EVANS BOB FARMS INC - BOBE Annual Report (10-K) ITEM 1. BUSINESS.

The following is an excerpt from a 10-K SEC Filing, filed by EVANS BOB FARMS INC on 7/23/2002.

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ITEM 1. BUSINESS.

Bob Evans Farms, Inc. was incorporated on Nov. 4, 1985, under the laws of the State of Delaware. It is the successor by merger to Bob Evans Farms, Inc., an Ohio corporation incorporated in 1957.

Bob Evans Farms, Inc. wholly owns BEF Holding Co., Inc. The subsidiaries owned by BEF Holding Co., Inc. include Bob Evans Farms, Inc., an Ohio corporation ("BEF Ohio"); Owens Country Sausage, Inc. ("Owens"); and BEF Aviation Co., Inc. ("Aviation"). BEF Ohio wholly owns Bob Evans Transportation Company, LLC ("Transportation") and BEF IN Holding Co., Inc. ("BEF IN Holding"). BEF Ohio is the limited partner and BEF IN Holding is the general partner of Bob Evans Restaurants of Indiana, L.P. ("BEF Indiana"). BEF Indiana wholly owns Bob Evans Restaurants of Michigan, Inc. ("Michigan Restaurants"). Michigan Restaurants wholly owns Bob Evans Restaurants, Inc. ("Restaurants"). Restaurants wholly owns BEF RE Holding Co., Inc. ("RE Holding"). RE Holding majority owns BEF REIT, Inc. Bob Evans Farms, Inc. and its direct and indirect subsidiaries are collectively referred to as the "company."

The company's business is divided into two principal industry segments: the ownership and operation of a chain of full-service, family restaurants located in 22 states and the manufacture, distribution and sale of fresh and fully cooked pork products and other complementary food products in 30 states.

RESTAURANT SEGMENT OPERATIONS

GENERAL

The company operates a total of 495 full-service, family restaurants under the Bob Evans Restaurant, Bob Evans Restaurant & General Store and Owens Restaurant names. The company experienced a same-store sales increase of 3.2 percent in fiscal 2002 as compared to a 2.6 percent increase during fiscal 2001 in its restaurant segment.

All of the company's family restaurants feature a wide variety of homestyle menu offerings designed to appeal to its diverse customer base, primarily families. Breakfast entrees, including traditional items and unique specialty offerings, are served all day. The restaurants are typically open from 6 a.m. until 10 p.m. Sunday through Thursday, with extended closing hours on Friday and Saturday for most locations. Average guest checks for breakfast, lunch and dinner are $6.02, $6.73 and $7.16, respectively. Approximately 65 percent of total revenues from restaurant operations are generated from 6 a.m. to 4 p.m., with the balance generated from 4 p.m. to closing. Sales on Saturday and Sunday account for approximately 39 percent of a typical week's revenues.

The company's restaurants are supplied with food and other inventory items (other than sausage products and related meat items) by five independent food and non-food distributors twice a week. Sausage products and other Bob Evans meat items are supplied by the company to each restaurant by the company's driver-salesmen, with the exception of the restaurants located in

Florida, Massachusetts, Mississippi, New York, North Carolina and South Carolina and parts of Missouri which are supplied by the aforementioned food distributors.

The following table sets forth the number, type and location of restaurants operated by the company as of the end of the 2002 fiscal year.

RESTAURANTS IN OPERATION AT APRIL 26, 2002

Traditional General Owens Total Stores Restaurants

Delaware 5 5

Florida 30 30

Illinois 18 18

Indiana 54 54

Iowa 1 1

Kansas 3 3

Kentucky 18 18

Maryland 19 19

Massachusetts 1 1

Michigan 48 48

Mississippi 1 1

Missouri 16 1 17

New Jersey 2 2

New York 13 13

North Carolina 14 14

Ohio 167 2 169

Pennsylvania 28 1 29

South Carolina 4 1 5

Tennessee 2 1 3

Texas 9 9

Virginia 12 12

West Virginia 23 1 24

TOTAL 479 7 9 495

During fiscal 2002, the company opened 27 new restaurants. The majority of these new restaurants are located in the company's core markets. However, the company also expanded its restaurant operations by opening restaurants in newer marketing areas, such as Kansas City, Mo., and Raleigh-Durham, N.C.

