Summary of EVANS BOB FARMS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General Overview
In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we use the terms "Bob Evans," "we," "us" and "our" to collectively refer to Bob Evans Farms, Inc., a Delaware corporation, and its subsidiaries. As of January 23, 2009, we owned and operated 710 full-service restaurants, including 569 Bob Evans Restaurants in 18 states and 141 Mimi's Cafés in 22 states. Bob Evans Restaurants are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States. Mimi's Cafés are primarily located in California and other western states. Revenue in the restaurant segment is recognized at the point of sale. We also produce and distribute 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 warehouses and grocery stores in the East North Central, mid-Atlantic, Southern and Southwestern United States. Revenue, net of promotional discounts, in the food products segment is recognized when products are delivered to the retailer.
This MD&A contains a number of forward-looking statements. Words such as "expects," "goals," "plans," "projects," "believes," "intends," "continues," "anticipates," "may," and variations of such words and similar expressions are intended to identify such forward-looking statements. Any statements that refer to projections of our future financial performance, anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. These statements are based on our current expectations and could be affected by the uncertainties and risk factors described in our press releases and filings with the Securities and Exchange Commission. In particular, please refer to the risk factors discussed under the heading "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 25, 2008. It is impossible to predict or identify all such risk factors. Consequently, no one should consider any such list to be a complete set of all potential risks and uncertainties. There is also the risk that we may incorrectly analyze these risks or that the strategies developed by us to address them will be unsuccessful. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the statement is made to reflect unanticipated events. Any further disclosures in our filings with the Securities and Exchange Commission should also be consulted. All subsequent written and oral forward-looking statements attributable to us, or any person acting on our behalf, are qualified by the cautionary statements in this section.
The following table reflects data for our third fiscal quarter ended January 23, 2009 ("Q3 2009"), compared to the prior year's third fiscal quarter ended January 25, 2008 ("Q3 2008"). The consolidated information is derived from the accompanying Consolidated Statements of Income. The table also includes data for our 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.

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                                  Consolidated Results                Restaurant Segment                Food Products Segment
(dollars in thousands)         Q3 2009            Q3 2008          Q3 2009           Q3 2008           Q3 2009           Q3 2008
Net sales                     $  443,773         $ 449,702        $ 359,190         $ 367,600        $    84,583         $ 82,102
Operating income (loss)       $  (46,434 )       $  32,732        $ (50,689 )       $  22,339        $     4,255         $ 10,393

Cost of sales                       31.5 %            30.0 %           25.1 %            25.4 %             58.6 %           50.6 %
Operating wages                     33.3 %            33.5 %           38.7 %            38.6 %             10.6 %           10.7 %
Other operating                     15.8 %            15.8 %           18.4 %            18.3 %              4.7 %            4.5 %
S,G&A                                9.9 %             9.1 %            7.8 %             6.9 %             18.7 %           19.0 %
Depr. & amort                        4.7 %             4.3 %            5.2 %             4.7 %              2.4 %            2.5 %
Goodwill & other
intangibles impairment              15.3 %               0             18.9 %               0                  0                0


Operating income (loss)            (10.5 %)            7.3 %          (14.1 %)            6.1 %              5.0 %           12.7 %

The third quarter results for fiscal 2009 and fiscal 2008 include the impact of the following:
• Consolidated and restaurant results for the third quarter of fiscal 2009 included a pre-tax charge of $68.0 million related to the impairment of goodwill ($56.2 million) and other intangible assets ($11.8 million) for Mimi's that is reflected separately on the Consolidated Statements of Income.

• Consolidated and restaurant results for the third quarter of fiscal 2009 included pre-tax charges of $0.8 million related to severance and retirement costs that are reflected in selling, general and administrative expenses ("S,G&A").

• Consolidated and restaurant results for the third quarters of fiscal 2009 and 2008 included net pre-tax gains of $0.3 million and $0.1 million, respectively, on asset disposals that are reflected in S,G&A.

• Consolidated and restaurant results for the third quarters of fiscal 2009 and 2008 included pre-tax charges of $6.4 million and $3.7 million, respectively, related to underperforming restaurants that are reflected in S,G&A.

