.
.
.
EXHIBIT 13
CONSOLIDATED FINANCIAL REVIEW
Bob Evans Farms, Inc. and Subsidiaries
Dollars and shares in thousands, except per share amounts
2003 2002* 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Operating Results
Net sales $ 1,091,337 $ 1,061,846 $ 1,007,508 $ 947,919 $ 946,984
Operating income 117,133 103,863 83,466 85,487 91,948
Income before income taxes 115,503 100,836 78,714 83,954 91,374
Income taxes 40,426 33,154 27,943 31,061 33,808
Net income 75,077 67,682 50,771 52,893 57,566
Earnings per share of common stock:
Basic $ 2.13 $ 1.94 $ 1.45 $ 1.38 $ 1.40
Diluted $ 2.10 $ 1.91 $ 1.44 $ 1.38 $ 1.39
Financial Position
Working capital $ (93,607) $ (85,794) $ (114,449) $ (129,475) $ (34,372)
Property, plant and equipment - net 704,442 648,179 603,063 546,594 493,369
Total assets 784,591 721,973 678,715 624,441 590,452
Debt:
Short-term 36,255 31,750 69,965 99,295 25,000
Long-term 28,333 32,333 36,000 431 833
Stockholders' equity 560,919 521,365 457,095 428,790 470,095
Supplemental Information
for the Year
Capital expenditures $ 106,268 $ 97,006 $ 99,807 $ 96,867 $ 68,525
Depreciation and amortization $ 44,150 $ 41,974 $ 39,792 $ 36,480 $ 35,386
Weighted-average shares outstanding:
Basic 35,203 34,868 35,005 38,230 41,210
Diluted 35,813 35,490 35,284 38,366 41,509
Cash dividends declared per share $ 0.44 $ 0.39 $ 0.36 $ 0.36 $ 0.35
Common stock market closing prices:
High $ 32.87 $ 31.18 $ 21.38 $ 22.06 $ 26.13
Low $ 21.22 $ 15.69 $ 12.56 $ 12.06 $ 18.25
Supplemental Information
at Year-End
Employees 40,446 39,990 38,542 35,576 32,363
Stockholders 36,977 36,595 39,466 42,102 44,173
Market price per share at closing $ 24.91 $ 29.59 $ 18.85 $ 13.06 $ 18.31
Book value per share $ 16.26 $ 14.77 $ 13.13 $ 12.09 $ 11.67
* 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.
13
CONSOLIDATED BALANCE SHEETS
Bob Evans Farms, Inc. and Subsidiaries
Dollars in thousands
April 25, 2003 April 26, 2002
- --------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and equivalents $ 9,066 $ 7,934
Accounts receivable 11,115 11,629
Inventories 16,872 15,252
Deferred income taxes 8,914 8,871
Prepaid expenses 1,975 1,016
----------------------------
Total Current Assets 47,942 44,702
Property, Plant and Equipment
Land 225,812 202,198
Buildings and improvements 561,243 518,011
Machinery and equipment 256,203 249,441
Construction in progress 3,557 2,193
----------------------------
1,046,815 971,843
Less accumulated depreciation 342,373 323,664
----------------------------
Net Property, Plant and Equipment 704,442 648,179
Other Assets
Deposits and other 3,112 3,037
Long-term investments 14,306 12,196
Deferred income taxes 13,222 12,292
Goodwill 1,567 1,567
----------------------------
Total Other Assets 32,207 29,092
----------------------------
$ 784,591 $ 721,973
============================
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit $ 32,255 $ 27,750
Current maturities of long-term debt 4,000 4,000
Accounts payable 10,374 10,741
Dividends payable 3,794 3,529
Federal and state income taxes 10,720 9,329
Accrued wages and related liabilities 18,834 19,804
Self insurance 19,241 17,722
Other accrued expenses 42,331 37,621
----------------------------
Total Current Liabilities 141,549 130,496
Long-Term Liabilities
Deferred compensation 8,554 6,182
Deferred income taxes 45,236 31,597
Long-term debt 28,333 32,333
----------------------------
Total Long-Term Liabilities 82,123 70,112
Stockholders' Equity
Common stock, $.01 par value; authorized 100,000,000 shares;
issued 42,638,118 shares in 2003 and 2002 426 426
Preferred stock, $500 par value; authorized 1,200 shares; issued 120 shares
in 2003 and 2002 60 60
Capital in excess of par value 150,253 151,264
Retained earnings 558,147 498,522
Treasury stock, 8,144,025 shares in 2003 and 7,343,596 shares
in 2002, at cost (147,967) (128,907)
----------------------------
Total Stockholders' Equity 560,919 521,365
----------------------------
$ 784,591 $ 721,973
============================
See Notes to Consolidated Financial Statements
14
CONSOLIDATED STATEMENTS OF INCOME
Bob Evans Farms, Inc. and Subsidiaries
Dollars in thousands, except per share amounts
Years Ended April 25, 2003; April 26, 2002; and April 27, 2001 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Net Sales $ 1,091,337 $ 1,061,846 $ 1,007,508
