Exhibit 13
CONSOLIDATED FINANCIAL REVIEW
BOB EVANS FARMS, INC. AND SUBSIDIARIES
Dollars and shares in thousands, except per share amounts
2002* 2001 2000 1999 1998
- ---------------------------------------------------- ------------- --------------- ------------- ------------ ------------
OPERATING RESULTS
Net sales $1,061,846 $1,007,508 $ 947,919 $946,984 $871,628
Operating income 103,863 83,466 85,487 91,948 74,460
Income before income taxes 100,836 78,714 83,954 91,374 72,521
Income taxes 33,154 27,943 31,061 33,808 26,833
Net income 67,682 50,771 52,893 57,566 45,688
Earnings per share of common stock:
Basic $1.94 $1.45 $1.38 $1.40 $1.10
Diluted $1.91 $1.44 $1.38 $1.39 $1.09
FINANCIAL POSITION
Working capital $ (85,794) $ (114,449) $(129,475) $(34,372) $(40,870)
Property, plant and equipment - net 648,179 603,063 546,594 493,369 485,949
Total assets 721,973 678,715 624,441 590,452 579,931
Debt:
Short-term 31,750 69,965 99,295 25,000 39,420
Long-term 32,333 36,000 431 833 1,223
Stockholders' equity 521,365 457,095 428,790 470,095 457,196
SUPPLEMENTAL INFORMATION FOR THE YEAR
Capital expenditures $ 97,006 $ 99,807 $ 96,867 $ 68,525 $ 47,801
Depreciation and amortization $ 41,974 $ 39,792 $ 36,480 $ 35,386 $ 32,882
Weighted-average shares outstanding:
Basic 34,868 35,005 38,230 41,210 41,610
Diluted 35,490 35,284 38,366 41,509 41,803
Cash dividends declared per share $0.39 $0.36 $0.36 $0.35 $0.32
Common stock market closing prices:
High $31.18 $21.38 $22.06 $26.13 $22.19
Low $15.69 $12.56 $12.06 $18.25 $13.13
SUPPLEMENTAL INFORMATION AT YEAR-END
Employees 39,990 38,542 35,576 32,363 31,189
Stockholders 36,595 39,466 42,102 44,173 43,980
Market price per share at closing $29.59 $18.85 $13.06 $18.31 $20.25
Book value per share $14.77 $13.13 $12.09 $11.67 $10.97
* Fiscal 2002 amounts include the impact of a net one-time gain on a divestiture
and disposal of assets: $1,842 before taxes, $2,349 after taxes and $0.07 per
share (both basic and diluted). See Note C.
CONSOLIDATED BALANCE SHEETS
BOB EVANS FARMS, INC. AND SUBSIDIARIES
Dollars in thousands
APRIL 26, 2002 APRIL 27, 2001
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 7,934 $ 1,787
Accounts receivable 11,629 13,620
Inventories 15,252 16,970
Deferred income taxes 8,871 8,335
Prepaid expenses 1,016 2,964
---------- ----------
TOTAL CURRENT ASSETS 44,702 43,676
PROPERTY, PLANT AND EQUIPMENT
Land 202,198 182,421
Buildings and improvements 518,011 474,754
Machinery and equipment 249,441 245,386
Construction in progress 2,193 3,216
---------- ----------
971,843 905,777
Less accumulated depreciation 323,664 302,714
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT 648,179 603,063
OTHER ASSETS
Deposits and other 3,037 1,644
Long-term investments 12,196 11,077
Deferred income taxes 12,292 11,762
Goodwill and other intangible assets 1,567 7,493
---------- ----------
TOTAL OTHER ASSETS 29,092 31,976
---------- ----------
$ 721,973 $ 678,715
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 27,750 $ 65,965
Current maturities of long-term debt 4,000 4,000
Accounts payable 10,741 8,509
Dividends payable 3,529 3,132
Federal and state income taxes 9,329 12,616
Accrued wages and related liabilities 19,804 16,220
Other accrued expenses 55,343 47,683
---------- ----------
TOTAL CURRENT LIABILITIES 130,496 158,125
LONG-TERM LIABILITIES
Deferred compensation 6,182 4,694
Deferred income taxes 31,597 22,801
Long-term debt 32,333 36,000
---------- ----------
TOTAL LONG-TERM LIABILITIES 70,112 63,495
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 100,000,000 shares;
issued 42,638,118 shares in 2002 and 2001 426 426
Preferred stock, $500 par value; authorized 1,200 shares; issued 120 shares
in 2002 and 2001 60 60
Capital in excess of par value 151,264 150,670
Retained earnings 498,522 444,476
Treasury stock, 7,343,596 shares in 2002 and 7,834,255 shares
in 2001, at cost (128,907) (138,537)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 521,365 457,095
---------- ----------
$ 721,973 $ 678,715
========== ==========
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS
OF INCOME
BOB EVANS FARMS, INC. AND SUBSIDIARIES
Dollars in thousands, except per share amounts
YEARS ENDED APRIL 26, 2002;
APRIL 27, 2001; AND APRIL 28, 2000 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES $1,061,846 $1,007,508 $947,919
Cost of sales 300,433 292,902 274,388
Operating wage and fringe benefit expenses 362,770 347,923 320,174
Other operating expenses 155,805 145,886 138,754
Selling, general and administrative expenses 98,843 97,539 92,636
Net (gain) on disposal of assets (1,842) 0 0
Depreciation and amortization expense 41,974 39,792 36,480
------- ------- --------
OPERATING INCOME 103,863 83,466 85,487
Net interest expense 3,027 4,752 1,533
------- ------- --------
INCOME BEFORE INCOME TAXES 100,836 78,714 83,954
Provisions for income taxes 33,154 27,943 31,061
------- ------- --------
NET INCOME $ 67,682 $ 50,771 $ 52,893
======= ======= ========
EARNINGS PER SHARE - BASIC $1.94 $1.45 $1.38
===== ===== =====
EARNINGS PER SHARE - DILUTED $1.91 $1.44 $1.38
===== ===== =====
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
BOB EVANS FARMS, INC. AND SUBSIDIARIES
Dollars in thousands
CAPITAL
COMMON PREFERRED IN EXCESS RETAINED TREASURY
STOCK STOCK OF PAR VALUE EARNINGS STOCK TOTAL
- ----------------------------------------------- ----------- ------------ --------------- ------------ -------------- ---------------
Stockholders' Equity at 4/30/99 $426 $60 $151,364 $366,924 $(48,679) $470,095
