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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 25, 2003
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___ Commission
File Number: 1-13666
DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3305930
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
5900 Lake Ellenor Drive 32809
Orlando, Florida (Zip Code)
(Address of principal executive offices)
(407) 245-4000 (Registrant's
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, without par value New York Stock Exchange
and Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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. Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by Reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of Common Stock held by non-affiliates of the
Registrant, based on the closing price of $21.33 per share as reported on the
New York Stock Exchange on November 22, 2002: $3,638,817,628.
Number of shares of Common Stock outstanding as of July 28, 2003:
164,330,855 (excluding 98,079,127 shares held in the Company's treasury).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated August 22, 2003 are
incorporated by reference into Part III, and portions of the Registrant's Annual
Report to Shareholders for the fiscal year ended May 25, 2003 are incorporated
by reference into Parts I, II and IV of this Report.
PART I
Item 1. BUSINESS
Introduction
Darden Restaurants, Inc. is the largest publicly held casual dining
restaurant company in the world1, and served over 300 million meals during
fiscal 2003. As of May 25, 2003, we operated 1,271 restaurants in the United
States and Canada. In the United States, we operated 1,234 restaurants in 49
states (the exception being Alaska), including 642 Red Lobster(R), 518 Olive
Garden(R), 34 Bahama Breeze(R), 39 Smokey Bones(R) BBQ and one Seasons 52SM
restaurants. In Canada, we operated 37 restaurants, including 31 Red Lobster and
six Olive Garden restaurants. We own and operate all of our restaurants in the
United States and Canada, with no franchising. Of our 1,271 restaurants and the
one Olive Garden Cafe open on May 25, 2003, 803 were located on owned sites and
469 were located on leased sites. In Japan, we licensed 33 Red Lobster
restaurants to an unaffiliated Japanese corporation that operates the
restaurants under an Area Development and Franchise Agreement.
Darden is a Florida corporation incorporated in March 1995, and is the
parent company of GMRI, Inc., also a Florida corporation. GMRI and our other
subsidiaries own the operating assets of the restaurants. GMRI was originally
incorporated in March 1968 as Red Lobster Inns of America, Inc.
Our principal executive offices and restaurant support center are located
at 5900 Lake Ellenor Drive, Orlando, Florida 32809, telephone (407) 245-4000.
Our corporate website address is www.darden.com (or, for employees inside our
computer firewall, www.dardenusa.com). We make our filed reports on Forms 10-K,
10-Q and 8-K, and Section 16 reports on Forms 3, 4 and 5, and all amendments to
those reports available free of charge on our website the same day as the
reports are filed with or furnished to the Securities and Exchange Commission.
Information on our website is not deemed to be incorporated by reference into
this Form 10-K. Unless the context indicates otherwise, all references to
Darden, "we", "our" or "us" include Darden, GMRI and our respective
subsidiaries.
Background
We opened our first restaurant, a Red Lobster, in Lakeland, Florida in
1968. Red Lobster was founded by William B. Darden, for whom we are named. We
were acquired by General Mills, Inc. in 1970. In May 1995, we became a separate
publicly held company when General Mills distributed all outstanding Darden
stock to General Mills' stockholders.
The number of Red Lobster and Olive Garden restaurants open at the end of
fiscal 2003 increased by six and 28, respectively, as compared to the end of
fiscal 2002. Red Lobster has grown from six restaurants in operation at the end
of fiscal 1970 to 673 units in North America by the end of fiscal 2003. Olive
Garden, an internally developed concept, opened its first restaurant in Orlando,
Florida in fiscal 1983, and by the end of fiscal 2003 had expanded to 524
restaurants and one food court cafe in North America.
Bahama Breeze is an internally developed concept with a Caribbean theme. In
fiscal 1996, Bahama Breeze opened its first restaurant in Orlando, Florida. At
the end of fiscal 2003, there were 34 Bahama Breeze restaurants.
Smokey Bones is also an internally developed concept featuring barbeque and
other American-style favorites served in an inviting lodge setting. The first
restaurant was opened in fiscal 2000 in Orlando, Florida. At the end of fiscal
2003, there were 39 Smokey Bones restaurants.
In February 2003, we opened a new test restaurant in Orlando, Florida
called Seasons 52SM. It is a casually sophisticated fresh grill and wine bar
with seasonally inspired menus offering fresh ingredients to create great
tasting, nutritionally balanced meals that are lower in calories than comparable
restaurant meals.
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1Source: Nation's Restaurant News, "Special Report: Top 100," June 30, 2003
(based on revenues from company- owned restaurants).
2
The table below shows our growth and lists the number of restaurants
operated by Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones and Seasons
52 as of the end of each fiscal year since 1970. The final column in the table
lists our total sales for the years indicated.
Company-Operated Restaurants Open at Fiscal Year End
Fiscal Red Olive Bahama Smokey Seasons Total Total Company Sales
Year Lobster Garden (1) Breeze Bones 52 Restaurants (1)(2) ($ in Millions) (3)(4)
---- ------- ---------- ------ ----- -- ------------------ ----------------------
1970 6 6 3.5
1971 24 24 9.1
1972 47 47 27.1
1973 70 70 48.0
1974 97 97 72.6
1975 137 137 108.5
1976 174 174 174.1
1977 210 210 229.2
1978 236 236 291.4
1979 244 244 337.5
1980 260 260 397.6
1981 291 291 528.4
1982 328 328 614.3
1983 360 1 361 718.5
1984 368 2 370 782.3
1985 372 4 376 842.2
1986 401 14 415 917.3
1987 433 52 485 1,097.7
1988 443 92 535 1,300.8
1989 490 145 635 1,621.5
1990 521 208 729 1,927.7
1991 568 272 840 2,212.3
1992 619 341 960 2,542.0
1993 638 400 1,038 2,737.0
1994 675 458 1,133 2,963.0
1995 715 477 1,192 3,163.3
1996 729 487 1 1,217 3,191.8
1997 703 477 2 1,182 3,171.8
1998 682 466 3 1,151 3,261.6
1999 669 464 6 1,139 3,432.4
2000 654 469 14 2 1,139 3,675.5
2001 661 477 21 9 1,168 3,992.4
2002 667 496 29 19 1,211 4,366.9
2003 673 524 34 39 1 1,271 4,655.0
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(1) Does not include one Olive Garden Cafe restaurant.
(2) Includes only Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones and
Seasons 52 restaurants. Does not include other restaurant concepts operated
by us in these years that are no longer owned or operated by us.
(3) Includes total sales from all of our operations, including sales from
restaurant concepts besides Red Lobster, Olive Garden, Bahama Breeze,
Smokey Bones and Seasons 52 that are no longer owned or operated by us.
(4) Emerging Issues Task Force Issue 00-14 "Accounting for Certain Sales
Incentives" requires sales incentives to be classified as a reduction of
sales. We adopted Issue 00-14 in the fourth quarter of fiscal 2002. For
purposes of this presentation, sales incentives have been reclassified as a
reduction of sales for fiscal 1998 through 2003. Sales incentives for
fiscal years prior to 1998 have not been reclassified.
3
Strategy
The restaurant industry is generally considered to be comprised of four
segments: quick service, midscale, casual dining and fine dining. The industry
is highly fragmented and includes many independent operators and small chains.
We believe that capable operators of strong multi-unit concepts have the
opportunity to increase their share of the casual dining segment. We plan to
grow by increasing the number of restaurants in each of our existing concepts
and by developing or acquiring additional concepts that can be expanded
profitably.
While we are a leader in the casual dining segment, we know we cannot be
successful without a clear sense of who we are. Our core purpose is "To nourish
and delight everyone we serve." This core purpose is supported by our core
values:
o integrity and fairness;
o respect and caring;
o diversity;
o always learning/always teaching;
o being "of service";
o teamwork; and
o excellence.
Our mission is to be "The best in casual dining, now and for generations."
Three strategic imperatives or "building blocks" support our mission:
o leadership development as a core competency;
o service and hospitality excellence; and
o culinary and beverage excellence.
These strategic imperatives are supported by three key enablers:
o brand management skills;
o diversity competency; and
o technology solutions.
Continuing focus on our three building blocks, supported by our commitment
to brand management, diversity and technology, provides a strong foundation for
future growth.
