- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-Q - -------------------------------------------------------------------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 24, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ......... to ......... - -------------------------------------------------------------------------------- 1-13666 Commission File Number - -------------------------------------------------------------------------------- DARDEN RESTAURANTS, INC. (Exact name of registrant as specified in its charter) Florida 59-3305930 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5900 Lake Ellenor Drive, Orlando, Florida 32809 (Address of principal executive offices) (Zip Code) 407-245-4000 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No - -------------------------------------------------------------------------------- APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares of Common Stock, no par value, outstanding as of March 29, 2002: 115,454,671 (excluding 56,583,536 shares held in the Company's treasury). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
DARDEN RESTAURANTS, INC. TABLE OF CONTENTS Page Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Earnings 3 Consolidated Balance Sheets 5 Consolidated Statements of Changes in Stockholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II - Other Information Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 Index to Exhibits 22 2
PART I FINANCIAL INFORMATION Item 1. Financial Statements DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended - -------------------------------------------------------------------------------------------------------------------- February 24, 2002 February 25, 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Sales........................................................ $1,134,388 $988,635 Costs and Expenses: Cost of sales: Food and beverage....................................... 350,310 313,242 Restaurant labor........................................ 358,327 313,930 Restaurant expenses..................................... 160,710 141,897 ---------- -------- Total Cost of Sales................................... $ 869,347 $769,069 Selling, general and administrative....................... 111,284 98,455 Depreciation and amortization............................. 41,865 37,092 Interest, net............................................. 9,116 8,528 ---------- -------- Total Costs and Expenses............................ $1,031,612 $913,144 ---------- -------- Earnings before Income Taxes................................. 102,776 75,491 Income Taxes................................................. (36,556) (25,964) ---------- -------- Net Earnings................................................. $ 66,220 $ 49,527 ========== ======== Net Earnings per Share: Basic..................................................... $ 0.57 $ 0.41 ========== ======== Diluted................................................... $ 0.54 $ 0.40 ========== ======== Average Number of Common Shares Outstanding: Basic..................................................... 116,700 119,800 ========== ======== Diluted................................................... 123,000 124,000 ========== ======== - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 3
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <TABLE> <CAPTION> Thirty-Nine Weeks Ended - -------------------------------------------------------------------------------------------------------------------- February 24, 2002 February 25, 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Sales........................................................ $3,229,382 $2,938,798 Costs and Expenses: Cost of sales: Food and beverage....................................... 1,015,204 942,640 Restaurant labor........................................ 1,020,134 935,469 Restaurant expenses..................................... 468,518 417,198 ---------- ---------- Total Cost of Sales................................... $2,503,856 $2,295,307 Selling, general and administrative....................... 324,379 303,755 Depreciation and amortization............................. 122,436 108,517 Interest, net............................................. 26,372 22,579 Restructuring credit...................................... (2,269) -- ---------- ---------- Total Costs and Expenses............................ $2,974,774 $2,730,158 ---------- ---------- Earnings before Income Taxes................................. 254,608 208,640 Income Taxes................................................. (89,769) (72,651) ---------- ---------- Net Earnings................................................. $ 164,839 $ 135,989 ========== ========== Net Earnings per Share: Basic..................................................... $ 1.41 $ 1.13 ========== ========== Diluted................................................... $ 1.34 $ 1.10 ========== ========== Average Number of Common Shares Outstanding: Basic..................................................... 116,900 120,400 ========== ========== Diluted................................................... 122,600 124,100 ========== ========== - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 4
DARDEN RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) (Unaudited) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- February 24, 2002 May 27, 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents................................. $ 37,144 $ 61,814 Receivables............................................... 29,485 32,870 Inventories............................................... 229,427 148,429 Net assets held for disposal.............................. 10,579 10,087 Prepaid expenses and other current assets................. 16,727 26,942 Deferred income taxes..................................... 50,538 48,000 ------------ ------------ Total Current Assets.................................... $ 373,900 $ 328,142 Land, Buildings and Equipment................................ 1,870,658 1,779,515 Other Assets................................................. 153,201 108,877 ------------ ------------ Total Assets........................................ $ 2,397,759 $ 2,216,534 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 174,394 $ 156,859 Short-term debt........................................... 62,700 12,000 Current portion of long-term debt......................... 2,640 2,647 Accrued payroll........................................... 