.
.
.
EXHIBIT 13
CONSOLIDATED FINANCIAL REVIEW
Bob Evans Farms, Inc. and Subsidiaries
Dollars and shares in thousands, except per share amounts
2005(a) 2004(b) 2003 2002(c) 2001
Operating Results
Net sales $ 1,460,195 $ 1,197,997 $ 1,091,337 $ 1,061,846 $ 1,007,508
Operating income 66,906 113,301 117,133 103,863 83,466
Income before income taxes 57,672 111,990 115,503 100,836 78,714
Income taxes 20,704 39,955 40,426 33,154 27,943
Net income 36,968 72,035 75,077 67,682 50,771
Earnings per share of common stock:
Basic $ 1.05 $ 2.07 $ 2.13 $ 1.94 $ 1.45
Diluted $ 1.04 $ 2.03 $ 2.10 $ 1.91 $ 1.44
Financial Position
Working capital $ (131,389) $ (98,375) $ (93,607) $ (85,794) $ (114,449)
Property,plant and equipment - net 956,946 783,397 704,442 648,179 603,063
Total assets 1,183,986 868,233 784,591 721,973 678,715
Debt:
Short-term 47,000 38,620 36,255 31,750 69,965
Long-term 210,333 24,333 28,333 32,333 36,000
Stockholders' equity 652,831 630,163 560,919 521,365 457,095
Supplemental Information
for the Year
Capital expenditures $ 139,587 $ 141,037 $ 106,268 $ 97,006 $ 99,807
Depreciation and amortization $ 66,835 $ 50,106 $ 44,150 $ 41,974 $ 39,792
Weighted-average shares outstanding:
Basic 35,315 34,878 35,203 34,868 35,005
Diluted 35,644 35,513 35,813 35,490 35,284
Cash dividends declared per share $ 0.48 $ 0.48 $ 0.44 $ 0.39 $ 0.36
Common stock market closing prices:
High $ 31.28 $ 34.08 $ 32.87 $ 31.18 $ 21.38
Low $ 20.31 $ 23.26 $ 21.22 $ 15.69 $ 12.56
Supplemental Information
at Year-End
Employees 52,558 42,035 40,446 39,990 38,542
Stockholders 33,871 35,044 36,977 36,595 39,466
Market price per share at closing $ 20.40 $ 30.73 $ 24.91 $ 29.59 $ 18.85
Book value per share $ 18.44 $ 17.88 $ 16.26 $ 14.77 $ 13.13
(a) On July 7, 2004, the company acquired SWH Corporation (d/b/a Mimi's Cafe),
whose results of operations are included from the date of acquisition.
(b) Fiscal 2004 was comprised of 53 weeks of activity versus 52 weeks of
activity in each of the other periods presented.
(c) 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).
13
CONSOLIDATED BALANCE SHEETS
Bob Evans Farms, Inc. and Subsidiaries
Dollars in thousands
APRIL 29, 2005 APRIL 30, 2004
-------------- --------------
Assets
Current Assets
Cash and equivalents $ 5,267 $ 3,986
Accounts receivable 14,707 13,413
Inventories 24,416 19,540
Deferred income taxes 10,623 8,869
Prepaid expenses 2,226 1,664
-------------- --------------
Total Current Assets 57,239 47,472
Property, Plant and Equipment
Land 252,843 247,695
Buildings and improvements 746,597 615,347
Machinery and equipment 358,557 276,373
Construction in progress 13,898 13,046
-------------- --------------
1,371,895 1,152,461
Less accumulated depreciation 414,949 369,064
-------------- --------------
Net Property, Plant and Equipment 956,946 783,397
Other Assets
Deposits and other 2,698 3,075
Long-term investments 19,278 17,791
Deferred income taxes 33,044 14,931
Goodwill 57,364 1,567
Other intangible assets 57,417 0
-------------- --------------
Total Other Assets 169,801 37,364
-------------- --------------
$ 1,183,986 $ 868,233
-------------- --------------
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit $ 43,000 $ 34,620
Current maturities of long-term debt 4,000 4,000
Accounts payable 24,422 12,390
Dividends payable 4,249 4,229
Federal and state income taxes 21,763 11,375
Accrued wages and related liabilities 23,767 20,887
Self insurance 16,340 17,441
Other accrued expenses 51,087 40,905
-------------- --------------
Total Current Liabilities 188,628 145,847
Long-Term Liabilities
Deferred compensation 17,046 13,519
Deferred income taxes 99,126 54,371
Deferred rent 16,022 0
Long-term debt 210,333 24,333
-------------- --------------
Total Long-Term Liabilities 342,527 92,223
Stockholders' Equity
Common stock,$.01 par value; authorized 100,000,000 shares; issued
42,638,118 shares in 2005 and 2004 426 426
Preferred stock,$500 par value; authorized 1,200 shares; issued 120 shares
in 2005 and 2004 60 60
Capital in excess of par value 149,593 149,967
Retained earnings 633,372 613,371
Treasury stock, 7,234,365 shares in 2005 and 7,397,219 shares
in 2004, at cost (130,620) (133,661)
-------------- --------------
Total Stockholders' Equity 652,831 630,163
-------------- --------------
$ 1,183,986 $ 868,233
-------------- --------------
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 29, 2005;April 30, 2004; and April 25, 2003 2005 2004 2003
- ------------------------------------------------------------- ------------ ------------ ------------
Net Sales $ 1,460,195 $ 1,197,997 $ 1,091,337
Cost of sales 443,226 340,840 286,977
Operating wage and fringe benefit expenses 530,995 418,029 379,875
Other operating expenses 236,811 174,932 164,916
Selling, general and administrative expenses 115,422 100,789 98,286
Depreciation and amortization expense 66,835 50,106 44,150
------------ ------------ ------------
Operating Income 66,906 113,301 117,133
Net interest expense 9,234 1,311 1,630
------------ ------------ ------------
Income Before Income Taxes 57,672 111,990 115,503
Provisions For Income Taxes 20,704 39,955 40,426
------------ ------------ ------------
Net Income $ 36,968 $ 72,035 $ 75,077
------------ ------------ ------------
Earnings Per Share - Basic $ 1.05 $ 2.07 $ 2.13
------------ ------------ ------------
Earnings Per Share - Diluted $ 1.04 $ 2.03 $ 2.10
------------ ------------ ------------
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 4/26/02 $ 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
------ --------- ------------ ---------- ---------- ----------
Net income 36,968 36,968
Dividends declared (16,967) (16,967)
Treasury stock reissued under employee plans (718) 3,041 2,323
Tax reductions - employee plans 344 344
------ --------- ------------ ---------- ---------- ----------
Stockholders' Equity at 4/29/05 $ 426 $ 60 $ 149,593 $ 633,372 $ (130,620) $ 652,831
------ --------- ------------ ---------- ---------- ----------
See Notes to Consolidated Financial Statements
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Bob Evans Farms, Inc. and Subsidiaries
Dollars in thousands
Years ended April 29, 2005; April 30, 2004; and April 25, 2003 2005 2004 2003
- -------------------------------------------------------------- ------------ ------------ ------------
Operating Activities
Net income $ 36,968 $ 72,035 $ 75,077
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 66,835 50,106 44,150
Deferred compensation 1,920 4,965 2,372
Deferred income taxes 3,006 7,471 12,666
Loss on disposal of assets 3,167 1,269 1,349
(Gain) loss on long-term investments (247) (1,871) 1,738
Compensation expense attributable to stock plans 295 681 1,488
Deferred rent 5,468 0 0
Cash provided by (used for) current assets
and current liabilities:
Accounts receivable 9 (2,298) 514
Inventories (1,489) (2,668) (1,620)
Prepaid expenses 487 311 (959)
Accounts payable 3,430 2,016 (367)
Federal and state income taxes 10,732 4,427 3,235
Accrued wages and related liabilities (967) 2,053 (970)
Self insurance (1,281) (1,800) 1,519
Other accrued expenses 1,718 (138) 4,710
------------ ------------ ------------
Net cash provided by operating activities 130,051 136,559 144,902
Investing Activities
Purchase of property, plant and equipment (139,587) (141,037) (106,268)
Acquisition of business, net of cash acquired (183,168) 0 0
Purchase of long-term investments (1,674) (2,048) (4,282)
Proceeds from sale of property, plant
and equipment 14,747 9,853 4,940
Other 1,451 37 (75)
------------ ------------ ------------
Net cash used in investing activities (308,231) (133,195) (105,685)
