EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the Company's
consolidated financial statements and related notes found elsewhere in this
report.
As of May 26, 2002, Darden Restaurants, Inc. (Darden or the Company) operated
1,211 Red Lobster, Olive Garden, Bahama Breeze, and Smokey Bones BBQ Sports Bar
restaurants in the United States and Canada and licensed 33 restaurants in
Japan. All of the restaurants in the U.S. and Canada are operated by the Company
with no franchising. Darden's fiscal year ends on the last Sunday in May. Fiscal
2002, 2001, and 2000 each consisted of 52 weeks of operation.
On March 21, 2002, the Company's Board of Directors declared a three-for-two
stock split of the Company's common stock. The stock split was effected in the
form of a 50 percent stock dividend which was distributed to stockholders on May
1, 2002, for all stockholders of record as of the close of business April 10,
2002. All applicable references to number of shares and per share amounts of
common stock have been adjusted to reflect the stock split.
RESULTS OF OPERATIONS FOR FISCAL 2002, 2001, AND 2000
The following table sets forth selected operating data as a percentage of sales
for the periods indicated. All information is derived from the consolidated
statements of earnings for the periods indicated.
Fiscal Years
- -------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Sales......................................................... 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales:
Food and beverage........................................ 31.7 32.6 32.6
Restaurant labor......................................... 31.4 31.6 32.2
Restaurant expenses...................................... 14.4 14.0 13.9
------ ------ ------
Total Cost of Sales.................................... 77.5% 78.2% 78.7%
Selling, general, and administrative....................... 9.7 9.8 9.9
Depreciation and amortization.............................. 3.8 3.7 3.6
Interest, net.............................................. 0.8 0.8 0.6
Restructuring and asset impairment credit, net............. (0.1) -- (0.2)
------ ------ ------
Total Costs and Expenses......................... 91.7% 92.5% 92.6%
------ ------ ------
Earnings before Income Taxes.................................. 8.3 7.5 7.4
Income Taxes.................................................. 2.9 2.6 2.6
------ ------ ------
Net Earnings.................................................. 5.4% 4.9% 4.8%
====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
SALES
Sales were $4.4 billion in fiscal 2002, $4.0 billion in fiscal 2001, and $3.7
billion in fiscal 2000.
The 9.4 percent increase in sales for fiscal 2002 was primarily due to increased
annual same-restaurant sales in the U.S. and a net increase of 43 Company-owned
restaurants since fiscal 2001. Increased U.S. same-restaurant sales for Red
Lobster totaled 6.2 percent and resulted primarily from a 2.8 percent increase
in average check and a 3.4 percent increase in guest counts. Increased U.S.
same-restaurant sales for Olive Garden totaled 6.3 percent and resulted
primarily from a 3.1 percent increase in average check and a 3.2 percent
increase in guest counts. Red Lobster and Olive Garden have enjoyed 18 and 31
consecutive quarters of U.S. same-restaurant sales increases, respectively.
The 8.6 percent increase in sales for fiscal 2001 was primarily due to increased
annual same-restaurant sales in the U.S. and a net increase of 29 Company-owned
restaurants since fiscal 2000. Increased U.S. same-restaurant sales for Red
Lobster totaled 5.9 percent and resulted primarily from a 4.8 percent increase
in average check and a 1.1
1
percent increase in guest counts. Increased U.S. same-restaurant sales for Olive
Garden totaled 7.2 percent and resulted primarily from a 4.9 percent increase in
average check and a 2.3 percent increase in guest counts.
COSTS AND EXPENSES
Total costs and expenses were $4.0 billion in fiscal 2002, $3.7 billion in
fiscal 2001, and $3.4 billion in fiscal 2000. As a percent of sales, total costs
and expenses have decreased from 92.6 percent in fiscal 2000 to 92.5 percent in
fiscal 2001 to 91.7 percent in fiscal 2002. The following analysis of the
components of total costs and expenses is presented as a percent of sales.
Food and beverage costs decreased in fiscal 2002 primarily as a result of lower
product costs and pricing changes. The comparability in fiscal 2001 and 2000
food and beverage costs is primarily a result of pricing changes, favorable
menu-mix changes, and other efficiencies resulting from higher sales volumes in
fiscal 2001, offset by higher product costs in fiscal 2001.
Restaurant labor decreased in fiscal 2002 and 2001 primarily due to efficiencies
resulting from higher sales volumes.
Restaurant expenses include lease, property tax, credit card, utility, workers'
compensation, new restaurant pre-opening, and other operating expenses.
Restaurant expenses increased in fiscal 2002 primarily as a result of increased
workers' compensation, credit card, new restaurant pre-opening, and other
operating expenses which were only partially offset by lower utility expenses
and the impact of higher sales volumes. Restaurant expenses in fiscal 2001 and
2000 were comparable, primarily as a result of higher sales volumes in fiscal
2001 and the fixed component of restaurant expenses in fiscal 2001 which were
not impacted by higher sales volumes, offset by higher fiscal 2001 utility
expenses.
Selling, general, and administrative expenses decreased in fiscal 2002 primarily
as a result of decreased national television marketing expenses and the
favorable impact of higher sales volumes in fiscal 2002, which were partially
offset by the Company's fiscal 2002 donation made as a result of the industry's
Dine Out for America benefit and other incremental fiscal 2002 donations to the
Darden Restaurants, Inc. Foundation. Selling, general, and administrative
expenses in fiscal 2001 were less than fiscal 2000 expenses primarily as a
result of reduced marketing expenses and the favorable impact of higher sales
volumes in fiscal 2001, which were partially offset by additional labor costs
associated with new concept expansion and development.
Depreciation and amortization expense increased in fiscal 2002 and 2001
primarily as a result of new restaurant and remodel activity, partially offset
by the favorable impact of higher sales volumes.
Net interest expense in fiscal 2002 was comparable to fiscal 2001 primarily
because increased interest expense associated with higher debt levels was offset
by the impact of higher fiscal 2002 sales volumes. Net interest expense in
fiscal 2001 increased over fiscal 2000 primarily due to increased interest
expense associated with higher debt levels in fiscal 2001, which was only
partially offset by the impact of higher fiscal 2001 sales volumes.
Pre-tax restructuring credits of $2.6 million and $8.6 million were recorded in
fiscal 2002 and 2000, respectively. The reversals resulted primarily because
lease terminations in connection with the Company's fiscal 1997 restructuring
were more favorable than projected. During fiscal 2000, an asset impairment
charge of $2.6 million was recognized related to write-downs of the value of
certain properties held for disposition. These amounts had no effect on the
Company's cash flow. No restructuring credit or asset impairment expense was
recognized in earnings during fiscal 2001. As of May 26, 2002, there was a
remaining restructuring liability balance of $1.9 million, which relates
primarily to lease buy-out costs associated with one closed leased property in
which the lease term does not expire until March 2011.
INCOME TAXES
The effective income tax rate for fiscal 2002, 2001, and 2000 was 34.6 percent,
34.6 percent, and 35.5 percent, respectively. The comparability of fiscal 2002
and 2001 effective rates was primarily a result of increased tax expense
associated with higher fiscal 2002 pre-tax earnings which was offset by fiscal
2002 deductions that were not available in fiscal 2001. The decrease from fiscal
2000 to 2001 resulted primarily from increases in income tax credits and
deductions that were not available in fiscal 2000, which was only partially
offset by increased tax expense associated with higher fiscal 2001 pre-tax
earnings.
NET EARNINGS AND NET EARNINGS PER SHARE
2
Net earnings for fiscal 2002 were $237.8 million ($1.30 per diluted share)
compared with net earnings for fiscal 2001 of $197.0 million ($1.06 per diluted
share) and net earnings for fiscal 2000 of $176.7 million ($.89 per diluted
share).
Net earnings and diluted net earnings per share for fiscal 2002 increased 20.7
percent and 22.6 percent, respectively, compared to fiscal 2001. Excluding the
after-tax restructuring credit of $1.6 million taken in fiscal 2002, net
earnings and diluted net earnings per share for fiscal 2002 increased 19.9
percent and 21.7 percent, respectively, compared to fiscal 2001. The increase in
both net earnings and diluted net earnings per share was primarily due to
increases in sales at both Red Lobster and Olive Garden and decreases in food
and beverage costs and restaurant labor as a percent of sales. Diluted net
earnings per share also reflected a reduction in the average diluted shares
outstanding from fiscal 2001 to fiscal 2002 because of the Company's continuing
repurchase of its outstanding common stock.
3
Net earnings and diluted net earnings per share for fiscal 2001 increased 11.5
percent and 19.1 percent, respectively, compared to fiscal 2000. Excluding the
after-tax restructuring and asset impairment net credit of $3.6 million taken in
fiscal 2000, net earnings and diluted net earnings per share for fiscal 2001
increased 13.8 percent and 20.5 percent, respectively, compared to fiscal 2000.
The increase in both net earnings and diluted net earnings per share was
primarily due to increases in sales at both Red Lobster and Olive Garden and
decreases in restaurant labor as a percent of sales. Diluted net earnings per
share also reflected a reduction in average diluted shares outstanding due to
the Company's share repurchase activities.
SEASONALITY
The Company's sales volumes fluctuate seasonally. In fiscal 2002, 2001, and
2000, the Company's sales were highest in the spring, lowest in the fall, and
comparable during winter and summer. Holidays, severe weather, storms, and
similar conditions may impact sales volumes seasonally in some operating
regions. Because of the seasonality of the Company's business, results for any
quarter are not necessarily indicative of the results that may be achieved for
the full fiscal year.
IMPACT OF INFLATION
For fiscal 2002, 2001, and 2000, management believes that inflation has not had
a significant overall effect on the Company's operations. As operating expenses
increase, management believes the Company has historically been able to pass on
increased costs through menu price increases and other strategies.
CRITICAL ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period (see Note 1 to the Company's consolidated financial
statements). Actual results could differ from those estimates.
Critical accounting policies are those that management believes are both most
important to the portrayal of the Company's financial condition and operating
results, and require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Judgments and uncertainties affecting the
application of those policies may result in materially different amounts being
reported under different conditions or using different assumptions. The Company
considers the following policies to be most critical in understanding the
judgments that are involved in preparing its consolidated financial statements.
Land, Buildings, and Equipment
All land, buildings, and equipment are recorded at cost less accumulated
depreciation. Building components are depreciated over estimated useful lives
ranging from seven to 40 years using the straight-line method. Equipment is
depreciated over estimated useful lives ranging from three to ten years also
using the straight-line method. Accelerated depreciation methods are generally
used for income tax purposes.
The Company's accounting policies regarding land, buildings, and equipment
include judgments by management regarding the estimated useful lives of such
assets, the residual values to which the assets are depreciated, and the
determination as to what constitutes enhancing the value of or increasing the
life of existing assets. These judgments and estimates may produce materially
different amounts of depreciation and amortization expense than would be
reported if different assumptions were used. As discussed further below, these
judgments may also impact the Company's need to recognize an impairment charge
on the carrying amount of these assets as the cash flows associated with the
assets are realized.
4
Impairment of Long-Lived Assets
Restaurant sites and certain other assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds their fair value. Restaurant sites and
certain other assets to be disposed of are reported at the lower of their
carrying amount or fair value, less estimated costs to sell, and are included in
net assets held for disposal.
