.
.
.
Exhibit 13
CONSOLIDATED FINANCIAL REVIEW
Bob Evans Farms, Inc. and Subsidiaries
Dollars and shares in thousands, except per share amounts
2004(a) 2003 2002(b) 2001 2000
----------- ----------- ----------- ----------- -----------
Operating Results
Net sales $ 1,197,997 $ 1,091,337 $ 1,061,846 $ 1,007,508 $ 947,919
Operating income 113,301 117,133 103,863 83,466 85,487
Income before income taxes 111,990 115,503 100,836 78,714 83,954
Income taxes 39,955 40,426 33,154 27,943 31,061
Net income 72,035 75,077 67,682 50,771 52,893
Earnings per share of common stock:
Basic $ 2.07 $ 2.13 $ 1.94 $ 1.45 $ 1.38
Diluted $ 2.03 $ 2.10 $ 1.91 $ 1.44 $ 1.38
Financial Position
Working capital $ (98,375) $ (93,607) $ (85,794) $ (114,449) $ (129,475)
Property, plant and equipment - net 783,397 704,442 648,179 603,063 546,594
Total assets 868,233 784,591 721,973 678,715 624,441
Debt:
Short-term 38,620 36,255 31,750 69,965 99,295
Long-term 24,333 28,333 32,333 36,000 431
Stockholders' equity 630,163 560,919 521,365 457,095 428,790
Supplemental Information
for the Year
Capital expenditures $ 141,037 $ 106,268 $ 97,006 $ 99,807 $ 96,867
Depreciation and amortization $ 50,106 $ 44,150 $ 41,974 $ 39,792 $ 36,480
Weighted-average shares outstanding:
Basic 34,878 35,203 34,868 35,005 38,230
Diluted 35,513 35,813 35,490 35,284 38,366
Cash dividends declared per share $ 0.48 $ 0.44 $ 0.39 $ 0.36 $ 0.36
Common stock market closing prices:
High $ 34.08 $ 32.87 $ 31.18 $ 21.38 $ 22.06
Low $ 23.26 $ 21.22 $ 15.69 $ 12.56 $ 12.06
Supplemental Information
at Year-End
Employees 42,035 40,446 39,990 38,542 35,576
Stockholders 35,044 36,977 36,595 39,466 42,102
Market price per share at closing $ 30.73 $ 24.91 $ 29.59 $ 18.85 $ 13.06
Book value per share $ 17.88 $ 16.26 $ 14.77 $ 13.13 $ 12.09
(a) Fiscal 2004 was comprised of 53 weeks of activity versus 52 weeks of
activity in each of the prior periods presented.
(b) 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.
PAGE 19
CONSOLIDATED BALANCE SHEETS
Bob Evans Farms, Inc. and Subsidiaries
Dollars in thousands
April 30, 2004 April 25, 2003
-------------- --------------
Assets
Current Assets
Cash and equivalents $ 3,986 $ 9,066
Accounts receivable 13,413 11,115
Inventories 19,540 16,872
Deferred income taxes 8,869 8,914
Prepaid expenses 1,664 1,975
----------- -----------
Total Current Assets 47,472 47,942
Property, Plant and Equipment
Land 247,695 225,812
Buildings and improvements 615,347 561,243
Machinery and equipment 276,373 256,203
Construction in progress 13,046 3,557
----------- -----------
1,152,461 1,046,815
Less accumulated depreciation 369,064 342,373
----------- -----------
Net Property, Plant and Equipment 783,397 704,442
Other Assets
Deposits and other 3,075 3,112
Long-term investments 17,791 14,306
Deferred income taxes 14,931 13,222
Goodwill 1,567 1,567
----------- -----------
Total Other Assets 37,364 32,207
----------- -----------
$ 868,233 $ 784,591
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit $ 34,620 $ 32,255
Current maturities of long-term debt 4,000 4,000
Accounts payable 12,390 10,374
Dividends payable 4,229 3,794
Federal and state income taxes 11,375 10,720
Accrued wages and related liabilities 20,887 18,834
Self insurance 17,441 19,241
Other accrued expenses 40,905 42,331
----------- -----------
Total Current Liabilities 145,847 141,549
Long-Term Liabilities
Deferred compensation 13,519 8,554
Deferred income taxes 54,371 45,236
Long-term debt 24,333 28,333
----------- -----------
Total Long-Term Liabilities 92,223 82,123
Stockholders' Equity
Common stock, $.01 par value; authorized 100,000,000 shares;
issued 42,638,118 shares in 2004 and 2003 426 426
Preferred stock, $500 par value; authorized 1,200 shares; issued 120 shares
in 2004 and 2003 60 60
Capital in excess of par value 149,967 150,253
Retained earnings 613,371 558,147
Treasury stock, 7,397,219 shares in 2004 and 8,144,025 shares
in 2003, at cost (133,661) (147,967)
----------- -----------
Total Stockholders' Equity 630,163 560,919
----------- -----------
$ 868,233 $ 784,591
=========== ===========
See Notes to Consolidated Financial Statements
PAGE 20
CONSOLIDATED STATEMENTS OF INCOME
Bob Evans Farms, Inc. and Subsidiaries
Dollars in thousands, except per share amounts
Years Ended April 30, 2004; April 25, 2003; and April 26, 2002 2004 2003 2002
- -------------------------------------------------------------- ----------- ----------- -----------
Net Sales $ 1,197,997 $ 1,091,337 $ 1,061,846
Cost of sales 340,840 286,977 298,329
Operating wage and fringe benefit expenses 418,029 379,875 362,770
Other operating expenses 174,932 164,916 157,909
Selling, general and administrative expenses 100,789 98,286 98,843
Net (gain) on sale of business and disposal of assets 0 0 (1,842)
Depreciation and amortization expense 50,106 44,150 41,974
----------- ----------- -----------
Operating Income 113,301 117,133 103,863
Net interest expense 1,311 1,630 3,027
----------- ----------- -----------
Income Before Income Taxes 111,990 115,503 100,836
Provisions For Income Taxes 39,955 40,426 33,154
----------- ----------- -----------
Net Income $ 72,035 $ 75,077 $ 67,682