Financing Activities
Cash dividends paid (16,947) (16,376) (15,187)
Purchase of treasury stock 0 (3,171) (30,024)
Line of credit 8,380 2,365 4,505
Proceeds from debt issuance 372,775 0 0
Principal payments on long-term debt (186,775) (4,000) (4,000)
Proceeds from issuance of treasury stock 2,028 12,738 6,621
------------ ------------ ------------
Net cash provided by (used in) financing activities 179,461 (8,444) (38,085)
------------ ------------ ------------
Increase (decrease) in cash and equivalents 1,281 (5,080) 1,132
Cash and equivalents at the beginning of the year 3,986 9,066 7,934
------------ ------------ ------------
Cash and equivalents at the end of the year $ 5,267 $ 3,986 $ 9,066
------------ ------------ ------------
See Notes to Consolidated Financial Statements
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 29, 2005
Dollars in thousands unless otherwise noted, except per share amounts
Note A - Summary of Significant
Accounting Policies
DESCRIPTION OF BUSINESS: Bob Evans Farms, Inc. (the "company") owns and operates
591 full-service, family restaurants in 21 states. Bob Evans Restaurants are
primarily located in the Midwest, mid-Atlantic and Southeast regions of the
United States, while Owens Restaurants operate in Texas. In addition, the
company owns and operates 92 Mimi's Cafe casual restaurants located in 13
states, primarily in California and other western states. The company is also a
leading producer and distributor of pork sausage and a variety of complementary
homestyle convenience food items under the Bob Evans and Owens brand names.
These food products are distributed primarily to grocery stores in the East
North Central, mid-Atlantic, Southern and Southwestern United States. The
company acquired SWH Corporation (d/b/a Mimi's Cafe)("Mimi's") in the first
quarter of fiscal 2005 (see Note G).
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 2005, 2004 and 2003 refer to fiscal years ended April 29,
2005; April 30, 2004; and April 25, 2003, respectively. Fiscal year 2004 was
comprised of 53 weeks. All other years presented were comprised of 52 weeks.
REVENUE RECOGNITION: Revenue is recognized in the restaurant segment at the
point of sale, other than revenue from the sale of gift cards and gift
certificates, which is deferred and recognized upon redemption. 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 ($19,167 in 2005
and $14,181 in 2004) and finished goods ($5,249 in 2005 and $5,359 in 2004).
PROPERTY, PLANT AND EQUIPMENT: The company states property, plant and equipment
at cost less accumulated depreciation. The straight-line depreciation method is
used for nearly all capitalized assets, although some assets purchased prior to
1995 continue to be depreciated using accelerated methods. Depreciation is
calculated 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). Improvements to leased properties are amortized over the shorter of
their useful lives or the lease terms, as defined by Statement of Financial
Accounting Standards (SFAS) No.13, Accounting for Leases.
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: Goodwill, which represents the cost in excess of fair market value of
net assets acquired, was $57,364 and $1,567 at the end of 2005 and 2004,
respectively. Beginning in 2003, the company ceased amortization of goodwill in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is
tested for impairment at the beginning of the fourth quarter each year (see Note
H).
OTHER INTANGIBLE ASSETS: Other intangible assets consist of a business trade
name and restaurant concept, and represent allocations of the purchase price of
the company's acquisition of Mimi's based on an independent valuation (see Notes
G and H). The trade name intangible asset is deemed to have an indefinite
economic life and is not amortized. It will be tested for impairment at the
beginning of the fourth quarter each year. The restaurant concept intangible is
amortized on a straight-line basis over its estimated economic life of 15 years.
FINANCIAL INSTRUMENTS: The fair values of the company's financial instruments
approximate their carrying values at April 29, 2005, and April 30, 2004. 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.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 29, 2005
Dollars in thousands unless otherwise noted, except per share amounts
PRE-OPENING EXPENSES: Expenditures related to the opening of new restaurants,
other than those for capital assets, are charged to expense when incurred.
ADVERTISING COSTS: The company expenses advertising costs as incurred.
Advertising expense was $46,690; $42,295; and $43,602 in 2005, 2004 and 2003,
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):
2005 2004 2003
------ ------ ------
Basic 35,315 34,878 35,203
Dilutive stock options 329 635 610
------ ------ ------
Diluted 35,644 35,513 35,813
====== ====== ======
Options to purchase 2,126,186; 696,387; and 653,571 shares of common stock
in 2005, 2004 and 2003, 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 29, 2005, the company had various
stock-based employee compensation plans that are described more fully in Note
D. The company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board ("APB") 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 was $0 in both 2005 and 2004 and $229 in 2003.
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:
2005 2004 2003
---------- ---------- ---------
Net Income, as reported $ 36,968 $ 72,035 $ 75,077
Add: Stock-based
employee compensation
cost, net of related tax
effects, included in
reported net income 190 438 967
Deduct: Stock-based
employee compensation
cost, net of related tax
effects, determined under
the fair value method
for all awards (5,568) (4,562) (4,980)
---------- ---------- ---------
Net Income, Pro forma $ 31,590 $ 67,911 $ 71,064
---------- ---------- ---------
Earnings Per Share
- Basic
As reported $ 1.05 $ 2.07 $ 2.13
Pro forma $ 0.89 $ 1.95 $ 2.02
Earnings Per Share
- Diluted
As reported $ 1.04 $ 2.03 $ 2.10
Pro forma $ 0.89 $ 1.91 $ 1.99
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 29, 2005
Dollars in thousands unless otherwise noted, except per share amounts
Reflected in these pro forma amounts are weighted-average fair values of
options of $7.96, $7.88 and $10.16 in 2005, 2004 and 2003, 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:
2005 2004 2003
----- ----- -----
Dividend yield 1.85% 1.85% 1.72%
Expected volatility 37.66% 40.29% 41.25%
Risk-free interest rate 3.66% 1.73% 3.96%
Expected life (in years) 4.1 3.8 4.1
LEASES: Rent expense for the company's operating leases, which generally have
escalating rentals over the term of the lease, is recorded on a straight-line
basis over the lease term, as defined in SFAS No.13. The lease term begins when
the company has the right to control the use of the leased property, which is
typically before rent payments are due under the terms of the lease. The
difference between the straight-line rent calculation and rent paid is recorded
as deferred rent in the consolidated balance sheets. Straight-line rent recorded
during the build-out period for new restaurants is capitalized as a cost of
constructing the related leasehold improvements. Straight-line rent from the
date the premises are ready for their intended use through the restaurant
opening date (generally a one-month period) is expensed. Contingent rents are
generally amounts due as a result of sales in excess of amounts stipulated in
certain restaurant leases and are included in rent expense as they accrue.