88,770 82,588 Accrued income taxes...................................... 47,185 47,698 Other accrued taxes....................................... 29,081 27,429 Other current liabilities................................. 268,584 225,037 ------------ ------------ Total Current Liabilities............................... $ 673,354 $ 554,258 Long-term Debt............................................... 513,053 517,927 Deferred Income Taxes........................................ 106,728 90,782 Other Liabilities............................................ 19,780 20,249 ------------ ------------ Total Liabilities.................................. $ 1,312,915 $ 1,183,216 ------------ ------------ Stockholders' Equity: Common stock and surplus.................................. $ 1,463,190 $ 1,405,799 Retained earnings......................................... 692,323 532,121 Treasury stock............................................ (1,007,760) (840,254) Accumulated other comprehensive income.................... (14,282) (13,102) Unearned compensation..................................... (46,644) (49,322) Officer notes receivable................................. (1,983) (1,924) ------------ ------------ Total Stockholders' Equity......................... $ 1,084,844 $ 1,033,318 ------------ ------------ Total Liabilities and Stockholders' Equity......... $ 2,397,759 $ 2,216,534 ============ ============ - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 5
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Thirty-Nine Weeks Ended February 24, 2002 and February 25, 2001 (In Thousands) (Unaudited) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Officer Total and Retained Treasury Comprehensive Unearned Notes Stockholders' Surplus Earnings Stock Income Compensation Receivable Equity - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> 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.................. -- 164,839 -- -- -- -- 164,839 Other comprehensive income: Foreign currency adjustment -- -- -- (648) -- -- (648) Change in fair value of derivatives............... -- -- -- (532) -- -- (532) -------------- Total comprehensive income -- -- -- -- -- -- 163,659 Cash dividends declared.......... -- (4,637) -- -- -- -- (4,637) Stock option exercises (2,534 shares)....................... 30,077 -- 1,161 -- -- -- 31,238 Issuance of restricted stock (212 shares), net of forfeiture adjustments................... 4,517 -- 789 -- (5,426) -- (120) Earned compensation.............. -- -- -- -- 3,064 -- 3,064 ESOP note receivable repayments.. -- -- -- -- 5,040 -- 5,040 Income tax benefit credited to equity........................ 20,834 -- -- -- -- -- 20,834 Purchases of common stock for treasury (5,017 shares)....... -- -- (170,831) -- -- -- (170,831) Issuance of treasury stock under Employee Stock Purchase and other plans (154 shares)...... 1,963 -- 1,375 -- -- -- 3,338 Issuance of officer notes (net).. -- -- -- -- -- (59) (59) - ---------------------------------------------------------------------------------------------------------------------------- Balance at February 24, 2002 $1,463,190 $692,323 $(1,007,760) $(14,282) $(46,644) $(1,983) $1,084,844 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Officer Total and Retained Treasury Comprehensive Unearned Notes Stockholders' Surplus Earnings Stock Income Compensation Receivable Equity - ---------------------------------------------------------------------------------------------------------------------------- Balance at May 28, 2000..........$1,351,707 $344,579 $(666,837) $(12,457) $(56,522) $(1,868) $958,602 Comprehensive income: Net earnings.................. -- 135,989 -- -- -- -- 135,989 Other comprehensive income, foreign currency adjustment... -- -- -- (517) -- -- (517) -------------- Total comprehensive income -- -- -- -- -- -- 135,472 Cash dividends declared.......... -- (4,766) -- -- -- -- (4,766) Stock option exercises (2,289 shares)...................... 23,758 -- -- -- -- -- 23,758 Issuance of restricted stock (293 shares), net of forfeiture adjustments....... 3,941 -- 1,035 -- (5,040) -- (64) Earned compensation.............. -- -- -- -- 3,077 -- 3,077 ESOP note receivable repayments.. -- -- -- -- 7,625 -- 7,625 Income tax benefit credited to equity....................... 10,324 -- -- -- -- -- 10,324 Purchases of common stock for treasury (6,433 shares)...... -- -- (125,231) -- -- -- (125,231) Issuance of treasury stock under Employee Stock Purchase and other plans (184 shares)..... 1,221 -- 1,701 -- -- -- 2,922 Issuance of officer notes (net).. -- -- -- -- -- (33) (33) - ---------------------------------------------------------------------------------------------------------------------------- Balance at February 25, 2001 $1,390,951 $475,802 $(789,332) $(12,974) $(50,860) $(1,901) $1,011,686 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 6
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended - -------------------------------------------------------------------------------------------------------------------- February 24, 2002 February 25, 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings.................................................... $ 66,220 $ 49,527 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization................................. 41,865 37,092 Amortization of unearned compensation and loan costs.......... 1,771 1,785 Change in current assets and liabilities...................... 117,791 62,175 Change in other liabilities .................................. (69) (405) (Gain) Loss on disposal of land, buildings and equipment...... (317) 1,327 Change in cash surrender value of trust owned life insurance 617 -- Deferred income taxes......................................... 10,954 910 Income tax benefit credited to equity....................... 10,157 1,699 Other, net.................................................... (564) 49 ------------ --------- Net Cash Provided by Operating Activities................... $ 248,425 $ 154,159 ------------ --------- Cash Flows--Investing Activities Purchases of land, buildings and equipment...................... (91,092) (86,736) Increase in other assets........................................ (5,131) (4,521) Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)...................... 4,355 3,324 ------------ --------- Net Cash Used by Investing Activities....................... $ (91,868) $ (87,933) ------------ ---------- Cash Flows--Financing Activities Proceeds from issuance of common stock.......................... 