=========== =========== ===========
Earnings Per Share - Basic $ 2.07 $ 2.13 $ 1.94
=========== =========== ===========
Earnings Per Share - Diluted $ 2.03 $ 2.10 $ 1.91
=========== =========== ===========
See Notes to Consolidated Financial Statements
PAGE 21
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 4/27/01 $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
---- --- -------- -------- --------- --------
Net income 72,035 72,035
Dividends declared (16,811) (16,811)
Treasury stock repurchased (3,171) (3,171)
Treasury stock reissued under employee plans (4,058) 17,477 13,419
Tax reductions - employee plans 3,772 3,772
---- --- -------- -------- --------- --------
Stockholders' Equity at 4/30/04 $426 $60 $149,967 $613,371 $(133,661) $630,163
---- --- -------- -------- --------- --------
See Notes to Consolidated Financial Statements
PAGE 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
Bob Evans Farms, Inc. and Subsidiaries
Dollars in thousands
Years ended April 30, 2004; April 25, 2003; and April 26, 2002 2004 2003 2002
- -------------------------------------------------------------- --------- --------- ---------
Operating Activities
Net income $ 72,035 $ 75,077 $ 67,682
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 50,106 44,150 41,974
Deferred compensation 4,965 2,372 1,488
Deferred income taxes 7,471 12,666 7,963
(Gain) loss on disposal of assets 1,269 1,349 (691)
(Gain) loss on long-term investments (1,871) 1,738 577
Compensation expense attributable to stock plans 681 1,488 1,590
Cash provided by (used for) current assets
and current liabilities:
Accounts receivable (2,298) 514 (105)
Inventories (2,668) (1,620) 140
Prepaid expenses 311 (959) 1,838
Accounts payable 2,016 (367) 2,531
Federal and state income taxes 4,427 3,235 (1,654)
Accrued wages and related liabilities 2,053 (970) 3,724
Self insurance (1,800) 1,519 1,181
Other accrued expenses (138) 4,710 6,108
--------- --------- ---------
Net cash provided by operating activities 136,559 144,902 134,346
Investing Activities
Purchase of property, plant and equipment (141,037) (106,268) (97,006)
Purchase of long-term investments (2,048) (4,282) (2,135)
Proceeds from sale of property, plant
and equipment 9,853 4,940 2,594
Cash proceeds from divestiture 0 0 16,276
Other 37 (75) 192
--------- --------- ---------
Net cash used in investing activities (133,195) (105,685) (80,079)
Financing Activities
Cash dividends paid (16,376) (15,187) (13,239)
Purchase of treasury stock (3,171) (30,024) (5,749)
Line of credit 2,365 4,505 (38,215)
Principal payments on long-term debt (4,000) (4,000) (3,667)
Proceeds from issuance of treasury stock 12,738 6,621 12,750
--------- --------- ---------
Net cash used in financing activities (8,444) (38,085) (48,120)
--------- --------- ---------
Increase (decrease) in cash and equivalents (5,080) 1,132 6,147
Cash and equivalents at the beginning of the year 9,066 7,934 1,787
--------- --------- ---------
Cash and equivalents at the end of the year $ 3,986 $ 9,066 $ 7,934
========= ========= =========
See Notes to Consolidated Financial Statements
PAGE 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 30, 2004
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 558
full-service, family-casual 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.
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 2004, 2003 and 2002 refer to fiscal years ended April 30,
2004; April 25, 2003; and April 26, 2002, respectively. Fiscal year 2004 was
comprised of 53 weeks. Fiscal years 2003 and 2002 were comprised of 52 weeks.
REVENUE RECOGNITION: Revenue is recognized in the restaurant segment at the
point of sale. Revenue in the 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 ($14,181 in 2004
and $12,475 in 2003) and finished goods ($5,359 in 2004 and $4,397 in 2003).
PROPERTY, PLANT AND EQUIPMENT: The company states property, plant and equipment
at cost less accumulated depreciation. Depreciation is calculated 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 2004 and 2003. 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 2004 and 2003 tests indicated no goodwill impairment. Goodwill
amortization expense was $319 ($211 net of income taxes) in 2002. The following
table illustrates the effect on net income and earnings per share if the company
had excluded such goodwill amortization in 2002.
2004 2003 2002
---------- ---------- ----------
Net Income
As reported $ 72,035 $ 75,077 $ 67,682
Pro forma, excluding
goodwill amortization $ 72,035 $ 75,077 $ 67,893
Earnings Per Share
- Basic
As reported $ 2.07 $ 2.13 $ 1.94
Pro forma, excluding
goodwill amortization $ 2.07 $ 2.13 $ 1.95
Earnings Per Share
- Diluted
As reported $ 2.03 $ 2.10 $ 1.91
Pro forma, excluding
goodwill amortization $ 2.03 $ 2.10 $ 1.91
The company did not have any other intangible assets as of the end of 2004
or 2003. Amortization expense of other intangible assets in 2002 was $60.
PAGE 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 30, 2004
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 30, 2004, and April 25, 2003. The
company does not use derivative financial instruments for speculative purposes.