Judgments made by the Company related to the expected useful lives of long-lived
assets and the ability of the Company to realize undiscounted cash flows in
excess of the carrying amounts of such assets are affected by factors such as
the ongoing maintenance and improvements of the assets, changes in economic
conditions, and changes in operating performance. As the Company assesses the
ongoing expected cash flows and carrying amounts of its long-lived assets, these
factors could cause the Company to realize a material impairment charge.
Self-Insurance Reserves
The Company self-insures a significant portion of expected losses under its
workers' compensation, employee medical, and general liability programs. Accrued
liabilities have been recorded based on the Company's estimates of the ultimate
costs to settle incurred and incurred but not reported claims.
The Company's accounting policies regarding self-insurance programs include
certain management judgments and actuarial assumptions regarding economic
conditions, the frequency or severity of claims and claim development patterns,
and claim reserve, management, and settlement practices. Unanticipated changes
in these factors may produce materially different amounts of expense that would
be reported under these programs.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operating activities provide the Company with a
significant source of liquidity. Since substantially all Company sales are for
cash and cash equivalents, and accounts payable are generally due in five to 30
days, the Company is able to carry current liabilities in excess of current
assets. In addition to cash flows from operations, the Company uses a
combination of long-term and short-term borrowings to fund its liquidity needs.
The Company manages its business and its financial ratios to maintain an
investment grade bond rating, which allows access to financing at reasonable
costs. Currently, the Company's publicly issued long-term debt carries "Baa1"
(Moody's Investors Service), "BBB+" (Standard & Poor's) and "BBB+" (Fitch)
ratings. The Company's commercial paper has ratings of "P-2" (Moody's Investors
Service), "A-2" (Standard & Poor's) and "F-2" (Fitch). These ratings are only
accurate as of the date of this annual report and have been obtained with the
understanding that Moody's Investors Service, Standard & Poor's, and Fitch will
continue to monitor the credit of the Company and make future adjustments to
such ratings to the extent warranted. The ratings may be changed, superseded, or
withdrawn at any time.
The Company's commercial paper program serves as its primary source of
short-term financing. As of May 26, 2002, there were no borrowings outstanding
under the program. To support its commercial paper program, the Company has a
credit facility with a consortium of banks under which the Company can borrow up
to $300 million. The credit facility expires in October 2004 and contains
various restrictive covenants, such as maximum debt to capital ratios, but does
not contain a prohibition on borrowing in the event of a ratings downgrade. None
of these covenants is expected to impact the Company's liquidity or capital
resources. As of May 26, 2002, no amounts were outstanding under the credit
facility.
At May 26, 2002, the Company's long-term debt consisted principally of: (1) $150
million of unsecured 8.375 percent senior notes due in September 2005, (2) $150
million of unsecured 6.375 percent notes due in February 2006, (3) $75 million
of unsecured 7.45 percent medium-term notes due in April 2011, (4) $100 million
of unsecured 7.125 percent debentures due in February 2016, and (5) an
unsecured, variable rate, $39.1 million commercial bank loan due in December
2018 that is used to support two loans from the Company to the Employee Stock
Ownership Plan portion of the Darden Savings Plan. In addition, in March 2002,
the Company issued $150 million of unsecured 5.75 percent medium-term notes due
in March 2007. A portion of the proceeds from the issuance were used to repay
short-term debt, and the remaining proceeds are being used to fund working
capital
5
needs. Through a shelf registration on file with the Securities and Exchange
Commission, the Company has provided for the issuance of an additional $125
million of unsecured debt securities from time to time. The debt securities may
bear interest at either fixed or floating rates, and may have maturity dates of
nine months or more after issuance.
6
A summary of the Company's contractual obligations and commercial commitments as
of May 26, 2002 is as follows (in thousands):
- -------------------------- -------------------------------------------------------------------------------------------
Payments Due by Period
- -------------------------- -------------------------------------------------------------------------------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Contractual Less than 2-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Long-term debt $664,140 $ -- $ -- $450,000 $214,140
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Operating leases 259,429 51,951 77,964 55,382 74,132
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Total contractual cash
obligations $923,569 $51,951 $77,964 $505,382 $288,272
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ---------------------------------------------------------------------------
Amount of Commitment Expiration per Period
- -------------------------- --------------- ---------------------------------------------------------------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total Amounts
Other Commercial Committed Less than 2-3 4-5 Over 5
Commitments 1 Year Years Years Years
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Trade letters of credit $ 9,786 $ 9,786 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Standby letters of
credit (1) 38,608 38,608 -- -- --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Guarantees (2) 5,463 1,204 1,285 1,171 1,803
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total commercial
commitments $53,857 $49,598 $1,285 $1,171 $1,803
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
<FN>
1) Includes letters of credit for $30,000 of workers' compensation and general
liabilities accrued in the Company's consolidated financial statements;
also includes letters of credit for $7,289 of lease payments included in
contractual operating lease obligation payments noted above.
2) Consists solely of guarantees associated with sub-leased properties. The
Company is not aware of any non-performance under these sub-lease
arrangements that would result in the Company having to perform in
accordance with the terms of the guarantees.
</FN>
The Company's adjusted debt to adjusted total capital ratio (which includes 6.25
times the total annual restaurant minimum rent and 3.00 times the total annual
restaurant equipment minimum rent as a component of adjusted debt and adjusted
total capital) was 46 percent and 44 percent at May 26, 2002, and May 27, 2001,
respectively. The Company's fixed-charge coverage ratio, which measures the
number of times each year that the Company earns enough to cover its fixed
charges, amounted to 6.8 times and 6.5 times at May 26, 2002, and May 27, 2001,
respectively. Based on these ratios, the Company believes its financial
condition remains strong. The composition of the Company's capital structure is
shown in the following table.
(in millions) May 26, 2002 May 27, 2001
- --------------------------------------------------------------------------------------------------------------------
CAPITAL STRUCTURE
- --------------------------------------------------------------------------------------------------------------------
Short-term debt $ -- $ 12.0
Long-term debt 662.5 520.6
- --------------------------------------------------------------------------------------------------------------------
Total debt 662.5 532.6
Stockholders' equity 1,128.9 1,033.3
- --------------------------------------------------------------------------------------------------------------------
Total capital $1,791.4 $1,565.9
====================================================================================================================
ADJUSTMENTS TO CAPITAL
- --------------------------------------------------------------------------------------------------------------------
Leases-debt equivalent $ 294.6 $ 275.1
Adjusted total debt 957.1 807.7
Adjusted total capital 2,086.0 1,841.0
Debt to total capital ratio 37% 34%
Adjusted debt to adjusted total capital ratio 46% 44%
====================================================================================================================
The Company's Board of Directors has approved a stock repurchase program that
authorizes the Company to repurchase up to 96.9 million shares of the Company's
common stock. Net cash flows used by financing activities included the Company's
repurchase of 9.0 million shares of its common stock for $209 million in fiscal
2002 compared to 12.7 million shares for $177 million in fiscal 2001 and 17.2
million shares for $202 million in fiscal 2000. As of May 26, 2002, a total of
86.3 million shares have been purchased under the program. The stock repurchase
program is used by the Company to offset the dilutive effect of stock option
exercises and to increase shareholder value. The repurchased common stock is
reflected as a reduction of stockholders' equity.
7
Net cash flows used by investing activities included capital expenditures
incurred principally for building new restaurants, replacing equipment, and
remodeling existing restaurants. Capital expenditures were $318 million in
fiscal 2002, compared to $355 million in fiscal 2001, and $269 million in fiscal
2000. The reduced expenditures in fiscal 2002 resulted primarily from a
reduction in renewal and replacement spending at Red Lobster restaurants. The
increased expenditures in fiscal 2001 resulted primarily from new restaurant
growth. The Company estimates that its fiscal 2003 capital expenditures will
approximate $400 million. Net cash flows used by investing activities for fiscal
2002 also included the purchase of $32 million of trust-owned life insurance
policies that cover certain Company officers and other key employees. The
policies were purchased to offset a portion of the Company's obligations under
its non-qualified deferred compensation plan.
The Company is not aware of any trends or events that would materially affect
its capital requirements or liquidity. The Company believes that its internal
cash generating capabilities and borrowings available under its shelf
registration for unsecured debt securities and short-term commercial paper
program should be sufficient to finance its capital expenditures, stock
repurchase program, and other operating activities through fiscal 2003.
FINANCIAL CONDITION
The Company's current assets at May 26, 2002 totaled $450 million, a 37.0
percent increase over current assets of $328 million at May 27, 2001. The
increase resulted primarily from increases in cash and cash equivalents of $91
million and short-term investments of $10 million that resulted principally from
the short-term investment of proceeds received from the March 2002 medium-term
debt issuance. Inventories also increased by $24 million primarily as a result
of opportunistic seafood purchases and purchases in support of upcoming
promotions.
Other assets of $159 million at May 26, 2002, increased from $109 million at May
27, 2001, primarily as a result of the purchase of $32 million of trust-owned
life insurance policies during fiscal 2002 as well as an increase in capitalized
costs associated with software improvements.
Current liabilities increased by $47 million compared to fiscal 2001, primarily
as a result of increases in accrued income taxes, gift card and gift certificate
payables, and employee benefit related accruals.
Net non-current deferred income tax liabilities of $118 million at May 26, 2002,
increased from $91 million at May 27, 2001, primarily as a result of current
income tax deductions for certain capitalized software costs, smallwares, and
equipment.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of market risks, including fluctuations in
interest rates, foreign currency exchange rates, and commodity prices. To manage
this exposure, Darden periodically enters into interest rate, foreign currency
exchange, and commodity instruments for other than trading purposes (see Notes 1
and 8 of the Notes to Consolidated Financial Statements).
The Company uses the variance/covariance method to measure value at risk, over
time horizons ranging from one week to one year, at the 95 percent confidence
level. As of May 26, 2002, the Company's potential losses in future net earnings
resulting from changes in foreign currency exchange rate instruments, commodity
instruments, and floating rate debt interest rate exposures were approximately
$1 million over a period of one year. The Company issued $150 million of new
long-term fixed rate debt during fiscal 2002. The value at risk from an increase
in the fair value of all of the Company's long-term fixed rate debt, over a
period of one year, was approximately $39 million. The fair value of the
Company's long-term fixed rate debt during fiscal 2002 averaged $522 million,
with a high of $643 million and a low of $470 million. The Company's interest
rate risk management objective is to limit the impact of interest rate changes
on earnings and cash flows by targeting an appropriate mix of variable and fixed
rate debt.
8
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and resolves significant implementation issues that had evolved
since the issuance of SFAS No. 121. SFAS No. 144 also establishes a single
accounting model for long-lived assets to be disposed of by sale. SFAS No. 144
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, and its provisions are generally to be applied prospectively.
The Company adopted SFAS No. 144 in the first quarter of fiscal 2003. Adoption
of SFAS No. 144 did not materially impact the Company's consolidated financial
statements.
