
                 
      295,582       263,656  
                 
    $ 380,288     $ 340,808  
                 
 
All share amounts reflect the 2-for-1 stock split effective January 5, 2006.
 
The accompanying notes are an integral part of these statements.


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share information)
 
                         
    Fiscal year ended  
    September 29,
    September 30,
    September 24,
 
    2007
    2006
    2005
 
    (52 weeks)     (53 weeks)     (52 weeks)  
 
Net Sales
  $ 568,901     $ 514,831     $ 457,112  
Cost of goods sold(1)
    382,374       342,412       302,065  
                         
Gross profit
    186,527       172,419       155,047  
                         
Operating expenses
                       
Marketing(2)
    70,248       61,601       57,197  
Distribution(3)
    48,945       45,331       39,589  
Administrative(4)
    20,142       19,306       17,582  
Impairment charge
          1,193        
Other general expense (income)
    (1,388 )     (76 )     430  
                         
      137,947       127,355       114,798  
                         
Operating income
    48,580       45,064       40,249  
                         
Other income (expenses)
                       
Investment income
    2,720       3,137       1,689  
Interest expense and other
    (142 )     (129 )     (136 )
                         
      2,578       3,008       1,553  
                         
Earnings before income taxes
    51,158       48,072       41,802  
Income taxes
    19,046       18,622       15,759  
                         
NET EARNINGS
  $ 32,112     $ 29,450     $ 26,043  
                         
Earnings per diluted share
  $ 1.69     $ 1.57     $ 1.40  
                         
Weighted average number of diluted shares
    19,005       18,807       18,600  
                         
Earnings per basic share
  $ 1.72     $ 1.60     $ 1.43  
                         
Weighted average number of basic shares
    18,635       18,421       18,194  
                         
 
 
(1) Includes share-based compensation expense of $227 for the year ended September 29, 2007 and $297 for the year ended September 30, 2006.
 
(2) Includes share-based compensation expense of $716 for the year ended September 29, 2007 and $576 for the year ended September 30, 2006.
 
(3) Includes share-based compensation expense of $50 for the year ended September 29, 2007 and $26 for the year ended September 30, 2006.
 
(4) Includes share-based compensation expense of $747 for the year ended September 29, 2007 and $687 for the year ended September 30, 2006.
 
All share amounts reflect the 2-for-1 stock split effective January 5, 2006.
 
The accompanying notes are an integral part of these statements.


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
 
                                                 
                Accumulated
                   
                Other
                   
    Common Stock     Comprehensive
    Retained
          Comprehensive
 
    Shares     Amount     Loss     Earnings     Total     Income  
 
Balance at September 26, 2004
    18,012     $ 33,349     $ (2,061 )   $ 179,088     $ 210,376          
Issuance of common stock upon exercise of stock options
    236       2,577                   2,577          
Issuance of common stock for employee stock purchase plan
    24       445                   445          
Foreign currency translation adjustment
                143             143     $ 143  
Issuance of common stock under deferred stock plan
          222                   222          
Dividends declared
                      (4,542 )     (4,542 )        
Net earnings
                      26,043       26,043       26,043  
                                                 
Comprehensive income
                                $ 26,186  
                                                 
Balance at September 24, 2005
    18,272     $ 36,593     $ (1,918 )   $ 200,589     $ 235,264          
Issuance of common stock upon exercise of stock options
    164       2,253                   2,253          
Issuance of common stock for employee stock purchase plan
    23       556                   556          
Foreign currency translation adjustment
                (46 )           (46 )   $ (46 )
Issuance of common stock under deferred stock plan
    9       392                   392          
Dividends declared
                      (5,517 )     (5,517 )        
Share-based compensation
          1,304                   1,304          
Net earnings
                      29,450       29,450       29,450  
                                                 
Comprehensive income
                                $ 29,404  
                                                 
Balance at September 30, 2006
    18,468     $ 41,098     $ (1,964 )   $ 224,522     $ 263,656          
Issuance of common stock upon exercise of stock options
    211       3,669                   3,669          
Issuance of common stock for employee stock purchase plan
    23       700                   700          
Foreign currency translation adjustment
                (42 )           (42 )   $ (42 )
Issuance of common stock under deferred stock plan
          275                   275          
Dividends declared
                      (6,326 )     (6,326 )        
Share-based compensation
          1,538                   1,538          
Net earnings
                      32,112       32,112       32,112  
                                                 
Comprehensive income
                                $ 32,070  
                                                 
Balance at September 29, 2007
    18,702     $ 47,280     $ (2,006 )   $ 250,308     $ 295,582          
                                                 
 
All share amounts reflect the 2-for-1 stock split effective January 5, 2006.
 
The accompanying notes are an integral part of this statement.


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
                         
    Fiscal year ended  
    September 29,
    September 30,
    September 24,
 
    2007
    2006
    2005
 
    (52 weeks)     (53 weeks)     (52 weeks)  
 
Operating activities:
                       
Net earnings
  $ 32,112     $ 29,450     $ 26,043  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Depreciation and amortization of fixed assets
    22,451       22,848       23,215  
Amortization of intangibles and deferred costs
    4,557       1,760       1,047  
(Gains) losses from disposals and impairment of property & equipment
    (49 )     1,062       150  
Other
    (150 )            
Share-based compensation
    1,740       1,586        
Deferred income taxes
    557       (96 )     (174 )
Changes in assets and liabilities, net of effects from purchase of companies:
                       
(Increase) decrease in accounts receivable
    (569 )     (4,223 )     1,048  
Increase in inventories
    (5,722 )     (2,160 )     (3,465 )
(Increase) decrease in prepaid expenses and other
    (65 )     (167 )     139  
Increase in accounts payable and accrued liabilities
    2,981       4,905       4,641  
                         
Net cash provided by operating activities
    57,843       54,965       52,644  
                         
Investing activities:
                       
Purchases of property, plant and equipment
    (22,765 )     (19,739 )     (21,632 )
Payments for purchases of companies, net of cash acquired
    (52,747 )     (26,264 )     (16,088 )
Purchase of marketable securities
    (60,875 )     (40,825 )     (31,725 )
Proceeds from sales of marketable securities
    78,882       36,050       14,000  
Proceeds from disposal of property and equipment
    592       1,046       819  
Other
    (921 )     (897 )     (807 )
                         
Net cash used in investing activities
    (57,834 )     (50,629 )     (55,433 )
                         
Financing activities:
                       
Proceeds from issuance of common stock
    4,369       2,809       2,241  
Payments of cash dividend
    (6,123 )     (5,273 )     (3,400 )
Payments on capitalized lease obligations
    (15 )            
                         
Net cash used in financing activities
    (1,769 )     (2,464 )     (1,159 )
Effect of exchange rate on cash and cash equivalents
    (42 )     (46 )     143  
                         
Net (decrease) increase in cash and cash equivalents
    (1,802 )     1,826       (3,805 )
Cash and cash equivalents at beginning of year
    17,621       15,795       19,600  
                         
Cash and cash equivalents at end of year
  $ 15,819     $ 17,621     $ 15,795  
                         
 
The accompanying notes are an integral part of these statements.