Restaurant Concepts
Red Lobster
Red Lobster is the largest casual dining, seafood-specialty restaurant
operator in the United States. It offers an extensive menu featuring fresh fish,
shrimp, crab, lobster, scallops and other seafood in a casual atmosphere. The
menu includes a variety of specialty seafood and non-seafood entrees, appetizers
and desserts.
Dinner entree prices range from $8.99 to $27.99, with certain fresh fish
and lobster items available at market price. Lunch entree prices range from
$5.99 to $11.99, and include side items and our signature Cheddar Bay biscuits.
During fiscal 2003, the average check per person was between $16.00 and $17.00,
with alcoholic beverages accounting for about nine percent of Red Lobster's
sales. Red Lobster maintains approximately 135 different menus across its trade
areas to reflect geographic differences in consumer preferences, prices and
selections, as well as a lower-priced children's menu.
Fiscal 2003 was a record year in sales for Red Lobster, with total sales of
$2.433 billion. Sales were 4.1 percent above the previous year, and average
sales per restaurant for fiscal 2003 were $3.7 million - all record levels for
Red Lobster. As of the end of fiscal 2003, Red Lobster had enjoyed 22
consecutive quarters of U.S. same-restaurant sales increases. Nevertheless, Red
Lobster's total sales in fiscal 2003 were lower than expected. Despite lower
food and beverage costs as a percent of sales, Red Lobster experienced increased
expenses, particularly
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restaurant labor costs, restaurant expenses, selling, general and administrative
expenses and depreciation as a percent of sales. This led to a decline in
operating profit during fiscal 2003 versus last year.
Olive Garden
Olive Garden is the market share leader among casual dining Italian
restaurants in the United States. Olive Garden's menu includes a variety of
authentic Italian foods featuring fresh ingredients, and an expanded wine list
that includes a broad selection of wines imported from Italy. The menu includes
antipasti (appetizers); soups, salad and garlic breadsticks; baked pastas;
sauteed specialties with chicken, seafood and fresh vegetables; grilled meats;
and a variety of desserts. Olive Garden also uses coffee imported from Italy for
its espresso and cappuccino.
Most dinner entree prices range from $7.75 to $17.95, and most lunch entree
prices range from $5.95 to $9.25. The price of each entree also includes as much
fresh salad or soup and breadsticks as a guest desires. During fiscal 2003, the
average check per person was $13.00 to $14.00, with alcoholic beverages
accounting for about nine percent of Olive Garden's sales. Olive Garden
maintains approximately 40 different dinner menus and 30 lunch menus across its
trade areas to reflect geographic differences in consumer preferences, prices
and selections, as well as two lower-priced children's menus.
Fiscal 2003 was a record year for both sales and profits at Olive Garden.
Olive Garden's total sales for fiscal 2003 were $1.990 billion, up 6.8 percent
from the prior year, and its annual average sales per restaurant were $3.9
million, both record levels. Olive Garden had 35 consecutive quarters of U.S.
same-restaurant sales increases as of the end of fiscal 2003. Olive Garden's
sales gains, combined with lower food and beverage expense, restaurant labor
costs and general and administrative expenses as a percent of sales, more than
offset increased restaurant and marketing expenses as a percent of sales,
resulting in record annual operating profit during fiscal 2003.
Bahama Breeze
Bahama Breeze is a Caribbean-themed restaurant that offers guests a
distinctive island dining experience. The first Bahama Breeze opened in 1996 and
met with strong positive consumer response. We continued to test the concept by
opening a limited number of additional restaurants in each of the following
years, and began national expansion of the concept in 1998. In fiscal 2003,
sales at Bahama Breeze surpassed $137 million and we opened five new
restaurants, bringing the total to 34 restaurants. The concept continues to be
well received by guests, although its financial performance has not met our
overall expectations, and we are making changes that we anticipate will improve
its sales, financial performance and long-term potential. These changes include
testing lunch operations, creating a new dinner menu and slowing new restaurant
development (we plan to open four new Bahama Breeze restaurants in fiscal 2004)
while reducing the size of the building and the related capital investment.
However, these actions are still in the test phase and results will not be
available until late in fiscal 2004. We expect Bahama Breeze to continue to be
dilutive to earnings in fiscal 2004.
Smokey Bones
Smokey Bones features barbequed pork, beef and chicken, as well as other
authentic American-style favorites, all served in a casual and inviting lodge
setting that includes sports viewing on televisions. We opened the first Smokey
Bones in September 1999, and began national expansion of the concept in fiscal
2002. Sales for Smokey Bones were $93 million in fiscal 2003. There are
currently 39 Smokey Bones restaurants, and we plan to open 25 to 30 new Smokey
Bones restaurants in fiscal 2004. We believe that Smokey Bones has strong
expansion potential and is capable of achieving future sales of $500 million or
more.
Recent and Planned Growth
During fiscal 2003, we opened 65 new restaurants (excluding the relocation
of existing restaurants to new sites and the rebuilding of restaurants at
existing sites) and closed four restaurants. This resulted in a net increase of
61 restaurants in fiscal 2003 (assuming the re-opening of one restaurant that
was temporarily closed as of the end of fiscal 2003). We plan to open
approximately 57 to 71 new Red Lobster, Olive Garden, Bahama Breeze and Smokey
Bones restaurants during fiscal 2004 (excluding relocations and rebuilds). Our
actual and projected new openings by concept (excluding relocations and
rebuilds) are shown below.
5
Actual New Projected New
Restaurant Openings Restaurant Openings
Fiscal 2003(1) Fiscal 2004
-------------- -----------
Red Lobster................................ 11 8-12
Olive Garden............................... 28 20-25
Bahama Breeze.............................. 5 4
Smokey Bones............................... 20 25-30
---- -----
Totals............................... 64 57-71
(1) Excludes one Seasons 52 test restaurant.
Our objective is to continue to expand our current portfolio of restaurant
concepts, and to develop or acquire additional concepts that can be expanded
profitably. We are currently testing new ideas and concepts, and expanding
Bahama Breeze and Smokey Bones nationally in light of favorable consumer
response. We also evaluate potential acquisition candidates to assess whether
they would satisfy our strategic and financial objectives. At present, we have
not identified any specific acquisitions.
We will continue to focus on improving operational returns at Olive Garden
and Red Lobster, and will limit new restaurant expansion of those concepts to
high potential sites that we believe can generate significant returns on our
investments. Olive Garden's expansion will include its recently developed
"Tuscan Farmhouse" design, an outgrowth of our collaboration with Rocca delle
Macie, a family-owned winery in Tuscany, Italy. In addition, we plan to expand
Bahama Breeze and Smokey Bones at a pace that we believe will enable each new
restaurant to capture the concept's full potential. The specific number of
openings will depend on many factors, such as the success of the changes
discussed above at Bahama Breeze, in addition to, in general, our ability to
locate appropriate sites, negotiate acceptable purchase or lease terms, obtain
necessary local governmental permits, complete construction and recruit and
train restaurant management and hourly personnel.
We consider location to be a critical factor in determining a restaurant's
long-term success, and we devote significant effort to the site selection
process. Prior to entering a market, we conduct a thorough study to determine
the optimal number and placement of restaurants. Our site selection process
incorporates a variety of analytical techniques to evaluate key factors. These
factors include trade area demographics, such as target population density and
household income levels; competitive influences in the trade area; the site's
visibility, accessibility and traffic volume; and proximity to activity centers
such as shopping malls, hotel/motel complexes, offices and universities. Members
of senior management evaluate, inspect and approve each restaurant site prior to
its acquisition. Constructing and opening a new restaurant typically takes 120
to 180 days after the site is acquired and permits are obtained.
The following table illustrates the approximate average capital investment,
size and dining capacity of the 11 Red Lobster and 28 Olive Garden restaurants
that were opened during fiscal 2003 (excluding relocations, rebuilds and
conversions of existing restaurants).
Capital Square Dining Dining
Investment(1) Feet(2) Seats(3) Tables(4)
Red Lobster (5).................... $3,714,000 6,962 222 58
Olive Garden (6)................... $3,779,000 7,685 210 59
(1) Includes net present value of leases, but excludes working capital.
(2) Includes all space under the roof, including the coolers and freezers, but
excludes gazebos, pavilions and porte cocheres.
(3) Includes bar dining seats and patio seating, but excludes bar stools.
(4) Includes patio dining tables.
(5) Excludes two center city urban Red Lobster restaurants whose size is larger
and cost is significantly higher than the average and therefore is not
representative of the typical restaurant.