- ----------------------------------------------- ----------- ------------ --------------- ------------ -------------- ---------------
Net income 52,893 52,893
Dividends declared (13,537) (13,537)
Treasury stock repurchased (82,228) (82,228)
Treasury stock reissued under employee plans (1,385) 2,706 1,321
Stock options granted under employee plans 122 122
Tax reductions - employee plans 124 124
- ----------------------------------------------- ----------- ------------ --------------- ------------ -------------- ---------------
Stockholders' Equity at 4/28/00 426 60 150,225 406,280 (128,201) 428,790
- ----------------------------------------------- ----------- ------------ --------------- ------------ -------------- ---------------
Net income 50,771 50,771
Dividends declared (12,575) (12,575)
Treasury stock repurchased (13,722) (13,722)
Treasury stock reissued under employee plans (261) 3,386 3,125
Stock options granted under employee plans 390 390
Tax reductions - employee plans 316 316
- ----------------------------------------------- ----------- ------------ --------------- ------------ -------------- ---------------
Stockholders' Equity at 4/27/01 426 60 150,670 444,476 (138,537) 457,095
- ----------------------------------------------- ----------- ------------ --------------- ------------ -------------- ---------------
NET INCOME 67,682 67,682
DIVIDENDS DECLARED (13,636) (13,636)
TREASURY STOCK REPURCHASED (5,749) (5,749)
TREASURY STOCK REISSUED UNDER EMPLOYEE PLANS (1,434) 15,379 13,945
STOCK OPTIONS GRANTED UNDER EMPLOYEE PLANS 395 395
TAX REDUCTIONS - EMPLOYEE PLANS 1,633 1,633
- ----------------------------------------------- ----------- ------------ --------------- ------------ -------------- ---------------
STOCKHOLDERS' EQUITY AT 4/26/02 $426 $60 $151,264 $498,522 $(128,907) $521,365
- ----------------------------------------------- ----------- ------------ --------------- ------------ -------------- ---------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS
OF CASH FLOWS
BOB EVANS FARMS, INC. AND SUBSIDIARIES
Dollars in thousands
YEARS ENDED APRIL 26, 2002;
APRIL 27, 2001; AND APRIL 28, 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 67,682 $ 50,771 $ 52,893
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 41,974 39,792 36,480
Deferred compensation 1,488 78 3,426
Deferred income taxes 7,963 6,140 (2,844)
Loss (gain) on sale of assets (691) 248 (24)
Loss on long-term investments 577 1,244 0
Compensation expense attributable to stock plans 1,590 1,092 395
Cash provided by (used for) current assets
and current liabilities:
Accounts receivable (105) 31 3,385
Inventories 140 (514) (2,157)
Prepaid expenses 1,838 (1,270) 3
Accounts payable 2,531 (576) (474)
Federal and state income taxes (1,654) 7,882 4,278
Accrued wages and related liabilities 3,724 1,369 (2,158)
Other accrued expenses 7,289 5,152 711
-------- -------- -------
Net cash provided by operating activities 134,346 111,439 93,914
Investing Activities:
Purchase of property, plant and equipment (97,006) (99,807) (96,867)
Purchase of long-term investments (2,135) (1,352) (3,483)
Proceeds from sale of property, plant
and equipment 2,594 2,677 6,903
Cash proceeds from divestiture 16,276 0 0
Other 192 (256) 2,117
-------- -------- -------
Net cash used in investing activities (80,079) (98,738) (91,330)
Financing Activities:
Cash dividends paid (13,239) (12,633) (13,973)
Purchase of treasury stock (5,749) (13,722) (82,228)
Line of credit (38,215) (33,330) 74,295
Proceeds from issuance of long-term debt 0 40,000 0
Principal payments on long-term debt (3,667) (431) (402)
Proceeds from issuance of treasury stock 12,750 2,422 1,049
-------- -------- -------
Net cash used in financing activities (48,120) (17,694) (21,259)
-------- -------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 6,147 (4,993) (18,675)
CASH AND EQUIVALENTS AT THE BEGINNING OF THE YEAR 1,787 6,780 25,455
-------- -------- -------
CASH AND EQUIVALENTS AT THE END OF THE YEAR $ 7,934 $ 1,787 $6,780
======== ======== =======
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
BOB EVANS FARMS, INC. AND SUBSIDIARIES - APRIL 26, 2002
Dollars in thousands unless otherwise noted, except per share amounts
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Bob Evans Farms, Inc. owns and operates 495
full-service, family restaurants in 22 states as Bob Evans Restaurants and Owens
Restaurants. The company also produces fresh and fully cooked pork products, as
well as other complementary food products, that are distributed primarily to
grocery stores in the East North Central, Mid-Atlantic, Southern and
Southwestern United States. Frozen rolls, biscuits and entrees are distributed
primarily to grocery stores in Ohio and various surrounding areas. In October
2001, the company sold its liquid-smoke flavorings business (see Note C).
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the company and its subsidiaries. Intercompany accounts and
transactions have been eliminated.
FISCAL YEAR: The company's fiscal year ends on the last Friday in April.
References herein to 2002, 2001 and 2000 refer to fiscal years ended April 26,
2002; April 27, 2001; and April 28, 2000, respectively. All three fiscal years
presented were comprised of 52 weeks.
CASH EQUIVALENTS: The company considers all highly liquid instruments,
with a maturity of three months or less when purchased, to be cash equivalents.
INVENTORIES: The company values inventories at the lower of first-in,
first-out cost or market. Inventory includes raw materials and supplies ($11,197
in 2002 and $11,481 in 2001) and finished goods ($4,055 in 2002 and $5,489 in
2001).