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
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
 
We recognize revenue from Food Service, Retail Supermarkets, The Restaurant Group and Frozen Beverage products at the time the products are shipped to third parties. When we perform services under service contracts for frozen beverage dispenser machines, revenue is recognized upon the completion of the services on specified machines. We provide an allowance for doubtful receivables after taking into consideration historical experience and other factors.
 
We follow EITF 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. Our product costs include amounts for shipping and handling, therefore, we charge our customers shipping and handling fees at the time the products are shipped or when services are performed. The cost of shipping products to the customer is recognized at the time the products are shipped to the customer and our policy is to classify them as Distribution expenses. The cost of shipping products to the customer classified as Distribution expenses was $48,945,000, $45,331,000 and $39,589,000 for the fiscal years ended 2007, 2006 and 2005, respectively.
 
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) and Staff Accounting Bulletin No. 104, Revenue Recognition, corrected copy (SAB 104) address certain criteria for revenue recognition. SAB 101 and SAB 104 outline the criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Our revenue recognition policies comply with the guidance contained in SABs 101 and 104.
 
We also sell service contracts covering frozen beverage machines sold. The terms of coverage range between 12 and 60 months. We record deferred income on service contracts which is amortized by the straight-line method over the term of the contracts.
 
During the years ended September 29, 2007, September 30, 2006 and September 24, 2005, we sold $9,000,000, $6,000,000 and $5,506,000, respectively, of service contracts related to our frozen beverage machines. At September 29, 2007 and September 30, 2006, deferred income on service contracts was $1,160,000 and $1,748,000, respectively, of which $126,000 and $183,000 is included in other long-term liabilities as of September 29, 2007 and September 30, 2006, respectively and the balance is reflected as short-term and included in accrued liabilities on the consolidated balance sheet. Service contract income of $9,612,000, $5,883,000 and $5,728,000 was recognized for the fiscal years ended 2007, 2006 and 2005, 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


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
the period. The cumulative translation adjustment is recorded as a separate component of stockholders’ equity and changes to such are included in comprehensive income.
 
4.   Use of Estimates
 
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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 and Accounts Receivable
 
We maintain cash balances at financial institutions located in various states. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. We customarily maintain cash balances in excess of these insurance limits.
 
Other financial instruments that could potentially subject us to concentrations of credit risk are trade accounts receivable; however, such risks are limited due to the large number of customers comprising our customer base and their dispersion across geographic regions. We usually have 2 to 3 customers with accounts receivable balances of between $1,500,000 to $4,000,000.
 
Our top ten customers accounted for 42%, 45% and 43% of our sales during fiscal years 2007, 2006 and 2005, respectively, with our largest customer accounting for 8% of our sales in all three years. Three of the ten customers are food distributors who sell our product to many end users.
 
The majority of our accounts receivable are due from trade customers. Credit is extended based on evaluation of our customers’ financial condition and collateral is not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
 
7.   Inventories
 
Inventories are valued at the lower of cost (determined by the first-in, first-out method) or market.
 
We follow FASB Statement 151, “Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4,” (Statement 151).
 
Statement 151 retains the general principle of ARB 43, Chapter 4, “Inventory Pricing”, that inventories are presumed to be stated at cost; however, it amends ARB 43 to clarify that
 
  •   abnormal amounts of idle facilities, freight, handling costs, and spoilage should be recognized as charges of the current period


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
 
  •   allocation of fixed production overheads to inventories should be based on the normal capacity of the production facilities.
 
Statement 151 defines normal capacity as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The Board concluded that normal capacity refers to a range of production levels that will vary based on business- and industry-specific factors. Accordingly, an entity will have to use judgment to determine when production is outside the range of expected variation in production (either abnormally low or abnormally high). In periods of abnormally low production (for example, periods in which there is significantly lower demand, labor and material shortages exist, or there is unplanned equipment downtime) the amount of fixed overhead allocated to each unit of production should not be increased. However, in periods of abnormally high production the amount of fixed overhead allocated to each unit of production is decreased to assure inventories are not measured above cost.
 
8.   Investment Securities
 
We account for our investment securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (SFAS No. 115). This standard requires investments in securities to be classified in one of three categories: held-to-maturity, trading, or available-for-sale. Our investment portfolio consists solely of investments classified as available for sale and is accounted for as such in accordance with SFAS No. 115.
 
9.   Depreciation and Amortization
 
Depreciation of equipment and buildings is provided for by the straight-line method 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 lives, whichever is shorter. Licenses and rights arising from acquisitions are amortized by the straight-line method over periods ranging from 4 to 20 years.
 
We follow SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS No. 144). We recorded an impairment charge of $1,193,000 in 2006 in the food service segment for the writedown of robotic packaging equipment based on a determination made during the year that we would not be able to make the equipment work as intended.
 
10.   Fair Value of Financial Instruments
 
The carrying value of our short-term financial instruments, such as accounts receivables and accounts payable, approximate their fair values, based on the short-term maturities of these instruments.
 
11.   Income Taxes
 
We account for our 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 that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.
 
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (SFAS 109).
 
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a


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Table of Contents

 
J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
 
FIN 48 also provides guidance on financial reporting and classification of differences between tax positions taken in a tax return and amounts recognized in the financial statements.
 
FIN 48 is effective for fiscal years beginning after December 15, 2006, and we will adopt it on September 30, 2007. We have not fully completed our evaluation of the impact FIN 48 will have on our financial position and results of operations when adopted. However, we currently estimate that the adoption will result in a charge to beginning retained earnings at September 30, 2007 of less than $1.0 million.
 
12.   Earnings Per Common Share
 
We follow SFAS No. 128, “Earnings Per Share” (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.
 
Our calculation of EPS is as follows (all share amounts reflect the 2-for-1 stock split effective January 5, 2006):
 
                         
    Fiscal Year Ended September 29, 2007  
    Income
    Shares
    Per Share
 
    (Numerator)     (Denominator)     Amount  
    (in thousands, except per share amounts)  
 
Earnings Per Basic Share
                       
Net Income available to common stockholders
  $ 32,112       18,635     $ 1.72  
Effect of Dilutive Securities
                       
Options
          370       (.03 )
                         
Earnings Per Diluted Share
                       
Net Income available to common stockholders plus assumed conversions
  $ 32,112       19,005     $ 1.69  
                         
 
128,200 anti-dilutive shares have been excluded in the computation of 2007 diluted EPS because the options’ exercise price is greater than the average market price of the common stock.
 