13,883 4,827 Purchases of treasury stock..................................... (108,965) (42,008) ESOP note receivable repayment.................................. 1,280 1,675 Decrease in short-term debt..................................... (44,300) (7,300) Repayment of long-term debt..................................... (1,280) (1,675) Payment of loan costs........................................... (30) (201) ------------ --------- Net Cash Used by Financing Activities....................... $ (139,412) $ (44,682) ------------ --------- Increase in Cash and Cash Equivalents.............................. 17,145 21,544 Cash and Cash Equivalents - Beginning of Period.................... 19,999 7,753 ------------ --------- Cash and Cash Equivalents - End of Period.......................... $ 37,144 $ 29,297 ============ ========= Cash Flow from Changes in Current Assets and Liabilities Receivables..................................................... (4,906) 109 Inventories..................................................... (2,631) 125 Prepaid expenses and other current assets....................... (372) 1,734 Accounts payable................................................ 42,010 (4) Accrued payroll................................................. 20,994 11,395 Accrued income taxes............................................ 9,284 22,655 Other accrued taxes............................................. 2,620 245 Other current liabilities....................................... 50,792 25,916 ------------ --------- Change in Current Assets and Liabilities...................... $ 117,791 $ 62,175 ============ ========= - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 7
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Thirty-Nine Weeks Ended - -------------------------------------------------------------------------------------------------------------------- February 24, 2002 February 25, 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings.................................................... $164,839 $ 135,989 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization................................. 122,436 108,517 Amortization of unearned compensation and loan costs.......... 5,408 5,189 Change in current assets and liabilities...................... 5,244 (28,886) Change in other liabilities .................................. (469) (447) Loss on disposal of land, buildings and equipment............. 2,344 1,346 Change in cash surrender value of trust owned life insurance.. 1,447 --- Deferred income taxes......................................... 13,408 (247) Income tax benefit credited to equity......................... 20,834 10,324 Non-cash restructuring credit................................. (2,269) --- Other, net.................................................... (703) 13 --------- --------- Net Cash Provided by Operating Activities................... $ 332,519 $ 231,798 --------- --------- Cash Flows--Investing Activities Purchases of land, buildings and equipment...................... (223,774) (244,714) Increase in other assets........................................ (18,326) (7,200) Purchase of trust owned life insurance.......................... (31,500) --- Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)...................... 6,864 11,923 --------- --------- Net Cash Used by Investing Activities....................... $(266,736) $(239,991) ========== ========== Cash Flows--Financing Activities Proceeds from issuance of common stock.......................... 34,406 26,504 Dividends paid.................................................. (4,637) (4,766) Purchases of treasury stock..................................... (170,831) (125,231) ESOP note receivable repayments................................. 5,040 7,625 Increase (decrease) in short-term debt.......................... 50,700 (33,000) Proceeds from issuance of long-term debt....................... --- 149,539 Repayment of long-term debt..................................... (5,047) (7,631) Payment of loan costs........................................... (84) (1,652) --------- --------- Net Cash (Used by) Provided by Financing Activities........ $ (90,453) $ 11,388 --------- --------- (Decrease) Increase in Cash and Cash Equivalents................... (24,670) 3,195 Cash and Cash Equivalents - Beginning of Period.................... 61,814 26,102 --------- --------- Cash and Cash Equivalents - End of Period.......................... $ 37,144 $ 29,297 ========= ========= Cash Flow from Changes in Current Assets and Liabilities Receivables..................................................... 3,385 (7,143) Inventories..................................................... (80,998) (68,161) Prepaid expenses and other current assets....................... 1,863 2,072 Accounts payable................................................ 17,535 3,718 Accrued payroll................................................. 6,182 264 Accrued income taxes............................................ (513) 7,713 Other accrued taxes............................................. 1,652 1,010 Other current liabilities....................................... 56,138 31,641 --------- --------- Change in Current Assets and Liabilities...................... $ 5,244 $ (28,886) ========= ========== - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 8
DARDEN RESTAURANTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollar Amounts in Thousands, Except per Share Data) Note 1. Background Darden Restaurants, Inc. (the "Company") owns and operates casual dining restaurants under the trade names Red Lobster(R), Olive Garden(R), Bahama Breeze(R) and Smokey Bones(R) BBQ Sports Bar. These consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). They do not include certain information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the thirteen and thirty-nine weeks ended February 24, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending May 26, 2002. These statements should be read in conjunction with the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended May 27, 2001 ("Form 10-K"). The accounting policies used in preparing these consolidated financial statements are the same as those described in our Form 10-K. Certain reclassifications have been made to prior period amounts to conform with current period presentation. Note 2. Consolidated Statements of Cash Flows During the thirteen and thirty-nine weeks ended February 24, 2002, the Company paid $7,739 and $22,877 respectively, for interest (net