-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LdcDEkQ2fZ1gLkyC16CJ/WxFjobKuqBdWf/QnmTsZfUYa75/XHkt42y21mW+obDs UU16uKMqQnhimSeLXUMEtA== 0000785956-98-000002.txt : 19980224 0000785956-98-000002.hdr.sgml : 19980224 ACCESSION NUMBER: 0000785956-98-000002 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971208 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: J&J SNACK FOODS CORP CENTRAL INDEX KEY: 0000785956 STANDARD INDUSTRIAL CLASSIFICATION: COOKIES & CRACKERS [2052] IRS NUMBER: 221935537 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-14616 FILM NUMBER: 98546854 BUSINESS ADDRESS: STREET 1: 6000 CENTRAL HGWY CITY: PENNSAUKEN STATE: NJ ZIP: 08109 BUSINESS PHONE: 6096659533 MAIL ADDRESS: STREET 1: 6000 CENTRAL HIGHWAY CITY: PENNSAUKEN STATE: NJ ZIP: 08109 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________ FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 _______________________ Date of Report December 8, 1997 (Date of earliest event reported) J & J SNACK FOODS CORP. (Exact name of registrant as specified in its charter) New Jersey 0-14616 22-1935537 (State or other jurisdiction (Commission File Number) (I.R.S. Employer of incorporation or organization) Identification Number) 6000 Central Highway, Pennsauken, New Jersey 08109 (Address, including zip code, of Principal Executive Offices) (609) 665-9533 (Registrant's telephone number, including area code) Item 2. Acquisition or Disposition of Assets On December 8, 1997, J & J Snack Foods Corp. ("Registrant") through its ICEE-USA Corp. subsidiary ("ICEE") acquired all of the common stock of National ICEE Corporation ("NIC"), a marketer and distributor of frozen carbonated beverages under the tradename ICEE, with approximate annual sales of $40,000,000. As a result of the acquisition, the Company now has the rights to market and distribute frozen carbonated beverages under the name ICEE to all of the continental United States, except for portions of eleven states. The purchase price paid to the former shareholders of NIC was $9,000,000 in the form of cash. Additionally, ICEE assumed approximately $44,000,000 of debt, of which approximately $42,000,000 was retired at closing. The source of cash utilized to retire the debt and to fund the purchase price was a $40,000,000 term loan and a revolving line of credit with the Registrant's existing banks. Item 7. Financial Statements and Exhibits (a) Financial statements of business acquired Audited Balance Sheets, March 29, 1997 and March 30, 1996 Audited Statement of Operations, years ended March 29, 1997 and March 30, 1996 Audited Statement of Stockholders' Equity (Deficiency), years ended March 29, 1997 and March 30, 1996 Audited Statement of Cash Flows, years ended March 29, 1997 and March 30, 1996 Unaudited Balance Sheet, September 27, 1997 Unaudited Statement of Operations for the six months ended September 27, 1997 Unaudited Statement of Stockholders' Equity (Deficiency)for the six months ended September 27, 1997 Unaudited Statement of Cash Flows for the six months ended September 27, 1997 (b) Pro forma financial information UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements give effect to the acquisition of NIC by the Registrant on December 8, 1997. This pro forma information has been prepared utilizing the historical financial statements of NIC and the Registrant. This information should be read in conjunction with the historical financial statements and notes thereto of the Registrant which are incorporated by reference to the Registrant's Form 10-K and the historical financial statements of NIC which are incorporated within this Form 8-K. The pro forma financial data is provided for comparative purposes only and does not purport to be indicative of the results which actually would have been obtained if the acquisition had been effected on the dates indicated or of the results which may be obtained in the future. The pro forma financial information is based on the purchase method of accounting for the acquisition. The pro forma adjustments are described in the accompanying Sheet and Notes to Unaudited Pro Forma Condensed Combined Statement of Income. The Unaudited Pro Forma condensed combined statements of income for the year ended September 28, 1997 assume that the acquisition of NIC had occurred on September 29, 1996 (combining the results for the twelve months ended September 27, 1997 for NIC and the year ended September 27, 1997 for the Registrant.) The unaudited pro forma condensed combined balance sheet at September 27, 1997 assumes that the acquisition of NIC had occurred on September 27, 1997 (combining the balance sheets for NIC and the Registrant as of September 27, 1997.) Acquisition The Purchase consideration payable to the former shareholders of NIC consisted of $9,000,000. Assumptions Purchase Price Allocation Although the Registrant does not have complete information at this time as to the fair value of NIC's individual assets and liabilities, an estimate of the eventual allocation of the purchase price was made on the basis of available information. The eventual allocation of the purchase price will be made on the basis of appraisals and valuations which give effect to various factors including the nature and intended future use ofassets acquired in determining their value. It is not anticipated that any change in the allocation price will be material from the pro forma adjustments. For purpose of pro forma presentations, the excess purchase price over the net assets acquired is being amortized over an estimated life of twenty years. In addition to historical information, the pro forma financial information contains forward-looking state- ments. 