(6) Excludes three center city urban Olive Garden restaurants whose size is
larger and cost is significantly higher than the average and therefore is
not representative of the typical restaurant.
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For Bahama Breeze, we are in the process of designing a new building
prototype with a lower capital investment and a simpler design that we expect to
use for the first time in fiscal 2004. For Smokey Bones, we continue to seek out
sites where existing buildings can be converted to Smokey Bones, and are
locating new units in prime casual dining trade areas that we believe will allow
us to realize greater rates of return on investment than were generated from
certain early sites in less desirable locations.
We systematically review the performance of our restaurants to ensure that
each one meets our standards. When a restaurant falls below minimum standards,
we conduct a thorough analysis to determine the causes, and implement marketing
and operational plans to improve that restaurant's performance. If performance
does not improve to acceptable levels, the restaurant is evaluated for
relocation, closing or conversion to one of our other concepts.
During fiscal 2003, we permanently closed four and relocated five Red
Lobster restaurants in the United States. During the same period, we relocated
three Olive Garden restaurants in the United States.
Restaurant Operations
We believe that high-quality restaurant management is critical to our
long-term success. We also believe that our leadership position, strong
success-oriented culture and various short-term and long-term incentive
programs, including stock options and restricted stock, help attract and retain
highly motivated restaurant managers.
Our restaurant management structure varies by concept and restaurant size.
Each restaurant is led by a general manager and one to four additional managers,
depending on the operating complexity and sales volume of the restaurant. Each
restaurant also employs approximately 65 to 140 hourly employees, most of whom
work part-time. We issue detailed operations manuals covering all aspects of
restaurant operations, as well as food and beverage manuals which detail the
preparation procedures of our formulated recipes. The restaurant management
teams are responsible for the day-to-day operation of each restaurant and for
ensuring compliance with our operating standards. At our two largest concepts,
Red Lobster and Olive Garden, restaurant general managers report to directors,
and each director is responsible for seven to 14 restaurants. Restaurants are
visited regularly by all levels of supervision to help ensure strict adherence
to all aspects of our standards.
Each concept's vice president or director of training, together with senior
operations executives, is responsible for developing and maintaining that
concept's operations training programs. These efforts include a 12-to 15-week
training program for management trainees, and continuing development programs
for managers, supervisors and directors. The emphasis of the training and
development programs varies by restaurant concept, but includes leadership,
restaurant business management and culinary skills. We also use a highly
structured training program to open new restaurants, including deploying
training teams experienced in all aspects of restaurant operations. The opening
training teams typically begin work one week prior to opening and remain at the
new restaurant one week following the opening. They are redeployed as
appropriate to enable a smooth transition to the restaurant's operating staff.
Quality Assurance
Our Total Quality Department helps ensure that all restaurants provide
safe, high-quality food in a clean and safe environment. Through rigorous
physical evaluation and testing at our North American laboratories and through
"point source inspection" by our international team of Quality Specialists in
several foreign countries, we purchase only seafood that meets or exceeds our
specifications. We use independent third parties to inspect and evaluate
commodity vendors. In addition, any commodity supplier that produces a "high
risk" product is subject to a minimum annual food safety evaluation by Darden
personnel. We require our suppliers to maintain sound manufacturing practices
and operate with the comprehensive HACCP food safety programs in place.
Since 1976, we have maintained a microbiological laboratory to routinely
test seafood and other commodities for quality and microbiological safety. In
addition, Darden Total Quality Managers and third party auditors visit each
restaurant periodically throughout the year to review food handling and to
provide education and training in food safety and sanitation. The Total Quality
managers also serve as a liaison to regulatory agencies on issues relating to
food safety.
7
Purchasing and Distribution
Our ability to ensure a consistent supply of high-quality food and supplies
at competitive prices to all of our restaurant concepts depends upon procurement
from reliable sources. Our purchasing staff sources, negotiates and purchases
food and supplies from more than 2,000 suppliers in 45 countries. Suppliers must
meet strict quality control standards in the development, harvest, catch and
production of food products. Competitive bids, long-term contracts and long-term
vendor relationships are routinely used to manage availability and cost of
products.
We believe that our seafood purchasing capabilities are a significant
competitive advantage. Our purchasing staff travels routinely within the United
States and internationally to source more than 100 varieties of top-quality
seafood at competitive prices. We believe that we have established excellent
long-term relationships with key seafood vendors, and usually source our product
directly from producers (not brokers or middlemen). We operate a procurement
office in Singapore, our only purchasing office outside of Orlando, to source
products directly from Asia. While the supply of certain seafood species is
volatile, we believe that we have the ability to identify alternative seafood
products and to adjust our menus as necessary. All other essential food products
are available, or can be made available upon short notice, from alternative
qualified suppliers. Because of the relatively rapid turnover of perishable food
products, inventories in the restaurants have a modest aggregate dollar value in
relation to revenues. Controlled inventories of specified products are
distributed to all restaurants through independent national distribution
companies.
Advertising and Marketing
We believe that we have developed significant marketing and advertising
capabilities. Our size enables us to be a dominant advertiser in the casual
dining segment of the restaurant industry. We leverage the efficiency of
national network television advertising and supplement it with local television
advertising. Our restaurants appeal to a broad spectrum of consumers and we use
advertising and product promotions to attract customers. We implement periodic
promotions as appropriate to maintain and increase our sales and profits. We
also rely on radio and newspaper advertising, as well as newspaper and direct
mail couponing programs, as appropriate, to attract customers. We have developed
and consistently use sophisticated consumer marketing research techniques to
monitor customer satisfaction and evolving expectations.
Employees
At the end of fiscal 2003, we employed approximately 140,700 persons. Of
these employees, approximately 1,300 were corporate or restaurant concept
personnel located in our restaurant support center in Orlando, Florida,
approximately 5,850 were restaurant management personnel in the restaurants or
in field offices, and the remainder were hourly restaurant personnel. Of the
restaurant support center employees, approximately 60% were management personnel
and the balance were administrative or office employees. Our operating
executives have an average of more than 14 years of experience with us. The
restaurant general managers average 11 years with us. We believe that we provide
working conditions and compensation that compare favorably with those of our
competitors. Most employees, other than restaurant management and corporate
management, are paid on an hourly basis. None of our employees are covered by a
collective bargaining agreement. We consider our employee relations to be good.
Management Information Systems
We strive for leadership in the restaurant business by using technology as
a competitive advantage. Since 1975, computers located in the restaurants have
been used to assist in the management of the restaurants. We have implemented
systems targeted at improved financial control, cost management, enhanced guest
service and improved employee effectiveness. Management information systems are
designed to be used across restaurant concepts, yet are flexible enough to meet
the unique needs of each restaurant concept. In fiscal 2002, we implemented a
suite of web-enabled financial systems and a high-speed data network connecting
all restaurants to all current and anticipated future applications. During
fiscal 2003, we completed an upgrade of our human resource (including payroll
and benefits) systems using web-enabled and fully integrated application suites.
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Restaurant hardware and software support is provided or coordinated from
the restaurant support center in Orlando, Florida, seven days a week, 24 hours a
day. A communications network sends and receives critical business data to and
from the restaurants throughout the day and night, providing timely and
extensive information on business activity in every location. The restaurant
support center houses our data center, which contains sufficient computing power
to process information from all restaurants quickly and efficiently. Our
information is processed in a secured environment to protect both the actual
data and the physical assets. We guard against business interruption by
maintaining a disaster recovery plan, which includes storing critical business
information off-site, testing the disaster recovery plan at a hot-site facility
and providing on-site power backup via a large diesel generator. We use
internally developed proprietary software, as well as purchased software, with
proven, non-proprietary hardware. This allows processing power to be distributed
effectively to each of our restaurants.
Our management believes its current systems and the upgrades currently
underway will position us well to support current needs and future growth. We
are committed to maintaining an industry leadership position in information
systems and computing technology. We use a strategic information systems
planning process that involves senior management and is integrated into our
overall business planning. Information systems projects are prioritized based
upon strategic, financial, regulatory and other business advantage criteria.
Competition
The restaurant industry is intensely competitive with respect to the type
and quality of food, price, service, restaurant location, personnel, concept,
attractiveness of facilities, and effectiveness of advertising and marketing
programs. The restaurant business is often affected by changes in consumer
tastes; national, regional or local economic conditions; demographic trends;
traffic patterns; the type, number and location of competing restaurants; and
consumers' discretionary purchasing power. We compete within each market with
national and regional chains as well as locally-owned restaurants, not only for
customers but also for management and hourly personnel and suitable real estate
sites Restaurants also face growing competition from the supermarket industry,
which offers "convenient meals" in the form of improved entrees and side dishes
from the deli section. We expect intense competition to continue in all of these
areas.