FORWARD-LOOKING STATEMENTS
Certain statements included in this report and other materials filed or to be
filed by the Company with the SEC (as well as information included in oral or
written statements made or to be made by the Company) may contain statements
that are forward-looking within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Words or phrases such as "believe", "plan", "will", "expect", "intend",
"estimate", and "project", and similar expressions are intended to identify
forward-looking statements. All of these statements, and any other statements in
this report that are not historical facts, are forward-looking. Examples of
forward-looking statements include, but are not limited to, projections
regarding expected casual dining sales growth; the ability of the casual dining
segment to weather economic downturns; demographic trends; the Company's
expansion plans, capital expenditures, and business development activities; and
the Company's long-term goals of increasing market share, expanding margins on
incremental sales, and earnings growth. These forward-looking statements are
based on assumptions concerning important factors, risks, and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
could cause the actual results to differ materially from those expressed in the
forward-looking statements. These factors, risks, and uncertainties include, but
are not limited to:
o the highly competitive nature of the restaurant industry, especially
pricing, service, location, personnel, and type and quality of food;
o economic, market, and other conditions, including changes in consumer
preferences, demographic trends, weather conditions, construction costs,
and the cost and availability of borrowed funds;
o changes in the cost or availability of food, real estate, and other items,
and the general impact of inflation;
o the availability of desirable restaurant locations;
o government regulations, including those relating to zoning, land use,
environmental matters, and liquor licenses; and
o growth plans, including real estate development and construction
activities, the issuance and renewal of licenses and permits for restaurant
development, and the availability of funds to finance growth.
9
REPORT OF MANAGEMENT RESPONSIBILITIES
The management of Darden Restaurants, Inc. is responsible for the fairness and
accuracy of the consolidated financial statements. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, using management's best estimates and
judgments where appropriate. The financial information throughout this report is
consistent with our consolidated financial statements.
Management has established a system of internal controls that provides
reasonable assurance that assets are adequately safeguarded, and transactions
are recorded accurately, in all material respects, in accordance with
management's authorization. We maintain a strong audit program that
independently evaluates the adequacy and effectiveness of internal controls. Our
internal controls provide for appropriate separation of duties and
responsibilities, and there are documented policies regarding utilization of
Company assets and proper financial reporting. These formally stated and
regularly communicated policies set high standards of ethical conduct for all
employees.
The Audit Committee of the Board of Directors meets regularly to determine that
management, internal auditors, and independent auditors are properly discharging
their duties regarding internal control and financial reporting. The independent
auditors, internal auditors, and employees have full and free access to the
Audit Committee at any time.
KPMG LLP, independent certified public accountants, are retained to audit the
Company's consolidated financial statements. Their report follows.
/s/ Joe R. Lee
Joe R. Lee
Chairman of the Board and Chief Executive Officer
10
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Darden Restaurants, Inc.
We have audited the accompanying consolidated balance sheets of Darden
Restaurants, Inc. and subsidiaries as of May 26, 2002, and May 27, 2001, and the
related consolidated statements of earnings, changes in stockholders' equity and
accumulated other comprehensive income, and cash flows for each of the years in
the three-year period ended May 26, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Darden Restaurants,
Inc. and subsidiaries as of May 26, 2002, and May 27, 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended May 26, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Orlando, Florida
June 18, 2002
11
CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) May 26, 2002 May 27, 2001 May 28, 2000
- --------------------------------------------------------------------------------------------------------------------
Sales $4,368,701 $3,992,419 $3,675,461
Costs and Expenses:
Cost of sales:
Food and beverage 1,384,481 1,302,926 1,199,709
Restaurant labor 1,373,416 1,261,837 1,181,156
Restaurant expenses 626,702 559,670 510,727
- --------------------------------------------------------------------------------------------------------------------
Total Cost of Sales $3,384,599 $3,124,433 $2,891,592
Selling, general, and administrative 420,947 389,240 363,041
Depreciation and amortization 165,829 146,864 130,464
Interest, net 36,585 30,664 22,388
Restructuring and asset impairment credit, net (2,568) -- (5,931)
- --------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses $4,005,392 $3,691,201 $3,401,554
- --------------------------------------------------------------------------------------------------------------------
Earnings before Income Taxes 363,309 301,218 273,907
Income Taxes 125,521 104,218 97,202
- --------------------------------------------------------------------------------------------------------------------
Net Earnings $ 237,788 $ 197,000 $ 176,705
====================================================================================================================
Net Earnings per Share:
Basic $ 1.36 $ 1.10 $ 0.92
Diluted $ 1.30 $ 1.06 $ 0.89
====================================================================================================================
Average Number of Common Shares Outstanding:
Basic 174,700 179,600 192,800
Diluted 183,500 185,600 197,800
====================================================================================================================
See accompanying notes to consolidated financial statements.
12
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------
(In thousands) May 26, 2002 May 27, 2001
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 152,875 $ 61,814
Short-term investments 9,904 --
Receivables 29,089 32,870
Inventories 172,413 148,429
Net assets held for disposal 10,047 10,087
Prepaid expenses and other current assets 23,076 26,942
Deferred income taxes 52,127 48,000
- --------------------------------------------------------------------------------------------------------------------
Total Current Assets $ 449,531 $ 328,142
Land, Buildings, and Equipment 1,920,768 1,779,515
Other Assets 159,437 108,877
- --------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,529,736 $ 2,216,534
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 160,064 $ 156,859
Short-term debt -- 12,000
Current portion of long-term debt -- 2,647
Accrued payroll 87,936 82,588
Accrued income taxes 68,504 47,698
Other accrued taxes 30,474 27,429
Other current liabilities 254,036 225,037
- --------------------------------------------------------------------------------------------------------------------
Total Current Liabilities $ 601,014 $ 554,258
Long-term Debt 662,506 517,927
Deferred Income Taxes 117,709 90,782
Other Liabilities 19,630 20,249
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 1,400,859 $ 1,183,216
- --------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock and surplus, no par value. Authorized
500,000 shares; issued 258,426 and 253,948 shares,
respectively; outstanding 172,135 and 176,069 shares,
respectively $ 1,474,054 $1,405,799
Preferred stock, no par value. Authorized 25,000 shares;
none issued and outstanding -- --
Retained earnings 760,684 532,121
Treasury stock, 86,291 and 77,879 shares, at cost (1,044,915) (840,254)
Accumulated other comprehensive income (12,841) (13,102)
Unearned compensation (46,108) (49,322)
Officer notes receivable (1,997) (1,924)
- --------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 1,128,877 $1,033,318
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,529,736 $2,216,534
====================================================================================================================
See accompanying notes to consolidated financial statements.
13
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
- -----------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock Other Officer Total
and Retained Treasury Comprehensive Unearned Notes Stockholders'
(In thousands, except per share Surplus Earnings Stock Income Compensation Receivable Equity
data)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 30, 1999 $1,328,796 $178,008 $(466,902) $(12,115) $(63,751) $(1,687) $ 962,349
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings 176,705 176,705
Other comprehensive income,
foreign currency adjustment (342) (342)
---------
Total comprehensive income 176,363
Cash dividends declared
($0.053 per share) (10,134) (10,134)
Stock option exercises
(1,730 shares) 10,212 10,212
Issuance of restricted stock
(245 shares), net of
forfeiture adjustments 3,638 (3,685) (47)
Earned compensation 3,314 3,314
ESOP note receivable repayments 7,600 7,600
Income tax benefits credited to
equity 5,506 5,506
Proceeds from issuance of equity
put options 1,814 1,814
Purchases of common stock for
treasury (17,230 shares) (202,105) (202,105)
Issuance of treasury stock under
Employee Stock Purchase Plan
(365 shares) 1,741 2,170 3,911
Issuance of officer notes, net (181) (181)
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 28, 2000 $1,351,707 $344,579 $(666,837) $(12,457) $(56,522) $(1,868) $958,602
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings 197,000 197,000
Other comprehensive income,
foreign currency adjustment (645) (645)
----------
Total comprehensive income 196,355
($0.053 per share) (9,458) (9,458)
Stock option exercises
(4,670 shares) 33,158 33,158
Issuance of restricted stock
443 shares), net of
for feiture adjustments 3,986 1,035 (5,109) (88)
Earned compensation 4,164 4,164
ESOP note receivable repayments 8,145 8,145
Income tax benefits credited to
equity 15,287 15,287
Purchases of common stock for
treasury (12,660 shares) (176,511) (176,511)
Issuance of treasury stock under
Employee Stock Purchase Plan
and other plans (336 shares) 1,661 2,059 3,720
Issuance of officer notes, net (56) (56)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 27, 2001 $1,405,799 $532,121 $(840,254) $(13,102) $(49,322) $(1,924) $1,033,318
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings 237,788 237,788
Other comprehensive income:
Foreign currency adjustment 169 169
Change in fair value of
derivatives, net of
tax of $234 380 380
Minimum pension liability
adjustment, net of tax
benefit of $177 (288) (288)
--------
Total comprehensive income 238,049
Cash dividends declared
($0.053 per share) (9,225) (9,225)
Stock option exercises
(4,310 shares) 34,742 1,364 36,106
Issuance of restricted stock
(374shares), net of
forfeiture adjustments 5,666 815 (6,493) (12)
Earned compensation 4,392 4,392
ESOP note receivable repayments 5,315 5,315
Income tax benefits credited
to equity 24,989 24,989
Purchases of common stock for
treasury (8,972 shares) (208,578) (208,578)
Issuance of treasury stock under
Employee Stock Purchase Plan
and other plans (290 shares) 2,858 1,738 4,596
Issuance of officer notes, net (73) (73)
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 26, 2002 $1,474,054 $760,684$(1,044,915) $(12,841) $(46,108) $(1,997) $1,128,877
- -----------------------------------------------------------------------------------------------------------------------
14
See accompanying notes to consolidated financial statements.
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
- --------------------------------------------------------------------------------------------------------------------
(In thousands) May 26, 2002 May 27, 2001 May 28, 2000
- --------------------------------------------------------------------------------------------------------------------
Cash Flows - Operating Activities
Net earnings $237,788 $ 197,000 $ 176,705
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization 165,829 146,864 130,464
Amortization of unearned compensation and loan costs 7,578 7,031 5,895
Change in current assets and liabilities 49,604 41,740 2,472
Change in other liabilities (619) (642) (371)
Loss on disposal of land, buildings, and equipment 1,803 1,559 2,683
Change in cash surrender value of trust-owned life
insurance 743 -- --
Deferred income taxes 22,800 11,750 24,609
Income tax benefits credited to equity 24,989 15,287 5,506
Non-cash restructuring and asset impairment credit, net (2,568) -- (5,931)
Other, net 195 (19) 594
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 508,142 $ 420,570 $ 342,626
- --------------------------------------------------------------------------------------------------------------------
Cash Flows - Investing Activities
Purchases of land, buildings, and equipment (318,392) (355,139) (268,946)
Increase in other assets (24,741) (10,730) (1,820)
Purchase of trust-owned life insurance (31,500) -- --
Proceeds from disposal of land, buildings, and equipment
(including net assets held for disposal) 10,741 13,492 20,998
Purchases of short-term investments (9,904) -- --
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities $ (373,796) $ (352,377) $(249,768)
- --------------------------------------------------------------------------------------------------------------------
Cash Flows - Financing Activities
Proceeds from issuance of common stock 40,520 36,701 13,944
Dividends paid (9,225) (9,458) (10,134)
Purchases of treasury stock (208,578) (176,511) (202,105)
ESOP note receivable repayments 5,315 8,145 7,600
(Decrease) increase in short-term debt (12,000) (103,000) 91,500
Proceeds from issuance of long-term debt 149,655 224,454 --
Repayment of long-term debt (7,962) (10,658) (9,986)
Payment of loan costs (1,010) (2,154) (349)
Proceeds from issuance of equity put options -- -- 1,814
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities $ (43,285) $ (32,481) $(107,716)
- --------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 91,061 35,712 (14,858)
Cash and Cash Equivalents - Beginning of Year 61,814 26,102 40,960
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents - End of Year $ 152,875 $ 61,814 $ 26,102
====================================================================================================================
Cash Flow from Changes in Current Assets and Liabilities
Receivables 3,781 (4,908) (7,706)
Inventories (23,984) (6,242) (1,485)
Prepaid expenses and other current assets 1,987 (289) (4,184)
Accounts payable 3,205 16,372 (4,238)
Accrued payroll 5,348 4,783 3,540
Accrued income taxes 20,806 14,442 16,712
Other accrued taxes 3,045 1,905 (441)
Other current liabilities 35,416 15,677 274
- --------------------------------------------------------------------------------------------------------------------
Change in Current Assets and Liabilities $ 49,604 $ 41,740 $ 2,472
====================================================================================================================
See accompanying notes to consolidated financial statements.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and Principles of Consolidation
The consolidated financial statements include the operations of Darden
Restaurants, Inc. and its wholly owned subsidiaries (the Company). The Company
owns and operates various restaurant concepts located in the United States and
Canada with no franchising. The Company also licenses 33 restaurants in Japan.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Fiscal Year
The Company's fiscal year ends on the last Sunday in May. Fiscal 2002, 2001, and
2000 each consisted of 52 weeks.