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Registrant undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. J & J SNACK FOODS CORP. By:_____________________________ Dennis G. Moore Senior Vice President & Chief Financial Officer Date: February 20, 1998 NATIONAL ICEE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 NATIONAL ICEE CORPORATION TABLE OF CONTENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 PAGE NUMBER Independent Auditor's Report 2 Consolidated Financial Statements: Balance sheet 3 Operations 4 Stockholders' (deficiency) 5 Cash flows 6 & 7 Notes to financial statements 8 to 19 INDEPENDENT AUDITOR'S REPORT May 21, 1997 Officers and Directors National Icee Corporation Philadelphia, Pennsylvania We have audited the accompanying consolidated balance sheet of National Icee Corporation as of March 29, 1997 and March 30, 1996 and the related consolidated statements of operations, stockholders' (deficiency), and cash flows for the years ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Icee Corporation as of March 29, 1997 and March 30, 1996 and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Margolis & Company P.C. Certified Public Accountants NATIONAL ICEE CORPORATION CONSOLIDATED BALANCE SHEET MARCH 29, MARCH 30, 1997 1996 ASSETS Current assets: Cash $ 255,561 $ 48,638 Accounts receivable, net of allowance for doubtful accounts of $175,000 and $142,000, respectively 3,106,641 2,581,373 Inventory 2,366,610 2,344,594 Prepaid expenses and other current assets 4,924,033 4,842,573 Total current assets 10,652,845 9,817,178 Property and equipment, less accumulated depreciation 27,348,084 29,229,557 Non-compete covenants 447,546 564,195 Other intangible assets 1,060,308 386,403 Other assets 161,032 160,608 Deferred income taxes 3,787,000 3,270,000 $43,456,815 $43,427,941 LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) Current liabilities: Demand notes, related parties $ 678,459 $ 734,456 Revolving credit, bank 19,800,000 - Line of credit, bank 3,875,000 1,180,000 Current portion of long-term debt 264,923 219,873 Accounts payable and accrued expenses 3,027,548 3,604,738 Unearned purchase rebates 164,500 132,000 Deferred income 3,333 73,646 Total current liabilities 27,813,763 5,944,713 Revolving credit, bank - 20,000,000 Long-term debt, less current portion 1,296,796 966,719 Subordinated debt 19,030,127 18,574,616 Unearned purchase rebates 120,639 274,585 Deferred income 28,350 31,674 Total liabilities 48,289,675 45,792,307 Stockholders' (deficiency) ( 4,832,860) ( 2,364,366) $43,456,815 $43,427,941 The notes to consolidated financial statements are an integral part of the above statement. NATIONAL ICEE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED MARCH 29, MARCH 30, 1997 1996 Sales $37,887,678 $36,946,167 Cost of sales 13,672,334 13,634,007 Gross profit 24,215,344 23,312,160 Selling and administrative expenses 17,729,012 16,842,190 Income before depreciation and amortization, interest, royalty and other (income) 6,486,332 6,469,970 Other (income) expenses: Depreciation and amortization 6,537,342 6,022,515 Interest, net 3,059,659 2,986,384 Royalty income ( 70,313) ( 93,750) Other ( 54,862) ( 39,121) 9,471,826 8,876,028 Loss before credit for income taxes ( 2,985,494) ( 2,406,058) Credit for income taxes ( 517,000) ( 916,000) Net loss ($ 2,468,494) ($1,490,058) The notes to consolidated financial statements are an integral part of the above statement. NATIONAL ICEE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK TOTAL (a) (b) Balance, April 1, 1995 $30,854 $1,909,407 ($2,808,813) ($5,756) ($874,308) Net loss - - ( 1,490,058) - ( 1,490,058) Balance, March 30, 1996 30,854 1,909,407 ( 4,298,871) ( 5,756)( 2,364,366) Net loss - - ( 2,468,494) - ( 2,468,494) Balance, March 29, 1997 $30,854 $1,909,407 ( $6,767,365) ($5,756)($4,832,860) (a)$.10 par value; 700,000 shares authorized; 308,540 shares issued at March 29, 1997 and March 30, 1996. (b) 818 shares (at cost) The notes to consolidated financial statements are an integral part of the above statement. NATIONAL ICEE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED MARCH 29, MARCH 30, 1997 1996 INCREASE (DECREASE) IN CASH Cash flows from operating activities: Net loss ($2,468,494) ($1,490,058) Adjustments to reconcile net loss to net cash provided by operating activities: Deferred income taxes (517,000) (916,000) Deferred income earned (73,637) (97,074) Amortization 421,975 416,217 Allowance for doubtful accounts 33,000 92,000 Depreciation 6,115,367 5,606,298 Accrued interest expense 660,524 600,106 Gain on sale of equipment (367,478) - (Increase) decrease in operating assets: Accounts receivable (71,921) 130,789 Inventory 127,992 381,662 Prepaid expenses and other current assets 179,425 ( 296,332) Other assets 3,936 1,006 (Decrease) in operating liabilities: Accounts payable and accrued expenses (1,875,290) ( 305,654) Net cash provided by operating