PROPERTY, PLANT AND EQUIPMENT: The company calculates depreciation on the
straight-line and accelerated methods at rates adequate to amortize costs over
the estimated useful lives of buildings and improvements (15 to 25 years) and
machinery and equipment (3 to 10 years). The straight-line depreciation method
was adopted for all new property beginning in fiscal 1995. Depreciation on
property placed in service prior to fiscal 1995 continues to be calculated
principally on accelerated methods.
LONG-TERM INVESTMENTS: Long-term investments include assets held under
certain deferred compensation arrangements and investments in income tax credit
limited partnerships. Assets held under certain deferred compensation
arrangements represent the cash surrender value of company-owned life insurance
policies. An offsetting liability for the amount of the cash surrender value is
included in the deferred compensation liability on the balance sheet.
Investments in income tax credit limited partnerships are recorded at amortized
cost. The company amortizes the investments to the expected residual value of
the partnerships once the income tax credits are fully utilized. The
amortization period of the investments matches the respective income tax credit
period.
GOODWILL AND OTHER INTANGIBLE ASSETS: Intangible assets include goodwill
($1,567 in 2002 and $7,338 in 2001) and other intangible assets ($0 in 2002 and
$155 in 2001). Goodwill (the cost in excess of net assets acquired) is amortized
over 25 years using the straight-line method. The company uses the cash flow
method to assess the recoverability of goodwill. Other intangible assets are
amortized on a straight-line basis over their estimated useful lives (10 to 15
years). The expense associated with the amortization of intangible assets in
2002, 2001 and 2000 was $379; $666; and $684, respectively.
FINANCIAL INSTRUMENTS: The fair values of the company's financial
instruments approximate their carrying values at April 26, 2002, and April 27,
2001. The company does not use derivative financial instruments for speculative
purposes.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
BOB EVANS FARMS, INC. AND SUBSIDIARIES - APRIL 26, 2002
Dollars in thousands unless otherwise noted, except per share amounts
PRE-OPENING EXPENSES: Expenditures related to the opening of new
restaurants, other than those for capital assets, are charged to expense when
incurred.
ADVERTISING COSTS: The company expenses advertising costs as incurred.
Advertising expense was $43,264; $43,488; and $41,548 in 2002, 2001 and 2000,
respectively.
COST OF SALES: Cost of sales represents food cost in the restaurant
segment and cost of materials in the food products segment.
COMPREHENSIVE INCOME: Comprehensive income is the same as reported net
income.
EARNINGS PER SHARE: Basic earnings per share computations are based on the
weighted-average number of shares of common stock outstanding during the period
presented. Diluted earnings per share calculations reflect the assumed exercise
and conversion of outstanding stock options.
The numerator in calculating both basic and diluted earnings per share for
each year is reported net income. The denominator is based on the following
weighted-average number of common shares outstanding (in thousands):
2002 2001 2000
------------ ------------ ------------
Basic 34,868 35,005 38,230
Dilutive stock options 622 279 136
--- --- ---
Diluted 35,490 35,284 38,366
====== ====== ======
Options to purchase 1,002,000 and 1,048,000 shares of common stock in 2001
and 2000, respectively, were excluded from the diluted earnings-per-share
calculations since they were anti-dilutive. There were no anti-dilutive options
in 2002.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and disclosure of contingent assets and
liabilities. Actual results could differ from the estimates and assumptions
used.
RECLASSIFICATIONS: Certain 2001 and 2000 amounts have been reclassified to
conform to the 2002 classification.
EFFECT OF NEW ACCOUNTING STANDARDS: The Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
Dec. 15, 2001. Under this statement, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the statement. Other intangible assets will
continue to be amortized over their useful lives.
The company will apply SFAS No. 142 beginning in the first quarter of
fiscal 2003. Application of the nonamortization provisions of the statement is
expected to result in an increase in income before income taxes of $161 per
year. Application of the impairment provisions of the statement is not expected
to have a material effect on the company's operating results or financial
position.
In May 2000, the Emerging Issues Task Force (EITF) reached consensus on
EITF Issue No. 00-14, Accounting for Certain Sales Incentives, which requires
that certain sales incentives provided to customers be
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
BOB EVANS FARMS, INC. AND SUBSIDIARIES - APRIL 26, 2002
Dollars in thousands unless otherwise noted, except per share amounts
classified in the consolidated statements of income as a reduction of sales. The
company previously classified such incentives as promotional expenses within
selling, general and administrative expenses. The company applied the consensus
in fiscal 2002 and retroactively to all years presented. Previously reported net
sales and selling, general and administrative expenses were reduced by
approximately $16,306 and $16,704 in fiscal 2001 and fiscal 2000, respectively,
in accordance with this accounting standard; operating income was unaffected.
NOTE B - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
In April 2001, the company issued a $40 million unsecured note to a bank
to replace an equivalent amount outstanding on its unsecured line of credit. The
note bears interest at a fixed rate of 7.35% and matures in May 2008. Required
payments are $4.0 million per year of principal plus interest, with a balloon
payment of $12.3 million at maturity. Customary for this type of agreement, the
note contains certain restrictive covenants related to tangible net worth, debt
levels and fixed charge coverage. At April 26, 2002, $36,333 was outstanding on
this note.
The company also has arrangements with certain banks from which it may
borrow up to $90 million on a short-term basis. The arrangements are reviewed
annually for renewal. At April 26, 2002, $27,750 was outstanding under these
arrangements. During 2002 and 2001, respectively, the maximum amounts
outstanding under these unsecured lines of credit were $73,265 and $114,480, and
the average amounts outstanding were $51,172 and $103,959 with weighted-average
interest rates of 3.72% and 6.75%. All interest paid on these arrangements is at
floating rates.
Interest costs of $1,536; $1,784; and $1,389 incurred in 2002, 2001 and
2000, respectively, were capitalized in connection with the company's
construction activities.
NOTE C - DIVESTITURE AND NET GAIN ON DISPOSAL OF ASSETS
In 2002, the company sold Hickory Specialties, Inc., which produced and
distributed smoke flavorings, for $16,276 in cash. The company realized a net
gain on the transaction of $3,334 (before and after tax). The company's results
of operations included net sales of $4,951; $11,228; and $11,882 and operating
income (loss) of $(39); $532; and $1,197 in 2002, 2001 and 2000, respectively,
for the divested business.