                         
    Fiscal Year Ended September 30, 2006  
    Income
    Shares
    Per Share
 
    (Numerator)     (Denominator)     Amount  
    (in thousands, except per share amounts)  
 
Earnings Per Basic Share
                       
Net Income available to common stockholders
  $ 29,450       18,421     $ 1.60  
Effect of Dilutive Securities
                       
Options
          386       (.03 )
                         
Earnings Per Diluted Share
                       
Net Income available to common stockholders plus assumed conversions
  $ 29,450       18,807     $ 1.57  
                         


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Table of Contents

 
J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
500 anti-dilutive shares have been excluded in the computation of 2006 diluted EPS because the options’ exercise price is greater than the average market price of the common stock.
 
                         
    Fiscal Year Ended September 24, 2005  
    Income
    Shares
    Per Share
 
    (Numerator)     (Denominator)     Amount  
    (in thousands, except per share amounts)  
 
Earnings Per Basic Share
                       
Net Income available to common stockholders
  $ 26,043       18,194     $ 1.43  
Effect of Dilutive Securities
                       
Options
          406       (.03 )
                         
Earnings Per Diluted Share
                       
Net Income available to common stockholders plus assumed conversions
  $ 26,043       18,600     $ 1.40  
                         
 
13.   Accounting for Stock-Based Compensation
 
Effective with the 2006 fiscal year, the Company follows FASB Statement No. 123(R), “Share-Based Payment”. Statement 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the fair value of the equity or liability instruments issued.
 
Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
 
In addition to the accounting standard that sets forth the financial reporting objectives and related accounting principles, Statement 123(R) includes an appendix of implementation guidance that provides expanded guidance on measuring the fair value of share-based payment awards.
 
Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used.
 
Since the Company adopted Statement 123(R) using the modified-prospective transition method, prior periods have not been restated. Under this method, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the period of adoption. We measured share-based compensation cost using the Black-Scholes option pricing model.
 
At September 29, 2007, the Company has three stock-based employee compensation plans. Share-based compensation of $1,148,000, net of a tax benefit of $592,000, or $.06 per diluted share, was recognized for the year ended September 29, 2007, comprised of $833,000 for options issued under our stock option plan, $146,000 for stock issued under our employee stock purchase plan, $138,000 for deferred stock issued to outside directors and $31,000 resulting from amortization of restricted stock issued to an employee. Share-based compensation of $1,161,000, net of a tax benefit of $425,000, or $.06 per diluted share, was recognized for the year ended September 30, 2006, comprised of $823,000 for options issued under our stock option plan, $165,000 for stock issued under our employee stock purchase plan and $173,000 for deferred stock issued to outside directors. At September 29, 2007, the Company has unrecognized compensation expense of


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Table of Contents

 
J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
approximately $1.6 million to be recognized over the next three fiscal years. Reported net income, adjusting for share-based compensation that would have been recognized in 2005 if Statement 123(R) had been followed is (all share amounts reflect the 2-for-1 stock split effective January 5, 2006):
 
                         
    Fiscal year ended  
    September 29,
    September 30,
    September 24,
 
    2007
    2006
    2005
 
    (52 weeks)     (53 weeks)     (52 weeks)  
    (in thousands, except per share amounts)  
 
Net income, as reported
  $ 32,112     $ 29,450     $ 26,043  
Less: share-based compensation costs determined under fair-value based method for all awards, net of tax
                1,127  
                         
Adjusted net earnings
  $ 32,112     $ 29,450     $ 24,916  
                         
Earnings per share of common stock — basic:
                       
As reported
  $ 1.72     $ 1.60     $ 1.43  
Share-based compensation
                (.06 )
                         
Adjusted net earnings
  $ 1.72     $ 1.60     $ 1.37  
Earnings per share of common stock — diluted:
                       
As reported
  $ 1.69     $ 1.57     $ 1.40  
Share-based compensation
                (.06 )
                         
Adjusted net earnings
  $ 1.69     $ 1.57     $ 1.34  
 
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 2007, 2006 and 2005; expected volatility of 27.4% for fiscal year 2007, 34.2% for year 2006 and 27.9% for year 2005; weighted average risk-free interest rates of 4.57%, 4.41% and 3.82%; dividend rate of .9% for year 2007 and 1% for years 2006 and 2005 and expected lives ranging between 5 and 10 years for all years. An expected forfeiture rate of 15% was used for year 2007 and 18% was used for year 2006.
 
Expected volatility is based on the historical volatility of the price of our common shares over the past 53 months for 5 year options and 10 years for 10 year options. We use historical information to estimate expected life and forfeitures within the valuation model. The expected term of awards represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures.
 
14.   Advertising Costs
 
Advertising costs are expensed as incurred. Total advertising expense was $4,084,000, $1,589,000, and $1,617,000 for the fiscal years 2007, 2006 and 2005, respectively.
 
15.   Commodity Price Risk Management
 
Our most significant raw material requirements include flour, shortening, corn syrup, sugar, raisins, juice, cheese, chocolate, and macadamia nuts. We attempt to minimize the effect of future price fluctuations related to the purchase of raw materials primarily through forward purchasing to cover future manufacturing requirements, generally for periods from 1 to 12 months. As of September 29, 2007, we have approximately $31,000,000 of such commitments. Futures contracts are not used in combination with forward purchasing of


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Table of Contents

 
J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
these raw materials. Our procurement practices are intended to reduce the risk of future price increases, but also may potentially limit the ability to benefit from possible price decreases.
 
16.   Research and Development Costs
 
Research and development costs are expensed as incurred. Total research and development expense was $529,000, $558,000 and $574,000 for the fiscal years 2007, 2006 and 2005, respectively.
 
17.   Recent Accounting Pronouncements
 
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.
 
Historically, there have been two widely used methods for quantifying the effects of financial statement misstatements. These methods are referred to as the “roll-over” and “iron curtain” method. The roll-over method quantifies the amount by which the current year income statement is misstated. Exclusive reliance on an income statement approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts. The iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated. Exclusive reliance on a balance sheet approach can result in disregarding the effects of errors in the current year income statement that results from the correction of an error existing in previously issued financial statements.
 
SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods.
 
SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of October 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. Use of this “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.
 
We did not record any such cumulative adjustment due to immateriality.
 
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (FAS 157). FAS 157 establishes a common definition for how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. The statement is effective for our 2008 fiscal year. We are currently evaluating the provisions of FAS 157 to determine its impact on our financial statements.
 
On February 15, 2007, the FASB issued SFAS Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (SFAS 159). The Fair value option established by SFAS 159 permits, but does not require, all entities to choose to measure eligible items at fair value at specified election dates. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective as of the beginning of an entity’s fiscal year that begins after November 15, 2007. We are currently assessing what the impact of the adoption of this SFAS would be on the Company’s financial position and/or results of operations.