Cash Equivalents
Cash equivalents include highly liquid investments such as U.S. treasury bills,
taxable municipal bonds, and money market funds that have a maturity of three
months or less. Amounts receivable from credit card companies are also
considered cash equivalents because they are both short-term and highly liquid
in nature and are typically converted to cash within three days of the sales
transaction.
Short-Term Investments
Short-term investments include a U.S. treasury bill that is classified as a
held-to-maturity security because the Company has the positive intent and
ability to hold the security to maturity. The security is valued at amortized
cost, which approximates fair value, and matures in September 2002.
Inventories
Inventories are valued at the lower of weighted-average cost or market.
Land, Buildings, and Equipment
All land, buildings, and equipment are recorded at cost less accumulated
depreciation. Building components are depreciated over estimated useful lives
ranging from seven to 40 years using the straight-line method. Equipment is
depreciated over estimated useful lives ranging from three to ten years also
using the straight-line method. Accelerated depreciation methods are generally
used for income tax purposes. Depreciation expense amounted to $162,784,
$145,058, and $129,094, in fiscal 2002, 2001, and 2000, respectively.
Capitalized Software Costs
Capitalized software is recorded at cost less accumulated amortization.
Capitalized software is amortized using the straight-line method over estimated
useful lives ranging from three to ten years. The cost of capitalized software
at May 26, 2002, and May 27, 2001, amounted to $38,621 and $17,252,
respectively. The increase for fiscal 2002 relates principally to capitalized
costs associated with new enterprise reporting and human resource management
systems. Accumulated amortization as of May 26, 2002, and May 27, 2001, amounted
to $5,006 and $2,886, respectively.
Trust-Owned Life Insurance
In August 2001, the Company caused a trust, that it previously had established,
to purchase life insurance policies covering certain Company officers and other
key employees (trust-owned life insurance or TOLI). The trust is the owner and
sole beneficiary of the TOLI policies. The policies, which had an initial cash
surrender value of $31,500, were purchased to offset a portion of the Company's
obligations under its non-qualified deferred compensation plan. The cash
surrender value of the policies is included in other assets while changes in
cash surrender value are included in selling, general, and administrative
expenses.
Liquor Licenses
The costs of obtaining non-transferable liquor licenses that are directly issued
by local government agencies for nominal fees are expensed as incurred. The
costs of purchasing transferable liquor licenses through open markets in
jurisdictions with a limited number of authorized liquor licenses are
capitalized. If there is permanent impairment in the value of a liquor license
due to market changes, the asset is written down to its net realizable value.
Annual liquor license renewal fees are expensed.
17
Impairment of Long-Lived Assets
Restaurant sites and certain other assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds their fair value. Restaurant sites and
certain other assets to be disposed of are reported at the lower of their
carrying amount or fair value, less estimated costs to sell, and are included in
net assets held for disposal.
Unearned Revenues
Unearned revenues represent the Company's liability for gift cards and
certificates that have been sold but not yet redeemed and are recorded at their
expected redemption value. When the gift cards and certificates are redeemed,
the Company recognizes restaurant sales and reduces the deferred liability.
Unearned revenues are included in other current liabilities and, at May 26,
2002, and May 27, 2001, amounted to $56,632 and $38,145, respectively.
Self-Insurance Reserves
The Company self-insures a significant portion of expected losses under its
workers' compensation, employee medical, and general liability programs. Accrued
liabilities have been recorded based on the Company's estimates of the ultimate
costs to settle incurred and incurred but not reported claims.
Income Taxes
The Company provides for federal and state income taxes currently payable as
well as for those deferred because of temporary differences between reporting
income and expenses for financial statement purposes versus tax purposes.
Federal income tax credits are recorded as a reduction of income taxes. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Income tax benefits credited to equity relate to tax benefits associated with
amounts that are deductible for income tax purposes but do not affect net
earnings. These benefits are principally generated from employee exercises of
non-qualified stock options and vesting of employee restricted stock awards.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133." SFAS No. 133 and SFAS No. 138 require
that all derivative instruments be recorded on the balance sheet at fair value.
SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all
fiscal years beginning after June 30, 2000. The Company adopted SFAS No. 133 and
SFAS No. 138 on May 28, 2001. There were no transition adjustments that were
required to be recognized as a result of the adoption of these new standards,
and therefore, adoption of these standards did not materially impact the
Company's consolidated financial statements.
The Company uses financial and commodities derivatives in the management of
interest rate and commodities pricing risks that are inherent in its business
operations. The Company's use of derivative instruments is currently limited to
interest rate hedges and commodities futures contracts. These instruments are
structured as hedges of forecasted transactions or the variability of cash flow
to be paid related to a recognized asset or liability (cash flow hedges). The
Company may also use financial derivatives as part of its stock repurchase
program, which is more fully described in Note 10. No derivative instruments are
entered into for trading or speculative purposes. All derivatives are recognized
on the balance sheet at fair value. On the date the derivative contract is
entered into, the Company documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking the various hedge transactions. This process includes
linking all derivatives designated as cash flow hedges to specific assets and
liabilities on the consolidated balance sheet or to specific forecasted
transactions. The Company also formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of hedged
items.
18
Changes in the fair value of derivatives that are highly effective and that are
designated and qualify as cash flow hedges are recorded in other comprehensive
income until earnings are affected by the variability in cash flows of the
designated hedged item. Where applicable, the Company discontinues hedge
accounting prospectively when it is determined that the derivative is no longer
effective in offsetting changes in the cash flows of the hedged item or the
derivative is terminated. Any changes in the fair value of a derivative where
hedge accounting has been discontinued or is ineffective are recognized in
earnings. Cash flows related to derivatives are included in operating
activities.
Pre-Opening Expenses
Non-capital expenditures associated with opening new restaurants are expensed as
incurred.
Advertising
Production costs of commercials and programming are charged to operations in the
fiscal year the advertising is first aired. The costs of other advertising,
promotion, and marketing programs are charged to operations in the fiscal year
incurred. Advertising expense amounted to $187,950, $177,998, and $165,590, in
fiscal 2002, 2001, and 2000, respectively.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages the use of a
fair-value method of accounting for stock-based awards under which the fair
value of stock options is determined on the date of grant and expensed over the
vesting period. As allowed by SFAS No. 123, the Company has elected to account
for its stock-based compensation plans under an intrinsic value method that
requires compensation expense to be recorded only if, on the date of grant, the
current market price of the Company's common stock exceeds the exercise price
the employee must pay for the stock. The Company's policy is to grant stock
options at the fair market value of the underlying stock at the date of grant.
The Company has adopted the disclosure requirements of SFAS No. 123.
Restricted stock and restricted stock unit (RSU) awards are recognized as
unearned compensation, a component of stockholders' equity, based on the fair
market value of the Company's common stock on the award date. These amounts are
amortized to compensation expense over the vesting period using assumed
forfeiture rates for different types of awards. Compensation expense is adjusted
in future periods if actual forfeiture rates differ from initial estimates.
Net Earnings Per Share
Basic net earnings per share is computed by dividing net earnings by the
weighted-average number of common shares outstanding for the reporting period.
Diluted net earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock. Outstanding stock options issued by the Company
represent the only dilutive effect reflected in diluted weighted- average shares
outstanding. Options do not impact the numerator of the diluted net earnings per
share computation.
Options to purchase 161,220, 3,618,900, and 5,379,300 shares of common stock
were excluded from the calculation of diluted net earnings per share for fiscal
2002, 2001, and 2000, respectively, because their exercise prices exceeded the
average market price of common shares for the period.
Comprehensive Income
Comprehensive income includes net earnings and other comprehensive income items
that are excluded from net earnings under accounting principles generally
accepted in the United States of America. Other comprehensive income items
include foreign currency translation adjustments, the effective unrealized
portion of changes in the fair value of cash flow hedges, and amounts associated
with minimum pension liability adjustments.
Foreign Currency Translation
The Canadian dollar is the functional currency for the Company's Canadian
restaurant operations. Assets and liabilities denominated in Canadian dollars
are translated into U.S. dollars using the exchange rates in effect at the
balance sheet date. Results of operations are translated using the average
exchange rates prevailing throughout the period. Translation gains and losses
are reported as a separate component of accumulated other comprehensive income
in stockholders' equity. Gains and losses from foreign currency transactions,
which amounted to $33 and $1, respectively, are included in the consolidated
statements of earnings for each period.
19
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Segment Reporting
As of May 26, 2002, the Company operated 1,211 Red Lobster, Olive Garden, Bahama
Breeze and Smokey Bones BBQ Sports Bar restaurants in North America as part of a
single operating segment. The restaurants operate principally in the United
States within the casual dining industry, providing similar products to similar
customers. The restaurants also possess similar pricing structures, resulting in
similar long-term expected financial performance characteristics. Revenues from
external customers are derived principally from food and beverage sales. The
Company does not rely on any major customers as a source of revenue. Management
believes that the Company meets the criteria for aggregating its operations into
a single reporting segment.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with
current year presentation.
Accounting Change
In July 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF Issue 00-14, "Accounting for Certain Sales Incentives." EITF
Issue 00-14 is effective for all annual or interim financial statements for
periods beginning after December 15, 2001. The Company adopted EITF Issue 00-14
in the fourth quarter of fiscal 2002. EITF Issue 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives offered to customers. Sales incentives include discounts, coupons,
and generally any other offers that entitle a customer to receive a reduction in
the price of a product by submitting a claim for a refund or rebate. Under EITF
Issue 00-14, the reduction in or refund of the selling price of the product
resulting from any sales incentives should be classified as a reduction of
revenue. Prior to adopting this pronouncement, the Company recognized sales
incentives as either selling, general, and administrative expenses or restaurant
expenses. As a result of adopting EITF Issue 00-14, sales incentives were
reclassified as a reduction of sales for all fiscal periods presented. Amounts
reclassified were $28,847, $28,738, and $25,795, in fiscal 2002, 2001, and 2000,
respectively. This pronouncement did not have any impact on net earnings.