In 2002, the company also realized a loss of $1,492 ($985 after tax) on
the disposal of certain assets in the restaurant segment.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
BOB EVANS FARMS, INC. AND SUBSIDIARIES - APRIL 26, 2002
Dollars in thousands unless otherwise noted, except per share amounts
NOTE D -- INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the company's deferred tax liabilities and assets as of April 26, 2002, and
April 27, 2001, were as follows:
APRIL 26, 2002 APRIL 27, 2001
-------------- --------------
Deferred Tax Assets:
Loss on impaired assets $ 7,546 $ 7,546
Self-insurance 6,557 6,107
Vacation pay 1,221 1,173
Stock compensation plans 4,541 4,016
Accrued bonus 895 984
Inventory and other 403 271
-------- --------
Total deferred tax assets 21,163 20,097
Deferred Tax Liabilities:
Accelerated depreciation/asset disposals 28,895 20,352
Other 2,702 2,449
-------- --------
Total deferred tax liabilities 31,597 22,801
-------- --------
NET DEFERRED TAX LIABILITIES $ 10,434 $ 2,704
======== ========
</Table>
Significant components of the provisions for income taxes are as follows:
<Table>
2002 2001 2000
-------- -------- --------
Current:
Federal $23,188 $19,771 $31,701
State 2,237 2,032 2,203
-------- -------- --------
Total Current 25,425 21,803 33,904
Deferred, primarily federal 7,729 6,140 (2,843)
-------- --------- ---------
TOTAL TAX PROVISIONS $33,154 $27,943 $31,061
======= ======= =======
</Table>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
BOB EVANS FARMS, INC. AND SUBSIDIARIES - APRIL 26, 2002
Dollars in thousands unless otherwise noted, except per share amounts
The company's provisions for income taxes differ from the amounts computed
by applying the federal statutory rate due to the following:
2002 2001 2000
-------- -------- -------
Tax at statutory rate $35,292 $27,550 $29,384
State income tax (net) 1,585 1,321 1,432
Nontaxable gain on divestiture (1,167) 0 0
Other (2,556) (928) 245
-------- -------- -------
PROVISIONS FOR INCOME TAXES $33,154 $27,943 $31,061
======= ======= =======
Taxes paid during 2002, 2001 and 2000 were $24,886; $13,751; and $28,390,
respectively.
NOTE E -- STOCK-BASED COMPENSATION PLANS
The company has employee stock option plans adopted in 1991, 1994 and
1998; a nonemployee directors' stock option plan adopted in 1989; and a
nonqualified stock option plan adopted in 1992, in conjunction with a
supplemental executive retirement plan. The 1992 plan provides that the option
price shall not be less than 50% of the fair market value of the stock at the
date of grant. The 1998 plan provides that the option price for 1) incentive
stock options shall be the fair market value of the stock at the grant date and
2) nonqualified stock options shall be determined by the compensation committee
of the board of directors. All other plans provide that the option price shall
be the fair market value of the stock at the grant date. Options may be granted
for a period of up to five years under the 1989 plan and up to 10 years under
all other plans.
The company's supplemental executive retirement plan (SERP) provides
retirement benefits to certain key management employees of the company and its
subsidiaries. The purpose of the 1992 nonqualified stock option plan discussed
earlier is to fund and settle benefit contributions of the company that may
arise under the SERP. To the extent that benefits under the SERP are satisfied
by grants of stock options under the nonqualified stock option plan, it operates
as an incentive plan that produces both risk and reward to participants based on
future growth in the market value of the company's common stock.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
BOB EVANS FARMS, INC. AND SUBSIDIARIES . APRIL 26, 2002
Dollars in thousands unless otherwise noted, except per share amounts
The following table summarizes option-related activity for the last three
years:
Shares Price Range
--------- ------------------
Outstanding, April 30, 1999 1,183,708 $6.56 to $21.38
-----------------------------------------------------------------
Granted 713,062 9.22 to 19.38
Exercised (60,583) 9.13 to 20.50
Canceled or expired (144,842) 6.56 to 21.38
-----------------------------------------------------------------
Outstanding, April 28, 2000 1,691,345 6.56 to 21.38
-----------------------------------------------------------------
Granted 927,048 6.78 to 14.44
Exercised (175,681) 6.56 to 19.38
Canceled or expired (58,406) 6.56 to 21.38
-----------------------------------------------------------------
Outstanding, April 27, 2001 2,384,306 6.56 to 21.38
-----------------------------------------------------------------
GRANTED 910,316 9.50 to 17.46
EXERCISED (760,288) 6.56 to 21.38
CANCELED OR EXPIRED (70,767) 6.56 to 21.38
-----------------------------------------------------------------
OUTSTANDING, APRIL 26, 2002 2,463,567 $6.56 to $21.38
-----------------------------------------------------------------
In addition to the outstanding options, 3,094,268 stock option shares were
available for grant at April 26, 2002. The following table summarizes
information regarding stock options outstanding at April 26, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------
Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices at 4/26/02 Contractual Life Price at 4/26/02 Price
- -------------------------------- --------------- -------------------- ---------------- -------------- ------------------
$ 6.56 to $13.99 300,555 11.8 $ 9.13 118,626 $ 9.32
14.00 to 14.99 676,954 7.5 14.44 138,935 14.44
15.00 to 16.99 73,028 4.9 15.31 73,028 15.31
17.00 to 18.99 822,960 8.5 17.46 8,320 17.46
19.00 to 20.99 466,288 6.7 19.38 286,542 19.38
21.00 to 21.38 123,782 5.1 21.38 109,306 21.38
$ 6.56 to $21.38 2,463,567 8.0 $16.11 734,757 $16.69
The company follows the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and as permitted under SFAS No. 123,
applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for employee stock
options. Accordingly, no compensation expense has been recognized for the stock
option plans when the exercise price of the options is equal to or greater than
the fair market value of the stock at the grant date. Compensation expense
recognized in income for stock options granted at less than fair market value in
2002, 2001 and 2000 was $395; $390; and $167, respectively. Had the company
elected to recognize compensation expense by using the fair-value
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
BOB EVANS FARMS, INC. AND SUBSIDIARIES - APRIL 26, 2002
Dollars in thousands unless otherwise noted, except per share amounts
method prescribed by SFAS No. 123, pro forma net income and earnings per share
would be as follows:
2002 2001 2000
--------------------------------------- ------------------ ------------------ ------------------
NET INCOME
As reported $67,682 $50,771 $52,893
Pro forma 65,301 47,790 50,507
EARNINGS PER SHARE - BASIC
As reported $ 1.94 $ 1.45 $ 1.38
Pro forma 1.87 1.37 1.32
EARNINGS PER SHARE - DILUTED
As reported $ 1.91 $ 1.44 $ 1.38
Pro forma 1.85 1.36 1.32
Note: the financial effects of applying SFAS No. 123 for the years
reported may not be representative of the effects on reported net
income and earnings per share in future years.