of amounts capitalized) and $6,138 and $56,191 respectively, for income taxes. During the thirteen and thirty-nine weeks ended February 25, 2001, the Company paid $8,364 and $18,064 respectively for interest (net of amounts capitalized) and $801 and $55,982 respectively, for income taxes. Note 3. Net Earnings Per Share 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 earnings per share computation. Options to purchase 1,025 and 29,667 shares of common stock were excluded from the calculation of diluted earnings per share for the thirteen weeks ended February 24, 2002 and February 25, 2001, respectively, because their exercise prices exceeded the average market price of common shares for the period. Options to purchase 13,525 and 2,524,418 shares of common stock were excluded from the calculation of diluted earnings per share for the thirty-nine weeks ended February 24, 2002 and February 25, 2001, respectively, for the same reason. Note 4. Derivatives In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Gains or losses resulting from changes in the fair values of those derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges is recognized in earnings. In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133". SFAS 138, which amended the accounting and reporting standards of SFAS 133 for certain derivative instruments and hedging activities, was required to be adopted concurrently with SFAS 133. The Company adopted SFAS 133 and SFAS 138 in the thirteen weeks ended August 26, 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 position, results of operations or cash flows. 9
Natural Gas and Coffee Futures Contracts During the thirteen and thirty-nine weeks ended February 24, 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, a component of stockholders' equity. These changes in fair value will be included in earnings of future periods when the natural gas and coffee are purchased and used by the Company in its operations. Net losses of $238 and $273 were recognized in earnings during the thirteen and thirty-nine weeks ended February 24, 2002, respectively. It is expected that $238 of net losses related to these contracts, recognized in accumulated other comprehensive income at February 24, 2002, will be reclassified 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. As of February 24, 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 nine months and ten months, respectively. No gains or losses were reclassified into earnings as a result of the discontinuance of natural gas and coffee cash flow hedges because it was probable that the original forecasted transactions would not occur. Interest Rate Lock Agreement During the thirteen and thirty-nine weeks ended February 24, 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 had a $75,000 notional principal amount of indebtedness. To the extent the treasury lock is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the treasury lock are not included in current earnings but are reported as other comprehensive income, a component of stockholders' equity. Changes in fair value will be 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 recognized in earnings. A deferred loss of $294 related to the treasury lock was recognized in accumulated other comprehensive income at February 24, 2002. No amounts were recognized in earnings during the thirteen and thirty-nine weeks ended February 24, 2002. As discussed in Note 9 to the Consolidated Financial Statements, on March 4, 2002, the Company issued $150,000 of indebtedness due in March 2007. The Company simultaneously settled the treasury lock at a gain of $267. 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 5. 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 were purchased to offset some of the costs of the participant earnings component of the Company's existing nonqualified deferred compensation plan. The cash surrender value of the policies, which is included in other assets in the accompanying consolidated balance sheets, amounted to $30,053 at February 24, 2002. Changes in cash surrender value are included in selling, general and administrative expense in the accompanying consolidated statements of earnings. Note 6. Restructuring Liability In 1997, the Company recorded restructuring charges of $70,900 in connection with the closing of certain restaurant properties. The related liabilities are included in other current liabilities in the accompanying consolidated balance sheets and were 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. The remaining restructuring actions, including disposal of the closed owned properties and the lease buy-outs related to the closed leased properties, are expected to be substantially completed during the current fiscal year. 10
A summary of restructuring liability activity for the thirty-nine weeks ended February 24, 2002 is as follows: <TABLE> <CAPTION> <S> <C> <C> Balance at May 27, 2001................................................ $ 5,798 Non-cash adjustments: Restructuring credit............................................. (2,269) Cash payments: Carrying costs and employee severance payments................... (679) Lease payments including lease buy-outs.......................... (395) ------- Balance at February 24, 2002........................................... $ 2,455 ======= </TABLE> During the thirty-nine weeks ended February 24, 2002, the Company reversed a portion of its 1997 restructuring liability totaling $2,269. The reversal was primarily the result of favorable lease terminations. Note 7. Stockholders' Equity Pursuant to the Company's 64.6 million share stock repurchase program and in accordance with applicable securities regulations, the Company repurchased 2,791,047 shares of its common stock for $108,965 in the thirteen weeks ended February 24, 2002, resulting in a cumulative repurchase as of February 24, 2002 of a total of 57,534,006 shares. The Company's stock repurchase plan 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. 