In some instances the company has received contributions from landlords
to help fund the construction of new restaurants. In accordance with SFAS No. 13
and Financial Accounting Standards Board ("FASB") Technical Bulletin No. 88-1,
Issues Relating to Accounting for Leases, the company has accounted for such
landlord contributions as lease incentive obligations that are amortized as a
reduction to lease expense over the applicable lease term. The lease incentive
obligations are included in the consolidated balance sheets as deferred rent.
NEW ACCOUNTING PRONOUNCEMENTS: In December 2002, the FASB issued SFAS No. 123
(R), Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock
Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS No. 123 (R) requires compensation costs related to
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based
on the fair value on the grant date of the equity or liability instruments
issued. Compensation cost will be recognized over the period that an employee
provides service for that award. This new standard will be effective for the
company in the first quarter of fiscal 2007. The company has not yet determined
the method of adoption nor the effect of adopting this standard.
Note B - Long-Term Debt and Credit Arrangements
Long-term debt is comprised of the following:
APRIL 29, 2005 APRIL 30, 2004
-------------- --------------
Unsecured senior
notes issued
July 28, 2004:
Series A, due
July 2007, 3.74% $ 30,000 $ 0
Series B, due
July 2010, 4.61% 40,000 0
Series C, due
July 2014, 5.12% 95,000 0
Series D, due
July 2016, 5.67% 25,000 0
Unsecured note
issued April 2001,
due May 2008, 7.35% 24,333 28,333
-------------- --------------
Total long-term debt 214,333 28,333
Less: current portion
of long-term debt 4,000 4,000
-------------- --------------
Long-term debt less
current portion $ 210,333 $ 24,333
============== ==============
On July 7, 2004, the company established a $183,000 short-term committed
credit facility with a bank to finance the acquisition of Mimi's. This credit
facility was paid in full on July 28, 2004, with the proceeds of a private
placement of $190,000 in unsecured senior notes. The senior notes mature over a
period from July 2007 to July 2016, with a weighted average interest rate of
4.9% paid quarterly.
In April 2001, the company issued a $40,000 unsecured note to a bank,
which 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.
Both of these long-term credit facilities are subject to various customary
covenants and restrictions that, among other things, require certain net worth
and fixed charge coverage ratios and place limitations on indebtedness. As of
April 29, 2005, the company was in compliance with the covenants contained in
these credit agreements.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 29, 2005
Dollars in thousands unless otherwise noted, except per share amounts
Maturities of long-term debt are as follows:
2006 $ 4,000
2007 4,000
2008 34,000
2009 39,237
2010 26,904
Thereafter 106,192
---------
Total $ 214,333
=========
The company also has arrangements with certain banks from which it may
borrow up to $100,000 on a short-term basis. The arrangements are reviewed
annually for renewal. At April 29, 2005, $43,000 was outstanding under these
arrangements, and unused bank lines of credit available were $57,000. During
2005 and 2004, respectively, the maximum amounts outstanding under these
unsecured lines of credit were $47,620 and $45,540, and the average amounts
outstanding were $39,481 and $36,826 with weighted-average interest rates of
2.50% and 1.70%. All interest paid on these arrangements is at floating rates.
Interest costs of $1,170; $1,474; and $1,335 incurred in 2005, 2004 and
2003, respectively, were capitalized in connection with the company's
construction activities.
Note C - 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 29, 2005, and
April 30, 2004, were as follows:
APRIL 29, 2005 APRIL 30, 2004
-------------- --------------
Deferred tax assets:
Loss on impaired assets $ 7,546 $ 7,546
Self-insurance 7,861 6,453
Vacation pay 1,755 1,381
Stock and deferred compensation plans 8,740 7,385
Accrued bonus 210 440
Tax credits 10,525 0
Deferred rent 6,233 0
Inventory and other 797 595
--------- ---------
Total deferred tax assets 43,667 23,800
Deferred tax liabilities:
Accelerated depreciation/asset disposals 75,607 52,992
Intangible assets 22,392 0
Other 1,127 1,379
--------- ---------
Total deferred tax liabilities 99,126 54,371
--------- ---------
Net deferred tax liabilities $ 55,459 $ 30,571
--------- ---------
Significant components of the provisions for income taxes are as follows:
2005 2004 2003
--------- -------- --------
Current:
Federal $ 14,779 $ 29,590 $ 25,080
State 2,919 2,894 2,680
--------- -------- --------
Total current 17,698 32,484 27,760
Deferred, primarily federal 3,006 7,471 12,666
--------- -------- --------
Total tax provisions $ 20,704 $ 39,955 $ 40,426
--------- -------- --------
The company's provisions for income taxes differ from the amounts computed by
applying the federal statutory rate due to the following:
2005 2004 2003
-------- -------- --------
Tax at statutory rate $ 20,185 $ 39,196 $ 40,426
State income tax (net) 1,897 1,881 1,743
Limited partnership tax credits (1,147) (1,151) (1,163)
Other (231) 29 (580)
-------- -------- --------
Provisions for income taxes $ 20,704 $ 39,955 $ 40,426
-------- -------- --------
Taxes paid during 2005, 2004 and 2003 were $6,932; $25,901; and $22,383,
respectively.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 29, 2005
Dollars in thousands unless otherwise noted, except per share amounts
The company's effective tax rate is based on income, statutory tax rates
and tax planning opportunities available to the company in the various
jurisdictions in which the company operates. Significant judgment 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.
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 the company's effective tax rate in the
period of resolution.
Note D - Stock-Based Compensation Plans
The company has equity compensation plans adopted in 1991, 1994 and 1998
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. The last grant of stock options
under the 1992 plan was in 2003; the company does not intend to grant additional
stock options under this plan.
Options granted under the 1992 plan 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 10 years.
The following table summarizes option-related activity for the last three
years:
SHARES PRICE RANGE
---------------------------------
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
--------- ------- -------
Granted 898,207 24.53 to 26.68
Exercised (164,676) 6.78 to 21.38
Canceled or expired (108,800) 6.78 to 31.16
--------- ------- -------
Outstanding, April 29, 2005 3,337,737 $ 6.56 to $ 31.16
--------- ------- -------
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 29, 2005
Dollars in thousands unless otherwise noted, except per share amounts
In addition to the shares subject to outstanding options, 866,954 shares
were available for grant under the company's equity compensation plans at April
29, 2005.