Reflected in these pro forma amounts are weighted-average fair values of
options of $6.21, $5.77 and $7.28 in 2002, 2001 and 2000, respectively. The fair
value of each option granted was estimated on the date of grant using the
Black-Scholes options-pricing model and the following weighted-average
assumptions:
2002 2001 2000
--------------------------------------- ------------------ ------------------ ------------------
Dividend yield 1.79% 2.05% 2.15%
Expected volatility 40.47% 39.00% 37.74%
Risk-free interest rate 4.85% 6.37% 5.98%
Expected life (in years) 4.8 6.1 5.9
The company's long-term incentive plan (LTIP) for managers, an unfunded
plan, provides for the award of up to an aggregate of 500,000 shares of the
company's common stock to mid-level managers as incentive compensation to attain
growth in the net income of the company as well as to help attract and retain
management personnel. Shares awarded are restricted until certain vesting
requirements are met; at which time all restricted shares are converted to
unrestricted shares. LTIP participants are entitled to cash dividends and to
vote their respective shares. Restrictions generally limit the sale, pledge or
transfer of the shares during a restricted period, not to exceed 12 years. In
2002 and 2000, 39,405 and 113,104 shares, respectively, were awarded as part of
the LTIP. No shares were awarded in 2001. Compensation expense attributable to
the plan was $1,195 in 2002, $702 in 2001 and $301 in 2000.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
BOB EVANS FARMS, INC. AND SUBSIDIARIES - APRIL 26, 2002
Dollars in thousands unless otherwise noted, except per share amounts
NOTE F -- OTHER COMPENSATION PLANS
The company has a profit sharing plan that covers substantially all
employees who have at least one year of service. The annual contribution to the
plan is at the discretion of the company's board of directors. The company's
expenses related to contributions to the plan in 2002, 2001 and 2000 were
$4,270; $3,773; and $3,278, respectively.
In 1999, the company implemented the Bob Evans Executive Deferral Plan
(BEEDP). The BEEDP provides certain executives the opportunity to defer a
portion of their current income to future years.
The company's SERP also provides executives with an option to accept all
or a portion of individual awards in the form of nonqualified deferred
compensation. The company's expense related to contributions to the SERP
deferred compensation plan was $769; $200; and $798 in 2002, 2001 and 2000,
respectively.
NOTE G -- COMMITMENTS AND CONTINGENCIES
At April 26, 2002, the company had contractual commitments approximating
$36,292 for restaurant construction, plant equipment additions and purchases of
land and inventory. At April 26, 2002, the company also had commitments for
future minimum payments on operating leases of approximately $2,500 per year for
each of the next five years.
The company is from time to time involved in a number of claims and
litigation considered normal in the course of business. Various lawsuits and
assessments, among them employment discrimination, product liability, workers'
compensation claims and tax assessments, are in litigation or administrative
hearings. While it is not feasible to predict the outcome, in the opinion of the
company, these actions should not ultimately have a material adverse effect on
the financial position or results of operations of the company.
NOTE H -- QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
2002 2001 2002 2001 2002 2001 2002 2001
------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------
Net sales $267,461 $253,093 $271,094 $257,712 $262,767 $249,023 $260,524 $247,680
Gross profit 190,651 179,447 193,326 182,697 188,837 176,296 188,599 176,166
Operating income 23,959 22,165 27,827 22,813 25,065 19,040 27,012 19,448
Net income 15,044 13,425 18,836 14,021 16,256 11,473 17,546 11,852
Earnings per share:
Basic $0.43 $0.38 $0.54 $0.40 $0.47 $0.33 $0.50 $0.34
Diluted 0.43 0.38 0.54 0.40 0.46 0.33 0.49 0.34
Common stock bid
prices:
High $19.39 $16.75 $22.73 $19.00 $28.70 $21.69 $31.80 $20.56
Low 16.76 12.44 15.05 15.44 18.37 17.00 25.70 16.43
Cash dividends declared $.09 $.09 $.10 $.09 $.10 $.09 $.10 $.09
- - Gross profit represents net sales less cost of sales (materials).
- - Each fiscal quarter is comprised of a 13-week period.
- - Total quarterly earnings per share may not equal the annual amount because
earnings per share are calculated independently for each quarter.
- - Stock prices are high and low bid prices for the Nasdaq National Market
(trading symbol - BOBE), which is the principal market for the company's
common stock.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
BOB EVANS FARMS, INC. AND SUBSIDIARIES - APRIL 26, 2002
Dollars in thousands unless otherwise noted, except per share amounts
- - The number of stockholders of the company's common stock at June 12, 2002,
was 37,218.
- - Second quarter 2002 amounts include the impact of a net one-time gain on a
divestiture and disposal of assets: $1,842 before taxes, $2,349 after
taxes and $0.07 per share (both basic and diluted). See Note C.
NOTE I -- INDUSTRY SEGMENTS
The company's operations include restaurant operations and the processing
and sale of food products. The revenues from these segments include both sales
to unaffiliated customers and intersegment sales, which are accounted for on a
basis consistent with sales to unaffiliated customers. Intersegment sales and
other intersegment transactions have been eliminated in the consolidated
financial statements.
