Note 1 -- Summary of Significant Accounting Policies

Description of Business: As of April 26, 2013, Bob Evans Farms, Inc. (“Bob Evans”) and its subsidiaries (collectively, Bob Evans and its subsidiaries are referred to as the “company,” “we,” “us” and “our”) owned and operated 560 full-service Bob Evans restaurants in 19 states. Bob Evans Restaurants are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States. We also produce and distribute pork sausage products and a variety of complementary home-style refrigerated side dishes and frozen food items primarily under the Bob Evans, Owens and Country Creek brand names. These food products are distributed primarily to warehouses that distribute to grocery stores throughout the United States. Additionally, we manufacture and sell similar products to foodservice accounts, including Bob Evans Restaurants and other restaurants and food sellers.

Effective December 28 and 31, 2012, we completed the conversions of Bob Evans Farms, Inc., an Ohio corporation, and SWH Corporation, a California corporation, respectively, from corporations to limited liability companies.

Effective January 28, 2013, we entered into a definitive agreement to sell our Mimi's Café restaurant chain to Le Duff America, Inc. (“Le Duff”). Le Duff is a U.S.-based subsidiary of Groupe Le Duff, a global bakery and restaurant company headquartered in France. Effective February 15, 2013, we completed the sale of Mimi's Café to Le Duff.

Principles of Consolidation: The consolidated financial statements include the accounts of Bob Evans and its subsidiaries. Intercompany accounts and transactions have been eliminated. Dollars are in thousands, except per share amounts.

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires us 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.

Segment Information: During fiscal 2013, we had three reportable segments: Bob Evans Restaurants, Mimi's Café and BEF Foods. See Note 13 for detailed segment information. Effective February 15, 2013, we completed the sale of Mimi's Café to Le Duff and at April 26, 2013, we had two business segments. See Note 3 for further information regarding the sale of Mimi's Café. Mimi's Café results of operations are included in the Consolidated Statements of Operations through the sale date of February 15, 2013.

The revenues from these three segments include both net sales to unaffiliated customers and intersegment net sales, which are accounted for on a basis consistent with net sales to unaffiliated customers. Intersegment net 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 our operations in each segment. General corporate assets consist of cash equivalents, long-term investments, note receivables and deferred income tax assets.

Fiscal Year: Our fiscal year ends on the last Friday in April. References herein to fiscal 2013, fiscal 2012 and fiscal 2011 refer to fiscal years ended April 26, 2013; April 27, 2012; and April 29, 2011, respectively. All years presented were comprised of 52 weeks.

Prior to fiscal 2012, the consolidated operating results of Bob Evans Restaurants and Mimi's Café segments were reported based upon a two-day early cutoff. During fiscal 2012, we eliminated this two-day early cutoff, as it was no longer required to achieve a timely consolidation. The effect of this change was to reflect 367 days of operating results for Bob Evans Restaurants and Mimi's Café within our fiscal 2012 consolidated income statements. This resulted in $1,803 and $207 of additional operating income for Bob Evans Restaurants and Mimi's Café, respectively, in fiscal 2012.

Revenue Recognition: Revenue is recognized for Bob Evans Restaurants and Mimi's Café (through the date of sale February 15, 2013) at the point of sale, other than revenue from the sale of gift cards, which is deferred and recognized upon redemption. Revenue in the BEF Foods segment is recognized when products are received by our customers. All revenue is presented net of sales tax collections.

We issue gift cards, which do not have expiration dates or inactivity fees. We recognize revenue from gift cards when they are redeemed by the customer. In addition, we recognize income on unredeemed gift cards (“gift card breakage”) based on historical redemption patterns, referred to as the redemption recognition method. Gift card breakage is recognized proportionately over the period of redemption in net sales in the Consolidated Statements of Operations. The liability for unredeemed gift cards is included in deferred revenue on the Consolidated Balance Sheets.

Cash Equivalents: We consider all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable: Accounts receivable represents amounts owed to us through our operating activities and are presented net of allowance for doubtful accounts. We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer's inability to meet its financial obligations to us, we record a specific allowance for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. In addition, we recognize allowances for bad debts based on the length of time receivables are past due with allowance percentages, based on our historical experiences, applied on a graduated scale relative to the age of the receivable amounts. If circumstances such as higher than expected bad debt experience or an unexpected material adverse change in a major customer's ability to meet its financial obligations to us were to occur, we estimate the recoverability of amounts due to us could change by a material amount. During fiscal 2013, we had an allowance for doubtful accounts of $29, compared to $327 and $302 for fiscal years 2012 and 2011, respectively.