Cost of sales 289,726 300,433 292,902
Operating wage and fringe benefit expenses 379,875 362,770 347,923
Other operating expenses 162,167 155,805 145,886
Selling, general and administrative expenses 98,286 98,843 97,539
Net (gain) on sale of business and disposal of assets 0 (1,842) 0
Depreciation and amortization expense 44,150 41,974 39,792
-------------------------------------------
Operating Income 117,133 103,863 83,466
Net interest expense 1,630 3,027 4,752
-------------------------------------------
Income Before Income Taxes 115,503 100,836 78,714
Provisions For Income Taxes 40,426 33,154 27,943
-------------------------------------------
Net Income $ 75,077 $ 67,682 $ 50,771
===========================================
Earnings Per Share - Basic $ 2.13 $ 1.94 $ 1.45
===========================================
Earnings Per Share - Diluted $ 2.10 $ 1.91 $ 1.44
===========================================
See Notes to Consolidated Financial Statements
15
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 4/28/00 $ 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
- ------------------------------------------------------------------------------------------------------------------------
Net income 75,077 75,077
Dividends declared (15,452) (15,452)
Treasury stock repurchased (30,024) (30,024)
Treasury stock reissued under employee plans (3,084) 10,964 7,880
Stock options granted under employee plans 229 229
Tax reductions - employee plans 1,844 1,844
Stockholders' Equity at 4/25/03 $ 426 $ 60 $ 150,253 $558,147 $ (147,967) $560,919
See Notes to Consolidated Financial Statements
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Bob Evans Farms, Inc. and Subsidiaries
Dollars in thousands
Years ended April 25, 2003; April 26, 2002; and April 27, 2001 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 75,077 $ 67,682 $ 50,771
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 44,150 41,974 39,792
Deferred compensation 2,372 1,488 78
Deferred income taxes 12,666 7,963 6,140
Loss (gain) on sale of assets 1,349 (691) 248
Loss on long-term investments 1,738 577 1,244
Compensation expense attributable to stock plans 1,488 1,590 1,092
Cash provided by (used for) current assets
and current liabilities:
Accounts receivable 514 (105) 31
Inventories (1,620) 140 (514)
Prepaid expenses (959) 1,838 (1,270)
Accounts payable (367) 2,531 (576)
Federal and state income taxes 3,235 (1,654) 7,882
Accrued wages and related liabilities (970) 3,724 1,369
Self insurance 1,519 1,181 (152)
Other accrued expenses 4,710 6,108 5,304
--------------------------------------------
Net cash provided by operating activities 144,902 134,346 111,439
Investing Activities:
Purchase of property, plant and equipment (106,268) (97,006) (99,807)
Purchase of long-term investments (4,282) (2,135) (1,352)
Proceeds from sale of property, plant
and equipment 4,940 2,594 2,677
Cash proceeds from divestiture 0 16,276 0
Other (75) 192 (256)
--------------------------------------------
Net cash used in investing activities (105,685) (80,079) (98,738)
Financing Activities:
Cash dividends paid (15,187) (13,239) (12,633)
Purchase of treasury stock (30,024) (5,749) (13,722)
Line of credit 4,505 (38,215) (33,330)
Proceeds from issuance of long-term debt 0 0 40,000
Principal payments on long-term debt (4,000) (3,667) (431)
Proceeds from issuance of treasury stock 6,621 12,750 2,422
--------------------------------------------
Net cash used in financing activities (38,085) (48,120) (17,694)
--------------------------------------------
Increase (decrease) in cash and equivalents 1,132 6,147 (4,993)
Cash and equivalents at the beginning of the year 7,934 1,787 6,780
--------------------------------------------
Cash and equivalents at the end of the year $ 9,066 $ 7,934 $ 1,787
============================================
See Notes to Consolidated Financial Statements
17
Notes to Consolidated Financial Statements
Bob Evans Farms, Inc. and Subsidiaries - April 25, 2003
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 523
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 2003, 2002 and 2001 refer to fiscal years ended April 25,
2003; April 26, 2002; and April 27, 2001, respectively. All three fiscal years
presented were comprised of 52 weeks.