SELF-INSURANCE: The company is self-insured for most workers' compensation,
general liability and automotive liability losses (collectively "casualty
losses"), as well as employee health care claims. The company maintains
stop-loss coverage with third party insurers to limit its total exposure. The
recorded liability associated with these programs is based on an estimate of the
ultimate costs to be incurred to settle known claims and claims incurred but not
reported as of the balance sheet date. The estimated liability is not discounted
and is based on a number of assumptions and factors, including historical
trends, actuarial assumptions and economic conditions.
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 $42,295; $43,602; and $43,264 in 2004, 2003 and 2002,
respectively.
COST OF SALES: Cost of sales represents food cost in the restaurant segment and
cost of materials in the food products segment. Cash rebates that the company
receives from suppliers are recorded as a reduction of cost of sales in the
periods in which they are earned. The amount of each rebate is directly related
to the quantity of product purchased from the supplier.
PROMOTIONAL SPENDING: In its food products segment, the company engages in
promotional (sales incentive) programs in the form of "off-invoice" deductions,
cooperative advertising programs and coupons. Costs associated with these
programs are classified as a reduction of net sales in the period in which the
sale occurs.
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):
2004 2003 2002
------ ------ ------
Basic 34,878 35,203 34,868
Dilutive stock options 635 610 622
------ ------ ------
Diluted 35,513 35,813 35,490
====== ====== ======
Options to purchase 696,387; 653,571; and 0 shares of common stock in
2004, 2003 and 2002, 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.
STOCK-BASED EMPLOYEE COMPENSATION: At April 30, 2004, 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 2004, 2003 and 2002 was $0;
$229; and $395, respectively.
PAGE 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 30, 2004
Dollars in thousands unless otherwise noted, except per share amounts
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:
2004 2003 2002
---------- ---------- ----------
Net Income, as reported $ 72,035 $ 75,077 $ 67,682
Add: Stock-based
employee compensation
cost, net of related tax
effects, included in
reported net income 0 149 261
Deduct: Stock-based
employee compensation
cost, net of related tax
effects, determined under
the fair value method for
all awards (4,124) (4,162) (2,642)
---------- ---------- ----------
Net Income, Pro forma $ 67,911 $ 71,064 $ 65,301
========== ========== ==========
Earnings Per Share
- Basic
As reported $ 2.07 $ 2.13 $ 1.94
Pro forma $ 1.95 $ 2.02 $ 1.87
Earnings Per Share
- Diluted
As reported $ 2.03 $ 2.10 $ 1.91
Pro forma $ 1.91 $ 1.99 $ 1.85
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 $7.88, $10.16 and $6.21 in 2004, 2003 and 2002, 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:
2004 2003 2002
---- ---- ----
Dividend yield 1.85% 1.72% 1.79%
Expected volatility 40.29% 41.25% 40.47%
Risk-free interest rate 1.73% 3.96% 4.85%
Expected life (in years) 3.8 4.1 4.8
RECLASSIFICATIONS: Certain 2003 and 2002 amounts have been reclassified to
conform to the 2004 classification.
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 30, 2004, $28,333 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 30, 2004, $34,620 was outstanding under these
arrangements, and unused bank lines of credit available were $35,380. During
2004 and 2003, respectively, the maximum amounts outstanding under these
unsecured lines of credit were $45,540 and $34,415, and the average amounts
outstanding were $36,826 and $19,543 with weighted-average interest rates of
1.70% and 2.17%. All interest paid on these arrangements is at floating rates.
Interest costs of $1,474; $1,335; and $1,536 incurred in 2004, 2003 and
2002, respectively, were capitalized in connection with the company's
construction activities.
PAGE 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 30, 2004
Dollars in thousands unless otherwise noted, except per share amounts
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 operating loss of $39 in 2002 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.
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 30, 2004, and
April 25, 2003, were as follows:
April 30, 2004 April 25, 2003
-------------- --------------
Deferred tax assets:
Loss on impaired assets $ 7,546 $ 7,546
Self-insurance 6,453 7,119
Vacation pay 1,381 1,303
Stock compensation plans 7,385 5,463
Accrued bonus 440 445
Inventory and other 595 260
------- -------
Total deferred tax assets 23,800 22,136
Deferred tax liabilities:
Accelerated depreciation/asset disposals 52,992 43,494
Other 1,379 1,742
------- -------
Total deferred tax liabilities 54,371 45,236
------- -------
Net deferred tax liabilities $30,571 $23,100
======= =======
Significant components of the provisions for income taxes are as follows:
2004 2003 2002
------- ------- -------
Current:
Federal $29,590 $25,080 $23,188
State 2,894 2,680 2,237
------- ------- -------
Total current 32,484 27,760 25,425
Deferred, primarily federal 7,471 12,666 7,729
------- ------- -------
Total tax provisions $39,955 $40,426 $33,154
======= ======= =======
The company's provisions for income taxes differ from the amounts computed by
applying the federal statutory rate due to the following:
2004 2003 2002
-------- -------- --------
Tax at statutory rate $ 39,196 $ 40,246 $ 35,292
State income tax (net) 1,881 1,743 1,585
Nontaxable gain on divestiture 0 0 (1,167)
Other (1,122) (1,743) (2,556)
-------- -------- --------
Provisions for income taxes $ 39,955 $ 40,426 $ 33,154
======== ======== ========
Taxes paid during 2004, 2003 and 2002 were $25,901; $22,383; and $24,886,
respectively.