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 amount of 75% of the value of the stock purchased. All stock purchased is held on deposit with the Company until the loan payment requirements are met. The interest rate for loans under the 1998 Program is the applicable federal rate for mid-term loans with semi-annual compounding for the month in which the loan originates. The Company accounts for outstanding officer notes receivable as a reduction of stockholders' equity. Prior to the thirteen weeks ended November 25, 2001, the Company accounted for these notes receivable as other assets. Therefore, in the accompanying consolidated balance sheets, officer notes receivable at May 27, 2001, have been reclassified as a reduction of stockholders' equity to conform to the current presentation. Note 8. Future Application of Accounting Standards 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 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 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. Currently, the Company recognizes certain sales incentives as selling, general and administrative expense. Although this pronouncement will not have any impact on the Company's consolidated results of operations or financial position, the presentation prescribed will have an effect of reducing net sales and selling, general and administrative expense in comparison to prior periods. The Company must adopt EITF 00-14 for all periods presented in the fourth quarter of fiscal 2002. Sales incentives included in selling, general and administrative expense for the thirteen weeks ended February 24, 2002 and February 25, 2001 amounted to $9,343 and $7,259, respectively. Sales incentives included in selling, general and administrative expense for the thirty-nine weeks ended February 24, 2002 and February 25, 2001 amounted to $22,658 and $20,052, respectively. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 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 121. SFAS 144 also establishes a single accounting model for long-lived assets to be disposed of by sale. The Company will adopt SFAS 144 in the first quarter of fiscal 2003. Adoption of SFAS 144 is not expected to materially impact the Company's consolidated financial position, results of operations or cash flows. 11
Note 9. Subsequent Events On March 4, 2002, the Company issued $150,000 of unsecured 5.75% medium-term notes due in March 2007. A portion of the proceeds from the issuance were used to repay short-term debt. The remaining proceeds will be used to fund working capital needs. 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 will be affected in the form of a 50% stock dividend to be 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 will be proportionately increased. Common share and earnings per share data included in the accompanying consolidated financial statements and footnotes have not been adjusted for the impacts of the stock split. The pro forma computation of basic and diluted earnings per share as if the stock split had been effective for all periods presented is as follows: <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended - -------------------------------------------------------------------------------------------------------------------- February 24, February 25, February 24, February 25, 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net Earnings............................... $66,220 $49,527 $164,839 $135,989 Net Earnings per Share: Basic................................... $ 0.38 $ 0.28 $ 0.94 $ 0.75 ======= ======= ======== ======== Diluted................................. $ 0.36 $ 0.27 $ 0.90 $ 0.73 ======= ======= ======== ======== Average Number of Common Shares Outstanding: Basic................................... 175,000 179,700 175,400 180,600 ======= ======= ======= ======= Diluted................................. 184,400 186,000 183,800 186,200 ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------- </TABLE> On March 21, 2002, the Board of Directors declared a four cents per share dividend to be paid on a pre-split basis to stockholders on May 1, 2002 for all stockholders of record as of the close of business on April 10, 2002. 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table sets forth selected restaurant operating data as a percentage of sales for the periods indicated. All information is derived from the consolidated statements of earnings for the thirteen and thirty-nine weeks ended February 24, 2002 and February 25, 2001. <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended - -------------------------------------------------------------------------------------------------------------------- February 24, February 25, February 24, February 25, 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Sales...................................... 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Cost of sales: Food and beverage..................... 30.9 31.7 31.4 32.1 Restaurant labor...................... 31.6 31.8 31.6 31.8 Restaurant expenses................... 14.2 14.3 14.5 14.2 ---- ----- ---- ----- Total Cost of Sales................. 76.7% 77.8% 77.5% 78.1% Selling, general and administrative..... 9.8 10.0 10.1 10.3 Depreciation and amortization........... 3.7 3.7 3.8 3.7 Interest, net........................... 0.8 0.9 0.8 0.8 Restructuring credit.................... -- -- (0.1) -- ---- ---- ---- ---- Total Costs and Expenses...... 91.0% 92.4% 92.1% 92.9% ---- ---- ---- ---- Earnings before Income Taxes............... 9.0 7.6 7.9 7.1 Income Taxes............................... (3.2) (2.6) (2.8) (2.5) ---- ---- ---- ---- Net Earnings............................... 5.8% 5.0% 5.1% 4.6% ==== ==== ==== ==== - -------------------------------------------------------------------------------------------------------------------- </TABLE> Results of Operations For the fiscal 2002 third quarter ended February 24, 2002, earnings after tax were $66.2 million or 54 cents per diluted share, compared to earnings after tax of $49.5 million or 40 cents per diluted share in the third quarter of fiscal 2001. The increase in third quarter earnings was primarily attributable to strong same-restaurant sales growth at both Red Lobster and Olive Garden. Sales of $1.13 billion for the third quarter were 14.7% higher than last year's third quarter. For the first nine months of fiscal 2002, net earnings were $164.8 million or $1.34 per diluted share, compared to $136.0 million or $1.10 per diluted share in the same fiscal 2001 period. An after-tax restructuring credit of $1.4 million was taken in the second quarter of fiscal 2002 as the Company reversed portions of its 1997 restructuring liability. The reversal resulted from favorable lease terminations and had no effect on the Company's cash flow. Net earnings for the first nine months of fiscal 2002 before the restructuring credit were $163.4 million or $1.33 per diluted share. Sales of $3.23 billion for the first nine months of fiscal 2002 were 9.9% higher than last year. Food and