Operating income represents earnings before interest and income taxes.
Identifiable assets by segment are those assets that are used in the company's
operations in each segment. General corporate assets consist of cash
equivalents, long-term investments and income taxes.
Information on the company's industry segments is summarized as follows:
2002 2001 2000
Sales
Restaurant operations $ 870,257 $ 805,957 $750,851
Food products 222,403 231,625 225,680
-------------------------------------------------------------
1,092,660 1,037,582 976,531
Intersegment sales of food products (30,814) (30,074) (28,612)
-------------------------------------------------------------
TOTAL $1,061,846 $1,007,508 947,919
=============================================================
Operating Income
Restaurant operations $ 85,009 $ 68,663 $ 67,877
Food products 18,854 14,803 17,610
-------------------------------------------------------------
TOTAL $ 103,863 $ 83,466 $ 85,487
=============================================================
Depreciation and Amortization Expense
Restaurant operations $ 35,060 $ 32,634 $ 29,165
Food products 6,914 7,158 7,315
-------------------------------------------------------------
TOTAL $ 41,974 $ 39,792 $ 36,480
=============================================================
Capital Expenditures
Restaurant operations $ 88,267 $ 93,554 $ 91,006
Food products 8,739 6,253 5,861
-------------------------------------------------------------
TOTAL $ 97,006 $ 99,807 $ 96,867
=============================================================
Identifiable Assets
Restaurant operations $ 626,318 $ 574,430 $519,168
Food products 60,713 73,025 75,311
-------------------------------------------------------------
687,031 647,455 594,479
General corporate assets 34,942 31,260 29,962
-------------------------------------------------------------
TOTAL $ 721,973 $ 678,715 $624,441
=============================================================
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Bob Evans Farms, Inc.:
We have audited the accompanying consolidated balance sheets of Bob Evans
Farms, Inc. and subsidiaries as of April 26, 2002, and April 27, 2001, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended April 26, 2002. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Bob Evans Farms,
Inc. and subsidiaries at April 26, 2002, and April 27, 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 26, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Columbus, Ohio
May 31, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
BOB EVANS FARMS, INC. AND SUBSIDIARIES
During the second quarter of fiscal 2002, the company sold Hickory
Specialties, Inc. ("HSI"), which produced and distributed smoke flavorings.
Therefore, certain comparisons of fiscal 2002 to fiscal 2001 have been adjusted
to exclude the effect of the business sold. The company's results of operations
for fiscal 2002, 2001 and 2000 included net sales of $5.0 million, $11.2 million
and $11.9 million, respectively, and operating income (loss) of $(39,000),
$532,000 and $1.2 million, respectively, from HSI.
References herein to 2002, 2001 and 2000 refer to fiscal years.
SALES
Consolidated net sales for Bob Evans Farms, Inc. and subsidiaries
increased $54.3 million, or 5.4%, in 2002. The 2002 increase was the net result
of a $64.3 million increase in restaurant segment sales and a $10.0 million
decrease in food products segment sales. Excluding HSI, consolidated net sales
increased $60.6 million, or 6.1%, in 2002 compared to 2001. Net sales increased
6.3% in 2001 compared to 2000.
Restaurant segment sales accounted for 82.0%, 80.0% and 79.2% of total
sales in 2002, 2001 and 2000, respectively. The $64.3 million additional
restaurant sales in 2002 represented an 8.0% increase over 2001 sales, which
were 7.3% higher than 2000 sales. The increase in restaurant sales in 2002 was
the result of a 3.2% increase in same-store sales as well as more restaurants in
operation. The same-store sales increase, inclusive of an average menu price
increase of 2.8%, reflected the continued trend of quarterly same-store sales
gains for five years running. Same-store sales increased 2.6% in 2001 and 3.4%
in 2000 (inclusive of average menu price increases of 3.3% and 2.3%,
respectively). Average sales at core stores (those open at least two full fiscal
years) were $1,875,000; $1,817,000; and $1,771,000 in 2002, 2001 and 2000,
respectively.
Additional restaurant sales growth in 2002 was provided by an increase
in the number of operating locations: 495 restaurants in operation at the end of
2002 versus 469 at the end of 2001. The 2002 openings included further expansion
into existing markets for the company with an emphasis on South Carolina and
Florida where three and four restaurants were opened, respectively. During 2002,
the company closed one under-performing restaurant.
The following chart summarizes the openings and closings during the
last two years:
BEGINNING OPENED CLOSED ENDING
----------------------- ---------------- ---------------- -------------- ----------------
FISCAL YEAR 2002
First Quarter 469 1 0 470
Second Quarter 470 4 1 473
Third Quarter 473 8 0 481
Fourth Quarter 481 14 0 495
FISCAL YEAR 2001
First Quarter 441 3 1 443
Second Quarter 443 5 1 447
Third Quarter 447 7 0 454
Fourth Quarter 454 15 0 469
An emphasis on dessert and carryout sales also contributed to the
restaurant sales increase in 2002. Carryout sales represented 5.4% of restaurant
segment sales in 2002 compared to 4.9% and 4.1% in 2001 and 2000, respectively.
Same-store carryout sales increased 13.9% in 2002. Another contributor to the
restaurant sales increase in 2002 was retail merchandise sales. Although retail
merchandise sales comprised only 1.7% of 2002 restaurant segment sales, total
retail merchandise sales increased 38.0% in 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
BOB EVANS FARMS, INC. AND SUBSIDIARIES
Various promotional programs were employed throughout the last few
years, including those involving gift certificates, children's programs and
seasonal menu offerings. The company has also updated the appearance of many of
its restaurants, of which 10 were rebuilt and many remodeled in the past year.
Management believes that the enhanced appearance of the restaurants, along with
menu innovations and seasonal merchandising, have upgraded the Bob Evans
concept. The company is attempting to carve out a new market niche - "family
casual" or "homestyle casual," which management believes offers the potential
for increased sales and profit.