REVENUE RECOGNITION: The company recognizes revenue in its restaurant segment at
the point of sale. Revenue in its food products segment is generally recognized
when products are delivered to the retailer.
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 ($12,475 in 2003
and $11,197 in 2002) and finished goods ($4,397 in 2003 and $4,055 in 2002).
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 1995. Depreciation on property
placed in service prior to 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: Goodwill, which represents the cost in
excess of net assets acquired, was $1,567 in 2003 and 2002. Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, states that goodwill and intangible assets deemed to have indefinite
lives are no longer amortized but are subject to an annual impairment test in
accordance with the statement. As required by SFAS No. 142, the company
completed the transitional impairment test of goodwill as of April 26, 2002, and
concluded that no impairment existed. The company has selected the end of the
fourth quarter as the date on which to perform its ongoing annual impairment
test. The 2003 test indicated no goodwill impairment. Goodwill amortization
expense was $319 and $511 ($211 and $330 net of income taxes) in 2002 and 2001,
respectively. The following table illustrates the effect on net income and
earnings per share if the company had excluded such goodwill amortization in
2002 and 2001:
2003 2002 2001
- ------------------------------------------------------------------
Net Income
As reported $ 75,077 $ 67,682 $ 50,771
Pro forma, excluding
goodwill amortization $ 75,077 $ 67,893 $ 51,101
Earnings Per Share
- Basic
As reported $ 2.13 $ 1.94 $ 1.45
Pro forma, excluding
goodwill amortization $ 2.13 $ 1.95 $ 1.46
Earnings Per Share
- Diluted
As reported $ 2.10 $ 1.91 $ 1.44
Pro forma, excluding
goodwill amortization $ 2.10 $ 1.91 $ 1.45
- ------------------------------------------------------------------
The company did not have any other intangible assets as of the end of
2003 or 2002. Amortization expense of other intangible assets in 2002 and 2001
was $60 and $155, respectively.
18
Notes to Consolidated Financial Statements
Bob Evans Farms, Inc. and Subsidiaries - April 25, 2003
Dollars in thousands unless otherwise noted, except per share amounts
FINANCIAL INSTRUMENTS: The fair values of the company's financial instruments
approximate their carrying values at April 25, 2003, and April 26, 2002. The
company does not use derivative financial instruments for speculative purposes.
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 $43,602; $43,264; and $43,488 in 2003, 2002 and 2001,
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):
2003 2002 2001
- -----------------------------------------------------------
Basic 35,203 34,868 35,005
Dilutive stock options 610 622 279
----------------------------
Diluted 35,813 35,490 35,284
============================
- -----------------------------------------------------------
Options to purchase 653,571; 0; and 1,002,000 shares of common stock in
2003, 2002 and 2001, respectively, were excluded from the diluted
earnings-per-share calculations since they were anti-dilutive.
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 2002 and 2001 amounts have been reclassified to
conform to the 2003 classification.
STOCK-BASED EMPLOYEE COMPENSATION: At April 25, 2003, the company had various
stock-based employee compensation plans that are described more fully in Note E.
The company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly, no compensation
expense has been recognized for stock options 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 recorded for stock options granted at less than
fair market value in 2003, 2002 and 2001 was $229; $395; and $390, respectively.