PAGE 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 30, 2004
Dollars in thousands unless otherwise noted, except per share amounts
The company's effective tax rate is based on expected income, statutory
tax rates and tax planning opportunities available to it in the various
jurisdictions in which it operates. Significant judgement is required in
determining the company's effective tax rate and in evaluating its tax
positions. The company establishes reserves when, despite its belief that its
tax return positions are fully supportable, it believes that certain positions
are likely to be challenged and that it may not succeed. The company adjusts
these reserves in light of changing facts and circumstances, such as the
progress of a tax audit. The company's effective tax rate includes the impact of
reserve provisions and changes to reserves that it considers appropriate, as
well as related interest. This rate is then applied to its quarterly operating
results.
A number of years may elapse before a particular matter, for which the
company has established a reserve, is audited and finally resolved. The number
of years with open tax audits varies depending on the tax jurisdiction. While it
is often difficult to predict the final outcome or the timing of resolution of
any particular tax matter, the company believes that its reserves reflect the
probable outcome of known tax contingencies. Unfavorable settlement of any
particular issue would require use of the company's cash. Favorable resolution
would be recognized as a reduction to its effective tax rate in the year of
resolution.
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.) nonqualified 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 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
--------- -------------------
Granted 766,893 27.84 to 27.84
Exercised (795,305) 6.78 to 31.16
Canceled or expired (43,963) 6.56 to 31.16
--------- -------------------
Outstanding, April 30, 2004 2,713,006 $ 6.56 to $ 31.16
--------- -------------------
PAGE 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 30, 2004
Dollars in thousands unless otherwise noted, except per share amounts
In addition to the outstanding options, 1,663,077 stock option shares were
available for grant at April 30, 2004. The following table summarizes
information regarding stock options outstanding at April 30, 2004:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices at 4/30/04 Contractual Life Price at 4/30/04 Price
- ------------------------ ----------- ------------------- ------------- ----------- -------------------
$ 6.56 to $13.99 256,944 10.1 $ 9.21 118,323 $ 9.32
14.00 to 14.49 168,377 5.3 14.44 147,557 14.44
14.50 to 16.99 67,312 5.9 15.23 53,102 15.31
17.00 to 18.99 500,248 6.6 17.46 239,563 17.46
19.00 to 26.99 298,587 4.9 19.81 298,587 19.81
27.00 to 31.16 1,421,538 8.3 29.42 255,904 30.93
---------------- --------- ---- ------ --------- ------
$ 6.56 to $31.16 2,713,006 7.5 $22.96 1,113,036 $19.82
---------------- --------- ---- ------ --------- ------
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 2004 and 2003, 71,926 and 83,949
shares, respectively were awarded as part of the LTIP. Compensation expense
attributable to the plan was $681 in 2004, $1,259 in 2003 and $1,195 in 2002.
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 2004, 2003 and 2002 were
$3,974; $3,833; and $4,270, 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 $379; $2,398; and $769 in 2004, 2003 and 2002,
respectively.
Note G - Commitments and Contingencies
At April 30, 2004, the company had contractual commitments approximating
$40,825 for restaurant construction, plant equipment additions and purchases of
land and inventory. At April 30, 2004, the company also had commitments for
future minimum payments on operating leases of approximately $2.3 to $2.9
million per year for each of the next five years. The company had 69 and 61
leased restaurant locations in 2004 and 2003, respectively.
The company is self-insured for most casualty losses and employee health
care claims up to certain stop-loss limits. The company has accounted for its
liabilities for casualty losses, including both reported and incurred but not
reported claims, based on information provided by independent actuaries. The
company has accounted for its employee health care claims liability through a
review of incurred and paid claims history.
Management believes that it has recorded reserves for casualty losses and
employee health care claims at a level that has substantially mitigated the
potential negative impact of adverse developments and/or volatility. Management
believes that its calculation of casualty losses and employee health care claims
liabilities would not change materially under different conditions
PAGE 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 30, 2004
Dollars in thousands unless otherwise noted, except per share amounts
and/or different methods. However, due to the inherent volatility of actuarially
determined casualty losses and employee health care claims, it is reasonably
possible that the company could experience changes in estimated losses, which
could be material to both quarterly and annual net income.
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
2004 2003 2004 2003 2004 2003 2004 2003
--------- --------- --------- --------- --------- --------- --------- ---------
Net sales $ 295,472 $ 277,021 $ 297,260 $ 277,601 $ 291,397 $ 271,252 $ 313,868 $ 265,463
Gross profit 30,428 32,256 28,196 31,358 24,457 26,080 30,220 27,439
Net income 19,246 20,624 17,900 20,078 15,591 16,733 19,298 17,642
Earnings per share:
Basic $ 0.56 $ 0.58 $ 0.52 $ 0.57 $ 0.45 $ 0.48 $ 0.55 $ 0.51
Diluted 0.55 0.57 0.51 0.56 0.44 0.47 $ 0.54 0.50
Common stock
bid prices:
High $ 29.07 $ 33.30 $ 29.60 $ 28.33 $ 33.25 $ 25.90 $ 34.37 $ 26.29
Low 23.00 23.09 24.79 21.65 28.07 21.75 30.44 21.18
Cash dividends declared $ 0.12 $ 0.11 $ 0.12 $ 0.11 $ 0.12 $ 0.11 $ 0.12 $ 0.11
- - Gross profit represents operating income.
- - Each fiscal quarter is comprised of a 13-week period, with the exception
of a 14-week period in the fourth quarter in fiscal year 2004.
- - 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 16,2004,
was 34,993.