• Consolidated and food products results for the third quarter of fiscal 2009 included a pre-tax charge of $0.4 million for unusable spare parts. The charge is reflected in other operating expenses.

• Consolidated and restaurant results for the third quarter of fiscal 2008 included a pre-tax gain of $6.6 million for unredeemed gift certificates and gift cards (known as "breakage"), which is reflected in net sales. Third quarter of fiscal 2008 was the first time we recorded breakage at Bob Evans Restaurants. Therefore, this amount represented breakage since the inception of our gift certificate and gift card programs at Bob Evans Restaurants.

• Consolidated and restaurant results for the third quarter of fiscal 2008 included a pre-tax charge of $0.7 million related to a dispute settlement, which is reflected in S,G&A.

Restaurant Segment Overview
The ongoing economic and industry-wide factors most relevant to our restaurant segment include: the economy, labor and fringe benefit expenses, commodity prices, energy prices, competition, consumer acceptance, restaurant openings and closings, governmental initiatives, food safety and weather. For the third quarter of fiscal 2009, the factors that had the greatest positive impact on our restaurant segment performance were an improvement in food costs and effective labor management. The factor that had the greatest negative impact was weak same-store sales at Bob Evans Restaurants and Mimi's.

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Third quarter fiscal 2009 same-store sales decreased 1.3% at Bob Evans Restaurants and decreased 6.8% at Mimi's compared to the corresponding period last year. Restaurant segment operating income decreased $73.0 million in the third quarter of fiscal 2009 compared to the corresponding period last year. This comparison reflects $74.9 million in net pre-tax charges in the third quarter this year compared to $2.3 million in net pre-tax gains in the third quarter last year as disclosed in the general overview section above. We remain focused on improving same-store sales at Bob Evans Restaurants and Mimi's in a challenging economic environment. We are also continuing our efforts to control labor and food costs, which we believe have been effective in mitigating the impact of higher minimum wages at the federal level and in many of the states where we operate.
Food Products Segment Overview
The ongoing economic and industry-wide factors most relevant to our food products segment include: sow costs and other commodity costs, transportation and energy costs, governmental initiatives, food safety and other risks such as the economy, weather and consumer acceptance. In the third quarter of fiscal 2009, net sales increased in the food products segment, but we experienced our first quarter of negative comparable pounds sold (principally sausage and refrigerated potatoes) in the last seven years. We believe this was primarily due to the fact that we increased some product prices and reduced the amount of promotional discounts we offered to retailers in an effort to protect our margins against higher raw material costs. Food products segment profitability was negatively impacted by a significant increase in sow costs in the third quarter compared to a year ago.
Food products segment net sales increased 3.0% in the third quarter of fiscal 2009 compared to the same period last year. The higher net sales were due to select price increases on key items and a decrease in promotional discounts, which are netted against sales.
Operating income in the food products segment decreased $6.1 million, or 59.1%, in the third quarter of fiscal 2009 compared to the corresponding period last year. Sow costs represent the majority of food products segment cost of sales, and the volatile nature of sow costs greatly impacts the profitability of the segment. In the third quarter of fiscal 2009, average sow costs increased 59.1% compared with the corresponding period last year. The increase in sow costs, slightly offset by improved sow yields, resulted in an increase in cost of sales in the food products segment from 50.6% of net sales in the third quarter of fiscal 2008 to 58.6% of net sales in the third quarter of fiscal 2009.
In the food products segment, we are in the process of converting from a direct-store-delivery distribution system to a warehouse system, in response to retailers' needs. We expect 90% of our distribution to be on the warehouse model by the end of fiscal 2009. The conversion to a warehouse system initially results in some severance costs and higher slotting fees, but it is expected to result in a lower cost structure in the long-term. Sales
Consolidated net sales decreased 1.3% to $443.8 million in the third quarter of fiscal 2009 compared to $449.7 million in the corresponding period last year. The decrease was comprised of a sales decrease in the restaurant segment of $8.4 million and a sales increase in the food products segment of $2.5 million. Restaurant sales accounted for 80.9% of consolidated net sales in the third quarter of fiscal 2009. For the nine-month period ended January 23, 2009, consolidated net sales increased $18.9 million, or 1.5%, compared to the corresponding period last year.
Restaurant sales decreased $8.4 million, or 2.3%, in the third quarter of fiscal 2009 and increased $0.6 million, or 0.1%, through nine months of fiscal 2009 compared to the corresponding periods last year. The sales decrease in the third quarter of fiscal 2009 was primarily due to the recognition of a $6.6 million gain for unredeemed gift certificates and gift cards, known as "breakage," in the third quarter of fiscal 2008 (see Note 10). The remaining decrease in the third quarter of fiscal 2009 is a result of negative same-store sales at both of our restaurant concepts, partially offset by new restaurant openings at Mimi's. For the nine-month period, the sales increase is due to more restaurants in operation at Mimi's and a slight year-to-date same-store sales increase for Bob Evans Restaurants, partially offset by a year-to-date same-store sales decline at Mimi's, as well as the impact of the breakage recorded last year.
Bob Evans Restaurants experienced a same-store sales decrease of 1.3% in the third quarter of fiscal 2009, which included an average menu price increase of 3.3%. We are committed to the ongoing development of new homestyle products with a Bob Evans twist, operations excellence and compelling marketing to help regain positive same-store sales momentum. Through nine months of fiscal 2009, Bob Evans Restaurants experienced a same-store sales increase of 0.1%, including an average menu price increase of 3.0%.