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Table of Contents

 
J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
18.   Reclassifications
 
Certain prior year financial statement amounts have been reclassified to be consistent with the presentation for the current year.
 
NOTE B — ACQUISITIONS
 
On March 17, 2005, we acquired all of the assets of Snackworks LLC, d/b/a Bavarian Brothers, a manufacturer of soft pretzels headquartered in Rancho Cucamonga, California for $14.8 million plus approximately $600,000 for inventory. Snackworks operated production facilities in California and Chambersburg, Pennsylvania and markets its products under the brand names SERIOUSLY TWISTED!, BAVARIAN BROTHERS and CINNAPRETZEL. Snackworks sells throughout the continental United States primarily to mass merchandisers and theatres. Annual sales are approximately $11 million.
 
On January 31, 2006, we acquired the stock of ICEE of Hawaii. ICEE of Hawaii, headquartered in Waipahu, Hawaii, distributes ICEE frozen beverages and related products throughout the Hawaiian islands. Annual sales are approximately $2.3 million.
 
On May 26, 2006, The ICEE Company, our frozen carbonated beverage distribution company, acquired the SLUSH PUPPIE branded business from Dr. Pepper/Seven Up, Inc., a Cadbury Schweppes Americas Beverages Company for $18.1 million plus approximately $4.3 million in working capital. SLUSH PUPPIE, North America’s leading brand for frozen non-carbonated beverages, is sold through an existing established distributor network to over 20,000 locations in the United States and Canada as well as to certain international markets. Sales of the SLUSH PUPPIE business were approximately $18 million in 2005. The allocation of the purchase price is as follows:
 
         
    (in thousands)  
 
Working Capital
  $ 4,264  
Property, plant and equipment
    25  
Prepaid license
    1,400  
Trade names
    7,460  
Customer relationships
    6,180  
Covenant not to compete
    148  
Goodwill
    2,987  
         
    $ 22,464  
         
 
On January 9, 2007 we acquired the assets of Hom/Ade Foods, Inc., a manufacturer and distributor of biscuits and dumplings sold under the MARY B’S and private label store brands to the supermarket industry. Hom/Ade, headquartered in Pensacola, Florida, had annual sales of approximately $30 million.
 
On January 31, 2007 we acquired the assets of Radar Inc., a manufacturer and seller of fig and fruit bars selling its products under the brand DADDY RAY’S. Headquartered and with its manufacturing facility in Moscow Mills, Missouri (outside of St. Louis), Radar, Inc. had annual sales of approximately $23 million dollars selling to the retail grocery segment and mass merchandisers, both branded and private label.
 
On April 2, 2007, we acquired the WHOLE FRUIT Sorbet and FRUIT-A-FREEZE Fruit Bar brands, along with related assets including a manufacturing facility located in Norwalk, California. Selling primarily to the supermarket industry, sales for the last six months of 2007 were $2,429,000.


F-15


Table of Contents

 
J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE B — ACQUISITIONS — (Continued)
 
On June 25, 2007, we acquired the assets of an ICEE distributor in Kansas with annual sales of less than $1 million.
 
The allocation of the purchase prices for the Hom/Ade and Radar acquisitions and other acquisitions which were made during the 2007 fiscal year is as follows:
 
                         
    Hom/Ade     Radar     Other  
    (in thousands)  
 
Working Capital
  $ 1,410     $ 1,284     $ 989  
Property, plant & equipment
    233       5,750       1,442  
Trade Names
    6,220       1,960       3,086  
Customer Relationships
    17,250       10,730       58  
Covenant not to Compete
    301       109        
Goodwill
    476       1,287       603  
                         
    $ 25,890     $ 21,120     $ 6,178  
                         
 
Included in the purchase price for Hom/Ade is a pre-acquisition contingency which was settled in the first quarter of fiscal year 2008 for approximately $1.9 million.
 
The following pro forma information discloses net sales, net earnings and earnings per share for the year ended September 29, 2007 excluding the impact of the Hom/Ade and Radar acquisitions.
 
The impact of the other acquisitions made during the year on net sales, net earnings and earnings per share was not significant.
 
                         
    Fiscal year ended  
    Pro Forma
             
    September 29,
    September 30,
    September 24,
 
    2007
    2006
    2005
 
    (52 weeks)     (53 weeks)     (52 weeks)  
    (in thousands except per share information)  
 
Net Sales
  $ 537,935     $ 514,831     $ 457,112  
Net Earnings
  $ 30,170     $ 29,450     $ 26,043  
Earnings per diluted share
  $ 1.59     $ 1.57     $ 1.40  
Earnings per basic share
  $ 1.62     $ 1.60     $ 1.43  
 
These acquisitions were accounted for under the purchase method of accounting, and their operations are included in the accompanying consolidated financial statements from their acquisition dates.
 
NOTE C — INVESTMENT SECURITIES
 
The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 29, 2007 are summarized as follows:
 
                                 
          Gross
    Gross
    Fair
 
    Amortized
    Unrealized
    Unrealized
    Market
 
    Cost     Gains     Losses     Value  
    (in thousands)  
 
Available for Sale Securities
                               
Equity Securities
  $ 41,200     $     $     $ 41,200  
Municipal Government Securities
                       
                                 
    $ 41,200     $     $     $ 41,200  
                                 


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Table of Contents

 
J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE C — INVESTMENT SECURITIES — (Continued)
 
The amortized cost, unrealized gains and losses, and fair market values of our investment securities available for sale at September 30, 2006 are summarized as follows:
 
                                 
          Gross
    Gross
    Fair
 
    Amortized
    Unrealized
    Unrealized
    Market
 
    Cost     Gains     Losses     Value  
    (in thousands)  
 
Available for Sale Securities
                               
Equity Securities
  $ 54,000     $     $     $ 54,000  
Municipal Government Securities
    5,000                   5,000  
                                 
    $ 59,000     $     $     $ 59,000  
                                 
 
Because of the short-term nature of our investment securities held at September 29, 2007 and September 30, 2006, they do not fluctuate from par.
 
Proceeds from the sale of marketable securities were $78,882,000 and $36,050,000 in the periods ended September 29, 2007, and September 30, 2006, respectively, with no gain or loss recorded. We use the specific identification method to determine the cost of securities sold.
 
NOTE D — INVENTORIES
 
Inventories consist of the following:
 
                 
    September 29,
    September 30,
 
    2007     2006  
    (in thousands)  
 
Finished goods
  $ 23,207     $ 18,398  
Raw materials
    6,703       5,415  
Packaging materials
    4,833       3,803  
Equipment parts and other
    11,856       10,174  
                 
    $ 46,599     $ 37,790  
                 
 
Inventory is presented net of an allowance for obsolescence of $2,864,000 and $2,330,000 as of fiscal year ends 2007 and 2006, respectively.
 