PAGE 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 30, 2004
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:
2004 2003 2002
----------- ----------- -----------
Sales
Restaurant operations $ 984,896 $ 902,345 $ 870,257
Food products 248,373 219,820 222,403
----------- ----------- -----------
1,233,269 1,122,165 1,092,660
Intersegment sales of food products (35,272) (30,828) (30,814)
----------- ----------- -----------
Total $ 1,197,997 $ 1,091,337 $ 1,061,846
=========== =========== ===========
Operating Income
Restaurant operations $ 95,878 $ 92,896 $ 85,009
Food products 17,423 24,237 18,854
----------- ----------- -----------
Total $ 113,301 $ 117,133 $ 103,863
=========== =========== ===========
Depreciation and Amortization Expense
Restaurant operations $ 42,516 $ 37,482 $ 35,060
Food products 7,590 6,668 6,914
----------- ----------- -----------
Total $ 50,106 $ 44,150 $ 41,974
=========== =========== ===========
Capital Expenditures
Restaurant operations $ 121,366 $ 97,113 $ 88,267
Food products 19,671 9,155 8,739
----------- ----------- -----------
Total $ 141,037 $ 106,268 $ 97,006
=========== =========== ===========
Identifiable Assets
Restaurant operations $ 749,599 $ 680,843 $ 626,318
Food products 76,933 65,472 60,713
----------- ----------- -----------
826,532 746,315 687,031
General corporate assets 41,701 38,276 34,942
----------- ----------- -----------
Total $ 868,233 $ 784,591 $ 721,973
=========== =========== ===========
Note J - Subsequent Event
On June 11, 2004, the company signed a definitive agreement to acquire SWH
Corporation (d/b/a Mimi's Cafe) for $182 million in cash, which includes the
assumption of approximately $78.7 million of outstanding indebtedness. Mimi's
Cafe is a casual dining chain based in Tustin, Calif., that operates 81
company-owned Mimi's Cafe restaurants in 10 states. The acquisition, which is
contingent upon customary regulatory approvals, is expected to be completed in
July 2004 and will be financed initially through a committed credit facility,
which is expected to be refinanced through a private placement of approximately
$190 million in debt securities.
PAGE 31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 30, 2004, and April 25, 2003, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended April 30, 2004. 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 standards of the Public Company
Accounting Oversight Board (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 30, 2004, and April 25, 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 30, 2004, in conformity with U.S.
generally accepted accounting principles.
/s/ Ernst & Young LLP
Columbus, Ohio
June 7, 2004
PAGE 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
Results of Operations
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.
References herein to 2005, 2004, 2003 and 2002 refer to fiscal years.
Fiscal 2004 is a 53-week year, whereas all other years presented are 52-week
years.
General Overview
The company owns and operates 558 full-service, family-casual restaurants in 22
states as Bob Evans Restaurants and Owens Restaurants. Revenue is recognized in
the restaurant segment at the point of sale. The company also produces fresh and
fully cooked pork products, as well as distributes other complementary food
products 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.
Revenue in the food products segment is generally recognized when products are
delivered to the retailer.
The following table reflects data for the company's fiscal year ended
April 30, 2004, compared to the preceding two fiscal years. The consolidated
information is derived from the accompanying consolidated statements of income.
Also included is data for the company's two industry segments - restaurant
operations and food products. The ratios presented reflect the underlying dollar
values expressed as a percentage of the applicable net sales amount.
CONSOLIDATED RESULTS RESTAURANT SEGMENT FOOD PRODUCTS SEGMENT
------------------------------------- ------------------------------ ------------------------------
(Dollars in thousands) 2004 2003 2002 2004 2003 2002 2004 2003 2002
- ---------------------- ----------- ---------- ---------- -------- -------- -------- -------- -------- --------
Net sales $ 1,197,997 $1,091,337 $1,061,846 $984,896 $902,345 $870,257 $213,101 $188,992 $191,589
Operating income $ 113,301 $ 117,133 $ 103,863 $ 95,878 $ 92,896 $ 85,009 $ 17,423 $ 24,237 $ 18,854
Cost of sales 28.4% 26.3% 28.1% 24.4% 23.6% 24.6% 47.3% 39.0% 44.1%
Operating wages 34.9% 34.8% 34.2% 39.6% 39.2% 38.8% 13.4% 14.0% 13.0%
Other operating 14.6% 15.1% 14.9% 16.6% 17.1% 17.0% 5.3% 5.5% 5.0%
S.G.&A.* 8.4% 9.0% 9.1% 5.4% 5.6% 5.8% 22.2% 25.2% 24.5%
Depr. & amort. 4.2% 4.1% 3.9% 4.3% 4.2% 4.0% 3.6% 3.5% 3.6%
=========== ========== ========== ======== ======== ======== ======== ======== ========
Operating income* 9.5% 10.7% 9.8% 9.7% 10.3% 9.8% 8.2% 12.8% 9.8%
*Fiscal 2002 includes one-time consolidated net gain of $1,842 ($3,334 gain in
food products segment and $1,492 loss in restaurant segment).
Restaurant Segment Overview
The ongoing economic and industry-wide factors relevant to the restaurant
segment include: competition, same-store sales (defined in the sales section
below), labor and fringe benefit expenses, commodity prices, energy prices,
restaurant openings and closings, governmental initiatives, food safety and
other risks such as the economy, weather and consumer acceptance. In 2004, the
three factors that had the greatest impact on restaurant segment profitability
were:
1.) lower same-store sales than management expected;
2.) higher commodity prices for the food items purchased; and
3.) increased costs associated with opening new restaurants.
Same-store sales in 2004, which management had projected to increase
approximately 2%, increased only 1.2% (excluding the extra week in 2004)
compared to 2003. Management believes that a lagging economic recovery in the
Midwest for much of 2004 and continued competition within the industry
negatively impacted same-store sales.