Other factors pertaining to our competitive position in the industry are
addressed under the sections entitled "Purchasing and Distribution,"
"Advertising and Marketing," "Management Information Systems" and
"Forward-Looking Statements" elsewhere in this report.
Trademarks and Related Agreements
We regard our Darden Restaurants(R), Red Lobster(R), Olive Garden(R),
Bahama Breeze(R), Smokey Bones(R) and Seasons 52SM service marks, and other
variations of these service marks, as having significant value and as being
important in marketing the restaurants. Our policy is to pursue registration of
our important service marks and trademarks and to oppose vigorously any
infringement of them. Generally, with appropriate renewal and use, the
registration of our service marks will continue indefinitely.
Our only restaurant operations outside of North America historically have
been conducted through an Area Development and Franchise Agreement with Red
Lobster Japan Co., Ltd. (Red Lobster Japan), an unaffiliated Japanese
corporation. Red Lobster Japan operated 33 Red Lobster restaurants in Japan as
of May 25, 2003. We do not have an ownership interest in Red Lobster Japan, but
receive royalty income under the Franchise Agreement. The amount of this income
is not material to our consolidated financial statements.
Seasonality
Our sales volumes fluctuate seasonally. During fiscal years 2003, 2002 and
2001, our 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.
9
Government Regulation
We are subject to various federal, state and local laws affecting our
business. Each of our restaurants must comply with licensing requirements and
regulations by a number of governmental authorities, which include health,
safety and fire agencies in the state or municipality in which the restaurant is
located. The development and operation of restaurants depend on selecting and
acquiring suitable sites, which are subject to zoning, land use, environmental,
traffic and other regulations. To date, we have not been significantly affected
by any difficulty, delay or failure to obtain required licenses or approvals.
Presently about 9.6 percent of our sales are attributable to the sale of
alcoholic beverages. Regulations governing their sale require licensure by each
site (in most cases, on an annual basis), and licenses may be revoked or
suspended for cause at any time. These regulations relate to many aspects of
restaurant operation, including the minimum age of patrons and employees, hours
of operation, advertising, wholesale purchasing, inventory control and handling,
and storage and dispensing of alcoholic beverages. The failure of a restaurant
to obtain or retain these licenses would adversely affect the restaurant's
operations. We also are subject in certain states to "dram-shop" statutes, which
generally provide an injured party with recourse against an establishment that
serves alcoholic beverages to an intoxicated person, who then causes injury to
himself or a third party. We carry liquor liability coverage as part of our
comprehensive general liability insurance.
We also are subject to federal and state minimum wage laws and other laws
governing such matters as overtime, tip credits, working conditions, safety
standards, and hiring and employment practices. Changes in these laws during
fiscal 2003 have not had a material effect on our operations.
We currently are operating under a Tip Rate Alternative Commitment ("TRAC")
agreement with the Internal Revenue Service. Through increased educational and
other efforts in the restaurants, the TRAC agreement reduces the likelihood of
potential chain-wide employer-only FICA assessments for unreported tips.
We are subject to federal and state environmental regulations, but these
rules have not had a material effect on our operations. During fiscal 2003,
there were no material capital expenditures for environmental control facilities
and no material expenditures for this purpose are anticipated.
Our facilities must comply with the applicable requirements of the
Americans With Disabilities Act of 1990 ("ADA") and related state accessibility
statutes. Under the ADA and related state laws, we must provide equivalent
service to disabled persons, and make reasonable accommodation for their
employment, and when constructing or undertaking significant remodeling of our
restaurants, we must make those facilities accessible.
Executive Officers
Our executive officers as of August 22, 2003 are:
Joe R. Lee, age 62, has been our Chief Executive Officer since December
1994 and Chairman of the Board since April 1995. Mr. Lee joined Red Lobster in
1967 as a member of its opening management team, and was named its President in
1975. From 1970 to 1995, he held various positions with General Mills, Inc., a
manufacturer and marketer of consumer food products and our former parent,
including Vice Chairman, with responsibility for various consumer foods
businesses and corporate staff functions, Chief Financial Officer and Executive
Vice President, Finance and International Restaurants.
Richard E. Rivera, age 56, has been our President and Chief Operating
Officer since December 2002, our Vice Chairman from March 2002 to December 2002,
and a Director since December 1997. He was our Executive Vice President, and
President of Red Lobster Restaurants from December 1997 until March 2002. He
served as President and Chief Executive Officer of Chart House Restaurants, Inc.
from July 1997 until December 1997, as President and Chief Executive Officer of
RARE Hospitality International, Inc., the owner of LongHorn Steakhouse
restaurants, from 1994 to 1997, and as President and Chief Executive Officer of
TGI Friday's, Inc. from 1988 to 1994. He began his career with Steak & Ale
Restaurants of America and has held various leadership positions in the industry
over the last 25 years, including as a Director of the National Restaurant
Association.
10
Blaine Sweatt, III, age 55, has been our President, New Business
Development since February 1996 and Executive Vice President since April 1995,
and a Director since 1995. He led teams that developed the Olive Garden, Bahama
Breeze, Smokey Bones and Seasons 52 concepts, among others. He joined Red
Lobster in 1976 and was named Director of New Restaurant Concept Development in
1981. From 1986 to 1989, he held various positions with General Mills, Inc., a
manufacturer and marketer of consumer food products and our former parent.
Laurie B. Burns, age 41, has been our Senior Vice President and President
of Bahama Breeze since March 2003. She joined us in April 1999 as Vice President
of Development for Red Lobster, and served as our Senior Vice President,
Development from September 2000 until March 2003. She was a private real estate
consultant from October 1998 until joining us in April 1999, and was Regional
Vice President for Development for the Eastern United States at Homestead
Village, an extended-stay hotel company, from 1995 to 1998.
Linda J. Dimopoulos, age 52, has been Chief Financial Officer since
December 2002. She joined us in 1982, and served as Senior Vice President,
Financial Operations of Red Lobster from 1993 to July 1998, as our Senior Vice
President, Corporate Controller and Business Information Systems from July 1998
to December 1999, and as our Senior Vice President, Chief Information Officer
from December 1999 until assuming her current position in December 2002.
Stephen E. Helsel, age 58, has been our Senior Vice President, Corporate
Controller since December 1999. He joined us in 1973 as an accountant with Red
Lobster, and was named Vice President, Controller of Red Lobster in 1989. He
served as our Vice President, Controller, Accounting Services from 1991 to 1996,
and as Senior Vice President, Information Services from 1996 until December
1999.
Daniel M. Lyons, age 50, has been our Senior Vice President, Human
Resources since January 1997. He joined us in 1993 as Senior Vice President of
Personnel for Olive Garden. Prior to joining Olive Garden, he spent 18 years
with the Quaker Oats Company.
Andrew H. Madsen, age 47, has been our Senior Vice President and President
of Olive Garden since March 2002. He joined us in December 1998 as Executive
Vice President of Marketing for Olive Garden. From 1997 until joining us, he was
President of International Master Publishers, Inc., a company that developed and
marketed consumer information products such as magazines and compact discs. From
1993 until 1997, he worked at James River (now part of Georgia-Pacific
Corporation, a diversified paper and building products manufacturer), where he
held various positions, including Vice President/General Manager for the Dixie
consumer products unit. From 1980 to 1992, he worked at General Mills, Inc., a
manufacturer and marketer of consumer food products and our former parent, where
he held progressively more responsible positions in consumer products marketing,
including Vice President of Marketing.
Edna Morris, age 51, has been our Senior Vice President and President of
Red Lobster since March 2002. She joined us in October 1998 and served from then
until March 2002 as Executive Vice President of Operations for Red Lobster. From
1992 until joining us, she held various positions with Advantica Restaurant
Group, Inc., the parent of Denny's and other restaurant companies, including
President of Quincy's Family Steakhouse from 1996 to 1998 and Executive Vice
President during 1998.
Barry Moullet, age 45, has been our Senior Vice President, Purchasing,
Distribution and Food Safety since June 1999. He joined us in July 1996 as
Senior Vice President, Purchasing and Distribution. Prior to joining us, he
spent 15 years in the purchasing field in various positions with Restaurant
Services, Inc., a Burger King purchasing co-operative, Kentucky Fried Chicken
and the Pillsbury Company.