From time to time, restaurants are evaluated and closed due to a changing market, poor performance or a change in access or building safety. During the 2002 fiscal year, one traditional Bob Evans Restaurant was closed in Gainesville, Fla., due to its inability to perform to company expectations.

The company has typically opened restaurants in areas where a strong consumer awareness and acceptance of its sausage products have been established over the years. It has deviated from this practice only in Florida, Massachusetts, Mississippi, North Carolina and South Carolina, where the company's driver-salesmen do not distribute Bob Evans Sausage.

SEASONALITY

Certain restaurants located near major interstate highways generally experience increased revenues during the summer travel season.

RESTAURANT EXPANSION

During fiscal 2003, the company plans to build and open approximately 30 new restaurants, about one-third of which will be constructed in the company's most established markets. Future restaurant growth will depend on the availability of sites at prices that are projected to meet or exceed the company's desired returns, as well as growth trends in consumer demand for mid-scale, family style restaurants. During fiscal 2003, the company plans to rebuild eight restaurants and remodel 56 restaurants to various degrees, including major remodels and expansions to minor equipment and decor updates. The restaurant remodel/rebuild plan, which requires significant capital expenditures, demonstrates the company's commitment to customer service and satisfaction. Restaurant capital expenditures for fiscal 2003 are estimated to be consistent with last year at approximately $97 million.

CARRYOUT BUSINESS

During fiscal 2002, carryout business in the company's restaurants accounted for approximately 5.4 percent of the total revenues generated by the restaurant segment. To increase carryout business and customer satisfaction, the company continues to include Carry Home Kitchen, an enhanced carryout area, in all new locations. Through dedicated staffing and facilities, Carry Home Kitchens not only better serve carryout customers, but also increase eat-in dessert sales as a result of the awareness generated by the added dessert case. The company's restaurants do not have a drive-through service for carryout business. Plans for fiscal 2003 are to continue to expand carryout business by increasing marketing programs and consumer awareness.

RETAIL SALES OF GOODS

The company offers retail items for sale on a limited basis in its traditional restaurants' Corner Cupboard area and on a much larger scale in its seven Bob Evans Restaurants & General Stores. The Corner Cupboard retail areas provide select offerings of the gifts, retail food items and other novelties available in Bob Evans Restaurants & General Stores. Given the success of this program, the company plans to include Corner Cupboard retail areas in all new and rebuilt restaurants. The company also introduced retail Corner Cupboard areas in 47 existing units during fiscal 2002 and plans to add an additional 13 in existing units during fiscal 2003, which will bring the total to approximately 265.

COMPETITION

The company's restaurant segment is engaged in an intensely competitive business. The company's restaurants compete for favorable expansion sites and customers with both local and national family, casual and fast-food restaurant chains, as well as with individual restaurant operators. The line continues to blur between family and casual restaurants. In the strictest sense, Bob Evans Restaurants continue to operate in the family dining segment. However, with attractive portions and lower price points, Bob Evans Restaurants are increasingly challenging our casual dining competitors in terms of food quality and value perceptions. Competition in the restaurant industry lies in price/value, menu variety, relevance and brand image. The company's restaurant segment sales are not a significant factor in the overall restaurant business in the company's market areas.

LABOR AND FRINGE BENEFIT EXPENSE

Labor and fringe benefit expense in the restaurant segment accounted for 38.8 percent of sales in fiscal 2002 as compared to 40.0 percent in fiscal 2001, both of which are high from a historical perspective. The decrease in fiscal 2002 is largely attributable to management initiatives that included reducing overtime, better scheduling and redirecting benefit dollars. The company also benefited from reduced pressures in the labor market due to the economy's softness, and the company expects a similar labor market during fiscal 2003. Congress is currently considering increases to the minimum wage rate which could significantly impact the company's labor costs.