Concentration of Credit Risk and Major Customers: We maintain cash depository accounts with major banks and invest in high-quality short-term liquid instruments. Such investments are made only in instruments issued or enhanced by high-quality institutions. These investments mature within three months and we have not incurred any related losses.

Accounts receivable can be potentially exposed to a concentration of credit risk with customers or in particular industries. Such credit risk is considered by management to be limited due to our many customers, none of which are considered principal in our total operations. We do have two individual customers that exceed 10 percent of total revenue in our BEF Foods operating segment. In addition, we perform ongoing credit evaluations of our customers' financial conditions and maintain reserves for credit losses. Such losses historically have been within our expectations.

As a result of the sale of Mimi's Café to Le Duff, we received a promissory note for $30,000. The note has an annual interest rate of 1.5% and a term of seven years. The interest and note are payable in full at maturity. See Note 3, Sale of Mimi's Café, for more information.

Inventories: We value our Bob Evans Restaurants inventories at the lower of first-in, first-out cost (“FIFO”) or market and our BEF Foods inventories are determined on an average cost method which approximates a FIFO basis due to the perishable nature of our inventory. Inventory includes raw materials and supplies ($13,540 in fiscal 2013 and $15,159 in fiscal 2012) and finished goods ($8,951 in fiscal 2013 and $8,229 in fiscal 2012).

Property, Plant and Equipment: Property, plant and equipment are recorded at cost less accumulated depreciation. The straight-line depreciation method is used for nearly all capitalized assets, although some assets purchased prior to fiscal 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 depreciated over the shorter of their useful lives or the lease terms. Total depreciation expense was $ 78,886; $ 81,301; and $ 82,323 in fiscal 2013, fiscal 2012 and fiscal 2011, respectively.

When permissible, we sell real property via like-kind exchanges under Internal Revenue Code Section 1031 whereby gains are not recognized for federal income tax purposes. We recognize all such gains for financial reporting purposes in the period the property is sold. Consolidated results for fiscal 2013, fiscal 2012 and fiscal 2011 include net pretax gains of $0, $365 and $128, respectively, on sale of assets via like-kind exchanges. The gains are classified as a reduction of selling, general and administrative (“S,G&A”) expenses in the Consolidated Statements of Operations.

We evaluate property, plant and equipment held and used in the business for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Impairment is determined by comparing the estimated fair value for the asset group to the carrying amount of its assets. If impairment exists, the amount of impairment is measured as the excess of the carrying amount over the estimated fair values of the assets. Generally, the estimated fair value is determined based on appraisals, which we deem to be Level 3 inputs under the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (“FASB” Accounting Standards Codification (“ASC”) 820. See Note 7 for further information.

Life Insurance Proceeds: The cash receipts and payments related to life insurance proceeds are included in cash flows from operating activities on the Consolidated Statements of Cash Flows and in S,G&A in the Consolidated Statements of Operations.

Long-term Investments: Long-term investments include assets held under certain deferred compensation arrangements, which represent the cash surrender value of company-owned life insurance policies and investments in income tax credit limited partnerships. An offsetting liability for the amount of the cash surrender value of company-owned life insurance is included in the deferred compensation liability amount on the Consolidated Balance Sheets.

Goodwill and Other Intangible Assets: Goodwill, which represents the cost in excess of fair market value of net assets acquired, was $19,634 and $1,567 for fiscal 2013 and fiscal 2012, respectively. In fiscal 2013, we recognized goodwill in relation to the purchase of Kettle Creations of $18,067. Goodwill is not amortized; rather it is tested for impairment at the beginning of the fourth quarter each year or on a more frequent basis when events occur or circumstances change between the annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value. In fiscal 2013, 2012 and 2011, no indicators of impairment existed, thus no goodwill impairment charges were recorded. See Note 11 for further information.

In fiscal 2013, other intangible assets consisted of the Kettle Creations trademark and a non-compete agreement related to the Kettle Creations acquisition. In fiscal 2012, other intangible assets consisted of the Mimi's Café business trade name and restaurant concept. The Kettle Creations trademark asset is deemed to have an indefinite economic life and is not amortized. It is tested for impairment at the beginning of the fourth quarter each year or on a more frequent basis if events or changes in circumstances indicate the asset might be impaired. The Kettle Creations non-compete agreement is amortized on a straight-line basis over its estimated economic life of 5 years. The Mimi's Café business trade name was deemed to have an indefinite economic life and as not amortized. The Mimi's Café restaurant concept intangible asset was amortized on a straight-line basis over its estimated economic life of 15 years. In fiscal 2013, we recognized $39,398 of impairment charges on the Mimi's Café trade name and restaurant concept intangible assets. There were no intangible asset impairment charges in 2012 and 2011. See Note 11 for further information.