The following table summarizes information regarding stock options
outstanding at April 29, 2005:
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices at 4/29/05 Contractual Life Price at 4/29/05 Price
- ------------------------ ----------- ---------------- ------------- ----------- -------------
$ 6.56 to $ 16.99 366,621 8.4 $ 11.97 235,930 $ 13.24
17.00 to 18.99 451,980 5.8 17.46 432,920 17.46
19.00 to 21.99 295,923 3.9 19.80 295,923 19.80
22.00 to 26.99 859,291 9.1 26.56 75,192 26.68
27.00 to 30.99 720,299 8.1 27.84 302,815 27.84
31.00 to 31.16 643,623 6.5 31.16 447,834 31.16
- -------- -------- --------- --- ------- --------- -------
$ 6.56 to $ 31.16 3,337,737 7.4 $ 24.29 1,790,614 $ 22.86
- -------- -------- --------- --- ------- --------- -------
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 2005 and 2004, 14,976 and 71,926
shares, respectively were awarded as part of the LTIP. Compensation expense
attributable to the LTIP was $383 in 2005, $681 in 2004 and $1,259 in 2003.
Note E - Other Compensation Plans
The company has a defined contribution 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 2005, 2004 and 2003
were $4,300; $3,974; and $3,833, respectively.
In 1999, the company implemented the Bob Evans Executive Deferral Plan
("BEEDP"). The BEEDP is a nonqualified plan that provides certain executives the
opportunity to defer a portion of their current income to future years.
The company's SERP previously provided executives with an option to accept
all or a portion of individual awards in the form of nonqualified deferred
compensation rather than nonqualified stock options. Since 2003, all awards have
been in the form of nonqualified deferred compensation. The company's expense
related to contributions to the SERP deferred compensation plan was $388; $379;
and $2,398 in 2005, 2004 and 2003, respectively.
Note F - Commitments and Contingencies
The company leases certain restaurant facilities under operating leases
having initial terms that primarily expire approximately 20 years from
inception. The leases typically contain renewal clauses of five to 30 years
exercisable at the option of the company. Certain of these leases require the
payment of contingent rentals based on a percentage of gross revenues, as
defined by the terms of the applicable lease agreement. Most of the leases also
contain either fixed or inflation-adjusted escalation clauses. Future minimum
rental payments on operating leases are as follows:
2006 $ 17,784
2007 17,679
2008 17,179
2009 16,903
2010 16,645
Thereafter 192,058
---------
Total $ 278,248
---------
At April 29, 2005, the company also had contractual commitments of
approximately $35,517 for restaurant construction, plant equipment additions and
purchases of land and inventory.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 29, 2005
Dollars in thousands unless otherwise noted, except per share amounts
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 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.
In 2005, the company received an assessment from the State of Ohio related
to corporate franchise tax for fiscal years 1998-2003. The company has
petitioned the State of Ohio for a reassessment, as the company believes its
positions on tax returns filed are correct. However, in the event that the
company does not ultimately prevail, management believes that recorded reserves
are adequate to meet any future tax-related payments to the State of Ohio.
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 G - Acquisition
On July 7, 2004, the company acquired all of the stock of Mimi's (based in
Tustin, Calif.) for approximately $106 million in cash, plus the assumption of
approximately $79 million in outstanding indebtedness, which was paid in full at
the closing of the acquisition.
The acquisition was financed through a committed credit facility of
approximately $183 million; the proceeds of which were used to purchase all of
the outstanding stock of Mimi's, repay existing indebtedness of Mimi's and pay
certain transaction expenses. The credit facility was refinanced on July 28,
2004, through a private placement of $190 million in unsecured senior notes (see
Note B).
On July 7, 2004, Mimi's operated 81 company-owned Mimi's Cafe restaurants
in 10 states, with most locations in California and other western states. The
restaurants are open for breakfast, lunch and dinner, and offer a wide variety
of freshly prepared food in an atmosphere reminiscent of a New Orleans cafe or
European bistro. The transaction was accounted for using the purchase method of
accounting as required by SFAS No. 141, Business Combinations, and accordingly,
the results of operations of Mimi's have been included in the company's
consolidated financial statements from the date of acquisition.
The primary reason for the acquisition was to add a complementary growth
vehicle in the casual segment of the restaurant industry. The company attributes
the goodwill associated with the transaction to the long-term historical
financial performance and the anticipated future performance of Mimi's.
The purchase price allocation to the acquired net assets is as follows:
Current assets $ 7,430
Property and equipment, net 117,860
Other assets 356
Goodwill 55,797
Intangible asset - trade name 45,800
Intangible asset - restaurant concept 12,300
Current liabilities (20,641)
Deferred compensation (1,607)
Net deferred tax liability (21,882)
Deferred rent (10,554)
----------
Cash paid 184,859
Less: cash acquired (1,691)
----------
Net cash paid for acquisition $ 183,168
----------
The intangible asset related to the trade name is deemed to have an
indefinite economic life and is not subject to amortization. It will be tested
for impairment at the beginning of the fourth quarter each year. The intangible
asset related to the restaurant concept is subject to amortization and will be
amortized on a straight-line basis over its estimated economic useful life of 15
years. None of the goodwill balance is expected to be deductible for tax
purposes.
Deferred rent represents fair value adjustments.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 29, 2005
Dollars in thousands unless otherwise noted, except per share amounts
The following table illustrates the pro forma impact on certain financial
results if the acquisition had occurred at the beginning of fiscal 2004. The
amounts have been updated to reflect the purchase price allocation shown above.
The pro-forma financial information does not purport to be indicative of the
operating results that would have been achieved had the acquisition been
consummated at the beginning of fiscal 2004 and should not be construed as
representative of future operating results.
2005 2004
----------- -----------
Net sales $ 1,510,864 $1,454,001
Net income $ 36,921 $ 69,324
Earnings per share:
Basic $ 1.05 $ 1.99
Diluted $ 1.04 $ 1.95
Note H - Goodwill and Other Intangible Assets
At the beginning of the fourth quarter of 2005 and 2004, the company
completed its annual impairment test required under the provisions of SFAS No.
142, Goodwill and Other Intangible Assets. The company determined that no
impairment existed and as a result, no impairment losses were recorded in 2005
or 2004.
The changes in goodwill are summarized below:
RESTAURANT FOOD PRODUCTS
SEGMENT SEGMENT TOTAL
April 30, 2004, and
April 25, 2003,
carrying amount $ 0 $ 1,567 $ 1,567
Goodwill acquired
(see Note G) 55,797 0 55,797
---------- ------- ---------
April 29, 2005,
carrying amount $ 55,797 $ 1,567 $ 57,364
---------- ------- ---------
Intangible assets at April 29, 2005, consisted of the following (see Note
G):
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
Amortized
intangible assets:
Restaurant concept
(15-year life) $ 12,300 $ 683 $ 11,617
Unamortized
intangible assets:
Business trade name 45,800
--------
Total net carrying amount $ 57,417
--------
The amortization expense related to these intangible assets was $683 in
2005; the company did not have these intangible assets prior to 2005.
Amortization expense related to intangible assets for the next five years is
expected to be $820 each year.