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Mimi's experienced a same-store sales decrease of 6.8% in the third quarter of fiscal 2009, which included an average menu price increase of 2.7%. Through nine months of fiscal 2009, Mimi's experienced a same-store sales decrease of 7.2%, including an average menu price increase of 2.7%. We believe these results reflect the challenging environment in the casual dining sector, as well as pressures on consumer spending in certain key markets, such as California, Arizona, Florida and Nevada, which account for approximately 75% of Mimi's same-store sales. We are looking at a variety of initiatives to help re-energize same-store sales at Mimi's restaurants. See the "BEST Brand Builders" section for further discussion of these initiatives.
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.
The following chart summarizes the restaurant openings and closings during the last nine quarters for Bob Evans Restaurants and Mimi's Café:
Bob Evans Restaurants:

                                   Beginning     Opened     Closed     Ending

                  Fiscal 2009
                  1st quarter           571         0           0        571
                  2nd quarter           571         0           1        570
                  3rd quarter           570         0           1        569

                  Fiscal 2008
                  1st quarter           579         0           0        579
                  2nd quarter           579         0           0        579
                  3rd quarter           579         1           0        580
                  4th quarter           580         1          10        571


Mimi's Café:

                                   Beginning     Opened     Closed     Ending

                  Fiscal 2009
                  1st quarter           132         3          0         135
                  2nd quarter           135         4          0         139
                  3rd quarter           139         2          0         141

                  Fiscal 2008
                  1st quarter           115         1          0         116
                  2nd quarter           116         2          0         118
                  3rd quarter           118         8          0         126
                  4th quarter           126         6          0         132

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Consolidated Restaurants:

                                   Beginning     Opened     Closed     Ending

                  Fiscal 2009
                  1st quarter           703         3           0        706
                  2nd quarter           706         4           1        709
                  3rd quarter           709         2           1        710

                  Fiscal 2008
                  1st quarter           694         1           0        695
                  2nd quarter           695         2           0        697
                  3rd quarter           697         9           0        706
                  4th quarter           706         7          10        703