The following table illustrates the effect on net income and earnings
per share if the company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation:
2003 2002 2001
- ------------------------------------------------------------------
Net Income, as reported $ 75,077 $ 67,682 $ 50,771
Add: Stock-based
employee compensation
cost, net of related tax
effects, included in
reported net income 149 261 252
Deduct: Stock-based
employee compensation
cost, net of related tax
effects, determined under
the fair value method for
all awards (4,162) (2,642) (3,233)
---------- ---------- ----------
Net Income, Pro forma $ 71,064 $ 65,301 $ 47,790
========== ========== ==========
Earnings Per Share
- Basic
As reported $ 2.13 $ 1.94 $ 1.45
Pro forma $ 2.02 $ 1.87 $ 1.37
Earnings Per Share
- Diluted
As reported $ 2.10 $ 1.91 $ 1.44
Pro forma $ 1.99 $ 1.85 $ 1.36
- ------------------------------------------------------------------
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.
19
Notes to Consolidated Financial Statements
Bob Evans Farms, Inc. and Subsidiaries - April 25, 2003
Dollars in thousands unless otherwise noted, except per share amounts
Reflected in these pro forma amounts are weighted-average fair values
of options of $10.16; $6.21; and $5.77 in 2003, 2002 and 2001, 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:
2003 2002 2001
- -----------------------------------------------------------
Dividend yield 1.72% 1.79% 2.05%
Expected volatility 41.25% 40.47% 39.00%
Risk-free interest rate 3.96% 4.85% 6.37%
Expected life (in years) 4.1 4.8 6.1
- -----------------------------------------------------------
EFFECT OF NEW ACCOUNTING STANDARDS: The Emerging Issues Task Force (EITF) has
reached consensus on EITF Issue No. 02-16, Accounting by a Customer for Certain
Consideration Received from a Vendor. Issue No. 02-16 requires that certain cash
consideration (rebates) received by a customer from a vendor be classified in
the customer's consolidated statements of income as a reduction of cost of
sales. The consensus is required to be applied to new arrangements entered into
after Dec. 31, 2002. Had Issue No. 02-16 been applicable for all years
presented, cost of sales would be reduced by $2,749; $2,104; and $1,988 in 2003,
2002 and 2001, respectively, with a corresponding increase to other operating
expenses. Operating income would be unaffected.
Note B - Long-Term Debt and Credit Arrangements
In April 2001, the company issued a $40,000 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 $4,000 per year of principal plus interest, with a balloon payment
of $12,300 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 25, 2003, $32,333 was outstanding on this note.
The company also has arrangements with certain banks from which it may
borrow up to $70,000 on a short-term basis. The arrangements are reviewed
annually for renewal. At April 25, 2003, $32,255 was outstanding under these
arrangements. During 2003 and 2002, respectively, the maximum amounts
outstanding under these unsecured lines of credit were $34,415 and $73,265, and
the average amounts outstanding were $19,543 and $51,172 with weighted-average
interest rates of 2.17% and 3.72%. All interest paid on these arrangements is at
floating rates.
Interest costs of $1,335; $1,536; and $1,784 incurred in 2003, 2002 and
2001, 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 and $11,228 and operating income
(loss) of $(39) and $532 in 2002 and 2001, 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.
20
Notes to Consolidated Financial Statements
Bob Evans Farms, Inc. and Subsidiaries - April 25, 2003
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 25,
2003, and April 26, 2002, were as follows:
April 25, 2003 April 26, 2002
- --------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Loss on impaired assets $ 7,546 $ 7,546
Self-insurance 7,119 6,557
Vacation pay 1,303 1,221
Stock compensation plans 5,463 4,541
Accrued bonus 445 895
Inventory and other 260 403
---------------------------
Total deferred tax assets 22,136 21,163
Deferred tax liabilities:
Accelerated depreciation/asset disposals 43,494 28,895
Other 1,742 2,702
---------------------------
Total deferred tax liabilities 45,236 31,597
---------------------------
Net deferred tax liabilities $ 23,100 $ 10,434
===========================
Significant components of the provisions for income taxes are as follows:
2003 2002 2001
---------------------------------------------
Current:
Federal $ 25,080 $ 23,188 $ 19,771
State 2,680 2,237 2,032
---------------------------------------------
Total current 27,760 25,425 21,803
Deferred, primarily federal 12,666 7,729 6,140
---------------------------------------------
Total tax provisions $ 40,426 $ 33,154 $ 27,943
=============================================
The company's provisions for income taxes differ from the amounts computed by
applying the federal statutory rate due to the following:
2003 2002 2001
---------------------------------------------
Tax at statutory rate $ 40,426 $ 35,292 $ 27,550
State income tax (net) 1,743 1,585 1,321
Nontaxable gain on divestiture 0 (1,167) 0
Other (1,743) (2,556) (928)
---------------------------------------------
Provisions for income taxes $ 40,426 $ 33,154 $ 27,943
=============================================
Taxes paid during 2003, 2002 and 2001 were $22,383; $24,886; and $13,751,
respectively.