Future Application of Accounting Standards
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and resolves significant implementation issues that had evolved
since the issuance of SFAS No. 121. SFAS No. 144 also establishes a single
accounting model for long-lived assets to be disposed of by sale. SFAS No. 144
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, and its provisions are generally to be applied prospectively.
The Company adopted SFAS No. 144 in the first quarter of fiscal 2003. Adoption
of SFAS No. 144 did not materially impact the Company's consolidated financial
statements.
NOTE 2 - ACCOUNTS RECEIVABLE
The Company's accounts receivable is primarily comprised of receivables from
national storage and distribution companies with which the Company contracts to
provide services that are billed to the Company on a per-case basis. In
connection with these services, certain Company inventory items are conveyed to
these storage and distribution companies to transfer ownership and risk of loss
prior to delivery of the inventory to our restaurants. These items are
reacquired by the Company when the inventory is subsequently delivered to
Company restaurants. These transactions do not impact the consolidated
statements of earnings. Receivables from national storage and distribution
companies amounted to $21,083 and $24,996 at May 26, 2002, and May 27, 2001,
respectively. The allowance for doubtful accounts associated with all Company
receivables amounted to $330 and $350 at May 26, 2002, and May 27, 2001,
respectively.
20
NOTE 3 - RESTRUCTURING AND ASSET IMPAIRMENT CREDIT, NET
Darden recorded asset impairment charges of $2,629 and $158,987 in fiscal 2000
and 1997, respectively, representing the difference between the fair value and
carrying value of impaired assets. The asset impairment charges related to
low-performing restaurant properties and other long-lived assets, including
restaurants that have been closed. Fair value is generally determined based on
appraisals or sales prices of comparable properties. In connection with the
closing of certain restaurant properties, the Company recorded other
restructuring expenses of $70,900 in fiscal 1997. The liability was established
to accrue for estimated carrying costs of buildings and equipment prior to
disposal, employee severance costs, lease buy-out provisions, and other costs
associated with the restructuring action. All restaurant closings under this
restructuring action have been completed. All other activities associated with
these restructuring actions, including disposal of closed owned properties and
lease buy-outs related to closed leased properties, were substantially completed
during fiscal 2002.
During fiscal 2002 and 2000, the Company reversed portions of its 1997
restructuring liability totaling $2,568 and $8,560, respectively. The fiscal
2002 and 2000 reversals primarily resulted from favorable lease terminations. No
restructuring or asset impairment expense or credit was charged to operating
results during fiscal 2001. The components of the restructuring and asset
impairment credit, net, and the after-tax and net earnings per share effects of
these items for fiscal 2002 and 2000 are as follows:
Fiscal Year
- --------------------------------------------------------------------------------------------------------------------
2002 2000
- --------------------------------------------------------------------------------------------------------------------
Carrying costs of buildings and equipment prior to disposal
and employee severance costs $ -- $ --
Lease buy-out provisions 2,568 8,560
- --------------------------------------------------------------------------------------------------------------------
Subtotal 2,568 8,560
Impairment of restaurant properties -- (2,629)
- --------------------------------------------------------------------------------------------------------------------
Total restructuring and asset impairment credit, net 2,568 5,931
Less related income taxes (991) (2,308)
- --------------------------------------------------------------------------------------------------------------------
Restructuring and asset impairment credit, net, net of
income taxes 1,577 3,623
- --------------------------------------------------------------------------------------------------------------------
Net earnings per share effect - basic and diluted $ 0.01 $ 0.03
====================================================================================================================
The restructuring liability is included in other current liabilities in the
accompanying consolidated balance sheets. As of May 26, 2002, approximately
$43,850 of carrying, employee severance, and lease buy-out costs associated with
the 1997 restructuring action had been paid and charged against the
restructuring liability. The remaining liability balance of $1,946 relates
primarily to lease buy-out costs associated with one closed leased property in
which the lease term does not expire until March 2011. A summary of
restructuring liability activity for fiscal 2002 and 2001 is as follows:
Fiscal Year
- ---------------------------------------------------------------------------- ------------------ --------------------
2002 2001
- ---------------------------------------------------------------------------- ------------------ --------------------
Beginning balance $ 5,798 $ 8,564
Non-cash adjustments:
Restructuring credits (2,568) --
Cash payments:
Carrying costs and employee severance payments (860) (1,364)
Lease payments including lease buy-outs, net (424) (1,402)
- ---------------------------------------------------------------------------- ------------------ --------------------
Ending balance $ 1,946 $ 5,798
============================================================================ ================== ====================
During fiscal 2000, asset impairment charges of $12,000 included in the
beginning fiscal 2000 restructuring liability were reclassified to reduce the
carrying value of land. This reclassification related to asset impairment
charges recorded in 1997 for long-lived assets associated with Canadian
restaurants.
21
NOTE 4 - LAND, BUILDINGS, AND EQUIPMENT
The components of land, buildings, and equipment are as follows:
May 26, 2002 May 27, 2001
- --------------------------------------------------------------------------------------------------------------------
Land $ 464,893 $ 426,171
Buildings 1,719,778 1,562,107
Equipment 830,404 759,812
Construction in progress 123,987 128,976
- --------------------------------------------------------------------------------------------------------------------
Total land, buildings, and equipment 3,139,062 2,877,066
Less accumulated depreciation (1,218,294) (1,097,551)
- --------------------------------------------------------------------------------------------------------------------
Net land, buildings, and equipment $1,920,768 $ 1,779,515
====================================================================================================================
NOTE 5 - OTHER ASSETS
The components of other assets are as follows:
May 26, 2002 May 27, 2001
- --------------------------------------------------------------------------------------------------------------------
Prepaid pension costs $ 48,262 $ 45,624
Capitalized software costs 33,615 14,366
Trust-owned life insurance 30,757 --
Liquor licenses 19,405 18,642
Prepaid interest and loan costs 17,895 19,768
Miscellaneous 9,503 10,477
- --------------------------------------------------------------------------------------------------------------------
Total other assets $ 159,437 $ 108,877
====================================================================================================================
NOTE 6 - SHORT-TERM DEBT
Short-term debt at May 26, 2002, and May 27, 2001, consisted of $0 and $12,000,
respectively, of unsecured commercial paper borrowings with original maturities
of one month or less. The debt bore an interest rate of 4.3 percent at May 27,
2001.
NOTE 7 - LONG-TERM DEBT
The components of long-term debt are as follows:
May 26, 2002 May 27, 2001
- --------------------------------------------------------------------------------------------------------------------
8.375% senior notes due September 2005 $ 150,000 $ 150,000
6.375% notes due February 2006 150,000 150,000
5.75% medium-term notes due March 2007 150,000 --
7.45% medium-term notes due April 2011 75,000 75,000
7.125% debentures due February 2016 100,000 100,000
ESOP loan with variable rate of interest (2.17% at May 26,
2002) due December 2018 39,140 44,455
Other -- 2,647
- --------------------------------------------------------------------------------------------------------------------
Total long-term debt 664,140 522,102
Less issuance discount (1,634) (1,528)
- --------------------------------------------------------------------------------------------------------------------
Total long-term debt less issuance discount 662,506 520,574
Less current portion -- (2,647)
- --------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current portion $ 662,506 $ 517,927
====================================================================================================================
22
In July 2000, the Company registered $500,000 of debt securities with the
Securities and Exchange Commission (SEC) using a shelf registration process.
Under this process, the Company may offer, from time to time, up to $500,000 of
debt securities. In September 2000, the Company issued $150,000 of unsecured
8.375 percent senior notes due in September 2005. The senior notes rank equally
with all of the Company's other unsecured and unsubordinated debt and are senior
in right of payment to all of the Company's future subordinated debt.
In November 2000, the Company filed a prospectus supplement with the SEC to
offer up to $350,000 of medium-term notes from time to time as part of the shelf
registration process referred to above. In April 2001, the Company issued
$75,000 of unsecured 7.45 percent medium-term notes due in April 2011. In March
2002, the Company issued $150,000 of unsecured 5.75 percent medium-term notes
due in March 2007. As of May 26, 2002, the Company's shelf registration provides
for the issuance of an additional $125,000 of unsecured debt securities.
In January 1996, the Company issued $150,000 of unsecured 6.375 percent notes
due in February 2006 and $100,000 of unsecured 7.125 percent debentures due in
February 2016. Concurrent with the issuance of the notes and debentures, the
Company terminated, and settled for cash, interest-rate swap agreements with
notional amounts totaling $200,000, which hedged the movement of interest rates
prior to the issuance of the notes and debentures. The cash paid in terminating
the interest-rate swap agreements is being amortized to interest expense over
the life of the notes and debentures. The effective annual interest rate is 7.57
percent for the notes and 7.82 percent for the debentures, after consideration
of loan costs, issuance discounts, and interest-rate swap termination costs.
The Company also maintains a credit facility which expires in October 2004, with
a consortium of banks under which the Company can borrow up to $300,000. The
credit facility allows the Company to borrow at interest rates that vary based
on the prime rate, LIBOR, or a competitively bid rate among the members of the
lender consortium, at the option of the Company. The credit facility is
available to support the Company's commercial paper borrowing program, if
necessary. The Company is required to pay a facility fee of 15 basis points per
annum on the average daily amount of loan commitments by the consortium. The
amount of interest and the annual facility fee are subject to change based on
the Company's achievement of certain debt ratings and financial ratios, such as
maximum debt to capital ratios. Advances under the credit facility are
unsecured. At May 26, 2002, and May 27, 2001, no borrowings were outstanding
under this credit facility.
The aggregate maturities of long-term debt for each of the five fiscal years
subsequent to May 26, 2002, and thereafter are $0 in 2003 through 2005, $300,000
in 2006, $150,000 in 2007, and $214,140 thereafter.
NOTE 8 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses interest rate related derivative instruments to manage its
exposure on its debt instruments, as well as commodities derivatives to manage
its exposure to commodity price fluctuations. By using these instruments, the
Company exposes itself, from time to time, to credit risk and market risk.
Credit risk is the failure of the counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty owes the Company, which creates credit risk for the Company.
The Company minimizes this credit risk by entering into transactions with high
quality counterparties. Market risk is the adverse effect on the value of a
financial instrument that results from a change in interest rates or commodity
prices. The Company minimizes this market risk by establishing and monitoring
parameters that limit the types and degree of market risk that may be
undertaken.
23
Natural Gas and Coffee Futures Contracts
During fiscal 2002, the Company entered into futures contracts to reduce the
risk of natural gas and coffee price fluctuations. To the extent these
derivatives are effective in offsetting the variability of the hedged cash
flows, changes in the derivatives' fair value are not included in current
earnings but are reported as other comprehensive income. These changes in fair
value are subsequently reclassified into earnings when the natural gas and
coffee are purchased and used by the Company in its operations. Net losses of
$276 related to these derivatives were recognized in earnings during fiscal
2002. It is expected that $413 of net gains related to these contracts at May
26, 2002, will be reclassified from accumulated other comprehensive income into
food and beverage costs or restaurant expenses during the next 12 months. To the
extent these derivatives are not effective, changes in their fair value are
immediately recognized in current earnings. Outstanding derivatives are included
in other current assets or other current liabilities.