Higher commodity prices - particularly for beef, chicken, pork, eggs and
oils - put negative pressure on restaurant cost of sales in 2004. Had restaurant
cost of sales in 2004 matched the rate in the corresponding period last year
(24.4% vs. 23.6%), and all other factors remained constant, restaurant operating
income would have been nearly $7.9 million higher in 2004.
An increase of new restaurant openings in addition to a higher pre-opening
expense average per store resulted in a $3.5 million increase in pre-opening
expenses in
PAGE 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
2004 compared to 2003. This increase is reflected in both operating wages and
other operating expenses with a corresponding decrease to restaurant operating
income.
All three of the factors are discussed further in the detailed sections
that follow. However, the end result is that restaurant operating income
increased $3.0 million, or 3.2%, in 2004 compared to 2003. Furthermore, the
segment's operating income margin fell to 9.7% from 10.3% during the same
periods. Excluding the impact of the extra week in 2004, management estimates
that restaurant operating income would have decreased $1.4 million, or 1.6%, in
2004 versus 2003.
Food Products Segment Overview
The ongoing economic and industry-wide factors relevant to the food
products segment include: hog costs, governmental initiatives, food safety and
other risks such as the economy, weather and consumer acceptance. In 2004, the
two factors that had the greatest impact on food products segment profitability
were:
1.) higher-than-expected sales growth; and
2.) changes in hog costs.
Food products segment net sales increased 12.8% in 2004 compared to 2003,
although management had projected an increase of approximately 7%. Excluding the
impact of the extra week in 2004, food products net sales increased 10.7% in
2004 compared to 2003. The higher net sales were driven by a combination of a
7.6% increase in pounds sold of comparable products (principally sausage and
refrigerated potatoes) and less discounting (via promotional spending). The
comparable pounds sold calculation excludes the extra week in 2004. Promotional
spending represents sales incentives in the form of "off-invoice" deductions,
cooperative advertising programs and coupons, which are all classified as a
reduction of net sales. The decrease in promotional spending, which did not
significantly lessen sales volume, resulted in a higher net sales price and
better profit margins for the products sold.
Hog costs represent the majority of food products segment cost of sales,
and the volatile nature of hog costs greatly impacts the profitability of the
segment. Compared to a year ago, hog costs increased 43.6% in 2004. This
increase caused cost of sales in the food products segment to increase from
39.0% to 47.3% of sales in 2003 versus 2004.
The significant sales increase in the food products segment provided
improved leverage of most expenses. However, the higher hog costs resulted in a
lower profit for the segment. The segment's operating income decreased $6.8
million, or 28.1%, in 2004 compared to 2003. Excluding the extra week, food
products operating income decreased $7.4 million, or 30.4%.
Sales
Consolidated net sales increased $106.7 million, or 9.8%, in 2004 compared
to 2003. The 2004 increase was the net result of an $82.6 million increase in
restaurant segment sales and a $24.1 million increase in food products segment
sales. Excluding the impact of the extra week in 2004, consolidated net sales
increased $84.0 million, or 7.7%, in 2004 versus 2003. Excluding HSI,
consolidated net sales increased $34.5 million, or 3.3%, in 2003 compared to
2002.
Restaurant segment sales accounted for 82.2%, 82.7% and 82.0% of total
sales in 2004, 2003 and 2002, respectively. The $82.6 million additional
restaurant sales in 2004 represented a 9.1% increase over 2003 sales, which were
3.7% higher than 2002 sales. Excluding the impact of the extra week in 2004,
restaurant sales increased 7.1% in 2004 over 2003. The increase in restaurant
sales in 2004 was the result of more restaurants in operation and a 1.2%
increase in same-store sales (excluding the impact of the extra week in 2004).
The same-store sales increase included an average menu price increase of 2.3% in
2004. Same-store sales decreased 1.4% in 2003 and increased 3.2% in 2002
(inclusive of average menu price increases of 2.8% for both 2003 and 2002).
Restaurant same-store sales computations for a given year are based on net sales
of stores that are open for at least two years prior to thestart of that year.
Sales of stores to be rebuilt are excluded for all periods in the computation
when construction commences on the replacement building. Sales of closed stores
are excluded for all periods in the computation.
PAGE 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
Additional restaurant sales growth in 2004 was provided by an increase in
the number of operating locations: 558 restaurants in operation at the end of
2004 versus 523 at the end of 2003. The 2004 openings included further expansion
into existing markets for the company, particularly in Ohio, but also with an
emphasis on Florida where eight restaurants were opened. During 2004, two
under-performing restaurants were closed. The following chart summarizes
restaurant openings and closings during the last two years:
Beginning Opened Closed Ending
--------- ------ ------ ------
Fiscal Year 2004
First Quarter 523 3 2 524
Second Quarter 524 11 0 535
Third Quarter 535 12 0 547
Fourth Quarter 547 11 0 558
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
An emphasis on dessert and carryout sales also contributed to the
restaurant sales increase in 2004. Carryout sales represented 6.3% of restaurant
segment sales in 2004 compared to 5.8% and 5.4% in 2003 and 2002, respectively.
Retail merchandise sales comprised 1.7% of both 2004 and 2003 restaurant segment
sales.
Various promotional programs were employed throughout the last few years,
including those involving gift certificates, children's programs and seasonal
menu offerings. The current-year strategy included advertising the variety of
menu offerings from the company that meet the various diet requirements of
today's consumer. The company has also updated the appearance of many of its
restaurants, of which nine 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.