21
Notes to Consolidated Financial Statements
Bob Evans Farms, Inc. and Subsidiaries - April 25, 2003
Dollars in thousands unless otherwise noted, except per share amounts
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 may not be less than the fair market value of the stock at the
grant date and 2) non-qualified stock options shall be determined by the
compensation committee of the board of directors. All other plans prohibit
option prices less than the fair market value of the stock at the grant date.
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 nonqualified stock options, 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.
Options granted under the SERP expire five years after the earlier of
the date the recipient attains age 65 or dies. All other options may be granted
for a period of up to five years under the 1989 plan and up to 10 years under
the other plans.
The following table summarizes option-related activity for the last
three years:
Shares Price Range
- -------------------------------------------------------------------
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
- -------------------------------------------------------------------
Granted 744,715 14.91 to 31.16
Exercised (381,482) 8.69 to 31.16
Canceled or expired (41,419) 14.44 to 31.16
- -------------------------------------------------------------------
Outstanding, April 25, 2003 2,785,381 $ 6.56 to $31.16
- -------------------------------------------------------------------
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 25, 2003
Dollars in thousands unless otherwise noted, except per share amounts
In addition to the outstanding options, 2,390,498 stock option shares
were available for grant at April 25,2003. The following table summarizes
information regarding stock options outstanding at April 25, 2003:
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices at 4/25/03 Contractual Life Price at 4/25/03 Price
==================================================================================================
$ 6.56 to $13.99 293,565 10.9 $ 9.13 137,092 $ 9.20
14.00 to 14.49 518,280 6.6 14.44 259,918 14.44
14.50 to 16.99 77,908 6.7 15.23 62,961 15.31
17.00 to 18.99 721,282 7.6 17.46 198,861 17.46
19.00 to 20.99 377,808 5.8 19.38 364,448 19.38
21.00 to 30.99 88,399 4.8 21.38 88,399 21.38
31.00 to 31.16 708,139 8.3 31.16 29,391 31.16
$ 6.56 to $31.16 2,785,381 7.6 $19.83 1,141,070 $16.93
The company's long-term incentive plan (LTIP) for managers, an unfunded
plan, provides for the award of 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 2003 and 2002, 83,949 and 39,405
shares, respectively were awarded as part of the LTIP. No shares were awarded in
2001. Compensation expense attributable to the plan was $1,259 in 2003, $1,195
in 2002 and $702 in 2001.
Note F - Other Compensation Plans
The company has a profit sharing plan that covers substantially all
employees who have at least 1,000 hours 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 2003, 2002 and 2001 were
$3,833; $4,270; and $3,773, 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 $2,398; $769; and $200 in 2003, 2002 and 2001,
respectively.
Note G - Commitments and Contingencies
At April 25, 2003, the company had contractual commitments
approximating $48,540 for restaurant construction, plant equipment additions and
purchases of land and inventory. At April 25, 2003, 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 had 61 and 58
leased restaurant locations in 2003 and 2002, respectively.
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.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 25, 2003
Dollars in thousands unless otherwise noted, except per share amounts
Note H - Quarterly Financial Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
2003 2002 2003 2002 2003 2002 2003 2002
========================================================================================================================
Net sales $277,021 $267,461 $277,601 $271,094 $271,252 $262,767 $265,463 $260,524
Gross profit 204,975 190,651 205,477 193,326 197,053 188,837 194,106 188,599
Operating income 32,256 23,959 31,358 27,827 26,080 25,065 27,439 27,012
Net income 20,624 15,044 20,078 18,836 16,733 16,256 17,642 17,546
Earnings per share:
Basic $ 0.58 $ 0.43 $ 0.57 $ 0.54 $ 0.48 $ 0.47 $ 0.51 $ 0.50
Diluted 0.57 0.43 0.56 0.54 0.47 0.46 0.50 0.49
Common stock
bid prices:
High $ 33.30 $ 19.39 $ 28.33 $ 22.73 $ 25.90 $ 28.70 $ 26.29 $ 31.80
Low 23.09 16.76 21.65 15.05 21.75 18.37 21.18 25.70
Cash dividends declared $ 0.11 $ 0.09 $ 0.11 $ 0.10 $ 0.11 $ 0.10 $ 0.11 $ 0.10
- - 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.