Clarence Otis, Jr., age 47, has been our Executive Vice President since
March 2002 and President of Smokey Bones BBQ since December 2002. He was our
Senior Vice President from December 1999 until March 2002, and our Chief
Financial Officer from December 1999 until December 2002. He joined us in 1995
as Vice President and Treasurer. He served as our Senior Vice President,
Investor Relations and Treasurer from July 1997 to July 1998, and as Senior Vice
President, Finance and Treasurer from July 1998 until December 1999. Prior to
joining us, he was employed by Chemical Securities, Inc., an investment banking
firm, where he had been Managing Director and Manager of Public Finance since
1991.
11
Paula J. Shives, age 52, has been our Senior Vice President, General
Counsel and Secretary since June 1999. Prior to joining us, she served as Senior
Vice President, General Counsel and Secretary from 1995 to 1999, and Associate
General Counsel from 1985 to 1995 of Long John Silver's Restaurants, Inc.
Richard J. Walsh, age 51, has been our Senior Vice President, Corporate
Relations since 1994. He joined General Mills, Inc., our former parent, in 1984
as Manager of Government Affairs for Red Lobster. He served as Vice President of
Government and Community Relations for General Mills Restaurants, Inc. from 1987
until assuming his current position in December 1994.
Forward-Looking Statements
Certain information included in this report and other materials filed or to
be filed by us with the Commission (as well as information included in oral or
written statements made by us or on our behalf), may contain forward-looking
statements about our future performance, plans and objectives, long-term goals,
forecasts of market trends and other matters. These statements may be contained
in our filings with the Securities and Exchange Commission, in our press
releases, in other written communications, and in oral statements made by or
with the approval of one of our authorized officers. Words or phrases such as
"believe," "plan," "will likely result," "expect," "intend," "will continue,"
"is anticipated," "estimate," "project" and similar expressions are intended to
identify forward-looking statements. These statements, and any other statements
that are not historical facts, are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, as codified in Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, as amended from time to time (the "Act"). These forward-looking
statements include, but are not limited to, projections regarding: our growth
plans and the number and type of new restaurant openings; improved financial
performance at Bahama Breeze as a result of changing the prototype and other
changes at that concept; and our expectation to realize more of Smokey Bones'
full potential as a result of changes in the location of units and other
initiatives.
In connection with the "safe harbor" provisions of the Act, we are filing
the following cautionary statements to identify important factors, risks and
uncertainties that could cause our actual results to differ materially from
those projected in forward-looking statements made by us, or on our behalf.
These cautionary statements are to be used as a reference in connection with any
forward-looking statements. The factors, risks and uncertainties identified in
these cautionary statements are in addition to those contained in any other
cautionary statements, written or oral, which may be made or otherwise addressed
in connection with a forward-looking statement or contained in any of our
subsequent filings with the Securities and Exchange Commission. Because of these
factors, risks and uncertainties, we caution against placing undue reliance on
forward-looking statements. Although we believe that the assumptions underlying
our forward-looking statements are reasonable, any of the assumptions could be
incorrect, and there can be no assurance that the forward-looking statements
will prove to be accurate. Forward-looking statements speak only as of the date
on which they are made. We do not undertake any obligation to modify or revise
any forward-looking statement to take into account or otherwise reflect
subsequent events, or circumstances arising after the date that the
forward-looking statement was made.
The following factors, risks and uncertainties, have affected, and may
continue to affect, our operating results and the environment within which we
conduct our business. If our projections and estimates regarding these key
factors differ materially from what actually occurs, our actual results could
vary significantly from the performance projected in our forward-looking
statements.
Competition. The casual dining sector of the restaurant industry is
intensely competitive in pricing, service, location, personnel, and type and
quality of food. We compete with national, regional and local organizations
primarily through the quality, variety and value perception of menu items. The
number and location of restaurants, quality and efficiency of service,
attractiveness of facilities and effectiveness of advertising and marketing
programs are also important factors. We anticipate that intense competition will
continue in all of these areas.
Economic, Market and Other Conditions. Certain risks are endemic to the
restaurant and retail industry in general. A protracted economic slowdown or
worsening economy, industry-wide cost pressures, or weak consumer demand could
lead to same-restaurant sales declines and suppress sales growth and profits.
The casual dining sector of the restaurant industry is affected by changes in
national, regional and local economic conditions; the seasonality of our
business; consumer preferences, including changes in consumer tastes and the
level of consumer acceptance of
12
our restaurant concepts; consumer spending patterns; demographic trends;
weather; traffic patterns; and the type, number and location of competing
restaurants. Our ability to undertake new restaurant development, as well as
improvements and additions to existing restaurants, is affected by economic
conditions, including interest rates, and government policies impacting land and
construction costs and the cost and availability of borrowed funds.
Price and Availability of Food, Labor, Utilities, Insurance and Media;
Other Costs. Our profitability depends significantly on our ability to
anticipate and react to changes in the price and availability of food; labor;
utilities; insurance (including workers' compensation, general liability,
health, and directors and officer's liability insurance); advertising, media and
marketing; employee benefits; and other costs over which we may have little
control. The price and availability of commodities, including, among other
things, shrimp, lobster and other seafood, are subject to fluctuation and could
increase or decrease more than we expect. We are subject to the general risk of
inflation, and possible shortages or interruptions in supply caused by inclement
weather or other conditions that could adversely affect the availability and
cost of the items we buy. Restaurant pre-opening expenses could be more than
expected, and labor shortages, increased employee turnover and higher minimum
wage rates all could raise our cost of doing business. Our business also is
subject to the risk of litigation by employees, consumers, suppliers,
shareholders or others that may result in additional costs. There can be no
assurance that management will be able to anticipate and react to these cost
issues without a material adverse effect on our profitability and results of
operations.
Unfavorable Publicity Relating to Food Safety or Other Concerns. Multi-unit
restaurant businesses can be adversely affected by publicity resulting from
complaints or litigation alleging poor food quality, food-borne illness,
personal injury, adverse health effects including obesity, or other operational
concerns. Negative publicity may also result from actual or alleged violations
of dram shop laws that may impose liability on sellers of liquors when a third
party is injured as a result of intoxication. Regardless of whether the
allegations are valid, unfavorable publicity relating to just one or a limited
number of restaurants could taint public perception of the entire brand. Such
unfavorable publicity and overall consumer perceptions of food safety could have
a material adverse effect on our business.
Importance of Locations. The success of our restaurants depends in large
part on location. There can be no assurance that current locations will continue
to be attractive, as demographic patterns change. Possible declines in
neighborhoods where restaurants are located, or economic conditions surrounding
those neighborhoods, could result in reduced sales in those locations.
Government Regulation. We are subject to various federal, state and local
laws affecting our business. The development and operation of restaurants depend
to a significant extent on the selection and acquisition of suitable sites,
which are subject to zoning, land use, environmental, traffic and other
regulations. Restaurant operations are also subject to licensing and regulation
by state and local departments relating to health, liquor licenses, sanitation
and safety standards, federal and state labor laws (including applicable minimum
wage requirements, overtime, working and safety conditions, and citizenship
requirements), federal and state laws which prohibit discrimination and other
laws regulating the design and operation of facilities, such as the Americans
With Disabilities Act of 1990. We cannot predict the effect on our operations of
these laws and regulations or the future enactment of additional legislation
regulating these and other areas.
Growth Plans. There can be no assurance that we will be able to achieve our
growth objectives or that new restaurants opened or acquired will be profitable.
There are inherent risks involved with expanding new concepts (such as Bahama
Breeze and Smokey Bones) that have not yet proved their long-term viability. The
opening and success of restaurants depends on various factors, including the
identification and availability of suitable and economically viable locations;
sales levels at existing restaurants; the negotiation of acceptable lease or
purchase terms for new locations; obtaining all required governmental permits,
including zoning approvals and liquor licenses, on a timely basis; other
regulatory compliance; the availability of necessary contracts and
subcontractors and the ability to meet construction schedules; our ability to
manage union activities such as picketing, which could delay construction; the
availability of capital at affordable cost to finance growth; changes in the
weather or other acts of God that could result in construction delays and
adversely affect the results of one or more restaurants for an indeterminate
amount of time; our ability to hire and train qualified management personnel;
and general economic and business conditions.