NOTE E — PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consist of the following:
 
                         
    September 29,
    September 30,
    Estimated
 
    2007     2006     Useful Lives  
    (in thousands)  
 
Land
  $ 1,316     $ 556        
Buildings
    7,751       4,497       15-39.5 years  
Plant machinery and equipment
    117,468       108,682       5-10 years  
Marketing equipment
    191,778       189,925       5-7 years  
Transportation equipment
    2,810       2,013       5 years  
Office equipment
    10,020       9,219       3-5 years  
Improvements
    17,556       16,264       5-20 years  
Construction in progress
    4,130       2,682        
                         
    $ 352,829     $ 333,838          
                         


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Table of Contents

 
J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE F — GOODWILL AND INTANGIBLE ASSETS
 
Our four reporting units, which are also reportable segments, are Food Service, Retail Supermarket, The Restaurant Group and Frozen Beverages.
 
The carrying amount of acquired intangible assets for the reportable segments are as follows:
 
                                 
    September 29, 2007     September 30, 2006  
    Gross
          Gross
       
    Carrying
    Accumulated
    Carrying
    Accumulated
 
    Amount     Amortization     Amount     Amortization  
    (in thousands)  
 
Food Service
                               
Indefinite lived intangible assets
                               
Trade Names
  $ 8,180     $     $     $  
Amortized intangible assets
                               
Licenses and rights
  $ 37,328     $ 6,214     $ 9,013     $ 3,029  
                                 
    $ 45,508     $ 6,214     $ 9,013     $ 3,029  
                                 
Retail Supermarket
                               
Indefinite lived intangible assets
                               
Trade Names
  $ 2,731     $     $     $  
                                 
The Restaurant Group
                               
Amortized intangible assets
                               
Licenses and rights
  $     $     $     $  
                                 
Frozen Beverages
                               
Indefinite lived intangible assets
                               
Trade Names
  $ 9,315     $     $ 8,960     $  
Amortized intangible assets
                               
Licenses and rights
  $ 8,227     $ 1,234     $ 8,175     $ 450  
                                 
    $ 17,542     $ 1,234     $ 17,135     $ 450  
                                 
 
Licenses and rights are being amortized by the straight-line method over periods ranging from 4 to 20 years and amortization expense is reflected throughout operating expenses. In January 2006, intangible assets of $1,746,000 were acquired in the ICEE of Hawaii acquisition and a product license agreement for $100,000 was entered into by the food service segment. In May 2006, intangible assets of $15,188,000 were acquired in the SLUSH PUPPIE acquisition.
 
In January 2007, intangible assets of $23,771,000 and $12,799,000 were acquired in the Hom/Ade Foods and DADDY RAY’S acquisitions, respectively. In April 2007, intangible assets of $2,731,000 were acquired in the WHOLE FRUIT and FRUIT-A-FREEZE acquisitions and $413,000 was acquired in the Kansas ICEE acquisition in June 2007.
 
Aggregate amortization expense of intangible assets for the fiscal years 2007, 2006 and 2005 was $3,974,000, $1,408,000 and $822,000.
 
Estimated amortization expense for the next five fiscal years is approximately $4,700,000 in 2008, $4,500,000 in 2009 and 2010, $4,100,000 in 2011 and $3,800,000 in 2012. The weighted average amortization period of the intangible assets is 10.3 years.


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE F — GOODWILL AND INTANGIBLE ASSETS — (Continued)
 
Goodwill
 
The carrying amounts of goodwill for the reportable segments are as follows:
 
                                         
    Food
  Retail
  Restaurant
  Frozen
   
    Service   Supermarkets   Group   Beverages   Total
    (in thousands)
 
Balance at September 29, 2007
  $ 23,988     $     $ 386     $ 35,940     $ 60,314  
                                         
Balance at September 30, 2006
  $ 22,225     $     $ 386     $ 35,337     $ 57,948  
                                         
 
Goodwill of $7,145,000 in the food service segment was acquired in the March 2005 acquisition of Snackworks, LLC. and $839,000 was acquired in an acquisition in August 2006. Goodwill of $500,000 in the frozen beverages segment was acquired in the January 2006 acquisition of ICEE of Hawaii. Goodwill of $2,987,000 in the frozen beverages segment was acquired in the May 2006 acquisition of the SLUSH PUPPIE branded business. Goodwill of $1,763,000 was acquired in the January 2007 acquisitions of Hom/Ade Foods and DADDY RAY’S and $603,000 was acquired in the June 2007 Kansas ICEE acquisition.
 
NOTE G — LONG-TERM DEBT
 
In December 2006, we entered into an amended and restated loan agreement with our existing banks which provides for up to a $50,000,000 revolving credit facility repayable in December 2011, with the availability of repayments without penalty. The agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. As of September 29, 2007 and September 30, 2006, there were no outstanding balances under the prior facility.
 
We self-insure, up to loss limits, certain insurable risks such as worker’s compensation and automobile liability claims. Accruals for claims under our self-insurance program are recorded on a claims-incurred basis. Under this program, the estimated liability for claims incurred but unpaid in fiscal years 2007 and 2006 was $1,900,000 and $2,800,000, respectively. In connection with certain self-insurance agreements, we customarily enter into letters of credit arrangements with our insurers. At September 29, 2007 and September 30, 2006, we had outstanding letters of credit totaling $9,595,000 and $8,620,000, respectively.
 
NOTE H — OBLIGATIONS UNDER CAPITAL LEASES
 
Obligations under capital leases consist of the following:
 
                 
    September 29,
    September 30,
 
    2007     2006  
    (in thousands)  
 
Capital lease obligations, with interest at 2.6%, payable in monthly installments of $8,700, through August 2013
  $ 565     $  
Less current portion
    91        
                 
    $ 474     $  
                 


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE I — INCOME TAXES
 
Income tax expense (benefit) is as follows:
 
                         
    Fiscal year ended  
    September 29,
    September 30,
    September 24,
 
    2007     2006     2005  
    (in thousands)  
 
Current
                       
U.S. Federal
  $ 15,485     $ 15,982     $ 13,932  
Foreign
    423       233       210  
State
    2,581       2,503       1,791  
                         
      18,489       18,718       15,933  
                         
Deferred
                       
U.S. Federal
    474       (82 )     (153 )
State
    83       (14 )     (21 )
                         
      557       (96 )     (174 )
                         
    $ 19,046     $ 18,622     $ 15,759  
                         
 
The provisions for income taxes differ from the amounts computed by applying the statutory federal income tax rate of approximately 35% to earnings before income taxes for the following reasons:
 
                         
    Fiscal year ended  
    September 29,
    September 30,
    September 24,
 
    2007     2006     2005  
    (in thousands)  
 