activities 2,168,399 4,122,960 Cash flows from investing activities: Proceeds from sales of equipment and intangible assets 1,198,168 - Acquisitions, manufacturing and rebuilding of property and equipment (2,839,674) ( 3,651,405) Purchase of business (1,800,000) - Net cash (used in) investing activities (3,441,506) ( 3,651,405) Cash flows from financing activities: Proceeds from demand notes 50,174 26,592 Repayments of demand notes (124,347) ( 9,555) Proceeds from line of credit, bank 2,104,306 - Repayment of revolving credit, bank (200,000) (70,000) Proceeds from long-term and subordinated debt 19,686 71,160 Repayments of long-term and subordinated debt ( 248,343) ( 402,994) Purchase rebates earned ( 121,446) ( 129,273) Net cash provided by (used in) financing activities 1,480,030 ( 514,070) Net increase (decrease) in cash 206,923 (42,515) Cash at beginning of year 48,638 91,153 Cash at end of year $ 255,561 $ 48,638 The notes to conslidated financial statements are an integral part of the above statement. NATIONAL ICEE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED YEAR ENDED MARCH 29, MARCH 30, 1997 1996 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest $2,443,740 $2,370,731 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES In 1996, the Company incurred a trademark claim in Oklahoma City and in settlement thereof, Sooner Icee, Inc. reduced the purchase price of the franchise costs and operating rights and its long- term debt obligation from the Company in the amount of $27,827 (see Notes 7 and 10). During the fiscal year ended March 29, 1997, the Company acquired the common stock of Icee Ventures, Inc. for $2,225,000 of which $425,000 was payable as a Note to Individual (see Notes 4 and 10) and the remaining amount of $1,800,000 was borrowed against the bank line of credit. In addition, the Company is obligated to the former stockholder of Icee Ventures, Inc. in the amount of $200,000 for a non-compete covenant (see Notes 6 and 10). During 1997, the Company agreed to offset equipment held under a lease from a stockholder against subordinated debt to a relative of the stockholder in the amount of $208,057. The equipment had a cost of $350,000 and accumulated depreciation of $141,943. The notes to consolidated financial statements are an integral part of the above statement. NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 1. Nature of Business and Summary of Significant Accounting Policies Nature of business - The Company operates predominately as a distributor of food and beverage products which are dispensed from machines it places, under exclusive arrangements, in retail stores generally located in the eastern United States. Principles of consolidation - The accompanying consolidated financial statements include the accounts of National Icee Corporation and its wholly-owned subsidiaries, FCB Syrups, Inc. and Icee Ventures, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. Use of estimates - The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Fiscal year - The Company's fiscal year ends on the Saturday closest to March 31. The fiscal years ended 1997 and 1996 each reflect a 52-week period. Inventory - Inventory is valued at the lower of cost or market, cost being determined on a first-in, first-out basis. Depreciation and amortization - Depreciation and amortization of property and equipment and intangible assets is provided by use of the straight-line method over their respective estimated useful lives. A patent, obtained in April, 1984, is being amortized over 17 years. Franchise costs and operating rights are being amortized over five years. Non-compete covenants are being amortized over periods of four to eight years. Excess of cost of investment over net assets of businesses acquired - The excess of cost of investment over the fair value of net assets acquired prior to November 1, 1970 and included in other intangible assets in the amount of $155,252 is not being amortized because, in the opinion of management, such value is of a permanent nature. The value is reviewed by management on a periodic basis and an amortization program will be established should future events render such treatment appropriate. The excess of cost of investment over the fair value of net assets acquired after November 1, 1970 is being amortized on a straight line basis over 15 years. Capitalization of manufacturing and rebuilding costs - The Company has its own dispenser manufacturing and rebuilding department. Applicable costs for parts, internal labor and related overhead are capitalized. NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 1. Nature of Business and Summary of Significant Accounting Policies - Continued Advertising material on hand - The Company creates advertising material for point of sale marketing. In management's opinion, the advertising materials have a future benefit and are expensed as the material is distributed to customer locations. Advertising expense totaled $506,437 and $672,848 for the years ended in 1997 and 1996, respectively. Basis of presentation - The Company has had losses for the past several years and at March 29, 1997 there is a net stockholders' deficiency of $4,832,860. Although this may indicate an uncertainty as to the Company's ability to continue as a going