As of May 26, 2002, the maximum length of time over which the Company is hedging
its exposure to the variability in future natural gas and coffee cash flows is
six months and seven months, respectively. No gains or losses were reclassified
into earnings during fiscal 2002 as a result of the discontinuance of natural
gas and coffee cash flow hedges.
Interest Rate Lock Agreement
During fiscal 2002, the Company entered into a treasury interest rate lock
agreement (treasury lock) to hedge the risk that the cost of a future issuance
of fixed rate debt may be adversely affected by interest rate fluctuations. The
treasury lock, which had a $75,000 notional principal amount of indebtedness,
was used to hedge a portion of the interest payments associated with $150,000 of
debt subsequently issued in March 2002. The treasury lock was settled at the
time of the related debt issuance with a net gain of $267 being recognized in
other comprehensive income. The net gain on the treasury lock is being amortized
into earnings as an adjustment to interest expense over the same period in which
the related interest costs on the new debt issuance are being recognized in
earnings. Amortization of $67 was recognized in earnings as an adjustment to
interest expense during fiscal 2002. It is expected that $53 of this gain will
be recognized in earnings as an adjustment to interest expense during the next
12 months.
NOTE 9 - FINANCIAL INSTRUMENTS
The Company has participated in the financial derivatives markets to manage its
exposure to interest rate fluctuations. The Company had interest rate swaps with
a notional amount of $200,000, which it used to convert variable rates on its
long-term debt to fixed rates effective May 30, 1995. The Company received the
one-month commercial paper interest rate and paid fixed-rate interest ranging
from 7.51 percent to 7.89 percent. The interest rate swaps were settled during
January 1996 at a cost to the Company of $27,670. This cost is being recognized
as an adjustment to interest expense over the term of the Company's 10-year,
6.375 percent notes and 20-year, 7.125 percent debentures (see Note 7).
The following methods were used in estimating fair value disclosures for
significant financial instruments: Cash equivalents and short-term debt
approximate their carrying amount due to the short duration of those items.
Short-term investments are carried at amortized cost, which approximates fair
value. Long-term debt is based on quoted market prices or, if market prices are
not available, the present value of the underlying cash flows discounted at the
Company's incremental borrowing rates. The carrying amounts and fair values of
the Company's significant financial instruments are as follows:
May 26, 2002 May 27, 2001
- --------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $152,875 $152,875 $ 61,814 $ 61,814
Short-term investments 9,904 9,904 -- --
Short-term debt -- -- 12,000 12,000
Total long-term debt 662,506 680,115 520,574 513,392
- --------------------------------------------------------------------------------------------------------------------
24
NOTE 10 - STOCKHOLDERS' EQUITY
Treasury Stock
The Company's Board of Directors has approved a stock repurchase program that
authorizes the Company to repurchase up to 96.9 million shares of the Company's
common stock. In fiscal 2002, 2001, and 2000, the Company purchased treasury
stock totaling $208,578, $176,511, and $202,105, respectively. As of May 26,
2002, a total of 86.3 million shares have been purchased under the program. The
Company's stock repurchase program is used by the Company to offset the dilutive
effect of stock option exercises and to increase shareholder value. The
repurchased common stock is reflected as a reduction of stockholders' equity.
As a part of its stock repurchase program, the Company issues equity put options
from time to time that entitle the holder to sell shares of the Company's common
stock to the Company, at a specified price, if the holder exercises the option.
In fiscal 2000, the Company issued put options for 2,625,000 shares for $1,814
in premiums. At May 28, 2000, put options for 375,000 shares were outstanding.
No put options were issued in fiscal 2002 or 2001 or outstanding at May 26, 2002
or May 27, 2001.
Stock Purchase/Loan Program
The Company has share ownership guidelines for its executive management. To
assist management in meeting these guidelines, the Company implemented the 1998
Stock Purchase/Loan Program (1998 Program) under its Stock Option and Long-Term
Incentive Plan of 1995. The 1998 Program provides loans to executives and awards
two options for every new share purchased, up to a maximum total share value
equal to a designated percentage of the executive's base compensation. Loans are
full recourse and interest bearing, with a maximum principal amount of 75
percent of the value of the stock purchased. The stock purchased is held on
deposit with the Company until the loan is repaid. The interest rate for loans
under the 1998 Program is fixed and is equal to the applicable federal rate for
mid-term loans with semi-annual compounding for the month in which the loan
originates. Interest is payable on a weekly basis. Loan principal is payable in
installments with 25 percent, 25 percent, and 50 percent of the total loan due
at the end of the fifth, sixth, and seventh years of the loan. The Company
accounts for outstanding officer notes receivable as a reduction of
stockholders' equity.
Stockholders' Rights Plan
Under the Company's Rights Agreement, as amended, each share of the Company's
common stock has associated with it two-thirds of a right to purchase
one-hundredth of a share of the Company's Series A Participating Cumulative
Preferred Stock at a purchase price of $62.50, subject to adjustment under
certain circumstances to prevent dilution. The number of rights associated with
each share of the Company's common stock reflects an adjustment resulting from
the Company's three-for-two stock split in May 2002. The rights are exercisable
when, and are not transferable apart from the Company's common stock until, a
person or group has acquired 20 percent or more, or makes a tender offer for 20
percent or more, of the Company's common stock. If the specified percentage of
the Company's common stock is then acquired, each right will entitle the holder
(other than the acquiring company) to receive, upon exercise, common stock of
either the Company or the acquiring company having a value equal to two times
the exercise price of the right. The rights are redeemable by the Company's
Board of Directors under certain circumstances and expire on May 24, 2005.
Stock Split
On March 21, 2002, the Company's Board of Directors declared a three-for-two
stock split of the Company's common stock. The stock split was effected in the
form of a 50 percent stock dividend which was distributed to stockholders on May
1, 2002, for all stockholders of record as of the close of business on April 10,
2002. In connection with the stock split, the number of common shares reserved
for issuance or subject to issuance under the Company's stock option, stock
grant, and other plans was proportionately increased. The total number of common
and preferred shares authorized for issuance under the Company's Articles of
Incorporation remained the same. All applicable references to number of shares
and per share amounts of common stock have been adjusted to reflect the stock
split.
25
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows:
May 26, 2002 May 27, 2001
- --------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $(12,933) $(13,102)
Unrealized gains on derivatives 380 --
Minimum pension liability adjustment (288) --
- --------------------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) $(12,841) $(13,102)
====================================================================================================================
Reclassification adjustments associated with pre-tax net derivative losses
realized in net earnings for fiscal 2002, 2001, and 2000 amounted to $209, $0,
and $0, respectively.
NOTE 11- LEASES
An analysis of rent expense incurred under operating leases is as follows:
Fiscal Year
- --------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Restaurant minimum rent $43,113 $40,007 $38,818
Restaurant percentage rent 3,550 3,163 2,183
Restaurant equipment minimum rent 8,386 8,388 8,267
Restaurant rent averaging expense (518) (510) (473)
Transportation equipment 2,481 2,320 1,946
Office equipment 1,526 1,323 1,090
Office space 1,387 1,020 597
Warehouse space 237 227 227
- --------------------------------------------------------------------------------------------------------------------
Total rent expense $60,162 $55,938 $52,655
====================================================================================================================
Minimum rental obligations are accounted for on a straight-line basis over the
term of the lease. Percentage rent expense is generally based on sales levels or
changes in the Consumer Price Index. Many of the Company's leases have renewal
periods totaling five to 20 years, exercisable at the option of the Company, and
require payment of property taxes, insurance, and maintenance costs in addition
to the rent payments. The annual non-cancelable future lease commitments for
each of the five fiscal years subsequent to May 26, 2002, and thereafter are:
$51,951 in 2003, $41,637 in 2004, $36,327 in 2005, $30,605 in 2006, $24,777 in
2007, and $74,132 thereafter, for a cumulative total of $259,429.
NOTE 12 - INTEREST, NET
The components of interest, net, are as follows:
Fiscal Year
- --------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Interest expense $41,493 $35,196 $24,999
Capitalized interest (3,653) (3,671) (1,910)
Interest income (1,255) (861) (701)
- --------------------------------------------------------------------------------------------------------------------
Interest, net $36,585 $30,664 $22,388
====================================================================================================================
Capitalized interest was computed using the Company's borrowing rate. The
Company paid $31,027, $24,281, and $19,834 for interest (excluding amounts
capitalized) in fiscal 2002, 2001, and 2000, respectively.
26
NOTE 13 - INCOME TAXES
The components of earnings before income taxes and the provision for income
taxes thereon are as follows:
Fiscal Year
- --------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes:
U.S. $ 359,947 $ 296,160 $ 269,802
Canada 3,362 5,058 4,105
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 363,309 $ 301,218 $ 273,907
- --------------------------------------------------------------------------------------------------------------------
Income taxes:
Current:
Federal $ 88,063 $ 79,285 $ 61,528
State and local 14,582 13,049 10,861
Canada 133 134 204
- --------------------------------------------------------------------------------------------------------------------
Total current $ 102,778 $ 92,468 $ 72,593
- --------------------------------------------------------------------------------------------------------------------
Deferred (principally U.S.) 22,743 11,750 24,609
- --------------------------------------------------------------------------------------------------------------------
Total income taxes $ 125,521 $ 104,218 $ 97,202
====================================================================================================================
During fiscal 2002, 2001, and 2000, the Company paid income taxes of $56,839,
$63,893, and $53,688, respectively.
The following table is a reconciliation of the U.S. statutory income tax rate to
the effective income tax rate included in the accompanying consolidated
statements of earnings:
Fiscal Year
- --------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
U.S. statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal tax benefits 3.1 3.1 3.3
Benefit of federal income tax credits (3.9) (4.1) (3.9)
Other, net 0.4 0.6 1.1
- --------------------------------------------------------------------------------------------------------------------
Effective income tax rate 34.6% 34.6% 35.5%
====================================================================================================================
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
May 26, 2002 May 27, 2001
- --------------------------------------------------------------------------------------------------------------------
Accrued liabilities $ 19,052 $ 14,899
Compensation and employee benefits 52,804 50,902
Asset disposition and restructuring liabilities 2,283 5,306
Net assets held for disposal 301 937
Other 2,392 2,436
- --------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets $ 76,832 $ 74,480
- --------------------------------------------------------------------------------------------------------------------
Buildings and equipment (93,752) (73,578)
Prepaid pension costs (18,096) (17,376)
Prepaid interest (3,478) (3,812)
Deferred rent and interest income (12,496) (13,474)
Capitalized software and other assets (12,127) (5,840)
Other (2,465) (3,182)
- --------------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities $(142,414) $ (117,262)
- --------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ (65,582) $ (42,782)
====================================================================================================================
A valuation allowance for deferred tax assets is provided when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Realization is dependent upon the generation of future taxable income
or the reversal of deferred tax liabilities during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. As of May 26, 2002, and May 27,
2001, no valuation allowance has been recognized for deferred tax assets because
the Company believes that sufficient projected future taxable income will be
generated to fully utilize the benefits of these deductible amounts.
27
NOTE 14 - RETIREMENT PLANS
Defined Benefit Plans and Post-Retirement Benefit Plan
Substantially all of the Company's employees are eligible to participate in a
retirement plan. The Company sponsors non-contributory defined benefit pension
plans for its salaried employees, in which benefits are based on various
formulas that include years of service and compensation factors, and a group of
hourly employees, in which a frozen level of benefits is provided. The Company's
policy is to fund, at a minimum, the amount necessary on an actuarial basis to
provide for benefits in accordance with the requirements of the Employee
Retirement Income Security Act of 1974, as amended. The Company also sponsors a
contributory post-retirement benefit plan that provides health care benefits to
its salaried retirees.