SOURCES AND AVAILABILITY OF RAW MATERIALS

Menu mix in the restaurant segment is varied enough that raw materials historically have been readily available. However, some food products may be in short supply during certain seasons and raw material prices often fluctuate according to availability. Cost of sales accounted for approximately 24.8 percent of restaurant segment sales during fiscal 2002, in comparison with 25.1 percent during fiscal 2001. Restaurant segment food costs were impacted by menu price increases, raw material prices and sales mix. The company does not currently anticipate that food costs will fluctuate significantly during its 2003 fiscal year.

MARKETING

The company spent approximately $32.9 million marketing the restaurant segment during its 2002 fiscal year. Approximately 65 percent of the marketing dollars were spent on television, radio, print and outdoor advertising to maintain and build brand awareness. The remaining 35 percent of dollars were spent primarily on in-store merchandising/menus, kids' marketing programs and local-store marketing. The company typically limits the use of coupons to certain outlying markets to encourage trial with new or infrequent customers. The company expects marketing expense as a percent of sales for fiscal 2003 to be consistent with fiscal 2002 levels.

RESEARCH AND DEVELOPMENT

The company is continuously testing new food items in its search for new and improved menu offerings to appeal to its customer base and to satisfy changing eating trends. Product

development has been concentrated on unique homestyle options, as well as quality enhancements to some of the company's best-selling items to keep the menu fresh and relevant. The company's Breakfast Savors and Lunch Savors programs, which are designed to drive weekday sales, continue to be updated with new items to maintain their success. During fiscal 2002, the company tested a new children's program which was introduced in early fiscal 2003. The program included new menu items, as well as new entertaining educational activities provided by Weekly Reader, a leading publisher of classroom periodicals for elementary and secondary schools. Research and development expenses, to date, have not been material.

TRADEMARKS, SERVICE MARKS AND LICENSES

The company maintains various trademarks and service marks in connection with its family restaurant operations, such as Bob Evans Carry Home Kitchen, Breakfast Savors, Lunch Savors and Sunshine Skillet. These trademarks and service marks are renewed periodically and the company believes that they adequately protect the various products and services to which they relate. The operations of the restaurant segment of the company are not dependent upon any patents, franchises or concessions.

FOOD PRODUCTS SEGMENT OPERATIONS

PRINCIPAL PRODUCTS AND PROCUREMENT METHODS

The company's traditional business in its food products segment is the production, distribution and sale of approximately 40 varieties of fresh, smoked and fully cooked pork sausage and ham products under the brand names of Bob Evans, Owens Country Sausage and Country Creek Farm. The company continues to devote time and effort on both new product development and sales of its pork sausage and ham products to institutional and foodservice purchasers. In addition to the company's well-known meat offerings, the company also sells a number of other complementary food items in the frozen and refrigerated areas of grocery stores. During fiscal 2002, the company expanded Bob Evans food products offerings by introducing Pizza Burrito; Sausage, Egg and Cheese Large SnackWiches; Wildfire Chicken with Rice entree; and Chicken and Noodles, Chicken Pot Pie and Lasagna with Meat Sauce family-sized entrees. Several items in the Bob Evans and Owens product lines, including SnackWiches, are microwaveable convenience items for meals and snacks.

Specialty items for the company's institutional and foodservice customers are made to their specifications and include sausage links and patties, sausage gravy and biscuit sandwiches. Although foodservice sales do not generate margins as high as sales of branded items, they provide the company with incremental volume in its production plants. During fiscal 2002 and fiscal 2001, foodservice sales accounted for approximately 8 percent of the company's food products sales. Foodservice sales are expected to remain relatively constant in fiscal 2003.

Previously, the company produced and sold liquid-smoke flavorings through its Hickory Specialties, Inc. subsidiary. In October 2001, the company sold Hickory Specialties to sharpen the focus on the company's core strengths in the food and restaurant businesses.

Percentage of Food Products Segment Revenues

FISCAL YEAR ENDED
APRIL 26, 2002 APRIL 27, 2001 APRIL 28, 2000

Sales of Bob Evans 76% 71% 71% Products

Sales of Owens 21% 24% 24% Country Sausage
Products

Sales of Hickory 3% 5% 5% Specialties Products*

*On Oct. 5, 2001, the company sold Hickory Specialties, Inc. to an unrelated third party.