concern, the Company has taken action to mitigate these concerns. The Company significantly reduced its overhead for the year ended March 30, 1996 and the number of dispensers manufactured for its own use. In addition, the Company hired a marketing specialist to improve the visibility and recognition of its products at over 8,000 locations and has additional marketing resources and expertise available from The Coca-Cola Company. The Coca-Cola Company has been and will continue to assist the Company with opportunities to supply FCB Syrups and/or dispensers to The Coca-Cola Company's customer base. In addition, the Company acquired a new territory during fiscal year ended March 29, 1997. Although the Company's operating overhead increased for the year ended March 29, 1997 as a result of the acquisition, management believes this acquisition will help to improve sales and income from operations in future years. The Company expects to show improved operating and cash flow results in the future from these improvements and available resources. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 2. Prepaid Expenses and Other Current Assets MARCH 29, MARCH 30, 1997 1996 Dispenser parts $3,597,182 $3,639,284 Advertising material on hand 896,446 610,095 Other 430,405 593,194 $4,924,033 $4,842,573 NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 3. Note Receivable - Stock Purchase In prior years, common stock was issued pursuant to an incentive stock option plan to certain officers in exchange for their personal notes. Outstanding balances were as follows: MARCH 29, MARCH 30, 1997 1996 Current portion included with "other current assets" $11,250 $14,250 Non-current portion included with "other assets" 11,000 18,500 $22,250 $32,750 4. Acquisition of Territory On June 14, 1996, the Company acquired 100% of the stock of Icee Ventures, Inc. for $2,225,000. The acquisition was funded with a note payable to the sole stockholder in the amount of $425,000 and cash of $1,800,000, which was borrowed on the bank line of credit. The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based on the fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was $532,000 and has been included with other intangible assets (see Note 7), which is being amortized on a straight-line basis over 15 years. The total purchase price was allocated as follows: Accounts receivable $ 486,347 Inventory 150,008 Prepaid expenses and other current assets 260,885 Property and equipment, net 2,432,963 Other intangible assets 779,231 Other assets 4,360 Accounts payable and accrued expenses ( 1,298,100) Debt obligations, line of credit, bank (1) ( 590,694) $2,225,000 (1)The Company utilized its bank line of credit to pay off $700,000 of Icee Ventures, Inc.'s obligations to the bank and stockholder, some of which occurred prior to June 14, 1996, in addition to the $1,800,000 borrowed for the acquisition. The operating results of the acquired business has been included in the consolidated statement of operations from the date of acquisition. In addition, the Company entered into a non-compete covenant agreement over five years with the former stockholder under a note obligation (see Note 10). NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 5. Property and Equipment, at Cost MARCH 29, MARCH 30, 1997 1996 Land, buildings and improvements $ 607,736 $ 595,412 Dispensers 62,587,982 57,292,172 Warehouse and office equipment 1,501,423 1,014,880 Vehicles 225,941 75,892 64,923,082 58,978,356 Less accumulated depreciation 37,574,998 29,748,799 $27,348,084 $29,229,557 Internal manufacturing and rebuilding costs for dispensers were approximately $1,907,239 and $2,563,511 for the years ended in 1997 and 1996, respectively. 6. Non-Compete Covenants MARCH 29, MARCH 30, 1997 1996 Southeastern Icee, Inc. - Florida Territory $ 650,000 $ 650,000 Southeastern Icee, Inc. - Georgia Territory 220,000 220,000 Icee of St. Louis, Inc. 650,000 650,000 Sooner Icee, Inc. 547,597 547,597 Icee Ventures, Inc. 200,000 - Icee of Memphis, Inc. 84,186 84,186 Icee of Plano, Inc. 50,000 50,000 Golden Spread Icee, Inc. 25,000 25,000 2,426,783 2,226,783 Less accumulated amortization 1,979,237 1,662,588 $ 447,546 $ 564,195 7. Other Intangible Assets MARCH 29, MARCH 30, 1997 1996 Excess of cost of investment over net assets of businesses acquired $ 687,252 $155,252 Patent 98,408 98,408 Franchise costs and operating rights 755,504 508,273 1,541,164 761,933 Less accumulated amortization 480,856 375,530 $1,060,308 $386,403 NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 8. Demand Notes, Related Parties The Company is indebted on demand notes payable to various officers and minority stockholders. The notes bear interest at 10%. Related party interest was $134,252 and $178,223 for the years ended March 29, 1997 and March 30, 1996, respectively. 