The following provides a reconciliation of the changes in the plan benefit
obligation, fair value of plan assets, and the funded status of the plans as of
February 28, 2002 and 2001:
Defined Benefit Plans (1) Post-Retirement Benefit Plan
- -------------------------------------------------- -------------- --------------- ---- --------------- ---------------
2002 2001 2002 2001
- -------------------------------------------------- -------------- --------------- ---- --------------- ---------------
- -------------------------------------------------- -------------- --------------- ---- --------------- ---------------
Change in Benefit Obligation:
Benefit obligation at beginning of period $ 97,339 $ 82,634 $ 6,739 $ 5,663
Service cost 3,586 3,488 291 246
Interest cost 7,145 6,450 500 448
Participant contributions -- -- 91 96
Benefits paid (4,412) (3,765) (214) (159)
Actuarial loss 7,497 8,532 1,949 445
----------- ----------- --------- ----------
Benefit obligation at end of period $ 111,155 $ 97,339 $ 9,356 $ 6,739
======== ========= ======== ========
Change in Plan Assets:
Fair value at beginning of period $ 120,042 $115,872 $ -- $ --
Actual return on plan assets (6,097) 7,894 -- --
Employer contributions 41 41 123 63
Participant contributions -- -- 91 96
Benefits paid (4,412) (3,765) (214) (159)
---------- ---------- --------- -----------
Fair value at end of period $ 109,574 $120,042 $ -- $ --
======== ======== =========== ============
Reconciliation of the Plan's Funded Status:
Funded status at end of year $ (1,581) $ 22,703 $ (9,356) $ (6,739)
Unrecognized transition asset -- (642) -- --
Unrecognized prior service cost (1,392) (1,849) 47 65
Unrecognized actuarial loss (gain) 47,762 22,857 1,579 (371)
Contributions for March to May 10 10 44 28
------------- ------------ ------------ -----------
Prepaid (accrued) benefit costs $ 44,799 $ 43,079 $ (7,686) $ (7,017)
========= ========= ========= =========
Components of the Consolidated Balance
Sheets:
Prepaid benefit costs $ 48,262 $ 45,624 $ -- $ --
Accrued benefit costs (3,929) (2,545) (7,686) (7,017)
Accumulated other comprehensive income 466 -- -- --
------------ -------------- ------------- -------------
Net asset (liability) recognized $ 44,799 $ 43,079 $ (7,686) $ (7,017)
========= ========= ========= =========
<FN>
(1) For plans with accumulated benefit obligations in excess of plan assets,
the accumulated benefit obligation and fair value of plan assets were
$3,939 and $0, respectively, as of February 28, 2002, and $2,781 and $0,
respectively, as of February 28, 2001.
</FN>
28
The following table presents the weighted-average assumptions used to determine
the actuarial present value of the defined benefit plans and the post-retirement
benefit plan obligations:
Defined Benefit Plans Post-Retirement Benefit Plan
- ---------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ---------------------------------------------------------------- ----------------------------------------------
Discount rate 7.0% 7.5% 7.0% 7.5%
Expected long-term rate of return on plan assets 10.4% 10.4% N/A N/A
Rate of future compensation increases 3.75% 4.0% N/A N/A
====================================================================================================================
The assumed health care cost trend rate increase in the per-capita charges for
benefits ranged from 9.0 percent to 10.0 percent for fiscal 2003, depending on
the medical service category. The rates gradually decrease to a range of 4.0
percent to 5.0 percent through fiscal 2007 and remain at that level thereafter.
The assumed health care cost trend rate has a significant effect on amounts
reported for retiree health care plans. A one-percentage-point variance in the
assumed health care cost trend rate would increase or decrease the total of the
service and interest cost components of net periodic post-retirement benefit
cost by $166 and $126, respectively, and would increase or decrease the
accumulated post-retirement benefit obligation by $1,955 and $1,560,
respectively.
Components of net periodic benefit cost (income) are as follows:
Defined Benefit Plans Post-Retirement Benefit Plan
- ------------------------------------------------- ---------- ----------- ---------- --- --------- ---------- --------
2002 2001 2000 2002 2001 2000
- ------------------------------------------------- ---------- ----------- ---------- --- --------- ---------- --------
- ------------------------------------------------- ---------- ----------- ---------- --- --------- ---------- --------
Service cost $ 3,586 $ 3,488 $ 3,091 $ 291 $ 246 $ 260
Interest cost 7,145 6,255 5,509 500 447 396
Expected return on plan assets (12,416) (11,589) (10,652) -- -- --
Amortization of unrecognized transition asset (642) (642) (642) -- -- --
Amortization of unrecognized prior service cost (456) (456) (456) 18 18 18
Recognized net actuarial loss (gain) 1,104 213 1,405 -- (18) --
- ------------------------------------------------- ---------- ----------- ---------- --- --------- ---------- --------
Net periodic benefit cost (income) $ (1,679) $(2,731) $(1,745) $ 809 $ 693 $ 674
================================================= ========== =========== ========== === ========= ========== ========
Defined Contribution Plan
The Company has a defined contribution plan covering most employees age 21 and
older. The Company matches contributions for participants with at least one year
of service at up to six percent of compensation, based on Company performance.
The match ranges from a minimum of $0.25 up to $1.00 for each dollar contributed
by the participant. The plan had net assets of $442,030 at May 26, 2002, and
$363,610 at May 27, 2001. Expense recognized in fiscal 2002, 2001, and 2000 was
$1,593, $3,358, and $3,729, respectively. Employees classified as "highly
compensated" under the Internal Revenue Code are ineligible to participate in
this plan. Amounts payable to highly compensated employees under a separate,
non-qualified deferred compensation plan totaled $66,241 and $53,763 as of May
26, 2002 and May 27, 2001, respectively.
The defined contribution plan includes an Employee Stock Ownership Plan (ESOP).
This ESOP originally borrowed $50,000 from third parties, with guarantees by the
Company, and borrowed $25,000 from the Company at a variable interest rate. The
$50,000 third party loan was refinanced in 1997 by a commercial bank's loan to
the Company and a corresponding loan from the Company to the ESOP. Compensation
expense is recognized as contributions are accrued. In addition to matching plan
participant contributions, Company contributions to the plan are also made to
pay certain employee incentive bonuses. Fluctuations in the Company's stock
price impact the amount of expense to be recognized. Contributions to the plan,
plus the dividends accumulated on allocated and unallocated shares held by the
ESOP, are used to pay principal, interest, and expenses of the plan. As loan
payments are made, common stock is allocated to ESOP participants. In fiscal
2002, 2001, and 2000, the ESOP incurred interest expense of $1,258, $3,086, and
$3,436, respectively, and used dividends received of $735, $415, and $941,
respectively, and contributions received from the Company of $5,166, $9,224, and
$9,385, respectively, to pay principal and interest on its debt.
Company shares owned by the ESOP are included in average common shares
outstanding for purposes of calculating net earnings per share. At May 26, 2002,
the ESOP's debt to the Company had a balance of $39,140 with a variable rate of
interest of 2.17 percent; $22,240 of the principal balance is due to be repaid
no later than December 2007, with the remaining $16,900 due to be repaid no
later than December 2014. The number of Company common shares within the ESOP at
May 26, 2002, approximates 13,460,000 shares, representing 4,682,000 allocated
shares, 197,000 committed-to-be-released shares, and 8,581,000 suspense shares.
29
NOTE 15 - STOCK PLANS
The Company maintains three principal stock option and stock grant plans: the
Amended and Restated Stock Option and Long-Term Incentive Plan of 1995 (1995
Plan); the Restaurant Management and Employee Stock Plan of 2000 (2000 Plan);
and the Stock Plan for Directors (Director Plan). All of the plans are
administered by the Compensation Committee of the Board of Directors. The 1995
Plan provides for the issuance of up to 33,300,000 common shares in connection
with the granting of non-qualified stock options, restricted stock, or RSUs to
key employees. Restricted stock and RSUs may be granted under the plan for up to
2,250,000 shares. The 2000 Plan provides for the issuance of up to 5,400,000
common shares out of the Company's treasury in connection with the granting of
non-qualified stock options and restricted stock or RSUs to key employees,
excluding directors and Section 16 reporting officers. Restricted stock and RSUs
may be granted under the plan for up to five percent of the shares authorized
under the plan. The Director Plan provides for the issuance of up to 375,000
common shares out of the Company's treasury in connection with the granting of
non-qualified stock options and restricted stock and RSUs to non-employee
directors. Under all of the plans, stock options are granted at a price equal to
the fair market value of the shares at the date of grant, for terms not
exceeding ten years, and have various vesting periods at the discretion of the
Compensation Committee. Outstanding options generally vest over two to four
years. Restricted stock and RSUs granted under the 1995 and 2000 Plans generally
vest over periods ranging from three to five years and no sooner than one year
from the date of grant. The restricted period for certain grants may be
accelerated based on performance goals established by the Committee.
The Company also maintains the Compensation Plan for Non-Employee Directors.
This plan provides that non-employee directors may elect to receive their annual
retainer and meeting fees in any combination of cash, deferred cash, or Company
common shares, and authorizes the issuance of up to 75,000 common shares out of
the Company's treasury for this purpose. The common shares issuable under the
plan have an aggregate fair market value equal to the value of the foregone
retainer and meeting fees.
The per share weighted-average fair value of stock options granted during fiscal
2002, 2001, and 2000 was $12.25, $11.69, and $4.31, respectively. These amounts
were determined using the Black Scholes option-pricing model, which values
options based on the stock price at the grant date, the expected life of the
option, the estimated volatility of the stock, expected dividend payments, and
the risk-free interest rate over the expected life of the option. The dividend
yield was calculated by dividing the current annualized dividend by the option
price for each grant. The expected volatility was determined considering stock
prices for the fiscal year the grant occurred and prior fiscal years, as well as
considering industry volatility data. The risk-free interest rate was the rate
available on zero coupon U.S. government obligations with a term equal to the
remaining term for each grant. The expected life of the option was estimated
based on the exercise history from previous grants.
The weighted-average assumptions used in the Black Scholes model were as
follows:
Stock Options
Granted in Fiscal Year
- --------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.50% 7.00% 6.50%
Expected volatility of stock 30.0% 30.0% 30.0%
Dividend yield 0.1% 0.1% 0.1%
Expected option life 6.0 years 6.0 years 6.0 years
====================================================================================================================
30
The Company applies an intrinsic value method in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for stock
options granted under any of its stock plans because the exercise price of all
options granted was equal to the current market value of the Company's stock on
the grant date. Had the Company determined compensation expense for its stock
options based on the fair value at the grant date as prescribed under SFAS No.
123, the Company's net earnings and net earnings per share would have been
reduced to the pro forma amounts indicated below:
Fiscal Year
- --------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
As reported $ 237,788 $ 197,000 $ 176,705
Pro forma $ 222,097 $ 184,542 $ 168,171
Basic net earnings per share
As reported $ 1.36 $ 1.10 $ 0.92
Pro forma $ 1.27 $ 1.03 $ 0.87
Diluted net earnings per share
As reported $ 1.30 $ 1.06 $ 0.89
Pro forma $ 1.21 $ 0.99 $ 0.85
====================================================================================================================
To determine pro forma net earnings, reported net earnings have been adjusted
for compensation expense associated with stock options granted that are expected
to eventually vest.