Income taxes at statutory rates
  $ 17,905     $ 16,825     $ 14,631  
Increase (decrease) in taxes resulting from:
                       
State income taxes, net of federal income tax benefit
    1,819       1,663       1,170  
Other, net
    (678 )     134       (42 )
                         
    $ 19,046     $ 18,622     $ 15,759  
                         
 
Deferred tax assets and liabilities consist of the following:
 
                         
    September 29,     September 30,     September 24,
 
    2007     2006     2005  
    (in thousands)  
 
Deferred tax assets
                       
Vacation accrual
  $ 975     $ 908     $ 831  
Insurance accrual
    2,795       2,883       2,624  
Deferred income
    103       138       225  
Allowances
    1,573       1,326       1,181  
Other, net
    1,233       921       666  
                         
      6,679       6,176       5,527  
                         
Deferred tax liabilities
                       
Amortization of goodwill and other intangible assets
    10,087       8,758       7,428  
Depreciation of property and equipment
    12,614       12,874       13,643  
Other, net
    33       42       50  
                         
      22,734       21,674       21,121  
                         
    $ 16,055     $ 15,498     $ 15,594  
                         


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE J — COMMITMENTS
 
1.    Lease Commitments
 
The following is a summary of approximate future minimum rental commitments for non-cancelable operating leases with terms of more than one year as of September 29, 2007:
 
                         
    Plants and
             
    Offices     Equipment     Total  
    (in thousands)  
 
2008
  $ 5,207     $ 5,017     $ 10,224  
2009
    4,757       3,968       8,725  
2010
    3,980       2,703       6,683  
2011
    3,204       1,997       5,201  
2012
    2,544       712       3,256  
2013 and thereafter
    9,252       25       9,277  
                         
    $ 28,944     $ 14,422     $ 43,366  
                         
 
Total rent expense was $13,708,000, $13,418,000 and $11,516,000 for fiscal years 2007, 2006 and 2005, respectively.
 
2.    Other Commitments
 
We are a party to litigation which has arisen in the normal course of business which management currently believes will not have a material adverse effect on our financial condition or results of operations.
 
We self-insure, up to loss limits, certain insurable risks such as worker’s compensation and automobile liability claims. Accruals for claims under our self-insurance program are recorded on a claims incurred basis. Under this program, the estimated liability for claims incurred but unpaid in fiscal years 2007 and 2006 was $1,900,000 and $2,800,000, respectively. In connection with certain self-insurance agreements, we customarily enter into letters of credit arrangements with our insurers. At September 29, 2007 and September 30, 2006, we had outstanding letters of credit totaling $9,595,000 and $8,620,000, respectively.
 
NOTE K — CAPITAL STOCK
 
In fiscal years 2005, 2006 and 2007, we did not purchase and retire any shares of our common stock.
 
NOTE L — STOCK OPTIONS
 
We have a Stock Option Plan (the “Plan”). Pursuant to the Plan, stock options may be granted to officers and our key employees which qualify as incentive stock options as well as stock options which are nonqualified. The exercise price of incentive stock options is at least the fair market value of the common stock on the date of grant. The exercise price for nonqualified options is determined by a committee of the Board of Directors. The options are generally exercisable after three years and expire no later than ten years from date of grant. There were 1,400,000 shares reserved under the Plan; options for 733,000 shares remain unissued as of September 29, 2007. There are options that were issued under an option plan that has since expired that are still outstanding.
 
We have an Employee Stock Purchase Plan (“ESPP”) whereby employees purchase stock by making contributions through payroll deductions for six month periods. The purchase price of the stock is 85% of the lower of the market price of the stock at the beginning of the six-month period or the end of the six-month period. In fiscal years 2007, 2006 and 2005 employees purchased 23,140, 23,205 and 23,996 shares at average


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE L — STOCK OPTIONS — (Continued)
 
purchase prices of $30.22, $23.95 and $18.53, respectively. ESPP expense of $146,000, $165,000 and $162,000 was recognized for fiscal years 2007, 2006 and 2005, respectively.
 
A summary of the status of our stock option plans as of fiscal years 2007, 2006 and 2005 and the changes during the years ended on those dates is represented below:
 
                                 
    Incentive Stock Options     Nonqualified Stock Options  
          Weighted-
          Weighted-
 
    Stock
    Average
    Stock
    Average
 
    Options
    Exercise
    Options
    Exercise
 
    Outstanding     Price     Outstanding     Price  
 
Balance, September 26, 2004
    941,106     $ 14.06       584,000     $ 9.84  
Granted
    12,646       23.65       24,354       21.35  
Exercised
    (177,052 )     9.43       (88,000 )     5.89  
Cancelled
    (27,212 )     15.14              
                                 
Balance, September 24, 2005
    749,488       15.28       520,354       11.04  
Granted
    135,671       29.73       40,000       30.44  
Exercised
    (111,224 )     13.75       (68,000 )     6.13  
Cancelled
    (44,000 )     19.70                
                                 
Balance, September 30, 2006
    729,935       17.93       492,354       13.30  
Granted
    114,700       41.45       35,000       36.49  
Exercised
    (151,130 )     17.45       (68,000 )     6.19  
Cancelled
    (20,100 )     23.70                
                                 
Balance, September 29, 2007
    673,405     $ 21.87       459,354     $ 16.12  
Exercisable Options, September 29, 2007
    428,488               380,000          
 
The weighted-average fair value of incentive options granted during fiscal years ended September 29, 2007, September 30, 2006 and September 24, 2005 was $11.98, $9.48 and $7.95, respectively. The weighted-average fair value of nonqualified stock options granted during the fiscal years ended September 29, 2007, September 30, 2006 and September 24, 2005 was $14.29, $14.79 and $8.80, respectively. The total instrinsic value of stock options exercised was $5.4 million, $3.8 million and $4.2 million in fiscal years 2007, 2006 and 2005, respectively.
 