13
Item 2. PROPERTIES
As of May 25, 2003, we operated 1,271 restaurants (including 673 Red
Lobster, 524 Olive Garden, 34 Bahama Breeze, 39 Smokey Bones and one Seasons 52
restaurants) and one Olive Garden Cafe in the following locations:
Alabama (20) Iowa (14) Nevada (11) South Dakota (3)
Arizona (28) Kansas (10) New Hampshire (3) Tennessee (29)
Arkansas (11) Kentucky (14) New Jersey (27) Texas (106)
California (96) Louisiana (8) New Mexico (10) Utah (12)
Colorado (27) Maine (3) New York (50) Vermont (1)
Connecticut (9) Maryland (20) North Carolina (27) Virginia (42)
Delaware (4) Massachusetts (8) North Dakota (4) Washington (24)
Florida (133) Michigan (50) Ohio (73) West Virginia (5)
Georgia (50) Minnesota (22) Oklahoma (17) Wisconsin (19)
Hawaii (1) Mississippi (7) Oregon (11) Wyoming (2)
Idaho (6) Missouri (29) Pennsylvania (62) Canada (37)
Illinois (55) Montana (2) Rhode Island (2)
Indiana (42) Nebraska (8) South Carolina (18)
Of our 1,271 restaurants and the one Olive Garden Cafe open on May 25,
2003, 803 were located on owned sites and 469 were located on leased sites. The
469 leases are classified as follows:
Land-Only Leases (we own buildings and equipment).................. 352
Ground and Building Leases...........................................59
Space/In-Line/Other Leases...........................................58
----
Total......................................................469
===
During fiscal 1999, we formed two subsidiary corporations, each of which
elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections
856 through 860 of the Internal Revenue Code. These elections limit the
activities of both corporations to holding certain real estate assets. The
formation of these two REITs is designed primarily to assist us in managing our
real estate portfolio and possibly to provide a vehicle to access capital
markets in the future.
Both REITs are non-public REITs. Through our subsidiary companies, we
indirectly own 100 percent of all voting stock and greater than 99.5 percent of
the total value of each REIT. For financial reporting purposes, both REITs are
included in our consolidated financial statements.
We own or lease our executive offices, culinary center and training
facilities in Orlando, Florida. Except in limited instances, our restaurant
sites and other facilities are not subject to mortgages or encumbrances securing
money borrowed by us from outside sources. In our opinion, our buildings and
equipment generally are in good condition, suitable for their purposes and
adequate for our current and foreseeable needs.
See also Note 4 "Land, Buildings and Equipment" and Note 10 "Leases" of
Notes to Consolidated Financial Statements on pages 36 and 40, respectively, of
the Company's 2003 Annual Report to Shareholders, incorporated herein by
reference.
Item 3. LEGAL PROCEEDINGS
From time to time, we are made a party to legal proceedings arising in the
ordinary course of business. We do not believe that the results of these legal
proceedings, even if unfavorable to us, will have a materially adverse impact on
our financial position, results of operations or cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal United States market on which our common shares are traded is
the New York Stock Exchange. As of July 28, 2003, there were approximately
42,429 record holders of our common shares. The information concerning the
dividends and high and low intraday sales prices for our common shares on the
New York Stock Exchange for each full quarterly period during fiscal 2002 and
2003 contained in Note 17, "Quarterly Data", on page 47 of our 2003 Annual
Report to Shareholders is incorporated herein by reference. We have not sold any
securities during the last three years that were not registered under the
Securities Act of 1933.
Item 6. SELECTED FINANCIAL DATA
The information for fiscal 1999 through 2003 contained in the Five-Year
Financial Summary on page 48 of our 2003 Annual Report to Shareholders is
incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 18
through 25 of our 2003 Annual Report to Shareholders is incorporated herein by
reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The text under the heading "Quantitative and Qualitative Disclosures About
Market Risk" contained within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 24 of our 2003 Annual Report to
Shareholders is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report, Consolidated Statements of Earnings,
Consolidated Balance Sheets, Consolidated Statements of Changes in Stockholders'
Equity and Accumulated Other Comprehensive Income, Consolidated Statements of
Cash Flows, and Notes to Consolidated Financial Statements on pages 26 through
48 of our 2003 Annual Report to Shareholders are incorporated herein by
reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")) as of May 25, 2003, the end of the
period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of May 25, 2003.
During the fiscal quarter ended May 25, 2003, there was no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
15
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the sections entitled "Who Are This Year's
Nominees?" on pages 6 through 8, "What Board Committees Do You Have?" on pages 9
through 11, and "Section 16(a) Beneficial Ownership Reporting Compliance" on
page 31 of our definitive Proxy Statement dated August 22, 2003, is incorporated
herein by reference. Information regarding executive officers is contained in
Part I above under the heading "Executive Officers."
Our Board of Directors has determined that in its judgment, Jack A. Smith,
the Chair of our Audit Committee, is an "audit committee financial expert" in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission, and has "accounting or related financial management
expertise" in accordance with the applicable listing standards of the New York
Stock Exchange. The Board also determined that Mr. Smith is independent, as that
term is used under applicable rules of the Securities and Exchange Commission,
the listing standards of the New York Stock Exchange, and our Corporate
Governance Guidelines.
We have adopted a Code of Business Conduct and Ethics that is applicable to
all of our employees. Appendix A to that Code provides a special Code of Ethics
with additional provisions that apply to our principal executive officer,
principal financial officer, principal accounting officer or controller, and
persons performing similar functions (the "Senior Financial Officers"). Appendix
B to the Code provides a Code of Business Conduct and Ethics for members of our
Board of Directors. These documents are posted on our internet website noted on
page two and are available free of charge. We intend to disclose any amendments
to or waivers from these Codes for directors, executive officers or Senior
Financial Officers on our website.
Item 11. EXECUTIVE COMPENSATION
The information contained in the sections entitled "How Are Directors
Compensated?" on page 11, "Summary Compensation Table" on pages 18 through 19,
"Option Grants in Last Fiscal Year" on page 20, "Stock Option Exercises and
Holdings" on page 21, "Long-Term Incentive Plans - Awards in Last Fiscal Year"
on page 20, "Do Executive Officers Currently Participate in a Defined Benefit
Retirement Plan?" on page 22, "Do Executive Officers Currently Participate in a
Non-Qualified Deferred Compensation Plan?" on page 22, "Do the Executive
Officers Have Any Change-in-Control Arrangements?" on pages 22 through 23, and
"Compensation Committee Interlocks and Insider Participation" on page 27 of our
definitive Proxy Statement dated August 22, 2003, is incorporated herein by
reference. The information appearing in the Proxy Statement under the heading
"Compensation Committee Report" (except under the heading "Compensation
Committee Interlocks and Insider Participation") is not incorporated herein.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained in the sections entitled "Security Ownership of
Principal Shareholders" on pages 16 through 17, and "Security Ownership of
Management" on pages 14 through 15 of our definitive Proxy Statement dated
August 22, 2003, is incorporated herein by reference.
Equity Compensation Plan Information
The following table gives information about our common shares that may be
issued as of May 25, 2003 under our 2002 Stock Incentive Plan ("2002 Plan");
Stock Option and Long-Term Incentive Plan of 1995 ("1995 Plan"); Restaurant
Management and Employee Stock Plan of 2000 ("2000 Plan"); Stock Plan for
Directors ("Director Stock Plan"); Compensation Plan for Non-Employee Directors
("Director Compensation Plan"); Stock Option and Long-Term Incentive Conversion
Plan ("Conversion Plan") and Employee Stock Purchase Plan ("ESPP").
16
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights (3) rights equity compensation plans
(excluding securities
reflected in column (a))
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security holders
(1) 23,093,014 $13.23 12,977,554 (4)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders
(2) 3,628,709 $16.87 1,760,163 (5)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 26,721,723 $13.73 14,737,717
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- -------------------------
(1) Includes the 2002 Plan, 1995 Plan, Conversion Plan and ESPP.
(2) Includes the 2000 Plan, Director Stock Plan and Director Compensation Plan.
(3) Includes deferred compensation obligations that may be paid out in common
stock.
(4) In addition to grants of options, warrants or rights, includes up to
8,550,000 shares of common stock or other stock-based awards, including up
to 1,700,000 shares of restricted stock, that may be issued under the 2002
Plan, up to 273,007 shares of restricted stock that may be issued under the
1995 Plan, and up to 778,456 shares of common stock that may be issued
under the ESPP.