Note I - Quarterly Financial Data (Unaudited)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
2005 2004 2005 2004 2005 2004 2005 2004
--------- --------- --------- --------- --------- --------- --------- ---------
Net sales $ 320,615 $ 295,472 $ 376,020 $ 297,260 $ 380,976 $ 291,397 $ 382,584 $ 313,868
Gross profit 23,084 30,428 19,184 28,196 13,119 24,457 11,519 30,220
Net income 14,236 19,246 10,569 17,900 6,636 15,591 5,527 19,298
Earnings per share:
Basic $ 0.40 $ 0.56 $ 0.30 $ 0.52 $0.19 $ 0.45 $ 0.16 $ 0.55
Diluted 0.40 0.55 0.30 0.51 0.19 0.44 0.16 0.54
Common stock
bid prices:
High $ 31.84 $ 29.07 $ 28.54 $ 29.60 $ 26.45 $ 33.25 $ 24.59 $ 34.37
Low 24.45 23.00 22.49 24.79 23.60 28.07 19.91 30.44
Cash dividends declared $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12
- - 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 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 20, 2005,
was 33,824.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bob Evans Farms, Inc. and Subsidiaries - April 29, 2005
Dollars in thousands unless otherwise noted, except per share amounts
Note J - 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:
2005 2004 2003
----------- ----------- -----------
Sales
Restaurant operations $ 1,230,301 $ 984,896 $ 902,345
Food products 269,903 248,373 219,820
----------- ----------- -----------
1,500,204 1,233,269 1,122,165
Intersegment sales of food products (40,009) (35,272) (30,828)
----------- ----------- -----------
Total $ 1,460,195 $ 1,197,997 $ 1,091,337
=========== =========== ===========
Operating Income
Restaurant operations $ 57,710 $ 95,878 $ 92,896
Food products 9,196 17,423 24,237
----------- ----------- -----------
Total $ 66,906 $ 113,301 $ 117,133
=========== =========== ===========
Depreciation and Amortization Expense
Restaurant operations $ 58,790 $ 42,516 $ 37,482
Food products 8,045 7,590 6,668
----------- ----------- -----------
Total $ 66,835 $ 50,106 $ 44,150
=========== =========== ===========
Capital Expenditures
Restaurant operations $ 132,683 $ 121,366 $ 97,113
Food products 6,904 19,671 9,155
----------- ----------- -----------
Total $ 139,587 $ 141,037 $ 106,268
=========== =========== ===========
Identifiable Assets
Restaurant operations $ 1,041,386 $ 749,599 $ 680,843
Food products 79,608 76,933 65,472
----------- ----------- -----------
1,120,994 826,532 746,315
General corporate assets 62,992 41,701 38,276
----------- ----------- -----------
Total $ 1,183,986 $ 868,233 $ 784,591
=========== =========== ===========
26
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Stockholders of Bob Evans Farms, Inc.:
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States. Internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Accordingly, even an effective system of internal control over financial
reporting will provide only reasonable assurance with respect to financial
statement preparation.
With the supervision of our president and chief executive officer and our
chief financial officer, management assessed our internal control over financial
reporting as of April 29, 2005, the end of our fiscal year. Management based its
assessment on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management's assessment included evaluation of such elements as the design and
operating effectiveness of key financial reporting controls, process
documentation, accounting policies and our overall control environment. This
assessment is supported by testing and monitoring performed by our internal
audit function.
Based on our assessment, management has concluded that our internal
control over financial reporting was effective as of the end of the fiscal year
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes in
accordance with accounting principles generally accepted in the United States.
This assessment excluded the internal control over financial reporting of SWH
Corporation (d/b/a Mimi's Cafe), which Bob Evans Farms, Inc. acquired on July 7,
2004, and whose financial statements reflect total assets and net sales
constituting 22% and 16%, respectively, of the related consolidated financial
statements as of and for the year ended April 29, 2005.
We reviewed the results of management's assessment with the audit
committee of our board of directors. Additionally, our independent registered
public accounting firm, Ernst & Young LLP, audited management's assessment and
independently assessed the effectiveness of the company's internal control over
financial reporting. Ernst & Young has issued an attestation report concurring
with management's assessment, which is included in this annual report.
/s/ Stewart K. Owens
- ----------------------
Stewart K. Owens
President and Chief
Executive Officer
/s/ Donald J. Radkoski
- -----------------------
Donald J. Radkoski
Chief Financial Officer
27
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 management's assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that Bob Evans
Farms, Inc. maintained effective internal control over financial reporting as of
April 29, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("the COSO criteria"). Bob Evans Farms, Inc.'s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control
Over Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of SWH Corporation (d/b/a Mimi's Cafe), which the company
acquired on July 7, 2004, and whose financial statements reflect total assets
and net sales constituting 22% and 16%, respectively, of the related
consolidated financial statements as of and for the year ended April 29, 2005.
Our audit of internal control over financial reporting of the company also did
not include an evaluation of the internal control over financial reporting of
SWH Corporation.
In our opinion, management's assessment that Bob Evans Farms, Inc.
maintained effective internal control over financial reporting as of April 29,
2005, is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Bob Evans Farms, Inc. maintained, in all material
respects, effective internal control over financial reporting as of April 29,
2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the 2005 consolidated
financial statements of Bob Evans Farms, Inc. and our report dated June 6, 2005,
expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Columbus, Ohio
June 6, 2005
28
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 29, 2005, and April 30, 2004, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended April 29, 2005. 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 29, 2005, and April 30, 2004, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 29, 2005, in conformity with accounting
principles generally accepted in the United States.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Bob
Evans Farms, Inc.'s internal control over financial reporting as of April 29,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated June 6, 2005, expressed an unqualified opinion.
ERNST & YOUNG LLP
Columbus, Ohio
June 6, 2005
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
Results of Operations
The company owns and operates 683 full-service restaurants, including 591
Bob Evans Restaurants in 21 states and 92 Mimi's Cafe restaurants in 13 states.
Bob Evans Restaurants are primarily located in the Midwest, mid-Atlantic and
Southeast regions of the United States, while Owens Restaurants operate in
Texas. Mimi's Cafe restaurants are primarily located in California and other
western states. Revenue in the restaurant segment is recognized at the point of
sale.
The company also produces and distributes fresh and fully cooked pork
products and a variety of complementary homestyle convenience food items under
the Bob Evans and Owens brand names. These food products are distributed
primarily to grocery stores in the East North Central, mid-Atlantic, Southern
and Southwestern United States. Revenue in the food products segment is
generally recognized when products are delivered to the retailer.
References herein to 2006, 2005, 2004 and 2003 refer to fiscal years.
Fiscal 2004 is a 53-week year, whereas all other years presented are 52-week
years. The company acquired SWH Corporation (d/b/a Mimi's Cafe) ("Mimi's") on
July 7, 2004 (see Note G of the consolidated financial statements). The results
of operations of Mimi's have only been included in the company's consolidated
financial statements from the date of acquisition, which will impact comparisons
to prior years.
General Overview
The following table reflects data for the company's fiscal year ended
April 29, 2005, 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.
(Dollars in
thousands) CONSOLIDATED RESULTS RESTAURANT SEGMENT FOOD PRODUCTS SEGMENT
- ---------------- --------------------------------- ------------------------------ ----------------------------
2005 2004 2003 2005 2004 2003 2005 2004 2003
---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Net sales $1,460,195 $1,197,997 $1,091,337 $1,230,301 $984,896 $902,345 $229,894 $213,101 $188,992
Operating income $ 66,906 $ 113,301 $ 117,133 $ 57,710 $ 95,878 $ 92,896 $ 9,196 $ 17,423 $ 24,237
Cost of sales 30.3% 28.4% 26.3% 25.9% 24.4% 23.6% 53.9% 47.3% 39.0%
Operating wages 36.4% 34.9% 34.8% 40.9% 39.6% 39.2% 12.2% 13.4% 14.0%
Other operating 16.2% 14.6% 15.1% 18.2% 16.6% 17.1% 5.5% 5.3% 5.5%
S.G.&A. 7.9% 8.4% 9.0% 5.5% 5.4% 5.6% 20.9% 22.2% 25.2%
Depreciation
& amortization 4.6% 4.2% 4.1% 4.8% 4.3% 4.2% 3.5% 3.6% 3.5%
---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Operating income 4.6% 9.5% 10.7% 4.7% 9.7% 10.3% 4.0% 8.2% 12.8%
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 2005, the
two factors that had the greatest impact on restaurant segment profitability
were lower same-store sales at Bob Evans Restaurants and, to a lesser extent,
the higher food cost at Bob Evans Restaurants and Mimi's.