Financial Instruments: The fair values of our financial instruments (other than long-term debt) approximate their carrying values at April 26, 2013, and April 27, 2012. At April 26, 2013, the estimated fair value of our long-term debt approximated $816 compared to a carrying amount of $1,000. In fiscal 2013, we used cash on hand and borrowings to prepay our long-term debt of $97,145, as well as a make whole payment of $6,150. See Note 4 for further information. At April 27, 2012, the estimated fair value of our long-term debt approximated $142,025 compared to a carrying amount of $135,716. We estimate the fair value of our long-term debt based on the current interest rates offered for debt of the same maturities. At April 26, 2013, the fair value of our long-term note receivables was $13,815. We do not use derivative financial instruments for speculative purposes.

Treasury Stock: During fiscal 2013, fiscal 2012 and fiscal 2011, we followed a policy of issuing treasury shares to satisfy restricted award and option exercises.

Preopening Expenses: Expenditures related to the opening of new restaurants and our remodel initiatives, other than those for capital assets, are expensed when incurred.

Advertising Costs: We expense advertising costs as incurred. Advertising expense was $45,384; $42,713; and $40,566 in fiscal 2013, fiscal 2012 and fiscal 2011, respectively. Advertising costs are classified in other operating expenses and S,G&A expenses in our restaurant segments and BEF Foods segments, respectively, in the Consolidated Statements of Operations. We have prepaid advertising costs of $655 and $695 as of April 26, 2013, and April 27, 2012, respectively.

Cost of Sales: Cost of sales represents primarily food cost for Bob Evans Restaurants and Mimi's Café (through the date of sale on February 15, 2013), and cost of materials in the BEF Foods segment. Cash rebates that we receive 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: We engage in promotional (sales incentive) programs in the form of “off-invoice” deductions, billbacks, cooperative advertising and coupons. Costs associated with these programs are classified as a reduction of gross sales in the period in which the sale occurs. Promotional spending was $110,394, $93,501 and $87,763 in fiscal 2013, fiscal 2012 and fiscal 2011, respectively.

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 employee 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):

The number of dilutive stock options outstanding at April 26, 2013, that were not included in the computation of diluted earnings per share, because to do so would be antidilutive, was 141 shares for fiscal 2013.

Options to purchase 451,842, 567,698 and 517,151 shares of common stock in fiscal 2013, fiscal 2012, and fiscal 2011, respectively, were excluded from the diluted earnings-per-share calculations because they were antidilutive.

Stock-based Employee Compensation: The Compensation – Stock Compensation Topic of the FASB ASC requires that we measure the cost of employee services received in exchange for an equity award, such as stock options, restricted stock awards and restricted stock units, based on the fair value of the award on the grant date. The cost is recognized in the income statement over the vesting period of the award on a straight-line basis. In fiscal 2012, awards issued to retirement eligible employees, in the 2010 Plan, were no longer subject to immediate expensing in full upon grant. See Note 8. Awards to retirement eligible employees are recognized over the vesting period of the award on a straight line basis. Compensation cost recognized includes: (1) compensation cost for all stock-based awards granted prior to, but not yet fully vested as of April 28, 2006, based on the grant date fair value estimated in accordance with the original provisions of the Compensation – Stock Compensation Topic of the FASB ASC and (2) compensation cost for all stock-based awards granted after April 28, 2006, based on the grant date fair value estimated in accordance with the Compensation – Stock Compensation Topic of the FASB ASC. Total stock-based compensation cost in fiscal 2013, fiscal 2012 and fiscal 2011 was $8,770, $5,603 and $7,259 respectively. The related tax benefit recognized was $2,642, $1,671 and $2,389 in fiscal 2013, fiscal 2012 and fiscal 2011, respectively. Expense associated with stock-based compensation is reflected in S,G&A expense.