Food products segment sales accounted for 17.8%, 17.3% and 18.0% of total
sales in 2004, 2003 and 2002, respectively. Food products segment sales
increased $24.1 million, or 12.8%, in 2004 versus 2003. Excluding the impact of
the extra week in 2004, food products segment sales increased $20.3 million, or
10.7%, in 2004 versus 2003. The 2004 sales increase was reflective of a 7.6%
increase in the volume of sausage products sold (calculated using the same
products in both periods and excluding both newer products and the extra week in
2004). The increase in volume was reflective of the strength in the company's
core sausage products, refrigerated potato products and the reformulated Bob
Evans Express fully cooked sausage links. A $2.0 million decrease in promotional
spending, which is netted against sales, also contributed to the increase in
sales.
Food products segment sales decreased $2.6 million, or 1.4%, in 2003
compared to 2002. Excluding HSI, food products segment sales increased $2.4
million, or 1.3% in 2003 compared to 2002. This sales increase was reflective of
an increase in the volume of sausage products sold, which was partially offset
by lower net prices charged by the company for its sausage products. The company
experienced a 4.7% increase in comparable pounds sold (calculated using the same
products in both periods and excluding newer products) in 2003 versus 2002.
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).
Cost of Sales
Consolidated cost of sales (cost of materials) was 28.4%, 26.3% and 28.1%
of sales in 2004, 2003 and 2002, respectively.
In the restaurant segment, cost of sales (predominantly food cost) was
24.4%, 23.6% and 24.6% of sales in 2004, 2003 and 2002, respectively. The
company attributed the significant increase in 2004 to cost increases in a
number of the commodity food items purchased, such as beef, oils, eggs, chicken,
and pork. Additional cost pressures were due to a shift in the product mix as
the company featured its Dinner Sensations, which carry an above-average food
cost.
Food products segment cost of sales was 47.3%, 39.0% and 44.1% of sales in
2004, 2003 and 2002, respectively. These results were reflective of changing hog
costs, which averaged $37.99, $26.46 and $37.84 per hundredweight in 2004, 2003
and 2002, respectively. The 2004 average represented a 43.6% increase compared
to 2003, and the 2003 average represented a 30.1% decrease compared to 2002. The
increase in cost of sales also reflects the additional sales of purchased
products (i.e. mashed potatoes, frozen entrees, etc.), which tend to have higher
cost of sales when compared to the manufactured products.
PAGE 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses ("operating
wages") were 34.9%, 34.8% and 34.2% of sales in 2004, 2003 and 2002,
respectively. The operating wage ratio increased in the restaurant segment but
decreased in the food products segment.
In the restaurant segment, operating wages were 39.6%, 39.2% and 38.8% of
sales in 2004, 2003 and 2002, respectively. The increase in 2004 was
attributable mainly to higher hourly and management wages resulting from
increased training costs associated with new store openings. Also contributing
to the increase was the fact that wages were not as well leveraged due to
lower-than-expected same-store sales. The increase in 2003 was attributable
mainly to higher management wages.
In the food products segment, operating wages were 13.4%, 14.0% and 13.0%
of sales in 2004, 2003 and 2002, respectively. The improvement in the operating
wages ratio in 2004 was primarily due to significantly increased sales, which
resulted in more leverage of wage expense in 2004. The 2003 increase was due
mostly 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.
Other Operating Expenses
More than 93% of other operating expenses ("operating expenses") occurred
in the restaurant segment in 2004; the most significant components of which were
advertising, utilities, restaurant supplies, repair and maintenance, taxes
(other than federal and state income taxes) and credit card processing fees.
Consolidated operating expenses were 14.6%, 15.1% and 14.9% of sales in 2004,
2003 and 2002, respectively. Restaurant segment operating expenses were impacted
in 2004 versus 2003 by decreases in utility expense (3.3% of sales versus 3.5%)
and advertising expense (3.5% of sales versus 3.7%) partially offset by higher
costs associated with new restaurant openings.
Food products segment operating expenses as a percent of sales improved
from 5.5% in 2003 to 5.3% in 2004 due to significantly increased sales, which
resulted in a better leverage of costs. The operating expenses increase in 2003
was the result of higher repair and maintenance and insurance expense, as well
as the addition of a new distribution center in 2003.
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 8.4%, 9.0% and
9.3% of sales in 2004, 2003 and 2002, respectively. Excluding HSI, S,G & A
expenses were 9.2% of sales in 2002. The decrease as a percentage of sales in
2004 was due mostly to significantly increased sales in the food products
segment, which resulted in improved leverage of S, G & A expenses, as well as
less food products segment advertising expenses. The decrease as a percentage of
sales in 2003 was also due to the improved leverage of S, G & A expenses and
less food products segment advertising expenses.
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 2004 or
2003.
Taxes
Excluding the impact of the HSI divestiture on the 2002 effective tax
rate, the effective federal and state income tax rates were 35.7%, 35.0% and
34.0% in 2004, 2003 and 2002, 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 $4.0
million at April 30, 2004. Dividends paid represented 22.7% of net income in
2004 and 20.2% of net income in 2003.
PAGE 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
Bank lines of credit were used for liquidity needs, capital expansion and
purchases of treasury shares during 2004 and 2003. At April 30, 2004, $34.6
million was outstanding under such arrangements, and unused bank lines of credit
available were $35.4 million. The unsecured revolving lines of credit are
renewed annually.
In 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 30, 2004, $28.3 million was
outstanding on this note.
Payments of the company's contractual obligations under outstanding
indebtedness as of April 30, 2004, are as follows:
Payments Due By Period (in thousands)
- ------------------------------------------------------------
Contractual 1 Year 2-3 4-5 After 5
Obligations Total and less Years Years Years
- -------------- ------- -------- ------- ------- -------
Operating
leases $37,412 $ 2,911 $ 5,316 $ 4,862 $24,323
Long-term
debt $28,333 $ 4,000 $ 8,000 $16,333 $ -
Purchase
obligations $40,825 $40,825 $ - $ - $ -
The company believes that funds needed for capital expenditures, working
capital and treasury share purchases during 2005 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 $2.3 to $2.9
million annually for the next five years. At the end of 2004, the company also
had $9.7 million in standby letters of credit for self-insurance plans.