Same-store sales in 2005 at Bob Evans Restaurants decreased 3.6% compared
to 2004 (excluding the extra week in 2004). Management believes that economic
pressures on core customers (who skew older) and a lagging economic recovery in
the Midwest negatively impacted same-store sales.
The inclusion of Mimi's results had a significant impact on the cost of
sales ratio in the restaurant segment. Mimi's restaurants traditionally have a
higher food cost average than Bob Evans Restaurants due primarily to a higher
concentration on lunch and dinner.
Initiatives to enhance customers' value perceptions and overall
satisfaction levels at Bob Evans Restaurants increased costs in the second half
of the fiscal year. This impact was reflected in cost of sales and operating
wages.
These factors are discussed further in the detailed sections that follow.
However, the end result is that restaurant operating income decreased $38.2
million, or 39.8%, in 2005 compared to 2004. Furthermore, the segment's
operating income margin fell to 4.7% from 9.7% during the same periods.
Excluding the impact of the extra week in 2004, management estimates that
restaurant operating income would have decreased $33.7 million, or 36.9%, in
2005 versus 2004.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
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 2005, the
two factors that had the greatest impact on food products segment profitability
were higher-than-expected sales growth and the dramatic increase in hog costs.
Food products segment net sales increased 7.9% in 2005 compared to 2004.
Excluding the impact of the extra week in 2004, food products net sales
increased 9.9% in 2005 compared to 2004. The higher net sales were driven by a
combination of a 5.4% increase in pounds sold of comparable products
(principally sausage and refrigerated potatoes), an approximate 5% price
increase in manufactured products 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 33.2% in 2005 and caused
cost of sales in the food products segment to increase from 47.3% to 53.9% of
sales in 2005 compared to 2004. The significant increase in cost of sales more
than offset the increase in net sales, which resulted in a decrease in operating
income of $8.2 million, or 47.2%, compared to 2004. Excluding the extra week in
2004, food products operating income decreased $7.7 million or 45.5% in 2005
compared to 2004.
Sales
Consolidated net sales increased $262.2 million, or 21.9%, in 2005
compared to 2004. The 2005 increase was the net result of a $245.4 million
increase in restaurant segment sales and a $16.8 million increase in food
products segment sales. Impacting the net sales comparison were $238.0 million
of sales at Mimi's in 2005 and $22.3 million of sales in 2004 due to the extra
week of operations.
Restaurant segment sales accounted for 84.3%, 82.2% and 82.7% of total
sales in 2005, 2004 and 2003, respectively. The $245.4 million additional
restaurant sales in 2005 represented a 24.9% increase over 2004 sales, which
were 9.1% higher than 2003 sales. Excluding the impact of the extra week in
2004, restaurant sales increased 27.4% in 2005 over 2004 and 7.1% in 2004 over
2003. The increase in restaurant sales in 2005 was mostly the result of the
inclusion of Mimi's ($238.0 million in sales for 2005) as well as more
restaurants in operation, partially offset by a 3.6% decrease in same-store
sales at Bob Evans Restaurants (excluding the impact of the extra week in 2004).
Same-store sales at Bob Evans Restaurants increased 1.2% in 2004 (excluding the
impact of the extra week in 2004) and decreased 1.4% in 2003. These same-store
sales comparisons included average menu price increases of 1.5%, 2.3% and 2.8%
in 2005, 2004 and 2003, respectively. Bob Evans 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 the start 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.
Additional restaurant sales growth in 2005 was provided by an increase in
the number of operating locations: 683 restaurants in operation at the end of
2005 (591 Bob Evans Restaurants and 92 Mimi's restaurants) versus 558 Bob Evans
Restaurants at the end of 2004. The 2005 Bob Evans Restaurant openings included
further expansion into existing markets for the company, particularly in Ohio,
but also with an emphasis on Florida and Pennsylvania. During 2005, four
under-performing Bob Evans Restaurants were closed. Mimi's 2005 openings
included two stores in each of California, Florida and Missouri, as well as the
first stores in Nebraska and Ohio. The chart below summarizes the restaurant
openings and closings during the last two years for Bob Evans Restaurants and
three quarters for Mimi's:
BOB EVANS RESTAURANTS:
BEGINNING OPENED CLOSED ENDING
--------- ------ ------ ------
Fiscal year 2005
First quarter 558 11 2 567
Second quarter 567 12 1 578
Third quarter 578 10 1 587
Fourth quarter 587 4 0 591
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
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
MIMI'S RESTAURANTS:
BEGINNING OPENED CLOSED ENDING
--------- ------ ------ ------
Fiscal year 2005
First quarter 81 0 0 81
Second quarter 81 3 0 84
Third quarter 84 4 0 88
Fourth quarter 88 4 0 92
CONSOLIDATED RESTAURANTS:
BEGINNING OPENED CLOSED ENDING
--------- ------ ------ ------
Fiscal year 2005
First quarter 639 11 2 648
Second quarter 648 15 1 662
Third quarter 662 14 1 675
Fourth quarter 675 8 0 683
Carryout and retail sales also contributed to the Bob Evans Restaurant
sales increase in 2005. Carryout sales represented 6.4% of Bob Evans Restaurant
sales in 2005 compared to 6.3% and 5.8% in 2004 and 2003, respectively. Retail
merchandise sales comprised 1.9% of Bob Evans Restaurant sales in 2005 compared
to 1.7% in both 2004 and 2003. Sales at Mimi's benefited in 2005 from beer and
wine sales, which represented 3.3% of its sales and also from carryout sales,
which represented 3.4% of its sales.
Various promotional programs were employed throughout the last few years,
including those involving gift cards, children's programs and seasonal menu
offerings. The current-year strategy primarily focused on enhancing customers'
value perceptions and overall satisfaction. The company has also updated the
appearance of many of its Bob Evans Restaurants, of which 10 were rebuilt and
approximately 50 remodeled in the past year. Management believes that the
enhanced appearance of the restaurants, along with improved value perceptions
and seasonal merchandising, will upgrade the Bob Evans concept. For fiscal 2006,
the company plans to decrease the growth rate of Bob Evans Restaurants
(approximately 20 new locations) and at the same time accelerate the remodeling
and rebuilding programs for existing restaurants. In addition, the company
expects to increase the number of Mimi's restaurant openings to approximately 15
in fiscal 2006.
Despite various efforts to improve sales at Bob Evans Restaurants,
same-store sales comparisons were negative in all months in 2005 except
February. Current trends indicate that negative same-store sales comparisons at
Bob Evans Restaurants will continue at least through the first quarter of 2006.