The following table summarizes information about incentive stock options outstanding at September 29, 2007:
 
                                         
    Options Outstanding   Options Exercisable
    Number
  Weighted-
      Number
   
    Outstanding
  Average
  Weighted-
  Exercisable
  Weighted-
    at
  Remaining
  Average
  at
  Average
Range of
  September 29,
  Contractual
  Exercise
  September 29,
  Exercise
Exercise Prices
  2007   Life   Price   2007   Price
 
$ 6.38 −$ 7.94
    81,000       3.0 years     $ 6.49       81,000     $ 6.49  
$10.60 −$15.20
    122,132       3.8 years     $ 10.66       122,132     $ 10.66  
$16.85 −$22.40
    226,356       1.6 years     $ 19.12       225,356     $ 19.10  
$27.42 −$38.54
    135,217       3.3 years     $ 29.96           $  
$41.57 −$41.60
    108,700       4.4 years     $ 41.60              
                                         
      673,405                       428,488          
                                         


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE L — STOCK OPTIONS — (Continued)
 
The following table summarizes information about nonqualified stock options outstanding at September 29, 2007:
 
                                         
    Options Outstanding   Options Exercisable
    Number
  Weighted-
      Number
   
    Outstanding
  Average
  Weighted-
  Exercisable
  Weighted-
    at
  Remaining
  Average
  at
  Average
Range of
  September 29,
  Contractual
  Exercise
  September 29,
  Exercise
Exercise Prices
  2007   Life   Price   2007   Price
 
$ 7.97 − $10.88
    272,000       2.1 years     $ 9.69       272,000     $ 9.69  
$19.77 − $27.42
    112,354       4.4 years     $ 20.22       108,000     $ 19.93  
$29.78 − $38.81
    75,000       8.2 years     $ 33.26              
                                         
      459,354                       380,000          
                                         
 
NOTE M — 401(k) PROFIT-SHARING PLAN
 
We maintain a 401(k) profit-sharing plan for our employees. Under this plan, we may make discretionary profit-sharing and matching 401(k) contributions. Contributions of $1,333,000, $1,219,000 and $1,243,000 were made in fiscal years 2007, 2006 and 2005, respectively.
 
NOTE N — CASH FLOW INFORMATION
 
The following is supplemental cash flow information:
 
                         
    Fiscal year ended  
    September 29,
    September 30,
    September 24,
 
    2007     2006     2005  
    (in thousands)  
 
Cash paid for:
                       
Interest
  $ 6     $ 4     $ 26  
Income taxes
    17,753       17,465       14,734  
Non cash items:
                       
Capital leases
  $ 580     $     $  
 
NOTE O — SEGMENT REPORTING
 
We principally sell our products to the food service and retail supermarket industries. We also distribute our products directly to the consumer through our chain of retail stores referred to as The Restaurant Group. Sales and results of our frozen beverages business are monitored separately from the balance of our food service business and restaurant group because of different distribution and capital requirements. We maintain separate and discrete financial information for the four operating segments mentioned above which is available to our Chief Operating Decision Makers. We have applied no aggregate criteria to any of these operating segments in order to determine reportable segments. Our four reportable segments are Food Service, Retail Supermarkets, The Restaurant Group and Frozen Beverages. All inter-segment net sales and expenses have been eliminated in computing net sales and operating income (loss). These segments are described below.
 
Food Service
 
The primary products sold by the food service segment are soft pretzels, frozen juice treats and desserts, churros and baked goods. Our customers in the food service segment include snack bars and food stands in


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE O — SEGMENT REPORTING — (Continued)
 
chain, department and discount stores; malls and shopping centers; fast food outlets; stadiums and sports arenas; leisure and theme parks; convenience stores; movie theatres; warehouse club stores; schools, colleges and other institutions. Within the food service industry, our products are purchased by the consumer primarily for consumption at the point-of-sale.
 
Retail Supermarkets
 
The primary products sold to the retail supermarket industry are soft pretzel products — including SUPERPRETZEL, frozen juice treats and desserts including LUIGI’S Real Italian Ice, MINUTE MAID Juice Bars and Soft Frozen Lemonade, FRUIT-A-FREEZE frozen fruit bars, WHOLE FRUIT Sorbet, BARQ’S FLOATZ and ICEE Squeeze-Up Tubes and TIO PEPE’S Churros. Within the retail supermarket industry, our frozen and prepackaged products are purchased by the consumer for consumption at home.
 
The Restaurant Group
 
We sell direct to the consumer through our Restaurant Group, which operates BAVARIAN PRETZEL BAKERY and PRETZEL GOURMET, our chain of specialty snack food retail outlets.
 
Frozen Beverages
 
We sell frozen beverages to the food service industry, including our restaurant group, primarily under the names ICEE, SLUSH PUPPIE and ARCTIC BLAST in the United States, Mexico and Canada.


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE O — SEGMENT REPORTING — (Continued)
 
The Chief Operating Decision Maker for Food Service, Retail Supermarkets and The Restaurant Group and the Chief Operating Decision Maker for Frozen Beverages monthly review and evaluate operating income and sales in order to assess performance and allocate resources to each individual segment. In addition, the Chief Operating Decision Makers review and evaluate depreciation, capital spending and assets of each segment on a quarterly basis to monitor cash flow and asset needs of each segment. Information regarding the operations in these four reportable segments is as follows:
 
                         
    Fiscal year ended  
    September 29,
    September 30,
    September 24,
 
    2007     2006     2005  
    (in thousands)  
 
Sales to external customers:
                       
Food Service
  $ 355,764     $ 320,167     $ 280,123  
Retail Supermarket
    52,131       46,948       42,347  
The Restaurant Group
    2,766       3,897       5,409  
Frozen Beverages
    158,240       143,819       129,233  
                         
    $ 568,901     $ 514,831     $ 457,112  
                         
Depreciation and Amortization:
                       
Food Service
  $ 16,176     $ 13,992     $ 13,715  
Retail Supermarket
                 
The Restaurant Group
    60       102       209  
Frozen Beverages
    10,772       10,514       10,338  
                         
    $ 27,008     $ 24,608     $ 24,262  
                         
Operating Income (Loss):
                       
Food Service
  $ 33,417     $ 32,083     $ 26,401  
Retail Supermarket
    (2 )     1,945       2,918  
The Restaurant Group
    31       (253 )     (314 )
Frozen Beverages
    15,134       11,289       11,244  
                         
    $ 48,580     $ 45,064     $ 40,249  
                         
Capital Expenditures:
                       
Food Service
  $ 12,755     $ 11,111     $ 9,832  
Retail Supermarket
                 
The Restaurant Group
    102       3       45  
Frozen Beverages
    9,908       8,625       11,755  
                         
    $ 22,765     $ 19,739     $ 21,632  
                         
Assets:
                       
Food Service
  $ 252,843     $ 218,834     $ 209,734  
Retail Supermarket
                 
The Restaurant Group
    690       838       1,010  
Frozen Beverages
    126,755       121,136       95,180  
                         
    $ 380,288     $ 340,808     $ 305,924  
                         


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J & J SNACK FOODS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE P — QUARTERLY FINANCIAL DATA (UNAUDITED)
 
                                 
    Fiscal Year Ended September 29, 2007  
                      Net Earnings
 
                      Per
 
          Gross
    Net
    Diluted
 
    Net Sales     Profit     Earnings     Share(1)  
    (in thousands, except per share information)  
 
1st Quarter
  $ 114,142     $ 35,248     $ 3,805     $ .20  
2nd Quarter
    130,040       42,407       5,333       .28  
3rd Quarter
    162,510       55,658       12,497       .66  
4th Quarter
    162,209       53,214       10,477       .55  
                                 
Total
  $ 568,901     $ 186,527     $ 32,112     $ 1.69  
                                 
 
                                 
    Fiscal Year Ended September 30, 2006  
                      Net Earnings
 
                      Per
 
          Gross
    Net
    Diluted
 
    Net Sales     Profit     Earnings     Share(1)  
    (in thousands, except per share information)  
 
1st Quarter
  $ 108,571     $ 33,117     $ 3,010     $ .16  
2nd Quarter
    112,044       35,226       4,137       .22  
3rd Quarter
    140,132       50,733       10,786       .57  
4th Quarter
    154,084       53,343       11,517       .61  
                                 
Total
  $ 514,831     $ 172,419     $ 29,450     $ 1.57  
                                 
 
All share amounts reflect the 2-for-1 stock split effective January 5, 2006.
 