Stock option activity during the periods indicated was as follows:
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
Exercisable Per Share Outstanding Per Share
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Balance at May 30, 1999 8,825,661 $ 7.02 23,249,327 $ 7.57
- --------------------------------------------------------------------------------------------------------------------
Options granted 5,591,244 $ 13.94
Options exercised (1,729,383) $ 6.12
Options cancelled (758,427) $ 8.71
- --------------------------------------------------------------------------------------------------------------------
Balance at May 28, 2000 10,068,389 $ 7.12 26,352,761 $ 8.98
- --------------------------------------------------------------------------------------------------------------------
Options granted 5,375,727 $ 10.99
Options exercised (4,670,100) $ 7.00
Options cancelled (926,100) $ 10.82
- --------------------------------------------------------------------------------------------------------------------
Balance at May 27, 2001 12,222,339 $ 7.62 26,132,288 $ 9.68
- --------------------------------------------------------------------------------------------------------------------
Options granted 5,776,350 $ 17.36
Options exercised (4,310,327) $ 8.36
Options cancelled (675,776) $ 13.49
- --------------------------------------------------------------------------------------------------------------------
Balance at May 26, 2002 12,152,538 $ 8.31 26,922,535 $ 11.44
- --------------------------------------------------------------------------------------------------------------------
The following table provides information regarding exercisable and outstanding
options as of May 26, 2002:
Weighted-
Weighted- Weighted- Average
Range of Average Average Remaining
Exercise Options Exercise Options Exercise Contractual
Price Per Share Exercisable Price Per Share Outstanding Price Per Share Life (Years)
- --------------------------------------------------------------------------------------------------------------------
$ 4.00 - $10.00 8,911,470 7.02 8,933,218 7.02 3.28
$10.01 - $15.00 3,178,559 11.75 12,273,097 11.95 7.28
$15.01 - $20.00 59,461 18.18 5,549,702 17.01 9.15
Over $20.00 3,048 20.45 166,518 25.89 8.55
- --------------------------------------------------------------------------------------------------------------------
12,152,538 $ 8.31 26,922,535 $11.44 6.35
====================================================================================================================
The Company granted restricted stock and RSUs during fiscal 2002, 2001, and 2000
totaling 428,280, 563,306 and 336,459 shares, respectively. The per share
weighted-average fair value of the awards granted in fiscal 2002, 2001, and 2000
was $17.10, $10.67, and $13.64, respectively. After giving consideration to
assumed forfeiture rates and subsequent forfeiture adjustments, compensation
expense recognized in net earnings for awards granted in fiscal 2002, 2001, and
2000 amounted to $4,392, $4,164, and $3,314, respectively.
31
NOTE 16 - EMPLOYEE STOCK PURCHASE PLAN
The Company maintains the Darden Restaurants Employee Stock Purchase Plan to
provide eligible employees who have completed one year of service an opportunity
to purchase shares of its common stock, subject to certain limitations. Under
the plan, employees may elect to purchase shares at the lower of 85 percent of
the fair market value of the Company's common stock as of the first or last
trading days of each quarterly participation period. During fiscal 2002, 2001,
and 2000, employees purchased shares of common stock under the plan totaling
284,576, 328,338, and 364,722, respectively. As of May 26, 2002, an additional
1,039,865 shares are available for issuance.
No compensation expense has been recognized for shares issued under the plan.
The impact of recognizing compensation expense for purchases made under the plan
in accordance with the fair value method specified in SFAS No. 123 is less than
$200 and has no impact on reported basic or diluted net earnings per share.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
The Company makes trade commitments in the course of its normal operations. As
of May 26, 2002, and May 27, 2001, the Company was contingently liable for
approximately $9,786 and $10,889, respectively, under outstanding trade letters
of credit issued in connection with purchase commitments. These letters of
credit have terms of one month or less and are used to collateralize the
Company's obligations to third parties for the purchase of inventories.
As collateral for performance on contracts and as credit guarantees to banks and
insurers, the Company is contingently liable under standby letters of credit. As
of May 26, 2002, and May 27, 2001, the Company had $30,000 and $30,000,
respectively, of standby letters of credit related to workers' compensation and
general liabilities accrued in the Company's consolidated financial statements.
As of May 26, 2002, and May 27, 2001, the Company had $8,608 and $8,166,
respectively, of standby letters of credit related to contractual operating
lease obligation and other payments. All standby letters of credit are renewable
annually.
As of May 26, 2002, and May 27, 2001, the Company had $5,463 and $6,922,
respectively, of guarantees associated with third party sub-lease obligations.
The guarantees expire over the lease terms.
The Company is involved in litigation arising from the normal course of
business. In the opinion of management, this litigation is not expected to
materially impact the Company's consolidated financial statements.
NOTE 18 - QUARTERLY DATA (UNAUDITED)
The following table summarizes unaudited quarterly data for fiscal 2002 and
2001:
Fiscal 2002 - Quarters Ended
- --------------------------------------------------------------------------------------------------------------------
Aug. 26 Nov. 25 Feb. 24 May 26 Total
- --------------------------------------------------------------------------------------------------------------------
Sales $1,073,892 $1,007,475 $1,124,943 $1,162,391 $4,368,701
Restaurant Operating Profit (1) 245,332 206,506 258,435 273,829 984,102
Earnings before Income Taxes (2) 95,577 56,255 102,776 108,701 363,309
Net Earnings (2) 62,156 36,463 66,220 72,949 237,788
Net Earnings per Share (2):
Basic 0.35 0.21 0.38 0.42 1.36
Diluted 0.34 0.20 0.36 0.40 1.30
Dividends Paid per Share -- 0.0265 -- 0.0265 0.053
Stock Price:
High 21.667 21.653 28.660 29.767 N/A
Low 16.400 15.400 20.007 23.733 N/A
====================================================================================================================
<FN>
(1) Restaurant operating profit is calculated as sales less cost of sales.
(2) Includes after-tax restructuring credits of $1,394 and $183 recorded
in the second and fourth quarters of fiscal 2002, respectively. The
related basic and diluted net earnings per share impact of the credits
recorded in the second and fourth quarters of fiscal 2002 amounted to
$0.01 and $0.00, respectively.
</FN>
32
Fiscal 2001 - Quarters Ended
- --------------------------------------------------------------------------------------------------------------------
Aug. 27 Nov. 26 Feb. 25 May 27 Total
- --------------------------------------------------------------------------------------------------------------------
Sales $1,011,292 $925,879 $981,216 $1,074,032 $3,992,419
Restaurant Operating Profit (1) 224,758 191,075 214,640 237,513 867,986
Earnings before Income Taxes 87,838 45,311 75,491 92,578 301,218
Net Earnings 56,921 29,541 49,527 61,011 197,000
Net Earnings per Share:
Basic 0.31 0.17 0.27 0.35 1.10
Diluted 0.31 0.16 0.27 0.33 1.06
Dividends Paid per Share -- 0.0265 -- 0.0265 0.053
Stock Price:
High 12.583 17.500 18.000 19.660 N/A
Low 10.292 11.083 12.667 13.773 N/A
====================================================================================================================
33
Five-Year Financial Summary
(In thousands, except per share data)
Fiscal Year Ended
- --------------------------------------------------------------------------------------------------------------------
May 26, May 27, May 28, May 30, May 31,
Operating Results 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Sales $4,368,701 $3,992,419 $3,675,461 $ 3,432,375 $ 3,261,555
- --------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of sales:
Food and beverage 1,384,481 1,302,926 1,199,709 1,133,705 1,083,629
Restaurant labor 1,373,416 1,261,837 1,181,156 1,117,401 1,062,490
Restaurant expenses 626,702 559,670 510,727 485,708 477,182
- --------------------------------------------------------------------------------------------------------------------
Total Cost of Sales $3,384,599 $3,124,433 $2,891,592 $ 2,736,814 $ 2,623,301
- --------------------------------------------------------------------------------------------------------------------
Restaurant Operating Profit 984,102 867,986 783,869 695,561 638,254
- --------------------------------------------------------------------------------------------------------------------
Selling, general, and administrative 420,947 389,240 363,041 343,280 338,209
Depreciation and amortization 165,829 46,864 130,464 125,327 126,289
Interest, net 36,585 30,664 22,388 19,540 20,084
Restructuring and asset impairment
credit, net (2,568) -- (5,931) (8,461) --
- --------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses $4,005,392 $3,691,201 $3,401,554 $ 3,216,500 $ 3,107,883
- --------------------------------------------------------------------------------------------------------------------
Earnings before Income Taxes 363,309 301,218 273,907 215,875 153,672
Income Taxes 125,521 104,218 97,202 75,337 51,958
- --------------------------------------------------------------------------------------------------------------------
Net Earnings (1) $ 237,788 $ 197,000 $ 176,705 $ 140,538 $ 101,714
- --------------------------------------------------------------------------------------------------------------------
Net Earnings per Share: (1)
Basic $ 1.36 $ 1.10 $ 0.92 $ 0.68 $ 0.46
Diluted $ 1.30 $ 1.06 $ 0.89 $ 0.66 $ 0.45
- --------------------------------------------------------------------------------------------------------------------
Average Number of Common Shares
Outstanding, Net of Shares Held in
Treasury:
Basic 174,700 179,600 192,800 206,000 222,500
Diluted 183,500 185,600 197,800 212,100 227,100
====================================================================================================================
Financial Position
Total Assets $2,529,736 $2,216,534 $1,969,555 $ 1,888,560 $ 1,984,742
Land, Buildings, and Equipment 1,920,768 1,779,515 1,578,541 1,461,535 1,490,348
Working Capital (Deficit) (151,483) (226,116) (316,427) (194,478) (161,123)
Long-term Debt 662,506 520,574 306,586 316,451 310,608
Stockholders' Equity 1,128,877 1,033,318 958,602 962,349 1,019,845
Stockholders' Equity per Share 6.56 5.87 5.23 4.86 4.82
====================================================================================================================
Other Statistics
Cash Flow from Operations $ 508,142 $ 420,570 $ 342,626 $ 357,942 $ 239,933
Capital Expenditures 318,392 355,139 268,946 123,673 112,168
Dividends Paid 9,225 9,458 10,134 10,857 11,681
Dividends Paid per Share 0.053 0.053 0.053 0.053 0.053
Advertising Expense 187,950 177,998 165,590 162,934 165,928
Stock Price:
High 29.767 19.660 15.375 15.583 12.083
Low 15.400 10.292 8.292 9.458 5.417
Close $ 25.030 $ 19.267 $ 12.583 $ 14.208 $ 10.292
Number of Employees 133,200 128,900 122,300 116,700 114,800
Number of Restaurants 1,211 1,168 1,139 1,139 1,151
====================================================================================================================
<FN>
(1) Net earnings and net earnings per share, excluding net restructuring and
asset impairment credit, for the fiscal years presented is as follows:
</FN>
Net Earnings $ 236,211 $ 197,000 $ 173,082 $ 135,313 $ 101,714
Net Earnings per Share:
Basic $ 1.35 $ 1.10 $ 0.90 $ 0.66 $ 0.46
Diluted $ 1.29 $ 1.06 $ 0.87 $ 0.64 $ 0.45
34