(5) In addition to grants of options, warrants or rights, includes up to 29,296
shares of restricted stock that may be issued under the 2000 Plan, up to
95,051 shares of common stock that may be issued under the Director
Compensation Plan, and up to 88,317 shares of common stock that may be
issued under the Director Stock Plan.
The 2000 Plan
The 2000 Plan provides for the issuance of up to 5,400,000 shares of common
stock out of our treasury. The 2000 Plan allows us to award non-qualified stock
options, restricted stock or restricted stock units. Only our employees other
than executive officers are eligible to receive awards under the 2000 Plan. The
purpose of the 2000 Plan is to provide incentives and awards to employees who
may be responsible for the management, growth and sound development of our
restaurants, and to align the interests of employees with the interests of our
shareholders. The 2000 Plan is administered by the Compensation Committee of the
Board of Directors. The exercise price of a stock option granted under the 2000
Plan may not be less than the fair market value of the underlying stock on the
date of grant, and no option may have a term of more than ten years. The options
that are currently outstanding under the 2000 Plan generally vest over a one- to
four-year period beginning on the date of grant and expire ten years from the
date of grant. Awards may be made under the 2000 Plan until January 1, 2004. The
2000 Plan was approved by our Board of Directors.
The Director Stock Plan
The Director Stock Plan provides for the issuance of up to 375,000 shares
of common stock out of our treasury as non-qualified stock options, restricted
stock or restricted stock units. Our non-employee directors are the only persons
eligible to receive awards under the Director Stock Plan. The purpose of the
Director Stock Plan is to provide incentives and awards to non-employee
directors to align their interests with those of our shareholders. The Director
Stock Plan is administered by the Compensation Committee of the Board of
Directors. The exercise price of a stock option granted under the Director Stock
Plan may not be less than the fair market value of the underlying stock on the
date of grant, and no option may have a term of more than ten years. The options
that are currently outstanding under the Director Stock Plan generally vest over
a one- to three-year period beginning on the date of grant and expire ten years
from the date of grant. The restrictions on restricted stock and restricted
stock units granted under the plan generally lapse one year after the date of
grant. Awards may be made under the Director Stock Plan until January 1, 2004.
The Director Stock Plan was approved by our Board of Directors.
17
The Director Compensation Plan
The Director Compensation Plan provides for the issuance of up to 105,981
shares of common stock out of our treasury. The plan allows us to award cash,
deferred cash or common stock. Our non-employee directors are the only persons
eligible to receive awards under the plan. The purpose of the plan is to provide
incentives and awards to non-employee directors to align their interests with
those of our shareholders. The plan is administered by the Compensation
Committee of the Board of Directors and was approved by the Board.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the sections entitled "Do We Provide Loans for
Executive Officers to Meet Their Share Ownership Guidelines?" on page 23, and
"Are There Any Other Relationships or Related Transactions Between Us and Our
Management?" on page 23 of our definitive Proxy Statement dated August 22, 2003,
is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the section entitled "Independent Auditor Fees
and Services" on page 29 of our definitive Proxy Statement dated August 22,
2003, is incorporated herein by reference.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
Consolidated Statements of Earnings for the fiscal years ended May 25,
2003, May 26, 2002 and, May 27, 2001 (incorporated by reference to page 27 of
our 2003 Annual Report to Shareholders).
Consolidated Balance Sheets at May 25, 2003 and May 26, 2002 (incorporated
by reference to page 28 of our 2003 Annual Report to Shareholders).
Consolidated Statements of Changes in Stockholders' Equity and Accumulated
Other Comprehensive Income for the fiscal years ended May 25, 2003, May 26,
2002, and May 27, 2001 (incorporated by reference to page 29 of our 2003 Annual
Report to Shareholders).
Consolidated Statements of Cash Flows for the fiscal years ended May 25,
2003, May 26, 2002 and May 27, 2001 (incorporated by reference to page 30 of our
2003 Annual Report to Shareholders).
Notes to Consolidated Financial Statements (incorporated by reference to
pages 31 through 48 of our 2003 Annual Report to Shareholders).
2. Financial Statements Schedules:
Not applicable.
3. Exhibits:
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain
instruments defining the rights of holders of certain of our long-term debt are
not filed, and in lieu thereof, we agree to furnish copies thereof to the
Securities and Exchange Commission upon request.
18
Exhibit Number Title
3(a) Articles of Incorporation (incorporated herein by reference
to Exhibit 3(a) to our Registration Statement on Form 10
effective May 5, 1995).
3(b) Bylaws as amended July 21, 2003.
4(a) Rights Agreement dated as of May 28, 1995 between us and
Wells Fargo Bank Minnesota, National Association (formerly
known as Norwest Bank Minnesota, N.A.), as amended May 23,
1996, assigned to Wachovia Bank, National Association
(formerly known as First Union National Bank), as Rights
Agent, as of September 29, 1997 (incorporated by reference
to Exhibit 4(a) to our Annual Report on Form 10-K for the
fiscal year ended May 31, 1998).
4(b) Indenture dated as of January 1, 1996, between us and Wells
Fargo Bank Minnesota, National Association (formerly known
as Norwest Bank Minnesota, N.A.), as Trustee (incorporated
herein by reference to our Current Report on Form 8-K filed
February 9, 1996).
*10(a) Darden Restaurants, Inc. Stock Option and Long-Term
Incentive Plan of 1995, as amended March 19, 2003
(incorporated herein by reference to Exhibit 10(b) to our
Quarterly Report on Form 10-Q for the quarter ended February
23, 2003).
*10(b) Darden Restaurants, Inc. FlexComp Plan, as amended March
19, 2003 (incorporated herein by reference to Exhibit 10(f)
to our Quarterly Report on Form 10-Q for the quarter ended
February 23, 2003).
*10(c) Darden Restaurants, Inc. Stock Option and Long-Term
Incentive Conversion Plan, as amended (incorporated herein
by reference to Exhibit 10(c) to our Annual Report on Form
10-K for the fiscal year ended May 26, 1996).
*10(d) Supplemental Pension Plan of Darden Restaurants, Inc.
(incorporated herein by reference to Exhibit 10(d) to our
Registration Statement on Form 10 effective May 5, 1995).
*10(e) Executive Health Plan of Darden Restaurants, Inc.
(incorporated herein by reference to Exhibit 10(e) to our
Registration Statement on Form 10 effective May 5, 1995).
*10(f) Darden Restaurants, Inc. Stock Plan for Directors, as
amended June 19, 2003.
*10(g) Darden Restaurants, Inc. Compensation Plan for
Non-Employee Directors, as amended March 19, 2003
(incorporated herein by reference to Exhibit 10(d) to our
Quarterly Report on Form 10-Q for the quarter ended February
23, 2003).
*10(h) Darden Restaurants, Inc. Management and Professional
Incentive Plan, as amended June 19, 2003.
*10(i) Benefits Trust Agreement dated as of October 3, 1995,
between us and Wells Fargo Bank Minnesota, National
Association (formerly known as Norwest Bank Minnesota,
N.A.), as Trustee (incorporated herein by reference to
Exhibit 10(i) to our Annual Report on Form 10-K for the
fiscal year ended May 25, 1997).
*10(j) Form of Management Continuity Agreement, as amended,
between us and certain of our executive officers
(incorporated herein by reference to Exhibit 10(j) to our
Annual Report on Form 10-K for the fiscal year ended May 25,
1997).
19
*10(k) Form of documents for our Fiscal 1998 Stock
Purchase/Option Award program, including a Non-Negotiable
Promissory Note and a Stock Pledge Agreement (incorporated
herein by reference to Exhibit 10(k) to our Annual Report on
Form 10-K for the fiscal year ended May 27, 2001).
*10(l) Darden Restaurants, Inc. Restaurant Management and
Employee Stock Plan of 2000, as amended June 19, 2003.
*10(m) Darden Restaurants, Inc. 2002 Stock Incentive Plan, as
amended March 19, 2003 (incorporated herein by reference to
Exhibit 10(a) to our Quarterly Report on Form 10-Q for the
quarter ended February 23, 2003).
10(n) Credit Agreement dated as of October 29, 1999, among Darden
Restaurants, Inc. and the banks named therein (incorporated
herein by reference to Exhibit 10(a) to our Quarterly Report
on Form 10-Q for the quarter ended August 25, 2002).