The company's retail pork sausage products are produced in the company's six processing plants located in Xenia, Bidwell and Springfield, Ohio; Hillsdale, Mich.; Galva, Ill.; and Richardson, Texas. The Bidwell, Springfield, Hillsdale and Richardson plants also manufacture the products sold to foodservice distributors. In the fall of 2002, the company expects to open its first distribution center near Springfield, Ohio. The distribution center will serve as a hub for the company's direct store distribution system.

The company procures live hogs at prevailing market prices from terminals, local auctions, country markets and corporate and family farms in Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Carolina, Ohio, Oklahoma, Pennsylvania, South Dakota, West Virginia, Wisconsin and Texas. Live hogs procured in these markets are purchased by an employee of the company. Live hogs are then transported overnight directly from the various markets and farms from which they were purchased to five of the company's processing plants where they are slaughtered and processed into various pork sausage products. These products, in turn, are shipped daily from the processing plants for distribution to the company's customers. The company generally has not experienced difficulty in procuring live hogs for its pork sausage products. The company has not traditionally contracted in advance for the purchase of live hogs, although it is currently evaluating contract pricing and may do so with limited quantities in fiscal 2003.

DISTRIBUTION METHODS

Products distributed under the Bob Evans brand name are distributed to retail customers in two ways:

(1) Primarily, the direct store delivery system is used for the retail distribution of the sausage and other refrigerated products bearing the Bob Evans brand name. Ninety-one driver-salesmen, driving company-owned refrigerated trucks, deliver the company's products directly to more than 5,870 grocery stores.

(2) On a smaller scale, the company uses alternate distribution methods for its sausage and frozen food products through warehouses and distributors, which makes the products available to approximately 4,000 additional grocery stores.

The marketing territory for Bob Evans brand products includes Delaware, the District of Columbia, Illinois, Indiana, Maryland, Michigan and Ohio as well as portions of Alabama, Georgia, Kansas, Kentucky, Iowa, Missouri, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia and Wisconsin.

Owens Country Sausage products are distributed to more than 5,500 retail customers in two ways:

(1) Company-owned transport trucks deliver directly to most major supermarket chain warehouse distribution centers in the Owens' market areas. Thereafter, the products are shipped to individual grocery stores.

(2) Ten driver-salesmen, driving company-owned refrigerated trucks, and various broker networks deliver products to grocery stores.

The marketing territory for Owens brand products includes Arizona, Arkansas, Colorado, Louisiana, New Mexico, Oklahoma and Texas, and portions of Kansas, Mississippi and Nevada.

Distribution to the company's foodservice customers is accomplished through food brokers and distributors.

INVENTORY LEVELS

Most of the company's food products are highly perishable and require proper refrigeration. Shelf life of the products ranges from 18 to 45 days for refrigerated products. Due to the highly perishable nature and short shelf life of the company's food products, the company's processing plants normally process only enough product to fill existing orders. Therefore, the company maintains minimal inventory levels because such products are generally manufactured only to meet existing demand and are delivered to retail outlets within a three-day period after processing.

TRADEMARKS AND SERVICE MARKS

The company maintains various trademarks and service marks in connection with its food products operations, such as SnackWiches, Hotz and Border Breakfast, that identify various Bob Evans Farms and Owens Country Sausage products. These trademarks and service marks are renewed periodically and the company believes that they adequately protect the brand names of the company. The operations of the food products segment of the company are not dependent upon any patents, licenses, franchises or concessions.

COMPETITION

The sausage business is highly competitive. The company competes primarily on the basis of the price and quality of its sausage products. Bob Evans uses high-quality ingredients to manufacture products that reflect the company's homestyle image and heritage. The company is in direct competition with a large number and variety of producers and wholesalers of similar products, including companies active both locally and nationally. Although many such competitors have substantially greater financial resources and higher sales volumes, the company believes that sales of its products constitute a significant portion of sales of sausage of comparable price and quality in the majority of its core market areas.