- - The number of stockholders of the company's common stock at June 9, 2003, was
36,975.
- - 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.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 25, 2003
Dollars in thousands unless otherwise noted, except per share amounts
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:
2003 2002 2001
=================================================================================
Sales
Restaurant operations $ 902,345 $ 870,257 $ 805,957
Food products 219,820 222,403 231,625
----------- ----------- -----------
1,122,165 1,092,660 1,037,582
Intersegment sales of food products (30,828) (30,814) (30,074)
----------- ----------- -----------
Total $ 1,091,337 $ 1,061,846 $ 1,007,508
=========== =========== ===========
Operating Income
Restaurant operations $ 92,896 $ 85,009 $ 68,663
Food products 24,237 18,854 14,803
----------- ----------- -----------
Total $ 117,133 $ 103,863 $ 83,466
=========== =========== ===========
Depreciation and Amortization Expense
Restaurant operations $ 37,482 $ 35,060 $ 32,634
Food products 6,668 6,914 7,158
----------- ----------- -----------
Total $ 44,150 $ 41,974 $ 39,792
=========== =========== ===========
Capital Expenditures
Restaurant operations $ 97,113 $ 88,267 $ 93,554
Food products 9,155 8,739 6,253
----------- ----------- -----------
Total $ 106,268 $ 97,006 $ 99,807
=========== =========== ===========
Identifiable Assets
Restaurant operations $ 680,843 $ 626,318 $ 574,430
Food products 65,472 60,713 73,025
----------- ----------- -----------
746,315 687,031 647,455
General corporate assets 38,276 34,942 31,260
----------- ----------- -----------
Total $ 784,591 $ 721,973 $ 678,715
=========== =========== ===========
25
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 25, 2003, and April 26, 2002, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended April 25, 2003. 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 25, 2003, and April 26, 2002, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended April 25, 2003, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
June 2, 2003
26
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 fiscal year comparisons have been adjusted to exclude the
effect of the business sold. The company's results of operations for fiscal 2002
included net sales of $5.0 million and an operating loss of $39,000 from HSI.
Fiscal 2001 results included net sales of $11.2 million and operating income of
$532,000 from HSI.
References herein to 2004, 2003, 2002 and 2001 refer to fiscal years.
Sales
Consolidated net sales for Bob Evans Farms, Inc. and subsidiaries
increased $29.5 million, or 2.8%, in 2003. The 2003 increase was the net result
of a $32.1 million increase in restaurant segment sales and a $2.6 million
decrease in food products segment sales. Excluding HSI, consolidated net sales
increased $34.5 million, or 3.3%, in 2003 compared to 2002. Net sales increased
5.4% (6.1% excluding HSI) in 2002 compared to 2001.
Restaurant segment sales accounted for 82.7%, 82.0% and 80.0% of total
sales in 2003, 2002 and 2001, respectively. The $32.1 million additional
restaurant sales in 2003 represented a 3.7% increase over 2002 sales, which were
8.0% higher than 2001 sales. The increase in restaurant sales in 2003 was the
result of more restaurants in operation, which was partially offset by a 1.4%
decrease in same-store sales. The same-store sales decrease (including an
average menu price increase of 2.8% in 2003) was due to lower customer traffic.
The company attributed the decline mostly to severe winter weather and the
overall economic environment. Same-store sales increased 3.2% in 2002 and 2.6%
in 2001 (inclusive of average menu price increases of 2.8% and 3.3%,
respectively).
Additional restaurant sales growth in 2003 was provided by an increase
in the number of operating locations: 523 restaurants in operation at the end of
2003 versus 495 at the end of 2002. The 2003 openings included further expansion
into existing markets for the company, particularly in Ohio, but also with an
emphasis on Florida and Maryland where four and three restaurants were opened,
respectively. During 2003, one restaurant was closed.