10(o) First Amendment dated as of July 26, 2002, to Credit
Agreement dated as of October 29, 1999, among Darden
Restaurants, Inc. and the banks listed therein (incorporated
herein by reference to Exhibit 10(b) to our Quarterly Report
on Form 10-Q for the quarter ended August 25, 2002).
12 Computation of Ratio of Consolidated Earnings to Fixed
Charges.
13 Portions of 2003 Annual Report to Shareholders.
21 Subsidiaries of Darden Restaurants, Inc.
23 Independent Accountants' Consent.
24 Powers of Attorney.
31(a) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated August
22, 2003.
31(b) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated August
22, 2003.
32(a) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated August
22, 2003.
32(b) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated August
22, 2003.
* Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K and
Item 601(b)(10)(iii)(A) of Regulation S-K.
We will furnish copies of any exhibit listed above upon request upon the
payment of a reasonable fee to cover our expenses in furnishing such
exhibit.
20
(b) Reports on Form 8-K.
During the fourth quarter covered by this report, we filed or furnished the
following current reports on Form 8-K:
(i) Current report on Form 8-K dated March 20, 2003, reporting certain
financial results for the third quarter of fiscal 2003.
(ii) Current report on Form 8-K dated April 29, 2003, announcing fiscal
April same-restaurant sales results.
In addition, we filed or furnished the following reports on Form 8-K
subsequent to the close of the fourth quarter of fiscal 2003:
(i) Current report on Form 8-K dated June 19, 2003, reporting fiscal 2003
annual and fourth quarter earnings per diluted share.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: August 22, 2003 DARDEN RESTAURANTS, INC.
By: /s/ Joe R. Lee
-----------------------------
Joe R. Lee
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
/s/ Joe R. Lee Director, Chairman of the Board and Chief August 22, 2003
- --------------------------------
Joe R. Lee Executive Officer (Principal executive officer)
/s/ Linda J. Dimopoulos Senior Vice President and Chief Financial Officer August 22, 2003
- --------------------------------
Linda J. Dimopoulos (Principal financial and accounting officer)
/s/ Leonard L. Berry* Director
- --------------------------------
Leonard L. Berry
/s/ Odie C. Donald* Director
- --------------------------------
Odie C. Donald
/s/ Julius Erving, II* Director
- --------------------------------
Julius Erving, II
/s/ David H. Hughes* Director
- --------------------------------
David H. Hughes
/s/ Cornelius McGillicuddy, III* ** Director
- --------------------------------
Cornelius McGillicuddy, III
/s/ Richard E. Rivera* Director
- --------------------------------
Richard E. Rivera
/s/ Michael D. Rose* Director
- --------------------------------
Michael D. Rose
/s/ Maria A. Sastre* Director
- --------------------------------
Maria A. Sastre
/s/ Jack A. Smith* Director
- --------------------------------
Jack A. Smith
22
/s/ Blaine Sweatt, III* Director
- --------------------------------
Blaine Sweatt, III
/s/ Rita P. Wilson* Director
- --------------------------------
Rita P. Wilson
*BY: /s/ Paula J. Shives
- --------------------------------
Paula J. Shives,
Attorney-In-Fact
August 22, 2003
** Popularly known as Senator Connie Mack, III. Senator Mack signs legal
documents, including this Form 10-K, under his legal name of Cornelius
McGillicuddy, III.
23
EXHIBIT INDEX
Exhibit
Number Title
3(a) Articles of Incorporation (incorporated herein by reference
to Exhibit 3(a) to our Registration Statement on Form 10
effective May 5, 1995).
3(b) Bylaws as amended July 21, 2003.
4(a) Rights Agreement dated as of May 28, 1995 between us and
Wells Fargo Bank Minnesota, National Association (formerly
known as Norwest Bank Minnesota, N.A.), as amended May 23,
1996, assigned to Wachovia Bank, National Association
(formerly known as First Union National Bank), as Rights
Agent, as of September 29, 1997 (incorporated by reference
to Exhibit 4(a) to our Annual Report on Form 10-K for the
fiscal year ended May 31, 1998).
4(b) Indenture dated as of January 1, 1996, between us and Wells
Fargo Bank Minnesota, National Association (formerly known
as Norwest Bank Minnesota, N.A.), as Trustee (incorporated
herein by reference to our Current Report on Form 8-K filed
February 9, 1996).
*10(a) Darden Restaurants, Inc. Stock Option and Long-Term
Incentive Plan of 1995, as amended March 19, 2003
(incorporated herein by reference to Exhibit 10(b) to our
Quarterly Report on Form 10-Q for the quarter ended February
23, 2003).
*10(b) Darden Restaurants, Inc. FlexComp Plan as amended
March 19, 2003 (incorporated herein by reference to Exhibit
10(f) to our Quarterly Report on Form 10-Q for the quarter
ended February 23, 2003). . * 10(c) Darden Restaurants, Inc.
Stock Option and Long-Term Incentive Conversion Plan, as
amended (incorporated herein by reference to Exhibit 10(c)
to our Annual Report on Form 10-K for the fiscal year ended
May 26, 1996).
*10(d) Supplemental Pension Plan of Darden Restaurants, Inc.
(incorporated herein by reference to Exhibit 10(d) to our
Registration Statement on Form 10 effective May 5, 1995).
*10(e) Executive Health Plan of Darden Restaurants, Inc.
(incorporated herein by reference to Exhibit 10(e) to our
Registration Statement on Form 10 effective May 5, 1995).
*10(f) Darden Restaurants, Inc. Stock Plan for Directors, as
amended June 19, 2003.
*10(g) Darden Restaurants, Inc. Compensation Plan for
Non-Employee Directors, as amended March 19, 2003
(incorporated herein by reference to Exhibit 10(d) to our
Quarterly Report on Form 10-Q for the quarter ended February
23, 2003).
*10(h) Darden Restaurants, Inc. Management and Professional
Incentive Plan, as amended June 19, 2003.
*10(i) Benefits Trust Agreement dated as of October 3, 1995,
between us and Wells Fargo Bank Minnesota, National
Association (formerly known as Norwest Bank Minnesota,
N.A.), as Trustee (incorporated herein by reference to
Exhibit 10(i) to our Annual Report on Form 10-K for the
fiscal year ended May 25, 1997).
24
*10(j) Form of Management Continuity Agreement, as amended,
between us and certain of our executive officers
(incorporated herein by reference to Exhibit 10(j) to our
Annual Report on Form 10-K for the fiscal year ended May 25,
1997).
*10(k) Form of documents for our Fiscal 1998 Stock
Purchase/Option Award program, including a Non-Negotiable
Promissory Note and a Stock Pledge Agreement (incorporated
herein by reference to Exhibit 10(k) to our Annual Report on
Form 10-K for the fiscal year ended May 27, 2001).
*10(l) Darden Restaurants, Inc. Restaurant Management and
Employee Stock Plan of 2000, as amended June 19, 2003.
*10(m) Darden Restaurants, Inc. 2002 Stock Incentive Plan, as
amended March 19, 2003 (incorporated herein by reference to
Exhibit 10(a) to our Quarterly Report on Form 10-Q for the
quarter ended February 23, 2003).
10(n) Credit Agreement dated as of October 29, 1999, among Darden
Restaurants, Inc. and the banks named therein (incorporated
herein by reference to Exhibit 10(a) to our Quarterly Report
on Form 10-Q for the quarter ended August 25, 2002).
10(o) First Amendment dated as of July 26, 2002, to Credit
Agreement dated as of October 29, 1999, among Darden
Restaurants, Inc. and the banks listed therein (incorporated
herein by reference to Exhibit 10(b) to our Quarterly Report
on Form 10-Q for the quarter ended August 25, 2002).
12 Computation of Ratio of Consolidated Earnings to Fixed
Charges.
13 Portions of 2003 Annual Report to Shareholders.
21 Subsidiaries of Darden Restaurants, Inc.
23 Independent Accountants' Consent.
24 Powers of Attorney.
31(a) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated August
22, 2003.
31(b) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated August
22, 2003.
32(a) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated August
22, 2003.
32(b) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated August
22, 2003.
* Items marked with an asterisk are management contracts or compensatory
plans or arrangements required to be filed as an exhibit pursuant to Item
14 of Form 10-K and Item 601(b)(10)(iii)(A) of Regulation S-K.
25