At April 30, 2004, the company had contractual commitments for restaurant
construction, plant equipment additions and the purchases of land and inventory
of approximately $40.8 million. Total capital expenditures for 2005 are expected
to approximate $124.0 million and depreciation and amortization expenses are
expected to approximate $57.5 million. The company plans to open approximately
40 restaurants in fiscal 2005, as well as upgrade various property, plant and
equipment in both segments.
The amounts of other contingent commercial commitments by expiration
period as of April 30, 2004, are as follows:
Amount of Commitment Expiration
Per Period (in thousands)
- ----------------------------------------------------------
Other Total
Commercial Amounts 1 Year 2-3 4-5 After 5
Commitments Committed and less Years Years Years
- ------------- --------- -------- ----- ----- -------
Lines of
credit $34,620 $34,620 $ - $ - $ -
Standby
letters of
credit 9,675 9,675 $ - $ - $ -
- ----------------------------------------------------------
Total
commercial
commitments $44,295 $44,295 $ - $ - $ -
On June 11, 2004, the company signed a definitive agreement to acquire SWH
Corporation (d/b/a Mimi's Cafe) for $182 million in cash, which includes the
assumption of approximately $78.7 million of outstanding indebtedness. Mimi's
Cafe is a casual dining chain based in Tustin, Calif., that operates 81
company-owned Mimi's Cafe restaurants in 10 states. The acquisition, which is
contingent upon customary regulatory approvals, is expected to be completed in
July 2004 and will be financed initially through a committed credit facility,
which is expected to be refinanced through a private placement of approximately
$190 million in debt securities.
Critical Accounting Policies
The company's accounting policies are more fully described in Note A of
the consolidated financial statements. As discussed in Note A, 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 the following
discussion addresses the company's most significant accounting policies, and the
following significant accounting policies may involve a higher degree of
judgment and complexity.
The company is self-insured for most casualty losses and employee health
care claims up to certain stop-loss limits. The company records its best
estimate of the remaining cost to settle incurred self-insured casualty losses
and employee health care claims. The recorded liability includes estimated
reserves for both reported
PAGE 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
claims and incurred but not reported claims. Casualty loss estimates are based
on the results of independent actuarial studies and consider historical claim
frequency and severity, as well as changes in factors such as business
environment, benefit levels, medical costs and the regulatory environment that
could impact overall self-insurance costs. The employee health care claims
reserve estimate is based on management's review of historical claims paid and
the historical time lag between the company's incurred claims and when the
claims are paid. The company reviews the time lag periodically throughout the
fiscal year. Additionally, a risk margin to cover unforeseen events that may
occur over the several years it takes for claims to settle is included in
reserves which increases management's confidence level that the recorded reserve
is adequate. 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. However, management believes that its calculation of insurance
liabilities would not change materially under different conditions and/or
different methods. Historically, the company has been adequately reserved for
self-insured losses and the estimated reserves have proven to be sufficient for
actual claims settled. See Note G for a further discussion of the company's
insurance programs.
Property, plant and equipment comprise 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). 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 2004, 2003, and 2002 would have been
lower by $4.1 million, $4.0 million and $2.4 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.
The company estimates certain components of its provision for income
taxes. These estimates include, among other items, effective rates for state and
local income taxes, allowable tax credits for items such as taxes paid on
reported tip income, estimates related to depreciation and amortization expense
allowable for tax purposes and the tax deductibility of certain other items. The
estimates are based on the best available information at the time that the
company prepares the tax provision. The company generally files its annual
income tax returns several months after its fiscal yearend. Income tax returns
are subject to audit by federal, state and local governments, generally years
after the returns are filed. These returns could be subject to material
adjustments or differing interpretations of the tax laws.
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.
PAGE 38
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: 1.2%, (1.4)% and 3.2%
in 2004, 2003 and 2002, 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 2004, two restaurants were closed due to poor performance. At the
beginning of 2005, the company closed one location due to poor performance.
Depending on profitability, as well as changes in access, the company may close
additional restaurants in 2005.
Competition for qualified labor eased in 2003 and 2004 due to overall
economic conditions. 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 costs increased significantly in 2004, which had an impact on
profitability. Food cost comparisons were favorable in 2003 versus 2002.
Management expects commodity prices to continue to remain relatively high in
2005.
Energy costs were moderate in 2004. Management expects slightly higher
prices in 2005. 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 2005 are to add
approximately 40 new restaurants in comparison to 37 in 2004 and 29 in 2003.
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 $37.99, $26.46 and $37.84 per hundredweight in 2004,
2003 and 2002, respectively. Trends at the beginning of 2005 lead management to
believe that hog costs will be higher in 2005, and operating margins may
decrease as a result.
Another uncertainty is the consumer acceptance of new items. Some of the
planned introductions in 2005 for the food products segment include two new
Brunch Bowls, three main dish entrees, refrigerated chili and a new Snackwich.
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
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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 2005 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"; accurately assessing the value, future growth
potential, strengths, weaknesses, contingent and other liabilities and potential
profitability of Mimi's Cafe; and unanticipated changes in business and economic
conditions affecting Mimi's Cafe, as well as other assumptions, risks,
uncertainties and factors previously disclosed in this report, the company's
securities filings and press releases.
PAGE 39