9. Bank Debt The Company refinanced its CoreStates Bank debt on September 19, 1994 with NationsBank of Georgia. The credit facility consists of a line of credit and a revolving credit. The credit facility allows the Company to pay a floating interest rate or a rate based on LIBOR for fixed periods of 1, 2, 3 or 6 months, for either the entire amount of the indebtedness or a portion thereof. The floating rate interest is payable quarterly in arrears on the last business day of each March, June, September and December. The LIBOR interest is payable the last day of the applicable period and three months after the first day for the six- month period. MARCH 29, MARCH 30, 1997 1996 Line of credit, NationsBank of Georgia, maximum borrowing limit of $5,000,000; floating interest at the greater of the federal funds effective rate plus 1/2% or prime rate plus 1/8%, or LIBOR plus 2 1/4% (effective interest rate was 8.625% at March 29, 1997); maturing December 31, 1997 $ 3,875,000 $ 1,180,000 Revolving credit, NationsBank of Georgia, maximum borrowing limit of $20,000,000; floating interest at the greater of the federal funds effective rate plus 1/2% or prime rate, or LIBOR plus 2% (effective interest rates were 7.31% on $13,000,000, 7.64% on $4,000,000 and 8.5% on $3,000,000 at March 29, 1997); maturing December 31, 1997 $19,800,000 $20,000,000 The line of credit and revolving credit are collateralized by accounts receivable, inventory property and equipment, and the common stock of the Company. They are also guaranteed by a principal stockholder. The credit facility is subject to certain financial covenants as defined in the loan agreement, including the ratio of current assets to current liabilities (excluding NationsBank debt) of no less than 2.0 to 1.0, and certain minimum cash flow requirements. As of March 29, 1997, the Company was in violation of the fixed coverage ratio which stipulates that the cash operating profit should be 1.25 of the sum of interest expense plus 10% of senior indebtedness (as defined in the bank debt agreement). The actual ratio was 1.19 as of March 29, 1997. NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 10. Long-Term Debt MARCH 29, MARCH 30, 1997 1996 Note, Southeastern Icee, Inc. (Georgia Territory), with an initial installment of principal of $100,000 paid December, 1994, and the balance payable in annual installments of $112,500 plus interest at 1 point above prime rate, maturing August, 2002 $ 675,000 $ 787,500 Notes, individual, for acquisition of Icee of Memphis Territory; payable in monthly installments of $6,833 through December, 1994; $6,000 through December, 1998; and $3,000 through December, 2000; including interest at 9% 172,308 226,140 Note, Sooner Icee, Inc., payable in quarterly installments of $6,957 plus interest at 1 point above prime rate, maturing November, 1999 48,697 76,523 Note, individual, for acquisition of Sooner Icee, Inc.; payable in quarterly installments of $6,429 plus interest at 1 point over prime rate, maturing November, 1999 70,714 96,429 Note, individual, for non-compete agreement in acquisition of Icee Ventures, Inc., payable in quarterly installments of $12,164 including interest at 8 1/4%, maturing June, 2001 170,000 - Note, individual, for acquisition of Icee Ventures, Inc., payable in quarterly installments of $31,250 beginning September, 1998 plus interest of 8 1/4%, maturing December, 2001 425,000 - 1,561,719 1,186,592 Less current portion (due in one year) 264,923 219,873 $1,296,796 $ 966,719 Maturities, excluding the revolving and line of credit, NationsBank, are as follows: YEAR ENDING IN 1998 $ 264,923 1999 379,485 2000 328,797 2001 291,014 2002 185,000 Thereafter 112,500 $1,561,719 The prime rate of interest at March 29, 1997 was 8.5%. NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 11. Subordinated Debt Debt subordinated to the NationsBank debt consisted of the following: Convertible note - Coca-Cola Financial Corporation (the "Holder"), interest at 6% per annum payable in quarterly installments. The amount of the note was $7,000,000 at the end of both years. The note matures October 1, 1998. The Company may prepay the note after October, 1996, including a premium of up to 1.7% of the principal. Prior to maturity, the note may be converted by the Holder into the equivalent of 22% of the Company's common stock. In addition, if certain events occur, the Holder may: accelerate the maturity of the note; require the Company to repurchase all of the Company's stock from the Holder, if the note was converted; or the Company's stockholders may be required to sell all of their stock to the Holder. Under the terms of this agreement, the Holder can designate two members for the Board of Directors of the Company. The Company has appointed the two designees to the Board of Directors. Convertible notes - Coca-Cola Financial Corporation (the "Holder"), original amounts totaling $9,000,000 with interest accruing at 3% compounded quarter-annually for Note A, 7.497% per annum for Note B, 9.516% per annum for Note C and 9.359% per annum for Note D. The balance of the notes were $11,041,115 and $10,465,042 at March 29, 1997 and March 30, 1996, respectively. The notes, including interest, mature December 23, 1999 for $12,810,257. The Holder and the Company have options to convert the convertible notes to stock prior to maturity as follows: SHARES BY HOLDER BY COMPANY ORIGINAL MATURITY Note A Common 78,695 78,695 $4,479,365 $ 5,521,766 Note B Preferred 26,715 1,520,635 2,558,105 Common 26,715 Note C Preferred 17,568 1,000,000 1,609,359 Common 17,568 Note D Preferred 35,156 2,000,000 3,121,027 Common 35,156 $9,000,000 $12,810,257 Notes payable - Stockholders and other related parties, no specific repayment terms, bearing interest at 