Food products segment sales accounted for 15.7%, 17.8% and 17.3% of total
sales in 2005, 2004 and 2003, respectively. Food products segment sales
increased $16.8 million, or 7.9%, in 2005 versus 2004. Excluding the impact of
the extra week in 2004, food products segment sales increased $20.6 million, or
9.9%, in 2005 versus 2004. The 2005 sales increase was reflective of a 5.4%
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) and an approximate 5% price increase in manufactured products. The
increase in volume was reflective of the continued strength of the company's
core sausage products and complementary homestyle convenience items (primarily
refrigerated potatoes and macaroni and cheese). A $4.9 million decrease in
promotional spending, which is netted against sales, also contributed to the
increase in sales.
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.
Cost of Sales
Consolidated cost of sales (cost of materials) was 30.3%, 28.4% and 26.3%
of sales in 2005, 2004 and 2003, respectively.
In the restaurant segment, cost of sales (predominantly food cost) was
25.9%, 24.4% and 23.6% of sales in 2005, 2004 and 2003, respectively. The
increase was mostly due to the inclusion of Mimi's cost of sales and, to a
lesser extent, a higher commodity price environment in the restaurant industry
and the impact of initiatives to enhance customers' value perceptions at Bob
Evans Restaurants. Mimi's cost of sales is traditionally higher than the cost of
sales at Bob Evans Restaurants primarily as a result of a greater portion of
sales that are derived from lunch and dinner items, which carry higher food
costs, as well as a different positioning strategy (similar to casual theme
restaurants) than Bob Evans Restaurants. The initiatives at Bob Evans
Restaurants that impacted the cost of sales ratio included increased portion
sizes as well as price reductions on several popular menu items.
Food products segment cost of sales was 53.9%, 47.3% and 39.0% of sales in
2005, 2004 and 2003, respectively. These results were reflective of changing hog
costs, which averaged $50.60, $37.99 and $26.46 per hundredweight in
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
2005, 2004 and 2003, respectively. The 2005 average represented a 33.2% increase
compared to 2004, and the 2004 average represented a 43.6% increase compared to
2003. The increase in cost of sales also reflects the additional sales of
purchased products (e.g. mashed potatoes, frozen entrees, etc.), which tend to
have higher cost of sales compared to the products produced internally.
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses ("operating
wages") were 36.4%, 34.9% and 34.8% of sales in 2005, 2004 and 2003,
respectively. The operating wage ratio increased in the restaurant segment but
decreased in the food products segment.
In the restaurant segment, operating wages were 40.9%, 39.6% and 39.2% of
sales in 2005, 2004 and 2003, respectively. The higher wages in 2005 compared to
2004 were the result of an increased focus on customer service initiatives,
higher health insurance costs and the fact that wages were not as well leveraged
(due to lower-than-expected same-store sales). The increase in 2004 over 2003
was attributable mainly to higher hourly and management wages resulting from
increased training costs associated with new store openings.
In the food products segment, operating wages were 12.2%, 13.4% and 14.0%
of sales in 2005, 2004 and 2003, respectively. The 2005 decrease was due to
better leveraging of costs as a result of increased sales volume, a price
increase in manufactured products, and a decrease in promotional spending
discussed in the "Sales" section above. The improvement in the operating wages
ratio in 2004 was also primarily due to increased sales, which resulted in more
leverage of wage expense in 2004 than in 2003.
Other Operating Expenses
Nearly 95% of other operating expenses ("operating expenses") occurred in
the restaurant segment in 2005; the most significant components of which were
advertising, utilities, restaurant supplies, repair and maintenance, taxes
(other than federal and state income taxes), rent and credit card processing
fees. Consolidated operating expenses were 16.2%, 14.6% and 15.1% of sales in
2005, 2004 and 2003, respectively. Restaurant segment operating expenses were
18.2%, 16.6% and 17.1% of sales in 2005, 2004 and 2003, respectively. The
restaurant operating expense ratios were impacted by the lower-than-expected
same-store sales at Bob Evans Restaurants, which resulted in a negative
leveraging of operating expenses, as well as the increased rent expense
associated with Mimi's, which leases nearly all of its locations. The decrease
in 2004 was due to lower utility and advertising expense partially offset
by higher costs associated with new restaurant openings.
Food products segment operating expenses as a percent of sales increased
to 5.5% in 2005 from 5.3% in 2004. The increase in fiscal 2005 is due to the
inclusion of a new production plant in Sulphur Springs, Texas.
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 7.9%, 8.4% and
9.0% of sales in 2005, 2004 and 2003, respectively. The decrease in fiscal 2005
was due to lower bonus accruals as well as the inclusion of Mimi's, which had an
overall lower S,G&A ratio than Bob Evans Restaurants. The decrease as a
percentage of sales in 2004 compared to 2003 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.
Taxes
The effective federal and state income tax rates were 35.9%, 35.7% and
35.0% in 2005, 2004 and 2003, 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 and capital expenditure
requirements in 2005. Cash and equivalents totaled $5.3 million at April 29,
2005. Cash dividends paid represented 45.8% of net income in 2005 and 22.7% of
net income in 2004.
Bank lines of credit were used for liquidity needs, capital expansion and
purchases of treasury shares during 2005 and 2004. At April 29, 2005, $43
million was outstanding under such arrangements, and unused bank lines of credit
available were $57 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 29, 2005, $24.3 million was
outstanding on this note.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
On July 7, 2004, the company established a $183 million short-term
committed credit facility with a bank to finance the acquisition of Mimi's. This
credit facility was paid in full on July 28, 2004, with the proceeds of a
private placement of $190 million in unsecured senior notes. The senior notes
mature over a period from July 2007 to July 2016, with a weighted-average
interest rate of 4.9% paid quarterly.
Payments of the company's contractual obligations under outstanding
indebtedness as of April 29, 2005, 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 $ 278,248 $ 17,784 $ 34,858 $ 33,548 $ 192,058
Long-term
debt $ 214,333 $ 4,000 $ 38,000 $ 66,141 $ 106,192
Purchase
obligations $ 35,517 $ 35,517 $ 0 $ 0 $ 0
The company believes that funds needed for capital expenditures, working
capital and treasury share purchases during 2006 will be generated internally
and from available bank lines of credit. Additional financing alternatives will
continue to be evaluated by the company as warranted. At the end of 2005, the
company also had $11.8 million in standby letters of credit for self-insurance
plans and land development agreements.
At April 29, 2005, the company had contractual commitments for restaurant
construction, plant equipment additions and the purchases of land and inventory
of approximately $35.5 million. Total capital expenditures for 2006 are expected
to approximate $120 million and depreciation and amortization expenses are
expected to approximate $77 million. The company plans to open approximately 35
full-service restaurants, comprised of 20 Bob Evans Restaurants and 15 Mimi's
restaurants, in fiscal 2006 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 29, 2005, 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 $ 43,000 $ 43,000 $ 0 $ 0 $ 0
Standby
letters of
credit 11,820 11,820 $ 0 $ 0 $ 0
----------- ----------- ----------- ----------- -----------
Total
commercial
commitments $ 54,820 $ 54,820 $ 0 $ 0 $ 0
In 2005, the company received an assessment from the State of Ohio related
to corporate franchise tax for fiscal years 1998 through 2003. The company has
petitioned the State of Ohio for a reassessment, as the company believes its
positions on tax returns filed are correct. However, in the event that the
company does not ultimately prevail, management believes that recorded reserves
are adequate to meet any future tax-related payments to the State of Ohio.