beverage costs for the third quarter were 30.9% of sales, compared to 31.7% of sales last year primarily attributable to lower product costs. Restaurant labor costs decreased to 31.6% of sales compared to last year's 31.8% of sales primarily due to efficiencies resulting from higher sales volumes. Restaurant expenses decreased to 14.2% of sales compared to 14.3% of sales last year primarily due to lower utility costs and efficiencies resulting from higher sales volumes, partially offset by certain employee benefit and restaurant technology expenses. Third quarter selling, general and administrative expense decreased to 9.8% of sales compared to 10.0% of sales last year. The decrease was primarily attributable to the favorable impact of marketing expense mix versus last year and higher sales volumes, partially offset by increased corporate level spending. Depreciation and amortization expense as a percentage of sales were comparable to last year at 3.7% primarily as a result of new restaurant and remodel activity, offset by the favorable impact of higher sales volumes. Interest expense decreased to 0.8% of sales compared to 0.9% of sales last year primarily due to efficiencies resulting from higher sales volumes which were offset by the impact of higher debt levels. 13
The effective tax rate for the third quarter of fiscal 2002 was 35.6% compared to 34.4% in last year's third quarter. The increase in the effective tax rate resulted primarily from increases in the level of expected annual pre-tax income for fiscal 2002 and a reduction in certain tax deductible costs. Food and beverage costs for the first nine months of fiscal 2002 were 31.4% of sales, compared to 32.1% of sales last year primarily attributable to lower product costs. Restaurant labor costs decreased to 31.6% of sales compared to last year's 31.8% of sales primarily due to efficiencies resulting from higher sales volumes. Restaurant expenses increased to 14.5% of sales compared to 14.2% of sales last year primarily as a result of increased utility and new restaurant pre-opening expenses, partially offset by the impact of higher sales volumes. Selling, general and administrative expense decreased to 10.1% of sales compared to 10.3% of sales last year. The decrease was primarily attributable to less national television marketing versus last year, media mix and deflation, and the favorable impact of higher sales volumes, partially offset by the impact of the Company's donation made as a result of the industry's Dine Out for America benefit. Depreciation and amortization expense as a percentage of sales increased to 3.8% from 3.7% last year primarily as a result of new restaurant and remodel activity, partially offset by the favorable impact of higher sales volumes. Interest expense was comparable to last year at 0.8% of sales primarily attributable to efficiencies resulting from higher sales volumes which were offset by the impact of higher debt levels. The effective tax rate for the first nine months of fiscal 2002, before the restructuring credit, was 35.2% compared to 34.8% last year. The increase in the effective tax rate resulted primarily from increases in the level of expected annual pre-tax income for fiscal 2002 and reduction in certain tax deductible costs, partially offset by increases in annual expected tax credits. Division Results Red Lobster sales of $613.0 million were 13.6% above last year's third quarter. Same-restaurant sales in the United States were up 12.0% for the quarter, marking the seventeenth consecutive quarter of same-restaurant sales increases. Third quarter operating profits improved over the prior year primarily as a result of the increased sales and lower food costs and marketing expenses as a percentage of sales. Through the first nine months of fiscal 2002, Red Lobster sales increased 7.9% to $1.73 billion and same-restaurant sales in the United States increased by 7.1%. Olive Garden sales of $481.2 million were 13.9% above last year's third quarter. Same-restaurant sales in the United States increased 9.8%, marking the thirtieth consecutive quarter of same-restaurant sales increases. Third quarter operating profits improved over the prior year primarily as a result of increased sales and lower restaurant labor, restaurant expenses and marketing expenses as a percentage of sales, partially offset by higher food and beverage costs as a percentage of sales. Through the first nine months of fiscal 2002, Olive Garden sales increased 9.5% to $1.39 billion and same-restaurant sales in the United States increased by 6.5%. Bahama Breeze produced average sales per restaurant that continue to rebound from the lower second quarter levels experienced when travel safety issues were of most concern. One new opening occurred in the third quarter, bringing the total number of restaurants in operation to 26. Three additional openings are scheduled in fiscal 2002. Restaurant sales at Smokey Bones continue to exceed management's initial expectations. Four new openings occurred in the third quarter, bringing the total number of restaurants in operation to 16. Since the end of the third quarter, one new restaurant opened. Two additional restaurants under construction are planned to open in fiscal 2002. 14
The table below details the number of restaurants open at the end of the third quarter of fiscal 2002, compared with the number open at the end of May 2001 and the end of last fiscal year's third quarter. <TABLE> <CAPTION> NUMBER OF RESTAURANTS - -------------------------------------------------------------------------------------------------------------------- February 24, 2002 May 27, 2001 February 25, 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Red Lobster - USA............................... 631 629 623 Red Lobster - Canada............................ 32 32 32 ----- ----- ----- Total...................................... 663 661 655 Olive Garden - USA.............................. 482 472 464 Olive Garden - Canada........................... 6 5 5 ----- ----- ----- Total...................................... 488 477 469 Bahama Breeze................................... 26 21 19 Smokey Bones.................................... 16 9 5 ----- ----- ----- Total...................................... 1,193 1,168 1,148 ===== ===== ===== - -------------------------------------------------------------------------------------------------------------------- </TABLE> Seasonality The Company's sales volumes fluctuate seasonally. In fiscal years 2000 and 2001, the Company's sales were highest in the spring, lowest in the fall, and comparable during winter and summer. 