10% per annum. The balances of the notes were $650,012 and $770,574 at March 29, 1997 and March 30, 1996, respectively. Notes payable - Non-profit institutions, various 5-10 year notes with interest payable semi-annually at 9% to 12% per annum. The balances of the notes were $339,000 for both years. NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 12. Purchase Rebates On September 1, 1991, the Company entered into an agreement with The Coca-Cola Company under which it became the Company's sole supplier of frozen carbonated beverage syrups. The contract, which ran through December 31, 1996, required the Company to purchase approximately 12.2 million gallons of Coca-Cola Classic and Flavored FCB syrup subject to minimum amounts each year. The agreement will continue to stay in effect until the 12.2 million gallons of FCB syrups are purchased by the Company. Purchase rebates were earned as follows: MARCH 29, MARCH 30, 1997 1996 Unearned total, beginning of year $406,585 $535,858 Rebates earned during year (121,446) (129,273) Unearned total, end of year $285,139 $406,585 At the inception of the agreement, the Company received the full amount of the rebates to be earned. The rebates are earned based on the gallons of FCB syrups the Company purchases. If the agreement is terminated by the Company and it does not meet the minimum required purchases, the remaining unearned purchase rebates are refundable to Coca- Cola, with interest. The rebates earned during the year have been reported as a financing activity for purpose of the statement of cash flows. 13. Deferred Income Royalty Income: On September 1, 1991, the Company received from The Coca- Cola Company an advance of $500,000 representing royalties to be earned by the Company as it makes The Coca-Cola Company's cherry flavored frozen carbonated beverage syrup available to its customers on an exclusive basis. The royalties were earned ratably over the 64-month life of the agreement. MARCH 29, MARCH 30, 1997 1996 Deferred royalty income, beginning of year $70,313 $164,063 Royalties earned during year ( 70,313) ( 93,750) Deferred royalty income, end of year - 70,313 Current portion - 70,313 Long-term portion $ - $ - NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 13. Deferred Income - Continued Non-Compete Covenant: A covenant not-to-compete in the amount of $50,000 from the sale of the Louisiana Territory in 1994 is being amortized over 15 years. MARCH 29, MARCH 30, 1997 1996 Current portion $ 3,333 $ 3,333 Long-term portion $28,350 $31,674 14. Income Taxes The Company follows the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities were as follows: MARCH 29, MARCH 30, 1997 1996 Deferred tax assets: Net operating loss carryforwards $7,884,000 $7,383,000 Alternative minimum tax credits 205,000 205,000 Amortizable goodwill and non-complete 346,000 281,000 Bad debt reserve 68,000 55,000 Total gross deferred tax assets 8,503,000 7,924,000 Less - valuation allowance 783,000 253,000 7,720,000 7,671,000 Deferred tax liabilities: Depreciation 3,933,000 4,401,000 Net deferred tax assets $3,787,000 $3,270,000 The Company has various tax credits and net operating loss carryforwards available as follows: a) Alternative minimum tax credits of approximately $205,000 are available to offset future income taxes on an indefinite carryforward basis. b) Net operating tax loss carryforwards of approximately $20,319,000 are available only for regular income tax purposes and $9,523,000 for alternative minimum tax purposes, which will expire over the period from 2007 to 2012. A valuation allowance is provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. The net deferred tax assets reflect management's estimate of the amount which will be realized from future profitability which can be predicted with reasonable certainty, as a result of management's downsizing the Company's overhead and significant reductions in the number of dispensers manufactured. The valuation allowance for deferred tax assets as of March 31, 1997 was $783,000 of which $415,000 relates to federal net operating losses and $368,000 relates to state net operating losses that more than likely will expire before being utilized. The credit for income taxes consisted of the following: FEDERAL STATE TOTAL 1997: Current $ - $ - $ - Deferred 458,000 59,000 517,000 Total $ 458,000 $ 59,000 $ 517,000 1996: Current $ - $ - $ - Deferred 795,000 121,000 916,000 Total $ 795,000 $ 121,000 $ 916,000 15. Stock Warrants and Options Stock Warrants: During the year ended March 30, 1991, the Company adopted a Common Stock Purchase Warrant Plan under which up to 65,000 warrants may be sold at a price of $.25 per warrant, allowing the purchaser to buy one share of common stock at a price of $21.30 per share for each warrant presented. The warrnts expired on March 31, 1996. At March 28, 1992, warrants to purchase 62,477 shares of the Company's common stock had been issued, none had been exercised and shares of common stock in that amount had been reserved for that purpose. Incentive Stock Option Plan: The Company has a non-qualified stock option plan (the "Plan") that provides for the issuance of up to 30,000 shares of common stock, in the aggregate, through the granting and exercise of options by specified employees at an option price based on the net book value of the Company plus 10%. The Plan will end April 12, 1999, the tenth anniversary of NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 its effective date. Stock options had been granted for a total of 17,300 shares of which 14,155 shares were exercised prior to April 1, 1995. 