The following chart summarizes restaurant openings and closings during
the last two years:
Beginning Opened Closed Ending
==========================================================
Fiscal Year 2003
First Quarter 495 0 0 495
Second Quarter 495 4 0 499
Third Quarter 499 8 0 507
Fourth Quarter 507 17 1 523
==========================================================
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
An emphasis on dessert and carryout sales also contributed to the
restaurant sales increase in 2003. Carryout sales represented 5.8% of restaurant
segment sales in 2003 compared to 5.4% and 4.9% in 2002 and 2001, respectively.
Same-store carryout sales increased 5.6% in 2003 on top of 13.9% in 2002. Retail
merchandise sales comprised 1.7% of both 2003 and 2002 restaurant segment sales
and remained relatively flat for the core stores (those open at least two full
fiscal years).
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 eight 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" which management believes offers the potential for increased sales and
profit.
Food products segment sales accounted for 17.3%, 18.0% and 20.0% of
total sales in 2003, 2002 and 2001, respectively. Food products segment sales
decreased $2.6 million, or 1.4%, in 2003 versus 2002. Excluding HSI, food
products segment sales increased $2.4 million, or 1.3%, in 2003. This sales
increase was reflective of an increase in the volume of products sold partially
offset by lower net prices charged by the company for its sausage products. The
company experienced a 4.7% increase in the volume of sausage products sold
(calculated using the same products in both periods and excluding newer
products). Including newer products, such as refrigerated potato products, and
items other than sausage, volume increased 6.7% in 2003 versus 2002. The company
was able to lower the net prices charged for sausage products in 2003 in
response to lower hog costs (discussed below).
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
Food products segment sales decreased $9.9 million, or 4.9%, in 2002
compared to 2001. Excluding HSI, the decrease was $3.7 million, or 1.9%. 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.
Cost of Sales
Consolidated cost of sales (cost of materials) was 26.5%, 28.3% and
29.1% of sales in 2003, 2002 and 2001, respectively.
In the restaurant segment, cost of sales (predominantly food cost) was
23.9%, 24.8% and 25.1% of sales in 2003, 2002 and 2001, respectively. The
company attributed the improvement in 2003 to a combination of lower commodity
prices and a management initiative to take selected price increases on certain
menu items and in certain geographical areas, based on extensive market research
indicating that demand sensitivity was low.
Food products segment cost of sales was 39.0%, 44.1% and 44.9% of sales
in 2003, 2002 and 2001, respectively. These results were reflective of changing
hog costs, which averaged $26.46, $37.84 and $39.51 per hundredweight in 2003,
2002 and 2001, respectively. The 2003 average represented a 30.1% decrease
compared to 2002, and the 2002 average represented a 4.2% decrease compared to
2001. Hog costs dropped to their lowest level of 2003 in the second quarter when
they averaged $22.50 per hundredweight. By the fourth quarter, hog costs rose to
average $30.00 per hundredweight.
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses ("operating
wages") were 34.8%, 34.2% and 34.5% of sales in 2003, 2002 and 2001,
respectively.
In the restaurant segment, operating wages were 39.2%, 38.8% and 40.0%
of sales in 2003, 2002 and 2001, respectively. The increase in 2003 was
attributable mainly to higher management wages. 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 2002 aimed at reducing employee-related expenses,
including better scheduling, reduced overtime and changes in benefit programs.
In the food products segment, operating wages were 14.0%, 13.0% and
12.6% of sales in 2003, 2002 and 2001, respectively. Operating wage expense
increased as a percentage of sales in the food products segment in 2003
primarily due to higher hourly wages related to the increase in volume of
sausage products produced as well as the addition of a new distribution center
in 2003. The 2002 increase was due mostly to lower sales of Owens branded
products, which resulted in less leverage of the wage expense in 2002.
Other Operating Expenses
More than 93% of other operating expenses ("operating expenses")
occurred in the restaurant segment in 2003; 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 14.9%, 14.7% and 14.5% of sales in 2003, 2002 and 2001,
respectively. Restaurant segment operating expenses were impacted in 2003 versus
2002 by increases in repair and maintenance expense (up 5.2% in core stores),
higher taxes (up 8.2% in core stores) and higher credit card processing fees (up
11.2% in core stores), largely offset by decreases in advertising expense (down
4.0% in core stores). Food products segment operating expenses increased 8.6% in
2003 versus 2002 due to higher repair and maintenance expense and insurance
expense, as well as the addition of a new distribution center in 2003. 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 compared
to 2001.