 
(1) Total of quarterly amounts do not necessarily agree to the annual report amounts due to separate quarterly calculations of weighted average shares outstanding


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Shareholders and Board of Directors
J & J Snack Foods Corp. and Subsidiaries
 
We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of J & J Snack Foods Corp. and Subsidiaries referred to in our report dated November 20, 2007, which is included in the Annual Report to Shareholders and incorporated by reference in Part II of this form. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
 
/s/ GRANT THORNTON LLP          
 
Philadelphia, Pennsylvania
November 20, 2007


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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
 
                                         
          Opening
    Charged to
          Closing
 
Year
    Description   Balance     expense     Deductions     Balance  
 
  2007     Allowance for doubtful accounts   $ 963,000     $ 189,000     $ 100,000 (1)   $ 1,052,000  
  2006     Allowance for doubtful accounts     1,054,000       300,000       391,000 (1)     963,000  
  2005     Allowance for doubtful accounts     1,104,000       112,000       162,000 (1)     1,054,000  
  2007     Inventory Reserve     2,330,000       1,911,000       1,377,000 (2)     2,864,000  
  2006     Inventory Reserve     1,922,000       1,679,000       1,271,000 (2)     2,330,000  
  2005     Inventory Reserve     1,131,000       1,890,000       1,099,000 (2)     1,922,000  
 
 
(1) Write-off of uncollectible accounts receivable.
 
(2) Disposals of obsolete inventory.


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CORPORATE INFORMATIO OFFICERS Gerald B. ShreiberH. Robert LongPRETZELS, INC. Chairman of the Board, Vice President, Distribution Gary Powell President and Chief Executive Officer Harry A. McLaughlinPresident Dennis G. MooreVice President, Controller Senior Vice President, Chief FinancialHOM/ADE FOODS, INC. Robert J. Pape Officer, Secretary and Treasurer Vice President, Sales — RetailGreg Lowery Robert M. RadanoPresident Leong-Chai Tan Senior Vice President and Vice President, Chief Financial Officer, Chief Operating OfficerQUARTERLY COMMON J&J Snack Foods Corp. of California Vincent A. MelchiorreSTOCK DATA Steven J. Taylor Executive Vice President and Vice President, Sales — Food ServiceMARKET PRICE Chief Marketing Officer Thomas WeberFISCAL 2007 HIGH LOW John Griffith Vice President, Operations Vice President, Information Systems1st Quarter ........... $42.27 $30.76 Harry FronjianMIA PRODUCTS2nd Quarter .......... 43.51 37.41 Vice President, Human Resources3rd Quarter . . . . . . . . . . 41.95 37.16 T.J. Couzens 4th Quarter . . . . . . . . . . 40.14 33.23 DIRECTORSVice President/General Manager Ernest FogleFISCAL 2006 HIGH LOW Gerald B. Shreiber Vice President, Research & Development Chairman of the Board, 1st Quarter ........... $32.34 $26.55 President and Chief Executive OfficerThe ICEE COMPANY2nd Quarter .......... 35.22 29.09 Dennis G. Moore3rd Quarter . . . . . . . . . . 35.51 29.76 Dan Fachner Senior Vice President, Chief Financial4th Quarter . . . . . . . . . . 33.94 28.58 President Officer, Secretary and Treasurer Kent Galloway Sidney R. Brown (1)(2)(3)STOCK LISTING Vice President and Chief Financial Officer Chief Executive Officer,The common stock of J&J Snack Foods Corp. NFI IndustriesScott Carteris traded on the NASDAQ National Market System Vice President, Operationswith the symbol JJSF. Peter G. Stanley (1)(2)(3) Vice President,Lou Fiorentino Emerging Growth Equities, Ltd.Vice President, Service DevelopmentTRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company Leonard M. Lodish, Ph.D. (1)(2)(3)David LauderNew York, NY Samuel R. Harrell Professor,Vice President, Controller Marketing Department and Vice Dean, INDEPENDENT ACCOUNTANTS Rick Naylor Wharton West of the Wharton School, Grant Thornton LLP Vice President/General Manager University of PennsylvaniaPhiladelphia, PA Central Zone OFFICERS OF Dan O’ Malley COUNSEL SUBSIDIARY Vice President/General ManagerFlaster Greenberg, LLP COMPANIESWestern ZoneCherry Hill, NJ Rod Sexton J&J SNACK FOODS SALES CORP.ANNUAL MEETING Vice President, Service Support Cliff BestThe Annual Meeting of Shareholders is Mark Winterhalterscheduled for Tuesday, February 5, 2008 Vice President, Distributor Sales Vice President/General Managerat 10:00 AM at The Crowne Plaza, Barbara DassattiEastern Zone2349 Marlton Pike West, Cherry Hill, NJ Regional Vice President, Foodservice Sales Susan Woods John DuckettVice President, MarketingFORM 10-K Vice President, Service & AssemblyCopies of the Company’s Annual Report to ICEE DE MEXICO, S.A. DE C.V. the Securities and Exchange Commission on Form Tom Hunter10-K may be obtained without charge Vice President, General ManagerAndres Gonzàlez by writing to: Uptown BakeriesVice President/General Manager J&J Snack Foods Corp. Paul Kennedy6000 Central Highway Vice President, SafetyCOUNTRY HOMEPennsauken, NJ 08109 BAKERS, INC.Attention: Dennis G. Moore Paul Klingensmith Vincent A. Melchiorreor by accessing our website www.jjsnack.com on Vice President, Sales — Frozen Desserts Presidentwhich our SEC filings are made available or by going Gerard Lawto the SEC’s Public Reference Room to read and Vice President, Western OperationsCharles Tommolinocopy filings or by accessing the SEC’s website, Vice President, Country Home Bakerswww.sec. gov. — Mike Harvison (1) Audit Committee MemberVice President, General Manager (2) Compensation Committee Member (3) Nominating Committee Member

 


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