16. Icee Dispenser Sales The Company sold dispensers to other Icee operators during the fiscal year ended March 29, 1997. The total proceeds from these sales were $1,042,228, the cost of the dispensers and the accumulated depreciation were $1,362,434 and $664,134, respectively. The proceeds and net book value were recorded to sales and cost of sales, respectively, in the statement of operations for the year ended March 29, 1997. The Company manufactured new dispensers for resale costing $945,885 which were sold for $1,178,450 and have been recorded to cost of sales and sales, respectively, in the statement of operations for the year ended March 30, 1996. 17. Leases and Commitment a) Administrative office - The Company has a five-year lease which commenced in 1994 with an annual rental of approximately $120,000. b) Warehouses - Annual commitments on leases are as follows: YEAR ENDING IN 1998 $876,060 1999 554,298 2000 352,573 2001 173,490 2002 116,496 Thereafter 917,168 Administrative and warehouse rentals amounted to $1,159,317 and $1,159,356 for the years ended in 1997 and 1996, respectively, including $107,771 and $107,318 for locations leased from the Company's principal stockholder and other related parties. c) Trucks and cars - The Company has leases for generally 50 months and after 13 months the Company has the option of returning the vehicle. At termination, the Company is liable for the difference between the fair market value and the depreciated value if the fair market value is less than the depreciated value on the leasing company's books, or the Company will receive a reimbursement from the leasing company if the fair market value is greater than the depreciated value on the leasing company's books. Rentals totaled approximately $914,000 and $1,175,000, net of reimbursements of $244,000 and $104,000 for the years ended in 1997 and 1996, respectively. Rentals for truck and car leases should approximate $1,000,000 for each of the following three years. d) The Company entered into a consulting agreement which provides for quarterly installments of $10,750 beginning March 31, 1993 through December 31, 1999. NATIONAL ICEE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 18. Profit-Sharing Plan The Company has a defined contribution profit-sharing plan for the benefit of substantially all its eligible employees. The Plan's year end is December 31. In 1996 the plan was amended to provide for participants' contributions under a 401(k) provision. The Company's contributions to the profit sharing plan are at the discretion of the Board of Directors up to the maximum allowed by IRS regulations. The profit sharing contributions was $50,000 and $25,000 during each of the years ended in 1997 and 1996, respectively. All participants' contributions and investments are directed by the plan participants and are held in a trust for the benefit of plan participants. All employees are 100% vested in their contributions and earnings thereon, but become vested in the Company's contributions and earnings at 10% per year from year one to year four and 20% per year in year five and thereafter with full vesting after seven years. 19. Major Customers The Company's sales to one of its customers accounted for 16% of sales for the year ended March 29, 1997 and to two of its customers accounting for a combined 24% of sales for the year ended March 30, 1996. NATIONAL ICEE CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEET SEPTEMBER 27, 1997 ASSETS Current assets: Cash $ 9,257 Accounts receivable, net of alowance for doubtful accounts of $175,000 4,231,548 Inventory 2,849,321 Prepaid expenses and other current assets 4,780,755 Total current assets 11,870,881 Property and equipment, less accumulated depreciation 26,144,698 Non-compete covenants 373,170 Other intangible assets 1,007,508 Other assets 218,868 Deferred income taxes 3,787,000 $43,402,125 LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) Current liabilities: Demand notes, related parties $ 690,787 Revolving credit, bank 17,870,000 Line of credit, bank 3,875,000 Current portion of long-term debt 298,873 Accounts payable and accrued expenses 3,432,770 Unearned purchase rebates 164,500 Deferred income 3,333 Total current liabilites 26,335,263 Long-term debt, less current portion 1,091,631 Subordinated debt 19,327,079 Unearned purchase rebates 32,918 Deferred income 26,688 Total liabilities 46,813,579 Stockholders' (deficiency) (3,411,454) $43,402,125 NATIONAL ICEE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 27, 1997 Sales $24,733,196 Cost of sales 9,166,637 Gross profit 15,566,559 Selling and administrative expenses 9,460,704 Income before depreciation and amortization, interest and other (income) 6,105,855 Other (income) expenes: Depreciation and amortization 3,249,982 Interest, net 1,604,767 Other (170,300) 4,684,449 Net income $ 1,421,406 NATIONAL ICEE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) FOR THE SIX MONTHS ENDED SEPTEMBER 27, 1997 Additional