The fair value of each option awarded in fiscal 2011 was estimated on the date of grant using the Black-Scholes option-pricing model. We did not award any stock options in fiscal 2012 or fiscal 2013. The expected term of options granted is based on the historical exercise behavior of full-term options, and the expected volatility is based on the historical volatility of our common stock. The risk-free rate is based on the U.S. Treasury zero-coupon yield curve in effect at the time of grant. Both expected volatility and the risk-free rate are based on a period commensurate with the expected option term. The expected dividend yield is based on the current dividend, the current market price of our common stock and historical dividend yields.

The following table presents the weighted-average per share fair value of options granted and the weighted-average assumptions used, based on a Black-Scholes option-pricing model:       

We issued restricted stock awards (“RSA's”) in fiscal 2013, fiscal 2012 and fiscal 2011, and restricted stock units (“RSU's”) in fiscal 2013 and 2012. RSA's and RSU's are valued based on the stock price at the end of the date on the date of grant. RSA”s and RSU's generally vest over 3 years and have associated dividends.

Other Compensation Plans: We have a defined contribution plan (401(k)) that is available to substantially all employees who have at least 1,000 hours of service. We also have nonqualified deferred compensation plans, the Bob Evans Executive Deferral Plan (“BEEDP”) and Bob Evans Directors' Deferral Plan (“BEDDP”), which provides certain executives and Board of Directors members, respectively, the opportunity to defer a portion of their current income to future years. Our annual matching contributions to the plans are at the discretion of our Board of Directors. The Supplemental Executive Retirement Plan (“SERP”) (see Note 9) provides awards in the form of nonqualified deferred cash compensation.

Leases: Rent expense for our operating leases, which generally have escalating rent payments over the term of the leases, is recorded on a straight-line basis over the lease term. We record the difference between the amount charged to expense and the rent paid as deferred rent in the Consolidated Balance Sheets, and begin amortizing the deferred rent upon the delivery of the lease location by the lessor, which is typically before rent payments are due under the terms of the lease. We expense all straight-line rent recorded during the build-out period for new restaurants.       

Contingent rents are generally amounts due as a result of net sales in excess of amounts stipulated in certain restaurant leases and are included in rent expense as they accrue. Effective February 15, 2013, with the sale of the Mimi's Café segment, we do not have any leases with contingent rent.

Rental expense in fiscal 2013, fiscal 2012 and fiscal 2011 was as follows:

Rental expense in fiscal 2013 includes rental expense for Mimi's Café through the sale date of February 15, 2013.

In some instances, we have received contributions or a reduction in rent from landlords to help fund the construction of new restaurants or remodeling of existing locations. We account for landlord contributions as lease incentive obligations that are amortized as a reduction to rent expense over the applicable lease term. Lease incentive obligations are included in the Consolidated Balance Sheets as deferred rent.

Income Taxes: Our effective tax rate is based on income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in evaluating our tax positions, which has an impact on our effective tax rate. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged based on technical merits. A tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination, including the resolution of any related appeals or litigation, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is more than 50 percent likely to be realized upon settlement.

Commitments and Contingencies: We rent certain restaurant facilities under operating leases having initial terms that primarily expire approximately 20 years from inception. The leases typically contain renewal clauses of 5 to 30 years exercisable at our option. 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. Effective February 15, 2013, with the sale of Mimi's Café, we do not have any leases with contingent rent. Most of the remaining leases contain either fixed or inflation-adjusted escalation clauses.

We are self-insured for most casualty losses and employee health-care claims up to certain stop-loss limits per claim. We have accounted for liabilities for casualty losses, including both reported claims and incurred but not reported claims, based on information provided by independent actuaries. We have accounted for our employee health-care claims liability through a review of incurred and paid claims history. We do not believe that our calculation of casualty losses and employee health-care claims liabilities would 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 we could experience changes in estimated losses, which could be material to both quarterly and annual net income.

We are from time-to-time involved in ordinary and routine litigation, typically involving claims from customers, employees and others related to operational issues common to the restaurant and food manufacturing industries. Management presently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position, cash flows or results of operations.

Reclassifications: Certain prior-year amounts have been reclassified to conform to the fiscal 2013 classification. Such reclassifications had no impact on reported net (loss) income.

New Accounting Pronouncements: In the normal course of business, management evaluates all new accounting pronouncements issued by the FASB, the Securities and Exchange Commission (“SEC”), the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting body to determine the potential impact they may have on the Company's consolidated financial statements.

In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), which is an update to existing guidance related to impairment testing for indefinite-lived intangible assets. The amendments will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An entity no longer will be required to test the fair value of an intangible asset unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This update was effective for our third quarter of fiscal 2013. The adoption of this guidance has no impact on our current year consolidated financial statements.