Selling, General and Administrative Expenses
The most significant components of selling, general and administrative
("S,G & A") expenses were wages, fringe benefits and food products segment
advertising expenses. Consolidated S,G & A expenses represented 9.0%, 9.3% and
9.7% of sales in 2003, 2002 and 2001, respectively. Excluding HSI, S,G & A
expenses were 9.2% and 9.4% of sales in 2002 and 2001, respectively. The
decrease as a percentage of sales in 2003 was due to less food products segment
advertising expenses and the improved leverage of S, G & A expenses. 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 2003 or
2001.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
Taxes
Excluding the impact of the HSI divestiture, the effective federal and
state income tax rates were 35.0%, 34.0% and 35.5% in 2003, 2002 and 2001,
respectively.
Liquidity and Capital Resources
Cash generated from both the restaurant and food products segments was
used as the main source of funds for working capital, capital expenditure
requirements and treasury share purchases. Cash and equivalents totaled $9.1
million at April 25, 2003. Dividends paid represented 20.2% of net income in
2003 and 19.6% of net income in 2002.
Bank lines of credit were used for liquidity needs, capital expansion
and purchases of treasury shares during 2003 and 2002. At April 25, 2003, $32.3
million was outstanding under such arrangements, and unused bank lines of credit
available were $37.7 million. The unsecured revolving lines of credit are
renewed annually.
In 2001, the company issued a $40.0 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 25, 2003, $32.3 million was
outstanding on this note.
The company believes that funds needed for capital expenditures,
working capital and treasury share purchases during 2004 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 2003, the company also
had $9.7 million in standby letters of credit for self-insurance plans.
At April 25, 2003, the company had contractual commitments for
restaurant construction, plant equipment additions and the purchases of land and
inventory of approximately $48.5 million. Total capital expenditures for 2004
are expected to approximate $120.0 million and depreciation and amortization
expenses are expected to approximate $48.0 million. The company plans to open
approximately 35 restaurants in fiscal 2004, 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.
The company applies the recognition and measurement principles of
Accounting Principles Board Opinion No.25, Accounting for Stock Issued to
Employees, in accounting for its stock-based compensation plans. Accordingly, no
compensation expense has been recognized for stock options when the exercise
price of the options is equal to or greater than the fair market value of the
stock at the grant date. Net income in 2003, 2002 and 2001 would have been lower
by $4.0 million, $2.4 million and $3.0 million, respectively, if the company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, to
stock-based compensation plans.
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.
29
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, commodity prices, 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. The change in
same-store sales for Bob Evans Restaurants are as follows: (1.4)%, 3.2% and 2.6%
in 2003, 2002 and 2001, respectively. The impact of same-store sales on overall
sales and corresponding profit margins may be significant. All restaurants
continue to be evaluated by management in order to identify under-performing
locations. In 2003, one restaurant was closed as a result of a decision to not
renew its lease. At the beginning of 2004, the company closed one restaurant due
to poor performance. Depending on profitability, as well as changes in access,
the company may close additional restaurants in 2004.
Competition for qualified labor eased slightly in 2002 and more
significantly in 2003. 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.
Food cost comparisons were favorable in 2003 versus 2002. Changes in
commodity prices could have an impact on profitability in 2004.
Natural gas prices were moderate in 2003. Management expects higher
prices in 2004. 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 2004 are to add
approximately 35 new restaurants in comparison to 29 in 2003 and 27 in 2002.
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. Hog costs averaged $26.46, $37.84 and $39.51 per hundredweight in 2003,
2002 and 2001, respectively. Trends at the beginning of 2004 lead management to
believe that hog costs in 2004 will be higher than those in 2003, and operating
margins may decrease as a result.
Another uncertainty is the consumer acceptance of new items. Some of
the planned product introductions in 2004 include a new fresh link flavor,
refrigerated macaroni and cheese, and large cheeseburger Snackwiches.
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 2004 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.
30