Common Paid-In (Accumulated) Treasury Stock Capital Deficit) Stock Total (a) (b) Balance, March 29, 1997 $30,854 $1,909,407 $(6,767,365) $(5,756) $(4,832,860) Net income - - 1,421,406 - 1,421,406 Balance, Sept. 27, 1997 $30,854 $1,909,407 $(5,345,959) $(5,756) $(3,411,454) (a) $.10 par value; 700,000 shares authorized; 308,540 shares issued at September 27,1997. (b) 818 shares (at cost) NATIONAL ICEE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 27, 1997 INCREASE (DECREASE) IN CASH Cash flows from operating activities: Net income $1,421,406 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income earned (1,662) Amortization 127,176 Depreciation 3,125,698 Accrued interest expense 327,301 Loss on sales of equipment 21,385 (Increase) decrease in operating assets: Accounts receivable (1,124,907) Inventory (482,711) Prepaid expenses and other current assets 143,278 Other assets (57,836) Increase in operating liabilities: Accounts payable and accrued expenses 405,222 Net cash provided by operating activities 3,904,350 Cash flows from investing activities: Proceeds from sales of equipment 241,621 Acquisitions, manufacturing and rebuilding of property and equipment (2,185,318) Net cash (used in) investing activities (1,943,697) Cash flow from financing activities: Proceeds from demand notes 25,486 Repayment of demand notes (28,006) Repayment of revolving credit, bank (1,930,000) Proceeds from long-term and subordinated debt 78,653 Repayment of long-term and subordinated debt (265,369) Purchase rebates earned (87,721) Net cash (used in) financing activities (2,206,957) Net (decrease) in cash (246,304) Cash at beginning of period 255,561 Cash at end of period $ 9,257 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $1,226,473 NATIONAL ICEE CORPORATION ("NIC") AND J & J SNACK FOODS CORP. ("J & J") UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET FOR THE YEAR ENDED SEPTEMBER 27, 1997 Historical J & J NIC Pro Forma ASSETS September 27, September 27, Adjustments Combined 1997 1997 Cash and cash equivalents $ 1,401,000 $ 9,000 $ $ 1,410,000 Receivables 25,458,000 4,232,000 29,690,000 Inventories 13,535,000 3,866,000 17,401,000 Prepaid Expenses and Deposits 853,000 264,000 (70,000)(A) 1,047,000 Total Current Assets 41,247,000 8,371,000 (70,000) 49,548,000 Property, Plant and Equipment, net 67,222,000 26,145,000 93,367,000 Other Assets 6,899,000 7,506,000 (3,787,000)(C)10,618,000 Goodwill, trademarks and rights, net 21,459,000 1,381,000 20,968,000 (B)43,808,000 $136,827,000 $43,403,000 $17,111,000 $197,341,000 LIABILITIES AND STOCKHOLDERS' EQUITY Line of credit - 21,745,000 21,745,000 Current maturities of long-term debt 16,000 990,000 1,006,000 Accounts payable 13,315,000 3,432,000 16,747,000 Accrued liabilities 8,652,000 201,000 4,700,000 (D)13,553,000 Total Current Liabilities 21,983,000 26,368,000 4,700,000 53,051,000 Long-term debt, less current maturities 5,028,000 20,419,000 9,000,000 (E)34,447,000 Deferred income 532,000 27,000 559,000 Deferred income taxes 3,380,000 - 3,380,000 Stockholders' Equity (deficiency) 105,904,000 (3,411,000) 3,411,000(F)105,904,000 $136,827,000 $43,403,000 $17,111,000 $197,341,000 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (A) to record the reclass of prepaid acquisition costs (B) to record the excess of the purchase price over the net assets acquired (C) to write off the deferred tax asset not deemed to be realizable (D) to record estimated acquisition costs, including an estimate of income tax liability (E) to record the purchase price paid to the former shareholders of NIC (F) to eliminate the Stockholder's Deficiency of NIC NATIONAL ICEE CORPORATION ("NIC")AND J & J SNACK FOODS CORP. ("J & J") UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED SEPTEMBER 27, 1997 Historical J & J NIC Pro Forma September 27, September 27, Adjustments Combined 1997 1997 Sales $220,318,000 $39,634,000 $ $259,952,000 Cost of Sales 112,159,000 14,344,000 (1,800,000)(A) 124,703,000 Gross Profit 108,159,000 25,290,000 1,800,000 135,249,000 Selling and Administrative Expenses 77,249,000 18,627,000 (1,700,000)(A) 94,176,000 Operating Income 30,910,000 6,663,000 3,500,000 41,073,000 Depreciation and Amortization 19,270,000 6,731,000 (500,000)(B) 25,501,000 Investment Income 630,000 - 630,000 Interest Expense (431,000) (3,151,000) (200,000)(D) (3,782,000) Other Income 112,000 190,000 302,000 Income (loss) before taxes 11,951,000 (3,029,000) 3,800,000 12,722,000 Income Taxes (benefit) 3,792,000 (520,000) 805,000(C) 4,077,000 Net Earnings $ 8,159,000 $(2,509,000) $ 2,995,000 $ 8,645,000 Earnings per common share $0.91 $(8.17) $0.96 Weighted Average Number of Shares 8,985,000 307,000 8,985,000 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (A) to reflect reduction of costs and expenses attributable to synergies and benefits from consolidation (B) to provide for reduced depreciation and amortization based on the allocation of purchase price to fixed assets and the excess of the purchase price over net assets acquired (C) to record income taxes on the increase in earnings before taxes of the combined entity over the earnings before taxes of J & J at J & J's historical rate of 37% of earnings before taxes (D) to reflect additional interest expense on borrowings -----END PRIVACY-ENHANCED MESSAGE-----