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. Financial Condition, Liquidity and Capital Resources Inventories totaled $229.4 million as of February 24, 2002, up from $148.4 million at May 27, 2001. The increase resulted from typical increases in seafood inventory levels during the first nine months of the year due to availability and upcoming promotions. The additional seafood is expected to be used during the fourth quarter. Other assets totaled $153.2 million as of February 24, 2002, up from $108.9 million at May 27, 2001. The increase resulted primarily from the Company's purchase of trust owned life insurance during the first quarter of fiscal 2002 with an initial cash surrender value totaling $31.5 million. The trust owned life insurance was purchased to offset some of the costs of the Company's nonqualified deferred compensation plan. Other assets also increased as a result of capitalized costs associated with software improvements. Cash and cash equivalents of $37.1 million at February 24, 2002, decreased from $61.8 million at May 27, 2001, primarily as a result of the purchase of the trust owned life insurance. Accounts payable of $174.4 million at February 24, 2002, increased from $156.9 million at May 27, 2001, principally due to the timing and terms of inventory purchases. Other current liabilities totaled $268.6 million as of February 24, 2002, up from $225.0 million at May 27, 2001. The increase is primarily a result of net increases in employee benefit related accruals and gift card payables. Net noncurrent deferred income tax liabilities totaled $106.7 million as of February 24, 2002, up from $90.8 million at May 27, 2001. The increase is primarily a result of current income tax deductions for certain capitalized software costs and equipment. 15
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 has a commercial paper program that serves as its primary source of short-term financing. To support the program, the Company has a credit facility with a consortium of banks under which the Company can borrow up to $300.0 million. The credit facility expires in October 2004 and contains various restrictive covenants, such as maximum debt to capital ratios. None of these covenants is expected to impact the Company's liquidity or capital resources. As of February 24, 2002, no amounts were outstanding under the credit facility. Short-term debt totaled $62.7 million as of February 24, 2002, up from $12.0 million at May 27, 2001. The increase in short-term debt was used to fund seasonal working capital needs and share repurchases. At February 24, 2002, the Company's long-term debt consisted principally of (i) $150.0 million of unsecured 6.375 percent notes due in February 2006, (ii) $100.0 million of unsecured 7.125 percent debentures due in February 2016, (iii) $150.0 million of unsecured 8.375 percent senior notes due in September 2005, (iv) $75.0 million of unsecured 7.45 percent medium-term notes due in April 2011, and (v) a $39.4 million commercial bank loan that is used to support two loans from the Company to the Employee Stock Ownership Plan portion of the Darden Savings Plan. On March 4, 2002, the Company issued $150.0 million of unsecured 5.75% medium-term notes due in March 2007. A portion of the proceeds from the issuance were used to repay short-term debt. The remaining proceeds will be used to fund working capital needs. The Company has a shelf registration on file with the SEC that provides for the issuance of an additional $125.0 million of unsecured debt securities from time to time. A summary of the Company's contractual obligations and commercial commitments as of February 24, 2002 is as follows (in thousands): <TABLE> <CAPTION> - -------------------------- ------------------------------------------------------------------------------------------- Payments Due by Period - -------------------------- ------------------------------------------------------------------------------------------- - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ Contractual Less than 2-3 4-5 After 5 Obligations Total 1 Year Years Years Years - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ <S> <C> <C> <C> <C> <C> Long-Term Debt $517,055 $ 2,640 $ -- $300,000 $214,415 - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ Operating Leases 250,652 46,793 78,248 55,060 70,551 - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ Total Contractual Cash Obligations $767,707 $ 49,433 $ 78,248 $355,060 $284,966 - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ - -------------------------- --------------- --------------------------------------------------------------------------- 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 $ 1,026 $ 1,026 $ -- $ -- $ -- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Standby Letters of Credit (1) 40,002 40,002 -- -- -- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Guarantees (2) 5,792 1,287 1,366 1,162 1,977 - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Total Commercial Commitments $ 46,820 $ 42,315 $ 1,366 $ 1,162 $ 1,977 - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- </TABLE> (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 $8,466 of lease payments included in contractual operating lease obligation payments noted above. (2) Consists solely of guarantees associated with sub-leased properties. Net cash flows used by investing activities included capital expenditures of $91.1 million for the third quarter of fiscal 2002 compared to $86.7 million in last year's third quarter. For the first nine months of fiscal 2002, capital expenditures were $223.8 million, compared to $244.7 million in the same period last year. The decrease in capital expenditures for the first nine months of fiscal 2002 principally related to timing as the Company estimates that its fiscal 2002 capital expenditures will be slightly more than that of fiscal 2001. 16