Food products segment sales accounted for 18.0%, 20.0% and 20.8% of
total sales in 2002, 2001 and 2000, respectively. Excluding HSI, food products
segment sales decreased $3.7 million (1.9%) in 2002. This decrease was mostly
the result of a 1% drop in the volume of sausage products sold (calculated using
the same products in both periods and excluding new products). The decrease in
comparable pound volume in 2002 was primarily due to a decline in Owens branded
products, reflective of intense competitive pressures in the Owens marketing
territory.
Also contributing to the decline in food products sales in 2002 was a
56% decline in sales of salad products, which were virtually discontinued near
the end of 2001.
Food products segment sales increased $4.5 million (2.3%) in 2001
compared to 2000. This increase reflected additional sales provided by new
products and higher sales prices, partially offset by a 3% decrease in pounds
sold of comparable sausage products and a 36% decrease in salad product sales.
COST OF SALES
Consolidated cost of sales (cost of materials) was 28.3%, 29.1% and
28.9% of sales in 2002, 2001 and 2000, respectively.
In the restaurant segment, cost of sales (predominantly food cost) was
24.8%, 25.1% and 25.2% of sales in 2002, 2001 and 2000, respectively. The
company attributed the improvement in 2002 to menu price increases as well as
favorable purchase prices on certain ingredients and changes in product mix.
Food products segment cost of sales was 44.1%, 44.9% and 43.4% of sales
in 2002, 2001 and 2000, respectively. These results were reflective of changing
hog costs, which averaged $37.84, $39.51 and $34.81 per hundredweight in 2002,
2001 and 2000, respectively. The 2002 average represented a 4.2% decrease
compared to 2001, and the 2001 average represented a 13.5% increase compared to
2000. Hog costs were over $40 per hundredweight for nearly all of the first half
of 2002 and stabilized in the $30 to $35 per hundredweight range in the second
half of the year.
OPERATING WAGE AND FRINGE BENEFIT EXPENSES
Consolidated operating wage and fringe benefit expenses ("operating
wages") were 34.2%, 34.5% and 33.8% of sales in 2002, 2001 and 2000,
respectively.
In the restaurant segment, operating wages were 38.8%, 40.0% and 39.3%
of sales in 2002, 2001 and 2000, respectively. The improvement in 2002 was
attributable to lower hourly wages and benefits partially offset by higher
health insurance expense and restaurant management bonuses. The company launched
several programs early in fiscal 2002 aimed at reducing employee-related
expenses, including better scheduling, reduced overtime and changes in benefit
programs. The increase in 2001 was primarily due to higher hourly and management
wages that were impacted by unusually low national unemployment rates.
In the food products segment, operating wages were 13.0%, 12.6% and
12.9% of sales in 2002, 2001 and 2000, respectively. Operating wages increased
slightly when compared to 2001; however, the lower food products segment sales
at Owens resulted in less leverage of the wage expense in 2002. The improvement
in
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
BOB EVANS FARMS, INC. AND SUBSIDIARIES
2001 was due to the fact that the increased food products sales were primarily
the result of price increases and increased sales of purchased products rather
than increased sales volume of manufactured product.
OTHER OPERATING EXPENSES
More than 93% of other operating expenses ("operating expenses")
occurred in the restaurant segment in 2002; the most significant components of
which were advertising, utilities, restaurant supplies, repair and maintenance,
taxes (other than income taxes) and credit card processing fees. Consolidated
operating expenses were 14.7%, 14.5% and 14.6% of sales in 2002, 2001 and 2000,
respectively. The operating expenses increase in 2002 was the result of higher
repair and maintenance and other operating expenses at Owens in the food
products segment. Restaurant segment operating expense did not change
appreciably in 2002. The decrease in 2001 was due to improved leverage of
expenses (primarily advertising and taxes) in the restaurant segment, partially
offset by higher utility costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The most significant components of selling, general and administrative
("S,G & A") expenses were wages and fringe benefits and food products segment
advertising expenses. Consolidated S,G & A expenses represented 9.3%, 9.7% and
9.8% of sales in 2002, 2001 and 2000, respectively. Excluding HSI, S,G & A
expenses were 9.2% versus 9.4% of sales in 2002 and 2001, respectively. The
decrease in 2002 was the result of decreased food products segment advertising
costs.
NET GAIN ON DISPOSAL OF ASSETS
During the second quarter of fiscal 2002, the company sold HSI, which
resulted in a gain (before and after tax) of $3.3 million. The company also
realized a loss of $1.5 million ($1.0 million after tax) on the disposal of
certain restaurant segment assets during the second quarter of fiscal 2002.
There were no significant gains or losses on asset disposals during 2001 or
2000.
TAXES
Excluding the impact of the HSI divestiture, the effective federal and
state income tax rates were 34.0%, 35.5% and 37.0% in 2002, 2001 and 2000,
respectively. The lower effective tax rates in 2002 and 2001 reflected the
impact of various state tax planning strategies.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from both the restaurant and food products segments has
been used as the main source of funds for working capital and capital
expenditure requirements. Cash and equivalents totaled $7.9 million at April 26,
2002. Dividends paid represented 19.6% of net income in 2002 and 24.9% of net
income in 2001.
Bank lines of credit were used for liquidity needs, capital expansion
and purchases of treasury shares during 2002 and 2001. At April 26, 2002, $27.8
million was outstanding under such arrangements, and unused bank lines of credit
available were $62.2 million. The unsecured revolving lines of credit are
renewed annually.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
BOB EVANS FARMS, INC. AND SUBSIDIARIES
In April 2001, the company issued a $40 million unsecured note to a
bank to replace an equivalent amount outstanding on its unsecured line of
credit. The note bears interest at a fixed rate of 7.35% and matures in May
2008. Required payments are $4.0 million per year of principal plus interest,
with a balloon payment of $12.3 million at maturity. At April 26, 2002, $36.3
million was outstanding on this note.
The company believes that funds needed for capital expenditures,
working capital and treasury share purchases during 2003 will be generated
internally and from available bank lines of credit. Additional financing
alternatives will continue to be evaluated by the company as warranted.