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 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
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SELECTED FINANCIAL INFORMATION
Bob Evans Farms, Inc. and Subsidiaries
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 F for a further discussion of the company's insurance
programs.
Property, plant and equipment comprise 81% 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 has goodwill totaling $57.4 million and other intangible
assets of $57.4 million primarily as a result of the Mimi's acquisition and
records the balances in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. At the beginning
of the fourth quarter of 2005 and 2004, the company completed its annual
impairment test required under the provisions of SFAS No. 142. The company
determined that no impairment existed and as a result, no impairment losses were
recorded in 2005 or 2004.
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 2005, 2004 and 2003 would have been lower
by $5.4 million, $4.1 million and $4.0 million, respectively, if the company had
applied the fair value recognition provisions of SFAS 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 year-end. 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.
35
MANAGEMENT'S DISCUSSION OF RISK FACTORS
Bob Evans Farms, Inc. and Subsidiaries
Management believes that the current reported financial information may
not be indicative of future operating results. In addition, 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, concentration of
Bob Evans Restaurants in the Midwest, 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: (3.6)%, 1.2% and
(1.4)% in 2005, 2004 and 2003, respectively. The impact of same-store sales on
overall sales and corresponding profit margins are significant. All restaurants
continue to be evaluated by management in order to identify under-performing
locations. In 2005, four restaurants were closed due to poor performance. At the
beginning of 2006, the company closed an additional three locations due to poor
performance. Depending on profitability and factors specific to a location, the
company may close additional restaurants in 2006.
A significant portion of the company's Bob Evans Restaurants are
concentrated in the Midwest, which has experienced a worse unemployment rate and
general economic environment than the country as a whole. Management believes
that economic pressures on Bob Evans Restaurants' core customers, who skew
older, have impacted the frequency of their visits to Bob Evans Restaurants.
These circumstances have impacted Bob Evans Restaurant same-store sales and
reduced profitability, particularly compared to the company's more
geographically diverse competitors.
Competition for qualified labor eased in 2005 due to overall economic
conditions. Increases in federal or state minimum wage rates may have an impact
on future wage costs as Congress and state legislatures consider increases to
the rates currently in effect.
Food cost increased sequentially in both 2005 and 2004 due in large part
to higher commodity prices. The increased food cost has had a negative impact on
profitability. Management expects commodity prices to continue to remain
relatively high in 2006.
Energy costs were moderate in 2004, but rose significantly in 2005.
Management expects higher prices in 2006. 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 company plans to open approximately 35
full-service restaurants, including 20 Bob Evans Restaurants and 15 Mimi's
restaurants in fiscal 2006 in comparison to 37 Bob Evans Restaurants and 11
Mimi's restaurants in 2005 and 37 Bob Evans Restaurants in 2004. As noted above,
the company plans to decrease the growth rate of Bob Evans Restaurants and at
the same time accelerate the remodeling and rebuilding programs for existing
restaurants in 2006.
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 $50.60, $37.99 and $26.46 per hundredweight in 2005,
2004 and 2003, respectively. Trends at the beginning of 2006 lead management to
believe that hog costs will be at higher-than-historical levels in 2006, and
operating margins will continue to be pressured.
Another uncertainty is the consumer acceptance of new items. Some of the
planned introductions in 2006 for the food products segment include a brown
sugar and honey sausage link; bacon, egg and cheese burrito; and a frozen large
Snackwich twinpack.
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.
36
MANAGEMENT'S DISCUSSION OF RISK FACTORS
Bob Evans Farms, Inc. and Subsidiaries
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements in this report that are not historical facts are forward-looking
statements and are based on current expectations. Forward-looking statements
involve various important assumptions, risks and uncertainties. Actual results
may differ materially from those predicted by the forward-looking statements
because of various factors and possible events, including, without limitation:
- Changing business and/or economic conditions, including energy costs
- Competition in the restaurant and food products industries
- Ability to control restaurant operating costs, which are impacted by
market changes in the cost or availability of labor and food,
minimum wage and other employment laws, fuel and utility costs and
general inflation
- Changes in the cost or availability of acceptable new restaurant
sites
- Adverse weather conditions in locations where the company operates
its restaurants
- Consumer acceptance of changes in menu, price, atmosphere and/or
service procedures
- Consumer acceptance of the company's restaurant concepts in new
geographic areas
- Changes in hog and other commodity costs
There is also the risk that the company may incorrectly analyze these
risks or that the strategies developed by the company to address them will be
unsuccessful.
Additional discussion of these factors is included in the company's
periodic filings with the Securities and Exchange Commission. Forward-looking
statements speak only as of the date on which they are made, and the company
undertakes no obligation to update any forward-looking statement to reflect
circumstances or events that occur after the date on which the statement is
made. All subsequent written and oral forward-looking statements attributable to
the company or any person acting on behalf of the company are qualified by the
cautionary statements in this section.
37
DIRECTORS AND SENIOR OFFICERS
Bob Evans Farms, Inc. and Subsidiaries
DIRECTORS EXECUTIVE OFFICERS OTHER SENIOR OFFICERS
Larry C. Corbin Russell W. Bendel Larry R. Beckwith
Retired Executive Vice President of President of Mimi's Cafe Senior Vice President of Information
Restaurant Division, Systems
Bob Evans Farms, Inc. Scott D. Colwell
Senior Vice President of Marketing L. Merl Beery
Daniel E. Evans Senior Vice President of Restaurant
Retired Chairman, Mary L. Cusick Purchasing and Technical Services
Bob Evans Farms, Inc. Senior Vice President of
Investor Relations and R. Earl Beery
Daniel A. Fronk Corporate Communications Senior Vice President of Food
Retired Senior Executive Vice President Products Operations
and Board Member, Joe L. Gillen
The Ohio Company Senior Vice President of John F. Curry
Bob Evans Restaurant Operations Senior Vice President of
Michael J. Gasser Restaurant Development
Chairman of the Board and Randall L. Hicks
Chief Executive Officer, Executive Vice President of Anton G. (Skip) Larson
Greif, Inc. Bob Evans Restaurant Operations Senior Vice President of Sales,
Food Products Division
E.W. (Bill) Ingram III Stewart K. Owens
President and Chief Executive Officer, Chairman of the Board and Jerry P. Owens
White Castle System, Inc. Chief Executive Officer Chairman Emeritus,
Owens Country Sausage
Cheryl L. Krueger Donald J. Radkoski
President and Chief Executive Officer, Chief Financial Officer, J. Michael Townsley
Cheryl & Co. Treasurer and Secretary President and
Chief Operating Officer,
G. Robert Lucas Tod P. Spornhauer Owens Country Sausage
Trustee, Senior Vice President of Finance and
The Jeffrey Trusts Controller Stephen A. Warehime
Senior Vice President,
Stewart K. Owens Roger D. Williams Director of Real Estate
Chairman of the Board Executive Vice President of Food
and Chief Executive Officer, Products Division
Bob Evans Farms, Inc. As of July 1, 2005
Robert E.H. Rabold
Retired Chairman,
The Motorists Insurance Group
38