Net cash flows used by financing activities included the Company's repurchase of 2,791,047 shares of its common stock for $109.0 million in the third quarter of fiscal 2002 compared to 1,949,369 shares for $42.0 million in last year's third quarter. The Company repurchased 5,016,639 shares of its common stock for $170.8 million in the first nine months of fiscal 2002 compared to 6,432,717 shares for $125.2 million in the first nine months of last year. 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 included in our Annual Report on Form 10-K). 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 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. 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 certain management judgments 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 that 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. Impairment of Long-Lived Assets Restaurant sites and certain identifiable intangibles 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 an asset to future net cash flows expected to be generated by the asset. 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 identifiable intangibles to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. 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. 17
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 reserving, management, and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense that would be reported under these programs. Future Application of Accounting Standards 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 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 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. Currently, the Company recognizes certain sales incentives as selling, general and administrative expense. Although this pronouncement will not have any impact on the Company's consolidated results of operations or financial position, the presentation prescribed will have an effect of reducing net sales and selling, general and administrative expense in comparison to prior periods. The Company must adopt EITF 00-14 for all periods presented in the fourth quarter of fiscal 2002. Sales incentives included in selling, general and administrative expense for the thirteen weeks ended February 24, 2002 and February 25, 2001 amounted to $9.3 million and $7.3 million, respectively. Sales incentives included in selling, general and administrative expense for the thirty-nine weeks ended February 24, 2002 and February 25, 2001 amounted to $22.7 million and $20.1 million, respectively. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 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 121. SFAS 144 also establishes a single accounting model for long-lived assets to be disposed of by sale. The Company will adopt SFAS 144 in the first quarter of fiscal 2003. Adoption of SFAS 144 is not expected to materially impact the Company's consolidated financial position, results of operations or cash flows. Forward-Looking Statements Certain information 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, statements regarding the number of new Bahama Breeze and Smokey Bones restaurants expected to be opened during fiscal 2002, the completion of certain restructuring actions during the current fiscal year and the amount of capital expenditures for fiscal 2002. These forward-looking statements are based on assumptions concerning important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, could cause the actual results to materially differ from those expressed in the forward-looking statements. These risks and uncertainties include, but are not limited to, competition, economic and market conditions, changes in food and other costs, importance of locations, effects of government regulations and the Company's ability to achieve its growth objectives, each of which is more specifically discussed in Exhibit 99 filed with the Company's Form 10-K, which is incorporated into this report by reference. 18
Item 3. 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, the Company periodically enters into interest rate, foreign currency exchange, and commodity instruments for other than trading purposes. 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 February 24, 2002, the Company's potential losses in future net earnings resulting from changes in foreign currency exchange rates, commodity prices, and floating rate debt interest rate exposures were approximately $2 million over a period of one year (including the impact of the natural gas and coffee hedges discussed in Note 4 to the Consolidated Financial Statements). At February 24, 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 $33 million. The fair value of the Company's long-term fixed-rate debt during the first nine months of fiscal 2002 averaged approximately $487 million, with a high of approximately $503 million and a low of approximately $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. 19
PART II OTHER INFORMATION Item 1. Legal Proceedings From time to time, the Company is made a party to legal proceedings arising in the ordinary course of business. The Company does not believe that the results of these legal proceedings, even if unfavorable to the Company, will have a materially adverse impact on its financial position, results of operations or cash flows. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed Charges Exhibit 99 Cautionary Statements Under Private Securities Litigation Reform Act of 1995 (incorporated herein by reference to Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended May 27, 2001). (b) Reports on Form 8-K. During the third quarter, the Company filed the following reports on Form 8-K: On December 17, 2001, the Company filed a Form 8-K dated December 13, 2001, reporting second quarter earnings. In addition, the Company filed the following reports on Form 8-K subsequent to the close of the third quarter: On March 5, 2002, the Company filed a Form 8-K dated March 4, 2002, reporting the issuance of $150.0 million 5.75% medium-term notes due March 2007. On March 22, 2002, the Company filed a Form 8-K dated March 21, 2002, to report third quarter earnings and the declaration by the Board of Directors of a 3-for-2 stock split. On March 27, 2002, the Company filed a Form 8-K dated March 26, 2002, to report its new leadership structure. 20
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DARDEN RESTAURANTS, INC. Dated: April 9, 2002 By: /s/ Paula J. Shives ---------------------------------- Paula J. Shives Senior Vice President, General Counsel and Secretary Dated: April 9, 2002 By: /s/ Clarence Otis, Jr. ---------------------------------- Clarence Otis, Jr. Executive Vice President and Chief Financial Officer (Principal financial officer)
INDEX TO EXHIBITS Exhibit Number Exhibit Title 12 Computation of Ratio of Consolidated Earnings to Fixed Charges 99 Cautionary Statements Under Private Securities Litigation Reform Act of 1995 (incorporated herein by reference to Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended May 27, 2001). 22