The company expects operating lease payments to approximate $2.5
million annually for the next five years. At the end of 2002, the company also
had $9.6 million in standby letters of credit for self-insurance plans.
At April 26, 2002, the company had contractual commitments for
restaurant construction, plant equipment additions and the purchases of land and
inventory of approximately $36.3 million. Total capital expenditures for 2003
are expected to approximate $97.0 million and depreciation and amortization
expenses are expected to approximate $45.0 million. The company plans to open
approximately 30 restaurants in fiscal 2003, as well as upgrade various
property, plant and equipment in both segments.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
company to make estimates and assumptions that affect the amounts reported.
Actual results could differ materially from those estimates. The company
believes that of its significant accounting policies, the following may involve
a higher degree of judgment and complexity.
The company is effectively self-insured for most workers' compensation,
health care claims, general liability and automotive liability losses. The
company records its insurance liabilities based on historical and industry
trends, which are continually monitored, and accruals are adjusted when
warranted by changing circumstances. Outside actuaries are used to assist in
estimating casualty insurance obligations. Since there are many estimates and
assumptions involved in recording insurance liabilities, differences between
actual future events and prior estimates and assumptions could result in
adjustments to these liabilities.
Property, plant and equipment comprise nearly 90% of the company's
assets. Depreciation is recognized using the straight-line and accelerated
methods in amounts adequate to amortize costs over the estimated useful lives of
depreciable assets (see Note A of Notes to Consolidated Financial Statements).
The company estimates useful lives on buildings and equipment based on
historical data and industry norms. Changes in estimated useful lives could have
a significant impact on earnings. Additionally, testing for impairment of
long-lived assets requires significant management judgment regarding future cash
flows, asset lives and discount rates. Changes in estimates could result in
future impairment charges.
From time to time in the normal course of business, the company is
subject to proceedings, lawsuits and other claims. Management assesses the
potential liabilities related to any lawsuits or claims brought against the
company. While it is typically very difficult to determine the timing and
ultimate outcome of these actions, management uses its best judgment to
determine if it is probable that the company will incur an expense related to
the settlement or final adjudication of such matters and whether a reasonable
estimation of such probable loss, if any, can be made. Given the inherent
uncertainty related to the eventual outcome of litigation, it is possible that
all or some of these matters may be resolved for amounts materially different
from any provisions that the company may have made with respect to their
resolution.
MANAGEMENT'S DISCUSSION OF RISK FACTORS
BOB EVANS FARMS, INC. AND SUBSIDIARIES
Management believes that the current reported financial information is
indicative of future operating results and is not aware of any material events
or uncertainties that would indicate otherwise. However, some level of business
risk and uncertainty is present in any industry; the following documents some of
the risks specific to both operating segments.
Restaurant segment business risks include: competition, same-store
sales, labor and fringe benefit expenses, energy prices, restaurant closings,
governmental initiatives and other risks such as the economy, weather and
consumer acceptance.
The restaurant industry is an intensely competitive environment that
will continue to challenge and influence the company's restaurant segment.
Competition from restaurants in the quick service, casual dining and
family-style categories is significant. Increased numbers of restaurants have
provided more options for consumers and have tended to suppress the industry's
same-store sales. The industry has seen several restaurant chains struggle to
maintain market share and close substantial numbers of locations. Same-store
sales for Bob Evans Restaurants have improved for three years in a row: the
increase was 3.2%, 2.6% and 3.4% in 2002, 2001 and 2000, respectively. The
impact of same-store sales on overall sales and corresponding profit margins is
significant. All restaurants continue to be evaluated by management in order to
identify under-performing locations. In fiscal 2002, the company closed one
restaurant. Depending on profitability, as well as changes in access, the
company may close other restaurants in fiscal 2003.
Competition for qualified labor was a challenge in 2001 with some
easing in 2002. Proposed increases in the federally mandated minimum wage may
have an impact on future wage rates as Congress considers increases to the rate
currently in effect.
Natural gas prices rose significantly in the winter of fiscal 2001 but
moderated in fiscal 2002. We expect higher prices in fiscal 2003. The company
will closely monitor energy costs and evaluate all options carefully.
Availability of sites and weather conditions generate uncertainty when
evaluating future expansion. However, the plans for fiscal 2003 are to add
approximately 30 new restaurants in comparison to 27 in 2002 and 30 in 2001.
Food products segment business risks include: hog costs, governmental
initiatives and other risks such as the economy, weather and consumer
acceptance. The prices to be paid in the live hog market have always been an
uncertainty for the food products segment as was evidenced in the last three
years. In 2000, hog cost averages increased nearly 50% from just the second to
the fourth quarter. In 2001, hog cost averages were relatively high in the first
and fourth quarters, but were stable in the second and third quarters. In 2002,
hog cost averages were relatively high in the first and second quarters, but
decreased significantly in the third and fourth quarters. Trends at the
beginning of fiscal 2003 lead management to believe that hog costs in 2003 may
remain comparable to those levels in the second half of 2002.
Another uncertainty is the consumer acceptance of new items. Some of
the planned product introductions in fiscal 2003 include Wildfire pulled pork
and beef brisket, Brunch Bowls, precooked grilling items and sour cream and
chives mashed potatoes.
The restaurant and food products segments share various risks and
uncertainties. Food safety is an issue that has taken precedence: risk of food
contamination is an issue focused on by the company at its restaurants as well
as in the manufacturing and distribution of its food products. The company has
continued its emphasis on quality control programs that limit the company's
exposure, including compliance with all aspects of the Hazard Analysis of
Critical Control Points program. Increased government initiatives at the local,
state and federal levels tend to increase costs and present challenges to
management in both segments of the business.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
The statements contained in this report which are not historical fact are
"forward-looking statements" that involve various important assumptions, risks,
uncertainties and other factors which could cause the company's actual results
for fiscal 2003 and beyond to differ materially from those expressed in such
forward-looking statements. These important factors include, without limitation,
the assumptions, risks and uncertainties set forth above in "Management's
Discussion of Risk Factors," as well as other assumptions, risks, uncertainties
and factors previously disclosed in this report, the company's securities
filings and press releases.