SEASONALITY

More pounds of fresh sausage are typically sold during the colder months from October through April. The company continues to promote products for outdoor grilling in an attempt to create more volume during the summer months.

MARKETING

During the 2002 fiscal year, the company spent approximately $10.3 million marketing its food products under the Bob Evans and Owens brand names. Approximately 85 percent of this amount was spent on broadcast media programs to maintain and build brand awareness and the remaining 15 percent was spent on consumer promotion efforts to encourage trial of the company's food products.

DEPENDENCE ON A SINGLE CUSTOMER

Bob Evans and Owens products are available to more than 50 percent of the population of the continental United States through more than 15,370 retail grocery stores. The company's food products segment is not dependent upon a single customer or group of affiliated customers.

SALES ON CREDIT; AGED PRODUCT

The company typically allows seven- to 30-day terms on the sales of its food products. The company has not experienced any significant bad debt problems, nor has the return of aged product had a significant effect on the company.

SOURCES AND AVAILABILITY OF RAW MATERIALS

The company is dependent upon the availability of live hogs to produce its pork sausage and ham products. Historically, the company has not experienced shortages in the number of hogs available at prevailing market prices. The live hog market is highly cyclical in terms of the number of hogs available and the current market price. The live hog market is also dependent upon supply and demand for pork products and corn production, since corn is the major food supply for hogs.

EXPANSION OF DISTRIBUTION AREA

The company has no current plans to expand the distribution area for its food products in fiscal 2003.

PROFIT MARGINS RELATED TO SAUSAGE PRODUCTION

Profit margins relating to sausage production are normally more favorable during periods of lower live hog costs. During fiscal 2002, hog prices averaged $37.84 per hundredweight as compared to $39.51 per hundredweight during fiscal 2001. The company believes live hog costs may decrease during fiscal 2003 in comparison to fiscal 2002 levels.

GENERAL

EMPLOYEES

The company employed 38,723 persons in the restaurant segment and 1,267 persons in the food products segment as of April 26, 2002.

COMPLIANCE WITH ENVIRONMENTAL PROTECTION REQUIREMENTS

The company does not anticipate that compliance with federal, state and local provisions which have been enacted or adopted to regulate the discharge of materials into the environment, or which otherwise relate to the protection of the environment, will have a material effect upon the capital expenditures, earnings or the competitive position of the company.

SALES, OPERATING PROFIT AND IDENTIFIABLE ASSETS

The following table sets forth information regarding revenues, operating profit and identifiable assets of the company's restaurant segment and food products segment for each of the last three fiscal years.

FISCAL YEAR ENDED (Dollars in thousands) April 26, April 27, April 28, 2002 2001 2000 ----------------- --------------- --------------- Sales: ----- Restaurant Operations: $870,257 $805,957 $750,851 Intersegment Sales of Food Products: $ 30,814 $ 30,074 $ 28,612 Food Products (excluding intersegment sales): $191,589 $201,551 $197,068

Operating Profit: ---------------- Restaurant Operations: $ 85,009 $ 68,663 $ 67,877 Food Products: $ 18,854 $ 14,803 $ 17,610

Identifiable Assets: ------------------- Restaurant Operations: $626,318 $574,430 $519,168 Food Products: $ 60,713 $ 73,025 $ 75,311

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in this Annual Report on Form 10-K which are not statements of historical fact are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). In addition, certain statements in future filings by the company with the Securities and Exchange Commission, in press releases and in oral and written statements made by or with the approval of the company which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include statements of plans and objectives of the company or its management or board of directors; statements regarding future economic performance; and statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects" and "intends" and similar expressions are intended to, but are not the exclusive means of, identifying those statements.

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, changes in hog costs, the possibility of severe weather conditions where the company operates its restaurants, the availability and cost of acceptable new restaurant sites, shortages of restaurant labor, acceptance of the company's restaurant concepts into new geographic areas, and other risks disclosed from time to time in the company's securities filings and press releases. 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.

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 after the date on which the statement is made to reflect unanticipated events. 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.