In the third quarter of fiscal 2009, we did not open any new Bob Evans Restaurants, compared to one new Bob Evans Restaurant opened in the third quarter of fiscal 2008. We opened two new Mimi's Cafés in the third quarter of fiscal 2009 compared to eight openings in the corresponding period a year ago. For fiscal 2009, we plan to build one new Bob Evans Restaurant and to rebuild four existing restaurants. At Mimi's, we opened 9 new restaurants through nine months of fiscal 2009 and expect to open 3 more in the fourth quarter of fiscal 2009, for a total of 12 new restaurants in fiscal 2009 compared to 17 openings in fiscal 2008.
The food products segment experienced a sales increase of $2.5 million, or 3.0%, in the third quarter of fiscal 2009 and $18.3 million, or 8.5%, through nine months of fiscal 2009 compared to the corresponding periods a year ago. In the third quarter of fiscal 2009, we experienced our first quarter of negative comparable pounds sold (down 6.0%) in the last seven years. We believe this was primarily due to the fact that we increased some product prices and reduced the amount of promotional discounts we offered to retailers in an effort to protect our margins against higher raw material costs. However, we still generated an increase in net sales in the third quarter of fiscal 2009, due primarily to select price increases on key items, lower promotional spending and lower returns and allowances (which are netted out of sales). The sales increase through nine-months of fiscal 2009 is due primarily to an increase in comparable pounds sold of 6.8%. Comparable pounds sold is calculated using the same products in both periods and excludes new products. We plan to continue our strategy of growing through successful product introductions and additional points of distribution. We are making progress in penetrating supercenter retail stores, which provides another high-volume sales channel for our food products. See the "BEST Brand Builders" section for further discussion of new products and distribution.
Cost of Sales
Consolidated cost of sales (cost of materials) was 31.5% of sales in the third quarter of fiscal 2009 and 30.9% through nine months of fiscal 2009 compared to 30.0% and 29.9% of sales, respectively, in the corresponding periods a year ago.
In the third quarter of fiscal 2009, restaurant segment cost of sales (predominantly food cost) was 25.1% of sales (25.3% year-to-date) versus 25.4% of sales (25.5% year-to-date) in the corresponding periods last year. The prior year ratios benefited from the $6.6 million gift card breakage reflected in fiscal 2008 third quarter net sales (see Note 10). The improvement in restaurant segment cost of sales as a percent of sales is attributable to decreasing commodity prices, a favorable shift in product mix and our purchasing initiatives. Part of the shift in product mix is attributable to Mimi's "Just Enough" menu, which features higher-margin items.
The food products segment cost of sales ratio was 58.6% of sales in the third quarter (56.5% year-to-date) versus 50.6% of sales (51.8% year-to-date) in the corresponding periods a year ago. The increase in the food products segment cost of sales ratio in the third quarter was due to a 59.1% increase in sow costs this quarter versus the same quarter last year. Sow costs averaged $49.03 per hundredweight in the third quarter of fiscal 2009 compared to $30.81 per hundredweight in the third quarter of fiscal 2008. The impact of higher sow costs on the food products cost of sales ratio was slightly offset by productivity initiatives in our manufacturing plants, which improved sow yields.

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Operating Wage and Fringe Benefit Expenses Consolidated operating wage and fringe benefit expenses ("operating wages") were 33.3% of sales in the third quarter of fiscal 2009 and 34.2% of sales through nine months of fiscal 2009 compared to 33.5% and 34.9% of sales, respectively, in the corresponding periods last year. In the third quarter of fiscal 2009, the operating wage ratio increased slightly in the restaurant segment and decreased slightly in the food products segment when compared to the corresponding period last year.
In the restaurant segment, operating wages were 38.7% of sales in the third quarter and 39.2% of sales through nine months of fiscal 2009 compared to 38.6% and 39.6% of sales, respectively, in the corresponding periods last year. The prior year ratios benefited from the $6.6 million gift card breakage reflected in fiscal 2008 third quarter net sales (see Note 10). Effective labor management at both of our restaurant concepts helped offset the negative leverage due to same-store sales declines at Bob Evans Restaurants in the third quarter and at Mimi's in the third quarter and year-to-date, as well as the negative impact of minimum wage increases and higher health insurance claims. See the "BEST Brand Builders" section for further discussion of labor management.
In the food products segment, operating wages were 10.6% of sales in the third quarter and 11.2% of sales through nine months of fiscal 2009 compared to 10.7% and 11.4% of sales, respectively, in the corresponding periods last year. The slight decrease in the operating wage ratio was due to improved leverage as a result of increased sales, as discussed in the "Sales" section above, and productivity improvements in our manufacturing plants. Other Operating Expenses
More than 94% of other operating expenses ("operating expenses") occurred in the restaurant segment in the third quarters of fiscal 2009 and fiscal 2008. The most significant components of operating expenses were utilities, restaurant marketing and advertising, restaurant supplies, repair and maintenance, rent, non-income taxes, and credit card processing fees. Consolidated operating expenses were 15.8% of sales in the third quarter and 16.3% of sales through nine months of fiscal 2009 compared to 15.8% and 16.1% of sales, respectively, in the corresponding periods last year.
In the restaurant segment, operating expenses were 18.4% of sales in the third quarter and 18.7% of sales through nine months of fiscal 2009 compared to 18.3% of sales in both of the corresponding periods last year. The slight third-quarter increase as a percent of sales was due to decreased leverage as a result of negative same-store sales, as well as the beneficial impact of the $6.6 million gift card breakage recorded in the third quarter last year (see Note 10). Also in the third quarter of fiscal 2009, higher utility costs in the restaurant segment were offset by lower restaurant pre-opening expenses.
In the food products segment, the operating expense ratio was 4.7% of sales in the third quarter and 5.1% of sales through nine months of fiscal 2009 compared to 4.5% and 5.2% of sales, respectively, in the corresponding periods last year. The increase in the third quarter of fiscal 2009 was due to a $0.4 million charge related to unusable spare parts. Selling, General and Administrative Expenses Consolidated S,G&A expenses were 9.9% of sales in the third quarter of fiscal 2009 and 9.1% of sales through nine months of fiscal 2009 compared to 9.1% and 8.5% of sales, respectively, in the corresponding periods last year. Impacting the third quarter and year-to-date S,G&A comparisons were the following items described in the general overview section earlier:

                                                        Three Months Ended                          Nine Months Ended
(in thousands)                                  Jan. 23, 2009        Jan. 25, 2008         Jan. 23, 2009         Jan. 25, 2008
Fixed-asset impairment charges                   $    6,444          $      3,659           $     6,444          $      3,659
Dispute settlement charge                                 0          $        669           $       675          $        669
Severance & retirement costs                     $      801                     0           $       801                     0
Gains on sale of real estate                     $      323          $         77           $     1,033          $      2,116

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We adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (R), "Share-Based Payment," in the first quarter of fiscal 2007. The most significant aspect of this accounting pronouncement was the requirement to expense the fair value of stock option grants. We significantly reduced the issuance of stock options and implemented a performance incentive plan that predominantly uses restricted stock, stock grants and cash awards. Pre-tax expense associated with stock options and the performance incentive plan was $1.0 million in the third quarter of fiscal 2009 and $6.8 million through nine months of fiscal 2009 compared to $0.8 million and $5.5 million, respectively, in the corresponding periods last year. Of the third quarter fiscal 2009 amount, $0.8 million ($5.3 million year-to-date) was recorded in the restaurant segment and $0.2 million ($1.5 million year-to-date) was recorded in the food products segment. Of the third quarter fiscal 2008 amount, $0.6 million ($4.2 million year-to-date) was recorded in the restaurant segment and $0.2 million ($1.3 million year-to-date) was recorded in the food products segment. Nearly all of this expense is reflected in S,G&A. We expect the expense associated with stock options and the performance incentive plan to approximate $7.7 million for all of fiscal 2009 compared to $6.3 million recorded for the full year in fiscal 2008.
Goodwill and Other Intangibles Impairment We are required for accounting purposes to assess the carrying value of our goodwill and other intangible assets annually or whenever circumstances indicate that a decline in value may have occurred. Based on our consolidated stock valuation relative to our book value, a scaled-back development plan and continued declining same-store sales at Mimi's, we determined that indicators of potential impairment were present during the third quarter of fiscal 2009. As a result, we performed interim impairment tests of goodwill and intangible assets with indefinite lives in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
The result of our impairment test of the unamortized Mimi's business trade name asset indicated that the asset had a fair value of $34.0 million, compared to its carrying value of $45.8 million. This resulted in a pre-tax impairment charge related to the business trade name of $11.8 million in the restaurant segment in the third quarter of fiscal 2009. The fair value of the business trade name was estimated using the relief-from-royalty method, an income approach to valuation.
We also performed an interim test to determine if the carrying amount of goodwill was impaired. The results indicated that the carrying value of Mimi's goodwill of $56.2 million was fully impaired. Therefore, we recorded a pre-tax goodwill impairment charge in the restaurant segment in the third quarter of . . .